Bureau of Internal Revenue Cumulative Bulletin 1950-2

Treasury Department : nTT ureau of Interna Revenue
Interna Revenue uetn

Cumuatve uetn 19 0-2
ULY-D C M R 19 0
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SP CI L TT NTION aec,e t0 tne cautonary notce on ths page that pub-
shed rungs of the ureau do not have the force and eftect
o Treasury Decsons and that they are appcabe ony to facts presented n the pubshed case
Treasury Department :
ureau of Interna Revenue
Interna Revenue uetn
Cumuatve uetn 19 0-2
ULY-D C M R 19 0
IN T IS ISSU
P e
ntroductory Notes
Contents v
Rungs Nos. 133 -13 0
Ta Court of the Unted States, The 1-6
Income Ta
Part I (Interna Revenue Code) 7-70
Part II (Revenue ct of 193 and pror Revenue
cts) 71-72
state and Gft Ta es 73- 0
mpoyment Ta es 1-127
Msceaneous Ta es-
cse Tb cs, Stamp Ta es, etc 129-116
Msceaneous Rungs 1 7-213
Legsaton 21-1-23 I
Commttee Reports 2 - 93
Inde . . . 9 -606
The rungs reported n the Interna Revenue uetn are (or the nformaton of ta payers and ther counse as
shovng the trend of offca opnon n the admnstraton of the ureau of Interna Revenue; the rungs other than
Treaury Decsons have none of the force or effect of Treasury Decsons and do not commt the Department to
any nterpretaton of the aw whch has not been formay approved and promugated by -he Secretary of the
Treasury. ach rung embodes the admnstratve appcaton of the aw and Treasury Decsons to the entre
state of facts upon whch a partcuar case rests. It s especay to be noted that the same resut w not neces-
sary be reached n another case uness a the matera facts are dentca wth those of Uc reported case. s t s
not aways feasbe to pubsh a compete statement of the facts underyng each rung, there can be no assurance
that any new ca.re s dentca wth the reported case. s bearng out ths dstncton, t may be observed that the
rungs pubshed from tne to tme may appear to reverse rungs prevousy pubshed.
Offcers of the ureau of Interna Revenue are especay cautoned aganst reachng a concuson n any case
merey on the bass |f smarty to a pubshed rung, and shoud base ther |udgment on the appcaton of a
pertnent provsons of the aw and Treasury Decsons to a the facts n each case- These rungs shoud be used
as ads tn studyng the aw and ts forma constructon as made n the reguatons and Treasury Decsons pre-
vousy ssued.
n addton to pubshng a Interna Revenue Treasury Decsons, t s the pocy of the ureau of Interna
Revenue to pubsh a rungs and decsons, ncudng opnons of the Chef Counse for the ureau of Interna
Revenue, whch, because they announce a rung or decson upon a nove queston or upon a queston n regard
to whch there e sts no prevousy pubshed rung or decson, or for other reasons, are of such mportance as
to be of genera nterest. It s aso the pocy of the ureau to pubsh a rungs or decsons whch revoke,
modfy, amend, or affect n any manner whatever any pubshed rung or decson. In many nstances opnons
of the Chef Counse for the ureau of Interna Revenue arc not of genera nterest because they announce no
new rung or new constructon of the revenue aws but smpy appy rungs aready made pubc to certan
stuatons of fact whch are wthout speca sgnfcance. It s not the pocy of the ureau to pubsh such opnons.
Therefore, the numbers assgned to the pubshed opnons of the Chef Counse for the ureau of Interna
Revenue are not consecutve- No unpubshed rung cr decson w be cted or reed upon by any offcer or
empoyee of the ureau of Interna Revenue as a precedent n the dsposton of ether cases- Uness otherwse
specfcay ndcated, a pubshed rungs and decsons have receved the consderaton and approva of the
Chef Counse for the ureau of Intcrna Revenue.
UNIT D ST T S GO RNM NT PRINTING OFFIC : W S INGTON : 19 1
For sae by Superntendent of ocuccn:s. U. S. Government Pnntn| Offce, Washngton 2 , D. C
See bach of tte for prces
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The Interna Revenue uetn servce conssts of buetns ssued
every other week and semannua cumuatve buetns.
The buetns contan the rungs and decsons whch are made
pubc and a Treasury Department decsons (known as Treasury
Decsons) pertanng to Interna Revenue matters. The semannua
cumuatve buetns contan a rungs and decsons (ncudng
Treasury Decsons) pubshed durng the prevous 6 months.
The compete uetn servce may be obtaned, on a subscrpton
bass, from the Superntendent of Documents, Government Prntng
Offce, Washngton 2 , D. C, for 2.00 per year; foregn, 3.7 . Snge
copes of the uetn, 10 cents each.
Certan ssues of cumuatve buetns are out of prnt and are,
therefore, not avaabe. Persons desrng avaabe cumuatve bue-
tns may obtan them from the Superntendent of Documents at prces
as foows:
Year
Frst 6 months
Cumuatve uetn
Second 6 montbs
1020
2
0. 2
3
0. 30
192
1I-1
. 3
I1-2
. 0
192 .)
III-1
. 0
ITI-2
.
1930
I -1
. 0
I -2
. SO
1932,
I-1
. 30
1936
-1
.
-2
.
1939
1939-1
1939-2
. CO
Part 1
. 0
Part 2
1. 00
19 0
19 0-1
. 30
19 0-2
. 60
19 1
19 1-1
.
19 1-2
. 60
19 2
19 2-1
. 0
19 2 2
. CO
19 3 ..
1. 2
19
2. 2
19 2 .
1. 0
19 6
19 0-1
. 0
19 0-2
. 7
19 7
19 7-1
. 0
19 7-2
. 7
19
191 -1
. 7
19 3-2
1. 00
19 9
1919-1
. 7
19 9-2
. 7
19 0
19 0-1
. 7
19 0-2
1. 0
Contans ony ncome ta rungs.
1 ouse, Senate, nnd conference reports on revenue bs enacted as the ct of
October 3, 1913, the ct of October 22, 191 , and the evenue cts of 1U1U to
193 , Incusve, nnd on amendments to such cts.
Prnted n one voume.
Persons desrng to obtan the servce n dgest form may do so at
prces as foows: Dgest No. 19 (ncome ta rungs ony, pr 1919
to December 1921, ncusve), 0 cents; Dgest No. 13 (19-2-2 ), 30
cents; Dgest No. 22 (192 -27), 3 cents; and Dgest (ncome ta
rungs ony, pr 1919 to December 1930, ncusve), 1. 0.
nqures n regard to these pubcatons an subscrptons shoud
be sent to the Superntendent of Documents, Government Prntng
Offce, Washngton 2 , D. C.
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INTRODUCTORY NOT S
Interna Revenue Cumuatve uetn 19 0-2, n addton to a
decsons of the Treasury Department (caed Treasury Decsons)
pertanng to Interna Revenue matters, contans opnons of the Chef
Counse for the ureau of Interna Revenue, rungs and decsons
pertanng to ncome, estate, gft, saes, e cess profts, empoyment,
soca securty, and msceaneous ta es, and egsaton affectng the
revenue statutes, as ndcated on the tte page of ths uetn, pub-
shed n uetns 1 to 26, ncusve, for the perod uy 1 to December
31,19 0. It aso contans a cumuatve st of announcements reatng
to decsons of The Ta Court of the Unted States, pubshed n the
Interna Revenue uetn Servce from uy 1 to December 31, 19 0.
Income ta rungs are prnted n two parts. The rungs under the
Interna Revenue Code are prnted as part I, the aw headngs corre-
spondng wth the sectons of the Code, as amended, and the reguatons
headngs correspondng wth the secton headngs of Reguatons 111
or 103. Rungs under the Revenue ct of 193 and pror revenue acts
are prnted as part II, the aw headngs correspondng wth the secton
headngs of those revenue acts and the reguatons headngs corre-
spondng wth the artce headngs of the appcabe reguatons.
ngs under ttes III and I of the Soca Securty ct and
under subchapters and C, chapter 9, of the Interna Revenue Code
n force pror to anuary 1,1910, are pubshed under artce headngs
of Reguatons 91 and 90, respectvey; rungs under subchapters
and C, chapter 9, of the Code n force on or after anuary 1, 19 0, are
pubshed under the secton headngs of Reguatons 100 and 107,
respectvey; rungs under the Carrers Ta ng ct of 1937 and under
subchapter , chapter 9, of the Code for perods pror to anuary 1,
19 9, are pubshed under the artce headngs of Reguatons 100, and
rungs under subchapter , chapter 9, of the Code for perods subse-
quent to December 31, 19 , w be pubshed under the secton head-
ngs of Reguatons 11 .
R I TIONS
The foowng abbrevatons are used throughout the uetn.
, , C, etc. The names of ndvduas.
. R. M. Commttee on ppeas and Revew memorandum.
. R. R. Commttee on ppeas and Revew recommendaton.
. T coho Ta Unt.
. T. . oard of Ta ppeas.
C. . Cumuatve uetn.
Ct. D. Court decson.
C. S. T. Capta Stock Ta Dvson.
C. T. Ta es on empoyment by carrers.
D. C. Treasury Department crcuar.
m. T. Ta es mposed by the Soca Securty ct, the Carrers Ta ng ct of
1937, and subchapters , , and C of the Interna Revenue Code.
. P. C. cess Profts Ta Counc rung or memorandum.
. T. state and Gft T; Dvson.
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I
G. C. M. Genera Counse s, ssstant Genera Counse s, or Chef Counse s
memorandum.
I. It. . Interna Revenue uetn.
I. R. C. Interna Revenue Code.
I. T. Income Ta Unt.
M, N, , Y, Z, etc. The names of corporatons, paces, or busnesses, accordng
to conte t.
Mn. Mmeographed etter.
MS. or M. T. Msceaneous Dvson.
O. or L. O. Soctor s aw opnon.
O. D. Offce decson.
Op. . G. Opnon of the ttorney Genera.
P. T. rocessng Ta Dvson.
S. T. Saes Ta Dvson.
S. Sver Ta Dvson.
S. M. Soctor s memorandum.
Sa. Op. Soctor s opnon.
S. R. Soctor s recommendaton.
S. S. T. Ta es on empoyment by others than carrers.
T. Tobacco Dvson.
T. . M. dvsory Ta oar; memorandum.
T. . R. dvsory Ta ard recommendaton.
T. C Ta Court of the Unted Sates.
T. D. Treasury Decson.
w and y are used to represent certan numbers, and when used wth the word
doars represent sums of money.
NNOUNC M NT R L TING TO D CISIONS OF T T COURT OF T
UNIT D ST T S
I order that ta payers and the genera pubc may be nformed
whether the Commssoner has acquesced n a decson of The Ta
Court of the Unted States dsaowng a defcency n ta determned
by the Commssoner to bo due, announcement w be made n the
Interna Revenue uetn at the earest practcabe date. Notce
that the Commssoner has acquesced or nonacquesced n a decson
of the Ta Court reates ony to the ssue or ssues decded adversey
to the Government. Decsons so acquesced n shoud be reed upon
by offcers and empoyees of the ureau of Interna Revenue as
precedents n the dsposton of other cases.
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CUMUL TI CONT NTS
Rung
Treasury Dersons:
379 .
79 .
797.
79 .
799.
00.
0
0
S06
07
0
09....
10
11
12
13
1
1 .
16.
17
1 -_.
19
20
Court decsons:
1732
1733
173
173 -
1730
1737
Chef Counse s memoranda:
3972.
States Tas Court:
1103 ..
12 .
12 79.
12707.
133 0.
13 3.
13 09.
13922.
13923.
1392 .
1392 .
13926.
13927.
Rung No.
Page
Rung
Rung No.
Pago
Unted Staes T Court Con.
19 0-1 -133 0
37
19 0-20-13 33
2
19 0-10-13102
2
19 0-20-13 33
1
19 0-10-13 01
1
1 2 0
19 0-19-13 22
1
10 0-10-1339
2
1 37
19 0-1 -13 1
3
19 0-10-13 03
200
1 0 1
19 0-16-13397
2
19 0-17-13 0
1 2
1 1
19 0-21-131 0
6
10 O-17-13 O9
133
1 19
19 0-17-13 0
6
19 0-1 -13 19
197
1 190
19 -17-13 0
19 0-1 -1311
1
1 97
10 0-17-13 0
19 0-1 -13117
1
1 9
19 0-17-13 0
19 0-19-1312
201
1 199
19 0-17-13 06
19 0-19-13 27
193
1 O0
19 0-17-13 06
19 0-19-13 20
112
1
19 0-2 -13 0
2
19 3-20-13 39
1 0
1 S0
19 0-17-13 0
19 0-20-13131
1
1 6
1930-17-13 0
6
19 0-20-13 3
3
1 7 3.
19|0-2 -13 0
6
19 0-22-13 60
1
1 067
19 0-16-13397
19 0-22-13 02
73
1 992
19 0-1 -13390
6
19 0-22-13 63
76
1 99
19 0-1 -1 90
6
19 0-22-13 60

19 0-1 -13390
6
19 0-22-13 01
6
19 0-1 -13390
6
19 0-2 -13
197
1 997
19 0-1 -13390
6
19 0-2 -13 0
7
161 2
19 0-1 -13390
19 0-20-13 00
62
16302
19 0-20-13 33
2, , ,0
19 0-20-13 0
129
16326
19 0-1 -13390
2
19 0-20-13 07
132
163 2
19 0-16-13397
2
19 0-20-13 0
1 2
163 3
19 0-10-13397
2
19 0-26-13 06
7
16670
19 0-21-13 0
2
17077
19 0-16-13397
3
19 0-1 -13337

170 1
19 3-16-13397
1,2
19 0-1 -13393
13
17101
19 0-23-13 73
19 0-20-13 3
1 1
17110
19 0-21-13 0
1
19 0-2 -13 91
139
17170
19 0-16-13397
19 0-2 -13 9
1 1
19 0-20-13 33
3
19 0-26-13 01
77
19 0-2 -13 0
6
17 63
19.30-16-13397
10 0-1 -13 1
17 10
19 0-1 -13390
3
19 0-19-13 2
0
17 2
19 0-16-13397
1
19 0-19-13 23
31
17 3.
19 0-16-13397
1
19 0-21-13 9
16
1 1.
19 0-19-13 22
6
1 13
19 0-16-13397
1
10 0-21-13 6
3
1 621
19 0-23-13 73
10 0-19-13 22
2
1S633
19 0-19-13 22
2
19 0-19-13 22
19 0-19-13 22
3
19 0-16-13397
3
19 0-1 -13390
19 0-21-13 6
1 1
19 0-20-13 33
3
19 0-21-131 6
3
19 0-20-13 33
3
19 9-22-13 7
19 0-1 -13 1
2
19 0-1 -13390
3
19 0-2 -13
3
19 0-23-13173
19 0-1S-13 1
19 0-1 -1311
3
19 0-1 -13 1
10 0-16-13397
3
19 0-21-13 0
6
19 0-16-13397
3
19 0-20-13 33
19 0-10-13397
3
19. ) )-20-13)33
19 0-16-13397
19 3-1 -13390
2
19 0-20-13133
19
19 3-22-13 7
2
19 0-23-13 73
1
196 9 ---
19 3-21-13 0
1
19 0-20-13 33
3
19679 -
19 3-1 -13 1
6
19 0-23-13 73
3
19 3-20-13 33
19 0-21-131 0
6
19 3-20-13 33
19 0-10-13397
2,
19 0-17-13 0
1
19 0-1 -13390
3
19 0-16-13397
2
19 0-16-13397
19 0-1 -13390
2
19 0-22-131 7
2
19 0-1 -13390
1
19 0-20-13133
19 0-2O-13133
19 0-20-13 33
19 0-20-13 33
1
19 0-20-13 33
3
19 0-20-13133
19 0-20-13 33
1
2006
19 0-1 -13 1
19 0-20-13133
3
20001....
19 0-2 -13 0
1
19 0-20-13133
20092
19 0-19-13 22
2
19 0-20-13 33
2
20093..
19 0-19-13 22
3
19 0-20-13 33
2009 --
19 0-19-13 22
2
( )
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CONT NTS OF CUMUL TI ULL TINS (I. T.) I TO ; S. T. FOR 1920 ND 1921: INT RN L
R NU 1-1, 1-2, 11-1. II-2, III-. I1I-2, I -1, I -2, -, -2, I 1, I 2, II-1, II-2. I1I-1, n-2,
I 1, I -2, -, -2, I-1, I-2, n-1. II-2. II-1. II-2, I -1. I -2, I, -2, 1937-1, 1937-2,
193 -1. 193 -2, 1939-1 (P RT 1 ND P RT 2), 1939-2. 19 0-1. 19 0-2. 19 1-1. 19 1-2, 1912-1, 19 2-2: N-
NU L ULL TINS FOR 1913. 19 1, ND 19 : S MI NNU L ULL TINS 1916-1. 19 6-2. 19 7-1,
19 7-2. 19 -1. 19 -2, 19 9-1. 1919-2, 19 0-1, ND 19 0-2
Cumuatve uetn
Income Ta :
December 1919 (No. I)
anuary- une 1920 (No. 2)
uy-December 1920 (No. 3)
anuary- une 1921 (No. )
uy-December 1921 (No. )
Saes Ta :
1920 (S. T. 1-20)
anuary- une 1921
uy-December 1921
Interna evenuc uetn:
anuary- une 1922 (No. 1-1)
uy-December 1922 (No. 1-2)
anuary- une 1923 (No. II-)
uy-December 1923 (No. II-2)
anuarv- une 192 (No. III-)
uy-December 192 (No. III-2)
anuary- une 192 (No. I -1).
uy-December 192 (No. I -2)
anuary- une 1926 (No. -)
uy-December 1926 (No. -2)
anuarv- une 1927 (No. I-1)
uv-Dccember 1927 (No. I-2)
anuary- une 192 (No. II-1)._
uv-Deccmber 192 (No. II-2)
anuary- une 1929 (No. III-1)
anuary- une 1930 (No. I -1).
uv-Deccmber 1930 (No. I -2)
anuary- une 1931 (No. -)
uy-December 1931 (No. -2)
anuary- une 1932 (No. I-1)
uy-December 1032 (No. I-2)
anuary- une 1933 (No. II-1)
uy-December 1933 (No. II-2)
anuary- uno 193 (No. III-1)
anuary- une 193 (No. I -1)
ny-December 193 (No. I -2)
anuary- une 1936 (No. -I).
uv-Deccmber 1936 (No. -2)
anuary- une 1937 (1937-1)
uy-December 1937 (1937-2)
anuary- une 193 (193 -1)
uy-December 10 (193 -2)
anuary- une 1939 (1939-1 part 1 and part 2).
uv-Deoomber 1939 (1939-2)
anuary- une 19 0 (19 0-1)
uv-December 10 0 (19 0-2) _
anuary- une 19 1 (19 1-1)
uy-December 19 1 (19 1-2)
anuary- une 1912 (19 2-1)
uy-December 19 2 (1912-2)
anuary-December 19 3 (12 months)..
anuary-December 19 (12 months)
anuary-December 19 (12 months)
anuary- une 19 (10 6-1)
anuary- une 19 7 (13 7-1)
anuary- une 19 (19 -1)
uy-December 19 (19 -2)
anuary- une 19 9 (19 9-1)
y- une 19 0 (19 0-1)
ber 19 0 (19 0-2)
( II)
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T T COURT OF T UNIT D ST T S
CUMUL TI LIST OF NNOUNC M NTS R L TING TO
D CISIONS OF T T COURT OF T UNIT D
TS T So LIS D IN T INT RN L R NU UL-
mt Ncfusv FR0M ULY 19 0 T0 D C M R C
19 0-26-1319
The Commssoner acquesces n the foowng decsons:
Ta payer
Report
No.
oume
2107
1
S 2
1 2 6
1
263
1 13
12
2
17110
1
11 7
20091
13
707
22
1
12
21133
1
136
197 0
1
361
199 9
1
11
20920
1
1 2
21 33
1
7
13931
1
9 7
19907
1
66
20G67
1
127
196 9
1
13 6
17110
1
1 7
170 1
1
611
1392
1
9 7
21 10
1
301
227 7
1
1 21
227
1
1 21
17 3
1
36
17 2
1
36
. . Contaner Corporaton
CF- r Motors Co. (successor by merger to mer-
can Car Foundry Motors Co.)
egheny roadcastng Corporaton, transferee 1
mercan Partcpatons-Trust
pr, Louse .2
tkns, Los Reynods
eachy, Cyrus M., estate of 3__
ecker, C.
en, Wam S
ack s Power Lght Co.
ond et u ., an
raskamp, C. L., transferee
rass Ra Restaurant Co
ryant, dth M
C
Carmehae, Lemue e ander
Cty Natona ank Trust Co., trustee of mercan
Partcpat ons-Trust
Cafn et a., very, e ecutors of estate of Irene de
Guebrant 3
Cayton, r.. W. ., transferee
Cons, Ruth W
Cubertson, .
Cubertson, Rubv
Cuen, Chares C
Cuen, Ruth M .
Nonacnuesccncc pubshed n Cumuatve uetn 19 9-1, page , wthdrawn.
Sec I. T. 027, pase 9, ths buetn.
state ta decson.
(1)
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cquescenoes Cont nued
Ta payer
Docket
No.
oume Pa e
Pameyer, W.
de ssengarthe, nna oto, estate of 12 .
Peerng, Frank C., estate of
Deerntfct a., oseph Godfrey, e ecutors of estate of
Frank C. Deerng 3
de Guebrant, Irene, estate of
DcLuca, .
Denman Tre Rubber Co
Dougas ote Co -
Drey mam, Car G.
Fak, r., Leon
Farnun, nna Scott, estate of1
Feds, oseph
Fdety-Phadepha Trust Co. et a ., e ecutors of
estate of nna Scott Farnun 1
Fscher, L. M
Fscher, Pear
Foundaton Co., The
Gensnger, . D
Oman, Frank
G man, Frank ., transferee of Ro bury eghts
Deveopers, Inc
Oman enretta
Goud. oward
Grav, Sona ., estate of
Gray et a., Wam ., e ecutors of the ast w and
testament of Sena . Gray 1
agectt, Suse C., estate of1

agner, Cena C
agner, Frederck II
abrett Reaty Corporaton
earst Corporaton, The, transferee
eer, L. ., transferee
ewtt, Dan S., transferee
nd, . utton, ancary admnstrator c. t. a. of
estate cf nna Foto do Fssongarthcn 12
rsch et a., Lena, e ecutrccs of estate of Samue
rsch 1
rsch, Samue, estate of 1
odous, Frank _
19
1
9 996
0 996
170 1
19906
19011
2 2
202 2
12707
20007
2
13169
2
211 3
211
10 1
20 02
20092
1 633
2009
1 0 1
16326
1C326
16302
163 3
163 2
22630
197 6
13930
1392S
1
19
19
16670
oard of Ta ppeas.
1 state ta decson.
Nonacqucsccnce pubshed n Cumuatve uetn 19 -2, pa re , wthdrawn.
3 Nonacquescence pubshed n Cumuatve uetn 19 0-1, pate f, wthdrawn.
1 cquescence reates ony to the ssue whether a o. the royaty ncome reazed from the sae 01 a
certan process s ncudbe n pettoner s gross ncome.
cquescence reates ony to the Issuo whether the commuted vaue of a certan annuty contract s
ncudbe n decedent s cross estate.
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cquescences Contnued
Ta payer
Docket
No.
oume Pago
omtne, ea
omsten, I. oe, transferee of Ro bury eghts
Deveopers, Inc
ornsten et u ., I. oe
unt, Mona S., e ecutr of estate of erne C. unt2_
unt, erne C, estate of2
ohnson Lumber Corporaton, CD.
nner, Irene, transferee.

en, doph
en, .
en et u ., .
Lawyers Tte Co. of Mssour
Lehman, an S.1
Ly, een W
Ly, Thomas .
Loyd, . Darse 3
Luccy, Mrs. Matney Dyer, estate of 2.
Ludwg, ua S.
M.
M
Masson-Ceveand- kron Sgn Co
McDonough, Mare, transferee
Mc wen, ohn D., e ecutor of estate of Cyrus
eachy 2
Mc enna, Roy C. 7
Mdand mpre Packng Co., a corporaton
Mnnck, C. Cfford (sometmes known as Cfford C.
Mnnck)
Modesto Dry Yard, Inc
Morganton Fu Fashoned osery Co
Manger, L. R., e ecutor of estate of Mrs. Matney
Dyer Lucey 2-
N
7 01
1 63
20093
12 1
12
77
13926
19310
2101
2101
1730
7
1 2
1 1
71
17 10
620
/ 22161 II
22162
1392
21133
3972
133 0
17077
1 37
1103
17 10
2
Ntto, nnette Caravetta
Ntto, nnette Caravetta, admnstratr of estate of
Frank Ntto. 1 Ss 11
Ntto, nnette Caravetta, guardan of estate of o-
seph Ntto, a mnor 0
Ntto, Frank, estate of 1
Ntto, oseph, a mnor, estate of 0
oard of Ta ppeas.
1 Nonacquescence. pubshed n Cumuatve uetn 19 7-1, page , wthdrawn.
state ta decson.
1 Nonacquescence pubshed n Cumuatve uetn -2 (1936), page 39, wthdrawn. . .
cquescence wth respect to deductbty otcontrbutons to amestown Fre Department ssocaton,
Inc., s based on aowance of the deducton under secton 23(o) (1), I. R. C.
Nonacquescence pubshed n Cumuatve uetn 19 6-2, page 6, wthdrawn.
cquescence s based on aowance of the deducton under secton 23(o)(), I. R. C.
Nonacqaescen.ee pubshed n Cumuatve uetn 19 6-1, page , wthdrawn.
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cquescences Contnued
Ta payer
Putnam, Inc., I.
Itabbett, W. ., transferee.
Ransohoffs Inc.1.
Rchardson, Uff Davd.
Rodgers Dary Co
Rohmer, Sa
S
Safe Depost Trust Co. of atmore, e ecutor of
estate of Suse C. aggett
Saunders, bert Dudey, estate of 1
Saunders et a., een S., e ecutors of estate of bert
Dudey Saunders
Seven-Up Co., The.
Shedon, Isabea M. 1
Smth, . R.
Smth, Mary C, transferee
Standard nveope Manufacturng Co., The
Stewart, Dorothy, transferee
Strngham, L. eever 7
Svcrdrup, Lef
Tavor Instrument Companes.
Tnda, . M
Tnda, Mame
U
Unon us Termna, Inc.
ance, Ws II
Wayman, Gordon S..
West Coast Securtes Co.
Western Cartrdge Co
W
Docket
No.
203G7
13929
930
220 3
101 2
6 6
16302
1 11
1 11
206 3
6203
13 3
13927
22112
13923
17101
2006
20236
19726
1972
1 967
199
2000
13922
9670
Report
oume PaRe
1
1
9
1 1
1
1
1 I
1
1
U
6
10
1
1
1
12
1
1
1
1
12
1
1
1
11
1 Nonacquescence pubshed n Cumuatve uetn 19 S-1, page , wthdrawn.
state ta decson.
1 cquescence reates ony to the ssue whether the commuted vaue o a certan annuty contract s
Incudbe n decedent s gross estate.
cquescence wth res cct to deductbty or contrbutons to amestown Fre Department t
ton, Inc., s based on aowance of the deducton under secton 23(o)(), I. It. C.
1 Nonacquescence pubshed n Cumuatve uetn 19 6-2, page 7, wthdrawn.
1 Nonacquescence pubshed n Cumuatve uetn 19 -1, page , wthdrawn.
1 Nonacquescence pubshed n Cumuatve uetn 19 9-2, page 1, wthdrawn.
1 Nonacquescence pubshed n Cumuatve uetn 19 9-1, page 7. wthdrawn.
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The Commssoner does NOT acquesce n the foowng decsons:
Ta payer
Copey, Ira C, estate of1
Currer et u ., Chares ertram 2.
D
Dreymann, Cr.r G.3_
Ferguson, nne ee
Ferguson, r., Water M
Frst Natona ank of Chcago et a.
of the w of Ira C. Copey 1
Fato, Frankn
Fato, Grace
The, e ecutors
G
Gdwtz, acob, estate of
Gdwtz et a., oseph L., e ecutors of estate of Rose
Gdwtz, deceased e ecutr of estate of acob
Gdwtz
Gdwtz, Rose, deceased e ecutr of estate of acob
Gdwtz
aggett, Suse C, estate of

eatbath Corporaton
opag S. . odng dc Partcpaton et dc Geston
do revets Industres
ohnson, bn
ohnson, en M
ohnson, George
ohnson, udah M.
ohnson, .
ohnson, Loyd W
ohnson, Roberta M_
No.
oume
I a|c
1 621
1
17
1 9
7
9S0
12707
11
1 3
1P3 0
1
6
193 0
1
6
1 021
1
17
19 71
1
12 1
19 72
1
12 1
2176
1
1263
2170
1
1263
217G
1
1263
10302
1
32
17 63
1
332
17170
1
3
1 96
1
3
1 97
1
3
1 99
1
3
I. ) 19
1
3
1 00
1
3
1
1
3
1 6
1
3
1 Gft ta decson.
cquescence pubshed n Cumu atv
N on acquescence reates ony to the
nventon s ta abe as ordnary ncome or
state ta decson.
1 Nonacqufescenee reates ony to the determnaton of the amount of the estate sub|ect to genera cams
n computng the net amount of aowabe deducton for property prevousy ta ed.
uetn 19 7-1. paste 2. wthdrawn.
ue whether the royaty ncome reaze- from the sae of an
s captt gan.
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6
Nonacqt|escences Contnued
Ta payer
L
Los ngees Sat Lake Raroad Co
M
Mer, Wam S., estate of
Moffett, Irene C
N
Northern Trust Co., The, former e ecutor of estate of
Wam . Mer1
0
Oregon Short Lne Raroad Co
Oregon-Washngton Raroad Navgaton Co
S
Safe Depost Trust Co. of atmore, e ecutor of
estate of Suse C. aggett12
St. oseph Grand Isand Raway Co., The
T
Terre, .
Thomas Fe be Coupng Co
0
Unon Pacfc Raroad Co
W
Western Constructon Co
Docket
No.
1 997
19 0
1 1
19 0
1 99
1 996
16302
1 99
19679
12 79
1 1
1 7 3
1737
1 992
106 73
111 69
1 9
oume Pago
1 state ta dvson.
1 Nonacqueseence reates ony to the determnaton of the amount of theestato sub|ect to genera cams
n computng the uot amount of aowaby deducton for property prevousy ta ed.
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INCOM T RULINGS. P RT I
INT RN L R NU COD
C PT R 1. INCOM T
SU C PT R . G N R L PRO ISIONS
P RT I. R T S OF T
S CTION 11. NORM L T ON INDI IDU LS
Secton 29.11-3: Who s a ctzen. 19 0-2 -13 9
T. D. 1
TITL 2C INT RN L R NU . OT PT R I, SU C PT R , P RT 29.
INCOM T ; T L Y RS GINNING FT R D C M R 31, 19 1
mendng secton 29.11-3 of Reguatons 111, reatng to who s
a ctzen of the Unted States.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 2 , D. G.
To Coectors of Interna Revenue, and Others Concerned:
Paragraph 1. Secton 29.11-3 of Reguatons 111 20 CFR 29.11-3
s amended to read as foows:
Sec. 29.11-3. Who s a Ctzen. very person born or naturazed n the
Unted States, and sub|ect to ts |ursdcton, s a ctzen. For rues governng
the e patraton of ctzens by brth and naturazed ctzens, see sectons 01-
10 of the Natonaty ct ot 10 0, as amended ( Stat. 110 ( U. S. C. 01-
10)). foregner who has fed hs decaraton of ntenton of becomng a
ctzen but who has not yet been admtted to ctzenshp by a fna order of a
naturazaton court s an aen. See sectons 29.211-2 to 29.211-u, ucusve,
for dstncton between a resdent aen ndvdua and a nonresdent aen
ndvdua.
Par. 2. Inasmuch as the amendment made by ths Treasury Decson
merey emnates a confct between the provsons of secton 29.11-3
of Reguatons 111 and sectons 333-330 and 0 - 00 of the Natona tv
ct of 19 0, as amended ( U. S. C. 733-730 and 0 - 0 ), t s found
that t s not necessary to ssue ths Treasury Decson wth notce
and pubc procedure thereon under secton (a of the dmnstratve
Procedure ct, approved une 11,19 0, or sub|ect to the effectve date
mtaton of secton (c) of sad ct.
(7)
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29.22(a)-.
(Ths Treasury Decson s ssued under the authorty contaned
n secton 62 of the Interna Revenue Code ( 3 Stat. 32; 26 U. S. C.
62).)
Geo. . Scoenemav,
Commssoner of Interna Revenue.
pproved November 13, 19 0.
Thomas . Lynch,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster November 10. 10 0, S: 2 a. m.)
P RT II. COMPUT TION OF N T INCOM
S CTION 22(a). GROSS INCOM : G N R L
D FINITION
Secton 29.22(a)-: What ncuded n gross 19 0-1 -13 1
ncome. G. C. M. 26399
INT RN L R NU COD ND P IOR R NU L WS
O and gas royates receved by restrcted members of the Osage
Trbe of Indans from the mnera enses of the trbe are ncudbe,
for Federa ncome ta purposes, n the gross ncome of such
members.
G. C. M. 1S2 2 (C. . 1037-1, 7) modfed.
Reconsderaton has been gven to G. C. M. 1 2 2 (C. . 1937-1, 7)
n the ght of the decson n Commssoner v. Sunnen (333 U. S. 91;
Ct. D. 169 , C. 13. 19 -1, 7).
In G. C. M. 16100 (C. . -1, 0 (1936)) t was hed, among other
thngs, that the ncome of restrcted members of the Osage Trbe of
Indans from rents, royates, and bonuses derved from the mnera
eases of the trbe s sub|ect to Federa ncome ta . That hodng was
predcated on the decson of the Supreme Court of the Unted States
n Superntendent of Fve Cvzed Trbes v. Commssoner (29 U. S.
1 , Ct. D. 97 , C. . I -1,1 (193 )).
G. C. M. 1 2 2, supra, revoked G. C. M. 16100, supra, to the e tent of
the above-stated hodng. though not so stated n G. C. M. 1 2 2,
that parta revocaton was based on the concuson that the Govern-
ment was estopped by the |udgment n ackbrd v. Commssoner (3
Fed. (2d) 976) from hodng that the above-mentoned ncome was
ta abe. owever, n the Sunnen case, supra, the Court stated:
ut coatera estoppe s a doctrne capabe of beng apped so as to avod an
undue dsparty n the mpact of ncome ta abty. ta payer may secure a
udca determnaton of a partcuar ta matter, a matter whch may recur
wthout substanta varaton for some years thereafter. ut a subsequent mod-
fcaton of the sgnfcant facts or a chance or deveopment n the controng ega
prncpes may make that determnaton obsoete or erroneous, at east for future
purposes. If such a determnaton s then perpetuated each succeedng year as to
the ta payer nvoved n the orgna tgaton, he s accorded a ta treatment
dfferent from that gven to other ta payers of the same cass. s a resut, there
are nequates n the admnstraton of the revenue aws, dscrmnatory ds-
tnctons n ta abty, and a ferte bass for tgous confuson. (Compare
Unted States v. Stone t Downer Co., 27 U. S. 22 , 23 -230.) Such consequences,
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29.22(a)-
however, are nether necesstated nor |ustfed by the prncpe of coatera
estoppe. That prncpe s desgned to prevent repettous awsuts over matters
whch have once been decded and whch have remaned substantay statc,
factuay and egay. It s not meant to create vented rghts n decsons that
have become obsoete or erroneous wth tme, thereby causng nequtes among
ta payers.
The Court hed n effect that the doctrne of coatera estoppe has
no appcaton when a subsequent decson of a court of ast resort has
effected a change n the appcabe ega prncpes. Therefore, the
doctrne of coatera estoppe or estoppe by |udgment has no appca-
ton n determnng the ta abe status of o and gas royaty ncome
of the Osage Trbe of Indans.
ccordngy, t s the opnon of ths offce that o and gas royates
receved by restrcted members of the Osage Trbe of Indans from
the mnera enses of the trbe are ncudbe, for Federa ncome ta
purposes, n the gross ncome of such members, (. C. M. 1 2 2, supra,
s modfed to conform to ths opnon.
Pursuant to authorty contaned n secton 3791(b) of the Interna
Revenue Code, the nstant rung s mted n ts appcaton to o and
gas royates receved by restrcted members of the Osage Trbe of
Indans on and after anuary 1,19 0.
Chares Opant,
Chef Counse, ureau of Interna Revenue.
pproved une , 19 0.
Fred S. Martn,
ctng Commssoner of Interna Revenue.
pproved ugust 1, 19 0.
Thomas . Lynch,
Secton 29.22(a)-: What ncuded n gross 19 0-21-13 7
ncome. I. T. 027
( so Secton 22(b), Secton 29.22(b) (3)-.)
INT RN L R NU COD ND PRIOR R NU L WS
Payments made by an empoyer to the wdow of a deceased offcer
or empoyee, n consderaton of servces rendered by the of cer or
empoyee, are ncudbe n the gross ncome of the wdow for Fed-
era ncome ta punwses.
O. D. 1017 (C. . , 101 (1921)) revoked and I. T. 3329 (C. .
1930-2, 1 3) modfed.
In O. D. 1017 (C. . ,101 (1921)) t was hed that a payment by a
corporaton to the wdow of a deceased offcer, equa to the saary whch
the deceased offcer woud have earned n 2 months, was wthout con-
sderaton, a gratuty voted as a compment to the deceased, and that
the payment dd not consttute ta abe ncome. In I. T. 3329 (C. .
1939-2, 1 3) t was hed that payments made by a corporaton to the
wdow of an offcer-stockhoder, even though made wthout contractua
obgaton, are deductbe by the corporaton as busness e penses
and that such amounts are gfts to the wdow and not ta abe ncome
to her.
It s stated n I. T. 3329 that When an aowance s pad by an
organzaton to whch the recpent has rendered no servce, the
923 30 1 2
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29.22(a)- .
10
amount s deemed to be a gft or gratuty and s not sub|ect to Federa
ncome ta n the hands of the recpent. Itacs supped. Sec-
ton 29.22(a)-2, Reguatons 111, reads n part as foows: owever,
so-caed pensons awarded by one to whom no servces have been ren-
dered are mere gfts or gratutes and are not ta abe. Itacs sup-
ped. Pror reguatons of the ureau contaned the same prov-
son.
It s beeved that the above-quoted provson of the reguatons was
msapped n I. T. 3329, supra. Whereas the reguatons stress the
poston of the payor, that rung ncorrecty emphaszes the poston
of the payee. The reguatons are not appcabe f servces have been
rendered to the person makng the payments. The fact that the recp-
ent of the payments dd not render such servces s mmatera. The
prncpe contaned n the reguatons s brought out n my . arne-
doe v. en (1 Fed. (2d) 07, certorar dened, 330 U. S. 21) as
foows (page 0 ) :
If the payments to the ta payer were not mere sfts or gratutes,
under the above-quoted e cepton the above-quoted reguaton 1, awarded by one
to whom no servces had been rendered, they are ta abe. It s not ncce sary
that the servces shoud have been rendered bp the pa/cc. The payor s the
one to whom the servces must have been rendered. Itacs supped.
Thus, the essenta factor s whether servces were rendered to the
empoyer, not, as ndcated n I. T. 3329, supra, whether servces were
rendered by the recpent. The type of stuaton ntended to be cov-
ered by the reguatons s e empfed n L. O. 10 0 (C. . 3, 120
(1920)). In that opnon t was hed that payments by the Carnege
Foundaton for the dvancement of Teachng, made to teachers and
ther wdows and not based on any servce to the foundaton, are non-
ta abe gfts. The foundaton was not the empoyer of any of the re-
cpents teachers or ther wdows.
In some nstances t has been hed that payments after the death
of the empoyee-husband to hs wdow by an empoyer consttute ta -
abe ncome on the ground that a defnte contractua obgaton e sted
to make such payments. The good w of the empoyee and hs fath-
fu servce are deemed to be consderaton for such payments and gve
rse to an obgaton whch may be enforced by the wdow. defnte
contract e sted between an empoyer and a deceased husband n
Farshem v. Unted States (1 G Fed. (2d) 10 ). In the arnedoe
case, supra, monthy payments were made to the wdow of a cty
freman pursuant to a Georga statute, and the court t re hed that
snce the wdow had a statutory rght to the money, she was ta abe
wth respect thereto under secton 22(a) of the Interna Revenue
Code. In I. T. 3972 (C. . 19 9-2, 1 ), the ordnary death beneft
receved by the wdow of an empoyee of the Government of the
Terrtory of awa, pursuant to awaan aw, was hed to con-
sttute ta abe ncome. owever, t has been hed that even where
the empoyer s pan for payments after the death of an empoyee s
a vountary pan, a contractua obgaton e sts. (See Mary Sutro
v. Unted States (unreported), decded une 2, 19 2, by the Unted
States Dstrct Court for the Northern Dstrct of Caforna; see
aso I. T. 3 0, C. . 19 7-1,7.)
It s the poston of the ureau that rrespectve of a pan, voun-
tary or nvountary, defnte or ndefnte, payments of the type
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11
( 29.22(a)-3.
heren consdered consttute ta abe ncome, and t s hed that pay-
ments made by an empoyer to the wdow of a deceased offcer or
empoyee, n consderaton of servces rendered by the offcer or em-
poyee, are ncudbe n the gross ncome of the wdow for Federa
ncome ta purposes. ccordngy, O. D. 1017, supra, s revoked.
I. T. 3329, m/ ra, s modfed, and the paragraph entted Gratuty
n part I of Treasury Decson 2090, approved on December 1 , 191 ,
w no onger be foowed.
Under authorty contaned n secton 3791 (b) of the Interna Reve-
nue Code, ths rung w not be appcabe to payments receved
pror to anuary 1,19 1.
Geo. . Scoeneman,
pproved September 12, 19 0.
Thomas . Lynch,
Secton 29.22(a)-2: Compensaton for persona
servces.
INT RN L R NU COD
Dsabty retrement pay receved by members of the unformed
servces under the Career Compensaton ct of 19 9. (See I. T. 017,
page 12.)
Secton 29.22(a)-3: Compensaton pad other 19 0-2 -13 1
than n cash. Mm. 6 3
( so Secton 1621(a), Secton 0 .101, Regua-
tons 116.)
Modfcaton of Mmeograph 6 72 (C. . 1930-1, 1 ) wth respect
to the effectve date for wthhodng of ncome ta on the vaue of
vng quarters or meas furnshed to empoyees as compensaton for
servces rendered.
Washngton 2 . D. C, October 19,19 0.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
1. Paragraph of Mmeograph 6 72 (C. . 19 0-1, 1 ) s modfed
to read as foows:
Under authorty contaned n secton 3791(b) of the Interna Revenue Code,
the provsons of ths mmeograph whch reate to the ncuson of the vaue of
vng quarters or meas n the gross ncome of empoyees w be apped wthout
retroactve effect from anuary 1, 19 9, but the provsons whch reate to the
wthhodng of ncome ta on wages by the empoyer w be apped wthout
retroactve effect from anuary 1,19 1, n eases n whch vng quarters or meas
are determned to be compensatory wthout reference to the convenence of the
empoyer rne, e cept that any ta es whch have been wthhed or pad on the
vaue of such vng quarters or meas w not be refunded.
2. The change n the effectve date for wthhodng purposes from
anuary 1, 19 9, to anuary 1, 19 1, s ntended to reeve empoyers
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22(b). 12
of retroactve abty for the wthhodng of ncome ta on wages
and to permt them, n doubtfu stuatons, to obtan rdngs whether
the vaue of vng quarters or meas furnshed to ther empoyees
represents compensaton for servces rendered. Snce the empoyees,
however, are ta abe from anuary 1. 19 9. on the vaue of vng
quarters or meas furnshed to them as part of ther compensaton,
t s e pected that empoyers now wthhodng on the vaue of vng
quarters or meas whch are compensatory n character w contnue
such wthhodng.
3. Correspondence reatng to ths mmeograph shoud refer to ts
number and to the symbos IT: IM f the nqury reates to the n-
cuson of the vaue of vng quarters or meas n the gross ncome of
empoyees, or to the symbos mT:R f the nqury reates to the
wthhodng of ncome ta on wages by.the empoyer.
Geo. . Schoeneman,
Conmssoner.
pproved October 19, 19 0.
ohn S. Graham,
Secton 29.22(a)-13: Canceaton of ndebtedness.
INT RN L R NU COD
Satsfacton of mortgage for ess than ts face vaue. (Sec I. T.
01 , page 20.)
S CTION 22(b). GROSS INCOM : CLUSIONS
FROM GROSS INCOM
19 0-1 -13391
I. T. 017
INT RN L R NU COD
The dsabty retrement pay receved by members of the un-
formed servces, as that term s defned In secton 102(a) of
the Career Compensaton ct of 19 0 (03 Stat. 02). who retre
under secton 02(f) of that ct wth an actve servce dsabty
of ess than 30 percent, and who eect under secton 02(d) of such
ct to have ther dsabty retrement pay computed on the bass
of years of actve servce, s e cudbe from gross ncome under
secton 22(b)( ) of the Interna Revenue Code to the e tent that
such pay does not e ceed the amount to whch they woud have
been entted had t been computed on the bass of percentage of
dsabty. ny e cess consttutes ta abe ncome to the recp-
ents.
dvce s requested wth respect to the porton of dsabty retre-
ment pay whch s e cudbe from gross ncome and e empt from
Federa ncome ta under the provsons of secton 22(b)( ) of the
Interna Revenue Code n the case of members of the unformed
servces, as that term s denned n secton 102(a) of the Career
Compensaton ct of 19 9 (63 Stat. 02), who retre under secton
02(f) of that ct wth an actve servce dsabty of ess than 30
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13
22(b).
percent and who eect, under secton 02(d) of such ct. to have
ther dsabty retrement pay computed ou the bass of years of
actve servce.
The pertnent provsons of the Career Compensaton ct of 19 9,
supra, read as foows:
Secton 102. For the purposes of ths ct
(a) The term unformed servces, uness otherwse qunfed, sha be Inter-
preted to mean and ncude the rmy of the Unted Staes, Navy, r Force
of the Unted States. Marne Corps, Coast Guard, Coast and Geodetc Survey,
and Pubc eath Servce, and a Reguar and Reserve components thereof.
Sec. 02.

(d) member of the unformed servces whose name Is paced upon the
temporary dsabty retred st of hs servce pursuant to subsectons (a),
(b), or (c) of ths secton, for the perod durng whch hs name s carred
ou such temporary dsabty retred st, but n no event to e ceed a- perod
of years, or a member of the unformed servces who s retred pursuant to
the provsons of ths tte Tte I , sha be entted to receve dsabty
retrement pay computed, at hs eecton, by mutpyng an amount equa
to the monthy basc pay of the rnnk. grade, or ratng hed by hm at the tme
of te pacement of hs name on the temporary dsabty retred st or at
the tme of hs retrement, whchever s earer, by (1) a number equa to
the number of years of actve servce to whch such member s entted under the
provsons of secton 12 of ths tte, mutped by 2 , per centum, or (2) the
percentage of hs physca dsabty as of the tme hs name was paced on the
temporary dsabty retred st or at the tme of retrement, whchever s
earer:

(f) Notwthstandng the foregong provsons of ths secton, any member
of the unformed servces who sha have competed at east 20 years of actve
servce as denned n secton 12 of ths tte, and who s otherwse quafed
to be retred for physca dsabty e cept that hs dsabty s ess than 30
per centum n accordance wth the standard schedue of ratng dsabtes n
current use by the eterans dmnstraton, sha be retred and sha be
entted to receve dsabty retrement pay as prescrbed n subsecton (d)
of ths secton: Provded, That the provsons of ths secton sha not be nter-
preted to mt the appcaton of any provsons, of aw reatng to vountary
or nvountary retrement.

(h) That part of the dsabty retrement pay computed on the bass of
years of actve servce whch s n e cess of the dsabty retrement pay that
a member w:oud receve f such dsabty pay were computed on the bass
of percentage of dsabty sha not be deemed to be a penson, annuty, or
smar aowance for persona n|ures or sckness resutng from actve servce
u the armed servce n the armed forces of any country wthn the meanng
of secton 22(b) ( ) of the Interna Revenue Code, as amended.
Secton 22(b)( ) of the Interna Revenue Code, as amended by
secton 113 of the Revenue ct of 19 2, reatng; to e cusons from
gross ncome of compensaton for n|ures or sckness, provdes n
part as foows:
(b) cusons from Gross Income. The foowng Items sha not be In-
cuded n gross ncome and sha be e empt from ta aton under ths chapter
Chapter 1 of the Code :

( ) Compensaton fob n|ures or sckness. amounts receved
as a penson, annuty, or smar aowance for persona In|ures or sckness
resutng from actve servce n the armed forces of any country;
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29.22(b)(2)- .
1
s evdenced by the foregong provsons of the Career Compensa-
ton ct of 19 9, supra, t s the ntent of Congress to permt members
of the unformed servces who are quafed to retre by reason of
the number of years of actve servce and percentage of physca ds-
abty to have ther retrement pay computed on the bass of years of
actve servce wthout osng any Federa ncome ta benefts to whch
they mght be entted f such retrement pay were computed on the
bass of percentage of dsabty.
It s hed that the dsabty retrement pay receved by members
of the unformed servces, as that term s defned n secton 102(a)
of the Career Compensaton ct of 19 9, supra, who retre under
secton 02(f) of that ct wth an actve servce dsabty of ess
than 30 percent, and vho eect under secton 02(d) of such ct to
have ther dsabty retrement pay computed on the bass of years
of actve servce, s e cudbe from gross ncome under secton
22(b) ( ) of the Interna Revenue Code to the e tent that such pay
does not e ceed the amount to whch they woud have been entted had
t been computed on the bass of percentage of dsabty. ny e cess
consttutes ta abe ncome to the recpents.
Secton 29.22(b)(2)- : Lfe nsurance n- 19 0-21-13
ppcaton of the amendment to secton 29.22(b) (2)- of Regu-
atons 111, made by Treasury Decson 6 (C. . 19 9-1, 0),
provdng ad|ustments to avod doube ta aton of amounts reported
as annutes, n accordance wth the reguatons pror to amendment,
whch do not consttute annutes under the amended reguatons.
dvce s requested as to the appcaton of the amendment to secton
29.22(b) (2)- of Reguatons 111, made by Treasury Decson 6
(C. . 19 9-1, 0), n connecton wth a cam for refund of Federa
ncome ta pad for the caendar year 191 , on account of the ncuson
n gross ncome for that year of a part of the amounts receved under
an endowment contract the proceeds of whch are payabe n nsta-
ments over a f ed perod of tme, whch part represented 3 percent of
the aggregate premums or consderaton pad for the contract.
Under the reguatons e stng pror to February 13, 19 9, the
term annutes ncuded amounts receved n perodca nstaments,
whether annuay, semannuay, quartery, monthy, or otherwse, and
whether for a f ed perod, such as a term of years, or for an ndefnte
perod, such as for fe, or for fe and a guaranteed f ed perod, whch
nstaments were pavabe over a perod onger than 1 year. ffectve
February 13, 19 9, secton 29.22(b) (2)-2 of Reguatons 111 was
amended by Treasury Decson 6 , supra, to read n part as foows:
s used n secton 22(b)(2)( ), amounts receved as an annuty under
an annuty or endowment contract means amounts (based on a computaton
wth reference to fe e pectancy and mortaty tabes and payabe over a perod
onger than 1 year) receved n perodca nstaments, whether annuay, sem-
annuay, quartery, monthy, or otherwse. For ad|ustment In the case of
I. T. 02
INT RN L R NU COD
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1
29.22(b)(2)- .
amounts receved n perodca Instaments for a f ed perod and ncuded In
|tross ncome for ta abe years endng pror to but not on December 31, 1 M , as
an annuty under an annuty or endowment contract see secton 29.22(b) (2)-.
In vew of the amendment quoted above, perodca nstaments
receved for a f ed perod of tme under endowment contracts, so-
caed annuty contracts, or under suppementa agreements for op-
tona settement of the surrender or maturty vaue of fe nsurance
contracts payabe otherwse than upon the death of the nsured (cf.
urtka M. Fsher v. Commssoner, 12 T. C. 102 , affrmed, 1 1 Fed.
(2d) 1010) are no onger ta abe as annutes, and are not sub|ect to
the 3 percent rue appcabe to annutes. To the contrary, such
amounts are ta abe ony after the aggregate of amounts receved
durng the ta abe year and amounts receved before the ta abe year
e ceeds the aggregate premums or consderaton pad for such con-
tracts. (See secton 20.22(b) (2)- of Reguatons 111.)
In the course of preparaton of Treasury Decson t . supra, t was
recognzed that, n the absence of provsons to prevent t, doube ta -
aton woud occur n the case of a ta payer who had been reportng as
an annuty the proceeds of such contracts payabe n nstaments over
a f ed perod of tme. In order to prevent doube ta aton, secton
29.22(b) (2)- of Reguatons 111 was amended by addng three
sentences at the end thereof. s ame ed, the secton reads as foows:
Sec. 2.0.22(b) (2)-. Lfe Insurance ndowment Contracts mounts Pad
Other Than by Reason ok the Death op the Insured. mounts receved under
a fe nsurance or endowment pocy (other than amounts pad by reason of
the death of the nsured, nterest payments on such amounts, amounts receved
as annutes, and amounts of perodc payments ncuded n gross ncome under
secton 22(k)) are not ta abe unt the aggregate of the amounts so receved
(when added to the amounts receved before the ta abe year under such pocy)
e ceeds the aggregate premums or consderaton pad, whether or not pad
durng the ta abe year. For purposes of the precedng sentence, the term
amounts receved before the ta abe year under such pocy sha not be con-
strued to ncude so much of any payments as were ncuded n gross ncome as
amounts receved as an annuty under an annuty or endowment contract for
ta abe years endng pror to but not on December 31, 101S. pproprate ad|ust-
ment w be requred wth respect to such payments, or porton thereof, so
ncuded as form the bass of a pendng or successfu cam or sut for refund.
For defnton of annuty see secton 29.22(b) (2)-2.
The genera pocy of the ureau n appyng secton 29.22(b) (2)-,
as amended, s to aow ta payers who, n accordance wth the regua-
tons pror to amendment, treated as annutes amounts whch under
the amended reguatons are not annutes to effect the foowng ad-
|ustments wth respect to so much of such amounts (3 percent of the
aggregate premums or consderaton pad for the contract) as were
ncuded n gross ncome:
(1) That porton thereof ncuded n gross ncome n returns for
ta abe years whch ended pror to but not on December 31, 19 , and
for whch the perod of mtaton (see secton 322(b) of the Interna
Revenue Code) ts e pred, shoud be e cuded, n the absence of a
pendng or successfu cam or sut for refund, from the amounts
receved before the ta abe year under such pocy as that term s
used n the above-quoted provsons of the reguatons.
ta abe years whch ended pror to but not on December 31,19 , and
for whch the perod of mtaton has not yet e pred, may be made
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29.22(b)(2)- .
16
the bass of cams for refund, or such returns may be aowed to stand,
n whch event the e cuson referred to n (1) above s appcabe.
ta abe years endng on or after December 31, 19 , may be made the
bass of cams for refund, but may not be ad|usted by the e cuson
referred to n (1) above.
Snce the nstant ta payer erroneousy ncuded n gross ncome for
the caendar year 19 part of the amounts receved under an endow-
ment contract the proceeds of whch are payabe n nstaments over
a f ed perod of tme, t foows that hs ony remedy wth respect
to the return for the perod ended on December 31,19 , was to fe a
cam for refund. Furthermore, snce hs cam for refund was fed
before the perod of mtaton had e pred, t was propery fed.
Secton 29.22(b) (2)-: Lfe nsurance n- 19 0-21-13 9
cowment contracts mounts pad other G. C. M. 2G 9
than by reason of the death of the nsured.
INT RN L R NU COD ND TRIOR R NU L WS
Perodca nstaments receved for a f ed perod of tme under
endowment contracts, or so-fUed annuty contracts, or suppemen-
ta agreements for optona settement of the surrender or maturty
vaue of fe nsurance contracts payabe otherwse than upon the
death of the nsured are not annutes wthn the meanng of sec-
ton 22(b) (2) ( ) of the Interna Revenue Code, and such amounts
are e cudbe from gross ncome unt the amounts receved dur-
ng the ta abe year under any such contracts, when added to the
amounts receved n earer years, e ceed the aggregate premums or
consderaton pad for the contracts. Thereafter, the tota of
amounts receved n e cess of the premums or consderaton pad
for such contracts s ncudbe n gross Income.
G. C. M. 2100G (C. . 19 0-1, 116) nnd G. C. M. 22r.9 (C. .
19 1-1, 330) revoked; So. Op. 100 (C. . III-2, 00 (192 )) mod-
fed. Recommended that I. T. 3 02 (C. . 19 0-2, 7) be revoked
and that I. T. 3202 (C. . 193S-2,13S) be modfed.
In vew of the amendment of secton 29.22(b) (2)-2 of Reguatons
111, made by Treasury Decson 6 (C. . 19 9-1, 0), reconsder-
aton has been gven to varous rungs hodng that perodca nsta-
ments receved under endowment contracts, or so-caed annuty con-
tracts, for a f ed term of years are amounts receved as annutes.
Pror to amendment by Treasury Decson 6 , supra, the frst
sentence of secton 29.22(b) (2)-2 of Reguatons 111 provded that
amounts receved as an annuty under an annuty or endowment con-
tract ncude amounts receved n perodca nstaments, whether
annuay, semannuay, quartery, monthy, or otherwse, and
whether for a f ed perod, such as a term of years, or for an ndefnte
perod, such as for fe, or for fe and a guaranteed f ed perod, whch
nstaments are payabe over a perod onger than 1 year. ffectve
February 13, 19 9, that sentence of the reguatons was amended by
Treasury Decson 6 , supra, to read as foows:
s used n secton 22(b) (2) ( ), amounts receved as an annuty under an
annuty or endowment contract means amounts (based on a computaton wth
reference to fe e pectancy and mortaty tabes and payabe over a perod onger
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17
1 29.22(b)(2)- .
than 1 year) receved n perodca nstaments, whether annuay, semannuay,
quartery, monthy, or otherwse.
Under the foregong provson of the amended reguatons, per-
odca nstaments receved for a f ed perod of tme under endow-
ment contracts, so-caed annuty contracts, or suppementa agree-
ments for optona settement of the surrender or maturty vaue of
fe nsurance contracts pnyabe otherwse than upon the death of
the nsured (cf. urtha M. Fsher v. Commssoner, 12 T. C. 102 ,
affrmed, 1 1 Fed. (2d) 1010) are not annutes because the amounts
so receved are not based on a computaton wth reference to fe
e pectancy and mortaty tabes. (See George II. Thorncy et u .
v. Commssoner, 2 T. C. 220, acquescence, C. . 19 9-1, , and George
II. ess, r., v. Unted States, 7 Fed. Supp. 13 .) It foows that
such amounts are not sub|ect to the 3 percent rde appcabe to annu-
tes, but are e cudbe from gross ncome unt the amounts receved
durng the ta abe year under any such contracts, when added to the
amounts receved n earer years, e ceed the aggregate premums or
consderaton pad for the contracts. Thereafter, the tota of amounts
receved n e cess of the premums or consderaton pad for such
cont-acts s ncudbe n gross ncome. (For ad|ustments to avod
doube ta aton of amounts prevousy reported as annutes, n
accordance wth the reguatons pror to amendment, wnch do not
consttute annutes under the amended reguatons, see I. T. 02 ,
page 1 , ths uetn.)
Snce G. C. M. 216G6 (C. . 19 0-1,116) and G. C. M. 22 19 (C. .
19 1-1, 330) are contrary to the amended reguatons, they are hereby
revoked. For the same reason, t s recommended that I. T. 3 02
(C. . 1C 0-2, 7) be revoked. It shoud be noted that the defn-
ton of an annuty set forth n So. Op. 1G0 (C. . III-2, ( 0, 02 (192 ))
and the frst two sentences of the ast paragraph of I. T. 3202 (C. .
193 -2, 13 ) are n confct wth the amended reguatons. So. Op.
160 s modfed to the e tent of such confct, and t s recommended
that I. T. 3202 be smary mofed.
Chares Opant,
Chef Counse7, ureau of Interna e venue.
Secton 29.22(b) (2)-: Lfe nsurance n- 19 0-21-13 0
dowment contracts mounts pad other I. T. 029
than by reason of the death of the nsured.
Revocaton of I. T. 3 02 (C. . 19 0-2, 7) and modfcaton of
I. T. 3202 (C. . 193 -2, 13 ).
In accordance wth the recommendatons contaned n G. C. M.
26 9 (page 16, ths uetn), I. T. 3 02 (C. . 19 0-2, 7) s revoked
and I. T. 3202 (C. . 193 -2,13 ) s modfed.
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29.22(b)(9)- .
IS
Secton 29.22(b) (3)-: Gfts and bequests.
INT RN L R NU COD
Payments by empoyer to wdow of deceased offcer or empoyee.
(See t T. 027, page 9.)
Secton 29.22(b) (9)-1: Income from dscharge
of ndebtedness.
( so Secton 29.22(b) (10)-1; Secton 322, Sec-
ton 29.322-7; Secton 19.322-7, Reguatons
103.)
TITL 2C INT RN L R NU . CII r-T R I, SU C PT R . T RT 10 ND
RT 29
Reguatons 103 and 111 amended to conform to secton 2 of Tub-
e Law 271 ( ghty-frst Congress) C. . 19 9-2, 272 , approved
ugust 27, 9 9, and Reguatons 111 aso amended to conform to
secton 3 of such pubc aw.
Wa hhffto7 2o, D. G.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 20 CFR, Part 19 and Regua-
tons 111 2G CFR, Part 29 to secton 2 of Pubc Law 271 ( shty-
frst Congress) C. . 19 9-2, 272 , approved ugust 27,19 9, and aso
to conform Reguatons 111 to secton 3 of such pubc aw, such regu-
atons are amended as foows:
Paragraph 1. There s nserted mmedatey precedng secton
29.22(b) (9)- of Reguatons 111 26 CFR 29.22(b) (9)-fand m-
medatey precedng secton 29.22(b) (10)-1 of Reguatons 111 26
CFR 29.22(b) (10)-1 the foowng:
PU LIC L W 271 ( IG TY-FIRST CONGR SS), PPRO D
UGUST 27, 19 9

S C. 3. T NSION OF TIM IN T C S O DISC RG
OP IND T DN SS.
Secton 22(b) (9) and secton 22(b) (10) of the Interna Revenue Code
are hereby amended by strkng out 19 9 and nsertng n eu thereof
19 0 .
Par. 2. Secton 29.22(b) (9)- of Reguatons 111, as amended by
Treasury Decson 76 C. . 19 7-2, 17 , approved September ,
19 7 26 CFR 29.22(b) (9)- , s further amended by strkng from
the frst paragraph and from the thrd paragraph anuary 1, 19 0
and nsertng n eu thereof n each nstance anuary 1,19 1 .
Par. 3. Secton 29.22(b) (10)-1 of Reguatons 111, as amended by
Treasury Decson 76 26 CFR 29.22(b) (10)-1 , s further amended
by strkng from the frst sentence and from the ast sentence anu-
ary 1.19 0 and nsertng n eu thereof n each nstance anuary 1,
19 1 .
19 0-20-1: 3
T. D. S07
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19
29.22(b) (10)-1.
Par. . There s nserted mmedatey precedng secton 19.322-1 of
Reguatons 103 26 CFR 19.322-1 and mmedatey precedng sec-
ton 29.322-1 of Reguatons 111 2G CFR 29.322-1 the foowng:
PU LIC L W 271 ( IG TY-FIRST CONGR SS), PPRO D
UGUST 27, 10 9

S C. 2. T NSION OF TIM FOR CL IMING R FUND WIT
R SP CT TO W R LOSS S.
The |ont resouton of une 29, 19 (Pubc Lnw 2 , ghteth
Congress), s hereby amended by strkng out 19 9 wherever appear-
ng theren and nsertng n eu thereof 19 0 .
Par. . Secton 19.322-7 of Reguatons 103. as amended by Treas-
ury Decson 6 7 C. . 19 -2, 100 , approved October 1, 191 26
CFR 19.322-7 , and secton 29.322-7 of Reguatons 111, as amended
by sad Treasury Decson 6 7 L26 CFR 29.322-7 . are further
amended by strkng out n the ast sentence of paragraph (a) of each
such secton the foowng: e tendng to December 31, 19 9, and by
nsertng n eu thereof the foowng: as amended by secton 2 of
Pubc Law 271 ( ghty-frst Congress), approved ugust 27, 19 9.
e tendng to December 31, 19 0, .
Par. 6. Inasmuch as the amendments made by ths Treasury De-
cson woud merey change the dates from those specfed by pror
aw to those now specfed by Pubc Law 271 ( ghty-frst Congress),
whch e tends the appcaton of secton 22(b) (9) and (10) of the
Interna Revenue Code and e tends the tme for fng certan cams
for credt or refund wth respect to war osses, t s hereby found that
t s unnecessary to ssue ths Treasury Decson wth notce and pub-
c procedure thereon under secton (a) of the dmnstratve Pro-
cedure ct, approved une 11, 19 6, or sub|ect to the effectve date
(Ths Treasury Decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code ( 3 Stat. 32; 26 U. S. C. 62).)
Geo. . Scoeneman,
Commssoner of Intcma h evenue.
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster September 1 , 19 0, : 3 a. m.)
Secton 29.22(b) (10)-1: Income from dscharge
of ndebtedness of raroad corporatons.
nterna revenue code
Reguatons 111 amended. (See T. D. 07, page 1 .)
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29.23(e)- .
20
S CTION 22(d). GROSS INCOM : IN NTORI S-
L CTI M T OD
Secton 29.22(d)-: Inventores under eec- 19 0-2 -13 2
tve method. I. T. 036
INT RN L R NU COD
Prce ndces for uy 19 0, pubshed by the ureau of Labor
Statstcs under date of September 7, 19 0, for use by department
stores empoyng the reta nventory and eectve nventory methods.
The foowng prce ndces for uy 19 0, pubshed by the ureau
of Labor Statstcs for use by department stores empoyng the reta
nventor|7 and eectve nventory methods, are accepted by the ureau
of Interna Revenue pursuant to Treasury- Decson G0 (C. . 19
1,16), approved March ,19 , and Mmeograph G2 (C. . 19 -1,
21), dated March 9, 19 , for approprate appcaton to nventores
for ta abe years of 12 months ended on une 30, 19 0, and uy 31,
19 0.
ureau of Labor Statstcs, department store nventory prce ndces, t
department groups
anuary 19 1 100
uy 19 9
to uy
Oroup
uy 19 9
uy 19 0
19 0.
percent
change
199.f
10 .0
2 0
192.7
19 .2
3 . 6
171. 1
16 .9
I . Lades outerwear and grs wear
176.
167.
.0
1 .9
1 3.
1.3
1 .3
1 6.1
1.2
171.0
173.
1.
III Ma|or appances and eectrca (food
100.9
1 .3
1.6
1 2.
1 .0
LS
. Lades accessores
1(17.1
163.6
2. 1
Tota Oroup I. II. III. I . . I , and
179.0
17 .
2.0
Tota Groups I, II, and III
173.7
173.
. 1
177.
17 .
-1.
S CTION 23(e). D DUCTIONS FROM GROSS INCOM :
LOSS S Y INDI IDU LS
Secton 29.23(e)-: Losses by ndvduas. 19 0-1 -13392
( so Secton 22(a), Secton 29.22(a)-13.) I. T. 01
INT RN L R NU COD
Treatment for Federa ncome ta purposes of dscount upon
settement of a purchase-money mortgage before maturty In a
case n whch the mortgagor was fuy abe to pay and there was
no decrease u vaue of the mortgaged property.
dvce s requested as to the treatment, for Federa ncome ta
purposes, of dscount upon the settement of a purchase-money mort-
gage before maturty under the crcumstances herenafter stated.
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21
29.23(e)- .
In the nstant case, the ta payer sod a farm n 19 6 for 1 ,000.
e receved ,000 n cash and a purchase-money mortgage n the
amount of 10,000. The ad|usted bass of the farm was n e cess of
the seng prce, and the ta payer deducted the fu amount of the
oss n computng net ncome for 19-16. In 19 7, the ta payer, beng n
need of funds, ofercd to accept 9,000 from the buyer n satsfacton
of the mortgage ndebtedness, and such offer was accepted. The
buyer was fuy abe to pay the entre amount of such ndebtedness,
and there had been no decrease n the vaue of the mortgaged property.
It s hed that the ta payer sustaned an ordnary oss whch s
deductbe under secton 23(e) of the Interna Revenue Code. The
property n the mortgage was e tngushed by aowance of a ds-
count and payment of the baance of the mortgage ndebtedness. The
transacton dd not consttute a sae or e change. (See I. W. ae v.
Ueverng, Fed. (2d) 19; Dougas Farbanks v. Unted States,
30G U. S. 6, Ct. D. 1391, C. . 1939-1 (Part 1), 260.)
It s further hed that the dscount aowed to the buyer upon sette-
ment represents ordnary ncome to hm. (See secton 29.22(a)-13
of Reguatons 111 and L. D. Coddon d ros., Inc., v. Commssoner,
37 . T. . 39 . Cf. aman Trsch v. Commssoner, 11 Fed. (2d)
6 6; everng v. . L. an Co., 12 Fed. (2d) 33, and hrens
Pubshng Co., Inc., v. Commssoner, 1 T. C. 3 , acquescence, C. .
19 3, 9.)
S CTION 23(e). D DUCTIONS FROM GROSS INCOM :
LOSS S Y INDI IDU LS
Secton 29.23 (e)-1: Losses by ndvduas. 19 0-22-13
I. T. 032
INT RN L R NU COD
The amount of oss whch s deductbe under secton 23(e) (3) of
the Interna Revenue Code, n the case of deprecabe nonbusness
property, s the dfference between the vaue of the property mmed-
atey precedng the casuaty and ts vaue (ncudng savage vaue)
mmedatey after the casuaty, but not n e cess of an amount equa
to the ad|usted bass of the property, reduced by any nsurance or
other compensaton receved.
dvce s requested as to the amount of oss deductbe under secton
23(e) (3) of the Interna Revenue Code, n the case of deprecabe non-
busness property, where such oss s partay covered by nsurance.
Secton 23(e) (3) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons:
(e) Losses by Indvduas. In the case .of an ndvdua, osses sustaned
durng the ta abe year and not compensated for by nsurance or otherwse

(3) of property not connected wth the trade or busness, f the oss arses
from fres, storms, shpwreck, or other casuaty, or from theft.
It s hed that the amount of oss whch s deductbe under secton
23(e) (3) of the Code, supra, n the case of deprecabe nonbusness
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29.23(m)-.)
22
property, s the dfference between the vaue of the property mmed-
atey precedng the casuaty and ts vaue (ncudng savage vaue)
mmedatey after the casuaty, but not n e cess of an amount equa to
the ad|usted bass of the property, reduced by any nsurance or other
compensaton receved. In other words, the amount of nsurance or
other compensaton receved must be apped to the amount of the oss
otherwse determned, whether measured by the dfference between the
vaue of the property mmedatey before and mmedatey after the
casuaty, or mted to the ad|usted bass of the property as provded
n secton 113(b) (1) of the Code.
ppcaton of the above-stated concuson s ustrated by the
foowng e ampes:
ampe 1. Resdenta property whch cost 10,000 had a vaue
of 1 ,000 mmedatey precedng the casuaty. Immedatey after the
casuaty, such property had no vaue. The amount recovered by
way of nsurance was 7,000.
aue of property mmedatey precedng casuaty 1S, 000
Less: aue of property mmedatey after casuaty O
Dfference, but not n e cess of cost (ad|usted bass) 10, 000
Less : Insurance recovery 7, 000
Loss deductbe under secton 23(e) (3), I. It. C 3,000
ampe 2. n automobe used for nonbusness purposes whch
cost 3,000 had a vaue of 1,000 mmedatey precedng the casuaty.
Immedatey after the casuaty, the automobe had a vaue (ncudng
savage vaue) of 100. The amount recovered by way of nsurance
was 700.
aue of automobe mmedatey precedng casuaty 1,000
Less: aue of automobe mmedatey after casuaty 100
Dfference, but not n e cess of cost (ad|usted bass) )00
Less : Insurance recovery 700
Loss deductbe under secton 23(e) (3), I. R. C 200
S CTION 23(m). D DUCTIONS FROM GROSS
INCOM : D PL TION
Secton 29.23(m)-: Depeton of mnes,
o and gas wes, other natura deposts,
and tmber; deprecaton of mprovements.
INT RN L R NU COD
d vaorem property ta es pad for essor by essee. (See G. C. M.
2G 2G, page 0.)
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23
29.23(o)-.
S CTION 23(o). D DUCTIONS FROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS
INT RN L R NU COD ND PRIOR R NU L WS
Contrbutons or gfts made by Indvduas to organzatons of
vounteer fremen are deductbe, n computng net ncome, unc er
secton 23(o)() of the Interna Revenue Code and correspondng
provsons of pror revenue aws as contrbutons or g ts to or for
the use of a potca subdvson of a State for e cusvey pubc
purposes.
I. T. 1 07 (C. . II-2, 1 (1923)) revoked.
Reconsderaton has been gven to I. T. 1 07 (C. . II-2,1 (1023))
n the ght of acquescence n the decsons n Roy C. Mc enna v.
Commssoner ( T. C. 712), Isabea M. Shedon et at. v. Commssoner
(G T. C. 10), arod . Smth v. Commssoner (Ta Court memo-
randum opnon dated December 21, 19 9), and Frederck 11. nght
et u . v. Commssoner (Ta Court memorandum opnon dated
une 9, 19 0).
I. T. 1 G7, supra, hods that a contrbuton made to a vounteer fre
company, a prvate corporaton, to be used by that corporaton for
the beneft of the nhabtants of an ncorporated muncpaty n
whch the fr company s ocated, s not a contrbuton Tor the use
of the muncpa corporaton and no part of the contrbuton s
deduct be.
Secton 23(o)() of the Interna Revenue Code provdes n part
that an ndvdua, n computng net ncome, sha be aowed as
deductons contrbutons or gfts payment of whch s mare wthn
the ta abe year to or for the use of a State, or any potca subdv-
son thereof, for e cusvey pubc purposes. Secton 211(a) (11) ( )
of the Revenue ct of 1921. under whch I. T. 1 G7, supra, was pro-
mugated, contans substantay smar provsons.
The acquescences n the Mc enna, Shedon, Smth, and nght
cases, s-upra, are based on the aternatve ground suggested by the Ta
Court as a bass for ts decsons, . e., aowance of the deductons
under secton 23(o) (1) of the Interna Revenue Code. The acques-
cences are based on the proposton that contrbutons to a vounteer
fre department reeve a potca subdvson of the burden of a
functon normay performed by a muncpaty.
In vew of the foregong, contrbutons or gfts made by ndvd-
uas to organzatons of vounteer fremen are deductbe, n com-
putng net ncome, under secton 23(o)() of the Interna Revenue
Code and correspondng provsons of pror revenue aws as contr-
butons or gfts to or for the use of a potca subdvson of a State
for e cusvey pubc purposes. I. T. 1 07, supra, s hereby revoked.
Secton 29.23(o)-: Contrbutons or gfts by
ndvduas.
19 0-21-13 1
I. T. 030
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29.23(q)-r.
2
S CTION 23 (q). D DUCTIONS FROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS Y COR-
POR TIONS - pS
Secton 29.23 (q)-: Contrbutons or gfts by 19 0-16-1330
corporatons. T. D. 796
( so Secton , Secton 29. -7; Secton 102,
Secton 29.102- .)
TITL 26 INT RN L R ND . OT PT R I, SU C PT R , T RT 29.
INCOM T ; T L Y RS GINNING FT R D C M R 31. 19 1
Reguatons 111 amended to conform to sectons 1 and 3 of Pubc
Law 37 , ghty-frst Congress C. P . 19 0-2, 27 , reatng to
farmers returns as decaratons of estmated ta and chartabe
contrbutons by corporatons on accrua bass.
Washngton 2d, D. C.
In order to conform Reguatons 111 26 CFR, Part 29 to sectons
1 and 3 of Pubc Law 37 , ghty-frst Congress C. . 19 9-2, 27 ,
approved October 2 , 19 9, such reguatons are amended as foows:
29.23(q)- 26 CFR 29.23(q)- the foowng:
S C. 3. C RIT L CONTRI UTIONS Y CORPOR TIONS ON
CCRU L SIS. (PU LIC L W 37 , IG TY FIRST CON-
GR SS, PPRO D OCTO R 2 , 19 9.)
(a) Secton 23(q) of the Interna Revenue Code (reatng to char-
tabe and other contrbutons) s hereby amended by addng at the end
thereof the foowng:
In the case of a corporaton reportng ts net ncome on the accrua
bass, at the eecton of the ta payer any contrbuton or gft payment
of whch s made after the cose of the ta abe year and on or before the
1 th day of the thrd month foowng the cose of such year sha, for
the purposes of ths subsecton, be consdered as pad durng such ta abe
year f, durng such year, the board of drectors authorzed such con-
trbuton or gft. Such eecton sha be made ony at the tme of the
fng of the return for the ta abe year, and sha be sgnfed n such
manner as the Commssoner, wth the approva of the Secretary, sha
by reguatons prescrbe.

(c) The amendments made by ths secton sha be appcabe wth
respect to ta abe years begnnng after December 31, 19 2. If the eec-
ton provded for n such amendments s made for any ta abe year
begnnng before anuary 1, 19 9
(1) the eecton for such year may be made (n eu of at the tme
of the fng of the return for such year) at any tme wthn one
year after the date of the enactment of ths ct; but
(2) such eecton sha not be aowed uness the ta payer, In
accordance wth reguatons prescrbed by the Commssoner wth
the approva of the Secretary, consents In wrtng to the assessment
(wthn such perod as may be agreed upon) of any defcency,
to the e tent resutng from such eecton, for any other ta abe
year of the ta payer, even though on the date of the fng of such
consent such assessment s otherwse prevented by the operaton
of any aw or rue of aw.
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2
29.23(q)-.
Par. 2. Secton 29.23 (q)-, as amended by Treasury Decson C
C. . 19 -2, 1 , approved uy 20, 19 26 CFR 29.23(q)- , s
further amended by addng at the end thereof the foowng:
For ta abe years begnnng after December 31, 19 2, a corporaton reportng
ts net ncome on tte accrua bass may eect to have consdered as pad durng the
ta abe year any contrbuton or gft to organzatons descrbed n secton 23(q),
wth the e ceptons herenbefore descrbed, payment of whch contrbuton or
gft Is made after the cose of the ta abe year and on or before the oth day of the
thrd month foowng the cose of such year f, durng such year, the board of
drectors authorzed such contrbuton or gft. For ta abe years begnnng
after December 31, 19 , such eecton shn be made ony at the tme of the fng
of the return for the ta abe year and sha be sgnfed by reportng such con-
trbuton or gft on the return and by attachng to the return a copy of the reso-
uton of the board of drectors authorzng such contrbuton or gft. There
sha be attached to such copy of the resouton of the board of drectors a wrt-
ten decaraton that the resouton of authorzaton was adopted by the boafd of
drectors durng the ta abe year, and such decaraton sha be verfed by a state-
ment sgned by the presdent or other prncpa offcer of the corporaton that t
s made under the penates of per|ury. For ta abe years begnnng before
anuary 1, 19 9, the eecton may be made (n eu of at the tme of the fng of
the return) at any tme before October 26, 19 0, f the corporaton fes n dup-
cate wth the Commssoner of Interna evenue, Washngton 2 , D. C, attenton
of the Income Ta Unt, Records Dvson, a wrtten consent to the assessment
(wthn such perod as may be agreed upon) of any defcency, to the e tent re-
sutng from such eecton, for any other ta abe year of the ta payer, even
though on the date of the fng of such consent such assessment s otherwse pre-
vented by the operaton of any aw or rue of aw. For ta abe years begnnng
after December 31, 19 2, and before anuary 1, 19 9, the eecton sha be sgn-
fed by a wrtten statement fed wth the consent herenbefore descrbed n whch
the contrbuton or gft sha be specfed together wth a copy of the resouton
of the board of drectors authorzng such contrbuton or gft. There sha be
attached to such copy of the resouton of the board of drectors a wrtten deca-
raton that the resouton of authorzaton was adopted by the board of drectors
durng the ta abe year wth respect to whch the deducton s camed, and such
decaraton sha be verfed by a statement sgned by the presdent or other prn-
cpa offcer of the corporaton that t s made under the penates of per|ury. If
the perod has e pred wthn whch a cam for credt or refund may be aowed
wth respect to a ta abe year, an eecton under secton 3(c) of Pubc Law 37 ,
ghty-frst Congress, wth respect to such ta abe year w not serve to remove
the bar of the statute of mtatons wth respect to such a credt or refund.
Par. 3. There s nserted mmedatey after secton 60 the foowng:
S CTION 1. F RM RS R TURNS S D CL R TIONS OF STI-
M T D T . (PU LIC L W 37 . IG TY-FIRST CONGR SS,
PPRO D OCTO R 2 , 19 9.)
Secton 60(a) of the Interna Revenue Code (reatng to decaraton of
estmated ta by farmers) s hereby amended by strkng out the perod
at the end thereof and nsertng n eu thereof the foowng: ; and f
such an ndvdua fes a return on or before anuary 31 of the succeed-
ng ta abe year, and pays n fu the amount computed on the return as
payabe, such return sha have the same effect as that prescrbed n
secton (d) (3) n the ease of a return fed on or before anuary 1 .
Pak. . Secton 29. -7, as amended by Treasury Decson 6 7
C. . 19 9-1, 9 , approved February 16, 19 9 26 CFR 29. -7 , s
further amended by revsng that porton of the frst sentence of para-
graph (g) whch precedes the matter dentfed as (1) to read as
foows:
If the ta payer fes hs return for the caendar year on or before anuary 1
(n the case of a farmer, anuary 31) of the succeedng caendar year (or f the
ta payer s on a fsca year bass, on or before the 1 th day (n the case of a
923 30 1-
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29.23(q)-.
2G
farmer, the ast day) of the frst month Immedatey succeedng the cose of
such fsca year) and pays In fu the amount of ta shown by such retam as
payabe, then
Par. . There s nserted mmedatey precedng secton 29.102-1
26 CFR 29.102-1 , the foowng:
CCRU L SIS. (PU LIC L W 37 , IG TY-FIRST CON-
GR SS, PPRO D OCTO R 2 , 19 9.)

(b) Secton 102(d) (1) ( ) of the Interna Revenue Code (reatng to
secton 102 net ncome), are each amended by addng at the
end thereof the foowng new sentence: For the purposes of the preced-
ng sentence, payment of any contrbuton or gft sha be consdered as
made wthn the ta abe year f and ony f t s consdered for the pur-
poses of secton 23 (q) as made wthn such year. .
respect to ta abe years begnnng after December 31,19 2. If the eec-
ton provded for n such amendments s made for any ta abe year begn-
nng before anuary 1, 19 9
(1) the eecton for such year may be made (n eu of at the
tme of the fng of the return for such year) at any tme wthn
one year after the date of the enactment of ths ct; but
(2) such eecton sha not be aowed uness the ta payer, n ac-
cordance wth reguatons prescrbed by the Commssoner wth the
approva of the Secretary, consents n wrtng to the assessment
(wthn such perod as may be agreed upon) of any defcency, to
the e tent resutng from such eecton, for any other ta abe year
of the ta payer, even though on the date of the fng of such consent
6uch assessment s otherwse prevented by the operaton of any aw
or rue of aw.
Par. 6. Secton 29.102- , as amended by Treasury Decson 17
C. . 19 6-2, , approved une 12, 19 6 26 CFR 29.102- , s
further amended by revsng that porton desgnated as (6) to read
as foows:
(6) contrbutons or gfts payment of whch s made wthn the ta abe year (or
consdered for the purposes of secton 23(( ) as made wthn such year), not
otherwse aowed as a deducton, to or for the nse of donees descrbed n secton
23(o) and secton 29.23(o)- for the purposes theren specfed;
Par 7. There s nserted mmedatey precedng secton 29.336-1 26
CFR 29.336-1 the foowng:
S C. 3. C RIT RL CONTRI UTIONS Y CORPOR TIONS ON
CCRU L SIS. (PU LIC L W 37 , IG TY-FIRST CON-
GU SS, PPRO D OCTO R 2 , 19 9.)

(b) secton 330(a)(2) of such Code Interna Revenue
Code (reatng to net ncome of foregn persona hodng companes),
are each amended by addng at the end thereof the foowng
new sentence: For the purposes of the precedng sentence, payment of
any contrbuton or gft sha be consdered as made wthn the ta abe
year f and ony f t s consdered for the purposes of secton 23(q) as
made wthn such year. .
respect to ta abe years begnnng after December 31, 19 2. If the
eecton provded for n such amendments s made for any ta abe year
of the fng of the return for such year) at any tme wthn one year
after the date of the enactment of ths ct; but
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27
29.23(q)-.
(2) such eecton sha not be aowed uness the ta payer, In
accordance wth reguatons proscrbed by the Commssoner wth
the approva of the Secretary, consents n wrtng to the assessment
(wthn such perod as m:y be agreed upon) of any defcency, to
the e tent resutng fron such eecton, for any other ta abe year
of the ta payer, even though on the date of the fng of such consent
such assessment s otherwse prevented by the operaton of any aw
or rue of aw.
Par. . There s nserted mmedatey precedng secton 29. 0 -1
2C CFR 29. 0 -1 the foowng:
CCRU L SIS. (PU LIC L W 37 , IG TY- URST CON-
GU SS, PPRO D OCTO R IT,, 19 9.)

(b) and secton 0 (a) (2) of such Code Interna Revenue
Code (reatng to net ncome of domestc persona hodng companes)
are each amended by addng at the end thereof the foowng new sen-
tence: For the purposes of the precedng sentence, payment of any
contrbuton or gft sha be consdered as made wthn the ta abe year
f and ony f t s consdered for the purposes of secton 23(q) as made
wthn such year. .
(e) Te amendments made by ths secton sha be appcabe wth
respect to ta abe years begnnng after December 31, 19 2. If the eec-
ton provded for n such amendments s made for any ta abe year
of the fng of the return for such year) at any tme wthn one
year after the date of the enactment of ths ct; but
(2) such eecton sha not be aowed uness the ta payer, n
accordance wth reguatons prescrbed by the Commssoner wth
the approva of the Secretary, consents n wrtng to the assessment
(wthn such perod as may be agreed upon)-of any defcency, to
the e tent resutng from such eecton, for any other ta abe year
of the ta payer, even though on the date of the tng of such consent
such assessment s otherwse prevented by the operaton of any aw
or rue of aw.
secton 62 of the Interna Revenue Code ( 3 Stat. 32; 26 U. S. C 62)
and sectons 1 and 3 of Pubc Law 37 , ghty-frst Congress, ap-
proved October 2 , 19 9.)
Inasmuch as the purpose of ths Treasury Decson s to conform
the reguatons to the provsons of sectons 1 and 3 of Pubc Law 37 ,
ghty-frst Congress, approved October 2 , 19 9, whch provsons
beraze requrements mposed upon ta payers, t s found that t s
unnecessary to ssue ths Treasury Decson under secton (a) of the-
dmnstratve Procedure ct, approved une 11, 19 6, as sub|ect to
the effectve date mtaton of secton (c) of sad ct.
Geo. . Sco N N,
pproved uy 19, 19 0.
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster uy 2 , 19 0, : 0 a. m.)
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29.23( )-.
2
S CTION 23( ). D DUCTIONS FROM GROSS INCOM :
M DIC L, D NT L, TC., P NS S
Secton 29.23 ( )-: Medca, denta, etc., 19 0-23-13 7
e penses. I. T. 03
INT RN L R NU COD
Where the ta payers daughter, who fed a |ont return wth
her husband for the ta abe year 19 , receved more than one-haf
of her support from the ta payers for the caendar year, she quafes
as a dependent of the ta payers under secton 2 (b) (3) of the Inter-
na Revenue Code, and medca e penses pad by them on her behaf
durng 19 are deductbe for 19 wthn the mtatons of secton
23( ) of the Code.
dvce s requested as to the aowance of a deducton for medca
e penses under secton 23( ) of the Interna Revenue Code under the
crcumstances herenafter stated.
In the nstant case, the ta payers, husband and wfe, fed a |ont
Federa ncome ta return for 19 n whch they camed ony them-
seves as e emptons under secton 2 (b) (1) of the Interna Revenue
Code. Durng that year they furnshed more than one-haf of the
support of ther marred daughter, ncudng payment of her medca
e penses. The daughter and her husband fed a |ont return for 19 3,
athough she had no ncome.
Secton 23( ) of the Code provdes that n computng net ncome
there sha be aowed as deductons:
( ) Medca, Denta, tc., penses. penses pad durng the ta abe
year, not compensated for by nsurance or otherwse, for medca care of the
ta payer, hs spouse, or a dependent specfed n secton 2. (6) (S), to the e tent
that such e penses e ceed per centum of the ad|usted gross ncome.
tacs supped.
Secton 2 (b) (3) of the Code provdes n part as foows:
(3) Defnton of dependent. s used n ths chapter chapter 1 of the
Code the term dependent means any of the foowng persons over haf
of whose support, for the caendar year n whch the ta abe year of the
ta payer begns, was receved from the ta payer:
( ) a son or daughter of the ta payer
The fact that the ta payers daughter s marred and fed a |ont
return for 19 wth her husband does not precude her from quafy-
ng as a dependent for the purpose of secton 23 ( ) of the Code, supra.
Snce she receved more than one-haf of her support durng 19 from
the ta payers, she s ther dependent.
Secton 2 (b) (1) (D) of the Code provdes that the 600 e empton
for a dependent sha not be aowed n respect of a dependent who
has made a |ont return wth hs or her spouse under secton 1 of
the Code, but that provson has no appcaton to the deducton for
medca e penses.
ccordngy, the ta payers daughter, havng receved more than
one-haf of her support from the ta payers for the caendar year, qua-
fes as a dependent of the ta payers under secton 2 (b)(3) of the
Interna Revenue Code, supra, and medca e penses pad by them on
her behaf durng 19 are deductbe for 19 wthn the mtatons
of secton 23 ( ) of the Code, supra.
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29
29. 2-1.
P RT I . CCOUNTING P RIODS ND M T ODS OF CCOUNTING
S CTION 2. P RIOD IN W IC IT MS OF
GROSS INCOM INCLUD D
Secton 29. 2-1: When ncuded n gross 19 0-1 -133
ncome. I. T. 016
INT RN L R NU COD
Where a cotton producer s not bound by an eecton under secton
123 of the Interna Revenue Code to have an amount receved by hm
as a oan from the Commodty Credt Corporaton consdered as n-
come for tho ta abe year n whch receved, any amount receved as
a oan under the 1 )-1S oan program of the Corporaton whch was
not repad became ncome and s ncudbe n the gross ncome of
the producer for the ta abe year n whch he no onger coud redeem
the cotton pedged as securty for the oan, namey, when the cotton
became a part of a producers poo created by the Corporaton.
If the producer reazes an addtona amount upon qudaton of
the poo, such addtona amount w consttute ncome for the ta -
abe year n whch receved, f the producer empoys the cash recepts
and dsbursements method of accountng, or for the ta abe year n
whch hs rght to receve the amount becomes f ed, f he empoys
the accrua method.
dvce s requested reatve to the ta abe year for whch an amount
receved by a cotton producer as a oan under the 19 cotton oan pro-
gram of the Commodty Credt Corporaton, whch was not repad, s
ncudbe n hs gross ncome, for Federa ncome ta purposes, where
the producer s not bound by an eecton under secton 123 of the Inter-
na Revenue Code to have amounts receved as oans from the Corpora-
ton consdered as ncome for the ta abe year n whch receved.
dvce s aso requested wth respect to the tme of ta abty of any
addtona amount receved by the producer upon qudaton of the
cotton poo created by the Commodty Credt Corporaton upon ma-
turty and nonpayment of the oan note.
In the nstant case the cotton producer obtaned a oan from the
Commodty Credt Corporaton n 19 upon e ecuton of a prescrbed
note and oan agreement. The producer s note was payabe on or
before uy 31, 19 9, or upon demand, wth nterest from the date of
the note unt pad at the rate of 3 percent a year. The note s sub|ect
to a the terms and condtons of the oan agreement and s secured by
warehouse recepts coverng cotton pedged by the producer. The
oan n queston was not repad, and on ugust 1, 19 9, the cotton,
together wth other 19 crop cotton pedged as securty for oans
whch were not repad by the producers, was pooed by the Commodty
Credt Corporaton pursuant to the provsons of the oan agreement
herenafter dscussed.
The oan agreement provdes, nter aa, that a hoders of the note
sha ook soey to the cotton for satsfacton of the oan uness the
producer has made a frauduent representaton n obtanng the oan,
and that, upon maturty and nonpayment of the note, and n the event
t s hed by the Commodty Credt Corporaton or other Federa
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29. 2-1 .
SO
agency, the hoder s authorzed wthout notce to the producer to poo
a or any part of the cotton wth any other cotton hed under generay
smar oan agreements, and s further authorzed to se, assgn, trans-
fer, and dever the cotton, or documents evdencng tte thereto, at
such tme, n such manner, for cash or upon such terms and condtons,
as such hoder may determne, and, upon such sae, the hoder may be-
come the purchaser of the whoe or any part of such cotton. In the
event that the cotton becomes a part of a producers poo created by
the Corporaton or other Federa agency, the producer sha not there-
after have the rght to redeem the cotton by payment of the oan or
otherwse. Proceeds from the cotton ncuded n the poo sha be
apped aganst the oans and charges on such cotton, and nterest
thereon, and, upon qudaton of a cotton n the poo, any surpus
remanng from the proceeds after satsfacton of a e penses sha be
prorated among the producers whose cotton was ncuded n the poo.
The ureau nas hed that advances receved by cotton producers
under smar oan agreements are oans and not proceeds from the
sae of cotton, even though the producer may not be caed upon to
pay any defcency whch may e st after sae of the pedged cotton,
provded the producer reduces cotton acreage n accordance wth a
certan agreement wth the Secretary of grcuture and provded he
has made no msrepresentaton n connecton wth the oan. (See
1. T. 2931, C. . I -2, 6 (193 ); foowed n I. T. 32 3, C. .
1939-1 (Part 1), 1, as to advances to corn producers under smar
oan agreements under whch the producer was not personay abe
for any defcency arsng upon sae of the coatera uness he had
obtaned the oan through frauduent representaton.) Those rungs
were cted n Od Coony Trust ssocates v. assett (1 0 Fed. (2d)
179,1 3) for the proposton that advances may be oans even when
there s an absence of persona abty and the ender can ook ony
to the pedged securtes for repayment. (Cf. I. T. 32 , C. .
1939-1 (Part 1), 2.)
It s hed that where a cotton producer s not bound by an eecton
under secton 123 of the Interna Revenue Code to have an amount
receved by hm as a oan from the Commodty Credt Corporaton
consdered as ncome for the ta abe year n whch receved, any
amount receved by hm as a oan under the 19 cotton oan program
of the Corporaton whch was not repad became ncome and s n-
cudbe n the gross ncome of the producer for the ta abe year n
whch he no onger coud redeem the cotton pedged as securty for
the oan, namey, when the cotton became a part of a poo created by
the Commodty Credt Corporaton. (Cf. G. C. M. 19367, C. . 1937-
2, 11 .) It s aso hed that f the producer reazes an addtona
amount upon qudaton of the poo, such addtona amount w con-
sttute ncome for the ta abe year n whch receved, f the producer
empoys the cash recepts and dsbursements method of accountng,
or for the ta abe year n whch hs rght to receve t becomes f ed,
f he empoys the accrua method.
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20. 1-1.
Secton 29. 2-1: When ncuded n gross ncome.
( so Secton 113(a), Secton 29.113(a)-2.)
19 0-2 -13 90
I. T. 037
INT RN L R NU COD
ppcaton of the provsons of Mmeograph 0 7 (C. . 19 0-1,
0) to bocked foregn ( deferabe ) ncome used for the purchase
of nvestment or busness property.
dvce s requested as to the appcaton of the provsons of Mmeo-
graph 017 (C. . 19 0-1, 0) to bocked foregn ( deferabe ) ncome
where funds representng such ncome are used for the purchase of
nvestment or busness property and thereafter, whe such property
s hed by the ta payer, the e change restrctons are removed.
Where funds representng deferabe ncome whch has been de-
ferred are used for the purchase of nvestment or busness property,
such property has a deferred-ncome bass measured by ts cost n
terms of the bocked foregn currency. The annua nformaton re-
turns of deferabe ncome shoud show, n terms of the foregn
currency, the amount of the bocked ncome, and the amount nvested
n such property together wth a ad|ustments thereto of the type
authorzed by the Interna Revenue Code. When such ncome ceases
to be deferabe ncome, the amount thereof, transated nto terms
of Unted States currency at the rate of e change prevang at that
tme, woud be ncuded n the ta payer s gross ncome and the amount
nvested n the property, wth the foregong ad|ustments, woud
smary be transated and the amount as thus transated woud con-
sttute the actua bass of the property. ( s to deductons for de-
precaton, etc., see paragraph 0 of Mmeograph 6 7 , supra). Upon
the subsequent dsposton of the property, such bass woud be used
n ascertanng gan or oss under the provsons of the Interna Rev-
enue Code and the reguatons.
Income from rea property separatey owned by a husband or wfe
n the State of Washngton, whch ncome Is earned through the
efforts of the husband and/or wfe, shoud be aocated between sep-
arate ncome and communty ncome.
Recommended that I. T. 123 (C. . 1-1, 232 (1922)) be modfed.
Reconsderaton has been gven to the ssue nvoved n I. T. 123
(C. . 1-1, 232 (1922)) n the ght of the decson n C. Cfford
Mnnck v. Commssoner (1 T. C. , acquescence, page 3, ths
uetn).
I. T. 123 , supra, reates to computaton of the e cess profts ta for
1917 n a case n whch ncome was derved from the sae of a crop
P RT . R TURNS ND P YM NT OF T
S CTION 1. INDI IDU L R TURNS
Secton 29. 1-1: Indvdua returns.
19 0-19-13 23
G. C. L 26 3
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29. 1-1.)
32
produced by the |ont efforts of a husband and wfe on a separatey
owned farm of the husband n the State of Washngton. It was hed
n part that such ncome consttuted separate ncome of the husband.
In the Mnnck case, supra, nvovng a stuaton smar to that n
I. T. 123 , supra, the Ta Court refused to foow I. T. 123 and
hed that the farm ncome earned through the |ont abor of the ta -
ayer and hs wfe n the State of Washngton shoud be aocated
etween separate and communty ncome, even though the farm was
the separate property of the husband.
In I. T. 123 , supra7 no aowance was made for that porton of
farm ncome whch mght have been drecty traceabe to the per-
sona efforts of the husband and wfe. owever, recognton was
gven the genera rue of apportonment under Washngton separate
property statutes that where ether spouse s engaged n a busness
the capta of whch s the separate property of such spouse, the por-
ton of the ncome derved from such busness whch s attrbutabe
to the persona to, abty, and ndustry of ether or both spouses
w be regarded as communty ncome, and that porton of the n-
come attrbutabe to the use or the separate property w be treated
as separate ncome. Such a rue of constructon of the Washngton
statutes as to the earnngs of ether or both spouses attrbutabe to hs
or ther abor and sk n genera busness where separate rea
property s not nvoved s practcay setted by the decsons of the
courts of Washngton and of those States n whch by statute the
rents, ssues, and profts beong to the owner of such separate
property. I. T. 123 , supra, ctes the foowng Caforna cases n
support of ths prncpe: Perera v. Perera (1 6 Ca. 1; 103 Pac.
); In re God s state (170 Ca. 621; 1 1 Pac. 12); McDuff v.
McDuf (191 Pac. 9 7).
smar rue of apportonment s mantaned by the Washngton
courts so that where busness ncome was produced n part by the
separate property and n part by the efforts of the communty, and
each of these two factors was substanta, the court w attempt to
aocate such earnngs (See ppea of uus Shafer et
u ., 2 . T. . 610, and ugh . Tnng v. Commssoner, 7 T. C.
1393, acquescence, C. . 19 7-1, .) Thus, n acobs v. ott et r.
(119 Wash. 2 3; 20 Pac. 1 ), the Washngton supreme court sad :
The rue s that the rents. Issues, and profts of separate property are separate
property. Secton 1)1 , Rem. Code; ester v. Stne, above. The compcaton
arses n ths case from the fact that the separate property dd not produce n
and of tsef a of the profts whch accrued to the busness. These profts were
ncreased by the abor and effort of the husband and wfe, whose earnngs after
ther marrage of course consttuted communty property. The dffcuty here s
to apporton those profts between the orgna separate property and the sub-
sequent communty earnngs It woud seem to us that t s not ony
equtabe, but s supported by the facts to hod that so much of the profts, at
east as they were represented by the amount whch ott repad to hs mother,
were profts from the orgna nvestment

In the case before us, athough the e act rato between the return
from the separate property nvestment and the return from the communty efforts
s not sub|ect to mathematca determnaton, yet we are satsfed that at east
the amount whch we have found was used n payng off the separate ndebtedness
was the earnng from the separate property, and the dvson between the sepa-
rate and communty nature of e present busness s sub|ect to what appears to
us a mathematca determnaton.
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33
29. 1-1.
In acobs v. Iott et u ., supra, ott had entered the bakery busness
before hs marrage wth funds borrowed from hs mother. s wfe
gave assstance n the bakery, and wth her |ont ad the busness pros-
pered. (See aso/n re Z7e er sta , 169 Wash. 02; 1 Pac. (2d) G.)
owever, reyng on In re Pepper s state (1 Ca. 619; 112 ac.
62), I. T. 123 , supra, concudes that the genera rue of apportonment
s not appcabe to ncome derved from a wheat crop grown on a sep-
aratey owned farm; therefore, no aocaton s made between that
porton of the ncome attrbutabe to the abor, actvty, and taent of
the spouses and that porton of the ncome attrbutabe to the use of
the farm. The ssue nvoved n In re Pepper s state, supra, was
whether the earnngs and profts of a nursery and farm separatey
owned by a husband consttuted communty property after marrage.
In ts opnon, the Caforna supreme court sad:
arnngs, acqured by the e ercse of the ndustry or sk of ether
husband or wfe, are to be credted to the communty. On the other hand, the
products of and, separatey owned by ether spouse, and cutvated by ether or
both, become the separate property of the one ownng the and. The
resutant product s n part due to the processes of nature operatng upon the
and, and n part to the ntegent appcaton of manua abor to the so. It s,
n the nature of thngs, mpossbe to apporton the crop so as to determne what
share of t has come from the so and what share from the e ertons of man.
The product must be treated as a whoe, and, f t s the growth of and separatey
owned, t s the separate property of the owner of the and.
The same poston s set forth n Seeker et a. v. Randa et u . (102
Fed. 21 ), n whch the court sad n the form of dcta:
nd, assumng that t s competent for the egsature to decare the
rents, ssues, and profts of the separate property of ether spouse to be com-
munty property, there s nothng n the present b to take the case out of the
genera rue that the sk or abor of ether spouse In carryng on farmng or
other ke operatons has nothng to do wth the queston of the ownershp of the
crops or other proceeds thereof. In such cases the tte to the products grows out
of the tte to the and tsef, and beongs to ts owner.
In Seeber et a. v. Randa et u ., supra, the queston presented was
whether a wfe acqured a communty nterest n a separatey owned
farm of her husband n the State of Washngton because of the sub-
sequent ncrease n the vaue of the farm durng marrage, or because
of mprovements made wth the proceeds of the crops rased on the
farm through the |ont abor of the spouses. There was not n ssue
any queston wth respect to ownershp of the proceeds from sae of
the crops. It s observed that no Washngton cases were cted n sup-
port of the statement of the court set forth above.
ven though the statement of the court, above, n the Seeber case
conssts of dcta and the Pepper decson s based on the faure of the
appeant to present to the court an aocaton, or evdence enabng the
court to make an aocaton, of ncome between separate and commu-
nty property, those cases a||pear to sustan the dstncton made n
I. T. 123 , supra, between products of the so and earnngs from non-
farmng busnesses. That dstncton was severey crtczed by the
Supreme Court of New Me co n Laughn v. Laughn ( 9 N. M. 20;
1 Pac. (2d) 1010). The communty property aw of New Me co
was n genera based on Caforna aw. s stated n I. T. 123 , supra,
the defntons of separate property n the Caforna and Washngton
statutes are n substance dentca, and the rung n that I. T. as to
Washngton aw s based many on a constructon of Caforna aw.
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3
In the Laughn case, the court consdered the precse queston n
ssue here. The tra court had hed that n vew of a separate prop-
erty statute n New Me co (smar to the Washngton statute), the
funds derved from the farmng operatons of a husband and wfe,
on the separatey owned farm of one spouse, were a separate funds
of such spouse. In concudng that the spouse who was the owner of
the farm was entted to ts renta vaue ether n cash or n the pro-
ceeds of crops sod from t, and that the communty was entted to
the baance of the ncome produced from the farm by the abor, taent,
and management of the partes, the State supreme court sad:
The dvson of the earnngs derved from the combnaton of separate rea
property and the abor, sk and ndustry of the spouses s much ess dffcut
than that nvovng commerca transactons.

We are satsfed wth ths concuson of the Caforna courts the rue of
apportonment n cases nvovng personaty , but we cannot foow those courts
n hodng that ths rue does not necessary appy to rea property. In re
Pepper s state, supra.
The statute does not dfferentate between rea and persona prop-
erty, and we shoud not do so.
ven acceptng, arguendo, the dcta n Seeber et a. v. Randa et u .,
supra, decded n 1900, and the decson n In re Pepper s state, supra,
decded n 1910. t s to be noted that many of the court decsons
regardng the effect of the use of separate property wth the abor and
taent of a member of the communty have been wrtten by the courts
of Caforna and Washngton snce that tme. Thus, n Cozz v. Cozz
( 1 Ca. (2d) 229; 1 3 Pac. (2d) 739), n a dvorce acton nvovng
rea property, as we as stocks and bonds, the court quoted from
Wtaschek v. Wtascheh ( 6 Ca. pp. 277; 132 Pac. (2d) 600) as
foows: The capta whch the husband brngs to the marrage
partnershp s hs own separate property, but t s a queston for the
court to determne what porton of the profts thereafter arses from
the use of ths capta and what part arses from the actvty and per-
sona abty of the husband ctng Perera v. Perera, supra, and In
re God s state, supra . In Segman v. Segman ( Ca. pp.
G 3; 2 9 Pac. 9 ), the court suggests that t woud have been proper
to make an aocaton f the wfe had submtted evdence to estabsh
the porton of the farm property and of the mercante busness whch
mght be attrbuted to the earnng capacty or the ascertaned earn-
ngs of the pantff husband by reason of hs management, abor
thereon, or contro thereof. Thus, t woud seem that the rue of
apportonment adopted n the Perera and God cases, supra, may be
apped to the farmng busness on submsson of approprate evdence.
Turnng drecty to the aw of Washngton, I. T. 123 , supra, states
that the ony case n pont s that of ester v. Stne ( 6 Wash. 69;
90 Pac. 9 ) n whch t was hed that the crops grown on a wfe s
separate and, wth no assstance from her husband who was absent
from the State most of the tme, consttuted her separate property.
In commentng on that case, t was stated n I. T. 123 , supra, that:
It s not perceved wheren the resut woud have been dfferent had
the husband been contnuousy present and ent hs assstance, for the
persona earnngs of each spouse nure to the beneft of the communty,
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29. 1-1.
and woud have so nured n the ester case but for the fact that the
barey was grown on the separate ands of the wfe. ere, too, t s
arguabe that an equay far nterpretaton of ester v. Stne, supra,
n the absence of drect comment by the court, s that the communty
woud have been entted to a porton of the earnngs derved from
the barey crop f some evdence as to a proper aocaton had been
presented to the court.
ssumng the correctness, as of 1922, the year of ssuance of I. T.
123 , supra, of the vew7 refected n the I. T. as to the rue of apporton-
ment n Washngton n rea estate and farm cases, the appcaton of
the rue n such cases has been carfed by the ater and emphatc e -
presson of the courts of that State.
In In re rmm s state (12 Wash. 273; 21 Pac. 10), the wdow
camed the entre rea and persona estate of her ate husband as com-
munty property. t the tme of hs marrage, and pror thereto, the
decedent had owned reaty and personaty vaued at about 70,000.
fter marrage, he entered nto busness transactons and as a resut
thereof acqured nterests n rea estate, nvestment companes, a
shnge and umber company, a hote company, nsurance, and bonds.
The court found no bass for any dstncton n the appcaton of the
rue of apportonment as to ncome derved from the operaton and
management of reaty and that derved from personaty. The court
stated n part as foows:
The case In rc tch a nan s state ( 9 Wash. 172; 1 Pac. 129) , nferenta ,
woud seem to make a dstncton between the rents, ssues, and profts of sep-
arate rea property and the profts arsng from separate persona property ; hut
we fnd that there s no such dstncton to be drawn, and fnd no authorty sup-
portng t.
Fna v, t shoud be noted that n the Mnnck case, supra, the Ta
Court reed heavy on In re Wtte s state (21 Wash. (2d) 112; 1 0
Pac. (2d) 9 ). In that case, a deceased husband had owned 0
acres of farm and as hs separate property pror to hs marrage. e
ater nherted an addtona 1 0 acres from hs mother. t the tme
of the husband s death, he owned n e cess of 1,100 acres of and. The
wdow camed a communty nterest n the. entre estate of her hus-
band. In ts opnon, the Supreme Court of Washngton stated n
part as foows:
Unquestonaby, the 0 acres orgnay owned by Mr. Wtte and the 1 0 acres
subsequenty nherted by hm from hs mother remaned bs separate property
throughout the years that he retaned them. Unquestonaby aso, Mr.
Wtte woud have been entted to retan as hs own the rents, ssues, and profts
of hs separate property, had he kept them separate, that s to say, after 190 ,
when he rented hs separate property, the rents were kewse hs separate prop-
erty, and he coud have retaned them as such had he kept them separate.
e was not, however, entted to retan, as hs separate property, a of the
earnngs from those propertes durng the perod when he, wth hs wfe, was
actuay farmng them. Such earnngs, though the resut of bs persona abors,
were communty property.
whether or not she the wfe rendered the manua assstance re-
ferred to above s mmatera, for even f she dd not, the persona earnngs of
the husband nevertheess beonged to the communty. Nor can those persona
earnngs be hed to be nconsequenta
the ncome from the home pace durng that perod represented both
the earnngs by persona effort and the renta vaue of the property
In vew of the foregong, t s the, opnon of ths offce that the
statutes and court decsons of the State of Washngton do not df-
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29. 3-2.
30
ferentate between rea property, whether t be farm ands or other-
wse, and persona property n appyng the rue of apportonment n
cases n whch ncome s produced n part by the separate property of
a spouse and n part by the efforts of the communty. Wnat may be
a propef aocaton s a queston of fact dependng upon the crcum-
stances of each case. (See acobs v. ott et u ., supra: State v. Saors
et a, 1 0 Wash. 269, 39 Pac. (2d) 397; compare G. C. M. 9 2 , C. .
-2, 1 6 (1931), modfed on another pont by G. C. M. 2 6 2, C. .
19 -1, 7.)
It s recommended that I. T. 123 , supra, be modfed to the e tent
that t s nconsstent wth the opnon e pressed n ths memorandum.
Chakes Ophant,
S CTION 3. TIM ND PL C FOR
FILING R TURNS
Secton 29. 3-1: Tms for fng returns.
INT RN L R NU COD
Reguatons 111 amended. (See T. D. 16, page 62.)
Secton 29. 3-2: tensons of tme for fng 19 0-1 -133
returns. Mm. 6 1
( so Secton 6, Secton 29. 6-2.)
tenson of tme for fng ncome ta returns of fe nsurance
companes for the caendar year 19 ).
Mmeograph 6 03 (C. . 19 0-1, 6) modfed.
Washngton 2 , D. C, une 26,19 0.
The frst sentence of the second paragraph of Mmeograph 6 03
(C. . 19 0-1, 6) s modfed to read as foows:
In vew of such proposed egsaton, a genera e tenson of tme s hereby
granted to a fe nsurance companes, as defned n secton 201(b) of the
Interna Revenue Code, to and ncudng September 1 , 19 0, for the fng of
ncome ta returns and payment of the ta for the caendar year 19 9.
Geo. . Schoeneman,
Commssoner.
Secton 29. 3-2: tensons of tme for fng
returns.
nterna revenue code
Lfe nsurance companes for 19 9. (See Mm. 6 26, page 66.)
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37
.
S CTION . PU LICITY OF R TURNS
19 0-1 -133 6
T. D. 793
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT 3 .
INSP CTION OF R TURNS
Inspecton of ncome, e cess-profts, decared vnue e cess-profts,
capta stock, estate, and gft ta returns by the Senate Speca
Commttee to Investgate Organzed Crme n Interstate Commerce.
Washngton 2 , D. C.
Sec. .30 . Inspecton of Returns y Senate Speca Commt-
tee To Investgate Organzed Crme n Interstate Commerce. (a)
Pursuant to the provsons of sectons (a), 0 , 603, 729(a), and
120 of the Interna Revenue Code ( 3 Stat. 29, 111, 171; Stat. 9 9,
100 ; Stat. 722; 26 U. S. C. (a), 0 , 603, 729(a), and 120 ), and
of the ecutve order ssued thereunder, any ncome, e cess-profts,
decared vaue e cess-profts, capta stock, estate, and gft ta returns
for any perod to and ncudng 19 9 sha be open to nspecton by the
Speca Commttee estabshed pursuant to Senate Resouton 202
( ghty-frst Congress, second sesson), or any duy authorzed sub-
commttee thereof, for the purpose of carryng out the provsons
of the sad Senate resouton.
The nspecton of returns heren authorzed may be made by the
commttee or a duy authorzed subcommttee thereof, actng drecty
as a commttee or as a subcommttee, or by or through such e amners
or agents as the commttee or subcommttee may desgnate or appont
n ts wrtten request herenafter mentoned. Upon wrtten request
by the charman of the commttee or of the authorzed subcommttee
to the Secretary of the Treasury, gvng the names and addresses of
the ta payers whose returns t s necessary to nspect and the ta abe
perods covered by the returns, the Secretary and any offcer or em-
poyee of the Treasury Department sha furnsh such commttee or
subcommttee wth any data reatng to or contaned n any such
return, or sha make such return avaabe for nspecton by the com-
mttee or subcommttee or by such e amners or agents as the com-
mttee or subcommttee may desgnate or appont, n the offce of the
Commssoner of Interna Revenue. ny nformaton thus obtaned
by the commttee or subcommttee thereof sha be hed confdenta:
Provded, however, That any porton or portons thereof reevant or
pertnent to the purpose of the nvestgaton may be submtted by the
commttee to the Unted States Senate.
(b) ecause of the mmedate need of the sad Speca Commttee
to nspect the ta returns heren mentoned, t s found that t s m-
practcabe and contrary to the pubc nterest to ssue ths Treasury
Decson wth notce and pubc procedure thereon under secton (a)
of the dmnstratve Procedure ct, approved une 11,19 6, or sub-
|ect to the effectve date mtaton of secton (c) of sad ct.
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(c) Ths Treasury Decson sha be effectve upon ts fng for
pubcaton n the Federa Regster.
ohn W. Snyder,
Secretary of the Treasury.
pproved une 17,19 0.
arry S. Truman,
The Whte ouse.
(Fed wth the Dvson of the Federa Regster une 19,10 0,10 : 32 a. m.)
INSP CTION OF INCOM . C SS-PROFITS, D CL R D LU C SS PROFITS,
C PIT L STOC , ST T , ND GIFT T R TURNS Y T S N T SP CI L
COMMITT TO IN STIG T ORG NIZ D CRIM IN INT RST T COMM RC
y vrtue of the authorty vested n me by sectons (a), 0 , 603,
729(a), and 120 of the Interna Revenue Code ( 3 Stat. 29, 111, 171;
Stat. 9 9, 100 ; Stat. 722; 26 U. S. C. (a), 0 , 603, 729(a),
and 120 ), t s hereby ordered that any ncome, e cess-profts, de-
cared vaue e cess-profts, capta stock, estate, and gft ta returns
for any perod to and ncudng 19 9 sha be open to nspecton by
the Speca Commttee estabshed pursuant to Senate Resouton 202
( ghty-frst Congress, second sesson), for the purpose of carryng
out the provsons of the sad Senate resouton, sub|ect to the cond-
tons stated n the Treasury Decson reatng to the nspecton of
such returns by that Commttee, approved by me ths date.
Ths ecutve order sha be effectve upon ts fng for pubcaton
n the Federa Regster.
arry S. Truman.
The Whte ouse,
une 17,19 0.
( . O. 10132)
(Fed wth the Dvson of the Federa Regster une 19,19D0,10: 32 a. m.)
19 0-20-13 3
T. D. 0
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT .
, INSP CTION OF R TURNS
Certfcaton of copes of certnn ta returns by coectors, nterna
revenue agents n charge, and heads of fed dvsons of Technca
Stuff. Treasury Decson 9 C. . 1939-2, 97 amended.
Washngton 6, D. G.
In order to permt coectors, nterna revenue agents n charge, and
the heads of fed dvsons of the Technca Staff to furnsh certfed
copes of ta returns to certan persons, Treasury Decson 9
C. . 1939-2, 97 , approved September 20, 1939 26 CFR .200-
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33
29. 6-2.
.209 , s amended, n the nterest of the nterna management of
the Government, by amendng secton 63D. 26 CFR .20 to
read as foows:
Sec. 0:D. . Furnshno copes of returns certfed copes.- In accordance
wth the reguatons n ths part, a copy of a return may be furnshed to any
person who s entted to nspect such return, upon wrtten appcaton therefor,
and the submsson of evdence satsfactory to the Commssoner of hs rght to
receve the copy. The appcaton and evdence of rght to receve the copy
of the return shoud be submtted to the Commssoner at Washngton, e cept
that f the appcant s (a) the ttorney Genera, The ssstant to the ttorney
Genera, and ssstant ttorney Genera or a Unted States ttorney, or (6)
the ta payer or hs duy authorzed attorney n fact, or (c) n the case of an
estate ta return, the e ecutor, admnstrator, or hs successor n offce, or bs
duy authorzed attorney n fact, or ( Z) n the case of a gft ta return, the
donor or hs duy authorzed attorney n fact, and the return s n the custody
of a coector of nterna revenue, an nterna revenue agent n charge, or the
head of a fed dvson of the Technca Staff, the appcaton and evdence of
rght to receve the copy may be submtted to such coector, agent n charge
or head of dvson, who may furnsh a copy of the return and certfy such
copy upon request. cept as provded above, certfed copes w be furnshed
ony by the Commssoner upon specfc request therefor by the appcant.
The Commssoner may prescrbe a reasonabe fee for furnshng copes
of returns.
Ths Treasury Decson sha be effectve upon ts fng for pub-
caton n the Federa Regster.
sectons , 0 , 603, 702(a), 729(a), 120 , 160 (c), and 3791 of the
Interna Revenue Code ( 3 Stat. 29, 111, 116. 171, 1 0, 67; Stat.
97 , 9 9, 100 ; Stat. 722; 26 U. S. C. . 0 , 003, 702(a), 729(a),
120 ,100 (c), and 3791).)
Geo. . Schoeneman,
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster September 1 , 19 0, : 3 a. m.)
S CTION 0. P YM NT OF T
Secton 29. 6-1: Date on whch ta sha be pad.
INT RN L R NO COD
Secton 29. 6-2: tenson of tme for payment
of the ta or nstament thereof.
INT RN L R NU COD
Lfe nsurance companes for 19 9. Mm. 6 03 (C. . 19 0-1, 6)
modfed. (See Mm. 6 1 , page 36.)
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129.11 -1. 0
S CTION . D CL R TION OF STIM T D T Y
INDI IDU LS
Secton 29. -7: Tme and pace for fng
decaratons Years begnnng after Decem-
ber 31, 19 3.
INT RN L R NU COD
SU C PT R C SUPPL M NT L PRO ISIONS
SUPPL M NT . R T S OF T
S CTION 102. SURT ON CORPOR TIONS IMPROP RLY
CCUMUL TING SURPLUS
Secton 29.102- : Computaton of undstrbuted
secton 102 net ncome.
INT RN L R NU COD
Reguatons 111 amended. (See T. D. 79G, page 2 .)
SUPPL M NT . COMPUT TION OF N T INCOM
S CTION 113(a). D UST D SIS FOR D T RMINING
G IN OR LOSS: SIS (UN D UST D) OF PROP RTY
Secton 29.113 (a)-2: Genera rue.
INT RN L R NU COD
Investment or busness property purchased wth bocked foregn
( deferabe ) ncome. (See I. T. 037, page 31.)
S CTION 11 . STS FOR D PR CI TION
ND D PL TION
Secton 29.11 -1: ass for aowance of depre- 19 0-19-13 2
caton and depeton. G. C. M. 26 26
( so Secton 23(m), Secton 29.23(m)-.)
INT RN L R NU COD
Payments of n vaorem property ta es by a essee of o and gas
wes pror to producton therefrom, for whch ta es the essor s
abe, are n the nature of deay rentas whch do not connote an
economc nterest n the essor, and such payments are not e cudbe
from depetabe gross ncome of the essee. Subsequent to produc-
ton from the wes and begnnng wth the month of such producton,
payments by the essee of the essor s ta es are treated as connot-
ng a depetabe economc nterest n the essor, and such payments
are e cudbe from depetabe gross ncome of the essee.
n opnon s requested whether payments of ad vaorem property
ta es bv a essee of o and gas wes, for whch ta es the essor s
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29.11 -1.
abe, are e cudbe from depetabe gross ncome of the essee under
secton 11 (b) (3) of the Interna evenue Code.
Under the ease heren consdered, t s provded that the essee
sha pay to the essor a straght percentage royaty based on gross
producton of mnera, or, f and when t e ceeds such royaty, a f ed
share of the net proceeds from ease operatons. It s further pro-
vded that the essee sha pay the fu amount of ad vaorem prop-
erty ta es accrung on the propertes nvoved. In that connecton,
the ease provdes n part as foows:
The essee sha wthcnt rembursement from the essor pay, before the same
eeome denquent, a ta es, assessments, and other governmenta charges what-
soever eved upon or assessed or charged aganst the sad demsed premses or
any part thereof and/or aganst any rghts of the essee hereunder and/or aganst
any budngs, pants, tanks, machnery, equpment, toos, or other persona
property or Improvements on the sad demsed premses and/or aganst any mn-
era or mnera rghts or other rghts theren, durng the term of ths ease.
County ta es (ncudng any nstaments aready pad) for the fsca year
193S-1939 sha be prorated between the partes hereto as of the date of ths
ease. The essee agrees that t w Indemnfy the essor and hod t harmess
from and w at a tmes keep the demsed premses and a parts thereof free
and cear of any and a ens, cams of en, cams, or demands based upon or
arsng out of any tar, assessment, or charge whatsoever. If the essee sha
fa and negect to pay any ta , assessment, or other charge before the same
sha become denquent, the essor sha have the rght, at ts opton, to pay the
same, together wth a penates and nterest thereon (the payment thereof
by the essor beng concusve upon the partes hereto as to the egaty or cor-
rectness of the ta , assessment, charge, or nterest so pad), and the essee sha
pay to the essor, forthwth upon demand, the amount of a ta es, assessments,
charges, nterest, and penates so pad, together wth nterest upon such amounts
so pad from the date of the payment thereof by the essor unt repad at the
rate of 1 percent per month.
In the case under consderaton, the essee contends that the essor s
rght to have the ta es n queston pad by the essee s not dependent
upon producton and such rght does not quafy as a depetar e eco-
nomc nterest n mnera n pace; that n reaty the payments of such
ta es are smar to deay rentas remtted by the essee to the essor
for the purpose of mantanng contro of the ease ndependent of
producton; that such payments do not nvove depeton of the mn-
era reserve, and, accordngy, amounts thus remtted by the essee for
ta es of the essor are not rents or royates of a character whch may
propery be e cuded from the depetabe gross ncome of the essee
under secton 11 (b) (3) of the Interna Revenue Code.
Secton 23(m) of the Code provdes, among other thngs, that n
the case of o and gas wes a reasonabe aowance for depeton sha
be aowed accordng to the pecuar condtons n each case and
that n the case of eases such aowances sha be equtaby appor-
toned between the essor and essee. (See everng v. Twn e
O Syndcate, 293 U. S. 312; Ct. D. 90 , C. . I -1, 2 3 (193 ), to
the same effect.) Secton 11 (b) (3) of the Code, reatng to the
bass for depeton, provdes that n the case of o and gas wes the
aowance for depeton under secton 23(m) sha be 27y2 per centum
of the gross ncome from the property durng the ta abe year,
e cudng from such gross ncome an amount equa to any rents or
royates pad or ncurred by the ta payer n respect of the property.
Secton 29.23(m)- of Reguatons 111 provdes that under the pro-
vsons of sectons 23(m) and 11 of the Code, annua denotnn
923 30 1 1
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29.11 -.
2
deductons are aowed to the owner of an economc nterest n
mnera deposts. Therefore, the prmary ssue to be resoved s
whether the rght of the essor to payment by the essee of the ta es
nvoved quafes as an economc nterest n mnera n pace. If such
rght so quafes, obvousy t must be e cuded from the depetabc
gross ncome of the essee. If t does not so quafy, t need not be
e cuded.
Under the provsons of secton 29.23(m)- of Reguatons 111, an
economc nterest s possessed at east n every case n whch the ta -
payer has acqured, by nvestment, any nterest n mnera n pace
and secures, by any form of ega reatonshp, ncome derved from
the severance and sae of the mnera, to whch the ta payer must ook
for a return of hs capta. s even more broady stated n urton-
Sutton O Co., Inc., v. Commssoner (32 U. S. 2 ; Ct. D. 1G7 . C. .
19 0-1, 237), It s the essor s, essee s or transferee s possbty of
proft from the use of hs rghts over producton, dependent soey
upon the e tracton and sae of te o, whch marks an economc
nterest n the o. Where there s an assgnment of mnera rghts
n consderaton of payments to be made out of the proceeds of future
producton, an economc nterest s not retaned f the assgnee s
under a persona obgaton to make such future payments or gves
securty n the form of a en, other than on the mnera produced, for
the fufment of sad obgaton. (See Thomas v. /. /. Perkns ct ah,
301 U. S. G ; Ct. D. 1237, C. . 1937-1, 1G2, and . Steve nderson
ct a. v. everng, 310 U. S. 0 ; Ct, D. 1 6, C. . 19 0-1,10 .)
It s true that the ease provsons here under consderaton do not
e pressy state that payment by the essee of the essor s ta es sha
be dependent upon producton. On the other hand, t s we recog-
nzed that the deducton for depeton s not governed by the forma
attrbutes of the agreements between the partes or the partcuar ega
form of the nterest hed pursuant thereto. (See . G. Pamer v.
ender, 2 7 U. S. 1; Ct. 1). G 1, C. . II-1, 23 (1933).) Thus, t
seems reasonabe to concude that, vewed reastcay, the nstant
agreement contempates that durng the perod pror to producton
the ta payments n queston sha be made by the essee out of ts
genera funds, and that foowng producton the amounts of the ta es
sha be obtaned from the proceeds of mnera e tracted and sod.
Certany, on the facts of the case, t woud seem dffcut to contend
that the essee s under a persona obgaton to make the ta payments
nvoved for the entre fe of the ease wthout, regard to whether
producton s obtaned. Rather, t appears that the essee s at berty
to surrender the ease foowng drng of the frst nonproductve
we and that the rght of the essor to payment of the ta es s not
supported by any en or other form of securty. ccordngy, once
producton has begun, the agreement of the essee to pay ta es for
whch the essor s abe s one of the appcabe factors n determnng
the dvson of producton ncome between the partes.
In vew of the foregong, t s the opnon of ths offce that pay-
ments of ad vaorem property ta es by a essee of o and gas wefs
pror to producton therefrom, for whch ta es the essor s abe, are
n the nature of deay rentas whch do not connote an economc n-
terest n the essor, and such payments are not e cudbe from the de-
petabe gross ncome of the essee. Subsequent to producton from
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-13
7.
the wes and begnnng wth the month of such producton, payments
by the essee of the essor s ta es are treated as connotng a depetabe
economc nterest n the essor, and such payments are e cudbe from
depetabe gross ncome of the essee.
Chares Ophant,
S CTION 117. C PIT L G INS ND LOSS S
19 0-21-13 2
L T. 031
INT RN L R NU COD
The provsons of secton 117() of the Interna Revenue Code,
reatng to bond, etc., osses of banks, are appcabe ony wth respect
to the securtes descrbed theren whch are hed by a bank for
nvestment purposes. Those provsons are not appcabe wth
respect to such securtes whch are hed by a bank as a deaer n
securtes.
dvce s requested whether the securtes mentoned n secton
117() of the Interna Revenue Code, reatng to bond, etc., osses of
banks, ncude a of such securtes hed by a Dank or ony such secu-
rtes as are hed for nvestment purposes.
Secton 117() of the Interna Revenue Code, added by secton
1 0(d) of the Revenue ct of 19 2, provdes as foows:
(1) ond, tc., Losses of anks. For the purposes of ths chapter chapter
1 of the Code , In the case of a bank, as defned n secton 10 , f the osses of the
ta abe year from saes or e changes of bonds, debentures, notes, or certfcates,
or other evdence of ndebtedness ssued by any corporaton (Incudng one
ssued by a government or potca subdvson thereof) wth nterest coupons
or n regstered form, e ceed the gans of the ta abe year from such saes or
e changes, no such sae or e change sha be consdered a sae or e change of a
capta asset.
ouse of Representatves Report No. 2333 on the revenue b of
19 2 (C. . 19 2-2,372) ncudes (page 399) the foowng statement:
Speca treatment s recommended for banks and nsurance companes, snce
bonds are a necessary type of nvestment for them. For banks, net capta osses
attrbutabe to saes or e changes of bonds or other evdences of ndebtedness are
aowed n fu aganst other ncome, the capta oss to be measured by the dffer-
ence between the purchase prce (or amortzed vaue) and the seng prce.
Losses from other types of capta assets and a gans woud be treated the
same for banks as for other corporate ta payers.
In the same report (page of C. . 19 2-2) and n Senate Report No.
1631 on the revenue b of 19 2 (C. . 19 2-2, 0 , 93) t s stated:
In the case of banks , a dstncton s to be made wth respect to osses
resutng from saes or e changes of bonds, debentures, notes, or certfcates or
other evdences of ndebtedness whch are n e cess of gans from saes or
e changes of such assets. In that case the e cess s to be consdered as an
ordnary oss and deductbe n fu aganst other ncome.
Snce the congressona commttee reports refer ony to bonds, deben-
tures, etc., whch are hed as capta assets, secton 117() of the Code
was evdenty ntended by Congress to ncude ony such securtes
descrbed theren as are hed as capta assets, and the secton shoud be
so construed.
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29.12 - .

In I. T. 3 2 (C. . 10 6-2, G ), as modfed by I. T. 3 91 (C. .
19 - 1, G9), t was hed n effect that deaers n securtes may treat
securtes hed as an nvestment as capta assets provded they are
acqured and hed soey for nvestment, are segregated physcay and
n the hoder s accounts, and are not ncuded n nventory. In Car
Marks Co. v. Commssoner (12 T. C. 1196, acquescence, C. .
19 9- 2, 3), the Ta Court hed that where a deaer n foregn secur-
tes transferred a of ts domestc securtes and certan of ts foregn
securtes out of ts nventory to an nvestment account, the profts
reazed from the sae of such securtes at a ater date were ta abe
as gans from the sae of capta assets.
In vew of the foregong, t s hed that the provsons of secton
117() of the Code are appcabe ony wth respect to the securtes
descrbed theren whch are hed by a bank for nvestment purposes.
Those provsons are not appcabe wth respect to such securtes
whch are hed by a bank as a deaer n securtes.
S CTION 12 . MORTIZ L OND PR MIUM
Secton 29.12 - : Caabe and convertbe 19 0-1 -133 7
bonds. Ct. D. 1732
INCOM T INT RN L R NU COD D CISION OF SUPR M COURT
1. Gross Income Deducton mortzabe ond Premum.
Premum pad for bonds caabe for redempton pror to maturty
date accordng to a schedue appearng n the ndenture s anortz-
abe n fu n the year of acquston under secton 12 , Interna
Revenue Code, despte the fact that the premum may have been due
entrey to the accompanyng prvege of convertng nto Ue
obgor s stock at a prce beow the current market. ond pre-
mum as used n the secton means any e tra payment, regardess
of the reason therefor. Congress made no dstnctons based upon
the nducements for payng the premum.
2. Decson ffrmed,
Decson of the Unted States Court of ppeas, Second Crcut
(176 Fed. (2d) 1 2 (19 9)), affrmng decson of the Ta Court (10
T. C. 1001 (19 S)), affrmed.
Supreme Court of the Unted States
Commssoner of Interna Revenue, pettoner, v. Chrstan W. ore
On wrt of certorar to the Unted States Court of ppeas for the Second Crcut
une , 19 0
opnon
Mr. Chef ustce nson devered the opnon of the Court.
The ta consequences of a purchase of convertbe bonds are In ssue here.
In ugust, 19 , respondent, an ndvdua ta payer, purchased certan mercan
Teephone Teegraph Co. bonds, each havng a face vaue of 100, at a premum
prce averagng sghty n e cess of 121. ach bond was convertbe nto a
share of common stock, at the opton of the bondhoder, upon the payment of
0. The market prce of the stock was over 103 when respondent made hs
bond purchases. The bonds were caabe pror to maturty date accordng to
a schedue appearng n the ndenture; had the corporaton gven approprate
notce at the dates of respondent s purchases, the bonds woud have been
redeemed at 10 .
In hs 19 ncome ta return, respondent camed a deducton n e cess of
,000 for amortzabe bond premum. e computed hs deducton on each
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29.12 - .
bond as the dfference between hs purchase prce, 121, and the ca prce, 10 .
Ths computaton s concededy correct f the deducton s aowabe. The Com-
mssoner of Interna Revenue, pettoner here, refused to aow any such deduc-
ton. s theory was that secton 12 of the Interna Revenue Code estabshng
the deducton for amortzabe bond premum dd not ncude premum pad for
the converson prvege. contrary vew of the statute was adopted by the
Ta Court. 10 T. C. 1001 (19 ). The court beow affrmed, hodng that re-
spondent was entted to the amortzaton deducton. 176 Fed. (2d) 1 2 (19 9).
We granted certorar, 33 U. S. 90 (19 9), to resove the confct between
the decson beow and that of the Court of ppeas for the Nnth Crcut In
Commssoner v. Shoong, 177 Fed. (2d) 131 (19 9).
Pror to 19 2, bond premum was rreevant for ta purposes. Whether or
not the purchase prce e ceeded the face vaue of the bond, the hoder consdered
the fu prce as the bass for capta gan or oss, and reported a ta abe
nterest receved as ncome.1 In presentng ts 19 2 ta proposas, however, the
Treasury adopted the vew that each recept of nterest s not entrey ncome
but s partay a restoraton of capta. Its spokesman ponted to the con-
sequent dscrmnaton aganst hoders of ta abe bonds: they were beng ta ed
on a return of capta, whe hoders of ta -e empt bonds were not. To remedy
ths nequty, the Treasury recommended that amortzaton of premum be per-
mtted n the case of ta abe bonds, and that the bass for capta gan or oss
for a bonds be ad|usted by the amount of deducton aowabe for ta abes
and dsaowabe for ta -e empts. These recommendatons were utmatey
Incuded n the Revenue ct of 19 2, 6 Stat. 22, as sectons 113 and 12 of the
Interna Revenue Code.
Secton 12 contans four subsectons. In (a), the genera rue s estabshed,
appcabe In the case of any bond , that the deducton for nnortzabe
Neu York Lfe Ins. Co. v. dwards, 271 D. S. 109, 11 (1926) TT. D. 3 72. C. . -,
S0 . 307 (1926) : cf. Od Coony R. Co. v. Commssoner, 2 D. S. 2, 61 (1932) Ct. D.
6. C. . I-1, 27 , 277 (1932) .
Statement of Randoph Pau, then Ta dvser to the Secretary of the Treasury and
subsequenty Genera Counse of the Department, 1 earngs before ouse Commttee on
ways and Means on Revenue Revsons of 19 2, 77th Cong., 2d scss. 90 (19 2).
Int. Rev. Code, secton 12 . tte mortzabe ond Premum, reads as foows:
(a) Genera Roe. In the case of any bond, as defned n subsecton (d), the fo-
owng rues sha appy to the amortzabe bond premum (determned under subsecton
(b)) on the bond for any ta abe year begnnng after December 31, 19 1:
(1) Interest whoy on partay ta abe. In the case of a bond (other than a
bond the Interest on whch Is e cudabe from gross ncome), the amount of the amortz-
abe bond premum for the ta abe year sha be aowed as a deducton.
(2) Intebest whoy ta -e empt In the case of any bond the nterest on whch Is
e cudabe from gross ncome, no deducton sha be aowed for the amortzabe bond
premum for the ta abe year.
(3) d|ustment op credt n case of nterest partay ta -e empt. In the case
of any bond the nterest on whch Is aowabe as a credt aganst net ncome, the credt
provded n secton 2 (a) (11 or (2), or secton 26(a), as the case may be, sha be reduced
by the amount of the amortzabe bond premum for the ta abe year.
(For ad|ustment to bass on account of amortzabe bond premum, see secton 113(b)
(1)( ).) See note 6. post. p. 7.
(b) mortzabe ond Premum.
(1) modnt op bond premum. for the purposes of paragraph (2), the amount of
bond premum, n the case of the hoder of any bond, sha be determned wth reference
to the amount of the bass (for determnng oss on sae or e change) of such bond, and
wth reference to the amount payabe on maturty or on earer ca date, wth ad|ustments
proper to refect unamortzed bond premum wth respect to the bond, for the perod pror
to the date as of whch subsecton (a) becomes appcabe wth respect to the ta payer
wth respect to such bond.
(2) mount amortzabe. The amortzabe bond premum of the ta abe year sha
be the amount of the bond premum attrbutabe to such year.
(3) Method op detebmnaton. The determnatons requred under paragraphs (1)
and (2) sha be made
( ) In accordance wth the method of amortzng bond premum reguary empoyed
by the hoder of the bond. If such method s reasonabe :
( ) n a other cases, n accordance wth reguatons prescrbng reasonabe methods
of amortzng bond premum, prescrbed by the Commssoner wth the approva of the
Secretary.
(c) ecton on Ta abe and Partay Ta abe onds.
1 gbty to eect and bonds wth bespect to whch eecton permtted.
Ths secton sha appy wth resect to the foowng casses of ta payers wth respect
to the foowng casses of bonds ony If the ta payer has eected to have ts secton
appy .
(d) Defnton of ond. s used In ths secton, the term bond means anv bond,
debenture, note, or certfcate or other evdence of ndebtedness, ssued by any corporaton
and bearng Interest (Incudng any ke obgaton ssued by a government or potca
subdvson thereof), wth Interest coupons or In regstered form, but does not Incude
Ray such obgaton whch consttutes stock In trade of the ta paver or any such obga-
ton of a knd whch woud propery be ncuded In the nventory of the ta payer If on
rand at the cose of the ta abe year, or any such obgaton hed by the ta payer prmary
for sae to customers In the ordnary course of hs trade or busness.
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29.12 - .
3
bond premum may not be tken f the nterest s ta -e empt, but may be f the
bond nterest s ta abe. Ta payers hodng bonds n the atter category may
eect whether or not to amortze n accordance wth rues ad down n subsec-
ton (c). Subsecton (b) defnes the method of computng the amount of bond
premum, In the case of the hoder of any bond . Pettoner urges that
ths does not defne the knd of bond premum whch s amortzabe; respondent
contends that ths provson estabshes a mandatory computaton appcabe to
any bond premum. Subsecton (d) conssts of a genera defnton of bond
and certan e ceptons thereto, chefy bonds hed for sae or as stock n trade.
That the securtes purchased by respondent fa wthn the genera defnton
and wthout the e ceptons s undsputed.
There can be no doubt that the caabty and convertbty of these bonds do
not remove them from the reach of secton 12 . The roe of such bonds was
specfcay brought nto the congressona dscusson by at east one wtness at
the hearngs.1 nd the Congress rendered unmstakaby cear answers n the
anguage of the ct, e. g., by e press reference to earer ca date, secton
12 (b) (1), and n both Commttee Reports. The fact that a bond s caabe or
convertbe nto stock does not of tsef prevent the appcaton of ths secton.
In the case of a caabe bond, the earest ca date w, for the purposes of ths
secton, be consdered as the maturty date. ence, the tota premum s
requred to be spread over the perod from the date as of whch the bass of the
bond s estabshed down to the earest ca date, rather than down to the
maturty date. In the case of a convertbe bond, f the opton to convert the
bond nto stock rests wth the owner of the bond fas t dd n ths ease, the
bond s wthn the purvew of ths secton. The e press decson of Congress
to ncude the type of bonds purchased by respondent s of course bndng on the
courts.
Pettoner concedes that the bonds purchased by respondent are wthn the
reach of secton 12 , but he urges that ths ease does not nvove the knd of
premum whch Congress had n mnd. The argument s that ths premum was
pad for the converson prvege, whereas Congress ntended to ncude ony that
premum (entted true premum by pettoner) whch s pad for securng a
hgher rate of nterest than the market average and for nothng ese. We re|ect
ths argument as napposte to the structure of the statute, unsupported by the
egsatve hstory and nconsstent wth the norma use of the term bond
premum.
s Congress wrote the statute, the scope of bond premum s adequatey
denoted by defnng bond. There was no need for Congress to quafy both
words n order to make ts meanng cear ; premum as an soated term may not
be defned n the statute nor e paned n the egsatve hstory, but premum
s never used n the statute apart from ts mate bond. No attempt to defne
and dstngush the reasons for payng premum mark the pertnent Treasury
Reguatons 111, secton 211.12 . They mrror the structure of the statute and
are constructed n terms of bonds. gan, we note that the bonds here nvoved
are wthout queston embraced by the statute.
To be sure, Congress mght have proceeded by defnng premum (and true
premum) rather than, or as we ns bond. ut we cannot re|ect the cear and
precse avenue of e presson actuay adopted by the Congress because n a
partcuar case we may know, f the bonds are dsposed of pror to our decson,
that the pubc revenues woud be ma mzed by adoptng another statutory path.
Congress was egsatng for the generaty of cases. It not ony created a new
deducton but aso requred that the b: ss be ad|usted to the e tent of the deduc-
ton aowabe for ta abes and dsaowabe for ta -e empts. The ad|ustment
ncreased the revenue potenta, for the ower bass obvousy rased possbe
capta gan and owered aowabe capta oss. In the case of ta -e empt bonds,
Sec statement of Roy C. Osgood. 2 earngs before Senate Commttee on Fnance on
. R. 737 , 77h Cons.. 2d sess. 172 -29 (10 2).
. R. ept. No. 2333. 77 Cons.. 2d se.-s. SO (10 2). Prprsey te same anguage
appears n S. ept. No. f 31, 77th Cong., 2d sess. 0 (10 2). U. S. Treas. Reg. I, secton
29.12 - . s of dentca tenor.
Int. Rev. Code, secton 113(1)) (1). provdes that Proper ad|ustment In respect of the
pro erty sha n a cases be made ( ) n the ease of any bond (as defned n
secton 12 ) the nterest on whch s whoy e empt from the ta mposed by ths chapter,
to the e tent of the amortzabe bond premum dsaowabe. as a deducton pursuant to
secton 12 (a)(2), and n the case of any other bond (as defned n such seeton) to the
e tent of the deductons aowabe pursuant to secton 12 (a)(1) wth respect thereto.
See note 3, ante, p. C, for the te t of secton 12 .
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29.12 - .
whch had a tota par vaue In 19 2 of over . bon doars/ there was no
aowabe deducton to be set off aganst ths new revenue potenta. In the case
of ta abe bonds, whether the ta pad on capta gans w e ceed the ta
avoded by the deducton depends n each partcuar nstance upon the uncer-
tantes of market fuctuatons and ta rates and the custer of other factors
whch nduces a bondhoder to act and determnes hs ta n gven years. These
factors may combne n a specfc case to produce an effect upon revenue whch to
some may appear too drastc for Congress to have Intended. ut there s nothng
n ths record to ndcate that Congress or the Treasury antcpated that the tota
ong run effect of sectons 113 and 12 on the yed from both ta abes and tn -
e eupts woud be to decrease Federa revenue. nd even f Congress had
e pected that some oss of revenue woud be entaed, It mght have decded that
more equa treatment of ta payers was more mportant than possbe revenue
oss; t cannot be argued that Congress acked the egsatve dscreton to have
reached such a concuson. If n practce these sectons are causng such oss of
revenue as to ndcate that Congress may have erred n ts baancng of the
competng consderatons nvoved, the amendment must obvousy be enacted by
the Congress and not the Commssoner of Interna Revenue or ths Court.
The egsatve hstory fas to ntmate that Congress ntended to confne
the deducton to bonds the premum on whch was pad for a hgher-than-market
nterest rate. t most, pettoner s presentaton of the egsatve materas
suggests that Congress may have had the bondhoder who was seekng a hgher
nterest rate prmary n mnd; but t does not estabsh that Congress n fact
egsated wth reference to hm e cusvey. Congress, and the Treasury n
advsng Congress, may we have concuded that the best manner of affordng
hm reef and correctng the nequtabe treatment of bondhoders whose n-
terest recepts were ta abe, was to defne the scope of the amendment by ref-
erence to types of bonds rather than causes of premum payment.
s bond premum s used by accountants and other wrters n the securtes
fed, t s any payment n addton to face vaue. There s no suggeston that
the words have ony a mted sgnfcance, echong pettoner s true premum,
appcabe soey to that e tra prce caused by the desre to obtan a hgher than
average nterest yed. On the contrary, some authors have noted the varety
of causes whch nduce the payment of bond premum, and the practca m-
possbty of dsentangng and soatng them for the purpose of reatve evau-
aton, as woud be requred f pettoner s readng of the statute were uphed.
We adopt the vew that bond premum n secton 12 means any e tra payment,
regardess of the reason therefor, n accordance wth the frmy estabshed prn-
cpe of ta aw that the ordnary meanng of terms s persuasve of ther stat-
utory meanng.
We concude that Congress made no dstnctons based upon the nducements
for payng the premum. Congress demted the bond premum t wshed to make
Of ths amount. 2 . bon was whoy, and 33.0 bon partay ta -e empt.
Statntca bstract 372 (19 ).
I In ths ease, the record does not dscose how pettoner dsposed of the bonds. If
for some reason he had sod them after 0 months at a prce above 13 . hs capta gan
woud hare e ceeded the deducton he took on the bond premum. Ths possbty s not
merey theoretca, for the bonds n fact stood above 13 for over a year, startng In
ugust. 19 .
Pettoner ctes . R. ept. No. 2333, 77th Cong., 2d ess. 7 (19 2), and the state-
ments of ohn O ren, 1 earngs before Senate Commttee on Fnance on . R. 737 ,
7th Cong.. 2d sess. 2 (19 2), and Randoph Pau, 1 earngs before ouse Commttee
on Ways and Means on Revenue Revson of 1912. 77h Cong., 2d sess. 90 (19 2). None
of these can be taken as a cear statement e cudng premum refectng fnanca Induce-
ments other than the nterest rate.
10 . g., When bonds se at a prce greater than par. they are sad to se at a premum
. Fnanca andbook 1210 (3d ed. 19 ) bond premum the
amount by whch ssue prce, or cost at ater date, e ceeds maturty vaue .
Paton dvanced ccountng 197 (19 1) : Grossman. Investment Prncpes and Practce 1
(1939) : Nobe, ccountng Prncpes 7 ( th ed. 19 ). nd see Od Coony R. Co. v.
Commssoner, 2 U. . 2, (1932) ; tcw York Lfe Ins. Co. v. dtrards, 271 U. S.
109. 116 (1920) ; ogert, Trusts and Trustees, secton 31 (11:3 ) ; 2 Scott on Trusts,
secton 239.2 (1939).
II See, e. g., 1 Dewng. Fnanca Pocy of Corporatons 0(12 ( th ed. 19 1); Saers
and omes, asc ccountng Prncpes 09 (1937) : (pt. 1) ogert, Trusts and Trus-
tees 319 (193 ) : 2 Scott on Trusts 1337 (1U39) ; Wams, re Convertbes Now ttrac-
tve 3 Mag. of Wa St. 13 (19 ).
Crane v. Commssoner, 331 U. S. 1, 6-7 (19 7) fCt. T . 10 . C. . 19 7-1, 97. 99 ;
gftvtrhu v. Faccus Oak Leather Co., 313 U. S. 2 7. 2 9 (19 1) Ct. D. 1 10, C. . 19 1-1,
||. 32 : everna v. San oaqun Frut Investment Co., 297 U. S. 90. 99 (1930)
ICt. D. 109 . C. . -1. 196. 197 (1930)1 ; Lang v. Commssoner. 2 9 U. S. 109. I
L S ) Ct. D. 602. C. . II 1, 171, 172 (1933) ; cf. tantc Coast Lne . Co. .
Pn||s, 332 U. S. 10 , 171 (19 7).
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29.131-1.
S
nmortzabe n terms of categores of bonds, and there s no doubt that respond-
ent purchased bonds whch are ncuded wthn the purvew of secton 12 .
Respondent s therefore entted to ths deducton and the |udgment beow Is
ffrmed.
Mr. ustce ack dssents. e beeves that ths case shoud be decded In
accordance wth, and for the reasons gven by, the opnon of the Court of ppeas
for the Nnth Crcut n Commssoner v. Shoong, 177 Fed. (2d) 131 (19 9).
Mr. ustce Dougas and Mr. ustce ackson took no part n the consdera-
ton or decson of ths case.
SUPPL M NT C CR DITS G INST T
S CTION 131. T S OF FOR IGN COUNTRI S ND
POSS SSIONS OF UNIT D ST T S
Secto 29.131-1: nayss of credt for 19 0-17-13 0G
ta es. I. T. 021
INT RN L revenue code
The ta wthhed from dvdends under the New Zeaand Soca
Securty ct, 193 , as amended, fas wthn the Unted States con-
cept of an ncome ta and s aowabe as a credt aganst Unted
States ncome ta under secton 131(a) of the Interna Revenue
Code, sub|ect to the mtatons contaned n secton 131(b) of the
Code.
dvce s requested, whether the ta wthhed under the New Zeaand
Soca Securty ct, 193 , as amended, from dvdends pad to a Unted
States corporaton by a New Zeaand corporaton s aowabe as a
credt under secton 131 of the Interna Revenue Code.
Secton 2 of the New Zeaand Soca Securty mendment ct, 19 0
( utterworth s Ta aton Laws of New Zeaand, Second dton, and
Suppements) provdes n part as foows:
2. Imposng Labty on Nonresdent Companes for Charge on Income
Under Part I of Prncpa ct.
(2) every nonresdent company sha, n respect of the ncome derved
by t from New Zeaand for the year endng on the thrty-frst day of March
nneteen hundred and forty-one. or for any year thereafter, be abe for the
charge on ncome mposed by Part I of the prncpa act
The pertnent provsons of the New Zeaand Soca Securty ct,
193 , as amended, read n part as foows:
10 . Soca Securty Contrbuton. The Soca Securty Contrbuton
sha consst of
(6) charge on saares, wages, and other ncome.
109. Commssoner of Ta es To Coect Soca Securty Contrbuton.

( ) Uness the conte t otherwse requres, a terms and e pressons used n
the Land and Income Ta ct, 1923, and aso n ths part of ths act, sha, when
used n ths part of ths net, have the same meanng as when used n the Land
and Income Ta ct, 1923.

127. Income Defned. (1) For the purposes of the assessment of the charge
on ncome n accordance wth the foregong provsons of ths part of ths net the
term ncome (e cept as otherwse provded n ths secton) ncudes a ncome
assessabe under the Land and Income Ta ct, 1923 (whether the ncome s
ta abe under that act or not), and a dvdends derved from com-
panes,
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9
29.131-1.
Secton 79 of the New Zeaand Land and Income Ta ct, 1923, as
amended, provdes n part as foows:
79. Items Deemed To e Incuded n ssessabe Income. (1) Wthout n
any way mtng the meanng of the term, the assessabe ncome of any person
sha for the purposes of ths act be deemed to ncude, save so far as e press
proTson s made n ths act to the contrary,

(g) nterest, dvdends, annutes, and pensons:
Secton 131 of the Interna Revenue Code provdes n part as foows:
(a) owance of Chedt. If the ta payer chooses to have the benefts of
ths secton, the ta mposed by ths chapter Chapter 1 of the Code , e cept the
ta mposed under secton 102, sha be credted wth:
(1) Ctzens and domestc corpokatons. In the case of a ctzen of
the Unted States and of a domestc corporaton, the amount of any ncome
ta es pad or accrued durng the ta abe year to any foregn coun-
try
In order for a ta pad to a foregn country to be aowabe as a
credt aganst Unted States ncome ta under secton 131 of the Inter-
na Revenue Code, supra, t must be shown that the ta mposed by
the foregn aw s a ta on ncome wthn the Unted States concept,
or s a ta n eu of an ncome ta .
It s hed that the ta wthhed from dvdends under the New
Zeaand Soca Securty ct, 193 , as amended, fas wthn the Unted
States concept of an ncome ta and s aowabe as a credt aganst
Unted States ncome ta under secton 131 (a) of the Interna Revenue
Code, sub|ect to the mtatons contaned n secton 131 (b) of the Code.
The percent ta mposed under artce 2 of Decree No. 0 1 of
19 9, ssued by the Presdent of the Repubc of Coomba, s an
ncome ta whch may be camed as a credt aganst Unted States
ncome ta under secton 131(a) of the Interna Revenue Code,
sub|ect to the mtatons contaned n secton 131(b) of the Code.
dvce s requested whether the percent ta mposed under artce
2 of Decree No. 0 1 of 19 9, ssued by the Presdent of the Repubc
of Coomba, s aowabe as a credt aganst Unted States ncome
ta under secton 131 of the Interna Revenue Code.
The pertnent provsons of Coomban Decree No. 0 1 of 19 9
read as foows:
bt. 1. The addtona obgaton, mposed by artce 1 of Law of 19 0 upon
those sub|ect to the ncome and compementary ta es, w be n force for 20
years as a natona ta and w be used to ncrease the capta of the Insttuto
de Credto Terrtora n such a manner as w permt t to attan the ob|ectves
f ed n sad provsons and to promote the natona stee ndustry, n accordance
wth the terms and condtons set forth heren.
rt. 2. The respectve dmnstraton of Fnance, upon makng qudaton of
the drect ta es, w assess each ta payer for an amount equa to fve percent
( ) of hs net ta abe ncome over ten thousand pesos, after frst deductng
such drect ta es as may be eved for the purposes set forth n the precedng
artce. Ths w be qudated and coected as a ta compementng the ncome
ta and under the same terms f ed for qudatng and coectng the atter,
e cept for what s provded n the foowng artces of ths Decree.
Secton 29.131-1: nayss of credt for
ta es.
19 0-1 -13 16
I. T. 023
INT RN L R NU COD
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29.131-1.
0
rtce 1 of Coomban Law of 19 6 provdes as foows:
rt. 1. s an addtona obgaton to the ncome ta and ts compementary
ta es, each ta payer, begnnng wth the year 10 7 must, on the ncome derved
durng the mmedatey precedng year and for a perod of ten years, aot for
the constructon of economca housng for workers and for the mdde cass, or
for addtons, mprovements or reconstructon of these, fve percent ( ) of the
e cess of the ta abe net ncome over ten thousand pesos, after deductng the
tota amount of the drect ta es whch he may be sub|ect to.
Secton 131 of the Interna Revenue Code provdes n part as
foows:
(a) owance of Credt. If the ta payer chooses to have the benefts of
ths secton, the ta mposed by ths chapter Chapter 1 of the Code , e cept the
ta mposed under secton 1(12, sha be credted wth:
(1) Ctzens and domestc corporatons. In the case of a ctzen of the
Unted States and of a domestc corporaton, the amount of any ncome
ta es pad or accrued durng the ta abe year to any foregn
It s hed that the percent ta mposed under artce 2 of Decree
No. 0 1 of 19 ), ssued by the Presdent of the Repubc of Coomba,
s an ncome ta whch may be camed as a credt aganst Unted
States ncome ta under secton 131(a) of the Interna Revenue Code,
sub|ect to the mtatons contaned n secton 131(b) of the Code.
The ta es mposed by the Peruvan Government under chapter
I, artce 11 of ct 700 . artce 3 of ct 0001, and artce 2 of
ct 10 10 fa wthn the Unted States concept of ncome ta es and
are aowabe as a credt aganst Unted States ncome ta under
secton 131(a) of the Interna Revenue Code, sub|ect to the mta-
tons contaned In secton 131(b) of the Code.
dvce s requested whether the ta es mposed by the Peruvan Gov-
ernment under chapter I, artce 11 of ct 790 , artce 3 of ct 90O1,
and artce 2 of ct 10 16 quafy as ncome ta es whch may be
aowed as a credt aganst Unted States ncome ta .
Tbe pertnent provsons of aw under whch the above-mentoned
Peruvan ta es are mposed read as foows:
Sub|ect to ths ta s a ncome derved from credt operatons carred on
abroad and coected by ndvduas or corporatons resdng n the naton.
Lkewse sub|ect to ths ta s a ncome derved from credt o eratons car-
red on n the naton and coected by any ndvdua or corporaton n a
foregn country. s of the date of promugaton of ths act, a nterest pad
or tems credted In the manner specfed n artce 12 by a concern estabshed
n the naton to another one estabshed abroad, or to ts head offces or branches
estabshed abroad, sha be sub|ect to payment of the ta , the person or con-
cern estabshed n the naton beng responsbe for the payment. Chapter I,
artce 11, ct 700 .1
Corporatons estabshed abroad sha pay, n substtuton of the 1 percent ta
on dvdends referred to n cause d of Decree-Law No. 710; , an addtona
ta of 1 percent on the profts they obtan n Peru. rtce 3, ct 0001.
Income derved from nterest on credt operatons, from rura and urban
property, from noncommerca professona profts and from compensaton for
persona servces rendered n Peru or obtaned theren by natve or foregn n-
dvduas resdng n a foregn country sha be sub|ect to a fat rate of 12
percent surta . Saares pad by the Government are e empt from ths ta .
country
19 0-20-13 36
I. T. 02
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29.131-1.
smar ta sha be mposed on Interest pad by a branch concern to ts prn-
cpa abroad. nonresdent of Peru s consdered to be a person who has not
resded theren unnterruptedy durng 6 months of each year. rtce 2,
ct 10 16.
Secton 131 of the Interna evenue Code provdes n part as
foows:
(a) owance of Credt. If the ta payer chooses to have the benefts
of ths secton, the ta mposed by ths chapter chapter 1 of the Code
sha be credted wth:
(1) Ctzens and domestc corporatons. In the case of a ctzen of
the Unted States and of a domestc corporaton, the amount of any ncome
country
credt aganst Unted States ncome ta under secton 131 of the In-
terna Revenue Code, supra, t must be shown that the ta mposed
by the foregn aw s a ta on ncome wthn the Unted States con-
cept, or s a ta pad n eu of an ncome ta .
It s hed that the ta es mposed by the Peruvan Government un-
der chapter I, artce 11 of ct 7901, artce 3 of ct 9001, and artce
2 of ct 10 16 fa wthn the Unted States concept of ncome ta es
and are aowabe as a credt aganst Unted States ncome ta under
secton 131(a) of the Interna Revenue Code, sub|ect to the mta-
tons contaned n secton 131(b) of the Code.
The ta mposed by the Federa Repubc of Germany (Western
Germany) under the aw desgnated as Corporaton Ta Law n
the Wordng of September , 19 9, fas wthn the Unted States
concept of an ncome ta and s aowabe as a credt aganst Unted
States ncome ta under secton 131(a) of the Interna Revenu
Code, sub|ect to the mtatons contaned n secton 131(b) of th.
Code.
dvce s requested whether the ta mposed by the Federa Re-
pubc of Germany (Western Germany) under the aw desgnated as
Corporaton Ta Law n the Wordng of September , 19 9, qua-
fes as an ncome ta whch may be aowed as a credt aganst Unted
States ncome ta .
Sub|ect to mted corporaton ta are:
1. Corporatons, combnes of persons and propertes who have nether
ther management nor ther resdence n GermaDy, wth ther German
ncome;
2. Corporatons, combnes of persons and propertes, who are not un-
restrctedy abe to ta es, wth ther German ncome, from whch a ta
deducton has to be coected.
Sectto 29.131-1: nayss of credt for
ta es.
INT RN L R NU COD
19 0-20-13 37
I. T. 026
Secton 2
LIMIT D T LI ILITY
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29.131-1.
2
Secton
(1) The corporaton ta s cacuated on the ncome whch the party abe
to ta aton has earned wthn a caendar year.
(2) If n case of partes abe to ta aton, who have to keep accounts n ac-
cordance wth the stpuatons of the commerca ega code, and who actuay
keep such accounts, the fsca year for whch cosngs are reguary made devates
from the caendar year, then the proft from busness s consdered as earned n
the caendar year n whch the fsca year ends. Ths appes correspondngy n
the case of acccuut-keepug partes of agrcuture and forestry abe to ta aton.
Secton 6
What as to be ascertaned as ncome, and n what manner t has to ho ascer-
taned, s ad down n the stpuatons of the Income Ta Law, and sectons 7
to 16 of that aw. In dong so aso dstrbutons of hdden profts must be con-
sdered.

Secton 11
(1) When ascertanng the ncome the foowng amounts have to be deducted
nsofar as they are not aready deductbe e pendtures n accordance wth the
reguntons of the Income Ta Law:
Secton 131 of the Interna Revenue Code provdes n part as foows:
ths secton, the ta mposed by ths chapter chapter 1 of the Code
sha be credted wth :
country
credt aganst Unted States ncome ta under secton 131 of the Inter-
na Revenue Code, supra, t must be shown that the ta mposed by the
foregn aw s a ta on ncome wthn the Unted States concept, or s
a ta pad n eu of an ncome ta .
It s hed that the ta mposed by the Federa Repubc of Germany
(Western Germany) under the aw desgnated as Corporaton Ta
Law n the Wordng of September , 19 9, fas wthn the Unted
Unted States ncome ta under secton 131(a) of the Interna Reve-
nue Code, sub|ect to the mtatons contaned n secton 131(b) of
the Code.
Secton 29.131-1: nayss of credt for ta es. 19 0-22-13 9
( so Secton 29.131-6.) I. T. 033
INT RN L R NU COD
The ong ong Inand Revenue Ordnance of 19 7, effectve pr
1, 19 7, mposes a ta on net ncome, and such ta quafes as an
ncome ta for whch a credt aganst Unted States ncome ta s
aowabe under secton 131 (a) of the Interna Revenue Code, sub|ect
to the mtatons provded by secton 131(b) of the Code.
ecton of method for camng credt for ong ong ncome ta
by ta payer keepng accounts and fng returns on the cash and ca-
endar year bases and manner of proratng the amount of such ta for
whch a credt s aowabe where the ta payer eects to accrue such
ta .
dvce s requested whether the ta mposed by the ong ong
Inand Revenue Ordnance of 19 7, effectve pr 1, 19 7, quafes
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29.131-1.
as an ncome ta for whch a credt aganst Unted States ncome ta
s aowabe under secton 131 of the Interna Revenue Code.
The ong ong Inand Revenue Ordnance of 19 7 mposes a
scheduer ta , separate schedues beng provded for a ta on saares
and annutes, profts, and nterest, wth the rght of eecton to ump
a ncome from whatever sources under one ta rate. The ordnance
provdes for certan persona e emptons and deductons for e penses
ncurred n the producton of ncome. Under the ordnance, the
ong ong ta abe year s a perod of 12 months commencng on the
1st day of pr and endng on the 31st day of March of the succeedng
year.
foows:
sha be credted wth:
(1) Ctzens and domestc corporatons. In the case of a ctzen of
the Unted States and of a domestc corporaton, the amount of any n-
come ta es pad or accrued durng the ta abe year to any foregn
country
It s hed that the ong ong Inand Revenue Ordnance of 19 7,
effectve pr 1, 19 7, mposes a ta on net ncome, and such ta
quafes as an ncome ta for whch a credt aganst Unted States
ncome ta s aowabe under secton 131(a) of the Interna Revenue
Code, sub|ect to the mtatons provded by secton 131(b) of the
Code.
ta payer who reports hs ncome on the cash bass w ordnary
take credt for foregn ncome ta es n the year n whch they are pad.
e may, however, eect to take credt for such ta es for the year n
whch they accrue. If an eecton s made to take such credt for
the year of accrua, the credt for a subsequent years must be taken
upon the same bass. (See secton 131(d), L R. C, and secton
.131-6, Reguatons 111.)
If a ta payer who fes hs Federa ncome ta returns for the
caendar year on the cash bass does not eect to accrue the foregn
ta es for whch he takes credt, the ong ong ncome ta must be
taken as a credt for the caendar year n whch t s pad. If such
a ta payer eects to accrue such foregn ta es, the aowabe credt for
ong ong ncome ta s that porton of the tota ta pad to ong
ong for the ong ong ta abe year endng on March 31 whch
bears the same reaton to the tota ta as the net ncome receved by
the ta payer that s sub|ect to ong ong ta for the perod pr
1 through December 31 bears to the net ncome receved that s sub|ect
to ong ong ta for the entre ong ong ta abe year.
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29.131-1.

19 0-2 -13 91
I.T. 033
The addtona ta mposed by artce 31. chapter I of the ncome
ta aw of enezuea, on ncome from royates and from the opera-
ton of mnes or hydrocarbon deposts fas wthn the Unted States
concept of an ncome ta and s aowabe as a credt aganst Unted
States ncome ta under secton 131 (a) of the Interna Revenue
Code, sub|ect to the mtatons contaned n secton 131(b) of the
Code.
dvce s requested whether the addtona ta mposed by artce
31, chapter I of the ncome ta aw of enezuea, on ncome from
royates and from the operaton of mnes or hydrocarbon deposts s
aowabe as a credt aganst Unted States ncome ta under secton
131 of the Interna evenue Code.
rtce 31, chapter I of the ncome ta aw of enezuea, pro-
vdes n part as foows:
rt. 31. In the case of net ncomes of ta payers who have revenues derved
from the mnng or o ndustry, ncudng royates and other shares comng from
the same source, f, after deducton of the norma ta and the surta , the re-
manng ncome e ceeds the tota of the ta es ncurred by reason of the ndus-
try s actvtes durng the ta abe year, sad e cess w be sub|ect to an add-
tona ta of 0 percent.
The reguatons reatng to the addtona ta read n part as
foows:
bt. 11 . Net ncome for purposes of the addtona ta s the net gan or
proft appearng n the contrbutor s books and duy determned accordng to
estabshed accountng practces.

kt. 11G. To determne the net ncome referred to n the above artce, there
sha e taken nto account a revenues and e penses of the ta payer for opera-
tons wthn enezuea appcabe to the ta year under consderaton, ncudng
a nonta abe ncome and e penses n the country or abroad, norma and neces-
sary ncndeductbe tems, for the base and progressve ta . Deductons asked
for n vrtue of ordna 9, artce 11 of the aw w be consdered.
foows:
sha be credted wth :
country
credt aganst Unted States ncome ta under secton 131 of the In-
terna evenue Code, supra, t must be shown that the ta mposed by
the foregn aw s a ta on ncome wthn the Unted States concept,
or s a ta pad n eu of an ncome ta .
It s hed that the addtona ta mposed by artce 31, chapter I
of the ncome ta aw of enezuea, on ncome from royates and from
the operaton of mnes or hydrocarbon deposts fas wthn the Unted
Unted States ncome ta under secton 131(a) of the Interna Reve-
nue Code, sub|ect to the mtatons contaned n secton 131(b) of
the Code.
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29.131- .
Secton 29.131- : Redetermnaton of ta when 19 0-22-13 60
credt proves ncorrect. T. D. 12
( so Secton 1 , Secton 29.1 - ; Secton
19.131- , Reguatons 103.)
TITL 2 INT RN L R NU . C PT R I, SU C PT R ,
P RT 10 ND P RT 29
Reguatons 103 and Reguatons 111 amended to conform to pro-
vsons of secton 2 of Pubc Law 37 ( ghty-frst Congress I C. .
19 9-2, 27 , approved October 2 , 11) 9, reatng to credt for foregn
ta ; Reguatons I amended to conform to provsons of secton
of Pubc Law 271 ( ghty-frst Congress) tC. . 19 9-2, 272 ,
approved ugust 27, 19 9. reatng to reports of compensaton of
corporate offcers and empoyees.
Washngton 2 , D. C.
In order to conform Reguatons 103 2G CFR, part 19 and Regu-
atons 111 26 CFR, part 29 to Pubc Law 37 ( ghty-frst Con-
gress) C. . 19 9-2, 27 , approved October 2 , 19 9, and Pubc Law
271 ( ghty-frst Congress) C. . 19 2-2, 272 , approved ugust 27,
19 9, such reguatons are amended as foows:
19.131-1. Reguatons 103 26 CFR 19.131-1 , and mmedatey pre-
cedng secton 29.131-1, Reguatons 111 26 CFR 29.131-1 , the
foowng:
S C. 2. FOR IGN T CR DIT (PU LIC L W 37 , IG TY-
FIRST CONGR SS. PPRO D OCTO R 2 , 19 9).
(a) Secton 131(c) of the Interna Revenue Code (reatng to ad-
|ustments on payment of accrued ta es) s hereby amended by addng
at the end thereof the foowng new sentences: In such redetermna-
ton by the Commssoner of the amount of ta due from the ta payer
for the year or years affected by a refund, the amount of the ta es
refunded for whch credt has been aowed under ths secton sha be
reduced by the amount of any ta descrbed n subsecton (a) mposed
b the foregn country or possesson of the Unted States wth respect to
such refund; but no credt under ths secton, and no deducton under
secton 23, sha be aowed for any ta abe year wth respect to such
ta mposed on the refund. No nterest sha be assessed or coected
on any amount of ta due upon any redetermnaton by the Comms-
soner, resutng from a refund to the ta payer, for any perod pror
to the recept of such refund, e cept to the e tent nterest was pad by
the foregn country or possesson of the Unted States on such refund
for such perod.
(b) The amendment made by subsecton (a) sha be appcabe wth
respect to ta abe years begnnng after December 31, 193 . If the
aowance of a credt or refund of any overpayment of ta resutng
from the appcaton of the amendment made by subsecton (a) s
prevented on the date of the enactment of ths ct, or wthn one year
from such date, by the operaton of any aw or rue of aw (other than
secton 3701 of the Interna Revenue Code, reatng to compromses),
credt or refund of such overpayment may, nevertheess, be aowed or
made f cam therefor Is fed wthn one year from the date of the
enactment of ths ct.
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29.131-6.
6
Par. 2. Secton 19.131- of eguatons 103 26 CF 19.131-
and secton 29.131- of eguatons 111 26 CF 29.13 are
amended as foows:
( ) y nsertng mmedatey before the frst sentence of each
such secton the subheadng: (a) Genera.
( ) y nsertng at the end of each such secton the foowng new
subsectons:
(6) Foregn ta mposed on foregn refund. Where the redetermnaton of
the ta for a ta abe year or years s occasoned by the refund to the ta payer
of ta pad to a foregn country or possesson of the Unted States, the amount
of such refund for whch credt has been granted sha be reduced by the amount
of any ta descrbed n secton 131(a) mposed by the foregn country or pos-
sesson of the Unted States wth respect to such refund. In such case no credt
under secton 131, and no deducton under secton 23, sha be aowed wth
respect to such ta mposed on the refund.
(c) Interest. Where the redetermnaton of the ta for a ta abe year or
years s occasoned by the refund to the ta payer of ta pad to a foregn country
or possesson of the Unted States, no nterest sha be assessed or coected on
the amount of ta due upon such redetermnaton resutng from such refund
to the ta payer, for any perod pror to the recept of such refund, e cept to the
e tent nterest was pad by the foregn country or possesson of the Unted States
on such refund for such perod.
Par. 3. ( ) There s nserted mmedatey precedng secton
29.1 -1, eguatons 111 20 CF 29.1 -1 the foowng:
S C. . R PORTS OF COMP NS TION (PU LIC L W 271,
IG TY-FIRST CONGR SS, PPRO D UGUST 27, 19 9).
Secton 1 (f) of the Interna Revenue Code (reatng to reports of
compensaton of corporate offcers and empoyees e ceedng 7 ,000)
s hereby repeaed.
( ) Secton 29.1 - of Reguatons 111 26 CFR 29.1 - s
deeted.
n secton 3791 of the Interna Revenue Code ( 3 Stat. 67; 26 U. S. C.
3791).)
ecause the amendments made by ths Treasury Decson are merey
of a technca nature and to reeve ta payers from a requrement
respectng the fng of an nformaton return, t s found that t s
unnecessary to ssue ths Treasury Decson wth notce and pubc
procedure thereon under secton (a) of the dmnstratve Pro-
cedure ct, approved une 11, 19 6, or sub|ect to the effectve date
Dane . oc,
pproved October 6,19 0.
ohn S. Graham,
(Fed wth the Dvson of the Federa Regster October 12, 19 0, : 1 a. m.)
Secton 29.131-6: When credt for ta es may be
taken.
nterna revenue code
Ta mposed by ong ong Inand Revenue Ordnance of 19 7.
(See I. T. 033. page 2.)
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7
23.11, Regs. 10 .
SUPPL M NT D. R TURNS ND P YM NT OF T
S CTION 1 1. CONSOLID T D R TURNS
Secton 23.11, Reguatons 10 : Consodated 19 0-26-13 99
returns for subsequent years. I. T. 0 0
INT RN L R NU COD
ffated corporatons whch fed consodated Federa ncome
ta returns for ta abe years begnnng on or before uy 1, 19 9,
and endng after une 30, 19 9, may, notwthstandng the fng of
such returns, fe separate Federa ncome ta returns for the frst
succeedng ta abe year whch begns on or before uy 1, 19 0, and
ends after une 30, 19 0.
L T. 3992 (C. . 19 0-1, 69) modfed.
Reconsderaton has been gven to I. T. 3992 (C. . 19 0-1, 69),
reatng to the fng of consodated Federa ncome ta returns for
fsca years endng n 19 0 by affated corporatons whch fed such
returns for fsca years ended n 19 9, n vew of the enactment of the
Revenue ct of 19 0, approved September 23,19 0.
I. T. 3992, supra, hods that the condtons stated n cause (2) of
secton 23.11 (a) of Reguatons 10 for the aowance of a new eecton
do not e st wth respect to fsca years endng n 19 0, and, accord-
ngy, affated corporatons whch fed consodated Federa ncome
ta returns for fsca years ended n 19 9 w not be permtted to fe
separate Federa ncome ta returns for fsca years endng n 19 0
uness one of the other condtons provded n secton 23.11 (a) of Regu-
atons 10 s met, or uness a subsequent change n the aw or regua-
tons shoud gve rse to an occason for an eecton for such years.
Secton 1 1(a) of the Interna Revenue Code, as amended, provdes
n part as foows:
(a) Pbtvege to Fe Consodated Income and cess-Profts-Ta Re-
turns. The makng of consodated returns sha be upon the cond-
ton that the affated group sha make both a consodated ncome-ta return
and a consodated e cess-profts-ta return for the ta abe year, and that a
corporatons whch at any tme durng the ta abe year have been members of
the affated group makng a consodated ncome-ta return consent to a the
consodated ncome- and e cess-profts-ta reguatons prescrbed under sub-
secton (b) pror to the ast day prescrbed by aw for the fng of such re-
turn.
Secton 23.11(a) of Reguatons 10 , as amended, reatng to con-
sodated ncome ta returns of affated corporatons, provdes n
part as foows:
(a) Consodated Returns Requred for Subsequent Years.
If a consodated return s made under these reguatons for any ta abe year,
a consodated return must be made for each subsequent ta abe year durng
whch the affated group remans n e stence uness (2) Chapter
1 of the Code to the e tent appcabe to corporatons, or these reguatons whch
have been consented to, have been amended and any such amendment s of a
character whch makes ess advantageous to affated groups as a cass the con-
tnued fng of consodated returns,
It s hed that chapter 1 of the Interna Revenue Code has been so
amended by the Revenue ct of 19 0 as to -make ess advantageous to
affated groups as a cass the contnued fng of consodated Federa
923 30 61
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29.162-1.

ncome ta returns for ta abe years begnnng on or before uy 1,
19 0, and endng after une 30, 19 0. ccordngy, affated cor-
poratons whch fed consodated Federa ncome ta returns for
ta abe years begnnng on or before uy 1, 19 9, and endng after
une 30, 19 9, may, notwthstandng the fng of such returns, fe
separate Federa ncome ta returns for the frst succeedng ta abe
year whch begns on or before uy 1, 19 0, and ends after
une 30, 19 0.
I. T. 3992, supra, s hereby modfed to the e tent that t s ncon-
sstent wth the foregong.
S CTION 1 . INFORM TION Y CORPOR TIONS
Secton 29.1 - : Informaton respectng com-
pensaton of offcers and empoyees n e cess
of 7 ,000.
INT RN L R NU COP
Reguatons 111 amended. (See T. D. 12, page .)
SUPPL M NT . ST T S ND TRUSTS
S CTION 1G2. N T INCOM
Secton 29.162-1: Income of estates and 19 0-16-13399
trusts. I. T. 019
INT RN L R NU COD
The decson of the Ta Court n state of my St. . Tat v.
Commssoner (11 T. C. 731), as e pressed n the orgna opnon
In that case, w not be used by the ureau as a precedent In the
dsposton of smnr cases arsng under the Unted States-Canada
ncome ta conventon (C. . 10 2-2, 337) or Income ta conventons
wth other foregn countres.
In genera, deductons under secton 1(12 (b) and (c) of the Inter-
na Revenue Code for dstrbutons of ncome to benefcares of
estates and trusts w not be dsaowed merey because such ncome
s e empt from Federa ncome ta under secton 22(b) (7) of the
Code.
dvce s requested wth respect to the unreported Ta Court dec-
son of no defcency n state of my St. . Tat v. Commssoner,
decson entered November 7,19 9. In that case, the orgna opnon
(11 T. C. 731) was promugated on October 29,19 .
In the orgna opnon n the Tat case, the Ta Court hed that a
fducary (ancary admnstrator) may not, n computng the net
ncome of an estate under secton 162 of the Interna Revenue Code,
deduct from gross ncome, under secton 162(b) of the Code, payments
to nonresdent aen benefcares (ctzens and resdents of Canada)
whch are e cuded from gross ncome under secton 22(b) (7) of the
Code, reatng to ncome e empt under treaty obgatons of the Unted
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29.162-1.
States, and rtce I of the Unted States-Canada ncome ta con-
venton (C. . 19 2-2, 337).
Secton 162 of the Interna Revenue Code provdes that the net
ncome of an estate or trust sha be computed n the same manner
and on the same bass as n the case of an ndvdua, e cept that
(b) There sha be aowed as an addtona deducton n computng the net
ncome of the estate or trust the amount of the ncome of the estate or trust for
ts ta abe year whch s to be dstrbuted currenty by the fducary to the
egatees, hers, or benefcares, but the amount so aowed as a deducton sha
Ic ncuded n computng the net ncome of the egatees, hers, or benefcares
whether dstrbuted to them or not. Itacs supped.
(c) In the case of ncome receved by estates of deceased persons durng the
perod of admnstraton or settement of the estates, there sha be
aowed as an addtona deducton n computng the net ncozne of the estate
or trust the amount of the ncome of the estate or trust for ts ta abe year,
whch s propery pad or credted durng such year to any egatee, her, or bene-
fcary, but the amount so aowed as a deducton sha be ncuded n computng
the net ncome of the egatee, her, or benefcary; Itacs supped.
Secton 22(b) of the Code provdes that the foowng tems sha
not be ncuded n gross ncome and sha be e empt from ncome
ta aton:
(7) Income e empt under treaty. Income of any knd, to the e tent
requred by any treaty obgaton of the Unted States;
The nternatona |urdca effect of a treaty s not dependent upon
the name gven to the nstrument, and the term treaty ncudes con-
ventons. (See ackworth s Dgest of Internatona Law, o. ,
nages 2 and 3.) conventon, by reason of ts approva by the
benate, s n the strct sense a treaty. (See dscusson n yde s Inter-
natona Law, o. 2, pages 1372 and 1373.)
The conventon between the Unted States and Canada, procamed
by the Presdent on une 17, 19 2, effectve anuary 1, 19 1, for the
avodance of doube ta aton and preventon of fsca evason, provdes
n rtce I (C. . 19 2-2, 337, 33 ) that
Pensons and fe annutes derved from wthn one of the contractng states
and pad to ndvduas resdng n the other contractng state sha be e empt
from ta aton n the former state. Itacs supped.
The term pensons s defned n paragraph of the protoco
(C. . 19 2-2, 3 2, 3 3) as perodc payments made n consderaton
for servces rendered or by way of compensaton for n|ures receved.
The Ta Court, n hodng that the payments made to four of the fve
benefcares n the Tat case quafed as pensons, stated n ts orgna
opnon
Snce the ta upon Income currenty dstrbutabe by a fducary s payabe
under the statute by ether the fducary or the benefcary, dependng upon
whether or not such ncome s ncudbe n computng the net ncome of the
benefcary for ncome ta purposes, t s ncumbent upon the fducary camng
the deducton to show that the amount sought to be deducted s ncudbe n the
net ncome of the benefcary to whom the ncome s dstrbutabe, whether ds-
trbuted or not.
In support of that concuson, the Ta Court reed ndrecty on
everng v. utterworth (290 U. S. 36 ; Ct. D. 769, C. . -1,
1 1 (193 )) and Uevenng v. Pardee (290 U. S. 36 ; Ct. D. 769, C. .
-1, 1 1 (193 )) as we as certan other decsons. In none of
the cases cted or reed upon was the ta aton of nonresdent aen
ndvduas consdered, nor was there nvoved n any of them an
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29.162-1.
60
ncome ta conventon between the Unted States and a foregn
country.
petton for revew was fed by the pettoner n the Tat case wth
the Unted States Court of ppeas for the Fourth Crcut. There-
after, on stpuaton by counse for the ta payer and counse for the
Commssoner, the case was remanded to the Ta Court. In connec-
ton wth reconsderaton by the Ta Court, t was contended by the
ta payer that the aowance of the deducton to the estate of the ds-
trbutons e empt n the hands of the benefcares s n harmony wth
secton 1G2 (b) and (c) of the Code and s necessary to the purposes
and ob|ectves of the Unted States-Canada ncome ta conventon
and ncome ta conventons generay. The Commssoner concurred
n the contentons of the ta payer, and the Ta Court thereupon
handed down a decson fndng no defcency n the case of the estate,
n whch decson the Commssoner acquesced (C. .19 0-1, ).
In vew of the foregong, the decson of the Ta Court n state of
my St. . Tat v. Commssoner, supra, as e pressed n the orgna
opnon n that case, w not be used by the ureau as a precedent n
the dsposton of smar cases arsng under the ncome ta conven-
ton wth Canada or ncome ta conventons wth other foregn coun-
tres. In genera, deductons under secton 162 (b) and (c) of the
Interna Revenue Code for dstrbutons of ncome to the benefcares
of estates and trusts w not be dsaowed merey by reason of the
fact that such ncome s e empt from Federa ncome ta under
secton 22(b)(7) of the Code. To dsaow the deductons n such
cases woud have the effect of ta ng ncome whch s specfcay
e empted by treaty.
though the Supreme Court of the Unted States n everng v.
utterworth, supra, stated that the evdent genera purpose of the
statute there nvoved was to ta n some way the whoe ncome of a
trust estates, that statement must be read n connecton wth the
foowng sentence contaned n the same paragraph: Certany,
Congress dd not ntend any ncome from a trust shoud escape ta -
aton uness defntey e empted. Itacs supped. It foows that
f the ncome s defntey e empted by treaty provsons, effect must
be gven to such provsons.
Secton 29.162-1: Income of estates and 19 0-23-13 7
trusts. I. T. 03
INT RN L R NU COD
The ncome benefcary of a Pennsyvana spendthrft trust who
makes an assgnment of the trust ncome s, notwthstandng the
assgnment, abe fo;- Federa ncome ta wth respect to such
ncome.
dvce s requested whether the ncome benefcary of a Pennsy-
vana spendthrft trust who makes an assgnment of the trust ncome
s abe for Federa ncome ta wth respect to such ncome.
In the nstant case, the deed of trust contans a spendthrft prov-
son whch reads as foows:
Provson for Protecton of enefcares. It s hereby e pressy decared
that so far as may be permssbe n aw a shares of prncpa and ncome
by ths deed gven to or drected to be hed for the use and beneft of the severa
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29.16 -1.
and respectve benefcares mentoned or set out n the trust decared by ths
deed, sha not be n any way or manner sub|ect or abe to ther or any of ther
antcpaton, sae, pedge, debts, contracts, engagements or abtes, and sha
not be sub|ect or abe to attachment or e ecuton or sequestraton under any
ega or equtabe or other process.
The vadty of assgnments of trust ncome s governed by the aws
and court decsons of the State n whch the trust s admnstered.
(See dward T. ah- v. Commssoner, 300 U. S. ; Ct. D. 120 , C. .
1937-1, 17 .) In In re eeer s state (33 Pa. 22 ; 3 t. (2d) 13),
the Supreme Court of Pennsyvana stated n part as foows:
When the benefcary makes an assgnment of future ncome and
drects the trustee to pay such ncome to the assgnee, such an assgnment, n the
case of spendthrft trusts, s nvad n the sense that t can be revoked at any
tme by the benefcary, but, uness and unt so repudated, t consttutes a vad
authorty to the trustee to make payments of the successvey accrung nsta-
ments of ncome to the assgnee. The drecton to the trustee to pay to the
assgnee s enforceabe ony as to each nstament after t accrues, and then
ony f the drecton has not prevousy been rescnded.
For Federa ncome ta purposes, the one who s to receve dstrb-
utabe trust ncome as the owner of the benefca nterest s to pay the
ta . If, under the aw governng the trust, the benefca nterest s
assgnabe, and f t has been rrevocaby assgned wthout reservaton,
the assgnee becomes the owner of the benefca nterest. (See dward
T. ar v. Commssoner, supra.)
Under the aws of Pennsyvana, the benefcary of a spendthrft
trust has the power to revoke an assgnment of trust ncome at any
tme, and the trust ncome s not deverabe to the assgnee unt t
accrues to the assgnor-benefcary of the trust. Under such crcum-
stances, the assgnee of spendthrft trust ncome cannot become the
owner of a benefca nterest n the trust. Therefore, t s hed that
the ncome benefcary of a Pennsyvana spendthrft trust who makes
an assgnment of the trust ncome s, notwthstandng the assgnment,
abe for Federa ncome ta wth respect to such ncome.
S CTION 16 . MPLOY S TRUSTS
Secton 29.16 -1: mpoyees trusts. 19 0-16-13 00
I. T. 020
INT RN L R NU COD
In vew of acquescence (C. . 19 0-1, ) n the decson n
ockenng Inc. v. Commssoner (13 T. C. 723), I. T. 367 (C. .
19 , 31 ), whch contans the so-caed 30 percent rue used n de-
termnng whether a penson or proft-sharng pan meets the requre-
ments of secton 16 (a) of the Interna Revenue Code, and I. T. 367
(C. . 19 , 316) and I. T. 3076 (C. . 19 , 317), both of whch
e empfy the appcaton of the 30 percent rue, are revoked.
owever, n order to quafy under secton 16 (a) of the Interna
Revenue Code, the egbty requrements of a penson or proft-
sharng pan must not dscrmnate n favor of empoyees who are
sharehoders, and such a pan must not amount to a subterfuge for
the dstrbuton of profts to such sharehoders.
Reconsderaton has been gven to the questons presented n I. T.
367 (C. . 19 , 31 ), I. T. 367 (C. . 19 , 316), and I. T. 3676
(C. . 19 , 317) n the ght of acquescence (C. . 19 0-1, ) n
the decson n vockenng Inc. v. Commssoner (13 T. C. 723).
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S 29.201-1.
G2
I. T. 367 , supra, hods that a penson or proft-sharng pan sha
not generay be consdered to be for the beneft of sharehoders f
contrbutons whch are requred to provde benefts for empoyees,
each of whom owns, drecty or ndrecty, more than 10 percent of
the votng stock of the corporaton, do not e ceed, n the aggregate,
30 percent of the contrbutons for a partcpants under the pan.
I. T. 367 , supra, and I. T. 3676, supra, e empfy the appcaton of
the provsons of I. T. 367 . In vew of acquescence n the decson
n the ockenng case, L T. 367 ,1. T. 367 , and I. T. 3676 are hereby
revoked.
quafed pan under secton 16 (a) of the Code must beneft
empoyees generay. In ths respect, attenton s nvted to that
porton of secton 29.16 -1 (a) of Reguatons 111 whch states: If
the pan s so desgned as to amount to a subterfuge for the dstrbuton
of profts to sharehoders, even f other empoyees who are not share-
hoders are ncuded.under the pan, t w not quafy as a pan
for the e cusve beneft of empoyees. Furthermore, the pan must
beneft ether the percentage of empoyees set forth n subparagraph
( ) of secton 16 (a) (3) of the Code, or such empoyees as quafy
under a cassfcaton set up by the empoyer and- found by the Com-
mssoner not to be dscrmnatory n favor of empoyees who are share-
hoders. ccordngy, f a pan fas to quafy under the percentage
requrements of secton 16 (a)(3)( ) of the Code, and such pan
covers empoyees who are sharehoders, the egbty condtons of
the pan w be sub|ect to a determnaton by the Commssoner as to
whether such pan s dscrmnatory n favor of the empoyee share-
hoders.
SUPPL M NT G. INSUR NC COMP NI S
S CTION 201. LIF INSUR NC COMP NI S
Secton 29.201-1: Ta on fe nsurance com- 19 0-26-13 00
panes. T. D. 16
( so Secton 3, Secton 29. 3-1; Secton
6, Secton 29. 6-1; Secton 322, Secton
29.322-7.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 29.
INCOM T ; T L Y RS GINNING FT R D C M R 31. 1 1
Reguatons 111 amended to conform to sectons 01 and 02 of
the Revenue ct of 19 0.
Washngton 2 , D. C.
In order to conform Reguatons 111 26 CFR, part 29 to sectons
01 and 02 of the Revenue ct of 19 0 ( ghty-frst Congress, second
sesson), approved September 23, 19 0, such reguatons are amended
as foows:
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03
29.201-1.
Paragraph 1. Secton 29. 3-1, as amended by Treasury Decson
662 C. . 19 -2, , approved October 21,19 26 CFR 29. 3-1 ,
s further amended by addng at the end thereof the foowng:
For provsons reatng to the tme for fng returns for ta abe years be-
gnnng n 19 9 of fe nsurance companes sub|ect to the ta es mposed by
secton 201, see secton 29.201-1.
Par. 2. Secton 29. 6-1, as amended by Treasury Decson 2
C. . 19 , 10 , approved December 29, 19 26 CFR 29. 6-1 , s
further amended by nsertng at the end thereof the foowng:
For provsons reatng to the date for payment of the ta for ta abe years
begnnng n 19 9 n the case of fe nsurance companes sub|ect to the ta es
mposed by secton 201, see secton 29.201-1.
Par. 3. Secton 29.201-1 26 CFR 29.201-1 , s amended by addng
at the end of the second paragraph from the end thereof the fo-
owng :
owever, wth respect to ta abe years of fe nsurance companes begnnng n
19 9, speca provsons wth respect to the fng of returns and the payment of
the ta are prescrbed by secton 02 of the Revenue ct of 19 0, as foows:
S P. 02. FILING OF R TURNS FOR T L Y R 19 9.
R NU CT OF 19 0, PPRO D S PT M R 23, 19 0.
very fe nsurance company sub|ect to the ta es mposed by sec-
ton 201 of the Interna Revenue Code sha, after the date of the
Secretary s procamaton requred by secton 01(c) of ths ct set
forth mmedatey precedng secton 29.202-1 and on or before De-
cember 1 , 19 0 the 1 th day of the thrd month foowng the cose of
the month n whch ths ct s enacted, make a return for ts ta abe
year begnnng n 19 9 wth respect to the ta es mposed by such secton
201 (determned wth the amendments made by secton 01 of ths ct).
The return requred by ths secton for such ta abe year sha consttute
the return for such ta abe year for a purposes of the Interna Revenue
Code; and no return for such ta abe year, wth respect to the ta es
mposed by secton 201 of such Code, fed on or before the date of such
procamaton sha be consdered for any of such purposes as a return
for such year. The ta es mposed by secton 201 of such Code (de-
termned wth the amendments made by secton 01 of ths ct) for such
ta abe year sha be pad on December 1 , 19 0 the 1 th day of the
thrd month foowng the cose of the month n whch ths ct s
enacted, n eu of at the tme prescrbed n secton 0(a) of such Code.
payments wth respect to the ta es for such ta abe year mposed
by secton 201 of such Code under the aw n effect pror to the enactment
of ths ct, to the e tent that such payments have not been credted or
refunded, sha be deemed to be payments made at the tme of the fng
of the return requred by ths secton on account of the ta es for that
year determned wth the amendments made by secton 01 of ths
ct
26 CFR 29.202-1 the foowng:
S C. 01. CORR CTION OF FORMUL US D IN COMPUTING
INCOM T S OF LIF INSUR NC COMP NI S FOR 19 9
ND 19 0. R NU CT OF 19 0, PPRO D S PT M R
23, 19 0.
(a) Resebve and Other Pocy Labty Credt. The second sen-
tence of secton 202(b) (reatng to defnton of reserve and other pocy
abty credt) s hereby amended to read as foows: Ths fgure sha
be based on such data wth respect to fe nsurance companes for the
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29.201-1.
6
precedng ta abe year as the Secretary consders representatve and
sha be computed as foows:
(1) In genera. cept as provded In paragraph (2), the
fgure sha be computed n accordance wth the foowng formua:
The rato whch a numerator comprsed of the aggregate of te
sums of ( ) 2 per centum of the reserves for deferred dvdends,
( ) nterest pad, and (C) the product of (1) the mean of the
ad|usted reserves at the begnnng and end of the ta abe year and
() the reserve earnng; rate bears to a denomnator comprsed of
the aggregate of the e cess of net ncomes computed wthout any
deducton for ta -free nterest, over the ad|ustment for certan
reserves provded n subsecton (c).
(2) Speca rue fob 19 9 and 960. In the case of the ta es
mposed for a ta abe year begnnng n 19 9 or 19 0, the fgure to
be used for such year sha be computed as provded n paragraph
(1) e cept that
( ) n computng the product requred under cause (C)
of paragraph (1), there sha be used, n eu of the reserve
earnngs rate, the average rate of nterest assumed n com-
putng fe nsurance reserves. Such average rate sha be ca-
cuated n the manner provded n the second sentence of sec-
ton 201(c)( ) ; nnd
( ) f the Secretary, n computng the rato, fnds that
the net effect of ncudng the data wth respect to any fe
nsurance company s to ncrease the numerator more than
t Increases the denomnator, he sha mt the net change n
the numerator resutng from such ncuson to the net change
n the denomnator resntng therefrom.

(c) ffectve Date. The amendments made by ths secton sha be
appcabe to ta abe years begnnng after December 1,19 . The Sec-
retary of the Treasury sha, wthn s ty days after the date of the
enactment of ths ct, determne and procam n accordance wth the
provsons of secton 202(b) of the Interna Revenue Code, as amended
by ths secton, the fgures to be used by fe nsurance companes n
computng ther reserve and other pocy abty credts for ta abe
years begnnng In 19 9.
26 CFR 29.203-1 the foowng:
S C. 01. CORR CTION OF FORMUL US D IN COMPUTING
INCOM T S OF LIF INSUR NC COMP NI S FOR 19 9
ND 19 0. R NU CT OF 19 0, PPRO D S PT M R
23. 19 0.

(b) Technca mendment. Secton 203(b) s hereby amended by
strkng out fgure and nsertng n eu thereof appcabe fgure .
(c) ffectve Date. The amendments made by ths secton sha be
appcabe to ta abe years begnnng after December 31, 19 . The
Secretary of the Treasury sha, wthn s ty days after the date of the
enactment of ths ct, determne and procam n accordance wth the
provsons of secton 202(b) of the Interna Revenue Code, as -
amended by ths secton, the fgures to be used by fe nsurance com-
panes n computng ther reserve and other pocy abty credts far
ta abe years begnnng n 19 9.
Par. 6. Secton 29.322-7(a), as amended by Treasury Decson 07
page 1 , ths uetn , approved September 12, 19 0 26 CFR
29.322-7(a) , s further amended by addng at the end thereof the
foowng:
For speca provsons for the determnaton of the date for fng returns and
payment of the ta for ta abe years begnnng n 19 9 of fe nsurance
companes sub|ect to the ta es mposed by secton 201, see secton 29.201-1.
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29.202-1.
ecause ths Treasury Decson, e cept for the nserton n the
reguatons of certan provsons of aw, merey conforms the regua-
tons to secton 02 of the Revenue ct of 19 0, provdng for a new
date for fng returns and makng payment of ta for ta abe years
of fe nsurance companes begnnng n 19 9, t s found mpractcabe
to ncur the deay whch woud resut from the ssuance of ths Treas-
ury Decson wth notce and pubc procedure thereon under secton
(a) of the dmnstratve Procedure ct, approved une 11, 19 6,
or sub|ect to the effectve date mtaton of secton ( ) of sad ct.
Ths Treasury Decson sha be effectve upon ts fng for pub-
(Ths Treasury Decson s ssued under authorty contaned n
sectons 62 and 3791 of the Interna Revenue Code ( 3 Stat. 32, G7;
2G U. S. C. 62,3791).)
Geo. . Schoeneman,
pproved December , 19 0.
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster December , 19 0, : 7 a. m.)
S CTION 202. D UST D NORM L-T
N T INCOM
Secton 29.202-1: Reserve and other pocy 19 0-22-13 61
abty credt for ad| usted norma-ta net T. D. 13
ncome.
TITL 26 INT RN L R NU . C PT R I. SU C PT R , P RT 29.
INCOM T ; T L Y RS GINNING FT R D C M R 31, 19 1
Fgure to be used In determnng reserve and other pocy abty
credt for fe nsurance companes.
Offce of the Secretary of the Treasury,
Washngton, D. C, October 11,19 0.
To Offcers and mpoyees of the Treasury Department and Others
Concerned:
Paragraph 1. y vrtue of the authorty vested n me by secton
202(b) of the Interna Revenue Code, as amended by secton 163 of
the Revenue ct of 19 2 ( 3 Stat. 71, 6 Sat. 70; 2G U. S. C. 19 6
ed., 202(b)) and as further amended by secton 01 of the Revenue
ct of 19 0, approved September 23, 19 0, t s hereby determned
that the fgure to be used n computng the reserve and other pocy
abty credt of fe nsurance companes for the ta abe year 19 9
sha be .93 .
Par. 2. It s found that notce and pubc procedure are unnecessary,
snce the fgure announced n ths Treasury Decson s computed from
nformaton contaned n the ncome ta returns of fe nsurance
companes for the year 19 whch are not open to pubc nspecton.
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29.291-1. 66
The pubc accordngy cannot effectvey partcpate n the deter-
mnaton of such fgure.
ohn S. Graham,
SUPPL M NT . NONR SID NT LI N INDI IDU LS
S CTION 212. GROSS INCOM
Secton 29.212-2: cuson of earnngs of 19 0-2 -13 92
foregn shps or arcraft from gross ncome. L T. 039
( so Secton 231, Secton 29.231-3.)
INT RN L R NU COD
rgentna satsfes the equvaent e empton requrements of sectons
212(b) and 231(d) of the Interna Revenue Code.
SUPPL M NT I. FOR IGN CORPOR TIONS
S CTION 231. T ON FOR IGN CORPOR TIONS
Secton 29.231-3: cuson of earnngs of foregn
shps or arcraft from gross ncome.
INT RN L R NU COD
rgentna equvaent e empton requrements. (See I. T. 039,
above.)
SUPPL M NT M. INT R ST ND DDITIONS TO T T
S CTION 291. F ILUR TO FIL R TURN
Secton 29.291-1: ddton to the ta n case 19 0-19-13 32
of faure to fe return. Mm. 6 26
( so Secton 3, Secton 29. 3-2.)
Fng of returns by fe nsurance companes for the caendar
year 19 9.
Treast|rt Department,
Washngton 2 , D. C, September 6, 19 0.
1. The pendng Revenue of 19 0 ( . R. 920), by secton 01
amends the formua used n computng the reserve and other pocy
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67
29.322-7.
abty credt of fe nsurance companes, as defned n secton 201 (b)
of the Interna Revenue Code. Secton 01, as revsed by the Senate
Fnance Commttee, provdes a speca rue wth respect to ta abe
years begnnng n 19 9 and 19 0.
2. In vew of the proposed egsaton affectng the ta aton of fe
nsurance companes, successve genera e tensons of tme have been
granted fe nsurance companes, as defned n secton 201(b) of the
Code, to and ncudng September 1 , 19 0, for fng ncome ta
returns for the caendar year 19 9 under the authorty of secton
3(a) (2) of the Code. (See Mn. 6 2, C. . 19 0-1, 6; Mn. 6 03,
C. . 19 0-1, 6; and Mm. 6 1 , page 36, ths uetn.)
3. Snce secton 3(a) (2) of the Code mts e tensons of tme for
fng returns to 6 months, no further e tenson of tme may be granted.
owever, due to the pendng egsaton and the fact that the fgure
necessary for computng the reserve and other pocy abty credt
has not been determned and procamed by the Secretarv as provded
for n secton 202(b) of the Code, t s mpractcabe for fe nsurance
companes to fe ther returns by September 1 , 19 0. ccordngy,
f the return s fed on or before November 1 , 19 0r the addton to
the ta for faure to fe on tme w not be asserted for the reason
that the faure to fe on tme w be regarded as due to reasonabe
cause wthn the meanng of secton 291 (a) of the Code.
. Correspondence regardng ths mmeograph shoud refer to ts
number and the symbos IT: IM.
Geo. . Schoeneman,
Commssoner.
SUPPL M NT O. O RP YM NTS
S CTION 322. R FUNDS ND CR DITS
Secton 29.322-7: Lmtatons upon the credtng
and refundng of ta es pad.
( so Secton 19.322-7, Reguatons 103.)
INT RN L R NU COD
Reguatons 103 and 111 amended. (See T. D. 07, page 1 .)
Secton 29.322-7: Lmtatons upon the credtng
and refundng of ta es pad.
INT RN L R NU COD
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Msc. 6
C PT R 2. DDITION L INCOM T S
SU C PT R . C SS PROFITS T
P RT I
C SS PROFITS T COUNCIL
19 0-21-13 3
.P.C.
Restatement of pocy wth respect to appcatons for reef under
secton 722 fed by ta payers havng base perods endng after
December 31,1939.
1. In vew of the decson n Wsconsn Farmer Co., 1 T. C. No. 117,
the poston of the cess Profts Ta Counc wth respect to app-
catons for reef fed by ta payers havng base perods, determned n
accordance wth secton 713(b) or 7 0(d), endng after December 31,
1939, s restated n the paragraphs beow.
2. s a genera rue, n estabshng what woud be a far and |ust
amount representng norma earnngs to be used as a constructve
average base perod net ncome, a change n the character of the ta -
payer s busness occurrng before the end of the ta payer s base perod
w not be e cuded because t occurred after December 31,1939.
3. Where a ta payer, after December 31,1939, but before the end of
ts base perod, acqures a or part of the assets of a compettor, regard
w be had to the specfc reference n secton 722 (b) ( ) to the date
anuary 1, 19 0. Thus, e cept n the so-caed newspaper cases
descrbed n the ast sentence of secton 722(b)( ), the acquston,
after December 31, 1939, but before the end,of the ta payer s base
perod, of a or part of a compettor s assets w not be taken nto
account n estabshng norma earnngs wthout a showng that t
changed the character of the ta payer s busness n some manner other
thanby emnatng or dmnshng the competton of such compettor.
For e ampe, f such an acquston resuted n a change n the opera-
ton or management of the busness, t may be taken nto account as a
change n the character of the ta payer s busness, snce a change n
the operaton or management of the busness fas wthn the rue stated
n paragraph 2 of ths memorandum. On the other hand, f such an
acquston resuted n an ncreased eve of earnngs due soey to the
emnaton or dmnuton of competton, t may not be taken nto
account.
. The commtment rue set forth n the ast sentence of secton
722(b) ( ) provdes that one type or cass of change n the character
of the busness (. e., a change n the capacty for producton or opera-
ton of the busness resutng from a course of acton to whch the ta -
payer was commtted pror to anuary 1, 19 0) may be taken nto
account f consummated durng an e cess profts ta ta abe year. It
s the vew of the Counc that ths provson shoud be consdered an
e tenson of, or an e cepton to, the genera rue whch requres that a
change n the character of the busness must occur durng or mme-
datey pror to the ta payer s base perod. For ths reason, where
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69
Mac.
such a change n a ta payer s capacty for producton or operaton oc-
curs after December 31,1939, but before the end of the ta payer s base
perod, t w be treated n the same manner as any other change n
character fang wthn the rue stated n paragraph 2 of ths memo-
randum. In such a case the ast sentence of secton 722(b) ( ) w
not be apped and the ta payer w not be requred to estabsh that
the condtons reatng to a commtment were satsfed.
. The newspaper acquston rue set forth n the ast sentence of
secton 722(b) ( ), ke the commtment rue, s consdered an e tenson
of, or an e cepton to, the genera rue whch requres that a change n
the character of the busness must occur durng or mmedatey pror
to the ta payer s base perod. It aso modfes the anuary 1, 19 0,
restrcton on acquston cases dscussed n paragraph 3 of ths memo-
randum snce t provdes recognton for certan acqustons occurrng
after December 31,1939. Cases nvovng the acquston of the assets
of one newspaper by another newspaper w be treated as foows:
(a) Where the acquston of assets occurred before anuary 1,
19 0, the ast sentence of secton 722(b) ( ) w not be appcabe, and
the ta payer, accordngy, w be requred to estabsh ony that t
acqured a or part rather than substantay a of such assets and
that competton was emnated or dmnshed rather than
emnated.
(b) Where the acquston of assets occurred after December 31,
1939 (whether before or after the end of the ta payer s base perod),
the ast sentence of secton 722(b) ( ) w be appcabe, and the ta -
payer w be requred to estabsh that t acqured substantay a
such assets and that competton e stng before anuary 1, 19 0, was
emnated.
6. In a cases nvovng ta payers havng base perods endng after
December 31, 1939, the prohbton contaned n secton 722(a) wth
respect to the use of post-1939 events or condtons n determnng
constructve average base perod net ncome must be observed. In a
such cases, therefore, the ta payer s actua earnngs for the porton
of ts base perod subsequent to December 31, 1939, must be recon-
structed n ther entrety. For e ampe, where the ta payer changed
the character of ts busness mmedatey pror to or durng the base
perod and such change affected the earnngs of but one of ts two
departments or dvsons, t cannot reconstruct base perod earnngs for
the department to whch the change n character reates and Tack
such reconstructed earnngs to the actua base perod earnngs for
ts other department. The post-1939 earnngs of the second depart-
ment aso must be reconstructed, snce they are an eement of con-
structve average base perod net ncome and as such fa wthn the
post-1939 prohbton of secton 722(a). Smary, f reef s camed
because of a strke occurrng durng 1937, earnngs for the post-1939
porton of the ta payer s base perod w be reconstructed rrespectve
of whether they were affected by the strke.
7. In the appcaton of the 2-year push-back rue to cases n whch
the base perod ends after December 31, 1939, norma earnngs w
be ascertaned wth respect to the constructve eve of earnngs at
the end of the ta payer s base perod. In such cases the actua eve
of earnngs at the end of the ta payer s base perod may not be em-
poyed. The constructve eve of earnngs at the end of the ta -
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0 .101, Regs. 116.
70
payer s base perod, ascertaned by assumng that the change n char-
acter occurred 2 years before t actuay dd, s the ony post-1939
earnng eve whch may be used n ascertanng norma earnngs.
(The procedure dscussed n the uetn on Secton 722 pages 1 9-
1 0, Gr. P. O. prntng, -w not be foowed.) In commtment cases
and n newspaper acquston cases where the change n the character
of the ta payer s busness occurred after the end of the ta payer s
base perod, the ta payer w be afforded a 2-year hypothetca de-
veopment perod wthn whch to estabsh ts constructve eve of
earnngs at the end of ts base perod. For e ampe, a corporaton
havng a base perod endng November 30,19 0, whch consummated a
commtment durng 19 3, w be aowed to assume that such change
was made November 30, 193 , for the purpose of estabshng ts con-
structve eve of earnngs at November 30,19 0.
. For purposes of reconstructon of earnngs for the perod after
December 31, 1939, whch s ncuded n the ta payer s base perod,
the actua genera economc condtons whch prevaed after Decem-
ber 31, 1939, may not be empoyed. In eu thereof there w be
substtuted average genera economc condtons prevang durng the
pre-19 0 porton of the ta payer s base perod or average genera
economc condtons of a dfferent pre-19 0 perod n cases where
such factors as ndustry-wde varant cyce or sporadc proft con-
dtons e st.
9. Where a ta payer, because, for e ampe, of dfferences n the
provsons of secton 7 0(d), has a partcuar base perod for one
e cess profts ta ta abe year and a dfferent base perod for another
e cess profts ta ta abe year, secton 722 w be apped wth respect
to each e cess profts ta ta abe year n accordance wth the base
perod appcabe to such year.
10. . P. C. 9 (C. . 19 7-1,76) and the fna paragraph of part III
(C) (2) of the uetn on Secton 722 (page 1 9, G. P. O. prntng)
are hereby revoked. Provsons of the uetn on Secton 722 and
pror Counc rungs nconsstent wth ths memorandum are super-
seded.
enry . Merrt,
Charman, cess Profts Ta Counc.
Seftemrer 19,19 0.
C PT R 9. MPLOYM NT T S
SU C PT R D.-COLL CTION OF INCOM T T SOURC ON
W G S
S CTION 1G21 (a). D FINITIONS: W G S
Secton 0 .101, Reguatons 11G: Wages.
INT RN L R NU COD
Mmeograph G 72 (C. . 19 0-1, 1 ) modfed. (See Mm. 6 3,
page 11.)
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71 21 (a) (11), rt. 2 1, Regs. 62.
INCOM T RULINGS. P RT II
R NU CT OF 193 ND PRIOR R NU CTS
SU TITL . G N R L PRO ISIONS
P RT II. COMPUT TION OF N T INCOM
S CTION 22(a). GROSS INCOM : G N R L
D FINITION
rtce 22 (a)-1, Reguatons 9 : What ncuded
n gross ncome.
G. C. M. 1 2 2 (C. . 1937-1, 7) modfed. (See G. C. M. 2G399,
page .)
rtce 22 (a)-1: What ncuded n gross
ncome.
R NU CTS OF 191 , 1936, ND 193
0. D. 1017 (C. . , 101 (1921) ) revoked and I. T. 3329 (C. .
1939-2, 1 3) modfed. (See I. T. 027, page 9.)
S CTION 22(b). GROSS INCOM : CLUSIONS
FROM GROSS INCOM
rtce 22(b) (2)-2, Reguatons 101: nnutes.
Revocaton of G. C. M. 21666 (C. . 19 0-1, 116), G. C. M. 22 19
(C. . 19 1-1, 330), and I. T. 3 02 (C. . 9 0-2, 7) ; modfcaton
of So. Op. 160 (C. . III-2, 60 (192 )) and I. T. 3202 (C. . 193 -2,
13 ). (See G. C. M. 26 9 , page 16, ths uetn, and I. T. 029,
page 17, ths uetn.)
S CTION 21 (a) (11). D DUCTIONS LLOW D:
C RIT L CONTRI UTIONS
rtce 2 1, Rhguatons 62: Chartabe contrbutons.
R NU CT OF 1921
I. T. 1 67 (C. . II-2, 1 (1923) ) revoked. (See I. T. 030,
page 23.)
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223, rt. 01, Regs. 62.
72
TITL II. W R C SS PROFITS T
S CTION 223. INDI IDU L R TURNS
rtce 01, Reguatons 62: Indvdua 19 0-19-13 2
returns. L T. 02
R NU CT OF 1017
Modfcaton of I. T. 123 (C. . 1-1, 232 (1922))
Pursuant to the recommendaton n G. C. M. 26 3 (page 31, ths
uetn), I. T. 123 (C. . 1-1, 232 (1922)) s hereby modfed.
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ST T ND GIFT T S
ST T T
S CTION 11(f). GROSS ST T : POW RS OF
PPOINTM NT
Secton 1.2 , Reguatons 10 : Property sub- 19 0-22-13 62
|ect to power of appontment by decedent. T. D. 10
R GUL TIONS R L TING TO ST T T
Reguatons 106 amended to conform to Pubc Law 7 ( ghty-
frst Congress) page 21 , ths uetn , reatng to reease of powers
of appontment.
Washngton 2 , D. C.
In order to conform Reguatons 10 26 CFR, part 1 to Pubc
Law 7 ( ghty-frst Congress, second sesson) page 21 , ths ue-
tn , approved une 27,19 0, such reguatons are amended as foows:
Paragraph 1. There s nserted mmedatey foowng secton 1
of Pubc Law 137 ( ghty-frst Congress, frst sesson), whch was
nserted n such reguatons by Treasury Decson 7 9 C. . 19 9-2,
11 , approved October 7, 19 9, and before secton 302(f) of the
Revenue ct of 1926 (as orgnay enacted) as set forth precedng
secton 1.2 , the foowng:
PU LIC L W 7 ( IG TY-FIRST CONGR SS, S COND S SSION),
PPRO D UN 27, 10 0
Resoved by the Senate and ouse of Representatves of the Unted
States of merca n Congress assembed. That sectons 03(d)(3)
of the Revenue ct of 10 2 (reatng to reease of certan
powers of appontment n the case of the estate ta es) are
hereby amended by strkng out 19 0 wherever appearng theren
and nsertng n eu thereof 19 1 .
Par. 2. Secton 1.2 ( ), added by Treasury Decson 239 C. .
19 3, 10 1 , approved March 10, 19 3, as amended by Treasury De-
cson 7 9 26 CFR 1.2 (b) , s further amended as foows:
( ) y strkng out 19 0 wherever t appears and nsertng n
eu thereof 19 1s.
( ) y strkng from the frst sentence of subparagraph (3) (as
amended by Pubc Law 137 ( ghty-frst Congress), approved une
19 9) and nsertng n eu thereof the foowng: (as amended
923 30 1 6
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1.9, Regs. 10 .
7
by Pubc Law 7 ( ghty-frst Congress), approved une 27,19 0) .
ecause of the technca nature of the amendments made heren, t
s found that t s unnecessary to ssue ths Treasury Decson wth
notce and pubc procedure thereon under secton (a) of the dmn-
stratve Procedure ct, approved une 11, 19 6, or sub|ect to the
effectve date mtaton of secton (c) of sad ct.
Ths Treasury Decson sha be effectve upon ts fng for pubca-
ton n the Federa Regster.
(Ths Treasury Decson s ssued under authorty contaned n
secton 3791 of the Interna Revenue Code ( 3 Stat. 67; 26 U. S. C.
3791) and Pubc Law 7 ( ghty-frst Congress, second sesson),
approved une 27,19 0.)
Dane . oc,
pproved October , 19 0.
ohn S. Graham,
S CTION 13(b). CR DITS G INST T : ST T
SUCC SSION, L G CY, ND IN RIT NC T S
Secton 1.9, Reguatons 10 : Credt for 19 0-26-13 06
estate, nhertance, egacy, or succes- T. D. 20
son ta es.
( so Secton 363 , Secton 1.70, Regua-
tons 10 .)
R GUL TIONS R L TING TO ST T T
Sectons S1.9 and 1.70 of Reguatons 10 amended
Washngton 2 , D. G.
Reguatons 10 26 CFR, part 1 are amended as foows:
Paragraph 1. Secton 1.9. as amended by Treasury Decson 239
C. . 19 3,10 1 , approved March 10,19 3 26 CFR 1.9 , s further
amended as foows:
( ) y strkng out the entre fourth paragraph (ncudng sub-
paragraphs (a) and (b) thereof) and nsertng n eu thereof the
foowng paragraph:
efore the Commssoner aows credt for such estate, nhertance, egacy, or
successon ta es, there must be submtted to hm a certfcate of the proper
offcer of the ta ng State, Terrtory, Dstrct of Coumba, or possesson of the
Unted States showng: (1) the tota amount of such ta mposed (before addng
nterest and penates and before aowng dscount) ; (2) the amount of any
dscount aowed; (3) the amount of any penates and nterest mposed or
charged; ( ) the tota amount actuay pad n cash; and ( ) the date of pay-
ment. If the amount of such ta es has been redetermned, the amount fnay
determned shoud be stated.
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7
1.9, Regs. 10 .
( ) y strkng out the second paragraph from the end and n-
sertng n eu thereof the foowng paragraph:
The Commssoner may requre the submsson of such addtona proof as s
deemed necessary to estabsh the rght to the credt. For e ampe, he may
requre the submsson of a certfcate of de proper offcer of the ta ng State
showng (1) whether a cam for refund of such estate, nhertance, egacy, or
successon ta es or any part thereof s pendng and (2) whether a refund of
such ta es or any part thereof has been authorzed, and f a refund has been
made, the date, the amount thereof, and a descrpton of the property or nterest
n respect to whch such refund was made. The Commssoner may aso requre
an temzed st of the property n respect to whch such ta es were mposed by
the State, Terrtory, Dstrct of Coumba, or possesson of the Unted States,
certfed by the offcer havng custody of the records pertanng to such ta es,
and an affdavt (or a wrtten c ecaraton under penates of per|ury) of the
e ecutor statng whether any tgaton has been nsttuted, or appea taken, or
whether any such acton s desgned or contempated, ether by hm or, to hs
knowedge, by any benefcary or other person, the fna determnaton of whch
may affect the amount of such ta es.
Par. 2. Secton 1.70 26 CFR 1.70 s amended by strkng out
the frst sentence and nsertng n eu thereof the foowng sentences:
In case t s mpossbe or Impractcabe for the e ecutor to fe a reasonaby
compete return wthn 1 months from the date of death, the Commssoner may,
upon a showng of good and suffcent cause, grant an e tenson of tme not to
e ceed 6 months from the due date. ppcaton for an e tenson of tme to fe
the return shoud be submtted on or before the due date and faure to do so
may ndcate neggence and consttute suffcent cause for dena.
ecause ths Treasury Decson reeves ta payers from certan
technca requrements under e stng reguatons, t s found that t
s unnecessary to ssue ths Treasury Decson wth notce and pubc
rocedure thereon under secton (a) of the dmnstratve Proce-
ure ct, approved une 11, 19 6, .or sub|ect to the effectve date
mtaton o secton (c) of sad ct.
(Ths Treasury Decson s ssued under authorty contaned n sec-
ton 3791 of the Interna Revenue Code ( 3 Stat. 67 : 26 U. S. C.
3791).)
Geo. . Schoeneman,
pproved December 7, 19 0.
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster December 12, 19 0, : 6 a. m.)
S CTION 363 . T NSION OF TIM FOR FILING
R TURNS
Secton 1.70, Reguatons 10 : tenson of
tme by Commssoner.
INT RN L R NU COD
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6.1, Regs. 10 .
7G
GIFT T
S CTION 1000. IMPOSITION OF T
Secton 6.1, Reguatons 10 : Imposton 19 0-22-13 63
of ta . T. D. 11
( so Secton 6.2, Reguatons 10 .)
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT 0. GIFT
T UND R C PT R OF T INT RN L R NU COD . S M ND D
Reguatons 10 amended to conform to Pubc Law 7 ( ghty-
frst Congress) page 21 , ths uetn , reatng to reease of powers
of appontment.
Washngton 2 , D. C.
In order to conform Reguatons 10 26 CFR, part 6 to Pubc
Law 7 ( ghty-frst Congress, second sesson) page 21 , ths ue-
tn , approved une 27,19 0, such reguatons are amended as foows:
Paragraph 1. There s nserted after secton 1 of Pubc Law 137
( ghty-frst Congress, frst sesson) whch was nserted by Treasury
Decson 7 0 C. . 19 9-2, 117 , approved October 7, 19 9, and m-
medatey precedng secton 6.1, the foowng:
PU LIC L W 7 ( IG TY-FIRST CONGR SS, S COND S SSION),
PPRO D UN 27, 19 0
States of merca n Congress assembed. That sectons
2(c) of the Revenue ct of 19 2 (reatng to reease of certan powers
of appontment n the case of the gft ta es) are hereby
amended by strkng out 19 0 wherever appearng theren and n-
sertng In eu thereof 19 1 .
Par. 2. Secton 6.1, as amended by Treasury Decson 7 0 26
CFR 6.1 , s further amended by strkng from the second sentence
19 0 and nsertng n eu thereof 19 1 .
Par. 3. Secton 6.2( ), as amended by Treasury Decson 7 0
26 CFR 6.2(b) , s further amended as foows:
( ) y strkng out 19 0 wherever t appears and nsertng n
eu thereof 19 1 .
( ) y strkng out as amended by Pubc Law 137 ( ghty-frst
Congress), approved une 2 ,19 9 wherever t appears and nsertng
n eu thereof the foowng: as amended by Pubc Law 7 ( ghty-
frst Congress), approved une 27, 19 0.
ecause of the technca nature of the amendments made heren, t
s found that t s unnecessary to ssue ths Treasury Decson wth
stratve Procedure ct, approved une 11 19 6, or sub|ect to the
Ths Treasury Decson sha be effectve upon fng wth the Dv-
son of the Federa Regster.
(Ths Treasury Decson s ssued under authorty contaned n sec-
tons 1029 and 3791 of the Interna Revenue Code ( 3 Stat. 1 7, 67;
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77 6. , Regs. 10 .
26 U. S. C. 1029, 3791) and Pubc Law 7 ( ghty-frst Congress,
second sesson), approved une 27, 19 0.)
Dane . oc,
pproved October ,19 0.
ohn S. Graham,
(Fed wth the Dvson of the Federa Regster October 11, 1900, : 0 a. m.)
Secton 6.2, Reguatons 10 : Transfers reached.
nterna revenue code
Secton 6.2, Reguatons 10 : Transfers
reached.
nterna revenue code
Property settement agreement survvng dvorce decree. (See
Ct. D. 1737, beow.)
S CTION 1002. TR NSF R FOR L SS T N
D U T ND FULL CONSID R TION
Secton 6. , Reguatons 10 : Transfers 19 0-26-13 01
for a consderaton n money or money s Ct. D. 1737
worth.
( so Secton 1000, Secton 6.2, Regua-
tons 10 .)
gft ta nterna revenue code decson of supreme court
1. Transfers Reached Transfer for Less Than dequate and
Fu Consderaton n Money or Money s Worth.
Ta payer transferred to her husband property n e cess of 107,-
1 0 over that transferred by hm to her pursuant to an agreement
e ecuted to sette ther property rghts n the event a dvorce shoud
be decreed by the Nevada Court. The agreement provded that the
covenants n ths agreement sha survve any decree of dvorce
whch may be entered, and such provson was ncorporated n the
dvorce decree. ed: Such transfer s not ta abe as a gft. The
gft ta statute s concerned wth the source of rghts, not wth the
manner In whch rghts at some dstant tme may be enforced. The
case s free from any promse or agreement concernng marta
rghts n property.
2. Decson Reversed..
Decson of the Unted States Court of ppeas for the Second
Crcut (17 Fed. (2d) 61), reversng as to ths ssua decson of
The Ta Court of the Unted States (10 T. C. 7 1), reversed.
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S 6. . Regs. 10 .
7
Cornea arrs, pettoner, v. Commssoner of Interna Revenue
On wrt of certorar to the Unted States Court of ppeas for the Second Crcut
November 27, 19 0
OPINION
Mr. ustce Dougas devered the opnon of the Court.
The Federa estate ta and the Federa gft ta , as hed n a ne of cases
endng wth Commssoner v. Wemyss, 32 U. S. 303 Ct. D. 163 , C. . 19 , 16 ,
and Merr v. Fahs, 32 U. S. 30 Ct. D. 163 , C. . 19 , 1 , are construed
n par matera, snce the purpose of the gft ta s to compement the estate ta
by preventng ta -free depeton of the transferor s estate durng hs fetme.
ot the gft ta 1 and the estate ta 1 e cude transfers made for an adequate
and fu consderaton n money or money s worth. In the estate ta ths
requrement s mted to deductons for cams based upon a promse or agree-
ment ; but the consderaton for the promse or agreement may not be the
reease of marta rghts n the decedent s property. In the Wemyss and Merr
cases the queston was whether the gft ta was appcabe to premarta property
settements. If the standards of the estate ta were to be apped e propro
vgore n gft ta cases, those transfers woud be ta abe because there was a
promse or agreement touchng marta rghts n property. We sustaned the
ta , thus gvng adequate and fu consderaton n money or money s worth
the same meanng under both statutes nsofar as premarta property sette-
ments or agreements are concerned.
The present case rases the queston whether Wemyss and Merr requre the
mposton of the gft ta n the type of post-nupta settement of property rghts
nvoved here.
Pettoner dvorced her husband, Regnad Wrght, n Nevada n 19 3. oth
she and her husband had substanta property nterests. They reached an under-
standng as respects the unscrambng of those nterests, the settement of a
tgated cams to the separate propertes, the assumpton of obgatons, and
the transfer of propertes.
Wrght receved from pettoner the creaton of a trust for hs fetme of the
ncome from ar remander nterest n a then e stng trust; an assumpton by
her of an ndebtedness of hs of 7,6 0; and her promse to pay hm 16.66 a
month for 10 years.
Pettoner receved from Wrght 21/90 of certan rea property n controversy;
a dscontnuance of a partton sut then pendng; an ndemnfcaton from and
assumpton by hm of a abty on a bond and mortgage on certan rea property
n London, ngand; and an ndemnfcaton aganst abty n connecton wth
certan rea property n the agreement. It was found that the vaue of the
property transferred to Wrght e ceeded that receved by pettoner by 107,1 0.
The Commssoner assessed a gft ta on the theory that any rghts whch Wrght
Secton 1002 of 26 U. S. C. (19 0 ed.) provdes: Where property s transferred for
ess than an adequate and fu consderaton n money or money s worth, then the amount
by whch the vaue of the property e ceeded the vaue of the consderaton sha, for the
purpose of the ta mposed by ths chapter, be deemed a Rft, and sha be ncuded n com-
putng the amount of gfts made durng the caendar year. (Itacs added.)
Secton 12 of 26 . S C. (10 6 ed.) provdes : For the purpose of the ta the vaue of
the net estate sha be determned, n the case of a ctzen or resdent of the Unted States
by deductng from the vaue of the gross estate (b) penses. Losses, Indebt-
edness, and Ta es. Such amounts (3) for cams aganst the estate, ( ) for
unpad mortgages upon, or any ndebtedness n respect to, property where the vaue of
decedent s nterest theren, undmnshed by such mortgage or Indebtedness, s Incuded n
the vaue of the gross estate, as are aowed by the aws of the ursdcton,
whether wthn or wthout the Unted States, under whch the estate Is beng admnstered,
but not ncudng any ncome ta es upon ncome receved after the death of the decedent,
or property ta es not accrued before hs death or any estate, successon, egncv. or
Inhertance ta es. The deducton heren aowed n the case of cams aganst the estate,
unpad mortgages, or any ndebtedness sha, when founded upon a promse or agreement,
be mted to the e tent that they were contracted bona fde and for an adequate and u
consderaton n money or money s worth , For the purposes of ths subchapter,
a renqushment or promsed renqushment of dower, curtesy or of a statutory estate
created n eu of dower or curtesy, or of other marta rghts n the decedent s property
or estate, sha not be consdered to any e tent a consderaton n money or money s
worth . (Itacs added.)
Sec secton 12(b) supra, note 2.
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70
6. , Regs. 10 .
mght have gven up by enterng nto the agreement coud not be adequate and
fu consderaton.
If the partes had wthout more gone ahead and vountary unraveed ther
busness nterests on the bass of ths compromse, there woud be no queston
but what the gft ta woud e payabe. For there woud have been n promse
or agreement that effected a renqushment of marta rghts n property. It
therefore woud fa under the ban of the provson of the estate ta whch by
|udca constructon has been ncorporated Into the gft ta statute.
ut the partes dd not smpy undertake a vountary contractua dvson of
ther property nterests. They were faced wth the fact that Nevada aw not
ony authorzed but Instructed the dvorce court to decree a ust and equtabe
dsposton of both the communty and the separate property of the partes. The
agreement rected that t was e ecuted n order to effect a settement of the
respectve property rghts of the partes In the event a dvorce shoud be
decreed ; and t provded that the agreement shoud be submtted to the dvorce
court for Its approva. It went on to say, It s of the essence of ths agreement
that the settement heren provded for sha not become operatve n any manntr
nor sha any of the rectas or covenants heren become bndng upon ether
party uness a decree of absoute dvorce between the partes sha be entered n
the pendng Nevada acton.
If the agreement had stopped there and were n fact submtted to the court,
t Is cear that the gft ta woud not be appcabe. That arrangement woud
not be a promse or agreement In the statutory sense. It woud be whoy
condtona upon the entry of the decree-; the dvorce court mght or mght not
accept the provsons of the arrangement as the measure of the respectve obga-
tons ; t mght ndeed add to or subtract from them. The decree, not the arrange-
ment submtted to the court, woud f the rghts and obgatons of the partes.
That was the theory of Commssoner v. Mares, 1 6 Fed. (2d) 929, and we thnk
t sound.
ven the Commssoner concedes that that resut woud be correct n case the
property settement was tgated n the dvorce acton. That was what happened
n Commssoner v. Converse, 163 Fed. (2d) 131, where the dvorce court decreed
a ump sum award n eu of monthy payments provded by the separaton
agreement. Yet wthout the decree there woud be no enforceabe, e stng agree-
ment whether the settement was tgated or untgated. oth requre the
approva of the court before an obgaton arses. The happenstance that the
dvorce court mght approve the entre settement, or modfy t n unsubstanta
detas, or work out matera changes seems to us unmportant. In each case
t s the decree that creates the rghts and the dutes; and a decree s not a
promse or agreement n any sense popuar or statutory.
ut the present case s dstngushed by reason of a further provson n the
undertakng and n the decree. The former provded that the covenants r ths
agreement sha survve any decree of dvorce whch may be entered. nd the
decree stated It s ordered that sad agreement and sad trust agreements
formng a part thereof sha survve ths decree. The court of appeas turned
the case on those provsons. It concuded that snce there were two sanctons
for the payments and transfers contempt under the dvorce decree and e ecuton
under the contract they were founded not ony on the decree but upon both
the decree and a promse or agreement. It therefore hed the e cess of the
vaue of the property whch pettoner gave her husband over what he gave
her to be ta abe as a gft. 17 Fed. (2d) 61.
We, however, thnk that the gft ta statute s concerned wth the source of
rghts, not wth the manner n whch rghts at some dstant tme may be enforced.
Remedes for enforcement w vary from State to State. It s the transfer of
the property wth whch the gft ta statute s concerned, not the sanctons whch
Id.
t the tme of the dvorce Nevada Comped Laws, secton 9 63 provded : In grantng
a dvorce the court may award such amony to the wfe and sha make such dsposton
of the communty and separate property of the partes as sha appear |ust and equtabe,
havng regard to the respectve merts of the partes and to the condton n whch they
w be eft by such dvorce, and to the party through whom the property was acqured,
and to the burdens. If any. Imposed upon It for the beneft of the chdren .
Secton 1000 of 26 U. S. C. (10 0 ed.) provdes: (a) For the caendar voar 19 0 and
each caendar year thereafter a ta , computed as provded n secton 1001. sha be
Imposed upon the transfer durng such caendar year by any ndvdua, resdent or non-
resdent, of property by gft . (b) The ta sha appy whether the transfer
s n trust or otherwse, whether the gft s drect or ndrect, and whether the property
s rea or persona, tangbe or htnngbe : but n the case of a nonresdent not a ctzen
of the Unted States, sha appy to a transfer ony f the property s stuated wthn the
Lnted States. (Itacs added.)
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S 1.70, Regs. 10 .
0
the aw suppes to enforce transfers. If the transfer of marta rghts In
property s effected by the partes, t s pursuant to a promse or agreement n
the meanng of the statute. If the transfer s effected by court decree, no
promse or agreement of the partes s the operatve fact. In no reastc
sense s a court decree a promse or agreement between the partes to a tga-
ton. If fner, more egastc nes are to be drawn, Congress must do It.
If, as we hod, the case s free from any promse or agreement concernng
marta rghts n property, t presents no remanng probems of dffcuty. The
Treasury reguatons recognze as ta free a sae, e change, or other transfer
of proDerty made n the ordnary course of busness (a transacton whch s bona
fde, at arm s ength, and free from donatve ntent). Ths transacton s not
n the ordnary course of busness n any conventona sense. Few transac-
tons between husband and wfe ever woud be; and those under the aegs of a
dvorce court are not ut f two partners on dssouton of the frm entered
nto a transacton of ths character or f chancery dd t for them, there woud
seem to be no doubt that the unscrambng of the busness nterests woud satsfy
the sprt of the reguatons. No reason s apparent why husband and wfe
shoud be under a heaver handcap absent a statute whch brngs a marta
property settements under the gft ta .
We are now advsed that snce submsson of the case on October 16, 19 0, pet-
toner has ded, and that t w take some weeks before an admnstrator of her
estate can be apponted. ccordngy we enter our |udgment as of October 16,
19 0, n pursuance of the practce obtanng n those crcumstances. See Mtche
v. Overman, 103 U. S. 62, 6 -6 ; McDonad v. Ma we, 27 U. S. 91, 99.
Reversed.
Dssentng opnon by Mr. ustce Frankfukteb, n whch Mr. ustce ack,
Mr. ustce ubton, and Mr. ustce Mnton |on.
Secton 6. of Treas. eg. 10 provdes: Transfers reached by the statute are not
confned to those ony whch, beng wthout a vauabe consderaton, accord wth the
common aw concept of gfts, but embrace as we saes, e changes, and other dspostons
ot property for a consderaton n money or money s worth to the e tent that the vaue of
the property transferred by the donor e ceeds the vaue of the consderaton gven therefor.
owever, a sae, e change, or other transfer of property made n the ordnary course of
busness (a transacton whch s bona fde, at arm s ength, and free from any donatve
ntent), w be consdered as made for an adequate and fu consderaton n money or
money s worth. consderaton not reducbe to a money vaue, as ove and affecton,
promses of marrage, etc., s to be whoy dsregarded, and the entre vaue of the property
transferred consttutes the amount of the gft,
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MPLOYM NT T RULINGS
INT RN L R NU COD
C PT R 9, SU C PT R . F D R L INSUR NC CONTRI UTIONS
CT
Secton 1 20: Coecton and payment of ta es. 19 0-16-13 01
Reguatons 106, Secton 02.606: Pace and T. D. 79
tme for fng returns.
( so Subchapter D (Coecton of Income Ta
at Source on Wages), Secton 1627; Regua-
tons 116. Secton 0 .601.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R D. P RTS
02 ND 0
Reguatons 106 and 116 amended wth respect to the fng date
ot the empoyer s quartery ta return (Form 9 1) In certan cases.
Offce of Commssoner of Interna Revenue.
Washngton # , D. C.
In order to e tend, n certan cases, the date for fng the mpoyer s
uartery Federa Ta Return, Form 9 1, from the ast day of the
frst month foowng the cose of the caendar quarter to the 10th
day of the second month foowng the cose of the caendar quarter,
Reguatons 106 26 CFR, Part 02 and Reguatons 116 26 CFR,
Part 0 are hereby amended as foows:
R GUL TIONS 106 26 CFR. P RT 02
Paragraph 1. Reguatons 106 26 CFR, Part 02 are amended
by strkng out the second sentence of secton 02.606 20 CFR 02.60C
and by nsertng n eu thereof the foowng:
cept as provded n secton 02.603, each return sha be fed on or before
the ast day of the frst month foowng the perod for whch t s mnde. ow-
ever, f, and ony f, the return s accompaned by depostary recepts. Form 0,
showng tmey deposts, n fu payment of the ta es due for the entre caendar
quarter, the return may be fed on or before the 10th day of the second month
foowng the perod for whch t s made. For the purpose of the precedng
sentence, the tmeness of the depost w be determned by the date of the en-
dorsement by a desgnated commerca bank on the reverse sde of Form 0 or,
f the depost s made drecty wth a Federa Reserve bank, by the date of vada-
ton of Form 0 by the Federa Reserve bank. Depost of the ta es for the
ast month of the caendar quarter wth a desgnated commerca bank or a
Federa Reserve bank, as the case may be, may be made on or before the ast
day of the frst month foowng the cose of such quarter.
( 1)
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Regs. 106, 02. 02.
2
R GUL TIONS 116 26 CFR, P RT 0
Par. 2. Reguatons 116 26 CFR, Part 0 are amended by strk-
ng out the frst sentence of secton 0 .601 26 CFR 0 .601 as
amended by Treasury .Decson 7 9 C. . 19 9-2, 119 , approved
November 10,19 9, and by nsertng n eu thereof the foowng:
cept as provded n secton 0 .602, every person requred, under the provsons
of secton 1622, to deduct and wthhod the ta on wages sha make a return
and pay such ta on or before the ast day of the month foowng the cose of
each of the quarters endng March 31, une 30, September 30, and December 31.
owever, f. and ony f. the return s accompaned by depostary recepts, Form
0, showng tmey deposts, n fu payment of the ta es due for the entre ca-
endar quarter, the return may be fed on or before the 10th day of the second
month foowng the perod for whch t s made. For the purpose of the preced-
ng sentence, the tmeness of the depost w be determned by the date of the
endorsement by a desgnated commerca bank on the reverse sde of Form 0 or,
f the depost s made drecty wth a Federa Reserve bank, by the date of vada-
ton of Form 0 by the Federa Reserve bank. Depost of the ta es for the Inst
month of the caendar quarter wth a desgnated commerca bank or a Federa
Reserve bank, as the case may be, may be made on or before the ast day of the
frst mouth foowng the cose of such quarter.
(Ths Treasury Decson s ssued pursuant to the authorty con-
taned n sectons 1 29 and 3791 of the Interna Revenue Code ( 3
Stat, 17 , G7; 26 U. S. C. 1 29, 3791).) _
ecause the amendments made by ths Treasury Decson merey
reeve ta payers by rea ng a requrement under e stng reguatons,
t s found that t s unnecessary to ssue ths Treasury Decson wth
stratve Procedure ct, approved une 11, 19 6, or sub|ect to the
Ths Treasury Decson sha be effectve upon ts rng for pubca-
GeO. . Sc O N M N,
ohn S. Graham,
(Fed wth the Dvson of the Federa Regster uy 1 , 10 0, : a. m.)
Secton 1 20: Coecton and payment of ta es. 19 0-16-13 02
Reguatons 106, Secton 02. 02: Interest. T. D. 79
( so Secton 02. 0 (a); Subchapter C (Fed-
era Unempoyment Ta ct), Secton 160 ;
Reguatons 107, Sectons 03.603, 03.60 (a);
Subchapter (Raroad Retrement Ta ct),
Secton 1 30; Reguatons 11 , Sectons
11.903, 11.90 (a) ; and Subchapter D (Co-
ecton of Income Ta at Source on Wages),
Sectons 1627 and 1631; Reguatons 116, Sec-
tons 0 .60 , 0 .60 , 0 . 02, 0 . 0 (a),
0 . 0 .)
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S3
Regs. 106. 02. 02.
TITL 26 INT RN L R NU . C PT R I. SU C PT R D. P RTS
02, 03, 11, ND 0
Reguatons 106, 107,11 , and 116 amended to conform to sectons
, 6, 7(a), and 9(a) of Pubc Law 271 ( ghty-frst Congress)
C. . 10 9-2, 272 .
Washngton 2 , D. C.
In order to conform Reguatons 106 26 CFR, Part 02 , Regua-
tons 107 26 CFR, Part 03 , Reguatons 11 26 CFR, Part 11 ,
and Reguatons 116 26 CFR, Part 0 to sectons , 6, 7(a), and
9(a) of Pubc Law 271 ( ghty-frst Congress) C. . 19 9-2, 272 ,
approved ugust 27, 19 9, such reguatons are hereby amended as
foows:
Paragraph 1. Immedatey precedng the capton Secton 3612
(a), (b), and (c) of the Interna Revenue Code as set forth pre-
cedng secton 02.601 26 CFR 02.601 , the foowng s nserted:
S CTION OF T CT OF UGUST 27, 19 9 (PU LIC L W
271, IG TY-FIRST CONGR SS)
(a) Chapter 3 of the Interna Revenue Code s hereby amended by
nsertng at tbe end thereof the foowng new secton:
S C. 3 09. RIFIC TION OF R TURNS; P N LTI S OF
P R URY.

(c) erfcaton n Leu of Oat. The Commssoner, under
reguatons prescrbed by hm wth the approva of the Secretary, may
requre that any return, statement, or other document requred to be
fed under any provson of the Interna revenue aws sha contan or
be verfed by a wrtten decaraton that t s made under the penates
of per|ury, and such decaraton sha be n eu of any oath otherwse re-
qured.
(b) Sectons and 1630 of such Code are hereby repeaed.
respect to any return, statement, or document fed after the date of the
Par. 2. Immedatey precedng secton 02.601 26 CFR 02.601
the foowng s nserted:
S CTION 7(a) OF T CT OF UGUST 27, 19 9 (PU LIC L W
(a) Secton 3310 of the Interna Revenue Code s hereby
amended by addng at the end thereof the foowng new subsecton:
(f) Dscreton owed Commssoner.
(1) Returns and payment of ta . Notwthstandng any other
provson of aw reatng to the fng of returns or payment of any
ta mposed by chapter 9, 9 , 10, 12, 19, 21, 30, 32, Subchapter
of Chapter 2 , or Subchapter of Chapter 29, the Commssoner
may by reguatons approved by the Secretnry prescrbe the perod
for whch the return for such ta sha be fed, the tme for the
fng of such return, the tme for the payment of such ta , and the
number of copes of the return requred to be fed.
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Regs. 106, 02. 02.
S
Par. 3. Immedatey precedng the capton Secton 3313 of the
Interna Revenue Code as set forth precedng secton 02.70 26
CFR 02.70 , the foowng s nserted:
S CTION 9(a) OF T CT OF UGUST 27. 19 9
(PU LIC L W 271, IG TY-FIRST CONGR SS)
(a) Secton 3770(a) of the Interna Revenue Code s hereby amended
by renumberng paragraph ( ) as paragraph (C), and by amendng
paragraph ( ) to read as foows:
( ) CR DIT OF O RP YM NT OP ON Cr. SS OP T G INST N-
OT R ctass of ta due. Notwthstandng any provson of aw to
the contrary, the Commssoner may, n hs dscreton, n eu of
refundng an overpayment of ta mposed by any provson of ths
tte, credt such overpayment aganst any ta cue from the ta payer
under any other provson of ths tte.
( ) Deegaton of authorty to cot.t.ectors to make re-
funds. The Commssoner, wth the approva of the Secretary, s
authorzed to deegate to coectors any authorty, duty, or functon
whch the Commssoner s authorzed or requred to e ercse or
perform under paragraph (1), (2), (3), or ( ) of ths subsecton,
or under secton 322 or 1027, where the amount nvoved (e cusve
of nterest, penates, addtons to the ta , and addtona amounts)
does not e ceed 10,000.

Par. . Secton 02. 02 26 CFR 02. 02 s amended to read as
foows:
Sec. 02. 02. Interest. If the ta s not pad to the coector when due and
s not ad|usted under secton 02.702 or 02.703, nterest accrues at the rate of
6 percent per annum sub|ect to the mnmum addton to the ta provded by
secton 1631.
Par. . The second sentence of secton 02. 0 (a) 26 CFR
02. 0 (a) s amended to read as foows:
The amount to be added to the ta s percent f the faure s for not more than
30 days, wth an addtona percent for each addtona 30 days or fracton
thereof durng whch faure contnues, but not e ceedng n the aggregate
2 percent of the ta , sub|ect, however, to the mnmum addton to the ta
provded by secton 1631.
Par. 6. Immedatey after secton 02. 0 26 CFR 02. 0 1 th
foowng s nserted:
S CTION 6 OF T CT OF UGUST 27, 19 9
Secton 1( 31 0f suoh Code Interna Revenue Code a
hereby amended to read as foows:
S C. 1631. F ILUR OF MPLOY R TO FIL R TURN OR P Y
T .
In case of a faure to make and fe any return, or a faure to pay
any ta , requred by ths chapter, or both, wthn the tme prescrbed by
aw or proscrbed by the Commssoner n pursuance of aw, uness t s
shown that such faure s due to reasonabe cause and not due to wfu
negect, the addton to the ta sha not be ess than .
Crmna Code, as nserted by Treasury Decson 302 C. . 19 3,
107 , approved October 11, 19 3, as set forth precedng secton
02. 0 a 26 CFR 02. 0 a , as added by Treasury Decson 32
C. . 19 , 2 , approved anuary ,19 , the foowng s nserted:
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Regs. 106, 02. 02.
S CTION OF T CT OF UGUST 27, 19 9
(a) Chapter 3 of the Interna Revenue Code 1b hereby amended by
Insertng at the end thereof the foowng new secton:
P R URY.
(a) Penates. ny person who wfuy makes and subscrbes any
return, statement, or other document, whch contans or Is verfed by a
wrtten decaraton that t s made under the penates of per|ury, and
whch he does not beeve to be true and correct as to every matera
matter, sha be guty of a feony, and, upon convcton thereof, sha be
fned not more than 2,000 or mprsoned not more than fve years, or
both.
(b) Sgnature Presumed Correct. The fact that an ndvdua s
name s sgned to a return, statement, or other document fed sha be
prma face evdence for a purposes that the return, statement, or other
document was actuay sgned by hm.

(c) The amendments made by ths secton sha be appcabe wth re-
spect to any return, statement, or document fed after the date of the
R GUL TIONS 107 26 CFR, P T 03
Par. . Immedatey precedng the capton Secton 3612 (a), (b),
and (c) of the Interna Revenue Code as set forth precedng sec-
ton 03. 01 26 CFR 03. 01 , the foowng s nserted:
S CTION OF T CT OF UGUST 27, 19 9 (PU LIC L W 271,
IG TY-FIRST CONGR SS)
(a) Chapter 3 of the Interna Revenue Code Is hereby amended
by nsertng at the end thereof the foowng new secton:
P R URY.

(c) erfcaton n Leu of Oath. The Commssoner, under reg-
uatons prescrbed by hm wth the approva of the Secretary, mny re-
qure that any return, statement, or other document requred to be
fed under any provson of the Interna revenue aws sha contan
or be verfed by a wrtten decaraton that t s made under the pena-
tes of per|ury, and such decaraton sha be n eu of any oath other-
wse requred.
respect to any return, statement, or document fed after the date of
the enactment of ths ct.
Interna Revenue Code as set forth precedng secton 03. 01 26
CFR 03. 01 , the foowng s nserted:
(a) Secton 3310 of the Interna Revenue Code . Is hereby
ta mposed by chapter 9, 9 , 10, 12, 19, 21, 30, 32, Subchapter
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Regs. 106, 02. 02.
6
of Chapter 2 , or Subchapter of Chapter 29, the Commssoner
may by reguatons approved by the Secretary prescrbe the perod
for whch the return for such ta sha be fed, the tme for the
fng of such return, the tme for the payment of such ta , and the
number of copes of the return requred to be fed.

Par. 10. Immedatey precedng the capton Secton 2703(a) or
the Interna evenue Code, Made ppcabe by Secton 1610
of the ct as set forth precedng secton 03.602 26 CFR 03.602 ,
S CTION 9(a) OF T CT OP UGUST 27, 19 9 (PU LIC L W
(a) Secton 3770(a) of the Interna Revenue Code s hereby amended
by renumberng paragraph ( ) as paragraph (6), and by amendng
paragraph ( ) to read as foows:
( ) Cbedt of overpayment of one cass of ta aganst an-
other cass of ta due. Notwthstandng any provson of aw
to the contrary, the Commssoner may, n hs dscreton, n eu
of refundng an overpayment of ta mposed by any provson of
ths tte, credt such overpayment aganst any ta due from the
ta payer under any other provson of ths tte.
( ) Deegaton of authorty to coectobs to make refunds.
The Commssoner, wth the approva of the Secretary, s authorzed
to deegate to coectors any authorty, duty, or functon whch the
Commssoner s authorzed or requred to e ercse or perform under
paragraph (1), (2), (3), or ( ) of ths subsecton, or under secton
322 or 1027, where the amount nvoved (e cusve of nterest, pena-
tes, addtons to the ta , and addtona amounts) does not e ceed
10,000.

Par. 11. Secton 03.603 26 CFR 03.603 s amended to read as
foows:
Sec. 03.603. Interest. If the ta s not pad to the coector when due, n-
terest accrues at the rate of 6 percent per annum sub|ect to the mnmum add-
ton to the ta provded by secton 1631.
Par. 12. The second sentence of secton 03.60 (a) 26 CFR
03.60 (a) s amended to read as foows:
The amount to be added to the ta Is percent f the faure s for not more
than 30 days, wth an addtona percent for each addtona 30 days or frac-
ton thereof durng whch faure contnues, but not e ceedng n the aggregate
2 percent of the ta , sub|ect, however, to the mnmum addton to the ta
provded by secton 1631.
PfcR. 13. Immedatey after secton 03.60 26 CFR 03.60 , the
foowng s nserted:
S CTION 6 OF T CT OF UGUST 27, 19 9
( U LIC L W 271, IG TY-FIRST CONGR SS)
Secton 1031 of such Code Interna Revenue Code s
T .
In case of a faure to make and fe any return, or a faure to pay
any ta , requred by ths chapter, or both, wthn the tme prescrbed by
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egs. 106, 02. 02.
aw or prescrbed by the Commssoner n pursuance of aw, uness t s
shown that such faure s due to reasonabe cause and not due to wfu
negect, the addton to the ta sha not be ess than .
Par. 1 . Immedatey precedng the capton Secton 12 of the
Crmna Code, as added by Treasury Decson 302, approved Octo-
ber 11,19 3, as set forth precedng secton 03.600 26 CFR 03.606 ,
S CTION OF T CT OF UGUST 27, 10 9
(a) Chapter 3 of the Interna Revenue Code Is hereby amended by
Insertng at the end thereof the foowng new secton :
S C. 3 09. RIFIC TION OF R TURNS: P N LTI S OF
P R URY.
return, statement,, or other document, whch contans or s verfed by
a wrtten decaraton that t s made under the penates of per|ury, and
fned not more than 2,000 or Imprsoned not more than fve years, or
both.
(h) Sgnature Pkesumed Correct. The fact that an ndvdua s

Par. 1 . Immedatey precedng the capton Secton 3612 (a),
(b), and (c) of the Interna Revenue Code as set forth precedng
secton 11.601 26 CFR 11.601 , the foowng s nserted:
S CTION OF T CT OF UGUST 27, 19 9 (TU LIC L W 271,
(a) Chapter 3 of the Interna Revenue Code s hereby amended by
P R URY.

(c) erfcaton n Leu of Oath. The Commssoner, under
reguatons prescrbed by hm wth the approva of the Secretary, may
requre that any return, statement, or other document requred to
be fed under any provson of the Interna revenue aws sha con-
tan or be verfed by a wrtten decaraton thnt t s made under the
penates of per|ury, and such decaraton sha be In eu of any cath
otherwse requred.
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Regs. 106, 02. 02.

Par. 16. Immedatey precedng secton 11.601 126 CFR 11.601 ,
S CTION 7(a) OF T CT OF UGUST 27, 19 9
(a) Secton 3310 of the Interna Revenue Code Is hereby
ta mposed by Chapter 9, 9 . 10.12.19, 21, 30. 32, Subchapter of
Chapter 2 , or Subchapter of Chapter 29, the Commssoner may
by reguatons approved by the Secretary prescrbe the perod for
whch the return for such ta sha be fed, the tme for the fng
of such return, the tme for the payment of such ta , and the num-
ber of copes of the return requred to be fed.

Interna Revenue Code as set forth precedng secton 11. 01 26
CFR 11. 01 , the foowng s nserted:
(a) Secton 3770(a) of the Interna Revenue Code s hereby
amended by renumberng paragraph ( ) as paragraph (6), and by
amendng paragrnph ( ) to read as foows:
( ) Credt of overpayment of one cass of ta aganst an-
other cass of ta due. Notwthstandng any provson of aw
to the contrary, the Commssoner may, n hs dscreton, n eu
of refundng an overpayment of ta mposed by any provson of
ths tte, credt such overpayment aganst any ta due from the
ta payer under any other provson of ths tte.
( ) Deegaton of authorty to coectors to make re-
funds. The Commssoner, wth the approva of the Secretary, s
authorzed to deegate to coectors any authorty, duty, or functon
whch the Commssoner s authorzed or requred to e ercse or
perform under paragraph (1), (2), (3), or ( ) of ths subsecton,
or under secton 322 or 1027, where the amount nvoved (e cusve
of nterest, penates, addtons to the ta , and addtona amounts)
does not e ceed 10,000.

Par. 1 . Secton 11.903 26 CFR 11.903 s amended to read as
foows:
Sec. 11.903. Interest. If the ta s not pad to the coector when due and
s not ad|usted under secton 11.702 or 11.703, nterest accrues at the rate of
6 percent per annum sub|ect to the mnmum addton to the ta provded by
secton 1031.
Par. 19. The second sentence of secton 11.90 (a) 26 CFR
11.90 (a) s amended to read as foows:
30 days, wth an addtona percent for each addtona 30 days or fracton
thereof durng whch faure contnues, but not e ceedng n the aggregate 2
percent of the ta , sub|ect, however, to the mnmum addton to the ta provded
by secton 1031.
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Regs. 106, 02. 02.
Par. 20. Immedatey after secton 11.90 20 CFR 11.90 , the
foowng s nserted:
S CTION 6 OF T CT OF UGUST 27. 10 9 (PU LIC L W 271,
Secton 1631 of such Code Interna Revenue Code Is
T .
In case of a faure to make and fe any return, or a faure to pay any
ta , requred by ths chapter, or both, wthn the tme prescrbed by aw
or prescrbed by the Commssoner n pursuance of aw, uness t s shown
that such faure s due to reasonabe cause and not due to wfu negect,
the addton to the ta sha not be ess than .
Par. 21. Immedatey precedng the capton Secton 1G21 of Tte
1 or the Unted States Code as set forth precedng secton 11.906
26 CFR 11.906 , the foowng s nserted:
S CTION OF T CT OF UGUST 27, 10 9 (PU LIC L W 271,
(a) Chapter 3S of the Interna Revenue Code s hereby amended by
P R URY.
return, statement, or other document, whch contans or s verfed by a
wrtten decaraton that t s made under the penates of per|ury, and.
fned not more tau 2,000 or mprsoned not more than fve years, or
both.

(c) The amendments made by ths secton sha be appcabe wth re-
spect to any return, statement, or document fed after the date of the
Par. 22. Immedatey precedng the capton Sec. 1627. Other
Laws ppcabe as dded bt Sec. 2(a), Current Ta Payment
ct of 19 3 , whch precedes secton 0 .001 26 CFR 0 .601 , the
foowng s nserted:
ffectve ugust 27.19 0. secton 6. Pubc Law 271. ghty-frst Con-
gress, repeaed secton 1026(c) and amended secton 1631 to supersede,
n effect, the provsons of secton 1626(c) quoted nbove. Secton 1631
as amended s set forth mmedatey precedng secton 0 . 0 .
Par. 23. Immedatey precedng the capton Secton 1 20 gf the
Interna Revenue Code whch precedes secton 0 .601 26 CFR
0 .601 , the foowng s nserted:
ffectve ugust 27, 19 9, secton (b) and (c) of Pubc Law 271,
ghty-frst Congress, repeaed secton 1630.
923 30 31 7
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Regs. 106, 02. 02.
90
S C. 3 09. RIFIC TION OF R TURNS; P N LTI S OF P R-
URY S DD D, FF CTI UGUST 27, 19 9, Y S C ,
PU LIC L W 271, IG TY-FIRST CONGR SS .
return, statement, or other document, whch contans or s verfed by a
wrtten decaraton that t s made under the penates of per|ury, and
fned not more than 2,000 or mprsoned not more than fve years, or
both.
(c) erfcaton n Leu of Oath. The Commssoner, under regu-
atons prescrbed by hm wth the approva of the Secretary, may re-
qure that any return, statement, or other document requred to be
fed under any provson of the nterna revenue aws sha contan or
be verfed by a wrtten decaraton that t s made under the penates
of per|ury, and such decaraton sha be n eu of any oath otherwse
requred.
Par. 2 . Immedatey precedng the capton Secton 1 30 of toe
Interna Revenue Code whch precedes secton 0 .601 2G CF
S C. 3310(f). DISCR TION LLOW D COMMISSION R S
DD D, FF CTI UGUST 27, 19 9, Y S C. 7, PU LIC
L W 271, IG TY-FIRST CONGR SS .
ta mposed by chapter 9, 9 , 10, 12, 19, 21, 30, 32, Subchapter of
Chapter 2 , or Subchapter of Chapter 29, the Commssoner may
by reguatons approved by the Secretary prescrbe the perod for
whch the return for such ta sha be fed, the tme for the fng of
such return, the tme for the payment of such ta , and the number
of copes of the return requred to be fed.

Par. 2 . Secton 0 .60 26 CF 0 .60 s amended to read as
foows:
Sec. 0 .60 . Penates for Fase Returns. Subsecton (a) of secton 3 09
provdes for penates n the case of any person who wfuy makes and sub-
scrbes any return, statement, or other document, whch contans or Is verfed
by a wrtten decaraton that t Is made under the penates of per|ury, and whch
he does not beeve to be true and correct as to every matera matter. Such
person sha be guty of a feony, and, upon convcton thereof, sha be fned not
more than 2,000 or mprsoned not more than years, or both.
Par. 26. Immedatey precedng secton 0 .60 26 CFR 0 .G0 ,
ffectve ugust 27, 19 9, sectoD 6, Pubc Law 271, ghty-frst
Congress, amended secton 1631 to provde for a mnmum addton to
the ta . The provsons of secton 1C31 quoted above were n effect
superseded by secton 3310(f) (2) as added by secton 7(a) of such aw.
S C. 3310(f)(2). US OF GO RNM NT D POSIT RI S S
DD D Y S C. 7(a) OF PU LIC L W 271, IG TY-FIRST
CONGR SS .
(2) Use of Government depostares. The Secretary may au-
thorze Federa Reserve banks, and ncorporated banks or trust
companes whch are depostares or fnanca agents of the Unted
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91
Regs. 106, 02. 02.
States, to receve any ta Imposed by ths tte, n such manner, at
such tmes, and under such condtons as he may prescrbe; and
he sha prescrbe the manner, tmes, and condt ns under whch the
recept of such ta by such banks and trust companes s to be
treated as payment of such ta to the coector.
Pab. 27. Secton 0 .60 26 CFR 0 .60 s amended by revsng
the frst sentence thereof, as amended by Treasury Decson 6 C. .
19 -2,123 , approved uy 1 ,19 , to read as foows:
It w be the duty of every empoyer who wthhed more than 100 durng
the month to pay, wthn 1 days after the cose of each caendar month, to a
depostary and fnanca agent authorzed by the Secretary of the Treasury to
receve deposts of wthhed ta es, pursuant to secton 1031 pror to ugust 27,
19 9, or pursuant to secton 3310(f) (2) after ugust 26, 10 9, a funds wthhed
as ta es durng that caendar month.
Par. 2 . Immedatey precedng the capton Secton 3313 of the
Interna Revenue Code whch precedes secton 0 .702 26 CFR
S CTION 3770(a) ( ) ND ( ) OF T INT RN L R NU
COD S M ND D, FF CTI UGUST 27, 19 9, Y
S C. 9, PU LIC L W 271, IG TY-FIRST CONGR SS .
( ) Credt of overpayment of one cass of ta aganst another
cass of ta due. Notwthstandng any provson of aw to the con-
trary, the Commssoner may, n hs dscreton, n eu of refundng an
overpayment of ta mposed by any provson of ths tte, credt such
overpayment aganst any ta due from the ta payer under any other
provson of ths tte.
( ) Deegaton of authorty to coectors to make refunds. The
Commssoner, wth the approva of the Secretary, s authorzed to dee-
gate to coectors any authorty, duty, or functon whch the Comms-
soner s authorzed or requred to e ercse or perform under paragraph
(1), (2), (3), or ( ) of ths subsecton, or under secton 322 or 1027,
where the amount nvoved (e cusve of nterest, penates, addtons
to the ta , and addtona amounts) does not e ceed 10,000.
Par. 29. Secton 0 . 02 26 CFR 0 . 02 s amended to read as
foows:
Sec 0 . 02. Interest. If the ta s not pad to the coector on or before
the date prescrbed n secton 0 .601 and s not ad|usted under secton 0 .701,
nterest accrues at the rate of 6 percent per annum sub|ect to the mnmum
addton to the ta provded by secton 1626(c) pror to ugust 27, 19 9, or
by secton 1631 after ugust 20,19 9. See secton 0 . 0 .
Par. 30. The second sentence of secton 0 . 0 (a) 26 CFR
0 . 0 (a) s amended to read as foows:
30 days, -wth an addtona percent for each addtona 30 days or fracton
thereof durng whch faure contnues, but not e ceedng n the aggregate 2
percent of the ta , sub|ect, however, to the mnmum addton to the ta provded
by secton 1626(c) pror to ugust 27, 10 9, or by secton 1631 after ugust
26,19 9.
Par. 31. Immedatey precedng secton 0 . 0 26 CFR 0 . 0 ,
ffectve ugust 27, 19 9. secton 6, Tubc Law 271. ghty-frst
Congress, repeaed secton 1626(c) and amended secton 1631 to super-
sede, n effect, the provsons of secton 1626(c) quoted above.
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Regs. 106, 02. 2.
92
S C. 1631. F ILUR OP MPLOY R TO FIL R TURN OR P Y
T S M ND D, FF CTI UGUST 27, 10 9, Y
S C. 6. PU LIC L W 271, IG TY-FIRST CONGR SS .
In case of a faure to make and fe any return, or a faure to pay any
ta , requred by ths chapter, or both, wthn the tme prescrbed by
aw or prescrbed by the Commssoner n pursuance of aw, uness t
s shown that such faure s due to reasonabe cause and not due to
wfu negect, the addton to the ta sha not be ess than .
Pah. 32. Secton 0 . 0 26 CFR 0 . 0 , as amended by Treasury
Decson 7 9 O. . 19 9-2, 119 , approved November 10, 19 9, s
further amended to read as foows:
Sec. 0 .S0 . Mnmum doton to toe Ta . (a) In the case of returns
requred to be fed or ta whch becomes due on or after ugust 27, 1010, f
on empoyer fas to fe a return or pay the ta requred to be wthhed wthn
the tme prescrbed n sectons 0 .601 and 0 .602, uness t s shown that the
faure s due to reasonabe cause and not to wfu negect, the addton to
the ta sha not be ess than . Ths provson s to be apped n accordance
Wth the foowng rues:
(1) In the case of faure to fe a return on the appcabe form wthn
the prescrbed tme, the addton to the ta sha be computed as provded
by secton 3612(d) and f ess than sha be ncreased to .
(2) In the case of faure to pay the ta when due, the addton to the
ta sha be computed as provded by secton 1 20(b) and f ess than o
sha bo ncreased to .
(3) In the case of concurrent faure to fe the return and pay the ta
wthn the prescrbed tme, the ad vaorem penaty provded by secton
3612(d) and the nterest provded by secton 1 20(b) sha be aggregated
and f ess than sha be ncreased to .
(b) In the case of returns requred to be fed or ta requred to be pad
pror to ugust 27, 10 0, the rues prescrbed n paragraph (a) sha be ap-
pcabe e cept that n each case the mnunum addton to the ta sha be 10
nstead of .
taned n sectons 1 29, 1 36, 1609, and 3791 of the Interna Revenue
Code ( 3 Stat. 17 , 1 3, 1 , 67; 26 U. S. C. 1 29, 1 36, 1609, and
3791).)
ecause the purpose of ths Treasury Decson s merey to conform
the reguatons to the provsons of sectons , 6, 7(a), and 9(a) of
Pubc Law 271, ghty-frst Congress, and because such sectons
of aw, amendng the Interna Revenue Code, became effectve on
ugust 27, 1919, t s found that t s unnecessary to ssue ths Treas-
ury Decson under secton (a) of the dmnstratve Procedure ct.
approved une 11, 19 6, or sub|ect to the effectve date mtaton of
-cton (c) of such ct.
Geo. . Schoeneman,
pproved uy 6,19 0.
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster uy 13, 19 0, : a. m.)
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93
Regs. 106, 02.20 .
Secton 1 20: Coecton and payment of ta es.
Reguatons 106, Secton 02. 0 (a) : dd-
tons to ta for denquent or fase returns.
mount added for faure to fe return sub|ect to mnmum pro-
vded under secton 1631. (See T. D. 79 , page 2.)
Secton 1 26: Defntons.
Reguatons 106, Secton 02.20 : grcu-
tura abor.
( so Subchapter D (Coecton of Income
Ta at Source on Wages), Secton 1621;
Reguatons 116, Secton 0 .102.)
grcutura abor changes effected by the Soca Securty ct
mendments of 19 0.
Washngton 2 , D. C, November 20,19 0.
Coectors of Interna Revenue and Others Concerned:
1. The purpose of ths mmeograph s to set forth the changes ef-
fected n chapter 9, subchapters and D, of the Interna Revenue
Code bv those provsons of the Soca Securty ct mendments of
19 0 reatng to grcutura abor.
2. Secton 1 26 (a) of the Federa Insurance Contrbutons ct, wth
respect to wages for empoyment performed on and after anuary 1,
19 1, s amended to read as foows:
(a) Wages. The term wages means a remuneraton for empoyment, n-
cudng the cash vaue of a remuneraton pad n any medum other than cash;
e cept that such term sha not ncude

( ) Remuneraton pad n any medum other than cash for agrcutura
abor;

3. Pursuant to the foregong, remuneraton for agrcutura abor
pad n any medum other than cash does not consttute wages sub-
|ect to the ta es mposed by the Federa Insurance Contrbutons ct,
as amended.
. Secton 1 26(b) of the Federa Insurance Contrbutons ct,
wth respect to servces performed on and after anuary 1, 19 1, s
amended to read as foows:
(b) mpoyment. The term empoyment means any servce,
of whatever nature, performed after 19 0 e cept that, n the case
of servce performed after 19 0, such term sha not Incude
(1) ( ) grcutura abor (as defned n subsecton (h) of ths secton)
performsd n any caendar quarter by an empoyee, uness the cash remunera-
ton pad for such abor (other than servce descrbed n subparagraph ( ))
Is 0 or more and such abor s performed for an empoyer by an ndvdua
who s reguary empoyed by such empoyer to perform such agrcutura
abor. For the purposes of ths subparagraph, an ndvdua sha be deemed
to be reguary empoyed by an empoyer durng a caendar quarter ony f
() such ndvdua performs agrcutura abor (other than servce
descrbed In subparagraph ( )) for such empoyer on a fu-tme bass
on s ty days durng such quarter, and
() the quarter was mmedatey preceded by a quafyng quarter.
19 0-26-13 02
Mm.6
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Regs. 1C6. 02.20 .)
9
For the purposes of the precedng sentence, the term quafyng quarter
means (I) any quarter durng a of whch such ndvdua was contnu-
ousy empoyed by such empoyer, or (II) any subsequent quarter whch
meets the test of cause () f, after the ast quarter durng a of whch
such ndvdua was contnuousy empoyed by such empoyer, each Inter-
venng quarter met the test of cause (). Notwthstandng the precedng
provsons of ths subparagraph, an Indvdua sha aso be deemed to be
reguary empoyed by an empoyer durng a caendar quarter f such Ind-
vdua was reguary empoyed (upon appcaton of causes (1) and (11))
by such empoyer durng the precedng caendar quarter.
( ) Servce performed n connecton wth the producton or harvestng
of any commodty defned as an agrcutura commodty n secton 1 (g)
of the grcutura Marketng ct, as amended, or n connecton wth the
gnnng of cotton;

. Pursuant to the foregong provsons of aw, any servce per-
formed by an empoyee n any caendar quarter begnnng on or after
anuary 1, 19 1, whch s agrcutura abor (as that term s de-
fned n subsecton (h)) s e cepted from empoyment uness the
cash remuneraton pad for such abor (sub|ect to the e cepton con-
taned n subparagraph ( )) s 0 or more and such abor s per-
formed for an empoyer by an ndvdua reguary empoyed by such
empoyer to perform such agrcutura abor. n ndvdua s deemed
to be reguary empoyed by an empoyer durng a caendar quarter
(ncudng the frst quarter of 19 1) ony f () such ndvdua per-
forms agrcutura abor (other than servces of the type specfed n
subparagraph ( )) for such empoyer on a fu-tme bass on 60 days
(whether or not consecutve) durng the quarter, and () the quarter
was mmedatey preceded by a quafyng quarter. quafyng
quarter s (I) any quarter durng a of whch the ndvdua was con-
tnuousy empoyed by the empoyer, or (II) any subsequent quarter
meetng the test of cause () above f, after the ast quarter durng
a of whch the ndvdua was contnuousy empoyed by the em-
poyer, each ntervenng quarter met the test of cause (). n nd-
vdua s aso deemed to be reguary empoyed by an empoyer dur-
ng a caendar quarter f he was reguary empoyed (upon appca-
ton of causes () and ()) by the empoyer durng the precedng
caendar quarter.
ampe. , the operator of a farm, engaged to perform servces
on hs farm as an empoyee durng the entre perod October 1, 19 0,
through December 31, 19 0. From anuary 1, 19 1, through March
31, 19 1, performed agrcutura abor for on a fu-tme bass
on 0 days and receved cash remuneraton totang 300 for hs
servces. Durng the perod pr 1, 19 1, through une 30. 19 1,
performed agrcutura abor for on a fu-tme bass for
cays and receved cash remuneraton totang 210. In the perod
uy 1, 19 1, through September 30, 19 1, performed agrcutura
abor for on a fu-tme bass on 60 days and receved cash remu-
neraton of 27 .
Under the foregong crcumstances the ast quarter of 19 0 s a
quafyng quarter for the reason that was contnuousy em-
poyed by durng the entre quarter. s reguary empoyed
. n the frst quarter of 19 1 for the reason that n such quarter
performed agrcutura abor for on a fu-tme bass on at east
60 days and such quarter was mmedatey preceded by a quafyng
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9
(Regs. IOC, 02.20 .
quarter. so, for purposes of the ne t succeedng, (or second) quar-
ter, the frst quarter of 19 1 consttutes a quafyng quarter. In the
second quatter of 19 1 s deemed to be reguary empoyed because
of the fact that durng the precedng caendar quarter he was regu-
ary empoyed by . owever, the second quarter of 19 1 s not a
quafyng quarter for purposes of the ne t succeedng (or thrd)
quarter because dd not perform agrcutura abor for on a f u-
tne bass on at east CO days of such second quarter. In the thrd
quarter of 19 1 s not reguary empoyed by because such
quarter was not mmedatey preceded by a quafyng quarter.
Nether s the thrd quarter of 19 1 a quafyng quarter because
was not contnuousy empoyed by durng a of such quarter.
In the e ampe set forth above ta abty under the Federa In-
surance Contrbutons ct s not ncurred n the ast quarter of
19 0, or quafyng quarter. In the frst and second quarters of 19 1
ta abty under the Federa Insurance Contrbutons ct s ncurred
because n each of such quarters s reguary empoyed by to
perform agrcutura abor and the cash remuneraton pad therefor
amounted to 0 or more. Ta abty under the Federa Insurance
Contrbutons ct, as amended, s not ncurred wth respect to wages
for the servces performed n the thrd quarter of 19 1 because such
quarter was not mmedatey preceded by a quafyng quarter.
It w be noted that a caendar quarter n whch an empoyee s
contnuousy empoyed by hs empoyer s a quafyng quarter
whether or not the servces consttute agrcutura abor. More-
over, the contnuous e stence durng an entre quarter of the reaton-
shp of empoyer and empoyee s suffcent for that purpose.
6. Servce performed n connecton wth the producton or harvest-
ng of any commodty defned as an agrcutura commodty n secton
1 (g) of the grcutura Marketng ct, as amended, or n con-
necton wth the gnnng of cotton, s e cuded from empoyment,
regardess of the amount of remuneraton pad or the reguarty of
the performance of such servce. The e cepton for servce reatng to
the producton or harvestng of any commodty defned as an agrcu-
tura commodty n secton 1 (g) of the grcutura Marketng ct,
as amended, appes ony to servce performed n connecton wth the
producton or harvestng of crude gum (oeoresn) from a vng tree
or the processng of such crude gum nto gum sprts of turpentne
and gum resn, provded such processng s carred on by the orgna
producer of such crude gum.
7. Secton 1 26(h) of the Federa Insurance Contrbutons ct. wth
respect to servces performed on and after anuary 1,19 1, s amended
to read as foows:
(h) oracTTLTU L Labob. The term agrcutura abor ncudes a servce
performed
(1) On a farm, In the empoy of any person, n cpnnecton wth cutvatng
the so, or n connecton wth rasng or harvestng any agrcutura or
hortcutura commodty, ncudng the rasng, shearng, feedng, carng for,
tranng, and management of vestock, bees, poutry, and fur-bearng an-
mas and wdfe.
(2) In the empoy of the owner or tenant or other operator of a farm,
n connecton wth the operaton, management, conservaton, mprovement,
or mantenance of such farm and ts tops and equpment, or n savagng
tmber or cearng and of brush and other debrs eft by a hurrcane, f
the ma|or part of such servce s performed -on a farm.
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Regs. 106, S 02.20 .
96
(3) In connecton wth the producton or harvestng of any commodty
defned as an agrcutura commodty In secton 1 (g) of the grcutura
Marketng ct, as amended, or n connecton wth the gnnng of cotton, or n
connecton wth the operaton or mantenance of dtches, canas, reservors, or
waterways, not owned or operated for proft, used e cusvey for suppy-
ng and storng water for farmng purposes.
( ) ( ) In the empoy of the operator of a farm n handng, pantng,
dryng, packng, packagng, processng, freezng, gradng, storng, or de-
verng to storage or to market or to a carrer for transportaton to market,
n ts unmanufactured state, any agrcutura or hortcutura commodty;
but ony f such operator produced more than one-haf of the commodty
wth respect to whch such servce s performed.
( ) In the empoy of a group of operators of farms (other than a co-
operatve organzaton) n the performance of servce descrbed n sub-
paragraph ( ), but ony f such operators produced a of the commodty
wth respect to whch such servce s performed. For the purposes of ths
subparagraph, any unncorporated group of operators sha be deemed a
cooperatve organzaton f the number of operators comprsng such group
s more than 20 at any tme durng the caendar quarter n whch such
servce s performed.
(C) The provsons of subparagraphs ( ) and ( ) sha not be deemed
to be appcabe wth respect to servce performed n connecton wth com-
merca cannng or commerca freezng or n connecton wth any agrcu-
tura or hortcutura commodty after ts devery to a termna market
for dstrbuton for consumpton.
( ) On a farm, operated for proft If such servce s not In the course of
the empoyer s trade or busness or s domestc servce n a prvate home of
the empoyer.
s used n ths secton, the term farm ncudes stock, dary, poutry, frut,
fur-bearng anma, and truck farms, pantatons, ranches, nurseres, ranges,
greenhouses or other smar structures used prmary for the rasng of agr-
cutura or hortcutura commodtes, and orchards.
. No changes are effected by the Soca Securty ct mendments
of 19 0 n paragraphs (1) and (2) of secton 1 20(h) of the Federa
Insurance Contrbutons ct.
9. Pursuant to paragraph (3), as amended, servces performed n
connecton wth the producton or harvestng of any commodty de-
fned as an agrcutura commodty n secton 1 (g) of the grcu-
tura Marketng ct, as amended, or n connecton wth the gnnng
of cotton, or n connecton wth the operaton or mantenance of
dtches, canas, reservors, or waterways, not owned or operated for
proft, used e cusvey for suppyng and storng water for farmng
purposes, consttute agrcutura abor.
10. Under paragraph ( ), as amended, the foowng servces con-
sttute agrcutura abor :
( ) Servces performed n the empoy of the operator of a farm
n the handng, pantng, dryng, packng, packagng, processng,
freezng, gradng, storng, or deverng to storage or to market or
to a carrer for transportaton to market, n ts unmanufactured state,
of any agrcutura or hortcutura commodty, provded such op-
erator produced more than one-haf of such commodty.
( ) Servces of the character descrbed n ( ), above, performed
n the empoy of a group of operators of farms (other than a coopera-
tve organzaton), provded such operators produced a of the com-
modty wth respect to whch the servces are performed. For
purposes of the foregong sentence, any unncorporated group of
operators w be deemed to be a cooperatve organzaton f the num-
ber of operators comprsng such group s more than 20 at any tme
durng the caendar quarter n whch the servces are performed.
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97
Regs. 106.
It s to be noted that servces of the character descrbed n ( ),
above, performed n the empoy of a cooperatve organzaton do not
consttute agrcutura abor.
11. Under paragraph ( ), as amended, servces of the character
descrbed n ( ) and ( ), above, performed n connecton wth com-
merca cannng or commerca freezng or n connecton wth any
agrcutura or hortcutura commodty after ts devery to a term-
na market for dstrbuton for consumpton do not consttute agr-
cutura abor.
12. Under paragraph ( ), the term agrcutura abor ncudes
a servce performed on a farm whch s operated for proft f such
servce s not n the course of the empoyer s trade or busness or s
domestc servce n a prvate home of the empoyer.
13. No change s effected by the Soca Securty ct mendments
of 19 0 n the defnton of the term farm.
1 . Determnatons of the status of servces performed on and after
anuary 1, 19 1, made under secton 1 26(h) of the Federa Insur-
ance Contrbutons ct, as amended, w be appcabe aso for pur-
g|ses of the ncome ta wthhodng under secton 1622 of the Interna
evenue Code. Income ta wthhodng does not appy to remunera-
ton pad for agrcutura abor as defned n secton 1 26(h), as
amended, regardess of the amount of remuneraton pad or the
reguarty of the performance of the servces consttutng agrcutura
abor.
1 . No changes are effected by the Soca Securty ct mendments
of 19 0 n the e cepton accorded agrcutura abor by secton
1607(c) (1) of the Federa Unempoyment Ta ct or n the defnton
of agrcutura abor contaned n secton 1607(1) of such ct.
16. It w be noted that pursuant to secton 1 26(b) ( ) of the
Federa Insurance Contrbutons ct, the term empoyment does
not ncude servce performed by an ndvdua n the empoy of hs
son, daughter, or spouse, and servce performed by a chd under the
age of 21 n the empoy of hs father or mother.
17. Correspondence reatng to ths mmeograph shoud refer to
the number thereof and the symbos mT: RR.
Geo. . Scoeneman,
Commssoner.
Reguatons 106. 19 0-26-13 03
( so Subchapter C (Federa Unempoyment Ta Mm. 6 9
ct), Reguatons 107; Subchapter D (Coecton
of Income Ta at Source on Wages), and Sub-
chapter (Genera Provsons), Reguatons
116.)
Soca Securty ct mendments of 19 0
Washngton 2 , D. C, November 20, 19 0.
1. The purpose of ths mmeograph s to outne for the nformaton
of coectors of nterna revenue and other nterested persons the prn-
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Regs. 106.
9
cpa changes effected n the Federa Insurance Contrbutons ct
and the Federa Unempoyment Ta ct (subchapters and C-of
chapter 9 of the Interna Revenue Code), n subchapter D of chapter
9 (reatng to the coecton of ncome ta at source on wages), and
n subchapter of such chapter (contanng genera prevsons of
aw), by the Soca Securty ct mendments of 19 0, approved
ugust 2 , 19 0 (Pubc Law 73 , ghty-frst Congress, second ses-
son) page 217, ths uetn ; and the changes made n such sub-
chapter D of chapter 9 by the Revenue ct of 19 0 (Pubc Law 1 ,
ght| -frst Congress, second sesson), approved September 23, 19 0.
Most of the changes w become effectve on anuary 1, 19 1.
2. The mmeograph s dvded nto four man parts
Part I. Changes made n the Federa Insurance Contrbutons
ct.
Part II. Changes made n the Federa Unempoyment Ta
ct.
Part III. Changes appcabe ony for purposes of the coec-
ton of ncome ta at source on wages.
Part I . Msceaneous and speca provsons.
3. The contents of ths mmeograph are for genera nformatona
purposes ony and they do not have the force or effect of forma regu-
atons approved by the Secretary of the Treasury. Such reguatons
are n the course of preparaton and w be made avaabe at the
earest practcabe date.
Part I
F D R L INSUR NC CONTRI UTIONS CT
D FINITION OF W G S
. ffectve wth respect to remuneraton pad after 19 0, subsecton
(a) of secton 1 26 of the Code, defnng the term wages, s changed
n severa respects. The subsecton, as amended, ( ) ncudes wthn
the term wages dsmssa payments whch the empoyer s not egay
requred to make; ( ) rases the ta abe wage base from 3,000 to
3,C00; (C) contans new provsons wth respect to the computaton
of the annua 3,600 mtaton on wages; (D) broadens the e cuson
n secton 1 26(a) (2) of the Code; and ( ) e cudes certan types of
payments heretofore ta abe.
. Paragraph (1) of the subsecton, reatng to the annua 3,000
mtaton on wages pad after 19 0, contans a rue for the computa-
ton of wages, sub|ect to the empoyee and empoyer ta es mposed
under the Federa Insurance Contrbutons ct, n any case where n
a caendar year (after 19 0) an empoyer acqures substantay a
the property used n a trade or busness of another empoyer (referred
to as a predecessor ), or used n a separate trade or busness, f m-
medatey after the acquston the successor-empoyer empoys n
hs trade or busness (whether or not n the same trade or busness n
whch the acqured property was used) an empoyee who mmedatey
pror to the acquston was empoyed n the trade or busness of the
predecessor-empoyer. Under such provson remuneraton wth re-
spect to empoyment pad to such empoyee by the predecessor (or
consdered as havng been pad by the predecessor) durng the ca-
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9 )
Regs. 106.
endar year n whch the acquston occurs (and pror to the acqus-
ton) w be attrbuted to the successor-empoyer for the purpose of
determnng whether such empoyer has n such caendar year pad
3,600 of ta abe wages to such empoyee.
6. - Paragraph (2) of the subsecton e cudes from wages payments
(ncudng any amounts pad by an empoyer for nsurance or annu-
tes, or nto a fund, to provde for any such payment) made to, or on
behaf of, an empoyee or any of hs dependents under a pan or sys-
tem estabshed by the empoyer for hs empoyees generay and ther
dependents or for a cass or casses of hs empoyees and ther de-
pendents, on account of ( ) retrement, or ( ) sckness or accdent
dsabty, or (C) medca or hosptazaton e penses n connecton
wth sckness or accdent dsabty, or (D) death (regardess of
whether or not one of the optons n the aw n force pror to anuary
1,19 1, e sts).
7. Paragraph (3) e cudes any payment made to an empoyee (n-
cudng any amount pad by an empoyer for nsurance or annutes,
or nto a fund, to provde for any such payment) on account of
retrement.
. Paragraph ( ) e cudes any payment on account of sckness or
accdent dsabty, or medca or hosptazaton e penses n connec-
ton wth sckness or accdent dsabty, made by an empoyer to, or
on behaf of, an empoyee after the e praton of s caendar months
foowng the ast caendar month n whch the empoyee worked for
such empoyer.
9. Paragraph ( ) e cudes from wages payments made to, or on
behaf of, an empoyee or hs benefcary ( ) from or to a trust e -
empt from ta under secton 16 (a) of the Code at the tme of such
payments, or ( ) under or to an annuty pan whch, at the tme of the
payment, meets the requrements of secton 16 (a) (3), ( ), ( ),
and (6). ( payment made to an empoyee of an e empt trust as
remuneraton for servces rendered as such empoyee and not as a
benefcary of the trust s not wthn the e cuson.)
10. Paragraph (6) of the subsecton contnues wthout change the
present e cuson of payments made by an empoyer (wthout deduc-
ton from the remuneraton of, or rembursement by, the empoyee) of
the empoyee ta mposed by secton 1 00 or empoyee contrbutons
under State unempoyment compensaton aws.
11. Paragraph (7) contans two new e cusons from wages
( ) Remuneraton pad n any medum other than cash to an
empoyee for nontrade or nonbusness servce or for domestc
servce n a prvate home of the empoyer.
( ) Cash remuneraton pad by an empoyer n any caendar
quarter to an empoyee for domestc servce n a prvate home of
the empoyer, f the cash remuneraton pad n the quarter for such
servce s ess than 0 or the empoyee s not reguary empoyed
by the empoyer n such quarter of payment.
For purposes of such paragraph 7( ), the amendments provde that
an empoyee sha be deemed to be reguary empoyed by an empoyer
durng a caendar .quarter ony f () on each of some 2 days durng
the quarter.the empoyee performs for the empoyer for some porton
of the day domestc servce n a prvate home of the empoyer, or ()
the empoyee was reguary empoyed (as determned under cause ())
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Regs. 106.
ICO
by the empoyer n the performance of such servce durng the pre-
cedng caendar quarter. Such test, however, s not appcabe to
domestc servce n a prvate home of the empoyer on a farm operated
for proft. (See the dscusson n paragraph 17 of ths mmeograph.)
new subsecton of secton 1 26 authorzes the ssuance of regu-
atons n approprate cases for the roundng off of remuneraton pay-
ments for domestc servce n a prvate home (other than on a farm
operated for proft) to the nearest whoe doar.
12. Paragraph ( ) e cudes remuneraton pad n any medum
other than cash for- agrcutura abor.
13. Paragraph (9) e cudes any payment (other than vacaton or
sck pay) made to an empoyee after the month n whch he attans age
6 , f he dd no work for the empoyer n the perod for whch such
payment s made.
1 . Paragraph (10) e cudes remuneraton pad by an empover n
any caendar quarter to an empoyee who performs servces as a home-
worker under certan condtons, f the cash remuneraton pad n such
quarter for such servce s ess than 0. (Such condtons are de-
scrbed n paragraph 33 of ths mmeograph.)
D FINITION OF MPLOYM NT
1 . ffectve anuary 1,19 1, subsecton (b) of secton 1 26 of the
Interna Revenue Code, defnng the term empoyment, s changed
so as to ncude wthn such term severa types of servces whch are
e cepted under the aw n force pror to such date. Such defnton
contnues unchanged some of the e ceptons n such subsecton (b) n
effect pror to anuary 1,19 1, revses others, and makes certan add-
tons. (Subsectons (e), (g), (h), (), and (|) of secton 1 26, whch
contan provsons pertnent to determnatons of empoyment, aso are
changed. (See paragraph 31 of ths mmeograph.)
16. The defnton of empoyment contaned n the aw n force pror
to anuary 1, 19 1, s retaned wth respect to servces performed
through December 31,19 0. The defnton appcabe to servces ren-
dered on and after anuary 1, 19 1, ncudes wthn empoyment (1)
servces performed by an empoyee for the person empoyng hm, r-
respectve of the ctzenshp or resdence of ether ( | wthn the
Unted States, or ( ) on or n connecton wth an mercan vesse or
mercan arcraft (as defned n secton 1 26(g)) under a contract of
servce whch s entered nto wthn the Unted States or durng the
performance of whch and whe the empoyee s empoyed on the vesse
or arcraft t tovches at a port n the Unted States, f the empoyee s
empoyed on and n connecton wth such vesse or arcraft when out-
sde the Unted States; and (2) servces performed outsde the Unted
States by ua ctzen of the Unted States as an empoyee of an mer-
can empoyer.
17. grcutura abor. Paragraph (1) ( ) of secton 1 26(b), as
amended, e cepts agrcutura abor (as denned n the new subsec-
ton (h) of such secton), but ony f certan tests set forth n such
paragraph are met Paragraph (1) ( ) of such secton e cepts serv-
ce performed n connecton wth the producton or harvestng of any
commodty defned as an agrcutura commodty n secton 1 (g)
of the grcutura Marketng ct, as amended (that s, certan nava
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101
IRcgs. 100.
stores products), or n connecton wth the gnnng of cotton. Such
servce s e cepted regardess of the amount of remuneraton pad
for, or the reguarty of the performance of, such servce. The new
defnton of agrcutura abor ncudes wthn such term servce
performed on a farm operated for proft f such servce s not n the
course of the empoyer s trade or busness or s domestc servce n
a prvate home of the empoyer. It s antcpated that more detaed
nformaton reatve to agrcutura abor w be made avaabe
pror to anuary 1,19 1.
1 . Domestc servce. Paragraph (2) contnues the e cepton of
domestc servce performed n a oca coege cub, or oca chapter
of a coege fraternty or sororty, but mts such e cepton to such
servces performed by a student who s enroed and s reguary
attendng casses at a schoo, coege, or unversty. (Domestc serv-
ce n a prvate home of an empoyer (other than such servce on a
farm operated for proft) performed on and after anuary 1, 19 1,
however, w not be e cepted from empoyment. )
19. Certan nontrade or nonbusness servce. Paragraph (3) s
changed so as to prescrbe a cash and reguarty-of-empoyment test
appcabe to certan nontrade or nonbusness servces. Such para-
graph (3), as amended, e cepts nontrade or nonbusness servce (other
than domestc servce n a prvate home of the empoyer, or nontrade
or nonbusness servce on a farm operated for proft) performed by
an empoyee n a caendar quarter ony f () the cash remuneraton
pad for such servce s ess than 0 or () such servce s performed
by an empoyee who s not reguary empoyed by the empoyer to
perform such servce. n empoyee w be deemed to be reguary
empoyed durng a caendar quarter f such empoyee performed
nontrade or nonbusness servces on each of 2 dfferent days n ether
such quarter or the mmedatey precedng caendar quarter.
20. Famy empoyment. Paragraph ( ) contnues unchanged the
e cepton of servce performed by an ndvdua n the empoy of hs
son, daughter, or spouse, and servce performed by a chd under the
age of 21 n the empoy of hs father or mother.
21. Workers on anon- mercan vesse or arcraft. Paragraph ( )
contnues the e cepton n the aw as t e sted pror to the amend-
ments for servce on foregn vesses; and ako e cepts servce per-
formed on or n connecton wth an arcraft, not an mercan arcraft,
f the empoyee s empoyed on and n connecton wth such arcraft
when outsde the Unted States.
22. mpoyees of the Unted States and nstrumentates thereof.
Paragraphs (6) and (7) of secton 1 26(b), as amended, take the pace
of such paragraph (6) pror to the amendments, whch contans the
e cepton appcabe to empoyees of the Unted States and whoy
owned nstrumentates thereof. The new paragraph (6) e cepts
servce performed n the empoy of any nstrumentaty of the Unted
States ony f such nstrumentaty s e empt from the empoyer ta
mposed by secton 1 10 of the Code by vrtue of any other provson of
aw whch specfcay refers to secton 1 10 n grantng the e empton
from such ta . The new paragraph (7) e cepts servce performed n
the empoy of the Unted States Government, or n the empoy of any
nstrumentaty of the Unted States whch s party or whoy owned
by the Unted States, but ony f (1) such servce s covered by a re-
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Regs. 106.
102
trement system estabshed by a aw of the Unted States, or (2) the
servce s of the character descrbed n a st of 13 speca casses of
e cepted servces. Such paragraph (7) aso e cepts from empoy-
ment, wth certan e cusons herenafter referred to, servce per-
formed n the empoy of an nstrumentaty of the Unted States f
such an nstrumentaty was e empt from the empoyer ta mposed
by secton 1 10 of the Code on December 31, 19 0. (Specfcay e -
cuded from such e cepton, however, are ( ) servce performed n the
empoy of a corporaton whch s whoy owned by the Unted States;
( ) servce performed n the empoy of a natona farm oan assoc-
aton, a producton credt assocaton, a Federa Reserve bank, or a
Federa credt unon; (C) servce performed n the empoy of a State,
county, or communty commttee under the Producton and Marketng
dmnstraton; and (D) servce performed by a cvan empoyee,
who s not compensated from funds approprated by the Congress, n
the rmy and r Force change Servce, rmy and r Force
moton pcture servce, Navy e changes, Marne Corps e changes, or
other actvtes, conducted by an nstrumentaty of the Unted States
sub|ect to the |ursdcton of the Secretary of Defense, at nstaatons
of the Department of Defense for the comfort, peasure, contentment,
and menta and physca mprovement of personne of such Depart-
ment.)
23. Under new subsecton (c) added to secton 1 20 of the Code by
the amendments, wth respect to servce performed by empoyees of the
Unted States or a whoy owned nstrumentaty thereof, the determ-
naton whether an ndvdua has performed servce whch consttutes
empoyment, as defned n secton 1 26, the determnaton of the
amount of remuneraton for such servce whch consttutes ta abe
wages, and the returns and payment of the Federa Insurance Contr-
butons ct ta es are to be made by the head of the Federa agency or
nstrumentaty havng the contro of such servce, or by such agents
as such head may desgnate. For convenence of admnstraton, the
person makng such a return s authorzed to make payments of the
empoyer ta under secton 1 10 of the Code wthout regard to the
3,600 mtaton on wages, and w not be requred to obtan a refund
of such empoyer ta on that part of the remuneraton n e cess of
3,600 pad to each empoyee n a caendar year. The new subsecton
(e) specfes that the provsons of such secton sha be appcabe
to the cvan empoyees referred to n (D) of paragraph 22 above;
and, for purposes of such subsecton (e), the Secretary of Defense
sha be deemed to be the head of the Unted Sates nstrumentaty for
whch any such cvan empoyee performs servces. Moreover, under
secton 1 11 of the Code each head of a Federa agency or nstrumen-
taty who makes a return pursuant to secton 1 20(e) and each agent,
desgnated by the head of a Federa agency or nstrumentaty, who
makes such a return w be deemed a separate empoyer.
2 . mpoyees of States, potca subdvsons, and ther nstrumen-
tates. The new paragraph ( ) of secton 1 26(b) contnues the
e cepton (wth an e cuson for covered tranportaton servce) of
servce performed n the empoy of a State, a potca subdvson
thereof, or a whoy owned nstrumentaty of one or more States or
potca subdvsons. (Provson s made, however, n a new secton
21 of the Soca Securty ct for the coverage of certan State and
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103
Regs 106.
oca empoyees for purposes of benefts under tte II of such ct
pursuant to vountary agreements between the States and the Federa
Securty dmnstrator.)
2 . mpoyees of regous, chartabe, etc., organzatons. The
new paragraph (9) of secton 1 26(b), whch takes the pace of para-
graph ( ) n effect pror to the amendments, e cepts ( ) servce per-
formed by a duy ordaned, commssoned, or censed mnster of a
church n the e ercse of hs mnstry or by a member of a regous
order n the e ercse of dutes requred by such order; and ( ) servce
performed n the empoy of a regous, chartabe, educatona, or
other organzaton e empt from Federa ncome ta under secton
101(6) of the Interna evenue Code, provded a certfcate fed pur-
suant to secton 1 26(1) s not n effect. The e cepton under ( ) s
not appcabe to servce performed for such an e empt organzaton
durng the perod that a certfcate s n effect f such servce s per-
formed by an empoyee (1) whose sgnature appears on a st fed by
such organzaton, or (2) who became an empoyee of such organza-
ton after the caendar quarter n whch the certfcate was fed. In
ths connecton, a new subsecton (1) of secton 1 26 provdes that such
an e empt organzaton may fe a certfcate certfyng that t desres
to have the nsurance system estabshed by tte II of the Soca
Securty ct e tended to servce performed by ts empoyees and that
at east two-thrds of ts empoyees concur n the fng of the certf-
cate. Such certfcate may be fed ony f t s accompaned by a st
contanng the sgnature, address, and soca securty account number
(f any) of each empoyee who concurs n the fng of the certfcate.
26. Carrer empoyees and empoyee representatves. Paragraph
(10) of secton 26 contnues wthout change the provsons of aw
e ceptng servce performed by an ndvdua as an empoyee or an
empoyee represetatve as defned n the Raroad Retrement Ta ct
(subchapter of chapter 9 of the Code).
27. mpoyees of organzatons e empt from Federa ncome ta
under secton 101, Interna Revenue Code, etc. The new paragraph
(11) revses certan e ceptons contaned n paragraph (10) n effect
pror to anuary 1, 19 1, and omts severa others. Such paragraph
11( ) contnues the e cepton of servce performed n any caendar
quarter n the empoy of any organzaton e empt from ncome ta
under secton 101 of the Code, but mts the e cepton to such servce
for whch the remuneraton s ess than 0. New paragraph 11( )
e cepts servce n the empoy of any schoo, coege, or unversty per-
formed by a student who s enroed and s reguary attendng casses
at such schoo, coege, or unversty (regardess of the amount of
remuneraton pad to the empoyee for servce n any quarter). (The
specfc e ceptons omtted are those reatng to (a) servce performed
under certan condtons n connecton wth the coecton of dues or
premums for a fraterna benefcary socety, order, or assocaton
e empt from ncome ta under secton 101 of the Code; (b) servce
performed n the empoy of agrcutura or hortcutura organza-
tons e empt from ncome ta under secton 101(1) of the Code; and
(c) servce performed by empoyees of certan vountary empoyees
benefcary assocatons descrbed n paragraph 10 (C) and (D) of
the aw n effect at the present tme.)
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Regs. 106.)
10
2 . mpoyees of foregn governments and certan of ther nstru-
mentates. Paragraphs (12) and (13) contnue wthout change the
e ceptons n effect at the present tme of servce performed n the
empoy of a foregn government or of a whoy owned nstrumentaty
of a foregn government under certan prescrbed condtons.
29. Student nurses and nternes, fshermen and offcers and mem-
bers of crews of certan sma vesses, newsboys, and certan newspaper
and magazne saesmen. The new paragraphs (1 ), (1 ), and (1G),
respectvey, contnue wthout changes the e ceptons of servces per-
formed by certan student nurses and nternes; by fshermen and off-
cers and members of the crews of certan sma vesses; and by news-
boys and other ndvduas n the devery and dstrbuton of news-
papers, shoppng news, and magaznes under certan prescrbed
condtons.
30. mpoyees of nternatona organzatons. Paragraph (17)
contnues wthout change the e cepton of servce performed n the
empoy of an nternatona organzaton.
31. Under amended secton 1 2G(e) the term State, and the term
Unted States when used n a geographca sense, are e tended to
ncude the rgn Isands, and Puerto Rco on and after the date on
whch the provsons of tte II of the Soca Securty ct are e tended
to Puerto Rco. The term ctzen of the Unted States does not n-
cude a ctzen of Puerto Rco who works n Puerto Rco (or ese-
where outsde the Unted States) as an empoyee of an mercan em-
poyer, wth respect to servces performed pror to the date on whch
the provsons of tte II are e tended to Puerto Rco. The term
mercan arcraft s defned n amended secton 1 26(g) to mean
an arcraft regstered under the aws of the Unted States. The
amended subsecton (h) of secton 1 26 defnes the term agrcutura
abor. stng subsectons () and (|) of secton 1 26, reatng re-
spectvey to certan servces performed for the War Shppng d-
mnstraton or the Unted States Martme Commsson and to cer-
tan servces performed for the onneve Power dmnstrator, are
superseded by a new subsecton () and other provsons under whch
servces (other than those specfcay e cepted) performed by em-
poyees of the Unted States and nstrumentates thereof are ncuded
defned n such new subsecton () to mean an empoyer whch s (1)
the Unted States or an nstrumentaty thereof, (2) an ndvdua
who s a resdent of the Unted States, (3) a partnershp, f two-
thrds or more of the partners are resdents of the Unted States, ( )
a trust, a the trustees of whch are resdents of the Unted States, or
( ) a corporaton organzed under the aws of the Unted States or
of any State as such term s defned n secton 1 26(e).
32. Subsecton (k) of secton 1 26 of the Code provdes that gener-
ay a servce performed after 19 0 n the empoy of a State or pot-
ca subdvson n connecton wth ts operaton of a pubc transpor-
taton system sha consttute covered transportaton servce f any
part of such system was acqured from prvate ownershp after 1936,
uness certan prescrbed condtons and crcumstances e st. Such
servces performed n connecton wth a pubc transportaton system
P O ISION P TI NT TO D T MIN TIONS OF MPLOYM NT
The term mercan empoyer s
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10
Regs. 106.
(or a part thereof) acqured after 1936 and pror to 19 1, w be
covered uness ( ) the State or potca subdvson on December 31,
19 0, has a genera retrement system n effect, coverng substantay
a servces performed n connecton wth the operaton of the system;
and ( ) such system provdes benefts whch, by reason of a prov-
son of the State consttuton deang specfcay wth retrement sys-
tems of the State or potca subdvsons thereof, cannot be dmn-
shed or mpared, wth an e cepton under whch a or ony certan
empoyees may be covered. Under such e cepton f the State or
potca subdvson makes a new acquston from prvate owner-
shp after 19 0 of an addton to ts transportaton system, then, n
the case of any empoyee who (C) became an empoyee of the State
or potca subdvson n connecton wth and at the tme of ts
acquston of such part, and (D) pror to such acquston rendered
servce n empoyment (ncudng as empoyment servce covered by
an agreement under secton 21 of the Soca Securty ct) n con-
necton wth the operaton of such part of the transportaton system,
the servce of such empoyee n connecton wth the operaton of the
transportaton system w consttute empoyment, commencng wth
the frst day of the thrd caendar quarter foowng the caendar
quarter n whch the acquston of the new addton took pace, uness
on such frst day the servce of the empoyee s covered by a genera
retrement system whch does not contan speca provsons app-
cabe ony to empoyees taken over by the State or potca subd-
vson n connecton wth such acquston. In the case of a State or
potca subdvson whch does not operate a transportaton system
on December 31,19 0. but acqures a transportaton system after such
date, a servce performed n connecton wth the acqured system
w consttute empoyment, uness at the tme the frst part of such
transportaton system s acqured by t from prvate ownershp the
State or potca subdvson has a genera retrement system cov-
erng substantay a servce performed n the operaton of the
transportaton system. The term potca subdvson s defned to
ncude an nstrumentaty of a State, or one or more potca sub-
dvsons of a State, or a State and one or more of ts potca
subdvsons.
D FINITION OF MPLOY
33. Wth respect to servces performed after 19 0, the defnton of
empoyee n secton 1 26(d) of the Code contnues to ncude wthn
such term any offcer of a corporaton; and aso ncudes ndvduas
covered by separate and ndependent tests. Paragraph (2) ncude
any ndvdua who, under the usua common-aw rues appcabe n
determnng the empoyer-empoyee reatonshp, has the status of an
empoyee. Paragraph (3) ncudes other ndvduas n the foow-
ng occupatona groups, who, under certan prescrbed crcumstances,
perform servces for remuneraton for any person:
( ) as an agent-drver or commsson-drver engaged n ds-
trbutng meat, vegetabe, frut, or bakery products, or beverages
(other than mk), or aundry or dry-ceanng servces, for hs
prncpa;
( ) as a fu-tme fe nsurance saesman;
923 30 1 S
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Regs. 106.
106
(C) as a home worker, f () he performs work accordng to
specfcatons furnshed by the person for whom the servces are
performed, on materas or .goods furnshed by such person whch
are requred to be returned to such person or a person desgnated
by hm, and f () the performance of such servces s sub|ect to
censng requrements under the aws of the State n whch such
servces are performed; and
(D) as a traveng or cty saesman, f he s engaged upon a fu-
tme bass n the soctaton on behaf of, and the transmsson to,
hs prncpa (e cept for sdene saes actvtes on behaf of some
other person) of orders from whoesaers, retaers, contractors, or
operators of hotes, restaurants, or other smar estabshments
for merchandse for resae or suppes for use n ther busness
operatons.
n ndvdua n a category sted n paragraph (3) s not an empoyee
under such paragraph, uness () the contract of servce nvoved con-
tempates that substantay a of the servces are to be performed
personay by such ndvdua, () such ndvdua has no substanta
nvestment n factes used n connecton wth the performance of
such servces (other than the nvestment n factes for transporta-
ton), and ( ) the servce s not n the nature of a snge transacton.
Such an ndvdua, however, may be an empoyee under ether para-
graph (1) or (2) of secton 1 26(d).
R T OF T ON W G S
3 . Sectons 1 00 and 1 10 of the Interna Revenue Code, reatng to
the rate of empoyee ta and of empoyer ta under the Federa Insur-
ance Contrbutons ct, aso were amended. The rates of each such
ta appcabe for the respectve caendar years are as foows:
Percent
For the caendar years 19 0 to 19 3, both Incusve
For the caendar years 19 to 19 9, both Incusve 2
For the caendar years 1960 to 196 , both ncusve 21/
For the caendar years 196 to 1069, both ncusve 3
For the caendar year 1970 and subsequent caendar years 31
SP CI L R FUNDS
3 . Secton 1 01(d) of the Code was amended to mt the app-
cabty of subsecton (2) thereof, reatng to speca refunds of em-
poyee ta pad on wages n e cess of 3,000 receved by an em-
poyee from more than one empoyer durng any caendar year after
19 G, to wages receved durng the caendar years 19 7 to 19 0, n-
cusve. The amendments aso added to secton 1 01(d) a new para-
graph (3) so as to conform the speca refund provsons to the ncrease
n the mtaton on wages from 3,000 to 3,600 for 19 1 and subse-
quent caendar years; and a new paragraph ( ) contanng speca
rues makng the speca refund provsons n the new paragraph (3)
appcabe to the empoyee ta n the cases of Federa empoyees and
to amounts equvaent to the empoyee ta n the cases of empoyees of
States, potca subdvsons, and nstrumentates thereof, whose
servces are covered pursuant to vountary agreements under secton
21 of the Soca Securty ct.
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107
Regs. 106.
Part II
F D R L UN MPLOYM NT T CT
D FINITION OF W G S
36. ffectve wth respect to remuneraton pad n a caendar year
after 19 0, subsecton (b) of secton 1607 of the Code, defnng the
term wages for purposes of the Federa Unempoyment Ta ct,
was amended to conform n certan respects to the defnton of such
term n amended secton 1 26(a).
37. Paragraph (1) of amended secton 1607(b) contnues the 3,000
mtaton on ta abe wages for purposes of the Federa Unempoy-
ment Ta ct, but contans provsons for appyng such mtaton
whch are dentca to those n secton 1 26(a) (1). Paragraphs (2)
through (6) and paragraph ( ) of amended secton 1607(b) contan
e cusons dentca to those n paragraphs (2) through (6) and para-
graph ( ), respectvey, of amended secton 1 26(a) of the Code.
(For an e panaton of such provsons and e cusons see paragraphs
through 10 and paragraph 13 of ths mmeograph.)
3 . Paragraph (7) of the new secton 1607(b) e cudes from wages
remuneraton pad n any medum other than cash to an empoyee for
nontrade or nonbusness servce.
39. Paragraph (9) contnues the e cuson of dsmssa payments
whch an empoyer s not egay requred to make, but such e cuson
s effectve ony wth respect to remuneraton pad pror to anuary
1,19 2.
0. ffectve wth respect to servces performed after 19 0, the e -
ceptons from empoyment, for purposes of the Federa Unempoy-
ment Ta ct, are changed n three respects:
Frst. Paragraph (3) of secton 1607 of the Code was changed so
as to e cept servce not n the course of an empoyer s trade or bus-
ness ony f () the cash remuneraton for such servce s ess than
0 or () such servce s performed by an empoyee who s not
reguary empoyed by the empoyer to perform such servce. (The
rue to be apped n determnng whether an empoyee s reguary
empoyed by an empoyer s the same as the rue e paned n para-
graph 19 of ths mmeograph.)
Second. Paragraph (10) ( ) () of secton 1007(c), reatng to
servce performed n any caendar quarter n the empoy of an organ-
zaton e empt from ncome ta under secton 101 of the Code, was
changed to substtute 0 for so as to correspond to the provsons
of amended secton 1 26(b) (11) ( ). _
Thrd. Paragraph (10) ( ) of secton 1607(c), reatng to servce
n the empoy of a none empt schoo, coege, or unversty performed
by a student who s enroed and reguary attendng casses at such
schoo, coege, or unversty, was changed to conform to the provsons
of amended secton 1 26(b) (11) ( ). (For a dscusson of such
second and thrd changes, see paragraph 27 of ths mmeograph.)
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Regs. 10 .
10
Part III
SU C PT R D OF C PT R 0 OF T COD (COLL CTION OF
INCOM T T SOURC ON W G S)
D FINITION OF W G S
1. ffectve wth respect to remuneraton pad after 19 0, some
of the e cusons n secton 1621(a) of the Code, defnng the term
wages for purposes of the ncome ta wthhodng, contnue un-
changed, others are revsed, and new e cusons are added so as to
conform to other provsons of the Code. It s to be noted, however,
that whe no change s made n the anguage of paragraph (2) of
such secton, provdng an e cuson for remuneraton pad for agr-
cutura abor as denned n secton 1 26(h), the change n such
defnton automatcay w be appcabe for purposes of ncome ta
wthhodng on wages pad after 19 0. owever, f and to the e tent
the wages are pad for servces performed before 19 1, the change
n the defnton of agrcutura abor s not appcabe.
2. New paragraph (1) of secton 1621(a) of the Code, added by
Pubc Law 1 , e cudes from wages remuneraton for actve servce
as a member of the rmed Forces of the Unted States performed
pror to anuary 1, 19 2, n a month durng any part of whch such
member performed servce n a combat zone as determned under
secton 22(b) (13) of such Code.
3. Paragraph ( ) of secton 1621(a) was revsed by Pubc Law
73 to e cude remuneraton for servce not n the course of an em-
poyer s trade or busness performed n any caendar quarter by an
empoyee ony f () the cash remuneraton pad for such servce s
ess than 0 or () such servce s performed by an empoyee who s
not reguary empoyed by the empoyer to perform such servce. For
purposes of such paragraph, an empoyee w be deemed to be regu-
ary empoyed durng a caendar quarter f such empoyee performed
servces on each of 2 dfferent days n ether such quarter or the mme-
datey precedng quarter. (Such rue s the same as that stated n
paragraph 19 of ths mmeograph.)
. Paragraph (6) of secton 1621 (a), as revsed by Pubc Law 1 ,
e cudes from wages remuneraton for servces performed by a non-
resdent aen ndvdua other than ( ) a resdent of a contguous
country who enters and eaves the Unted States at frequent ntervas,
or ( ) a resdent of Puerto Rco f such servces are per formed as
an empoyee of the Unted States or any agency thereof.
. Paragraph ( ) of secton 1621(a), as amended by Pubc Law
1 , nsofar as t reates to remuneraton for servces performed wthn
a possesson of the Unted States by a ctzen of the Unted States,
contans two e cusons. Paragraph ( ) ( ) e cudes remuneraton
for servces for an empoyer other than the Unted States or an
agency thereof) performed by a ctzen of the Unted States wthn
a possesson of the Unted States (other than Puerto Rco), f t s
reasonabe to beeve that at east 0 percent of the remuneraton to
be pad to the empoyee by such,empoyer durng the caendar year
w be for such servces. Paragraph ( ) (C) e cudes remuneraton
for servces for an empoyer (other than the Unted States or an
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109
Regs. 106.
agency thereof performed- by a ctzen of the Unted States wthn
Puerto Rco, f t s reasonabe to beeve that durng the entre caen-
dar year the empoyee w be a bona fde resdent of Puerto Rco.
6. Paragraph (9) of secton 1621 (a), as revsed by Pubc Law 73 ,
conformng to secton 1 26(b)(9)( ) of the Code, e cudes from
wages remuneraton for servces performed by certan mnsters of
churches and members of regous orders.
7. New paragraph (10) of secton 1621(a), added by Pubc Law
73 , conformng to amended secton 1 20(b) (16), e cudes remunera-
ton for servces performed by newsboys and other ndvduas n the
devery and dstrbuton of newspapers, shoppng news, and maga-
znes under certan condtons prescrbed to the same e tent as such
servces are e cepted n the Federa Insurance Contrbutons ct.
. New paragraph (11) of secton 1621(a), added by Pubc Law
73 , e cudes such remuneraton for nontrade or nonbusness servce as
s pad n any medum other than cash.
9. New paragraph (12), added to secton 1621(a) by Pubc Law
73 , conformng to secton 1 26(a)( ), e cudes from wages under
certan specfed condtons remuneraton pad to, or on behaf of, an
empoyee or hs benefcary from or to a trust e empt from ta under
secton 16 (a) of the Code, or under or to an annuty pan meetng
certan requrements. (For a further e panaton of such new para-
graph, see paragraph 9 of ths mmeograph.)
Part I
MISC LL N OUS ND SP CI L PRO ISIONS
0. Penates for frauduent statement or faure to furnsh state-
ment. Subsecton (a) of a new secton 163 , added to subchapter
of chapter 9 of the Code, provdes for a fne of not more than 1,000
or mprsonment for not more than 1 year, or both, for each fase or
frauduent statement wfuy made, or for wfu faure to furnsh
a statement, under secton 1633. Subsecton (b) of secton 103 pro-
vdes for a cv penaty of 0 for each such offense; and that such
penaty sha be assessed and coected n the same manner as the em-
poyer ta mposed by secton 1 10 of the Code.
1. Lmtaton perods for assessment, coecton, credtng, and re-
fundng of Federa Insurance Contrbutons ct and wthhodng
ta es. Insofar as these ta es are concerned the amendments make sec-
tons 3312 and 3313 of the Code, prescrbng generay a -year perod
of mtaton on assessments, credts, and refunds, and a -year perod
for brngng a proceedng n court for coecton wthout assessment,
nappcabe to such ta es mposed wth respect to remuneraton pad
durng any caendar year after 19 0; and add new sectons 103 and
1630 to subchapter of chapter 9 of the Code appcabe to the ta es
wth respect to remuneraton pad n 19 1 and subsequent years. Such
new sectons contan new genera mtaton perods and a concusve
presumpton as to the date of fng returns and payng ta . Secton
163 aso contans provsons whch correspond to the provsons of
secton 3312 (b), (c), and (d); and secton 1636 contans provsons
correspondng to secton 322(b) of the Code, mtng the amount of
credt or refund of ncome ta mposed by chapter 1 of such Code.
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Regs. 106.
110
2. Subsecton (a) of the new secton 163 provdes that generay
the amount of any ta under subchapter or D of chapter 9 of the
Code sha be assessed wthn 3 years after the return was fed, and no
proceedng n court wthout assessment for the coecton of such ta
sha be begun after the e praton of such perod. Subsectons (b)
and (c) of secton 163 provde, however, that the ta may be assessed,
or a proceedng n court may be begun wthout assessment, at any tme
n the case of a fase|or frauduent return wth ntent to evade ta or a
faure to fe a return, and n the case of a wfu attempt n any
manner to defeat or evade ta . Subsecton (d) thereof provdes that
where the assessment of any such ta s made wthn the perod of
mtaton propery appcabe thereto, such ta may be coected by
dstrant or by a proceedng n court, but ony f begun (1) wthn
6 years after the assessment of the ta , or (2) pror to the e praton
of any perod for coecton agreed upon n wrtng by the Comms-
soner and the ta payer.
3. Subsecton (a) of the new secton 1636 provdes that generay
credt or refund must be camed n the 3-year perod after the return
s fed e cept that f no return s fed credt or refund must be camed
wthn 2 years after the ta s pad, and n any event refund may be
camed wthn such 2-year perod. The amount of the credt or re-
fund may not e ceed the porton of the ta pad ( ) wthn 3 years
mmedatey precedng the fng of the cam, n a case where a return
was fed; or ( ) durng the 2 years mmedatey precedng the fng
of a cam, n a case where no return was fed or where the cam was
not fed wthn 3 years from the tme the return was fed. In a case
where no cam s fed the amount of the credt or refund may not
e ceed the porton of the ta pad (C) wthn 3 years from the tme the
return s fed; or (D) n a case where no return s fed or the aowance
s not made wthn 3 years from the tme the return was fed, durng
the 2 years mmedatey precedng the aowance of the credt or re-
fund. Subsecton (b) of secton 1636 provdes that the perod of
mtaton prescrbed by subsecton (a) of such secton sha appy to
any penaty or sum assessed or coected wth respect to the ta es m-
posed by subchapter or D of chapter 9 of the Code.
. Presumptve .date of fng a return and payment of ta . For
purposes of the perods of mtaton prescrbed n sectons 163 and
1636 of the Code, subsectons (e) and (c), respectvey, of such sectons
provde that a return for any perod n a caendar year whch s fed
before March 1 of the succeedng caendar year sha be consdered
fed (and ta wth respect to such a return pad before such March 1
sha be consdered pad) on March 1 of such succeedng caendar
year.
. Mnmum penaty provsons of chapter 9 of Interna Revenue
Code. ffectve wth respect to returns fed on or after anuary 1,
19 1, secton 1631 of the Code provdng mnmum addtons for
faure to fe a return or pay ta tmey under chapter 9 of the Code
(that s, wthhodng ta or ta es under the Federa Insurance Contr-
butons ct, Federa Unempoyment Ta ct, or Raroad Retrement
Ta ct) was amended (1) to dscontnue the mnmum addton
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Regs. 106.
to such a ta for faure to pay; and (2) to provde ony one mn-
mum addton to the ta for faure to fe a return, rrespectve of
whether one or more ta es are requred to be reported on such return.
6. Reef from Federa Insurance Contrbutons ct and the
Federa Unempoyment Ta ct empoyer ta es n cases of certan
corporate successons pror to 1961. Secton 209(e) of the amend-
ments provdes for mted reef from empoyer ta under sectons
1 10 and 1C00 of the Interna Revenue Code n a case where a cor-
poraton ncorporated under the aws of one State s succeeded after
19 and before 10 1 by another corporaton ncorporated under the
aws of another State, provded certan condtons e st. In order to
quafy for such reef ( ) the busness of the successor must, m-
medatey upon the successon, be dentca wth that of the predeces-
sor; ( ) e cept for quafyng shares, the proportonate nterest of
each sharehoder n the successor must, mmedatey upon the succes-
son, be dentca to hs proportonate nterest n the predecessor; (C)
the predecessor must, n connecton wth the successon, be dssoved
or merged nto the successor; and (D) both the predecessor and
successor must, n the caendar year n whch the successon takes
pace, be empoyers wthn the meanng of both the Federa Insurance
Contrbutons ct and the Federa Unempoyment Ta ct. If a
of such condtons are met, the successor may count toward the 3,000
mtaton n the defnton of wages under such cts, before appyng
such mtaton to remuneraton pad by the successor to ts empoyees
n the caendar year n whch the successon takes pace, the amount
of the ta abe wages pad by the predecessor n such caendar year
to the same empoyees, as though such wages pad by the predecessor
had been pad by the successor; and, sub|ect to the appcabe statutes
of mtaton, the successor may be entted to a credt or refund,
wthout nterest, of any empoyer ta under secton 1 10 or 1600 of
the Code (together wth any nterest or penaty thereon) pad by t
wth respect to certan remuneraton whch t pad durng such
caendar year.
7. Ta on sef-empoyment ncome. The amendments aso add
to chapter 1 of the Interna Revenue Code a new subchapter ,
contanng provsons mposng a ta on the sef-empoyment n-
come of ndvduas (other than those specfcay e cuded) for
each ta abe year begnnng after December 31, 19 0. The rate of
such ta for any such ta abe year begnnng pror to anuary 1,
19 , s 21 percent of the sef-empoyment ncome for such year. It
s antcpated that more detaed nformaton reatng to such ta
w be made avaabe pror to anuary 1,19 1.
. Correspondence reatng to ths mmeograph shoud refer to
ts number and to the symbos mT: RR.
Geo. . Schoeneman,
Commssoner.
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Regs. 106, 02.227.
112
Secton 1 26: Defntons. 19 0-19-13 26
Reguatons 106, Secton 02.227: Wages. T. D. 0
( so Subchapter. C (Federa Unempoyment Ta
ct), Secton 1607; Reguatons 107, Secton
03.227.)
TITL 20 nterna revenue. C PT R I, SU C PT R d,
P RTS 02 ND 03
Reguatons 100 and 107 amended wth respect to whether pay-
ments for traveng and other e penses consttute wages.
Washngton , D. C.
On pr 19, 19 0, notce of proposed rue makng, regardng
amendments to the empoyment ta reguatons wth respect to whether
payments for traveng and other e penses consttute wages, was
pubshed n the Federa Regster (1 F. R. 2199). No ob|ecton
to the rues proposed havng been receved, the amendments set forth
beow are hereby adopted.
Paragraph 1. Secton 02.227 of Reguatons 106, as amended bv
Treasury Decson 02 C. . 19 6-1, 2 0 , approved March 1 ,19 6,
and by Treasury Decson 66 C. . 19 7-2, 1 , approved une
23, 19 7 26 CFR 02.227 , and secton 03.227 of Reguatons 107,
as amended by Treasury Decsons 02 and 66 26 CFR 03.227 ,
are each further amended as foows:
( ) y addng after the s th paragraph of secton 02.227 (a) and
of secton 03.227(a) the foowng:
mounts pad specfcay ether as advances or rembursements for trave-
ng or other bona fde ordnary and necessary e penses ncurred or reasonaby
e pected to be ncurred n the busness of the empoyer are not wages. Trave-
ng and other rembursed e penses must be dentfed ether by makng n sepa-
rate payment or by specfcay ndcatng the separate amounts where both
wages and e pense aowances are combned n a snge payment.
( ) y strkng out subparagraph (2) of secton 02.227(b) and
of secton 03.227(b) and by renumberng subparagraphs (3) and
( ) of such sectons as subparagraphs (2) and (3), respectvey.
Par. 2. The amendments made by ths Treasury Decson sha be
appcabe ony wth respect to remuneraton pad after December 31,
19 9; e cept that the amendments made by ths Treasury Decson
sha not affect any determnaton of the amount of wages pad before
October 1, 19 0, f such determnaton woud be proper but for the
amendments made by ths Treasury Decson.
n sectons 1 29,1609, and 3791 of the Interna Revenue Code ( 3
Stat. 17 ,1 , 67; 26 U. S. C. 1 29,1609, and 3791).)
Geo. . Schoeneman,
pproved ugust 30,19 0.
Thomas . Lynch,
Fed wth the Dvson of the Federa Regster ugust 31, 19 0, 2:17 p. m.)
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113
Regs. 106, 02.227.
Secton 1 26: Defntons.
Reguatons 106, Secton 02.227: Wages.
( so Subchapter C (Federa Unempoyment Ta
ct), Secton 1607; Reguatons 107, Secton
03.227.)
Revsed Reguatons for determnng whether traveng and other
e penses consttute wages for Federa empoyment ta purposes.
Washngton 2 , D. C, October 27,19 0.
1. Secton 02.227(b) (2) of Reguatons 106 reatng to the ta es
mposed under the Federa Insurance Contrbutons ct and secton
03.227(b)(2) of Reguatons 107 reatng to the ta mposed under
the Federa Unempoyment Ta ct as n force and effect pror to the
effectve date of Treasury Decson 0 (page 112, ths uetn), ap-
proved ugust 30, 19 0, provded that amounts pad to traveng
saesmen or other empoyees as aowance or rembursement for trave-
ng or other e penses ncurred n the busness of the empoyer con-
sttuted wages ony to. the e tent of the e cess of such amounts over
such e penses actuay ncurred and accounted for by the empoyee
to the empoyer. Under these sectons of the reguatons the ureau
permtted amounts ncurred for traveng and other e penses and
accounted for by an empoyee to hs empoyer to be deducted from
the payments made by the empoyer to the empoyee n computng
the porton of such payments whch consttuted wages, even though
no specfc porton of such payments was desgnated as an aowance
or rembursement for traveng or other e penses.
2. Reguatons 106 and 107, as amended by Treasury Decson 0 ,
supra, provde that amounts pad specfcay ether as advances or
rembursements for traveng or other bona fde ordnary and neces-
sary e penses ncurred or reasonaby e pected to be ncurred n the
busness of the empoyer are not wages. Traveng and other rem-
bursed e penses must be dentfed ether by makng a separate pay-
ment or by specfcay ndcatng the separate amounts where both
wages and e pense aowances are combned n a snge payment.
Thus, under the revsed rue ony such porton of a payment made
by an empoyer to hs empoyee as s specfcay dentfed at the tme
of payment as an advance or rembursement for traveng or other
e penses may be e cuded n computng the porton of the payment
whch consttutes wages. n accountng by the empoyee to the
empoyer of e penses ncurred s no onger necessary.
3. Ihe amended reguatons are appcabe ony wth respect to
remuneraton pad after December 31,19 9; e cept that such amended
reguatons sha not affect any determnaton of the amount of wages
pad before October 1, 19 0, f such determnaton woud have been
proper under the reguatons then n effect.
. Secton 0 .101 (c) of Reguatons 116 reatng to the coecton
of ncome ta at source on wages contans provsons dentca to those
now contaned n secton 02.227(a) of Reguatons 106 and secton
03.227(a) of Reguatons 107 reatng to traveng e penses.
19 0-2 -13 3
Mm. 6 7
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Regs. 107, 03.603.
11
. The adopton of Treasury Decson 0 , supra, resuts n un-
form reguatons wth respect to the treatment of traveng and other
e penses as wages both for Federa empoyment ta purposes and for
furposes of the ncome ta wthhodng under secton 1622 of the
nterna Revenue Code, as amended.
6. Crcuar , entted mpoyer s Ta andbook ssued by the
urean, reatng to ncome ta wthhodng and the ta es mposed
under the Federa Insurance Contrbutons ct and the Federa Un-
empoyment Ta ct wth respect to wages pad on and after anuary
1, 19 0, contans the revsed rue stated heren. In accordance wth
such crcuar, many empoyers have undoubtedy apped the revsed
rue n makng wage computatons for ta purposes n cases nvovng
traveng and other e penses for a ta -return perods subsequent to
December 31, 19 9. On the other hand| other empoyers probaby
have apped the former rue as stated n the reguatons n effect
pror to the promugaton of Treasury Decson 0 . proper app-
caton of ether rue by an empoyer wth respect to perods subsequent
to December 31, 19 9, and pror to October 1, 19 0, w not be ds-
turbed. owever, for ta -return perods begnnng after September
30, 19 0, the rue stated n Treasury Decson 0 s mandatory.
7. Correspondence reatve to ths mmeograph shoud refer to ts
number and to the symbos mT: RR.
Geo. . Schoeneman,
- Commssoner.
C PT R 9, SU C PT R . R ILRO D R TIR M NT T CT
Reguatons 11 , Secton 11.903: Interest.
Interest on unpad ta sub|ect to mnmum addtons to ta pro-
Reguatons 11 , Secton 11.90 (a) : dd-
vded under secton 1631. (See T. D. 791, page 2.)
C PT R 9, SU C PT R C F D R L UN MPLOYM NT T CT
Secton 160 : Payment of ta es.
Reguatons 107, Secton 03.603: Interest.
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11
Regs. 116, 0 .102.
Secton 160 : Payment of ta es.
Reguatons 107, Secton 03.60 (a): dd-
ton to ta for denquent or fase returns.
Secton 1607: Defntons.
Payments made bv empoyer of traveng and other e penses. (See
T. D. S0 , page 112.)
Traveng and other e penses, determnaton under revsed regua-
tons. (See Mm. 6 7, page 113.)
Reguatons 107.
Soca Securty ct mendments of 19 0. (See Mm. 6 9,
page 97.)
C PT R 9, SU C PT R D. COLL CTION OF INCOM T T
SOURC ON W G S
Reguatons 116, Secton 0 .102: cu-
sons from wages.
Changes effected by the Soca Securty ct mendents of 19 0
reatng to agrcutura abor. (See Mm. 6 , page 93.)
Reguatons 116.
page 97.)
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Regs. 116, 0 .201.
116
Secton 1622: Income ta coected at source. 19 0-22-13 6
Reguatons 116, Secton 0 .201: Requre- Mm. 6 3
ment of wthhodng.
Wthhodng ta tabes for payro perods of 10 days and pay-
ro perods of 2 days.
Mmeograph 62 9 (O. . 19 -1, 9 ) revoked.
Washngton 2 , D. C, October 2,19 0.
1. The attached wthhodng tabes coverng payro perods of 10
days and 2 days have been constructed on the bass of the Revenue
ct of 19 0. The percentage method of wthhodng and the reguar
tabes coverng weeky, bweeky, semmonthy, monthy, and day
or msceaneous payro perods are found n Crcuar Suppement,
September, 19 0.
2. Coectors may reproduce the 10-day and 2 -day payro perod
wthhodng tabes for dstrbuton to empoyers requestng them. s
ndcated on page 2 of the orgna Crcuar , ths w De the ony
pan of dstrbuton of these tabes.
3. Correspondence reatve to the contents of ths mmeograph
shoud refer to ts number and to the symbos C: Co.
Geo. . Schoeneman,
Commssoner.
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117
Regs. 116, 0 .201.
Income Ta Wthhodng Tade ffectve October 1,19 0
If the payro perod wth respect to an empoyee s a 10-day perod
nd the wascs arc
nd the number of wthhodng e emptons camc s
0
1
2
3
6
6
7
9
10 or
. kc
ut crs
than
The amount of ta to be wthh Id sha be
mor.1

20.00....
11 0
0
0
0
0
0
0
0
0
0
to
20.00
22. 0....
SSS)
.60
0
0
0
0
0
0
0
0
0
2 .00
. 0
1.00
0
0
0
0
0
0
0
0
f
.nO
27.60....
. 0
1. 0
0
0
0
0
0
0
0
0
0
27. 0
30.00
.00
2.00
0
0
0
0
0
0
0
0
0
S3C00
32.60
. 0
2.60
0
0
0
0
0
0
0
0
0
32.60
3 .00
6.00
3.00
0
0
0
0
0
0
0
0
0
3 .on
37.f0....
6. 0
3.00
0
0
0
0
0
0
0
0
0
37 SO
0.00
7.00
3. 0
.60
0
0
0
0
0
0
0
0
0.00
2. 0
7. 0
.00
1.00
0
II
0
0
0
0
0
0
2. 0
.00
.00
. 0
1. 0
0
0
0
0
0
0
0
0
.00
7. 0
. so
6.00
1.60
0
0
0
0
0
0
0
0
7. 0
0.00
9.00
. 0
2.00
0
0
0
0
0
0
0
0
0.00
2. 0....
9.00
6.00
2. 0
0
0
0
0
0
0
0
0
32. 0
.00....
9. 0
6. 0
3. CO
0
0
0
0
0
II
0
0
S 0
7.69
10.00
7.00
3. 0
. 0
0
0
0
0
0
0
0
7. 0
60.00....
10. 0
7. 0
.00
.60
0
0
0
0
0
0
0
62:
02. 0....
11.00
7. 0
. 0
1.00
0
0
0
0
0
0
0
06.00....
11. 0
.00
.00
1. 0
0
0
0
0
0
0
0
see.oo
7. 0....
12.00
. 0
. 0
2.00
0
0
0
0
0
0
0
1)7. 0
70.00....
12. 0
9.00
600
2.60
0
0
0
0
0
0
0
70.00
72. 0....
13.00
9.60
6.00
3.00
0
0
0
0
0
0
0
72. 0
7 .00
13. 0
10.00
6. 0
3. 0
0
0
0
0
0
0
0
7 .00
77. 0
13. 0
10. 0
7.00
.00
. 0
0
0
0
0
0
0
77. 0
0.00
1 .00
11.00
7.60
. 0
1.00
0
0
0
0
0
u
0.00
2. 0
1 . 0
11.60
.00
6.00
1.60
0
0
0
0
0
0
2. 0
.00
1 .00
12.00
.60
6.00
2.00
0
0
0
0
0
1)
.00
7. 0
1 . 0
12.00
9.00
6.60
2. 0
0
0
0
0
0
0
7. 0
00.00
16.00
12. 0
9.60
6.00
3.00
0
0
0
0
0
0
0.00
62. 0
16. 0
13.00
10 00
6.60
3. 0
0
0
0
0
0
0
92.W
9 .00
17.00
13. 0
10. 0
7.00
3. 0
. 0
0
0
0
0
0
9 .00
97. 0....
17. 0
1 .00
10.60
7. 0
.U0
1.00
0
0
0
0
0
97. 0
100.00. __
1 .00
1 . 0
11.00
.00
. 0
1. 0
0
0
0
0
0
100.00
10 .00...
1 . 0
1 .00
12.00
. 0
6. 0
2.00
0
0
0
0
0
10 .00
110.00...
16. 0
16.00
13.00
6. 0
6.00
3. 00
0
0
0
0
0
110.00
11 .00.
20. 0
17.00
13. 0
10. 0
7. CO
.00
.60
0
0
0
0
111.00
120.00...
21.00
1 .00
1 . 0
11. 0
.00
. 0
1. 0
0
0
0
0
120.00
12 .00...
22. CO
19.00
1 . 0
12.00
.f
6.60
2. 0
0
0
0
0
12 .00
130.00...
23.00
19. 0
16. 0
13.00
10.00
0. 0
3.00
0
0
0
0
130.00
13 .00...
2 .00
20. 0
17. 0
1 .00
10. so
7. 0
. 00
1.00
0
0
0
13 ,110
1 0.00...
2 .00
21. 0
1 .00
1 .00
11. 0
. 0
6.00
1. 0
0
0
0
1 0.00
1 0...
2 . 0
22. 0
10.00
16. OC
12. 0
9.00
6.00
2. 0
0
0
0
1 .00
1 0.00...
26. 0
23.60
20.00
16. 0
13. 0
10.00
7.00
3. 0
0
0
0
1 0.00
1 .00...
27. 0
2 .00
21.00
17. 0
1 . 0
11.00
7. 0
. 0
1.00
0
0
S1 .O0
160.00...
2 . 0
2 .00
22.00
1 . 0
1 .00
12.00
. 0
6. 0
2.00
0
0
160.00
10 .00...
29. 0
26.00
22. 0
19. 0
10.00
13.00
6. 0
6.00
3.00
0
0
16 .00
170.00...
30.00
27.00
23.60
20. 0
17.00
13. 0
10. 0
7.00
.00
. 0
0
170.00
17 .00...
31.00
2 .00
2 . 0
21.00
1 .00
1 . 0
11. 0
.00
. 0
.r.
0
7 0
1 0.00...
32.00
2 . 0
2 . 0
22.00
19.00
1 . 0
12.00
9.00
.60
2. 0
II
19 .00...
33.00
29. 0
26. 0
23.00
19. 0
16. 0
13.00
10.00
6. 0
3. 0
0
1 00
190.00...
3 .00
30. 0
27.00
2 .00
20. 0
17. 0
1 .00
10. 0
7. 0,
.00
1.00
I90,00__ .
19 .00...
3 ; 0
31. 0
2 .00
2 .00
21. 0
1 .00
1 .00
11. 0
. 0
.00
2.00
19 00
200.00...
3 . 0
32. 0
29.00
2 . 0
22. 0
16.00
16.00
12. 0
9.00
6.00
2. 0
200.00
210.00...
37.00
33. 0
30. 0
27.00
23. 0
20. 0
17.00
1 .00
10. 0
7. 0
.00
210.00
220.00...
3 . 0
3 . 0
32.00
29.00
2 . 0
22. 0
19.00
1 . 0
12. 0
0.00
6.00
220.00
230.00...
0. 0
37.00
3 .00
30. 0
27. 0
2 .00
21.00
17. 0
1 .00
11.00
7. 0
230.00
2 0.00...
2. 0
39.00
3 . 0
32. 0
29.00
26.00
22. 0
19. 0
16.00
12. 0
9. 0
2 0.00
2 0.00...
.00
1.00
37. 0
3 .00
31.00
27. 0
2 . 0
21.00
1 .00
1 . 0
11.00
2 0.00
260.00...
6.00
2. 0
39. 0
36.00
32. 0
29. 0
26.00
23.00
19.60
16. 0
13.00
2 0.00
270 0...
7. 0
. 0
1.00
3 .00
3 . 0
31. 0
2 .00
2 . 0
21. 0
1 .00
1 .00
270.00
2 0.00...
9. 0
6.00
3.00
39. 0
36. 0
33.00
30.00
20. 0
23.00
20.00
16. 0
12 0.00
200.00...
61. 0
.00
. 0
1. 0
3 .00
3 .00
31. 0
2 . 0
2 .00
21. 0
1 .60
2 0.00
300.00...
63.00
0.00
6. 0
3.00
0.00
36. 0
33. 0
30.00
27.00
23.60
20.00
1 percent of the e cess over 300 pus
300.00 and over
.00
0. 0
7. 0
.00
1.00
37. 0
3 . 0
31.00
27. 0
2 . 0
21.00
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#
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Regs. 116, 0 .201.3 US
If the payro perod wth respect to an empoyee s a 2 -day perod
nd the wages arc
nd the number of wthhodng e emptons camed s
1
2
3
6
7
9
10 or
The
amount of ta to be wthhed sha be
to
0
0
0
0
O
to
0
0
0
1. 0
0
0
0
0
0
0
0
0
0
2. 0
0
0
0
0
0
0
0
0
0
.20
0
0
0
0
0
0
0
0
0
.60
0
0
0
0
0
0
0
0
0
7.00
1
0
0
0
0
0
0
0
0
. 0
0
0
0
0
0
0
0
0
0
. 0
0
0
0
0
0
0
0
0
0
9. 0
1. 0
0
0
0
0
0
0
0
0
11.20
2. 0
0
0
0
0
0
0
0
0
12.60
.20
0
0
0
0
0
0
0
0
1 .00
.20
0
0
0
0
0
0
0
0
1 . 0
.60
0
0
0
0
0
0
0
0
16. 0
7.00
0
0
0
0
0
0
0
0
1 .20
. 0
0
0
0
0
0
0
0
0
10.60
9. 0
1. 0
0
0
0
0
0
0
0
21.00
11.20
1. 0
0
0
0
0
0
0
0
21.00
12.60
2. 0
0
0
0
0
0
0
0
22. 0
1 .00
.20
0
0
0
0
0
0
0
23. 0
1 . 0
6.60
0
0
0
0
0
0
0
2 .20
16. 0
7.00
0
0
0
0
0
0
0
26.00
16. 0
. 0
0
0
0
0
0
0
0
2 .00
1 .20
9. 0
0
0
0
0
0
0
0
29. 0
10.60
11.20
1. 0
0
0
0
0
0
0
30. 0
21.00
12.60
2. 0
0
0
0
0
0
0
32.20
22. 0
1 .00
.20
0
0
0
0
0
0
33.60
23. 0
1 .09
.60
0
0
0
0
0
0
33.60
2 .20
1 . 0
7.00
0
0
0
0
0
0
3 .00
26.60
16. 0
. 0
0
0
0
0
0
0
36. 0
2 .00
1 .20
9. 0
0
0
0
0
0
0
37. 0
29. 0
19.60
9. 0
1. 0,
0
0
0
0
0
39.20
29. 0
21.00
11.20
2. 0
0
0
0
0
0
0.60
30. 0
22. 0
12.60
.20
0
0
0
0
0
2.00
33.60
23. 0
16. 0
6.60
0
0
0
0
0
. 0
36. 0
26.60
16. 0
. 0
0
0
0
0
0
7.60
37. 0
29. 0
19.60
11.20
1. 0
0
0
0
0
0. 0
0.60
32 20
22. 0
12.60
.20
0
0
0
0
3.20
3. 0
33.60
2 .20
16. 0
7.00
0
0
0
0
.60
6.20
36. 0
2 .00
1 .20
. 0
0
0
0
0
7. 0
9.00
39.20
29. 0
21.00
11.20
2. 0
0
0
0
60.20
0. 0
2.00
32.20
23. 0
1 .00
.20
0
0
0
63.00
63.20
. 0
36.00
2 .20
16. 0
7.00
0
0
0
6 . 0
6.00
0.20
37. 0
2 .00
19.60
9. 0
0
0
0
67.20
6 . 0
9.00
0.60
30. 0
21.00
12.00
2. 0
0
0
70.00
61.60
1. 0
2.00
33.00
23. 0
16. 0
6.60
0
0
72. 0
63.00
.60
. 0
36. 0
26.60
16. 0
. 0
0
1
7 .60
6 . 0
7. 0
7.00
37. 0
29. 0
10.60
11.20
1. 0
0
7 . 0
6 .60
. 0
0. 0
0.60
32.20
22. 0
12.60
.20
0
79. 0
71. 0
61.60
3.20
3. 0
33.60
26.20
1 . 0
7.00
0
2.60
7 .20.
6 . 0
.00
6.20
36. 0
2 .00
1 .20
9. SO
0
. 0
7 .60
67.20
67. 0
9.00
39.20
29. 0
21.00
11.20
2. 0
.20
7 . 0
70.00
00.20
0. 0
2.00
32.20
23. SO
1 .00
6.60
91.00
1.20
71. 0
63.00
3.20
. 0
3 .00
2 .20
16. 0
7.00
93. 0
. 0.
7 .60
6 . 0
7. 0
7.60
39.20
29. 0
21.00
11.20
99. 0
9.60
1.20
71. 0
63.00
63.20
3. 0
3 .00
2 .20
16. 0
103.60
9 .20
6 . 0
77.00
67.20
6S. 0
9.00
39.20
30. 0
21.00
109.20
99. 0
91.00
1.20
72. 0
63.00
6 .60
. 0
3 .00
26.60
11 . 0
10 .00
9 .20
. 0
77.00
6 .60
6 . 0
60. 0
0.60
30. 0
119.00
110.60
100. 0
91.00
2.60
72. 0
6 . 0
.60
6.20
36. 0
12 .60
11 . 0
106. 0
96.60
.20
7 . 0
6 .60
60.20
60. 0
2.00
12 . 0
120. 0
110.60
102.20
02. 0
.00
7 .20
6 . 0
66.00
6.20
13 . 0
12 .60
116.20.
100. 0
9 .00
.20
79. SO
70.00
60.20
1. 0
1 0.00
130.20
120. 0
112.00
102.20
93. 0
.00
7 .60
6 . 0
6.00
1
erccnt o the e cess over 0 pus

1 1. 0
133.00
123.20
11 . 0
10 .00
96.60
6. 0
77.00
6 .60
. SO
t east
ut cs:
than
O
6.00
63.00
70.00
77.00
.00
91.00
9 .00
10 .00
112.00
110.00
126.00
133.00
1 0.00
1 7.00
1 .00
161.00
16 .00
17 .00
1 2.00
1 9.00
196.00
203.00
210.00
217.00
22 .00
231.00
23 .00
2 .00
2 2.00
2 9.00
206.00
273.00
2 0.00
29 .00
30 .00
322.00
336.00
3 0.00
31 .00
37 .00
392.00
06.00
20.00
3 .00
.00
62.00
76.00
90.00
0 .00
1 .00
32.00
6 6.00
60.00
6S .00
610.00..
6 .00..
072.00..
700. 1..
72S.O0..
7 0.00..
7 .00..
12 0..
0.00...
63.00...
70.00...
77.00...
.00...
91.00...
9 .00...
10 .00..
112.00-
119.00..
126.00..
133.00..
1 0.00..
1 7.00..
1 .00..
161.00..
163.00..
17 .00..
1 2.00..
1 9.00..
196.00..
203.00..
210.00..
217.00..
22 .00..
231.00..
23 .00..
2 .00..
2 2.00..
2 9.00..
260.00. _
273.00..
2 0.00..
29 .00..
30 .00..
322.00..
336.00..
3 0.00..
36 .00..
37 .00..
392.00..
06.00..
20.00-
3 .00..
.00..
62.00..
76.00..
90.00..
01.00..
SM .OO-
32.00..
. ..0O_.
60.00-
.00..
016.00..
6 .00-
672.00..
700.00-
72 .00-
7 0.00..
7 .00-
12.00..
10.00-
1 of
12.60
12.60
1 .00
1 . 0
16. 0
1 .20
19.60
21.00
22. 0
23. 0
2 .20
2 .20
26.60
2 .00
29. 0
30. SO
32.20
33.60
3 .00
36. 0
37. 0
37. 0
39.20
0.90
2.00
3. 0.
. 0
6.20
7.60
9.00
0. 0
1. 0
.60
7. 0
6 . 0
61.60
6 . 0
67.20
70.00
71. 0
7 .20
77.00
79. 0
2.60
.00
0. 0
9.00
92. 0
9 .20
96.60
99. 0
103.00
107. 0
113. 0
119.00
123.20
12 . 0
133.00
13 .60
1 .20
1 . 0
0 and over
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119
Regs. 116, 01.
Secton 162 : Recepts. 19 0-22-13 6
Reguatons 116, Secton 01: Recepts for Crcuar 2199
ta wthhed at source on wages.
Form W-2, Wthhodng Statements for 19 1. Rues for repro-
ducton.
Washngton 2 , D. C, September 29,19 0.
1. Form W-2 for 19 1 has been approved. It may be reproduced,
but ts reproducton must have offca approva. Requests for such
approva must be addressed to the Commssoner of Interna Revenue,
ttenton: C: Co: O. Washngton 2 , D. C, and must ncude the
proposed form of the reproducton and a sampe of the paper to be
used. The foowng specfcatons must bo met:
(a) Coor and quaty of paper: The forms must be prnted on
whte paper of substantay the same weght and te ture, and of
quaty as good as that used by the Government. The use of wa -
coated paper w not be permtted.
(b) Typography: The reproducton must be prnted n back nk
usng type not smaer than the correspondng type on the offca
form, and, as neary as possbe, of the same font. mted rear-
rangement of the face of the form w be permtted, but the space for
the name of the empoyee must be above that used for the name of
the empoyer.
(c) Data to be shown on Form W-2: Reproduced Forms W-2 mutt
be desgned so as to provde for entry by empoyers of the same data
as to wages pad and ta es wthhed as requred by the offca form.
Permsson w not be granted for reproductons whch woud permt
empoyers to show, on the orgna and trpcate copes, any payro
deductons other than those ndcated heren. There s no ob|ecton
to the attachment of a stub, or e tenson, to the dupcate porton
of the form ony, to provde addtona nformaton not authorzed
for reproducton on the form tsef.
(d) ddtona copes smar to Form W-2b may be reproduced
for the use of empoyers. It w be permssbe to prepare forms
as carbon mpressons of Form W-2, for use n connecton wth ta es
other than Federa ncome ta and ta due under the Federa Insur-
ance Contrbutons ct, provded such forms bear no menton of the
Interna Revenue Servce or the Unted States Treasury Department.
These forms or addtona copes must not be paced ahead of Form
W-2a n the assemby. Forms for devery to State or oca ta ng
authortes shoud be ceary abeed to ndcate the purpose for whch
they are ntended and shoud not bear any part of the desgnaton
Form W-2.
(e) Dmensons: The offca sze of the form s 7 nches wde by
3 nches n depth but the depth may vary from 3 to 3 nches and
wdth from 7 nches to nches.
(/) Carbonzed forms or spot carbons are not permssbe. In-
tereaved carbon, f used, must be of good quaty to precude
smudgng.
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Regs. 116, 01.
120
(g) The Government Prntng Offce symbo must be omtted from
reproduced forms.
(h) uthorzed reproducton: n approved form must bear the
notaton pp. . I. R. and the date of ts approva n sma type on
the bottom margn, eft-hand sde of the face of both the orgna and
the coector s copy, Form W-2a.
2. facsme of Form W-2, for 19 1, s attached for your nforma-
ton and the nformaton of those who wsh to reproduce the form.
Ths facsme shoud be made avaabe to any empoyers or prnters
n your dstrct who wsh to reproduce the form. The form w be
prnted on whte paper of 16-pound commerca weght, and w
otherwse be arranged and foded smar to the earer forms. The
pages of the form are reproduced n the attached facsme n the
foowng order: front page, orgna copy; back page, orgna copy;
front page, empoyee s copy; front page, coector s copy; back page,
coector s copy; and front page, empoyer s copy.
3. Correspondence reatve to the contents of ths crcuar shoud
refer to ts number and to the symbos C: Co.
Dane, . oc,
ctng Com m ns oner.
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WIT OLDING ST T M NT-19 1 ORIGIN L
Wages Pod end Income ond T. I. C. . Ta es Wthhed Do Not Lose Ths Statement
Form W-2
. . TreMury Department
Interna Uevgmn Servce
MPLOY TO W OM P ID (Prnt name, fu address, and Soca Securty account number)
ICOM T R TURN
Federa ncome ta wthhed,
f any
It must be attached to your U. S. ncome

ta return for 19 1.
Ths statement s mportant
INFORM TION FOR II
Tota wages (before payro de-
ductons) pad n 19 1
NOTIC TO MPLOY
See nstructons on other sde
nber)
CONTRI UTIONS CT
F.I.C. . empoyee ta wthhed,
f any
D (Name, address, aod Identfcaton m

F D R L INSUR NC
TotaF.I.C. . wages (before pay-
ro deductons) pad n 19S1
MPLOY R Y W OM P
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INSTRUCTIONS FOR FILING . S. INCOM T R TURN
Who Mut Fe. If your ncome n 19 1 was 600 or more,
you must fe an ncome ta return ether on mpoyee s Optona
Income Ta Return (Form 10 0 ) or on Form 10 0. Copes of
these forms may be obtaned from the Coector of Interna Reve-
nue, your empoyer, bank, or post offce.
snge person wth ess than 600 ncome shoud fe a return
to get a refund f ta was wthhed. marred person wth
ncome ess than her (or hs) own persona e empton(s) shoud
aways fe a |ont return wth husband or wfe to get the smaer
ta or arger refund for the coupe.
Fng on Form 10 0 . If your tota ncome was ess than
,000 and conssted entrey of wages sub|ect to ncome ta
wthhodng and reported on Wthhodng Statements (Forms
W-2), or of such wages and not more than 100 tota of other
wages, dvdends, and nterest, you may use mpoyee s Optona
Income Ta Return (Form 10 0 ). The Coector w compute
the ta and send you ether a check for any refund due you or
a b for any amount you owe. e w determne your ta
from the tabe provded by aw whch aows about 10 percent
of your tota ncome for chartabe contrbutons, nterest, ta es,
casuaty osses, medca e penses, and msceaneous tems.
Fng on Form 10 0. If your ncome does not meet the tests
gven n the precedng paragraph, or you had ncome from any
other source, such as rents, annutes, etc., you must use Form
10 0 and compute your own ta . so, t w generay be to
your advantage to fe Form 10 0 your deductons amount to
more than 10 percent of your ncome, or you cam traveng
or rembursed e penses.
ont Returns of Marred Coupes. usband and wfe may
use Form 10 0 f ther combned ncome was ess than ,000 and
conssted entrey of wages sub|ect to ncome ta wthhodng and
reported on Wthhodng Statements (Forms W-2), or of such
wages and not more than 100 tota of other wages, dvdends, and
nterest.
To assure any benefts of the spt-ncome provsons, a mar-
red coupe shoud fe a |ont ncome ta return. |ont return
on Form 10 0 never resuts n more ta than separate returns
because the ta s computed by the Coector on the combned
ncomes or on the separate ncomes, whchever resuts n the
smaer ta or arger refund for the coupe.
mpoyee avng Two mpoyers Durng Teas. I an
aggregate of more than of F. I. C. . empoyee ta was
wthhed durng 19 1 because you worked for two or more em-
oyers, cam the e cess over as Federa ncome ta wth-
ed on your return for 19 1.
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I-omW-2 WIT OLDING ST T M NT 19 1
SSS t SSSSF Wage Pad and Income and r. I. C. . Ta es Wthhed
MPLOY TO W OM P ID (Prnt nam , u add eu. and Soca Se:urty account nurabo)
Tota F.I.C. . wages (before pay-
toII deductons) pad n 19 1
F. I. C. . empoyee ta wthhed,
f any
INFORM TION FOR INCOM T R TURN

ductons) pad n 19 1
Federa ncoma ta wthhed,
f any
MPLOY R Y W OM F ID (Nora , adnn, ard denhca or. nunte)
P T IS COPY
rOR YOUR OWN R CORD
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TO MPLOY R:
1. Prepare ths form n trpcate for each empoyee (a) from
whom ncome ta has been wthhed durng the year or (b)
whose wages, for purposes of ncome ta wthhodng, e -
ceeded the amount of one wthhodng e empton for any pay-
ro perod (even though no ncome ta was wthhed).
2. F n
(a) the empoyee s name, address, and Soca Securty
account number;
(b) tota F. I. C. . wages pad before any payro deductons;
(c) the amount of F. I. C. . empoyee ta deducted and
wthhed, f any;
(d) tota wages, for purposes of ncome ta wthhodng, pad
before any payro deductons;
(e) the amount of ncome ta deducted and wthhed, f any;
and
(f) your name, address, and dentfcaton number.
3. Gve orgna and mpoyee s Copy to empoyee.
. Forward ths trpcate copy and a other trpcate copes,
together wth your yeary Reconcaton Statement, Form W-3,
to your Coector of Interna Revenue wth your mpoyer s
uartery Federa Ta Return (Form 9 1) for the fourth
quarter of the caendar year (or wth your fna return).
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FormW-2b WIT OLDING ST T M NT 19 1 COPY
Interna Revenue Servce Wages Pad and Income and F. I. C. . Ta es Wthhed
MPLOY TO W OM P ID (Prnt name, fu addrers, and Soca Securty account number)
TotaF.I.C. . wages (beforepay-
ro deductons) pad n 19 1
F. I. C. . empoyee ta wthhed,
f any
INfORM T ON FOR INCOM T R TURN
ductons) pad n 19 1
Federa ncome ta wthhed,

f any
MPLOY R Y W OM F ID (Name, address, ard dentfcaton number)
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127 Regs. 116, 0 .Oo.
Secton 1627: Other aws appcabe.
Reguatons 116, Secton 0 .601: Return and
payment of ncome ta wthhed on wages.
Fng date of the empoyer s quartery ta return (Form 9 1) n cer-
tan cases. (See T. D. 79 , page 1.)
Reguatons 116, Secton 0 .60 : Penates
for fase returns.
Fase returns, penates for. (See T. D. 79 , page 2.)
Reguatons 116, Secton 0 .60 : Use of Gov-
ernment depostares n connecton wth pay-
ment of ta es.
Depostares n connecton wth payment of ta es. (See T. D. 79 ,
page 2.)
Reguatons 116, Secton 0 . 02: Interest.
vded under secton 1631. (Sse T. D. 79 , page 2.)
Reguatons 116, Secton 0 . 0 (a) : dd-
Secton 1631: Faure of empoyer to fe return
or pay ta .
Reguatons 116, Secton 0 . 0 : Mnmum
addton to the ta .
Mnmum penaty reduced from 10 to . (See T. D. 79 , page
C PT R 9, SU C PT R . G N R L PRO ISIONS
Reguatons 116.
Page 97.)
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MISC LL N OUS T RULINGS
ST MP T S
INT RN L R NU COD
Reguatons (193 ), rtces 11 and 12 . 19 0-20-13 0
T. D. 17
TITL 2G INT RN L R NU . C PT R I, SU C PT R C. T RT 1 0.
T S ON TO CCO. SNUFF, CIG RS, CIG R TT S, CIG R TT P T RS ND
TU S, ND PURC S ND S L OF L F TO CCO
Stamps attached n foregn countres to certan tobacco products
Washngton, D. C.
To Coectors of Interna Revenue a d Others Concerned:
In order to conform Reguatons 26 CFR, part 1 0 , reatng to
the ta es on tobacco, snuff, cgars, and cgarettes, cgarette papers
and tubes, and purchase and sae of eaf tobacco to secton ( 0 of the
Revenue ct of 19 0 (Pubc Law 1 , ghty-frst Congress, second
sesson), approved September 23, 19 0, such reguatons, but ony as
prescrbed and made appcabe to the Interna Revenue Code by
Treasury Decson C. . 1939-1 (part 1), 390 . approved Feb-
ruary 11,1939 20 CFR, Cum. Supp., page 70 , are amended, effec-
tve November 1,19 0, as foows:
Paragraph 1. There s nserted mmedatey precedng artce 11
26 CFR 1 0.11 the foowng:
S C. 2103. ST MPS. (INT RN L R NU COD .)

(c) Suppy. The stamps provded for under secton 2002(a) (1) sha
be furnshed to the coectors requrng them, and each coector sha
keep at a tmes a suppy equa n amount to three months sae thereof,
and sha se the same ony to the manufacturers of tobacco and snuff
n ther respectve dstrcts who have gven bonds as requred by aw,
and to owners or consgnees of tobacco or snuff, upon the requston of
the proper customhouse offcer havng the custody of such tobacco or
snuff.

S C. 60S. LLOWING ST MPS TO TT C D IN FOR IGN
COUNTRI S TO C RT IN TO CCO PRODUCTS. R -
NU CT OF 19 0 (PU LIC L W 1 , IG TY-FIRST CON-
GR SS), PPRO D S PT M R 23, 19 0.
(a) Tobacco and Snuff. Secton 2103(c) (reatng to suppy of
stamps) s hereby amended by addng at the end thereof the foowng
new sentence: If the government of a foregn country permts the reve-
nue stamps of such country to be aff ed n the Unted States to
(129)
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Regs. (193 ), rts. 11 , 12 . 130
tobncco or snuff manufactured In the Unted States and toported nto
such foregn country, then, f tobacco or snuff manufactured n such
foregn country s mported nto the Unted States from such foregn
country, the mporter may, under such rues and reguatons as the Sec-
retary may prescrbe, have the Unted States revenue stamps attached
to such tobacco or snuff n such foregn country.
(b) Cgars. The second sentence of secton 2112(c) (reatng to
attachng stamps to cgarettes n foregn countres) s hereby amended
by strkng out cgarettes wherever appearng theren and nsertng n
eu thereof cgars or cgarettes .
(c) ffectve Date. The amendments made by ths secton sha take
effect on the frst day of the frst month whch begns more than ten
days after the date of the enactment of ths ct.
Par. 2. rtce 11 . as amended by Treasury Decson 209 C. .
19 3, 1171 , approved anuary , 19 3 26 CFR 1 0.11 , s further
amended by changng the ast sentence of the frst paragraph to read
as foows:
In accordance wth the provsons of artce 12 T26 CFR 1 0.12 a , stamps to
cover a partcuar mportaton of tobacco, snuff, cgars, or cgarettes may aso
be sod to the mporter for attachment In the country of manufacture.
Par. 3. There s nserted mmedatey precedng artce 12 26
CFR 1 0.12 the foowng:
S C. 2103. ST MPS. INT RN L R NU COD .

(c) Suppy. The stamps provded for under secton 2002(a)(1)
sha be furnshed to the coectors requrng them, and each coector
sha keep at a tmes a suppy equa n amount to three months sae
thereof, and sha se the same ony to the manufacturers of tobacco and
snuff n ther respectve dstrcts who have gven bonds as requred by
aw, and to owners or consgnees of tobacco or snuff, upon the requston
of the proper customhouse offcer havng the custody of such tobacco or
snuff.

S C. 60 . LLOWING ST MPS TO TT C D IN FOR IGN
COUNTRI S TO C RT IN TO CCO PRODUCTS. R NU
CT OF 19 0 (PU LIC L W 1 . IG TY-FIRST CONGR SS),
PPRO D S PT M R 23, 19 0.
(a) Tobacco and Snuff. Secton 2103(c) (reatng to suppy of
stamps) s hereby amended by addng at the end thereof the foowng
new sentence: If the government of a foregn country permts the rev-
enue stamps of such country to be aff ed n the Unted .States to tobacco
or snuff manufactured u the Unted States and mported nto such for-
egn country, then, f tobacco or snuff manufactured In such foregn coun-
try s mported nto the Unted States from such foregn country, the
mporter may, under such rues and reguatons as the Secretary may pre-
scrbe, have the Unted States revenue stamps attached to such tobacco
or snuff n such foregn country.
(b) Cgars. The second sentence of secton 2112(c) (reatng to
attachng stamps to cgarettes n foregn countres) s hereby amended
by strkng out cgarettes wherever appearng theren and nsertng
n eu thereof cgars or cgarettes .
(c) ffectve Date. The amendments made by ths secton sha take
effect on the frst day of the frst month whch begns more than ten
duys after the date of the enactment of ths ct.
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131 Regs. (193 ), rts. 11 , 12 .
Par. . rtce 12 , as added by Treasury Decson 209 2G CFR
1 0.12 a , s amended to read as foows:
rt. 12SI - 20 CFR 1 0.12 a. Sae op Tobacco Products Stamps to Import-
ers fob ff ture n Foregn Countres. On and after November 1, 10 2,
stamps n payment of the ta on mported cgarettes, and on and after November
1,19 0, stamps n payment of the ta on mported tobacco, snuff, and cgars, may
be aff ed to such artces n the foregn country n whch manufactured, pro-
vded the aws of such foregn country grant a ke prvege n respect of sm-
ar artces manufactured n the Unted .States e ported to such foregn country.
n mporter desrng to have the stamps n payment of the ta on mported
tobacco, snuff, cgars, and cgarettes aff ed to such products n the foregn
country from whence mported sha fe wth any coector of nterna revenue
an order for the necessary stamps. No partcuar form for such order s
prescrbed, but the order sha show (1) the name and address of the person by
whom such products are to be mported, (2) the name of the foregn country from
whence the products w be mported, (3) the quantty of each such product to
be Imported, and ( ) the number, cass, and vaue of the stamps of each denomna-
ton, the tota vaue of a the stamps and bow they shoud be sent to the
purchaser. ach order must be accompaned by the proper remttance for the
fu amount of the order. Uness otherwse drected, stamps w be sent by
ordnary ma at the rsk of purchaser. If ordered to be sent by regstered
ma, the order must be accompaned by an addtona amount suffcent to pay
the regstry fee.
Upon recept of the order and remttance specfed n the precedng paragraph,
the coector may f the order, provded t has been estabshed by offca rung
that the foregn country named n the order permts ts revenue stamps to be
aff ed n the Unted States to smar tobacco products manufactured n ths
country and mported nto such foregn country. In a other cases, the coector
sha transmt the order to the Commssoner of Interna Revenue for approva.
Stamps n payment of the ta on mported tobacco, snuff, cgars, and cgarettes
aff ed to such products n the foregn country from whence mported may be
canceed n such foregn country n eu of canceaton whe the products are
n customs custody as requred by artce 12 20 CFR 1 0.12 . In a other
respects, the mportaton of such products must be made n compance wth a
provsons of aw and these reguatons reatng to the mportaton of the products
from foregn countres.
secton 3791 of the Interna Revenue Code and secton G0 of the
Revenue ct of 19 0 ( 3 Stat. 67; secton 60 , Pubc Law 1 ,
ghty-frst Congress; 26 U. S. C. 3791).)
ecause the soe purpose of the amendments made heren s to
reeve restrctons, t s found that t s unnecessary to ssue ths
Treasury Decson wth notce and pubc procedure thereon under
secton (a) of the dmnstratve Procedure ct, approved une 11,
19 6, or sub|ect to the effectve date mtaton of secton (c) of
sad ct.
Geo. . Schoeneman,
pproved December , 19 0.
Thomas . Lynch,
(Ped wth the Dvson of the Federa Regster December S, 10 0, : 7 a. m.)
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Regs. 3 (192 ).
132
Reguatons 3 (192 ). 19 0-26-13 07
T. D. 1
WIT DR W L OF PILL D C S , PL TING C RDS, TO CCO. SNUFF,
CIG RS, ND CIG R TT S, FROM F CTORI S, FR OF T , FOR US OF
T UNIT D ST T S
Transportaton and devery bonds for payng cards; emnaton
of oeomargarne.
Treasurt Department,
Washngton 2 , D. C.
Reguatons 3 (Revsed anuary 192 ) 26 CFR, part 0 , but
ony as prescrbed and made appcabe to the Interna Revenue Code
by Treasury Decson C. . 1939-1 (part 1), 39 , approved
February 11,1939 note, 26 CFR, Cum. Supp., page 7 , are amended
as foows:
Paragraph 1. The capton mmedatey foowng the tte Regu-
atons No. 3 , Revsed s amended to read as foows:
Reguatons Governng the Wthdrawa of Fed Cheese, Patng Cards,
Tobacco, Snuff. Cgars, and Cgarettes, From Factores, Free of Ta , fob
Use of the Unted States.
Par. 2. The frst sentence of the paragraph as amended bv Treasury
Decson 0 C. . 19 , , approved February 27,19 26 CFR
0.0 precedng artce 1 26 CFR 0.1 s further amended by
strkng out oeomargarne, .
Par. 3. rtce 2, as amended by Treasury Decson 0 26 CFR
0.2 , s further amended to read as foows:
rt. 2. 26 CFR 0.2. ond. Transportaton and devery bonds w not be
requred for the wthdrawa free of ta of fed cheese, tobacco, snuff, cgars,
and cgarettes, for use of the Unted States. The manufacturers bond of manu-
facturers makng such wthdrawas w be hed responsbe for any ta abty
Incurred under the reguatons n ths part. manufacturer of payng cards
s not requred to fe a manufacturer s bond, but before wthdrawng payng
cards under the reguatons n ths part must furnsh a transportaton and
devery bond n dupcate on Form 66 wth satsfactory suretes. The pena
sum of the bond must be suffcent to cover the estmated amount of ta whch
w at any tme consttute a charge aganst the bond, and n no case be ess than
00. The abty under such bond w be a contnung one, sub|ect to ncrease
as successve wthdrawas are made thereunder and to decrease as evdence of
recept, herenafter requred, s receved by the coector. When the mt of
abty under any such bont . has been reached, no further wthdrawas may be
made thereunder; a new bond n dupcate must be fed under whch subsequent
wthdrawas w be made. The bond sha state the ocaton of the factory,
ncudng the dstrct and State, from whch the wthdrawa s to be made. When
a transportaton and devery bond, n dupcate, s submtted to the coector,
he w, f the bond meets hs approva make Indorsement to that effect on both
the orgna and dupcate copes and forward the dupcate bond mmedatey to
the Commssoner of Interna Revenue. The bonds may be e ecuted by corporate
surety or ndvdua suretes; f gven wth ndvdua suretes, each ndvdua
surety w be requred to furnsh affdavt n dupcate on Form 33, whch w
be attached to the orgna and dupcate bond, respectvey.
Par. . The second sentence of artce 3 26 CFR 0.3 s amended
by strkng out and n the case of oeomargarne, the number of nner
packages, f any, .
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133
Regs. 71 (19 1), 113.3 , etc.
Par. . rtce , as amended by Treasury Decson 0 26 CFR
0. , s further amended by strkng out paragraph (a), and by re-
etterng paragraphs (b), (c), and (a) as (a), (b), and (c), respec-
tvey.
Par. 6. rtce , as amended by Treasury Decson 0 2G CFR
0. , s further amended by strkng out oeomargarne, from the
second sentence of the second subparagraph of paragraph (a).
secton 3331 of the Interna Revenue Code ( 3 Stat. 03, U. S. C.
3331).)
ecause the purpose of ths Treasury Decson s to reeve restrc-
ton, t s found that t s unnecessary to ssue such Treasury Decson
wth notce and pubc procedure thereon under secton (a) of the d-
mnstratve Procedure ct, approved une 11, 19 6, or sub|ect to the
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster December 12, 19 0, : a. m.)
Reguatons 71 (19 1), Sectons 113.3 , tc. 19 0-17-13 09
T. D. 799
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT 113.
DOCUM NT RY ST MP T S
empt transfers between corporatons and ther nomnees
emnaton of returns of brokers and deaers n stocks and bonds.
Washngton 2 , D. C.
In order to conform Reguatons 71 (19 1 dton) 26 CFR, Part
113 , to the provsons of secton of Pubc Law 37 ( ghty-frst
Congress, frst sesson), approved October 2 , 19 9, and n order to
emnate the requrement of fng a monthy return on Form 3 by
brokers and by deaers n stocks and bonds, such reguatons are
amended as foows:
Paragraph 1. Immedatey precedng secton 113.30 26 CFR
113.30 there s nserted the foowng:
PU LIC L W 37 ( IG TY-FIRST CONGR SS, FIRST S SSION),
PPRO D OCTO R 2 , 19 9
S C. . TR NSF RS OF STOC TW N CORPOR TION ND
NOMIN .
(a) Secton 1 02(b) of the Interna Revenue Code (reatng to stamp
ta es on saes and transfers of stock) s hereby amended by strkng out
the perod at the end of cause (2) and nsertng n eu thereof a sem-
coon, and by nsertng after cause (2) the foowng new cause:
(3) From a corporaton to a regstered nomnee of such cor-
poraton, or from one such nomnee to another Fuch nomnee, f n
ether case the shares or certfcates contnue to be hed by such
nomnee for the same purpose for whch they woud be hed f
retaned by such corporaton; or from such nomnee to such cor-
poraton.
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Regs. 71 (19 1), 113.3 , etc. 13
(b) In the case of the death before the date of the enactment of ths
ct of a nomnee of a corporaton (whether or not such nomnee was
regstered), the ta under secton 1 02(b) of the Interna Revenue Code
sha not be Imposed upon any devery or transfer of stock from the
e ecutor or admnstrator of such nomnee to such corporaton f such
devery or transfer s made on or before the date of the enactment of
ths ct or wthn one year after such date.
Par. 2. Secton 113.3 , as amended by Treasury Decson 613
C. . 19 -1,133 , approved pr 27,19 26 CFR 113.3 , s fur-
ther amended as foows:
( ) y changng the desgnatons of paragraphs (g) and ( )
to ( ) and () respectvey, by substtutng (g) for (/) n the frst
sentence of the redesgnated paragraph (), and by changng ( )
as t occurs n subsectons (a) to (/) ncusve to ( ) .
( ) y nsertng a new paragraph (g) as foows:
(g) Transfer/ between corporatons and ther nomnees. The ta does not
appy to the devery or transfer of stock from a corporaton to a regstered
nomnee of such corporaton, or from one such nomnee to another such nomnee,
f n ether case the shares or certfcates contnue to be hed by such nomnee for
the same purpose for whch they woud be hed f retaned by such corporaton;
or from such nomnee to such corporaton. No e empton s granted uness the
nomnee s regstered n the manner provded n secton 113.1 3 26 CFR 113.1 3 .
In the case of the death before October 2 , 19 9, of a nomnee of a corporaton
(whether or not such nomnee was regstered), the ta sha not appy to the
devery or transfer of stock from the e ecutor or admnstrator o such nomnee
to such corporaton f such devery or transfer s made on or before Octo-
ber 2 , 19 0.
The e empton specfed In ths subsecton sha not be granted n any case
uness the devery or transfer s accompaned by an e empton certfcate,
e ecuted by the person makng the e empt transfer, In substantay the form
prescrbed In subsecton ().
Par. 3. Secton 113.1 3 26 CFR 113.1 3 s amended by deetng
the thrd paragraph thereof and nsertng n ts pace the foowng
two paragraphs:
ny corporaton may appont some person to act as nomnee n hodng stock
on ts behaf.
The name of the person apponted as nomnee of a broker, custodan, or cor-
poraton sha be regstered wth the coector for the dstrct n whch the
prncpa offce of the broker, custodan, or corporaton Is ocated. Substtuton
of a nomnee may be effected by kewse regsterng the name of the successor
nomnee.
Par. . Secton 113.1 26 CFR 113.1 s amended by deetng
from the thrd paragraph thereof the words broker or custodan
wherever such words appear and nsertng n eu thereof the words
broker, custodan, or corporaton .
Par. . Sectons 113.39 26 CFR 113.39 and 113.69 26 CFR
113.69 are deeted.
secton 3791 of the Interna Revenue Code ( 3 Stat. 67; 26 U. S. C.
3791).)
ecause the purposes of ths Treasury Decson are merey to con-
form the reguatons to the provsons of secton of Pubc Law 37
( ghty-frst Congress, frst sesson), e emptng from stamp ta cer-
tan deveres and transfers of stock, and to emnate the fng of
monthy returns by brokers or deaers n stocks or bonds, t s found
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13
Rogs. 71 (19 1), 113. 3.
that t s unnecessary to ssue ths Treasury Decson under secton
(a) of the dmnstratve Procedure ct, approved une 11, 19 G,
or sub|ect to the effectve date mtaton of secton (c) of sad ct.
Fred S. Martn,
Thomas . Ltnch,
(Fed wth the Dvson of the Federa Regster ugust 7, 10 0, : 1 a. m.)
S CTION 3 2. CON Y NC S
Reguatons 71 (19 1), Secton 113. 3: Convey- 19 0-1 -13393
ances sub|ect to ta . Ct. D. 1733
ST MP T S INT RN L R NU COD D CISION OF COURT
1. Ta on Conveyances O and Gas Leases Okahoma and
ansas.
O and gas eases and assgnments of o and gas eases of ands
n Okahoma and ansas consttute reaty for documentary stamp
ta purposes and are sub|ect to the ta on conveyances mposed by
sectons 3 0 and 3 2, Interna Revenue Code.
2. Cebtorab Dened.
Petton for certorar dened February 20, 19 0 ( 339 U. S. 90 ).
Unted States Court of ppeas, Tenth Cmcurr
Phps Petroeum Co., a Corporaton, appeant, v. . C. ones, Coector of
Interna Revenue, appeee
176 Fed. (2d) 737
ppea from the Unted States Dstrct Court tor the Western Dstrct of Okahoma
efore Phps, Chef udge, and u man and Mubbah, Crcut udges
ugust 2, 19 9
opnon
Mubbah, Crcut udge, devered the opnon of the court.
The soe queston here s whether the conventona thereafter and uness
Okahoma o and gas ease s wthn the ncdence of sectons 3 0 and 3 2, Tte
2G U. S. C. ., whch, together mpose a documentary stamp ta upon a deed, n-
strument, or wrtng whereby any auds, tenements, or other reaty sod
sha be granted, assgned, transferred or otherwse conveyed .
Durng the years 19 2, 19 3, 19 and 19 , ncusve, the Phps Petroeum
Co. purchased o and gas eases n Okahoma, whch by ther terms granted and
eased e cusvey unto Phps descrbed and for the purpose of nvestgatng,
e porng, prospectng, drng, and mnng for and producng o, gas and a
other mneras for a stpuated prmary term (usuay years), and
as ong thereafter as o, gas or other mnera s produced from sad and
hereunder. The eases aso generay provded that the ease woud termnate
at the end of 1 year, uness a we was commenced thereon and dred wth
due dgence, or n eu thereof annua stpuated rentas pad for the prmary
term of the ease.
On the premse that these eases sod and conveyed ands, tenements, or other
reaty, the Commssoner assessed the stamp ta , whch Phps pad n an
agreed amount under protest, and brought ths sut aganst the coector to
recover. It was aeged and contended that snce, under controng Okahoma,
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Regs. 71 (19 1), 113. 3.
136
ansas, of Federa aw, an o and gas ease s not reaty, but a mere rght or
prvege to go upon the and to e pore, produce and convert the o to the essee s
possesson as persona property, the e ecuton of a ease, or an assgnment
thereof, on ands n Okahoma and ansas does not consttute a sae of ands,
tenements, or other reaty wthn the meanng and purposes of the ta ng act.
Phps has appeaed from a udgment n favor of the coector.
The ta ng act was orgnay enacted n 1917, and reenacted n amost dent-
ca anguage by each succeedng Congress unt 1926. It was agan reenacted n
1932, and a subsequent Congresses, unt 19 1, when t was made a permanent
ta . See Stat. 706, secton 0 . From 1920 unt 1926, and from 1932 unt
19 1, appcabe Treasury reguatons (Regs. 71, art. ) provded that ( ) What
consttutes ands, tenements, or other reaty s determnabe by the aw of
the State n whch the property s stuated . Pursuant to ths nter-
pretaton of the statute, and appyng the aw of Okahoma and ansas, the
Treasury rued at varous tmes durng ths perod that o and gas eases, and
assgnments thereof, were not sub|ect to the stamp ta n Okahoma and ansas.
egnnng n 19 1, however, the appcabe Treasury reguatons omtted any
defnton of the crtca phrase ands, tenements or other reaty, and on ugust
31, 1912, by Genera Counse Memorandum No. 2329 , the ureau of Interna
Revenue repudated artce of Reguatons 71, by rung that what consttutes
ands, tenements, and other reaty for purposes of the stamp ta abty was
not controed by State aw, and paraphrasng Mr. ustce Stone n urnet v.
ormc, 2 7 U. S. 103 Ct. D. 611, C. . I-2, 210 (1932) , rued that henceforth
reference woud be made to State aw to determne the character of the rghts
conveyed, but whether conveyances of such rghts were ta abe woud be
determned under Federa aw. The memorandum went on to state that for
the purposes of determnng abty for stamp ta , the phrase ands, tene-
ments, or other reaty embraces those nterests whch endure for a perod of
tme, the termnaton of whch s not f ed or ascertaned by a specfc number
of years, such as an estate n fee smpe, fe estate, perpetua easement, etc., and
those nterests endurng for a perod of years but whch ether by reason of the
ength of the term or the grant of a rght to e tend the term by renewa or other-
wse, convey a bunde of rghts appro matng those of the cass of nterest frst
above mentoned. Thus, for e ampe, a ease of rea estate for 999 years, or a
ease for 99 years renewabe forever or for severa succeedng terms s ta abe.
On the other hand, a ease for years s not ta abe even f the rght s granted
to renew t for severa successve terms. Ths rue was e pressy made pro-
spectvey appcabe n determnng abty under the ta ng statute, and t was
under ths authorty that the Commssoner mposed the ta es nvoved here.
On appea, Phps frst Invokes the so-caed reenactment rue, contendng
that under we-setted prncpes appcabe to revenue acts, the repeated and
consstent reenactment of the ta ng statute as admnstratvey nterpreted
froze the admnstratve nterpretaton nto the act, and the Commssoner s
wthout authorty to gve t another an dfferent meanng upon whch ta abty
depends, wthout congressona sancton, ctng Unted States v. Ccreccdo
Iermanos Y. Compana. 209 U. S. 337; everng v. R. . Reynods Tobacco Co.,
306 U. S. 110 Ct. D. 13 3, C. . 1939-1 (Part 1), 22 ; McFeey v. Commssoner,
296 U. S. 102 Ct. D. 10 0, C. . 1 -2, 209 (193 ) . The ta payer adopts the
argument of the Commssoner n Morroc v. Seofed, 116 Fed. (2d) 17, to the
effect that State aw does contro ta abty, and that undoubtedy under the aw
of Okahoma and ansas, an o and gas ease cannot be cassfed or egay
characterzed as reaty or an nterest theren.
Indsputaby, Okahoma and ansas, wthout devaton have hed that an o
and gas ease s a chatte rea, a proft a prendre, or an ncorporea heredtament,
whch grants ony the e cusve rght, sub|ect to egsatve contro, to e pore
by drng operatons; to reduce to possesson, and thus acqure tte to the
o and gas, whch s personaty. See cases cted n Contnenta Suppy Co. v.
Marsha, 1 2 Fed. (2d) 300. For ansas decsons, see Conne v. anwa O,
Inc., 170 P. 2d 631; Wson v. om, 1 P. 2d 99. In Okahoma, t Is sad that
whe an o and gas ease creates an estate n reaty, that Interest or estate
s not rea estate wthn the meanng of the Okahoma statute reatng to the
sae of reaty. Duff v. caton, 12 P. 291; see aso State v. Shombn, 90 P.
2d 10 3.
ut ta statutes and ta reguatons have never been statc. perence,
changng needs, changng phosophes nevtaby produce constant change n
each. everna v. Wshre O Co., 30 U. S. 90 Ct D. 1 2 , C. . 1939-2,
213 . In that ease, the Supreme Court confned the reenactment roe to The
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137
Regs. 71 (10 1), 113. 3.
stuaton where the vadty of admnstratve acton standng by Itsef may
be dubous or where ambgutes n a statute or rues are resoved by reference
to admnstratve practce pror to reenactment of a statute; and where t does
not appear that the rue or practce has been changed by the admnstratve agency
through e ercse of ts contnung rue-makng power. Id. p. 100. It s sad
that where the admnstratve agency s possessed of a contnung rue-makng
power, as s the Commssoner of Interna Revenue, the court shoud not ham-
strng t by prohbtng future changes In rues, prospectve In character, smpy
because the doctrne of admnstratve constructon receves egsatve approva
by a statutory provson wthout matera change. Id. See aso Whte v.
Wnchester Cub, 31 U. S. 32 Ct. D. 1 3 , C. . 19 2-1, 2721 ; Morrssey v. Com-
mssoner, 206 U. S. 3 Ct. D. 100 , C. . -1. 20 (193 ) ; Contnenta O
Co. v. ones 10C , decded une 20,19 9,176 Fed. (2d) 19.
The Wshre case ns bren roundy crtczed n o. T,, Coumba Law Re-
vew, February 10 0, p. 2 2, the argument beng that there s or shoud be a
dstncton between nterpretve and egsatve reguatons. It s suggested,
wth good reason, that the deegated power to promugate egsatve reguatons
necessary contempates the power to change them wthout congressona ap-
prova, so ong as they do not dstort the broad egsatve purpose. ut the
power to amend or change nterpretve reguatons, havng the effect of changng
the congressona meanng after reenactment. Is In effect a repudaton of the
congressona ntent. Suffce It to say that the Wshre case makes no such
dstncton, and we are bound by the decson, not the crtcsm.
Courts have emphaszed the desrabty of unformty In the Naton-wde
scheme of ta aton, and have accordngy made State aw appcabe ony when
the Federa ta ng act, by e press anguage or necessary Impcaton, makes
ts own operaton dependent upon State aw. urnet v. arme, supra. Thus,
when the Ffth Crcut bad before t the appcabty of ths ta ng net to a
Te as o and gas ease (under the aw of whch State the e ecuton of a ease
conveyed a present nterest n the and covered thereby), the court sad that the
comprehensve anguage of the Federa statute made manfest the ntenton of
Congress to requre the aff ng of stamps to nstruments of ths knd, wthout
regard to the partcuar ega effects and consequences whch mght he nttached
to them by aws of a partcuar State. Morrow v. Reofcd, supra. The cha-
enged G. C. Memorandum was undoubtedy nfuenced by the hodng nnd the
phosophy of the arme and Scofed cases, and was ntended to brng the
Treasury rung n harmony wth the pronouncement n those cases.
Concedng arguendo that oca aw s not decsve, t s suggested that Okahoma
and ansas aw s taken from the earer Federa decsons, . e., Oho O Co v.
Indana, 177 U. S. 190; Rch v. Doneghc|. 177 P. 6, 3 . L. R. 3 2; e ander v.
ng, 6 Fed. (2d) 23 , 23 , consequenty the ease n queston, when |udged
by Federa aw, cannot be construed as reaty wthn the meanng of the ta ng
act. In that same connecton, t s earnesty contended that the rung of the
Commssoner and the udgment of the tra court fes n the face of the
phosophy of urnet v. arme, supra, e ander v. ng, supra, and other cases
hodng that the nta bonuses for an o and gns ease or the proceeds of the
producton therefrom, s not capta gan wthn the meanng of secton 20S(a) (1)
of the Revenue ct of 192 , 3 Stat. 202, defnng capta gan as the sae or
e change of capta assets. See nnot. 12 . L. R. 773. The arme case
nvoved ease bonuses and the proceeds of the producton of o from a Te as o
and gas ease. The ta payer took the poston that snce, under Te as aw, an
o and gas ease passed tte to the o and gns n pace as reaty, the ease
bonuses and ncome from the producton of the ease represented capta gans
and not ordnary ncome. The court hed that rrespectve of any oca char-
acterzaton of the payments, producton of o under the ease was ony an
Incdent to the use of the and t conveyed, and coud not be vewed as a sae or
converson of capta assets. y anaogy, t s argued that f the producton from
a ease cannot be vewed as a capta gan, the sae of the ease certany shoud
not be hed to be a sae of reaty wthn the meanng of the documentary stamp
ta . nd ths s especay true where t s shown that ess than 1 percent of
the o and gas eases taken n Okahoma and ansas are e tended beyond ther
prmary term by operaton of the thereafter or uness provsons of the ease.
ut the nfuence of the arme and ng cases s greaty dmnshed, f not
whoy nufed, when t s consdered that regardess of oca characterzatons,
the outrght sae of an o and gas ease, when hed for the statutory perod,
consttutes a converson of capta assets. See nderson v. Icvcrng, 310 T . S.
23 30 1 10 - .
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Regs. 71 (19 1), 113. 3.) 13
0 , 0 Ct. D. 1 6, C. . 19 0-1, 10 ; McLean v. Commssoner, 120 Fed. (2d)
9 2; Commssoner v. Femng, 2 Fed. (2d) 32 ; nderson v. Commssoner, 1
Fed. (2d) 7; Mertens Law of Income Ta , sectons 22.2 , 2 .2 , 2 .2 and 2 .26.
It may be conceded that when |udged by the aws of the States of Okahoma
and ansas, or the genera Federa aw, an o and gas ease s not reaty or an
estate theren. ut even so, we are concerned ony wth the meanng and app-
caton of a Federa e cse ta , mposed by Congress n the e ercse of ts penary
power under the Consttuton. It s the w of Congress whch contros, an n
the absence of e press anguage to the contrary, the act s to be nterpreted to
gve unform appcaton to a Naton-wde scheme of ta aton. The crtca
anguage n the act s undoubtedy taken from State rues of property, havng
ther geness n ngsh feuda aw. Its technca defnton beongs to antquty,
but t takes ts coor and content from modern busness practces and the era
reatonshps they create. Cf. ones v. Magrudcr, 2 Fed. Supp. 193. Thus,
whe cngng to the technca common aw defntons, the Okahoma courts
have nevertheess hed that an o and gas ease s wthn the statute of frau.s
appcabe to rea estate; ts conveyance by a corporaton s requred to be
attested by ts secretary n accordance wth a statute reatng to rea estate;
t s a conveyance wthn the homestead aws of the State; and t s a grant of
rea property wthn the meanng of the Okahoma statute reatng to breaches
of covenants n a grant of an estate of rea property. It has been hed that an
e cepton n a deed of conveyance reservng unto the grantor the o and gas, s a
reservaton of an nterest n aud; t s a proper sub|ect of an equtabe pro-
ceedngs to quet tte; the pedge of unaccrued royaty as securty by the essor
of an o and gas ease s a pedge of an nterest n rea estate; and, a mortgage
upon and s a mortgage upon the o and gas n pace as an ncdent to the and
tsef. n assgnment of an o and gas ease requres a of the formates of
a other conveyances of rea estate; t must be recorded as an nstrument reatng
to rea estate to mpart notce; and, a mortgage of an o and gas ease must te
recorded as a rea estate mortgage. See Contnenta Suppy Co. v. Marsha,
1 2 Fed. (2d) 200, and cases coected there.
If an Okahoma o and gas ease s reaty or an nterest theren for a of
the foregong practca purposes, we do not thnk that t s a perverson of ts
true character to say that t s reaty for documentary stamp ta purposes.
The |udgment s affrmed.
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139
(Regs. 1, rt. 2.
M RI U N
INT RN L R NU COD
S CTION 2 90(a)(2). TR NSF RS TO OT RS
Reguatons 1, rtce 2: mount of ta . 19 0-2 -13 9
Ct. D. 173
M RI U N T INT RN L R NU COD D CISION OF SUrR M COURT
Consttutonaty of Ta .
The ta mposed upon the transfer of marhuana under secton
2 90(a) (2) of the Interna Revenue Code s not unconsttutona. It
s a egtmate e ercse of the ta ng power despte ts coatera
reguatory purpose and effect and ts cose resembance to a penaty.
Supreme Coubt of the Unted States
The Unted States, appeant, v. Ms. Mara Mctona Sanchez and rmatd ota,
appeees
On appea from the Dstrct Court tor the Northern Dstrct of Inos
November 13, 10 0
opnon
Mr. ustce Cark devered the opnon of the Court.
Ths s a drect appea, 2S U. S. C, secton 12 2. from dsmssa by the dstrct
court of a sut for recovery of ,701.0 n ta es and nterest aeged to be due
under secton 7(a)(2) of the Mnrhunna Ta ct, 0 Stat. 1, now secton
2 90(a) (2) of the Interna Revenue Code. 2f U. S. C, secton 2 90(a) (2). In
tter moton to dsmss, whch was granted wthout opnon, defendants attacked
the consttutonaty of ths subsecton on the ground that t eved a penaty,
not a ta . The vadty of ths evy s the ssue here.
In enactng the Marhuana Ta ct. the Congress had two ob|ectves: Frst,
the deveopment of a pan of ta aton whch w rase revenue and at the same
tme render e tremey dffcut the acquston of marhuana by persons who
desre t for ct uses and, second, the deveopment of an adequate means of
P bczng deangs n marhuana n order to ta and contro ths traffc
effectvey. S. Rept. No. 900, 7 th Cong, 1st stss., p. 3. To the same effect, see
. R. Rept. No. 792, 7 th Cong., 1st sess., p. 2.
Pursuant to these ob|ectves secton 3230 of the Code mposes a speca ta
rangng from 1 to 2 on every person who mports, manufactures, produces,
compounds, ses, deas n, dspenses, prescrbes, admnsters, or gves away
marhuana. For purposes of admnstraton secton 3231 requres such persons
to regster at the tme of the payment of the ta wth the coector of the dstrct
n whch ther busnesses are ocated. The Code then makes t unawfu wth
certan e ceptons not pertnent here for any person to transfer marhuana
e cept n pursuance of a wrtten order of the transferee on a bank form ssued
by the Secretary of the Treasury. Secton 2 91. Secton 2 90 requres the
transferee at the tme he appes for the order form to pay a ta on such transfer
of 1 per ounce or fracton thereof f he has pad the speca ta and regstered,
secton 2 90(a) (1), or 100 per ounce or fracton thereof f he has not pad the
speca ta and regstered. Secton 2 90(a)(2). The transferor s aso made
abe for the ta so mposed n the event the transfer s made wthout an order
form and wthout the payment of the ta by the transferee. Secton 2 90(b).
Defendants n ths case are transferors.
It s obvous that secton 2 90, by mposng a severe burden on transfers to
unregstered persons, mpements the congressona purpose of restrctng traffc
n marhuana to accepted ndustra and medcna channes. ence the attack
here rests on the reguatory character and prohbtve burden of the secton as
we as the pena nature of th 1 mposton. ut despte the reguatory effect and
the cose resembance to a penaty, t does not foow that the evy s nvad.
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Regs. 1, rt. 2.
1 0
Frst. It Is beyond serous queston that a ta does not cease to be vad
merey beenuse t reguates, dscourages, or even defntey deters the actvtes
ta ed. Sonznsky v. Unted States, 300 U. S. 06, 13-1 (1937) Ct. D. 1217, C. .
1937-1, 3 1 . The prncpe appes even though the revenue obtaned s obvousy
neggbe, Sonznsky v. Unted States, supra, or the revenue purpose of the ta
may be secondary, ampton Co. v. Unted States, 276 U. S. 39 (192S). Nor
dees a a statute necessary fa because t touches on actvtes whch Congress
mght not otherwse reguate. s was ponted out n Magnano Co. v. amton,
292 U. S. 0, 7 (193 ) :
From the begnnng of our Government, the courts have sustaned ta es
athough mposed wth the coatera ntent of effectng uteror ends whch,
consdered apart, were beyond the consttutona power of the awmakers to
reaze by egsaton drecty addressed to ther accompshment.
These prncpes are controng here. The ta n queston s a egtmate e er-
cse of the ta ng power despte ts coatera reguatory purpose and effect.
Second. The ta eved by secton 2 90(a) (2) s not condtoned upon the com-
msson of a crme. The ta s on the transfer of marhuana to a person who
has not pad the speca ta and regstered. Such a transfer s not made an
unawfu act under the statute. Labty for the payment of the ta rests
prmary wth the transferee; but f he fas to pay, then the transferor, as here,
becomes abe. It s thus the faure of the transferee to pay the ta that gves
rse to the abty of the transferor. Snce hs ta abty does not n effect
rest on crmna conduct, the ta can be propery caed a cv rather than a
crmna sancton. The fact Congress provded cv procedure for coecton n-
dcates ts ntenton that the ta be treated as such. evcrng v. Mtche, 303
U. S. 391 (193 ) Ct. D. 1320, C. . 193 -1, 317 . Moreover, the Government s
seekng to coect the evy by a |udca proceedng wth ts attendant safeguards.
Compare Lpke v. Lcdcrcr, 2 9 U. S. 7 (1922) ; Tovar v. areck, 173 Fed. (2d)
9 (C. . 7th Cr. 19 9).
Nor s the cv character of the ta mposed by secton 2 90(a) (2) atered by
ts severty n reaton to that assessed by secton 2 90(a)(1). The dfference
has a ratona foundaton. Unregstered persons are not key to procure the
requred order form pror to transfer or pay the requred ta . Free of sanctons,
deaers woud be prone to accommodate such persons n ther unawfu actvty.
The mposton of equay severe ta burdens on such transferors s reasonaby
adapted to secure payment of the ta by transferees or stop transfers to un-
regstered persons, as we as to provde an addtona source from whch the
e pense of unearthng candestne transfers can be recovered. Cf. evcrng v.
Mtche, supra.
The |udgment beow must be reversed and the cause remanded for further
proceedngs n conformty wth ths opnon.
Reversed.
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1 1
Msc.
M NUF CTUR RS CIS T S
INT RN L R NU COD
S CTION 36 0
19 0-20-13 3
Ct. D. 173
manufacturers e cse ta es nterna revenue code d. s. code
decson of court
Sut fob Damages Persona Labty of Coector fob eged
Iega ssessment and Coecton of Ta .
t the tme of the evy and sezure n queston there were out-
standng n the hands of the coector unpad assessments aganst
ta payer, and the warrant for dstrant under whch evy and sezure
were made was e pressy based upon such assessments. Under these
crcumstances t was wthn the scope of the coector s mnstera
duty to make the evy and coecton, and he cannot be hed answer-
abe In damages for so dong.
Unted States Court of ppeas fob the Thrd Crcut
annah May Potce, appeant, v. Water . Rothenses, Indvduay and as
Former Coector of Interna Revenue for the Frst Dstrct of Pennsyvana
ppea from the Unted States Dstrct Court for the Mdde Dstrct of Pennsyvana
efore Mars, Woodbury and aste, Crcut udges
uy 31, 10 0
OPINION
y Mars, Crcut udge: In ths acton the pantff seeks to recover damages
from the defendant, a former coector of nterna revenue, for the aeged Iega
sezure and sae by hm of certan of her property. It appears that the property
was sezed and sod under an aegedy nvad warrant for dstrant and that
the proceeds were apped to the payment of manufacturer s e cse ta es aeged
to be owng by the pantff to the Unted States. It further appears that n a
pror sut aganst the defendant the pantff recovered back the amount of
the ta es thus pad, t beng determned by the court that the pantff was not
a ta abe manufacturer and, therefore, that the ta es had been egny assessed
and coected. The court In that sut, however, certfed that there was probabe
and reasonabe cause for the act of the defendant n demandng and coectng
the ta . The |udgment obtaned by the pantff was accordngy pad by the
Unted States pursuant to secton 9 9 of the Revsed Statutes.1 t the tra of
the present case the tra |udge drected the partes premnary to confne ther
evdence to the queston of abty. t the concuson of the evdence off red
upon ths queston he drected a verdct for the defendant. The appea now
before us was taken by the pantff from the |udgment entered on that verdct.
The |udgment must be affrmed.
The theory of the pantff s case s that the defendant eved upon, sezed
and sod her property for the coecton of an aeged ta whch had not actuay
been assessed aganst her by the Commssoner of Interna Revenue and that n so
dong the defendant acted whoy outsde the scope of hs dutes and wthout
authorty of aw, and s, therefore, abe to her for the damages she sustaned
by reason of hs act. The dffcuty wth the pantff s theory s that the evdence
does not support t. On the contrary the evdence offered by the pantff hersef
concusvey estabshes that at the tme of the evy and sezure n queston there
were outstandng n the hands of the defendant two unpad assessments aganst
the pantff for manufacturer s e cse ta es and that the warrant for dstrant
under whch the evy and sezure were made was e pressy based upon these
two outstandng unpad assessments, whch wth nterest and penaty then
amounted to ,71 . . Under these crcumstances t was wthn the scope of
the defendant s mnstera duty to make the evy and coecton here n con-
troversy and he cannot be hed answerabe n damages for so dong. The tra
|udge, therefore, rghty drected a verdct for the defendant.
_The |udgment of the dstrct court w be affrmed.
1 Now Incorporated n 2 U. S. C. secton 2006.
- rekne v. ohnbach, 1 71, 1 U. S. 613. 616-617; affn . Mason, 1 72, 2 U. S. 671;
ardng v. Woodcock, 1 90. 137 U. S. 3 : Moore Ice Cream Co. v. Rose, 1933. 2S9 U. S. 373.
3 1-3 3 Ct. D. 676, C. . II-1, 3 1 ; Cooper . O Connor, C. . D. C. 193 , 99 Fed. (2d)
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Regs. 1 (19 1), 320.0, etc. 1 2
R T IL RS CIS T S
INT RN L R NU COD
Reguatons 1 (19 1), Sectons 320.0, 320.2, 19 0-20-13 0S
and 320.3. T. D. 19
TITL 20 INT RN L R NU . C PT R I. SU C PT R C, P RT 320.
R T IL RS CIS T S
Saes by auctoneers or other agents of |ewery and furs; and
saes by the Unted States, ts agences or nstrumentates.
Washngton 2 , D. C.
In order to conform Reguatons 1 2G CFR, part 320 , reatng
to retaers e cse ta under chapters 9 and 19 of the Interna Reve-
nue Code, to the Revenue ct of 19 0 (Pubc Law 1 , ghty-frst
Congress, second sesson), approved September 23, 19 0, such regu-
atons are hereby amended as foows:
Paragraph 1. The subheadng mmedatey precedng the headng
Subpart . Introductory , as amended by Treasury Decson
C. . 19 7-1, 1 7 , approved pr 11, 19 7, s further amended to
read as foows:
Reguatons Reatng to cse Ta es on Saes by the Retaed (Chapters
9 and 19 of the Interna Revenue Code, as mended).
Par. 2. The frst sentence of secton 320.0, as amended by Treasury
Decson , s further amended to read as foows:
Sucton 320.0. Scope of Reguatons. The reguatons contaned n ths part
dea wth e cse ta es mposed by chapter 19 of the Interna Revenue Code, as
added by secton 2 of the Revenue ct of 19 1, and chapter 9 of the Interna
Revenue Code, as added by secton 210 of the Revenue ct of 19 0, and amended
by the Revenue ct of 19 . , the cse Ta ct of 19 7, and the Revenue ct of
19 0, on saes by the retaer of
(a) ewery.
(6) Furs.
(c) Toet preparatons.
(d) Luggage.
Par. 3. Immedatey precedng secton 320.2 26 CFR 320.2 there
s nserted the foowng:
S C. 610. FF CTI D T OF S CTIONS 601. C02,
R NU CT OF 19 0 (PU LIC L W 1 , IG TY-FIRST
CONGR SS, S COND S SSION), PPRO D S PT M R 23,
19 0 .
The amendments made by sectons 601, 602, sha be effec-
tve ony wth respect to artces sod on or after the frst day of the frst
month whch begns more than ten days after the date of the enactment
of ths ct. For the purposes of ths secton an artce sha be consd-
ered as sod pror to such frst day f possesson thereto, or the rght of
possesson thereto, passed to the purchaser before such frst day.
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1 3 Regs. 1 (19 1), 320.0, etc.
Pah. . Secton 320.2, as amended by Treasury Decson 3 3 C. .
19 , 97 , approved March 31, 19 26 CFR 320.2 , s further
amended by addng at the end thereof the foowng:
The provsons of secton 601 of the Revenue ct of 19 0, reatng to saes by
auctoneers or other agents of |ewery and furs; and secton 602 of the Revenue
ct of 19 0, reatng to reta saes by the Unted States, ts agences or nstru-
mentates, become effectve November 1, 19 0.
Par. . Immedatey precedng secton 320.3 26 CFR 320.3 , there
s nserted the foowng:
S C. 601. S L S T UCTION R NU CT OF 19 0 (PU LIC
L W 1 , IG TY-FIRST CONGR SS, S COND S SSION), P-
PRO D S PT M R 23, 19 0 .
Chapter 19 (reatng to retaers e cse ta es) s hereby amended by
addng at the end thereof the foowng new secton:
S C. 2 12. UCTION S L S OF W LRY ND FURS.
(a) In Geneba. For the purposes of sectons 2 00 and 2 01 the
term artces sod at reta ncudes an artce sod at reta by an
auctoneer or other agent n the course of hs busness on behaf of (1)
a person who s not engaged n the busness of seng ke artces, or
(2) the ega representatve of the estate of a decedent who was not
engaged n the busness of seng ke artces. In the case of artces
so sod, the auctoneer or other agent sha, for the purposes of secton
2 03, be consdered the person who ses at reta .
(b) empton of 100 n Case or ucton Sae at Prvate ome.
(1) In the case of an aucton sae hed at the home of a person
whose artces are beng sod, any ta abe artce (as defned In
paragraph (2)) of such person sod by the auctoneer sha be e -
empt from the ta mposed by secton 2 00 or 2 01 e cept to the
e tent that the prce for whch such artce s sod, when added to
the sum of the sae prces of a other ta abe artces of such per-
son prevousy sod at the same aucton, e ceeds 100.
(2) For the purposes of ths subsecton
( ) the term ta abe artce means an artce whch, by
reason of subsecton (a) of ths secton and wthout regard to
the e empton provded n paragraph (1), s ta abe under
secton 2 00 or 2 01 when sod at aucton; and
( ) n the case of artces of a decedent sod on behaf of
the ega representatve of hs estate, an aucton sae hed at
the home of such decedent sha be consdered as hed at the
home of a person whose artces are beng sod .
S C. 602. R T IL S L S Y T UNIT D ST T S OR Y ITS
G NCI S OR INSTRUM NT LITI S R NU CT OF 19 0
(PU LIC L W 1 , IG TY-FIRST CONGR SS, S COND S S-
SION), PPRO D S PT M R 23, 19G0 .
Chapter 19 (reatng to retaers e cse ta es) s hereby amended by
addng after secton 2 12 (added by secton 601 of ths ct) the fo-
owng new secton:
S C. 2 13. S L S Y UNIT D ST T S, TC.
The ta es mposed by ths chapter and by secton IGu sha appy
wth respect to artces sod at reta by the Unted States, or by any
agency or nstrumentaty of the Unted States, uness saes by such
agency or nstrumentaty are by statute specfcay e empted from
such ta es.
Par. 6. Secton 320.3 as amended by Treasury Decson 3 3 26
CFR 320.3 s further amended by addng at the end thereof the
foowng:
On and after November 1, 19 0, artces ta abe as |ewery or furs sod by an
auctoneer or other agent n the course of hs busness on behaf of a person not
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Regs. .1 (10 1), 320.0, etc. 1
engaged n the busness of seng ke artces at reta, or of the ega representa-
tve of such a person sha, for the purposes of sectons 2 00 fnd 2 01 be retarded
as artces sod at reta. Lkewse, such artces sod at reta by an auctoneer
or other agent n the course of bs busness on behaf of the ega representatve
of the estate of a decedent who was not engaged n the busness of seng ke
artces at reta sha be regarded as artces sod at reta. In the case of
such artces so sod the auctoneer or other agent sha, for the purposes of
secton 2 03, be consdered the person who ses at reta, and sha be abe
for the payment of ta and fng of returns.
The provsons of secton 2 12(a) are not mted to aucton saes but are
appcabe to a saes of ta abe fur and |ewery artces at reta by an auctoneer
or other agent n the course of hs busness.
mted e empton n the amount of 100 s provded n the case of an
aucton sae hed at the home of the owner of the |ewery or furs. Thus, for
e ampe, f |ewery were frst sod by an auctoneer at the owner s home for 0
and a fur coat were ne t sod at the same sae for 1 0, the sae of the |ewery
woud be ta -free and the remanng G0 of the 100 e empton woud be apped
aganst the saes prce of the coat, 90 of such saes prce beng sub|ect to ta .
Saes of artces not ta abe under ether secton 2 00 or 2 01 sha not be con-
sdered n appyng the 100 e empton. Ony one e empton s to be aowed
regardess of the perod of tme durng whch the aucton sae takes pace. The
e empton e tends to an aucton sae of artces oZ a decedent hed at the home
of such a decedent.
The ta es mposed by sectons 2 00 (|ewery, etc.), 2 01 (furs), 2 02 (toet
preparatons), and 16 1 (uggage, etc.) are appcabe to any saes at reta by
the Unted States, ts agences or nstrumentates, of artces wthn the scope
of such ta es f made wthn the Unted States (ncudng aska and awa),
uness saes by any such agency or nstrumentaty are by statute specfcay
e empted from such ta es. Thus, reta saes by rmy changes, Navy -
changes, and other smar estabshments are sub|ect to the ta .
For the purpose of secton 2 03, the agency or nstrumentaty, or the person
desgnated by t sha fe returns and pay the ta due on behaf of the Unted
States or the agency or nstrumentaty.
ecause of the short perod of tme between September 23, 19 0,
the date of approva of the Revenue ct of 19 0, and November 1,19 0,
the date on whch, pursuant to such ct, the amendments to chapter
19 become effectve, and because of the technca nature of such amend-
ments, t s found that t s mpractcabe and unnecessary to ssue ths
Treasury Decson wth notce and pubc procedure thereon under
secton (a) of the dmnstratve Procedure ct, approved une 11,
19 0, or sub|ect to the effectve date mtaton of secton (c) of
sad ct.
taned n sectons 3791 and 2 10 of the Interna Revenue Code ( 3
Stat. 07, Stat. 720; 20 U. S. C. 3791,2 10).)
Fred S. Martn,
pproved December 7, 19 0.
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster December 12, 10 0, : 6 a. m.)
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F D R L FIR RMS CT (193 )
19 0-1 -13 17
T. D. 02
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT 31 .
LIC NSING UND R T F D R L FIR RMS CT OF M NUF CTUR RS OF,
ND D L RS IN. FIR RMS OR MMUNITION
Treasury Decson 06 6
Sezures and forfetures
Washngton 26, D. C.
In order to conform to the provsons of the ct approved February
7, 19 0 (Pubc Law 2. ghty-frst Congress, second sesson)
C. . 19 0-1, 2 9 , amendng the Federa Frearms ct, approved
une 30, 193 , as amended ( 2 Stat. 12 0. 3 Stat. 1222, 61 Stat. 11;
1 U. S. C. 901-909), Treasury Decson 6 6 C. . 19 -2, 19 ,
approved uy 26,19 , as amended by Treasury Decson 763 C. .
19 9-2, 13 , approved December 2, 19 9 26 CFR, Part 31 , s
further amended as foows:
Paragraph 1. The second of the paragraphs precedng the tabe of
contents s amended by strkng out the word and mmedatey fo-
owng the semcoon; by strkng out the parenthetca matter Pub-
c Law 1 , 0th Congress and nsertng n eu thereof 61 Stat. 11 ;
and by strkng out I he perod at the end thereof and nsertng n
eu of such perod a semcoon and the foowng: and secton of
such ct as so quoted refects the amendment made by the ct ap-
proved February 7,19 0 (Pubc Law 2, 1st Congress).
Par. 2. Secton 31 .0 s amended by strkng from the quotaton of
the ct Sec. , and nsertng n eu thereof Sec. . (a) and addng
to the quotaton of secton of the ct a new subsecton desgnated
(b) as foows:
(b) ny frearm or ammunton nvoved n any voaton of the provsons of
ths ct or any rues or reguatons promugated thereunder sha be sub|ect to
sezure and forfeture, and a provsons of the Interna Revenue Code reatng
to the sezure, forfeture, and dsposton of frearms as defned n secton 2733
of such Code sha, so far as appcabe, e tend to sezures and forfetures n-
curred under the provsons of ths ct.
Par. 3. Secton 31 .13 26 CFR 31 .13 s amended by strkng out
Sec 31 .13 Penates. , and nsertng n eu thereof Sec. 31 .13 (a)
Genera ; by strkng out Secton n the frst sentence thereof
and nsertng n eu thereof Secton (a) ; and by addng a new
paragraph desgnated (6) as foows:
(6) Forfetures. (1) Pursuant to secton (b) of the ct any frearm
or ammunton nvoved In any voaton of the ct or of these reguatons
s sub|ect to sezure and forfeture, and a provsons of the Interna
Revenue Code reatng to the sezure, forfeture, and dsposton of frearms
as defned n secton 2733 of the Code, so far as appcabe, e tend to
sezures and forfetures ncurred under the provsons of the ct.
(2) Pursuant to Treasury Decson 71 , approved by the Secretary on
Say 22, 19 0, and the Federa Property and dmnstratve Servces ct of
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1 6
19 9, Pubc Law 1 2, ghty-frst Congress, frst sesson, approved une
30, 19 9, any frearm or ammunton forfeted by reason of a voaton
of the Federa Frearms ct or any rues or reguatons promugated there-
under, the forfeture of whch frearm or ammunton has not been re-
mtted or mtgated, sha be devered to the dmnstrator of Genera
Servces for use or dsposton as provded by aw.
secton 7 of the Federa Frearms ct ( 2 Stat. 12 2; 1 t . S. C. 907).)
ecause of the technca nature of the amendments made heren
t s found that t s mpractcabe to ssue ths Treasury Decson wth
notce and pubc procedure thereon under secton (a) of the d-
mnstratve Procedure ct, approved une 11, 19 6, or sub|ect to the
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster ugust 21, 19 0, : 0 a. m.)
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MISC LL N OUS RULINGS
S CTION 3 OF T INSON CT ( ST T. 03, 0 ),
- S M ND D ND SUPPL M NT D
19 0-17-13 07
L T. 022
ppcabty of the proft mtaton provsons (secton 3) of the
nson ct (as amended and suppemented) to (1) mtary and
nava contracts or subcontracts each of whch contans, as requred
by certan statutory provsons, an artce of agreement that It a
sub|ect to the Renegotaton ct of 19 but to whch that Renego-
taton ct, under subsecton (b) thereof, Is eventuay not
appcabe by vrtue of at east 100,000 not havng been receved
or accrued under a such contracts or subcontracts by the contractor
or subcontractor durng any fsca year, and to (2) contracts or
subcontracts whch the Secretary of Defense (or hs deegate) n
hs dscreton has e empted, as authorsed n subsectons (d) and
(g) of the Renegotaton ct of 19 , from the provsons of that
Renegotaton ct.
Secton 622(b) of the Natona Mtary stabshment ppropra-
ton ct, 19 0 (63 Stat. 9 7, 1021; C. . 19 9-2, 2 1), provdes that
the proft mtaton provsons secton 3 of the ct of March 27,
193 ( Stat. 03, 0 ), as amended and suppemented whch ct s
commony known as the nson ct, and s sometmes referred to as
the nson-Tramme ct , sha not appy to any contract or sub-
contract whch s sub|ect to the Renegotaton ct of 19 . dvce
s requested whether certan mtary and nava contracts and sub-
contracts each of whch contans, as requred by (1) subsecton (a)
of the Renegotaton ct of 19 (whch ct s secton 3 of the
Suppementa Natona Defense ppropraton ct. 19 ), by (2)
secton 01 of the Second Defcency ppropraton ct, 19 , or by
(3) secton 622(a) of the Natona Mtary stabshment ppropra-
ton ct, 19 0, an artce of agreement that t s sub|ect to the Rene-
gotaton ct of 19 , are e empt, under secton 622(b) of the Na-
tona Mtary stabshment ppropraton ct, 19 0, supra, from
the proft mtaton provsons of the nson ct (as amended and
suppemented), even though, under subsecton (b) of the Renegota-
ton ct of 19 , that Renegotaton ct s eventuay not
appcabe to the contracts or subcontracts by vrtue of at east 100.-
000 not havng been receved or accrued under a such contracts or
subcontracts by the contractor or subcontractor durng any fsca year.
dvce s aso requested whether, where the Secretary of Defense (or
hs deegate) n hs dscreton has e empted, as authorzed n subsec-
tons (d) and (g) of the Renegotaton ct of 19 , certan contracts
or subcontracts from the provsons of that ct, such contracts or
subcontracts are e empt, under secton 622(b) of the Natona Mtary
stabshment ppropraton ct, 19 0, svpra, from the proft mta-
ton provsons of the nson ct (as amended and suppemented).
(1 7)
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1
Secton 3 of the Suppementa Natona Defense ppropraton ct,
19 (62 Stat. 2 9; C. . 19 -1, 23 ), provdes n part as foows:
Sec. 3. (a) contracts n e cess of 1,000 entered nto under the authorty
of ths ct, obgatng funds approprated hereby, obgatng funds consodated
by ths ct wth funds approprated hereby, or entered nto through contract
authorzatons heren granted, and a subcontracts thereunder n e cess of 1,000
sha contan the foowng artce:
Renegotaton rtce. Ths contract s sub|ect to the Renegotaton ct of
19 and the contractor hereby agrees to nsert a ke artce n a contracts or
purchase orders to make or furnsh any artce or to perform a or any part of
the work requred for the performance of ths contract.
(b) Whenever n the opnon of the Secretary of Defense e cessve profts are
refected under any contract or contracts or subcontract or subcontracts requred
to contan the renegotaton artce prescrbed n subsecton (a), the Secretary s
authorzed and drected to renegotate such contracts and subcontracts for the
purpose of emnatng e cessve profts. e sha endeavor to make an agree-
ment wth the contractor or subcontractor wth respect to the amount, f any, of
such e cessve profts and to ther emnaton. If no such agreement s reached,
the Secretary sha ssue an order determnng the amount, f any. of such e -
cessve profts and sha emnate them by any of the methods set forth n sub-
secton (c) (2) of-the Renegotaton ct of February 2 , 19 , as amended. In
emnatng e cessve profts the Secretary sha aow the contractor or su -
contractor credt for Federa ncome and e cess profts ta es as provded n
secton 3 0C of the Interna Revenue Code. The powers hereby conferred upon
the Secretary sha be e ercsed wth respect to the aggregate of the amounts
receved or accrued under a such contracts and subcontracts by the contractor
or subcontractor durng hs fsca year or upon such other bass as may be
mutuay agreed upon; e cept that ths secton sha not be appcabe n the
event that the aggregate of the amounts so receved or accrued s ess than
100,000 durng any fsca year.

(d) The provsons of ths secton sha not appy to any of the contracts or
subcontracts specfed n subsecton ()() of the Renegotaton ct of Febru-
ary 2 , 19 , as amended, and the Secretary of Defense n hs dscreton. may
e empt from the provsons of ths secton any other contract or subcontract
both ndvduay and by genera casses or types.

(g The powers and dutes hereby conferred upon the Secretary of Defense
may be deegated by hm to any offcer (mtary or cvan) or agency of the
Natona Mtary stabshment.

() Ths secton may be cted as the Renegotaton ct of 19 .
Secton 01 of the Second Defcency ppropraton ct, 19 (62
Stat. 1027,10 9), provdes as foows:
Sec. 01. The Secretary of Defense s authorzed and drected, whenever n
hs |udgment the best nterests of the Unted States so requre, to drect the
nserton of a cause ncorporatng the Renegotaton ct of 19 n any contracts
for the procurement of shps, arcraft, arcraft parts, and the constructon of
factes or nstaatons outsde contnenta Unted States entered nto by or In
behaf of the Department of the rmy, the Department of the Navy or the
Department of the r Force whch obgates any funds made avaabe for
obgaton n the fsca year 19 9.
Secton 622 of the Natona Mtary stabshment ppropraton
ct, 19 0, supra, provdes as foows:
Sec. 622. (a) negotated contracts for procurement n e cess of 1,000
entered nto durng the fsca year 19 0 by or on behaf of the Department of
Defense (ncudng the Department of the rmy, Department of the Navy, and
Department of the r Force), and a subcontracts thereunder n e cess of
1,000, are hereby made sub|ect to the Renegotaton ct of 19 S n the same
manner and to the same e tent as f such contracts and subcontracts were re-
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1 9
Msc.
qured by such ct to contan the renegotaton artce prescrbed n subsecton
(a) of such ct. ach contract and subcontract made sub|ect to the Renegota-
ton ct of 19 by ths secton sha contan an artce statng that t s sub|ect
to the Renegotaton ct of 10 . In determnng whether the amounts receved
or accrued to a contractor or subcontractor durng hs fsca year from contracts
and subcontracts sub|ect to the Renegotaton ct of 19 amount n the aggre-
gate to 100,000. recepts or accruas from contracts and subcontracts made
sub|ect to such ct by ths secton sha be added to recepts or accruas from
a other contracts and subcontracts sub|ect to such ct.
(b) Notwthstandng any agreement to the contrary, the proft mtaton pro-
vsons of the ct of March 27, 103 ( S Stat. 03, 0 ), as amended and suppe-
mented, sha not appy to any contract or subcontract whch Is sub|ect to the
Renegotaton ct of 19 .
In Senate (Commttee on ppropratons) Report No. 7 , ghty-
frst Congress, frst sesson, the foowng s stated regardng the pur-
pose and ntent of secton 022 of the Natona Mtary stabshment
ppropraton ct, 19 0, supra:
Secton 622 sub|ects to the Renegotaton ct of 19 a negotated
contracts n e cess of 1,000, and subcontracts thereunder n e cess of 1,000,
entered nto by or on behaf of the Department of the rmy, the D; pnrtment
of the Navy, or the Department of the r Force durng the fscs year 19 0.
Contracts and subcontracts whch are sub|ected to the Renegotaton ct of
19 by ths secton sha be renegotated aong wth contracts and subcontracts
aready sub|ect to renegotaton under that ct an sha be sub|ect to a
of the provsons of that ct e cept subsecton (a) thereof, n the same man-
ner and to the same e tent as f they had been entered Into under the author-
ty of Pubc Law No. 7, ghteth Congress. In order to resove any doubts
that separate renegotaton of contracts and subcontracts made sub|ect to rene-
gotaton by ths secton s not ntended, t s specfcay provded that the
100,000 mtaton set forth n subsecton (b) of the Renegotaton ct of 19
sha appy to the aggregate of recepts and accruas under a contracts and
subcontracts whch have been or whch are hereby sub| cter to the Renegotaton
ct of 10 . authorty, powers, and dutes e ercsed by or mposed on the
Secretary of Defense wth respect to contracts and subcontracts heretofore
sub|ect to the Renegotaton ct of 19 Sha be appcabe n ke manner to
the contracts and subcontracts hereby made sub|ect to such ct.
Subsecton (b) of ths secton provdes for the suspenson of the appcaton
of the nson-Tramme ct wth respect to any contract or subcontract sub|ect
to the Renegotaton ct of 19 . Ths suspenson s made necessary by the
confctng provsons of the two cts when apped to the same contracts or
subcontracts. The nson-Tramme ct s apped on a competed contract bass.
Renegotaton operates on an over-a fsca year bass and takes nto account
recepts and accruas from a contracts beng performed n a gven fsca year
regardess of ther state of competon. When both cts are apped smuta-
neousy to the same contracts t s necessary to determne for the purpose of
appyng the nson-Tramme ct the porton of the profts determned to be
e cessve n renegotaton whch reate to each contract. Thus, n order to make
possbe the admnstraton of the nson-Tramme ct, t becomes mpossbe
to admnster the Renegotaton ct n the manner contempated by aw, namey,
on an over-a bass. The suspenson of the nson-Tramme ct wth respect
to those contracts and subcontracts sub|ect to the Renegotaton ct of 19 S s.
for the reasons stated above, hghy desrabe. The appcaton of the Renegota-
ton ct of 19 to contracts and subcontracts so reeved from the operaton of
the nson-Tramme ct w effectvey precude the retenton of e cessve
profts by contractors and subcontractors wth respect thereto, and at the same
tme w reeve both the Government and contractor of the addtona cost and
admnstratve burden now made necessary by the appcaton of both cts.
On pr 21,19 0, pursuant to the authorty n subsectons (d) and
(g) of the Renegotaton ct of 19 , supra, the Mtary Renegota-
ton Pocy and Revew oard amended the Mtary Renegotaton
Reguatons by the adopton of an amendment (see 1 Federa Reg-
ster 2 17) to e empt from renegotaton:
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1 0
subcontracts sub|ect to the Renegotaton ct of 19 entered nto on or
after anuary 1, 10 9, whch are for tems customary purchased for stock In
the norma course of the purchaser s busness, e cept when such Items are spe-
cay purchased for use n performng a contract or hgher ter subcontract
sub|ect to the enegotaton ct of 19 .
It s hed that contracts and subcontracts each of whch contans, as
requred by (1) subsecton (a) of the Renegotaton ct of 19 ,
supra, by (2) secton 01 of the Second Defcency ppropraton ct,
19 , supra, or by (3) secton 622(a) of the Natona Mtary stab-
shment pproprat on ct, 19 0, supra, an artce of agreement that
t s sub|ect to the Renegotaton ct of 19 , are e empt, under sec-
ton 622(b) of the Natona Mtary stabshment ppropraton
ct, 19 0. supra, from the proft mtaton provsons of the nson
ct (as amended and suppemented), even though, under subsecton
(b) of the Renegotaton ct of 19 , supra, such Renegotaton ct
s eventuay not appcabe to the contracts and sub-
contracts by vrtue of at east 100,000 not havng been receved or
accrued under a such contracts and subcontracts by the contractor
or subcontractor durng any fsca year. It s aso hed that where the
Secretary of Defense (or hs deegate) n hs dscreton has e empted,
as authorzed n subsectons (d) and (g) of the Renegotaton ct of
19 , supra, certan contracts or subcontracts from the provsons of
that ct, such contracts or subcontracts are not e empt, under sec-
ton 622(b) of the Natona Mtary stabshment ppropraton
ct, 19 0, supra, from the proft mtaton provsons of the nson
ct (as amended and suppemented).
Secton 3 of the nson ct, as amended and suppemented, and
now n force and effect, s appcabe (wth certan e ceptons specfed
n subsecton (b) thereof) to any contract or subcontract (f not e -
empt therefrom under secton 622(b) of the Natona Mtary stab-
shment ppropraton ct, 19 0, supra), where the award e ceeds
10,000 for the constructon and/or manufacture of any compete
nava vesse or rmy or Navy arcraft, or any porton thereof, n-
cudng equpment, parts, and fabrcatng materas (whether or not
purchased as stock or stock repenshment) whch become or ut-
matey w become a component part of an artce or artces con-
structed and/or manufactured for the purpose or purposes specfed
under such ct. (See I. T. 2 1. C. . III-2, (193 ); I. T.
2903, C. . I -2. 32 (193 ); I. T. 2930. C. . I -2, 33 (193 );
I. T. 3236, C. . 193 -2, ; I. T. 3239, C. . 193 -2, ; I. T. 3393,
C. . 19 0-2, 393; Comnssoner v. umnum Co. of merca (1 2
Fed. (2d) 663, certorar dened. 323 U. S. 72 ); and Pressed Stee
Tank Co. v. Commssoner ( 6 . T. . 2, affrmed, 133 Fed. (2d)
776.) That secton s appcabe n such cases even though no e press
provson was ncuded n the contract for agreement by the contractor
to the mtaton on proft provded n the secton. (See I. T. 32 ,
C. . 1939-1 (Part 1), 07, cted wth approva n Dougas rcraft
Co., Inc., v. Commssoner, 6 . T. . 102 ,1033, and The Waterbury
Too Co. v. Commssoner, 2 T. C. 90 ,909.) The term award means
the amount or prce at whch the contract or subcontract was awarded.
(See artce 2 of Treasury Decson 723, C. . 1937-1, 19, 21; sec-
ton 17.3 of Treasury Decson 906, C. . 1939-2, 0 , 0 ; secton 16.2
of Treasury Decson 909, C. . 1939-2, 22, 2 ; I. T. 2 1, supra;
I. T. 2903. supra; I. T. 2930. supra; I. T. 3236, supra; I. T. 3239, supra;
and I. T. 32 2, C. . 1939-1 (Part 1), 06.)
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1 1
3672.
19 0-22-13 72
CUTI ORD R 10172 D SIGN TING T C RTIFYING UT ORITY WIT
R SP CT TO T MORTIZ TION OF M RG NCY F CILITI S
y vrtue of the authorty vested n me by secton 12 of the
Interna Revenue Code, and as Presdent of the Unted States, t s
hereby ordered as foows:
1. The Charman of the Natona Securty Resources oard s hereby
desgnated as the certfyng authorty for the purposes of and wthn
the meanng of secton 12 of the Interna Revenue Code, as adder)
by secton 216 of the Revenue ct of 19 0, approved September 23,
19 0.
2. In carryng out hs functon as the certfyng authorty, the
Charman sha utze departments and agences of the Government,
accordng to ther respectve assgned responsbtes pursuant to the
Defense Producton ct of 19 0, as foows:
(a) To furnsh reports and recommendatons n respect of appca-
tons for necessty certfcates reatng to the amortzaton of emergency
factes.
(b) To mantan reatonshps wth the varous ndustres n respect
of appcatons for necessty certfcates.
(c) To deveop necessary programs for the e panson of capacty.
arry S. Truman.
The Whte ouse,
October 12,19 0.
(Fed wth the Dvson of the Federa Regster October 16,19 0, S: a. m.)
S CTION 3672. LIDITY G INST MORTG G S.
PL DG S, PURC S RS, ND UDGM NT CR DITORS
19 0-2 -13 9
Ct. D. 1736
F D R L T S INT RN L R NU COD D CISION OF SUPR M CODRT
1. Federa Ta Len Puouty Oveb Credtor s ttachment Le .
ta en of the Unted States recorded subsequent to the dnte
of a credtor s attachment en but pror to the date the credtor
obtaned |udgment s superor to such attachment en, whch s
nchoate unt perfected by |udgment.
2. Decson Reversed.
Decson of the Dstrct Court of ppea, Fourth ppeate Dstrct,
of Caforna (93 Caf. pp. (2d) 60S) reversed.
Unted States of merca, pettoner, v. Securty Trust d Savnas ank of Son
Dego, ecutor, tc., et a.
On wrts of certorar to the Dstrct Court of ppea, Fourth ppeate Dstrct, of
Caforna
November 13, 19 0
OPINION
Mr. ustce Mnton devered the opnon of the Court.
The queston presented here s whether a ta en of the Unted States Is pror
n rght to an attachment en where the Federa ta en was recorded subsequent
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3672.
1 2
to the date of the attachment en but pror to the date the attachng credtor
obtaned |udgment.
On October 17, 19 6, Wton M. Morrson sued George and Gene Styano on
an unsecured note. Pursuant to sectons 37 and 2 of the Caforna Code of
Cv Procedure,1 Morrson procured the attachment of four parces of rea estate
owned by the Styanos n Pan Dego County. On pr 2 , 19 7, Morrson
obtaned |udgment and t was recorded n the .offce of the recorder of San Dego
County on May 2, 19 7. Meanwhe, on December 3, , and 10, 19 6, the Unted
States had fed notces of Federa ta ens n the same offce.1
Subsequenty, four suts were brought n the Superor Court of San Dego
County nvovng the four parces of and upon whch Morrson had procured
the attachment. Morrson and the Unted States were made partes defendant
n each of these suts. The f rst sut was brought to quet tte to one of the
parces of-rea esate. The Styanos had sod ths parce to the pantffs of the
sut, who pad the baance of the purchase prce nto court. The other three
suts were to forecose separate mortgages on the other three parces. The
Superor Court ordered the baance of the purchase prce and any surpus re-
manng from the forecosure saes after the mortgagees receved payment n
fu to be apped frst n payment of Morrson s |udgment en, and secondy n
payment of any Federa ta ens.1
The Dstrct Court of ppea for the Fourth ppeate Dstrct affrmed.
93 Caf. pp. (2d) 60 . The Supreme Court of Caforna decned to hear the
case, and we granted certorar. 339 U. S. 9 7. The four cases were con-
sodated beow for purposes of appea, and Morrson s cams of prorty were
treated as a snge ssue. They are treated here n the same manner.
Secton 37 of the Caforna Code of Cv Procedure provdes that a pantff
may have the property of the defendant attached at any tme as securty for
the satsfacton of any |udgment that may be recovered. Secton 2(a) pro-
vdes : The en of the attachment on rea property attaches and becomes effec-
tve upon the recordng of a copy of the wrt, together wth a descrpton of the
property attached, and a notce that t s attached wth the county recorder of
the county wheren sad rea property Is stuated . The attachment
whether heretofore eved or hereafter to be eved sha be a en upon a rea
property attached for a perod of 3 years after the date of evy uness sooner re-
eased or dscharged ether as provded n ths chapter, or by dsmssa of the
acton, or by the fng wth the recorder of an abstract of the |udgment n the
acton.
The effect of a en n reaton to a provson of Federa aw for the coecton
of debts owng the Unted States s aways a Federa queston. ence, athough
a State court s cassfcaton of a en as specfc and perfected s entted to
weght, t s sub|ect to ree amnaton by ths Court. On the other hand, f the
State court tsef descrbes the en as nchoate, ths cassfcaton s practcay
concusve. Inos v. Campbe, 329 U. S. 3(12, 371. The Supreme Court of
Caforna has so descrbed ts attachment en n the case of Pusscgur v.
Yarhrough, 29 Caf. (2d) 09, 12, by statng that, The attachng credtor ob-
tans ony a potenta rght or a contngent en . amnaton of the
Caforna statute shows that the above s an apt descrpton. The attachment
en gves the attachment credtor no rght to proceed aganst the property uness
he gets a |udgment wthn 3 years or wthn such e tenson as the statute pro-
vdes. Numerous contngences mght arse that woud prevent the attachment
en from ever becomng perfected by a |udgment awarded and recorded. Thus
the attachment en s contngent or Inchoate merey a s pendens notce that
a rght to perfect a en e sts.
Nor can the doctrne of reaton back whch by process of |udca reasonng
merges the attachment en n the |udgment and reates the |udgment on back
to the date of attachment operate to destroy the reates of the stuaton.
When the ta ens of the Unted States were recorded Morrson dd not have a
|udgment en. e had a mere caveat of a more perfect en to come. Nec
York v. Macay, 2 S U. S. 290, 29 .
1 Doerns s Caforna Code Cv. Proc. nn.. 10 1. sectons . 7 and 2.
Notce of a further on n fp sum of 12.1 was fk d on anuary 22, 19 , but ns to
ths the Government does not cam prorty.
The Government aso dscams any prorty over the mortgages forecosed n these
proceed ngs.
Morrson ded whe the case was pendng on appea to the Dstrct Court of ppea,
and the Securty Trust Savngs ank as e ecutor of hs ast w and testament was
substtuted.
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1 3
3672.
The ens asserted by the Unted States stem from 3 Stat. 1 , 0, 20 U. S. C,
sectons 3070, 3071, 3072. Secton 3070 provdes: If any person abe to pay
any ta negects or refuses to pay the same after demand, the amount (ncudng
any nterest, penaty, addtona amount, or addton to such ta , together wth
any costs that may accrue n addton thereto) sha be a en n favor of the
Unted States upon a property and rghts to property, whether ren or per-
sona, beongng to such person. Secton 3071 provdes that the en arses when
the assessment sts are receved by the coector uness some other date s
specfed by aw. Secton 3072 provdes that the en sha not be vad aganst
mortgagees, pedgees, purchasers or udgment credtors, unt notce thereof has
been fed n the offce provded by the aw of the State for such fng n ths
case, the offce of the recorder of San Dego County.
In cases nvovng a kndred matter, . e., the Federa prorty under Revsed
Statutes, secton 3 00, t has never been hed suffcent to defeat the Federa
prorty merey to show a en effectve to protect the enor aganst others than
the Government, but contngent upon takng subsequent steps for enforcng t.
Inos v. Campbe, supra, 37 . If the purpose of the Federa ta en statute to
nsure prompt and certan coecton of ta es due the Unted States from ta
denquents s to be fufed, a smar rue must preva here. ccordngy, we
nd that the ta ens of the Unted States are superor to the nchoate attach-
ment en of Morrson, and the |udgment of the Dstrct Court of ppea for the
Fourth ppente Dstrct s reversed.
Concurrng opnon by Mr. ustce ackson.
Revsed Statutes, secton 3 66. Whenever any person Indebted to the Unted States Is
Insovent, or whenever the estate of any deceased debtor. In the hands of the e ecutors
or admnstrator, s Insuffcent to pay a the debts due from the deceased, the debts due
to the Unted States sha be frst satsfed, and the prorty estabshed sha e tend
as we to cases In whch a debtor, not havng suffcent property to pay a hs debts,
makes a vountary assgnment thereof, or In whch the estate and effects of an abscondng,
conceaed, or nbsent debtor are attached by process of aw, as to cases n whch an act
of bankruptcy s commtted.
923 30 1 11
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Regs. 3, 1 2.1, etc. 1
INDUSTRI L LCO OL
INT RN L R NU COD
Reguatons 3, Sectons 1 2.1, tc. 19 0-1 -13 1
T. D. 01
TITL 26 INT RN L R ND . C PT I, SU C PT R C. P RT 1 2.
INDUSTRI L LCO OL
mendng Reguatons 3
Washngton 2 , D. C.
To Dstrct Supervsors and Others Concerned:
1. Reguatons 3, approved March 6, 19 2 (26 CFR, Part 1 2), as
amended, are hereby amended as foows:
(a) Sectons 1 2.1, 1 2.6(a-), 1 2. , 1 2.10( /), 1 2.1 a,
1 2.21(c), 1 2. , 1 2. 9(6), 1 2.C3. 1 2.6 , 1 2.6 , 1 2.71, 1 2.72,
1 2.7 , 1 2. 2, 1 2. 2a, 1 2. 3, 1 2. , 1 2.119, 1 2.126, 1 2.19 ,
1 2.199,1 2.203,1 2.271,1 2.272,1 2.27 ,1 2.2 2,1 2.290,1 2.291,
1 2.292,1 2.293,1 2.29 ,1 2.296, 1 2.297,1 2.302,1 2.30 , 1 2.30 ,
1 2.30 ,1 2.312,1 2.313,1 2.31 ,1 2.317,1 2.31 ,1 2.319,1 2.320,
1 2.321, 1 2.327, 1 2.32 , 1 2. 00(c), 1 2. 0 , 1 2. 0 , 1 2. 07,
1 2. 0 , 1 2. 0 1, 1 2. 0 m, 1 2. 23, 1 2. 7, 1 2. 3, 1 2. 9 ,
1 2. 9 , 1 2. 00, 1 2. 11a, 1 2. 13, 1 2. 1 , 1 2. 2 , 1 2. 6 to
1 2. 72, 1 2. 7 a, 1 2. 7 e, 1 2.611, 1 2.62 , 1 2.6 a, 1 2.719,
1 2.7 9, 1 2.7 9, 1 2.7 , 1 2. 13, 1 2. 7, 1 2. 77, 1 2. 79, and
1 2.997 are amended;
(b) Sectons 1 2.6(a- ) to (a-9), 1 2.7 a, 1 2. 2b, 1 2.S2c,
1 2.119a, 1 2.119b. 1 2.119c, 1 2.271a, 1 2.2 1a, 1 2.2 2a, 1 2.303a,
and 1 2. 07a are added; and
(c) Sectons 1 2.201, 1 2.2 , 1 2.2 9, 1 2.29 , 1 2.307, 1 2.309,
1 2.326, 1 2. 99, 1 2. 7 f, 1 2.6 3(c), and 1 2.71 are revoked.
Reguatons Suteuskded
Sec 1 2.1. Premses and qupment eretofore pproved. estabsh-
ments covered y the reguatons n ths part and the equpment theren, here-
tofore estabshed and approved, may contnue to operate f constructed and
equpped so as to afford adequate securty and protecton to the revenue. The
dstrct supervsor may, at any tme, requre the propretor to make changes
theren conformng to the provsons of the reguatons n ths part, f deemed
necessary to safeguard the revenue or to permt more economca and effcent
supervson by Government offcers. estabshments hereafter constructed
and a changes n e stng estabshments or equpment heretofore approved
must be n conformance wth the reguatons n ths part. ( 3 Stat. 31 , 31 ,
3 , 36 , 373, as amended, 37 ; 20 U. S. C. 2 23, 2 20, 310 , 312 , 3170, 3176.)
Defntons
Sec 1 2.6. Defntons. s used In ths part, the foowng words and phrases
sha have the meanngs as heren defned:

(o-) Tank car sha mean a raroad tank car conformng to the requre-
ments of ths part. Tank truck sha mean a motor drven tan truck, n-
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Regs. 3, 1 2.1, eto.
eudng tank truck traer, conformng to the requrements of ths part: Pro-
vded, That any tank truck used for the conveyance of unta -pad acoho, spe-
cay denatured acoho, or competey denatured acoho sha be of a capacty
of not ess than 1,000 gaons.

(o- ) Gaon or Wne gaon sha mean a Unted States gaon of qud
measure equvaent to the voume of 231 cubc nches.
(a- ) I. It. C. sha mean the Interna Revenue Code.
(a-6) Proof sha mean the ethy acoho content of a qud at 60 F.,
stated as twce the percent of ethy acoho by voume.
(o-7) Proof gaon sha mean the acohoc equvaent of a Unted States
gaon at 00 F., contanng r 0 percent of ethy acoho by voume.
(o- ) Proof sprts sha mean that acohoc quor whch contans 0 per-
sent of ethy acoho by voume at 60 F. and whch has a specfc gravty of
0.93 1 n ar at 00 F. referred to water at 00 F. as unty.
(a-9) U. S. C. sha mean the Unted States Code.
stabshment, Locaton, and Use
Sec. 1 2. . permenta Industra coho Pants. permenta ndus-
tra acoho pants may, n the dscreton of the Commssoner, be estabshed for
a specfc and mted perod of tme for the purpose of e permentaton n, or
deveopment of processes and sources of materas from whch acoho may be
produced, or n manufacturng processes n whch acoho s produced. The
Commssoner may e empt the propretor, nsofar as consstent wth the aw,
from any of the provsons of the reguatons n ths part, and the Commssoner
may authorze the dstrct supervsor to Issue permt to operate under such
condtons and restrctons as the Commssoner may deem proper: Provded,
That appcaton Form 1 31, and bond, Form 1 32- , sha be fed. ( 3 Stat.
3 , 30 , 37 ; 20 U. S. C. 310 , 312 , 3176.)
Sec. 1 2.10. Industra coho onded Warehouses.
(d) Dscreton of dstrct supervsor. The dstrct supervsor may dsap-
prove any appcaton for the estabshment of a bonded warehouse not to be
ocated on the premses of an ndustra acoho pant, or n any ocaty where
the safety of the acoho and the revenue woud be endangered, or where sats-
factory evdence as to the need for the warehouse s not submtted, or where the
prospectve voume of busness s nsuffcent to warrant the e pense of super-
vson of the warehouse by Government offcers. ( 3 Stat. 3 7, 3 , 36 , 37 ; 26
U. S. C. 3101, 310 , 312 , 3170.)
Constructon
ndustra acoho pants
Sec 1 2.1 a. qupment Not n udngs. Notwthstandng other provsons
of the reguatons In ths part the dstrct supervsor may, In hs dscreton, ap-
prove ndustra acoho pants consstng, n whoe or n part, of equpment and
apparatus not ocated n a room or budng, f, n hs opnon, the ocaton and
constructon are such that the safety of the acoho and the revenue are not
endangered. gh-wne tanks, recevng tanks, and other tanks used for the
recept and storage of acoho must be encosed and protected n the manner re-
qured by secton 1 2. . n adequate number of eectrc foodghts sha be
nstaed for propery ghtng the premses at nght. ny other protectve
measures deemed essenta bv the dstrct supervsor or Commssoner may be
requred. ( 3 Stat. 3 , 36 , 37 ; 26 U. S. C. 310 , 312 , 3170.)
Skc. 1 2.21. Wndows n Recevng and Wne Rooms.
(c) tenson of requrements. The dstrct supervsor may requre any other
wndows n the recevng and wne rooms to be protected by ron bars or shutters,
or both, when deemed necessary to safeguard the acoho. ( 3 Stat. 3 , 36 ,
37 ; 26 U. S. C. 310 , 312 , 3170.)

OND D warehouses
Sec. 1 2. . Storage Tanks as Warehouses. The dstrct supervsor may ap-
prove permanent storage tanks not ocated wthn a room or budng as a bonded
warehouse or a part thereof: Provded. That such tanks are constructed, equpped,
and encosed n conformty wth the foowng requrements:

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Regs. 3, 1 2.1, etc.
1 3
(/) ddtona requrements. The dstrct supervsor mny requre, In any case
n whch he deems t necessary, ether the nstaaton of eectrc foodghts for
ghtng the tank encosure or the mantenance of watchman servces or both
or other protectve measures or devces. ( 3 Stat. 316, 3 7, 3 , 36 , 373, as
amended, 37 ; 26 U. S. C. 2S23,3101, 310 ,312 , 3170,3176.)
denaturng pants
Sec. 1 2. 9. Constructon.
(b) If not ocated on ndustra acoho pant or bonded warehouse premses.
If the denaturng pant s not to be ocated on the premses of an ndustra acoho
pant or bonded warehouse, pursuant to authorty granted by the dstrct super-
vsor, t may consst of a budng or a room or foor of a budng, n whch case t
must be competey separated from a oer budngs, rooms, and foors, whch
are not a part of the denaturng pant, by sod unbroken foors and was of
substanta constructon, e tendng from the ground or foor to the roof or ceng.
The doors and other openngs must open nto a pubc street or nto the yard
connected wth the denaturng pant, or nto an eevator shaft or common passage-
way parttoned off from a other busnesses, and eadng ether drecty or
through another eevator shaft or smar passageway to the street or yard n
accordance wth the provsons of secton 1 2. 1. ( 3 Stat. 3 , 36 , 373, as
amended, 37 ; 26 U. S. C. 310 , 312 , 3170, 3176.)
qupment
ndustra acoho pants
Sec. 1 2.63. Scaes for Weghng Packages. Where packages are to be fed
n the recevng room, sutabe and accurate scaes for weghng such packages
of acoho must be provded by the propretor. The beams or das of such
scaes must ndcate weght n one-haf pound graduatons: Provded, That f
packages are to be fed wth e acty 1, 2, , and 10 wne gaons, whch woud
requre weghng n terms of pounds and ounces, scaes ndcatng weght n
1-ounce graduatons must be povded. ( 3 Stat. 3 , 36 , 37 ; 26 U. S. C. 310 ,
312 . 3170.)
Sec. 1 2.6 . Weghng Tanks for coho. Where acoho s to be removed
from the recevng room by ppene the propretor must provde n the recevng:
room one or more sutabe weghng tanks, uness such removas are mted to
transfer of acoho to a weghng tank n a bonded warehouse or denaturng pant
operated by the propretor on the same or contguous promses as provded by
secton 1 2. 07. Weghng tanks for acoho sha be constructed of meta and
sha be statonary and each such tank sha be cabrated and equpped wth a
sutabe measurng devce whereby the contents w be correcty ndcated. The
dstrct supervsor w have the cabraton of each weghng tank verfed by
a Government offcer. The net and outet ppe connectons of each weghng
tank must be ftted wth vaves so constructed that they can be secured wth
Government ocks, and any other openngs n such tanks must be so constructed
that they can be cosed and smary ocked. ach weghng tank sha be
mounted on accurate scaes and sha have pany and egby panted thereon
the words Weghng tank, foowed by ts sera number and capacty n gaons.
eams or das of scaes must be graduated to enabe readngs to be made as
foows: to the nearest one-haf pound for scaes havng n capacty not to e ceed
2,000 pounds; to the nearest 1 pound for scaes havng a capacty of over 2,000
pounds, but not e ceedng 6,000 pounds; to the nearest 2 pounds for scaes havng
a capacty over 6,000 pounds, but not e ceedng 20,000 pounds; to the nearest
pounds for scaes havng a capacty over 20,000 pounds, but not e ceedng
0,000 pounds; and to the nearest 10 pounds for scaes havng a capacty over
00,000 pounds. cept n the case of scaes havng a capacty of 2,000 pounds or
ess, where acoho s to be gauged for ta payment not ess than 20 per centum of
the tota capacty of the weghng tank scae may be entered nto the tank for
gaugng for determnaton of ta : Provded, That ots of sprts weghng 1.01 1
pounds or ess must be weghed on scaes havng -pound graduatons. ( 3 Stat.
307, 3 , 3 9, 360, 36 , 37 ; 26 U. S. S. 2 0S, 310 , 3107, 3112, 312 , 3176.)
Sec. 1 2.6 . Scaes or Measurng Tanks for Dstng Materas. The
propretor must provde on the ndustra acoho pant premses sutabe an
accurate scaes for the weghng of gran and other nonqud dstng materas
receved and used: Provded, That where the propretor receves shpments of
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Regs. 3, 1 2.1, etc.
materas by ra or motor carrer, the shpper s weghts appearng on the b
of adng or nvoce may be recorded as the amount receved; and, n such cases,
track or truck scaes for weghng the mnteras receved need not be furnshed.
If the ndustra acoho pant s equpped wth mea hoppers mounted on scaes
the mea may be weghed theren. If moasses or other quds are used as ds-
tng materas, a sutabe weghng or measurng tank must be provded for
determnng the quantty thereof. ( 3 Stat. 307, 3 , 3 9, 36 , 37 ; 26 U. S. C.
2 0 , 310 , 3107, 312 , 3176.)
Sec. 1 2.71. Fermenters. ach fermenter must be constructed of wood, meta,
concrete, or other sutabe matera, and so arranged as to permt proper e -
amnaton thereof. ach fermenter must have pany and egby panted thereon
the word Fermenter, foowed by ts sera number and capacty n gaons,
depth n nches, and, f of unform dmensons and standng on end, the capacty
per nch of depth. Where such tanks are of rreguar dmensons the propretor
sha furnsh the dstrct supervsor a tabe, n dupcate, showng the capacty of
the tank for each nch of depth. The dstrct supervsor w retan one copy of the
tabe and forward the other to the storekeeper-gauger, who w retan the same In
the Government offce. The propretor sha provde an accurate measurng rod
marked n nches, or a stee tape, sutabe for use n determnng the contents of
such tanks. When deemed necessary, the accuracy of the propretor s cabra-
ton of fermenters w be verfed bv Government offcers. ( 3 Stat. 3 7, 3 S,
36 , 37 : 26 U. S. C. 3103, 310 , 312 , 3176.)
Sec. 1 2.72. Washwater Recevng Tanks. If carbon do de s recovered
and the washwater s to be utzed n the manufacture of acoho, there must be
provded a suffcent number of washwater recevng tanks, whch sha be con-
structed of meta. ach such tank sha be equpped wth a sutabe measurng
devce whereby the actua contents w be correcty ndcated. There must be
panted on each tank the words Washwater recevng tank, foowed by ts
sera number and capacty n gaons. The outet vave must be equpped for
ockng wth a Government ock. Such tanks, f connected wth ow-wne tanks,
sts, or other dstng apparatus, sha be connected by means of f ed meta
ppenes for the purpose of transferrng the washwater. If the washwater s
not used n the manufacture of acoho as provded by secton 1 2.301, washwater
recevng tanks need not be provded. ( 3 Stat. 316, 31 , 3 , 3G , 37 ; 26 U. S. C.
2S23, 2 29, 310 . 312 , 3176.)
Sec. 1 2.7 . Genera Requrements for Tanks. tanks used as receptaces
for sprts between the outet of the frst condenser or worm and the recevng
tanks sha be constructed of meta, and sha be equpped wth a sutabe meas-
urng devce whereby the actua contents w be correcty ndcated. Where such
tanks are of rreguar dmensons the propretor sha furnsh to the dstrct
supervsor a tabe, n dupcate, showng the capacty of the tank for each nch
of depth. The dstrct supervsor w retan one copy of the tabe and forward
the other to the storekepper-gauger who w retan the same n the Government
offce. tanks must be so constructed as to permt proper e amnaton thereof,
and so arranged as to eave an open space of not ess than three feet between
the top and the roof or foor above. Where tanks are equpped wth manhoes
or vaves n the top, whch are requred to be ocked wth Government ocks,
sutabe waks or andngs wth steps or starways eadng thereto, must be pro-
vded near the top of such tanks n order that ready access may be had by
Government offcers to the manhoes. Dstrct supervsors may requre such
waks or andngs, wth steps or starways eadng thereto to be nstaed at
pants now operatng, where the tanks have manhoes or vaves n the top, whch
are requred to be ocked wth Government ocks, and the present method of
ganng access to the top of the tanks s hazardous or unsafe to Government
offcers who are requred to open and cose the ocks on such manhoes or vaves
or to nspect the contents of the tanks from tme to tme. tanks, such as
ow-wne tanks, hgh-wne tanks, heads and tas tanks, fuse o tanks, dsted
water tanks, and smar equpment, sha each have pany and egby panted
thereon ts desgnated use, sera number, and capacty n gaons. Manheads,
nets, and outets of the tanks and a openngs n the dstng apparatus and
equpment, e cept coumn sts, whereby access may be had to the acoho must
be provded wth factes for ockng wth Government ocks or otherwse
securey fastened or seaed: Provded, That dsted water storage tanks need
not be so equpped uness a ppene s connected therewth for the conveyance
of dsted water to contguous estabshments, as provded n secton 1S2.76.
Tanks used as receptaces for acoho may be permanenty connected wth ppe-
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1
nes for the conveyance thereto of ar and dsted water, but the dsted
water ppene must be aff ed to the top of the tanks, and may not e tend nto
the tank. Such ppenes must be equpped wth a contro vave whch may be
ocked wth a Government ock. Ppenes used for the conveyance of ar must
aso be equpped wth a check vave ocated near the pont of entry to the tank
n order to effectvey prevent abstracton of acoho from the tank. Other ppe-
nes, e cept those used for the conveyance of acoho, mav not be permanenty
connected wth such tanks. ( 3 Stat. 316, 31 , 3 , 36 , 37 ; 26 U. S. C. 2 23,
2 29, 310 , 312 , 3176.)
Sec. 1 2.7 a. Measurng Devces foe coho Tanks. tanks used as re-
ceptaces for acoho sha be equpped wth foats and counterweghts and a
proper scae whereby the actua contents w be correcty Indcated, e cept that
tanks ocated n a ocked room may be equpped wth sutabe and accurate gass
gauges: Provded, That the use of other sutabe and accurate measurng devces
may be authorzed by the Commssoner upon appcaton of the propretor. The
openngs n the tanks for cords or wres for foats and counterweghts must be no
arger than are absoutey necessary to accommodate the cords or wres. Where
tanks equpped wth foats and counterweghts are n a ocked room, the scae
shoud be e tended to the outsde of the room to permt ascertanment of the
contents of the tank and thus guard aganst overfow wthout the necessty of
openng the door of the room. Where tanks n a ocked room are equpped w-th
gass gauges, a propery barred and secured wndow must be provded n the wa
or door to permt readng the gauge. ( 3 Stat. 316, 31 , 3 , 36 , 37 ; 26 U. S. C.
2 23, 2 29, 310 , 312 , 3176.)
Sec. 1 2. 2. Ppenes. The dstng apparatus and equpment must be
cosed and contnuous, commencng wth the frst st n whch the vapors rse
and contnung wth securey cosed vesses and ppes to the recevng tanks n
whch the fnshed product s deposted. such ppenes must be of a f ed
and permanent character, constructed of meta, or other matera affordng neces-
sary protecton, and so arranged as to be e posed to vew n ther entrety.
vaves, unons, fanges, and other detachabe connectons n the ppenes of the
dstng equpment from the pont where the vapors rse n the frst st to the
recevng tanks must be so secured by brazng, wedng, fastenng and seang, or
ockng wth Government ocks as to effectuay prevent dsconnecton and access
to the acoho. Ppenes used for conveyng acoho from the recevng room to
estabshments on the same or contguous premses sha be constructed, secured
and e posed n ke manner and sha be so arranged that each such ppene
can be competey draned or empted after each transfer of acoho: Provded,
That such ppenes may be connected wth weghng tanks by means of fe be
meta hose wth ends brazed or weded to the outet of the tank and to the ppene,
or by means of short, detachabe hose connectons, f the end of the ppene s
ftted wth the vave so constructed that t may be secured wth a Government
ock. Ppenes kewse may be connected wth tank cars and tank trucks by
short, detachabe hose connectons. separate ppene must be nstaed to each
pant to whch transfer of acoho by ppene s authorzed, or for the oadng
or unoadng of tank cars, e cept as provded n secton 1 2. 13. Such ppenes
may he connected ony to the tanks to or from whch transfer of acoho s author-
zed, e cept, where two or more tanks are used for the same purpose, manfod
connectons may be used. Manfod connectons must be equpped wth vaves
whch may be secured wth Government ocks and so arranged as to permt
compete contro of acoho nto or out of each tank. There sha be panted on
each ppene e tendng to and from a manfod a egend showng the knd and
sera number of the tank or the type and regstry number of the contguous
estabshment wth whch the ppene s connected. Where there are separate
ppenes eadng drecty from a tank to a tank car oadng zone or an estabsh-
ment on the same or contguous premses, a egend ndcatng the use of such
ppene or the type and regstry number of the contguous estabshment sha be
panted thereon. Ppenes sha be kept panted n the coors requred by
secton 1 2. 3. ( 3 Stat. 31 , 316, 31 , 33 , as amended, 3 , 30 , 37 ; 26 U. S. C.
2 20, 2 23, 2 29, 2 3, 310 , 312 , 3176.)
Sec. 1 2. 2a. Preparaton for Seang Fanges. Where fanges and other de-
tachabe connectons n the ppenes (other than unons or vaves) are not se-
cured by wedng or brazng, and are not to be secured by Government ocks, they
must be prepared by the propretor for seang wth cap seas by one of the
foowng methods:
( ) y appyng a caste nut wth a hoe dred through the bot, so
the seang wre may he passed through ke a cotter pn, two such nuts beng
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1 9
Regs. 3, 1 2.-1, etc.
apped to each fange, opposte each other, uness the fange s secured wth
an uneven number of bots, n whch case three such nuts w be apped at
appro matey equa dstances apart;
( ) y drng a sma hoe through both nut and bot, two such bots
and nuts beng dred for each fange, opposte each other, uness the
fange s secured wth an uneven number of bots, n whch case three such
nuts w be apped at appro matey equa dstances apart; or
(o) y drng a hoe through the corner of the head of the bot and one
through the corner of the nut so the two w be seaed together, two such bots
and nuts beng dred for each fange, opposte each other, uness the fange
s secured wth an uneven number of hots, n whch case three such nuts
w bo apped at appro matey equa dstances apart.
( 3 Stat. 316, 31 , 3 7, 3 , 30 , 37 ; 2G U. S. C. 2 23, 2 29, 3101, 310 , 312 ,
3176.)
Sec. 1 2. 2b. Preparaton for Seang Unons. Where unons n the ppenes
are not secured by wedng or brazng, and are not to be secured by Government
ocks, they w be prepared for seang by encosng the same n a meta bo wth
hoes for the seang wre. ( 3 Stat. 310, 31 , 3 7, 3 , 36 , 37 ; 26 U. S. C. 2 23,
2 29, 3101, 310 , 312 , 3176.)
Sec. 1 2. 2c. Preparaton for Seang aves. Where sma gate and gobe
vaves n the ppenes are secured by wedng or brazng, and are not to be
secured by Government ocks, they may be prepared for seang by ncosng the
packng nut and hood wth a meta band or strap drawn tghty around the fange
and ftted for recepton of the seang wre, or by drng a hoe n the packng
nut so that seang wre may be passed through and drawn around the ppe and
seaed. Where vaves have arge fanges, such fan|res may be seaed n the same
manner as other fanges. ( 3 Stat. 316, 31 , 3 7, 3 , 36 , 37 ; 26 TL S. C. 2 23,
2 29, 3101, 310 , 312 , 3176.)
Sec. 1 2. 3. Coors fob Ppenes. The ppenes n the ndustra acoho pant
used for conveyng the foowng substances sha be kept panted n the cooru
ndcated:
ack
ue
Red
Gray
rown
Yeow
Yeow wth red strpe
Yeow wth green strpe-
Yeow wth purpe strpe.
Whte
umnum
Orange
Ove green
Purpe
coho.
apor, ow wne.|, hgh wnes or other
unfnshed sprts.
Fermented mash or beer, or other ds-
tng matera.
Moasses or other unfermented matera.
Spent beer or sop.
Fuse o.
ther.
uty acoho.
cetone.
Water.
Steam.
r.
Carbon do de.
Refrgerants.
These coors are ntended for such ppenes ony, and are prescrbed for the
purpose of dstngushng such ppenes from each other and from a other
ppenes oa the premses whch arc panted but for whch coors are not pre-
scrbed. The pantng n one of the prescrbed coors, or a coor smar thereto,
of a ppene for whc a coor s not prescrbed s prohbted. Ppenes for
ether, buty acoho, and acetone sha he strped conspcuousy n the pre-
scrbed coors. Ppenes for whch coors are not prescrbed may be panted n
sectons of not more than 3 feet n contrastng coors. ( 3 Stat. 3 7, 3 , 36 ,
37 ; 26 U. S. C. 3103, 310 , 312 , 3170.)
bonded warehouses
Sec. 1 2. . Weghng Tanks. Where acoho s to be removed by ppene
to tank cars for shpment or to a denaturng pant on the same premses, or to a
rectfyng pant or ta -pad bottng house on contguous premses, or to a tank
track for transfer n bond to another bonded warehouse (as authorzed by secton
1 2. 0) or to a denaturng pant (as authorzed by secton 1 2. 60), or where
acoho s to be receved n tank cars, or receved n tank trucks from an Indus-
tra acoho pant (as authorzed by secton 1S2. 00) or from another tonded
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Regs. 3, 1 2.1, etc.
160
warehouse (as authorzed by secton 1 2. 0), the propretor of the warehouse
must provde for use n weghng such acoho one or more sutabe weghng
tanks, constructed and secured n accordance wth the provsons of secton
1 2.6 . ( 3 Stat. 307, 3 , 3 9, 36 , 37 ; 26 U. S. C. 2 0 , 310 , 3107, 312 , 3176.)
uafyng Documents
ndustra acoho pants, bonded warehouses, and denaturng pants
Sec. 1 2.119. Consent, Form 1602. Where the propretor s not the owner n fee
of the ot or tract of and on whch the ndustra acoho pant or bonded ware-
house s stuated, unencumbered by any mortgage, |udgment, en, or other en-
cumbrance, or Is not the owner of the dstng apparatus and equpment, un-
encumbered by any mortgage, |udgment, en, or other encumbrance, he must
fe the wrtten consent, Form 1602, of the owner and of any mortgagee, |udg-
ment-credtor, enor, or other encumbrancer, condtona saes vendor, or pror
essee, that the premses or property may be used for the purpose of dstng
acoho or the storage of acoho sub|ect to the provsons of aw. and e pressy
stpuatng that the en of the Unted States for ta es and penates sha have
prorty over any tte, rght, or nterest of the person gvng the consent, and
that, n the case of the forfeture of the premses or property, or any part thereof
the tte to the same sha vest n the Unted States, dscharged from any such
rght, tte, or nterest. ( 3 Stat. 311, 3 , 36 , 37 ; 26 U. S. C. 2 1 , 310 , 312 ,
3176.)
Sec. 1 2.119a. ecuton of Consent. The consent sha be e ecuted on Form
1602, n trpcate, n accordance wth the nstructons prnted thereon, duy
acknowedged before an offcer authorzed to take acknowedgment of deeds,
propery recorded and submtted to the dstrct supervsor wth the appcaton.
Form 1 31, and made a part thereof. The acknowedgment and certfcate of
recordaton sha be e ecuted on a three copes of the form. ( 3 Stat. 311, 3 ,
36 , 37 ; 26 U. S. C. 2 1 , 310 , 312 , 3176.)
Sec. 1 2.119b. New Consent Requred. new consent w be requred for
each year begnnng on the frst day. of anuary, uness the consent s gven
for a defnte perod of tme e ceedng 1 year, n whch event the consent shoud
be gven n terms to e pre at the begnnng of an annua perod, anuary 1. If,
after such consent s fed, the premses are e tended and the propretor s not the
owner n fee, unencumbered, of the addtona premses, or addtona apparatus
and equpment are nstaed, and the propretor, or the party who e ecuted the
consent then n effect s not the owner thereof, unencumbered, consent on Form
1602 must be fed for such addtona premses or apparatus and equpment.
new consent w aso be requred whenever there s a change n propretorshp,
ncudng successon for a temporary perod by a essee or fducary, uness the
consent procured by the predecessor specfcay covers operaton of the premses
by hs successor or assgns. In the event of faure of such consent the propretor
w be no oncer quafed, uness an ndemnty bond on Form 160 s fed. ( 3
Stnt. 311, 3 , 36 , 37 ; 26 U. S. C 2 1 , 310 , 312 , 3176.)
Sec. 1 2.119c. ond n Leu of Consent. Where consent on Form 1602 cannot
be obtaned or where the ndustra acoho pant or bonded warehouse was sod
at a |udca or other sae n favor of the Unted States, and there e sts a rght
o- redempton from such sae, the propretor may fe n eu of such consent, an
ndemntv bond. Form 160 , as provded n sectons 1 2.122 to 1 2.12 . ( 3 Stat.
311. 3 , 36 . 37 ; 2G U. S. C. 2 1 , 310 , 312 , 3176.)
Sec. 1 2.126. Lst of Stockhoders. In the case of corporatons and smar
ega enttes, there must be submtted wth Form 1 31 at the commencement of
busness and annuay thereafter on May 1 a st of the names and addresses
of a stockhoders and other persons nterested n the corporaton or other ega
entty and the amount and nature of the stockhodng or other nterests of
each, whether such nterest appears n the name of the nterested party or n
the name of another for hm: Provded, That where more than 100 persons are
nterested n the corporaton or other ega entty as stockhoders or otherwse
there need be furnshed ony the names and addresses and the amounts and
nature of the stockhodng or other nterest of the 100 persons havng the argest
ownershp or other Interest n each of the respectve casses of stock or other
Interests, e cept where more compete nformaton sha be specfcay requred
by the Commssoner or dstrct supervsor: Provded further, That where there
has been no change n the stockhoders and other persons Interested n the
corporaton or other ega entty, or n the e tent of the stockhodng or other
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161
Regs. 3, 1 2.1, etc.
nterest of such persons, the propretor may furnsh on May 1 of each ypar a
certfed statement, n trpcate, to that effect n eu of the prescrbed st.
Where a corporaton operates two or more ndustra acoho pants, bonded
warehouses or denaturng pants or other pants stuated In the same supervsory
dstrct, or whoy owns one or more subsdares operatng pants under the
nterna revenue aws and reguatons so stuated, and n connecton wth qua-
fyng for the operaton of one of such pants fes a st of stockhoders and other
persons nterested, ns prescrbed heren, the fng of an addtona st for each
pant w not be requred, provded that n eu of such addtona st there s
submtted wth the appcaton, Form 1 31, a certfcate, n trpcate, defntey
dentfyng the corporaton and pant wth whoso appcaton the st of stock-
hoders and other persons nterested a fed, and gvng the date of the fng
thereof. ( 3 Stat. 3 7, 3 , 3G , 37 ; 26 U. S. C. 3103, 310 , 312 , 3170.)
ond and Consents of Surety
Sec. 1 2.10 . Investgaton. The dstrct supervsor w cause an nvestga-
ton to be made of a the facts stated n the surety s affdavt on Form 33 and
supportng documents. ( 3 Stat. 3 , 36 , 37 ; 26 U. S. C. 310 , 312 , 317G.)
Sec. 1 2.199. Consents of Surety. Consents of surety to a change In the terms
of a bond must be e ecuted on Form 1 33, n as many copes as are requred of
the bond whch they affect, by the prncpa and a suretes wth the same
formaty and proof of authorty to e ecute as are requred for the e ecuton of
bonds. Form 1 33 w be used by obgors on coatera bonds as we as those on
surety bonds. The Form 1 33 must propery dentfy the bond affected thereby
and state specfcay and precsey what s covered by the e tended terms thereof.
If the surety s a corporaton, the consent may be e ecuted by an agent or attorney
n fact duy authorzed so to do by power of attorney fed by the surety wth the
approprate dstrct supervsor, or the consent may be e ecuted by the homo
offce offcas of such corporate surety; e cept that, n cases where the savng of
tme s an eement, the consent may be e ecuted by an agent or attorney n fact
where the home offce offcas, by specfc drecton, order ts e ecuton. copy
of such specfc drecton shoud be attached to each copy of such consent. ( 3
Stat. 3 , 3 , 3(0, 30 , 37 ; 26 U. S. C. 3070, 310 , 311 , 312 , 3170.)
Sec. 1 2.203. ddtona or Strengthenng onds. In a cases where the
pena sum of a bond on fe and n effect s not suffcent, computed as prescrbed
by aw and reguatons, the prncpa may gve an addtona or strengthenng
bond n a suffcent pena sum, provded the surety thereon s the same as on the
bond aready on fe and n effect; otherwse a new bond coverng the entre
abty w be requred. Such addtona or strengthenng bonds beng fed to
ncrease the bond abty of the prncpa and the surety, they are n no sense
substtute bonds, and the dstrct supervsor w refuse to approve any addtona
or strengthenng bond where any notaton s made thereon, ntended, or whch
may be construed, as a reease of any former bend, or as mtng the amount of
ether bond to ess than ts fu pena sum. ddtona or strengthenng bonds
must show the current date of e ecuton and the effectve date In the bank
spaces provded therefor. Such bonds must have marked thereon, by the obgors
at the tme of e ecuton, ddtona ond or Strengthenng ond. ( 3 Stat.
3 , 3 , 300, 30 , 37 ; 26 U. S. C. 3070, 310 , 311 , 312 , 3170.)
Requrements, Governng Changes n Name, Pnornt Tor.smp, Contro,
Locaton, Premses and qupment; and n the Tte to Industra coho
Pant or onded Warehouse Property or the ncumbrance Thereof
change n ocaton, premses, constructon, apparatus, etc.
Sec. 1 2.271. Changes n qupment. Where changes are to he made n the
apparatus and equpment of an ndustra acoho pant, bonded warehouse, or
denaturng pant, or n the denatured acoho recovery system at a denatured
acoho user s premses, the permttee sha frst secure approva thereof by the
dstrct supervsor pursuant to appcaton, n trpcate, settng forth specfcay
the proposed changes: Provded, That emergency repars may be made under the
supervson of the Government offcer, vhere one s assgned to the premses,
wthout pror approva of the dstrct supervsor. Where such emergency repars
are made, the permttee sha fe mmedatey a report thereof, n trpcate,
wth the dstrct supervsor. If the apparatus or equpment referred to n secton
1 2.272 s to b3 removed the appcaton sha ncude nformaton showng: (a)
The date of orgna purchase; (6) the name and address of the vendor; (c)
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Rega. 3, 1 2.1, etc.
162
a descrpton of the artce, Incudng mode and sera numbers, f any, ( f)
orgna cost; (e) present book vaue and method used n determnng such
vaue; and (/) proposed dsposton of the artce. Changes covered by an ap-
proved appcaton w be made under the supervson of the Government offcer,
where one s assgned to the premses. Upon competon of any change made
under hs supervson, the Government offcer w authorze the remova of the
dsmanted equpment, and the use of the new or repared equpment, and submt
a report, n trpcate, of the changes to the dstrct supervsor. ( 3 Stat. 3 7,
3 , . CO. 36 , 37 ; 2f U. S. C. 3103, 310 , 3112, 3121, 3170.)
Skc. 1 2.271a. Instaaton of ddtona qupment. Where the propretor
of the ndustra acoho pant or bonded warehouse s the owner n fee unencum-
bered, or has procured the consent of the owner or of any encumbrancer, of the
premses, appr.rntus and equpment thereon, and addtona apparatus and
equpment are nstaed, the propretor, f he s not the owner n fee unencumbered
of the addtona apparatus and equpment, must procure the consent of the
owner or any encumbrancer, n accordance wth secton 1 2.119, or n eu thereof
fe an ndemnty bond, Form 160 , equa to the apprased vaue of the entre
premses, ncudng the addtona apparatus and equpment. In accordance wth
secton 1N2.12L. If such propretor has fed an ndemnty bond. Form 100 . n
eu of the consent of the owner or any encumbrancer, n accordance wth the
provsons of secton 1 2.122, and the vaue of the premses s ncreased by the
nstaaton of addtona apparatus or equpment, an addtona or new bond on
such form to cover the ncrease n vaue w be requred, n accordance wth
provsons of secton 1S2.122. ( 3 Stat. 3 7, 3 , 300, 30 , 37 ; 26 U. S. C. 3103,
310 . 3112, 312 , 3170.)
Sec. 1 2.272. Indemnty ond Coverng Remova of qupment. If apparatus
or equpment on ndustra acoho pant or bonded warehouse premses on whch
a en has attached, under secton 3112, I. . C, for ta es on acoho produced or
stored, whch has not been ta -pad or wthdrawn for a ta -free purpose, s to be
removed from the premses wthout repacement thereof wth apparatus or
equpment that w become a rea f ture In aw of an equa or greater vaue than
the apparatus or equpment to be removed, (1) where the propretor s the owner
of the premses n fee unencumbered, whether the property s reaty or personaty ;
(2) where consents, n accordance wth secton 1 2.110, are necessary and have
been obtaned, whether the property s reaty or personaty; and (3) where an
ndemnty bond, Form 100 , s on fe and the property s personaty; the permttee
must fe wth the dstrct supervsor an ndemnty bond on Form 1617, n trp-
cate, n a pena sum equa to the vaue of the apparatus or equpment to be
removed, or equa to the e cess n vaue of the od apparatus or equpment to be
removed over the vaue of the new apparatus or equpment to be substtuted
therefor: Provded, That f such vaue, or dfference n vaue, as the case may be,
s ess than , ,O0O, no ndemnty bond w be requred: Provded further. That
no ndemnty bond w be requred to cover the remova of equpment from the
ndustra acoho pant or bonded warehouse premses to another bonded premses
f the two premses are controed by the same nterests. The vaue of the ap-
paratus or equpment to be removed, or the dfference between the vaue of such
apparatus or equpment and the vaue of the apparatus or equpment to be
substtuted therefor, w be determned by apprasa n the manner prescrbed
n secton 1 2.270(a). ( 3 Stat. 3 7, 3 , 300, 30 , 37 ; 26 U. S. C. 3a3, 310 ,
3112, 312 , 3176.)
C NG IN TITL TO INDUSTRI L LCO OL PL NT OR OND D W R OUS PROP RTY
Ot T NCUM R NC T R OF
Sec. 1 2.27 . Chance of Tte. Where the tte to the ot or tract of and
upon whch an ndustra acoho pant or bonded warehouse s ocated s changed
by sae, |udca or otherwse, or where there s any change n te ownershp of
the premses or the apparatus or equpment, subsequent to the approva of bond.
Form 1 32- , the permttee s no onger quafed. If the ermttee desres to
quafy for further operaton when such a change occurs, he must fe nn amended
appcaton. Form 1 31, together wth the necessary consent. Form 1602, or, n
eu of such consent, an ndemnty bond, Form 160 . In addton to such amended
appcaton and consent, Form 1602, or ndemnty bond. Form 160 , the dstrct
supervsor may, n hs dscreton requre the permttee to fe a new bond. Form
1 32- . ( 3 Stat. 3 7, 3 , 300, 30 , 37 ; 20 U. S. C. 3103, 310 , 3112, 312 , 3176.)
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Regs. 3, 1 2.1, etc.
cton by Dstrct Supervsor
orgna estabshment
Sec. S2.2 1a. uthorty to pprove. Dstrct supervsors nre authorzed to
approve a appcatons, bonds, consents of surety, and other quafyng docu-
ments requred by ths part and to ssue requred permts n connecton therewth,
e cept appcatons for use of specay denatured acoho or ta -free acoho by
the Unted States or governmenta agency thereof, and appcatons, bonds, and
quafyng documents requred n connecton wth estabshment and operaton
of an e permenta ndustra acoho pant. ( 3 Stat. 3 , 3G0, 36-1, 373, as
amended, 373; 26 U. S. C. 310 , 311 , 312 , 3170, 3172, 3176.)
Sec. 1 2.2 2. Investgaton of ppcant. efore approvng any app-
caton fed by any ndvdua, frm, partnershp, corporaton, or assocaton, the
dstrct supervsor w cause such nqury or nvestgaton to be made as may be
deemed necessary to ascertan whether such ndvdua, frm, partnershp, corpo-
raton, or assocaton, or any person ownng, controng, or actvey partcpat-
ng n the management of the busness, has been convcted of, or has compromsed,
an offense of the nature specfed n secton 1 2.100(6), or s precuded by the
provsons of secton s2.100(a) from recevng a permt, and sha make a
thorough nvestgaton to determne the appcant s quafcatons to hod a
permt and whether he s entted to the confdence of the Department. The
dstrct supervsor s nqury and nvestgaton n connecton wth an appcaton
on Form 1 31 for permt to operate an Industra acoho pant or bonded ware-
house, n con|uncton wth whch an appcaton was fed for permt under
the Federa coho dmnstraton ct, sha ncude the procurement of
suffcent nformaton to pass upon the appcaton for such permt. ( 3 Stat.
3 7, 3 , 3G0, 36 , 373, as amended, 37 ; 26 U. S. C. 3103, 310 , 311 , 312 , 3170,
3176.)
Sec 1 2.2 2a. Dsapprova of ppcaton. Where, after hearng or oppor-
tunty for hearng, as provded n sectons 1 2.220 to 1S2.22 , the dstrct super-
vsor fnds that the appcant s not entted to the confdence of the Department,
or s precuded by secton 311 (a), Interna Revenue Code, and secton 1 2.100(a)
from recevng a permt, he sha note hs dsapprova on a copes of the
appcaton wth bref statements of hs reasons therefor and dspose of the
appcaton, bond, and supportng documents n accordance wth the provsons
of secton 1 2.293. ( 3 Stat. 3 7, 3 , 300, 36 , 373, as amended, 37 ; 26 U. S. C.
3103, 310 . 311 , 312 , 3170, 3176.)
Sec. 1 2.200. pprova of uafyng Documents. If the dstrct supervsor
fnds, upon e amnaton of the nspecton report and the quafyng documents,
that the appcant has comped n a respects wth requrements of aw and
ths part, and f the bond and consent, f any, or the ndemnty bond fed n eu ,
thereof, propery may be approved, and f the appcant s entted to a permt,
he w note hs approva on a copes of the appcaton, pat and pans, bonds
and consent or ndemnty bond, and sha dspose of the quafyng documents
and nspector s report n accordance wth secton 1S2.293. In the case of e per-
menta ndustra acoho pants, appcatons, bonds, and one set of other
quafyng documents w be forwarded to the Commssoner, together wth a
copy of the nspecton report, for approva or dsapprova n accordance wth
secton 1 2. . The dstrct supervsor w refer trade names to the Comms-
soner for approva before approvng appcatons for basc permts nvovng use
of trade names and w refer to the Commssoner a formuae and abes
for denatured acoho, artces, or other products manufactured therefrom,
e cept rubbng acoho compound manufactured n accordance wth secton
1 2.1 7(a). Issuance of basc permts on Form 1 33 coverng orgna estabsh-
ment or ndustra acoho pants, bonded warehouses or denaturng pants w
be wthhed pendng assgnment of basc permt and regstry number by the Com-
mssoner n accordance wth sectons 1 2.291 and 1 2.30 . The dstrct super-
vsor w advse the Commssoner n advance of fna acton on such permts
nsofar as possbe, n order that basc permt and regstry numbers may be
assgned to prevent undue deay n the proposed operatons. Symbos and
numbers for other basc permts w be assgned by the dstrct supervsor n
accordance wth the provsons of secton 1 2.291. ( 3 Stat. 3 S, 360, 36 , 373,
as amended, 37 ; 26 U. S. C. 310 , 311 , 312 , 3170, 3176.)
Sec. 1 2.291. Symbos and Numbers fob asc Permts. basc permts,
e cept those ssued on Forms 1 33, 1 , and 1 6, sha bear a symbo nd-
catng the cass of permt, the recognzed abbrevaton of the State n whch the
busness s to be conducted, and a sera number; the symbo, State abbrevaton,
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Regs. 3, 1 2.1, etc.
16
and the sera number beng separated by dashes, as TF-NY-123. The sera
number of permts to dea n specay denatured acoho w be foowed by
the capta etter D In parentheses. basc permts sha be numbered
seray accordng to the cass of permt n the order of ssuance. mended
and renewa permts sha be gven the same number as the orgna permt.
separate seres of numbers w be used for each State n the case of permts,
Form 1 , Form 1 7, Form 1 76, and Form 1 1. Sera numbers of basc
permts heretofore ssued w be retaned and new permts w be assgned
numbers n sequence thereto. asc permt numbers prevousy assgned to
permttees w not be reassgned to other permttees. In the case of basc
permts, Form 1 33, the dstrct supervsor sha nsert the permt and regstry
numbers assgned by the Commssoner on the form. The prescrbed symbos are
as foows:
I P Industra acoho pant.
W onded Warehouse.
DP Denaturng pant.
TF User of ta -free acoho (other than the Unted States or governmenta
agency thereof).
SD Deaer n specay denatured acoho (The etter D beng nserted
n parentheses after the sera number, as SD -NY-3(D) ).
SD User of specay denatured acoho (ncudng the recovery of spe-
cay denatured acoho, or recovery of artces n the form of denatured
acoho).
SDR Deaer n specay denatured rum (the etter D beng nserted n
parentheses after the sera number, as SDR-NY- (D) ).
SDR User of specay denatured rum.
CD R Recovery of competey denatured acoho.
C Carrer transportng ta -free or specay denatured acoho.
US-TF Use of ta -free acoho by the Unted States or governmenta
agency thereof.
US-SD Use of specay denatured acoho by the Unted States or gov-
ernmenta agency thereof.
( 3 Stat 3 , 360, 36 , 373, as amended, 37 ; 26 U. S. C. 310 , 311 , 312 , 3170,
3176.)
Sec. 1 2.292. Dsapprova of uafyng Documents. If the dstrct super-
vsor fnds, after hearng or opportunty for hearng, as provded n sectons
1S2.220 to 1 2.22 , that the appcant has not comped n a respects wth the
requrements of the aw and ths part, or that the stuaton of the premses s
such as woud enabe the appcant to defraud the Unted States, or that the bond
shoud be dsapproved, he w note hs dsapprova on the appcaton, and w
dspose of the quafyng documents n accordance wth secton 1 2.203. Where
an appcaton or bond or consent of surety s dsapproved by the dstrct super-
vsor and an appea s taken to the Commssoner, the dstrct supervsor w
furnsh the Commssoner wth fu nformaton respectng the reasons for ds-
approva, ncudng (a) In the ease of a voaton of the nature specfed n secton
1 2.106(6), the nature of the offense, the names of the offenders, the date of
convcton or acceptance of an offer n compromse, and (6) n the case of an
offense whch precudes the ssuance of a permt under secton 1 2.106(a), the
nature, date and pace of the offense. The Commssoner w grant a hearng
n the matter f the partes so request at the tme appea s taken upon the
acton of the dstrct supervsor. ( 3 Stat. 3 , 360, 36 , 373, as amended, 37 ;
26 U. S. C. 310 , 311 , 312 , 3170, 3176.)
Sec 1S2.293. Dsposton of uafyng Documents. If the dstrct super-
vsor approves the quafyng documents, he w forward to the appcant one
copy of the documents wth the orgna of the basc permt, and orgna of the
permt ssued under the Federa coho dmnstraton ct (f any), forward to
the Commssoner the orgnas of the quafyng documents and a copy of the
basc permt, and permt ssued under the Federa coho dmnstraton ct
(f any), together wth copes of nspecton reports, and retan one copy of such
quafyng documents and permts for the fe of the appcant If the quafyng
documents are dsapproved, the dstrct supervsor sha return to the appcant
by regstered ma one copy of the dsapproved appcaton, together wth a
copes of the quafyng documents and a copes of the bond wthout acton
thereon. The dstrct, supervsor sha forward one copy of the dsapproved ap-
pcaton to the Commssoner and w advse hm fuy respectng the dsapprova
thereof. e sha retan the remanng papers n hs fes. If the appcant Is
not entted to a basc permt, the dstrct supervsor w, upon dsapprova of
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Regs. 3, 1 2.1, etc.
the appcaton therefor, return a copes of the quafyng documents to the
appcant wthout acton thereon. ( 3 Stat. 3 , 30 , 37 ; 20 U. S. C. 31U .
312 , 3170.)
C NG S SU S U NT TO ORIGIN L ST LIS M NT
Sec. 1 2.29 . Procedure ppcabe. The provsons of secton S2.2Sa to
1 2.293 respectng the acton requred of dstrct supervsors n connecton wth
appcatons for orgna basc permts w be foowed, to the e tent appcabe,
where there s a change n the ndvdua, nn, or corporate nnme, or n the trade
name or stye, or where the premses are to be operated ntay under a trade
name or stye or where there s a change n the propretorshp, ocaton, premses,
constructon, apparatus and equpment, or n the type of premses, or n the tte
to the property In the case of an ndustra acoho pant or bonded warehouse, or
where such property becomes sub|ect to a mortgage, |udgment, or other encum-
brance, or where operatons are permanenty dscontnued. ( 3 Stat. 3 S, 30 ,
37 ; 20 U. S. C. 310 , 312 , 3170.)
Sec. 1 2.296. Indemnty ond, Form 1017. Where changes to be made n
ndustra acoho pant or bonded warehouse premses, budngs, or former n-
dustra acoho pant or bonded warehouse premses, budngs, or equpment or
apparatus, are such as to requre the fng of an ndemnty bond on Form 1617, as
provded n sectons 1 2.270 and 1 2.272, the dstrct supervsor w, upon recept
of a satsfactory bond, note hs approva thereon, forward the orgna to the
Commssoner, forward one copy to the permttee, and retan one copy. ( 3 Stat.
3 , 36 , 373, as amended, 37 ; 26 U. S. C. 310 , 312 , 3170, 317G.)
Sec. 1 2.297. ppcaton and Reports Coverng Changes. Where an app-
caton coverng changes n apparatus or equpment, or n constructon or use of a
room or budng s approved by the dstrct supervsor, he w retan one copy
of the appcaton and forward one copy to the permttee and one copy to the
Commssoner; and, when reports coverng changes n apparatus, and equpment
are receved from Government ohcers n accordance wth secton 1 2.271, he w
retan one copy and prompty forward one copy to the Commssoner. Smar
dsposton w be made of reports receved from the permttee coverng emer-
gency repars of apparatus and equpment. ( 3 Stat. 3 , 30 , 37 ; 26 U. S. C.
310 , 312 , 3176.)
dscontnuance or ndustra acoho pant, bonded warehouse, oh
denaturng pant
Sec 1 2.302. Dstrct Supervsor s cton. If the dstrct supervsor fnds,
upon recept of the report from the storekeeper-ganger or other Government
offcer, that a acoho or denatured acoho produced or deposted has been
wthdrawn, and propery accounted for, he w note hs approva on a copes of
Form 1 31, forward the orgna thereof, together wth a copy of the Government
offcer s report, to the Commssoner and return a copy to the propretor. Where
dscontnuance of a bonded warehouse or denaturng pant was ordered by the
Commssoner, the dstrct supervsor w forward to the Commssoner a com-
pete report of the remova of the acoho or specay denatured acoho from the
premses, together wth a copy of the Government offcer s report of the nspecton
of the propretor s and storekeeper-ganger s records and the remova of the
Government property from the premses. ( 3 Stat. 3 , 36 , 373, as amended,
37 ; 26 U. S. C. 310 , 312 , 3170, 3176.)
cton by Commssoner
orgna estabshment
Sec. 1 2.303a. uthorty To pprove. The Commssoner w approve or
dsapprove appcatons for use of trade names as provded n secton 1S2.290,
formuas and abes for denatured acoho, artces, or other products manufac-
tured therefrom as provded n secton 1 2.1 1, appcatons, bonds and quafy-
ng documents requred n connecton wth estabshment and operaton of e per-
menta ndustra acoho pants n accordance wth provsons of secton 1 2.S,
and appcatons for the use of ta -free and specay denatured acoho by the
Unted States or governmenta agences thereof, and w ssue necessary permts
or certfcates n connecton wth such appcatons. ( 3 Stat. 3 , 360, 36 ,
373, as amended, 37 ; 26 U. S. C. 310 , 311 , 312 , 3170, 3176.)
Sec. 1 2.30 . Revew of Documents. The Commssoner w revew the
acton of the dstrct supervsor reatng to the estabshment of ndustra
acoho pants, bonded warehouses and denaturng pants, and w determne
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Regs. 3, 1 2.1, etc.
ICS
whether such acton s In conformty wth the requrements of aw and ths
part. If not, the Commssoner w advse the dstrct supervsor as to the
necessary acton to be taken. ( 3 Stat. 3 , 3G , 37 ; 2G U. S. C. 310 , 312 , 3176.)
Sec. 1 2.30 . Regstry and Permt Numbers. Upon request therefor by ds-
trct supervsors the Commssoner w assgn regstry and permt numbers to
ndustra acoho pants, bonded warehouses and denaturng pants. Such pants
w be numbered seray, rrespectve of States or dstrcts. Symbos and num-
bers for basc permts w be assgned as provded n secton 1S2.291. Regstry
and permt numbers prevousy assgned to dscontnued acoho pants, bonded
warehouses, and denaturng pants w not be reassgned to other such pants.
The same regstry number w be contnued whenever there s an mmedate
change of propretorshp. new basc permt number w be assgned when
there s a change of propretorshp. The same regstry and permt number w
be assgned to an ndustra acoho pant, bonded warehouse, and denaturng
pant, or any combnaton of such pants on the same premses. ( 3 Stat. 3 ,
300, 30 , 373, as amended, 37 ; 26 U. S. C. 310 , 311 , 312 , 3170, 3176.)
C NG S SU S U NT TO ORIGIN L ST LIS M NT
Sec. 1 2.30 . Procedure ppcabe. The provsons of secton 1 2.30
respectng the acton of the Commssoner n connecton wth the appcatons for
orgna basc permts w be foowed, to the e tent appcabe, where there s a
change n the ndvdua, frm, or corporate name, or n the trade name or stye,
or n the propretorshp, ocaton, premses, constructon, apparatus and equp-
ment, or n the type of premses or operatons, or n the tte to ndustra acoho
pant or bonded warehouse property or where such property becomes sub|ect to
a mortgage, |udgment, or other encumbrance. ( 3 Stat. 3 , 36 , 37 ; 26 U. S. C.
310 , 312 , 3176.)
Termnaton of onds
Sec. 1 2.312. Drect port onds. onds coverng a specfc ot of acoho
wthdrawn for drect e port, Form 1 97, w be termnated by the dstrct super-
vsor by makng the bond Canceed, foowed by the date of canceaton, upon
recept of evdence of the andng of the acoho n a foregn country or sats-
factory proof of oss at sea: Provded, That where there s a defcency, the bond
w not be canceed by the dstrct supervsor unt the abty for the defcency
has been termnated. Contnung bonds coverng acoho wthdrawn from tme to
tme for drect e port, Form 1 9 , w be smary termnated by the dstrct
supervsor where no further wthdrawas are to be made thereunder: Provded.
That the account kept wth the bond n accordance wth secton 1S2.611 shows
that there are no outstandng charges. ( 3 Stat. 336, 3 , 30 , 373, as amended,
37 ; 20 U. S. C. 2 , 310 , 312 , 3170, 3170.)
Sec. 1 2.313. Transportaton for port onds. onds coverng a specfc
ot of acoho wthdrawn for transportaton for e port, Form 1 9 . w be term-
nated by the dstrct supervsor by markng the bond Canceed, foowed by
the date of canceaton, upon recept of Form 691 from the coector of customs
showng the cearance of the acoho: Provded, That where there s a oss n
transt, the bond w not be canceed unt the abty for the oss has been
termnated. Contnung bonds for acoho wthdrawn from tme to tme for
transportaton for e port, Form 1 90, w be smary termnated by the ds-
trct supervsor where no further wthdrawas are to be made thereunder: Pro-
vded, That the account kept wt the bond n accordance wth secton 1 2011
shows that there are no outstandng charges. ( 3 Stat. 337, 3 , 36 , 373, as
amended, 37 ; 20 U. S. C. 2 6, 310 , 312 , 3170, 3176.)
Sec 1 2.31 . onds Coverng Transportaton to Customs Manufacturng
onded Warehouse. onds coverng a specfc ot of acoho wthdrawn fcr
transportaton to a customs manufacturng warehouse. Form 1 9, w be term-
nated by the dstrct supervsor by markng the bond Canceed, foowed by
the date of canceaton, upon recept from the coector of customers of Form
3923 showng the depost of the acoho n the customs manufacturng bonded
warehouse: Provded, That where there s a oss n transt the bond w not be
canceed by the dstrct supervsor unt abty for the oss has been termnated.
Contnung bonds coverng acoho wthdrawn from tme to tme for transporta-
ton to customs manufacturng bonded warehouse, Form 1 00, w be smary
termnated by the dstrct supervsor where no further wthdrawas are to made
thereunder, provded that the account kept wth the bond n accordance wt
secton 1 2.02 shows that there are no outstandng charges. ( 3 Stat. 3 0, 3 ,
36 , 373, as amended, 37 ; 20 U. S. C. 2S91. 310 , 312 , 3170, 3170.)
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Regs. 3, 1 2.1, etc.
Sec. 1 2.317. cton on ppcaton for Notce of Termnaton of ond
Supportng a asc I ermt. When an appcaton for notce of termnaton,
as to future operatons, of a bond supportng a basc permt s fed wth the
dstrct supervsor n a case where a supersedng bond has been approved, or
the prncpa has dscontnued busness, as provded n secton 1S2.310 the ds-
trct supervsor w make a compete e amnaton of records to determne
whether there s any abty then due and payabe outstandng aganst the bond.
e w aso ascertan from the coector of nterna revenue whether there are
any outstandng unpad assessments or demands for ta es, penates and nterest
onncoho or denatured acoho under the bond. If t Is found that voatons
of aw or reguatons occurred durng the perod covered by the bond, and that
penates ncurred or fnes mposed have not been pad, or that outstandng
assessments, or demands for payment of ta es, chargeabe aganst the bond have
not been pad, or otherwse setted, the dstrct supervsor w dsapprove the
appcaton, uness the abty s setted. If the dstrct supervsor fnds that
the bond propery may be termnated he w ssue notce of termnaton n
accordance wth provsons of secton 1 2.320. ( 3 Stat. 33 , 30 , 37 ; 20 U. S. C.
310 , 312 , 3170.)
Sec. 1S2.31 . cton on ppcaton for Notce of Termnaton of Indemnty
onds. When an appcaton for notce of termnaton of an ndemnty bond,
Form 100 , as to future operatons of an ndustra acoho pant or bonded
warehouse s fed wth the dstrct supervsor n a case where a supersedng
bond has been approved, or the prncpa has dscontnued busness, as provded
n secton 1 2.311, the dstrct supervsor w take acton n accordance wth the
procedure prescrbed n secton 1 2.317, n the case of an appcaton for term-
naton of the bond supportng a basc permt. When an appcaton for notce
of termnaton of an ndemnty bond. Form 1017, coverng changes n budngs
or equpment s fed wth the dstrct supervsor, he w make a compete nqury
to determne whether a acoho, the ta on whch consttuted the en n rea-
ton to whch the bond was gven, has been ta -pad or removed for a awfu
ta -free purpose. If the dstrct supervsor fnds that the bond propery may be
termnated, he w ssue notce of termnaton thereof n accordance wth secton
1S2.320. ( 3 Stat. 3 , 30 , 37 ; 20 U. S. C. 310 , 312 , 3170.)
Sec 1 2.319. cton on ppcaton for Notce of Termnaton of Other
onds. When an appcaton for notce of the termnaton of e port bonds
(Forms 1 0 and 1 97), transportaton for e port bonds (Forms 1 90 and 1 9 ),
bonds coverng transportaton of acoho to the customs manufacturng bonded
warehouse (Forms 1 9 and 1 G0), and bonds coverng wthdrawas for use on
vesses and arcraft (Forms 1000 and 1001) s fed wth the dstrct supervsor,
he w e amne hs records to determne whether the requred evdence of foregn
andng or oss at sea, or cearance, or depost n the customs manufacturng
bonded warehouse, or use, as the case may be, of the acoho wthdrawn under
the bond has been fed, and f there were defcences, whether abty therefor
has been termnated. If the dstrct supervsor fnds that the bond propery
may be termnated, he w ssue notce of termnaton thereof n accordance wth
secton 1 2.320. ( 3 Stat. 3 S. 30 , 37 ; 20 U. S. C. 310 , 312 , 3170.)
Sec. 1 2.320. Notce of Termnaton. Upon canceaton as to abty for
future transactons, of a bond supportng a basc permt, or an ndemnty bond,
Form 160 , as to abty for future operatons of an ndustra acoho pant
or bonded warehouse, the dstrct supervsor w e ecute notce of bond termna-
ton on Form 1 90 where a supersedng bond has been approved, or notfcaton
of reease of bond on Form 1 91 where the prncpa has dscontnued busness,
as the case may be, n quadrupcate (n quntupcate f there are two suretes),
and w forward the orgna together wth one copy of the appcaton for
notce of termnaton to the Commssoner, one copy to each obgor on the bond,
and retan one copy on fe wth the bond to whch t reates. Smar acton w
be taken by the dstrct supervsor on approva of an appcaton for notce of
termnaton of an ndemnty bond on Form 1617. Where an appcaton for the
ssuance of notce of the termnaton of a drect e port bond, transportaton for
e port bond, bond coverng transportaton to a customs manufacturng bonded
warehouse, or bond coverng wthdrawa for use on vesses and arcraft, has
been fed wth the dstrct supervsor, and he has found that there has been
compance wth the provsons of sectons 1 2.312, 1 2.313, 1 2.31 , or 1 2.31 a,
as the case may be, he w ssue Form 1 90 or Form 1 91, as provded above.
( 3 Stat. 3 , 36 , 37 ; 26 U. S. C. 310 , 312 , 3176.)
Sec. 1 2.321. Reease of Coatera. The reease of coatera pedged and
deposted wth the Unted States to support bonds requred n ths part w be
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Regs. 3, 1 2.1, etc.
16
In accordance wth the provsons of Department Crcuar 1 , revsed (31 CF R,
Part 22 ), sub|ect to the condtons governng the ssuance of notces on Forms
1 90 and 1 91 of the termnaton of such bonds. Uness a supersedng bond has
been approved, the reease of the securty n the case of such bonds w not be
authorzed unt a acoho or denatured acoho or artces produced or wth-
drawn, whe such bonds were n force and effect, have been awfuy dsposed of.
ccordngy, coatera may not be reeased whe any acoho or denatured
acoho or artces reman an outstandng charge aganst a bond supportng a
basc permt or ndemnty bond, Form 160 . When an appcaton for reease
of coatera deposted n support of a bond supportng a basc permt on Form
1 33, or an ndemnty bond, Form 160 , s receved by the dstrct supervsor, he
w determne whether a outstandng abtes have been setted, and uness
a supersedng bond has been approved whether a acoho or denatured acoho
produced, wthdrawn, used, etc., whe the bond was n effect has been awfuy-
dsposed. Coatera pedged and deposted to support an ndemnty bond. Form
1617, coverng changes n ndustra acoho pant or bonded warehouse budngs
or equpment may be reeased upon approva of a supersedng bond or upon
awfu remova of a acoho the ta on whch consttuted the en n reaton
to whch the bond was gven. Upon approva of an appcaton for the ssuance
of notce of termnaton of a bond supportng basc permt on Form 1 33, or
ndemnty bonds (Form 160 or 1617) supported by coatera securty, the dstrct
supervsor w f the date or dates on whch a part or a of the securty may
be reeased. In f ng such date, the dstrct supervsor w satsfy hmsef
that the nterest of the Government w not be |eopardzed. The date of reease
for coatera supportng a bond on Form 1 32- w ordnary be f ed at not
ess than 6 months from the date of determnaton that there s no outstandng
abty aganst the bond, and coatera pedged for other bonds w ord-
nary be reeased upon ssuance of notce on Form 1 90 or Form 1 91. Co-
atera pedged and deposted to support a bond supportng a basc permt on
Form 1 33, or ndemnty bond (Form 160 or 1617), w not be reeased by the
dstrct supervsor uness a abty thereunder has been termnated. t any
tme pror to the reease of coatera securty, the dstrct supervsor may, n
hs dscreton and for proper cause, further e tend the date of the reease of
such securty for such addtona perod of tme as, n hs |udgment, may be
approprate. (Sec. 1120, Stat. 122; 0 U. S. C. 1 ; 3 Stat. 3 , 36 , 37 ;
26 U. S. C. 310 , 312 , 3176.)
Operaton or Industra coho Pants
Sec. 1 2.327. randy. Where t s desred to produce brandy under Regua-
tons (2G CFR, Part 1 ) governng the producton of brandy at frut dsteres
under the e emptons from aw afforded frut dsters by vrtue of secton 2 2 ,
I. R. C, the ndustra acoho pant must be dscontnued n accordance wth sec-
tons 1S2.276 to 1S2.279 and reestabshed and operated as a frut dstery n
accordance wth Reguatons . ( 3 Stat. 3 , 30 , 37 ; 26 U. S. C. 310 , 312 ,
3176.)
Sf.c. 1 2.32 . permenta Operatons. Persons authorzed, pursuant to
provsons of secton 1S2. , to conduct e permenta operatons for a temporary
perod of tme n connecton wth the producton of acoho are requred to sub-
mt such reports and mantan such records as the Commssoner sha, n each
case, prescrbe. The acoho produced n an e permenta ndustra acoho
pant sha be dsposed of or denatured wth such denaturng materas and
quanttes thereof as may be authorzed by the Commssoner, under such cond-
tons and restrctons as he may mpose. coho so denatured sha be used or
dsposed of n the manner prescrbed by the Commssoner n each case. ( 3
Stat 3 7, 3 , 36 , 37 ; 26 U. S. C. 3103, 310 , 312 , 3176.)
ta -payment, remova, and transfer of acoho
from recevng room
Sec. 1 2. 00. uthorzed Removas.

(c) Wthdrawn n packages, tank cars or tank trucks, upon payment of ta
as authorzed by secton 1 2. 0 to secton 1 2. 0 1 or ta -pad and transferred
bv ppene to a rectfvng pant or a ta -pad bottng house on contguous
premses as authorzed by sectons 1 2. 0 m, and 1 2. 7 a to 1 2. 7

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169
Regs. 3, 1 2.1, etc.
DR WING OFF, G UGING, ND R MO L OF LCO OL
Sec. 1 2. 0 . Dbawno Off coho. When acoho s to be drawn from a
recevng tank, the storekeeper-gauger w see that the vave n the ppene con-
trong the fow of acoho nto the tank s cosed nnd ocked before the acoho n
the tank s reduced and proofed and that such vave remans cosed and ocked
unt the acoho as been removed. Whenever acoho s to be drawn from re-
cevng tanks or transferred nto or out of other tanks secured wth Government
ocks, the storekeeper-gauger w open and cose the ocks, but t sha be the
duty of the propretor to manpuate the stopcocks or vaves controng the fow
of the acoho. T e storekeeper-gauger assgned to the recevng room s re-
qured to be present and personay supervse the drawng off of a acoho n
the recevng tanks, the markng and brandng of a packages of acoho fed
therefrom, and the stampng of a packages t -pad or e ported drecty from
the recevng room. mechanca dutes connected wth such oparaton sha
be performed by the propretor. ( 3 Stat. 30 , 30 , 37 ; 20 U. S. C. 310 , 312 ,
3176.)
Sec 1 2. 0 . Gaugng of coho. acoho drawn from recevng tanks
w be carefuy gauged by the propretor by weghng and proofng the sprts
n accordance wth ths part and the Gaugng Manua (20 CFR, Tart 1 0), and
the detas thereof sha be entered by the propretor on Form 1 0. ntres
sha be made as ndcated by the headngs of the varous coumns and nes nnd
n accordance wth the nstuctons prnted on the form or ssued n respect there-
to and as requred by ths part. Packages sha be marked n accordance wth
ths part. The storekeeper-gauger w verfy the proof, weght, and gaonage
of a acoho wthdrawn and w see that the nstructons n the Gaugng Manua
(26 CFR, Part 1 6) respectng the proofng of acoho are strcty foowed n
order that the proof may be accuratey determned. The proof of the acoho
sha be ad|usted to a whoe or compete degree of proof before beng removed
from the recevng tanks: Provded, That the proof of acoho transferred by
ppene, tank truck, tank car, tank shp or tank barge, to ndustra acoho
bonded warehouses or denaturng pants need not be so ad|usted. The acoho
n the recevng tank must be thoroughy agtated before takng the proof. The
proof so ascertaned w be regarded as the proof of acoho run nto a packages
ted from the recevng tank and a acoho removed from such tank by ppene
or n tank cars or tank trucks. owever, the proof of the acoho n the recevng
tank w be checked severa tmes whe the acoho s beng drawn off. The pro-
pretor sha provde, at hs own e pense, accurate hydrometers, hydrometer cups
and thermometers for the purpose of gaugng acoho. coho to be transferred
by ppene or n raroad tank cars or tank trucks for shpment sha be gauged
In a weghng tank as provded n secton 1 2. 07. ( 3 Stat. 307, 3 7, 3 S, 30 ,
37 ; 26 U. S. C. 2 0 , 3103, 310 , 312 , 3176.)
Sec 1 2. 07. Weghng coho Removed by Ppene. Where acoho s to
be removed by ppene, t w be weghed n a weghng tank before remova from
the recevng room, e cept that where acoho s transferred by ppene from
the recevng tanks to a bonded warehouse or denaturng pant on ndustra
acoho pant premses, and no weghng tank s provded n the recevng room,
the acoho may be run nto weghng tanks at the bonded warehouse or de-
naturng pant, respectvey, and weghed theren. The acoho must, n any
event, be weghed once n connecton wth ts transfer to the bonded warehouse
or the denaturng pant. Where acoho s transferred from recevng tanks
to tank cars or tank trucks one or more weghng tanks must bo provded n the
recevng room and a acoho removed by ppene must he weghed In such
weghng tanks, and the correct weght w be recorded by the propretor on the
approprate form. The storekeeper-gauger w baance the scaes upon whch
the weghng tank- s mounted before the acoho s run nto such tank. ( 3
Stat. 307, 3 , 3 9, 36 , 37 ; 20 U. S. C. 2S0 , 310 , 3107, 312 , 3176.)
S c.1 2. 07a. Testng Tank Scaes. Scaes used for weghng acoho n ots
of not over 00 gaons w be tested from tme to tne under the supervson
of the storekeeper-gauger by means of test weghts provded n accordance wth
secton 1 2.66. Such scaes w be tested by pacng the prescrbed test weghts
on the scaes and checkng the weght regstered on the beam of the scaes. The
test weghts w then be removed wthout dsturbng the beam and the tank
fed wth acoho or water to the same weght, whereupon the test weghts w
agan be paced upon the scaes, the acoho or water beng retaned n the tank
and the weght regstered on the beam checked. Ths operaton w then be
923 30 1 12
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Regs. 3, 1 2.1, etc.
170
contnued unt the scaes have been checked n 00-pound notches at a weghts
for whch the scaes are used. Propretors w have scaes used for weghng
acoho n arger ots tested and ther accuracy certfed by State, county, or cty
departments of weghts and measures or by a responsbe scae company at n-
tervas of not more than 6 months. Government offcers w see that tank scaes
are so tested. Government offcers w aso check, at east once a month, the
gaonage represented to be on the scae aganst the gaonage Indcated by a
voumetrc determnaton of the contents of the tank. Such voumetrc de-
termnaton w be made by (a) accuratey ascertanng the proof and the
temperature of the acoho and the depth of the qud n the tank by means of
a stee tape, (6) mutpyng the depth n nches by the capacty of the tank
for 1 nch of depth, and (c) correctng the voume to GO0 F. n accordance wth
tabe 7 of the Gaugng Manua. The corrected gaons thus determned w be
compared wth the gaons represented by the readng of the beam of the scae.
Uness the voumetrc check s wthn 0. percent of the quantty shown to be n
the tank, the Government offcer w take approprate steps to have the accuracy
of the scae verfed. In addton to the voumetrc check descrbed, Govern-
ment offcers w, as frequenty as condtons ndcate the necessty therefor,
test tank scaes of arge capacty n the manner prescrbed for smaer capacty
tank scaes, e cept that such tests on arge capacty tank scaes may be made
when they contan consderabe quanttes of qud. In ths case the beam w
bo carefuy baanced, and test weghts w be added to the oad, one at a tme,
unt the range of 00 pounds s checked. t any tme an offcer fnds a scae
to be naccurate, he w requre the propretor to have such scae ad|usted and
ts accuracy certfed. ( 3 Stat. 3 , 30 , 37 ; 2G U. S. C. 310 , 312 , 3170.)
Sec. 1 2. 0 . Ppene Removas. Ppenes used for the transfer of acoho
from the recevng room must conform to the requrements of secton 1 2. 2, e -
cept that acoho may be transferred nto a tank car or tank truck by means of
a hose connecton where the connectng hose s n fu vew of the Government
offcer throughout ts entre ength. The vaves on such ppenes sha be kept
cosed and ocked at a tmes, e cept when necessary to be opened for the trans-
fer of acoho. The keys to a ocks on the vaves of ppenes sha reman at
a tmes n the custody of the storekeeper-ganger. coho may be transferred
bv ppene onv under the mmedate supervson of the storekeeper-ganger.
( 3 Stat. 3 , 3 9, 30 , 37 ; 20 U. S. C. 310 , 3107, 312 , 3170.)
Ta -Pad Wthdrawas n Tank Cabs or Tank Trucks
Sec. 1S2. 0S1. Procedure. Whenever the propretor desres to wthdraw aco-
ho from recevng tanks for ta -payment and remova n tank cars or tank trucks,
the procedure prescrbed bv sectons 1 2. 06 to 1 2. 7 w be foowed. ( 3
Stat. 3 7. 3 , 3 , 300, 30 , 37 , 7, as amended; 20 U. S. C. 3103, 310 , 3100,
3112, 312 , 3170, 30 6.)
ta -pad wthdrawas ny ppene to rectfyng pant of ta -pad
OTTLING OUS
Skc. S2. 0 m. Procedure. Where a ppene has been nstaed and approved
for the transfer of acoho, after ta -payment, drect from the weghng tank n
the ndustra acoho pant to a contguous rectfyng pant or ta -pad bottng
house and the propretor desres to so transfer acoho the procedure prescrbed
by sectons 1 2. 7 a to S2. 7 e and 1 2. 7 g w be foowed. ( 3 Stat. 3 7,
3 , 3 , 36 , 37 ; 26 U. S. C. 3103, 310 , 3100, 312 , 3170.)
SUSP NSION of operatons
Sec. 1S2. 23. Notce, Form 12 . ny propretor desrng to suspend opera-
tons for an ndefnte perod or for a defnte perod of 7 days or more at hs
ndustra acoho pant sha gve notce on Form 12 , n dupcate, statng when
ho w suspend operatons. The notce w he devered to the storekeeper-
ganger n charge at the pant. ( 3 Stat. 3 7, 3 , 30 , 37 ; 20 U. S. C.
3103, 310 , 312 , 3170.)
C NG IN PROPRI TORS IP
Sko. 1 2. 7. Competon of Operatons Requred. When a successon, or
actua change, n the person or persons operatng the ndustra acoho pant
sha take pace, other than a change brought about by operaton of aw, as .by
the appontment of an admnstrator, e ecutor, recever, trustee, assguee, or
other fducary, the busness of producng acoho must be competey fnshed
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171
Regs. 3, 1 2.1, etc.
hy the person or persons who httve been carryng on the busness, nm the operu-
tons suspende before the busness sha he undertaken, or begun by the suc-
ceedng propretor, uness by an agreement between the outgong propretor and
the successor t sha be arranged to transfer from the former to the atter, at
mdnght of a certan day, a mash and beer, or other dstng matera, on
hand, and a unfnshed acoho outsde the recevng room at that hour: nd
provded. That, n ether case, the appcaton, bond and other quafyng docu-
ments of the successor have been approved and a basc permt Issued to take ef-
fect on the day ne t succeedng that at the cose of whch the transfer Is made.
Such documents shoud, therefore, be submtted to the dstrct supervsor n suf-
fcent tme to permt such approva and ssuance of basc permt for the date
desred. The successor sha not commence operatons unt a documents re-
qured for hs quafcaton as propretor of an ndustra acoho pant have been
approved and a basc permt has been ssued. fnshed acoho on hand n
the recevng room at the tme of the change must be drawn off, gauged, marked,
and removed by the outgong propretor n the name under whch t was pro-
duced before any acoho Is deposted In the recevng room or wthdrawn from
the ndustra acoho pant by the successor. ( 3 Stat. 3 , 36 , 37 ; 20 U. S. C.
310 , 312 , 3176.)
Operaton of Industra coho onded Warehouses
en for ta on acoho
Sec. 1 2. 3. Certfcate of Dscharge of Len. ny person camng any
nterest n any such and or budng may appy to the dstrct supervsor for a
duy acknowedged certfcate to the effect that such en s dscharged, and f the
dstrct supervsor determnes that any such en s e tngushed, he sha ssue
such certfcate, and any such certfcate may be recorded. ( 3 Stat. 3 7, 3 ,
36 , 37 ; 26 U. S. C. 3103, 310 , 312 , 3176.)
R C IPT OF LCO OL FROM INDUSTRI L LCO OL PL NT NOT ON W R OUS PRF.MI
ND FROM NOT R OND D W R OUS IN S M SUP R ISORY DISTRICT
Sec. 1 2. 9 . Method of Depost. (a) coho receved n packages. co-
ho receved In packages may be deposted n the warehouse n the packages In
whch t s receved, or the contents of the packages may be dumped nto storage
tanks f report s made thereof on Forms 1 0, 1 3- , and 1 3- , as provded
n sectons 1 2.6 3. 1 2.0 . and 1 2.6 6. If packages of acoho contanng
e acty 1, 2, , and 10 wne gaons are receved, the warehouse must be equpped
wth scaes capabe of weghng n terms of ounces, from whch the weght, to
hundredths of a pound, can be cacuated n accordance wth secton 1 2. 09(a).
(b) coho receved n tank cars. coho receved n tank cars must be
deposted, after gaugng, n warehouse storage tanks. If t s desred to receve
acoho In bond n raroad tank cars, proper raroad sdng factes must be
provded at the bonded warehouse. When acoho s receved n tank cars, the
seas must not be broken, or any acoho removed; e cept u the presence of the
storekeeper-gauger assgned to the bonded warehouse.
(c) coho receved n tank trucks. Undenatured ethy acoho receved In
tank trucks sha be gauged and transferred mmedatey to storage tanks. The
seas must be broken by the storekeeper-gauger assgned to the bonded warehouse
and no undenatured ethy acoho may be removed from the tank truck, e cept n
the presence of such offcer. ( 3 Stat. 3 7, 3 , 3 9, 360, 36 , 37 ; 26 U. S. C. 3101,
310 , 3107, 3113, 312 , 3176.)
R MO L OF LCO OL FROM STOR G OR W IG ING T N S
Sec. 1 2. 9 . Gauge on Wthdrawa. coho wthdrawn from storage or
weghng tanks n the warehouse w be gauged n accordance wth the provsons
of secton 1 2. 0 . ( 3 Stat. 307, 3 7, 3 7, 3 , 36 , 37 ; 26 U. S. C. 2 0 , 3101,
3103, 310 , 312 , 3176.)
Sec. 1 2. 00. Testng of Scaes. The storekeeper-gauger sha baance the
scaes before ether empty or fed packages are weghed, and w frequenty test
by means of test weghts provded n accordance wth secton 1 2.66, the accuracy
of such scaes. Weghng tank scaes w be tested n accordance wth provsons
of secton 1 2. 07a. In case the scae s found naccurate for any reason the
storekeeper-gauger w not permt t to be used whe t Is In such condton.
( 3 Stat. 307, 3 , 36 , 37 ; 26 U. S. C. 2 0 , 310 , 312 , 3176.)
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Regs. 3, 1 2.1, etc.
172
PP O D CONT IN RS
Sec. 1 2. 11a. Tank Trucks. Undenatured ethy acoho may be transported
In bond by tank trucks ony where sutabe storage tanks are .provded on the
recevng bonded warehouse premses. The manhoe covers, outet vaves, aud
a other openngs on tank trucks used for shppng undenatured acoho In bond
sha be equpped wth factes for seang so that the contents cannot be
removed wthout showng evdence of tamperng. Seray numbered cap son Is
for use on such tank trucks sha be furnshed by the Government and aff ed by
the storekeeper-gauger. Immedatey after fng, such tank trucks sha be seaed
n such a manner as w secure a openngs affordng access to the contents of the
tank. Ta -pad acoho may be transported by tank trucks equpped wth a route
board smar to that prescrbed for raroad tank cars n secton 1 2. 11. ( 3
Stat. 3 7, 3 , 3 9, 3 9, 360, 36 , 37 ; 26 U. S. C. 3101, 310 , 3107, 310S, 3112.
312 , 3170.)
Sec. 1 2. 13. Ppene Removas. Ppenes used for remova of acoho from
the bonded warehouse, n accordance wth the provsons of ths part must con-
form to the requrements of secton 1S2. 2, e cept that acoho may be transferred
nto a tank car or tank truck by means of a hose connecton where the connectng
hose s n fu vew of the Government offcer throughout ts entre ength. The
ockng of vaves and the supervson of removas sha be n accordance wth
secton 1 2. 9. ( 3 Stat. 3 7, 3 , 3 9, 3 9, 36 , 37 ; 20 U. S. C. 3101, 310 , 3107,
310 , 312 , 3170.)
M R S, R NDS, ND ST MPS
Sec. 1 2. 1 . Genera. efore weghng empty casks or packages, offcers
w e amne them and w not permt the use of any cask or package whch con-
tans or has on ts nteror or e teror, any substance that w prevent the correct
ascertanment of tare. The tare of the empty package w be determned mme-
datey precedng the fng of the same n a cases: Provded, That the tare
of a number of packages may be ascertaned and marked thereon before any are
fed but not e ceedng the number whch are to be fed the same day or the
foowng day. If the pneknges are not to be fed unt the foowng day, they
must be ocked n the recevng room or bonded warehouse after beng weghed
and marked. The tare or weght of the empty package w be marked on the
package as soon as ascertaned and recorded on the entry form. packages of
sprts, when fed, sha be further marked and branded as provded by ths part,
and where such packages are ta -pad, the ta -pad stamps w be aff ed thereto
and canceed n the manner prescrbed n secton 1 2. 27. ( 3 Stat. 3 7, 3 S, 36 ,
37 ; 26 U. S. C. 3101, 310 , 312 . 3170.)
Sec. 1 2. 2 . Other Marks. The marks requred by ths part to be on packages
must be paced on the Government head of a package or sde of a case, and no
other marks may be shown, wth the e cepton of those requred or authorzed to
be aff ed by Federa aw and reguatons. marks requred by ths part on
Government heads of packages or sdes of cases must be n coor dstncty n
contrast wth the coor of the background on whch they are paced. The pro-
pretor may show on the Government head, or end of packages, the brand or
trade name, provded the brand or trade name w not nterfere wth or detract
from the requred Government markngs. Cauton notces, etc., requred by
Federa aw and reguatons, may be paced on the Government head of packages,
or sde of cases, but such notces must be so paced as to not obscure the markngs
prescrbed by ths part. ( 3 Stat. 3 , 30 , 37 ; 26 U. S. C. 310 , 312 , 3176.)
T -P YM NT OF LCO OL IN P C G S
Sec 1 2. 0 . Remova of coho. The propretor sha dever a copes of
Form 1 0 wth the ta -pad stamps to the storekeeper-gauger, who w verfy
the data thereon, and, f no dscrepances are found, he w note the sera num-
bers of the stamps on the retaned copy of Form 1 0, and aff hs sgnature to
each stamp. Facsmes of sgnatures of storekeeper-gangers may be aff ed by
the use of hand stamps, care beng taken to use ony such nk as w nether
fade nor bur. The storekeeper-gauger w then return the stamps to the pro-
pretor, who w stamp and mark the packages or cases, as provded n sectons
1 2. 2 , 1 2. 27, and 1S2. 2 after whch the propretor w mmedatey remove
the acoho from the premses or to hs ta -pad storeroom, f one has been pro-
vded. When the acoho has been removed, the storekeeper-gauger w forward
one copy of Form 1 0 to the dstrct supervsor, and return two copes to the
propretor, who w retan one copy as a permanent record, as provded n sec-
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173
Regs. 3, 1 2.1, etc.
ton 1 2.6 3(h) and If he so desres, furnsh the remanng copy to the vendee.
(63 Stat 3 7,3 , 36 ,37 ; 26 U. S. O. 3103, 310 , 312 , 3176.)
T -P ID WIT DR W LS IN T N C S O T N TRUC S
Sec. 1 2. 66. Gaugng of coho. Whenever the propretor desres to wth-
draw acoho from recevng or storage tanks for ta -payment and remova In
tank cars or tank trucks, the acoho w be run nto a weghng tank, where It
w be gauged and then run Into such conveyances. The propretor sha prepnre
Form 1 0, n quadrupcate, gvng the detas of the gauge and submt a
copes to the storekeeper-gauger for e amnaton. If the forms are n proper
order, the storekeeper-gauger w retan one copy and return three copes to the
propretor. ( 3 Stat. 3 7, 3 7, 3 , 360, 36 , 37 ; 20 U. S. C. 3101, 3103, 310 ,
3112, 312 , 3176.)
Sec. 1 2. 67. ppcaton fob Certfcate of Ta -Payment, Form 1 9 . The
propretor w e ecute Form 1 0 (appropratey modfed, f shpment Is to be
made n a tank truck), n dupcate, f the vendee s ocated n the same super-
vsory dstrct, and n trpcate f the vendee s ocated n a dfferent supervsory
dstrct. e w then forward a copes of Form 1 9 wth a copes of Form
1 0 accompaned by proper remttance for the ta to the coector of nterna
revenue. The coector may, n hs dscreton, accept uncertfed checks n pay-
ment of the ta on acoho contaned n tank cars or tank trucks where certfcates
are ssued n eu of stamps. ( 3 Stat. 3 7, 3 , 360, 3G , 37 , 7, as amended;
26 U. S. C. 3101, 310 , 3112, 312 , 3170, 30 0.)
Sec. 1 2. 6 . Certfcate of Ta -Paymknt, Form 1 9 . The coector w ssue
Form 1 9 (appropratey modfed, f shpment s n tank trucks), e ecute hs
certfcate of ta -payment and enter the sera number of the certfcate (In the
coumn provded for enterng the sera numbers of ta -pad stamps) on a
copes of Form 1 0. The coector w f n a the requred data n the bank
spaces on the certfcate e cept those provded In the ower eft corner for the
verfcaton of the storekeeper-gauger, and date and sgn the certfcate n the
same manner as a ta -pad stamp s requred by secton 1 2. 0 to be fed n,
dated, and sgned. Ths certfcate s not negotabe and shn not be used on any
tank car or tank truck other than the one specfed theren. The coector w
enter on the orgna and the copy, or copes, of Form 1 9 , n the space provded,
the sera number, date, and amount of the certfcate ssued. The coector w
retan one copy of Form 1 0 and the orgna copy of Form 1 9 . e w ma
or dever the certfcate (Form 1 9 ) and the orgna and remanng copes of
Form 1 0 to the vendor or hs desgnated agent, n accordance wth the vendor s
request n Form 1 9 . The coector w send one copy of the appcaton (Form
1 9 ) to the dstrct supervsor. Where the vendee s ocated n a dfferent
supervsory dstrct, the coector w send the remanng copy of Form 1 9 to
the supervsor of the dstrct n whch the vendee s ocated. ( 3 Stat. ; 7, 3 ,
360, 36 , 37 ; 26 U. S. C. 3101, 310 . 3112, 312 , 3170.)
Sec. 1 2. 69. of Ladng. The propretor sha ncorporate In the b of
adng a descrpton of Form 1 9 as foows:
Form 1 9 , Sera Number , Owner and Number of Car (or truck)
, endor , ddress ,
endee , ddress
( 3 Stat. 3 7, 3 , 30 , 37 ; 26 U. S. C. 3101, 310 , 312 , 3176.)
Sec. 1 2. 70. erfcaton and ff ng of Certfcate. The propretor sha
gve the certfcate of tn -payment (Form 1 9 ), the b of adng, and a copes
of Form 1 0 to the storekeeppr-gnuger. The storekeeper-ganger w verfy the
contents of the tank car or tank truck, and the descrpton of Form 1 9 n the
b of adng, determne the securty of the route board, and, f no dscrepances
are found, he w note the sera number of the certfcate on Form 1 0, and
date and sgn the certfcate n the space provded therefor. The propretor sha
then aff the certfcate to the route board n the presence of the storekeeper-
gauger. The certfcate must be securey aff ed to the route board wth good
adhesve and wth a tack n each corner, whereupon t w be canceed n the
same manner as a ta -pad stamp after attachment to a package. The certfcate
w then be covered wth a coatng of transparent sheac, varnsh, or acquer
to prevent ts easy remova or ateraton. ( 3 Stat 3 7, 3 , 36 , 37 ; 26 U. S. C
3101, 310 , 312 , 3176.)
Sec 1 2. 71. Reease of Tank Car or Tank Truck. When the certfcate of
ta -payment has been aff ed to the route board and canceed, and the conveyance
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Regs. 3, 1 2.1, etc.
17
seaed by the propretor (who sha furnsh the necessary ocks or seas), the
storekeeper-ganger w return the b of adng to the propretor and reease the
tank car or tank truck for shpment. The ston-keeper-gauger w forward one
copy of Form 1 0 to the dstrct supervsor and dever two copes to the pro-
pretor, who w forward one copy to the vendee, and retan the remanng copy
as a permanent record n accordance wth secton 1 2.6 3. ( 3 Stat. 3 7( 3 ,
300, 36 , 37 ; 26 U. S. C. 3101, 310 , 3112, 312 , 3170.)
Sec. 1 2. 72. 1 rocedube When Tank Cab ob Tank Truck Is mpty; Scapng
Certfcate. When acoho s receved n a tank car or tank truck by the pro-
pretor of a rectfyng pant, ta -pad bottng house, or other vendee authorzed
to receve ta -pad acoho, the vendee sha, at the tme the car s empted, scap
the certfcate of ta -payment on Form 1 0 by cuttng out a of that porton of
the certfcate wthn the border. The vendee sha then send the scaped porton
of the certfcate to the supervsor of the dstrct n whch the vendee s ocated
and sha obterate the remander of the certfcate. If the tank car or tank
truck s receved wthout the certfcate attached thereto, the vendee sha note
such fact on the b of adng and mmedatey notfy the dstrct supervsor who
w cause such nqury to be made respectng the shpment and recept of the
conveyance as he may deem approprate. Where a conveyance wth the certf-
cate mssng s receved by a pant where a storekeeper-ganger s assgned, such
storekeeper-ganger w furnsh a compete report to the dstrct supervsor. ( 3
Stat. 3 S, 30 , 37 ; 20 U. S. C. 310 , 312 , 3170.)
T -P ID wthdrawas by ppene to rectfyng pant or ta -pad
OTTLING OUS
Sec 1 2. 7 a. Gaugng of coho. Where a ppene has been nstaed and
approved for the transfer of acoho, after ta -payment, drect from the weghng
tank n the ndustra acoho pant or bonded warehouse to a contguous rectfy-
ng pant or ta -pad bottng house as provded n secton 1 2. 2 and the pro-
pretor desres to so transfer acohc, the acoho w be run nto a weghng tank
where t w be gauged n accordance wth secton 1S2. 0 . The propretor sha
prepare Form 1 0, n quadrupcate, gvng the detas of the gauge and submt
a copes to the storekeeper-ganger for e amnaton. If the forms are n proper
order, the storekeeper-gauger w retan one copy and return three copes to
the propretor. The outet of the weghng tank w be cosed and ocked before
the acoho to be ta -pad s transferred to the tank, and the net of the tank
w be cosed and ocked after the acoho has , een run nto the tank. oth the
outet and net w be kept ocked, pendng payment of ta and recept of the
coector s certfcate of ta -payment, Form 1 0 , as herenafter provded. ( 3
Stat. 3 7, 3 7, 3 , 30 , 37 ; 20 U. S. C. 3101, 3103, 310 , 312 , 3170.)
Sec 1 2. 7 e. Transfer of coho. When a certfcate of ta -payment has
been aff ed to the weghng tank and canceed, the storekeeper-ganger w unock
the mtet vave and permt the propretor to transfer the acoho by ppene to
the rectfyng pant or ta -pad bottng house specfed n the certfcate. The
acoho sha be transferred ony under the mmedate supervson of the store-
keeper-ganger at the ndustra acoho pant or bonded warehouse and the
storekeeper-gauger at the rectfyng pant or ta -pad bottng house who 3ha
verfy by weght or measure the quantty receved. fter the acoho has been
transferred, the storekeeper-gauger w forward one copy of Form 1 0 and the
canceed Form 1 9 to the dstrct supervsor and dever two copes of Form
1 0 to the propretor who w dever one copy of such form to the rectfer or
botter. ( 3 Stat. 3 7, 3 , 30 , 37 ; 20 U. S. C. 3101, 310 , 312 , 3170.)
e portaton of acoho free of ta
Sec 1 2.611. ccount Wth Contnung port onds. The dstrct super-
vsor w keep an account wth each contnung drect e port bond, Form 1 0 ,
and each contnung transportaton for e port bond, Form 1 06. In the account
wth each contnung drect e port bond, the prncpa w be charged wth the
nterna revenue ta on each ot of acoho wthdrawn thereunder for e portaton
and w receve credt for each ot concernng whch satsfactory evdence of and-
ng n a foregn country has been receved. In the account of each contnung
bond for transportaton for e port, the prncpa w be charged wth the nterna
revenue ta on each ot of acoho wthdrawn under the bond for transportaton
for e port and w receve credt for each ot concernng whch evdence of cear-
ance from the port of e port s receved from the coector of customs. In case
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Regs. 3, 1 2.1, etc.
a shortage In any shpment Is reported, credt w be entered for the actua
quantty e ported or ceared for e portaton, as the case may be, but no credt
w be entered for the oss unt abty therefor has been termnated. ( 3 Stat.
336, 337, 3 , 36 , 37 ; 26 U. S. C. 2 , 2 6, 310 , 312 , 3176.)
TR NSF R OF LCO OL TO CUSTOMS M NUF CTURING OND D W R OUS S
Sec. 1S2.02 . ccount Wt Contnung ond, Form 1 60. The dstrct super-
vsor w keep an account wt each bond on Form 1 G0, n whch account the
prncpa w be charged wth the ta on each ot of acoho removed for trans-
portaton to a customs manufacturng bonded warehouse and w receve credt
for the ta on each ot concernng whch satsfactory proof of the depost n
such warehouse Is receved. If there has been a oss of acoho n transt, the
account may be credted wth the (pnntty of acoho deposted n the manufac-
turng warehouse upon recept from the coector of customs on Form 3023 ( u-
reau of Customs) coverng the depost. owever, the oss sha not be credted
unt abty for ta due thereon has been termnated. When no further wth-
drawas are to be made under the bond, the dstrct supervsor w, f there are
no outstandng charges, cance the bond n accordance wth the provsons of
secton 1S2.31 . ( 3 Stat. 3 0, 3 , 300, 3C , 37 ; 26 U. S. C. 2 91, 310 , 3113,
312 , 3176.)
R CORDS ND R PORTS OF PROPRI TOR
Sec. 1 2.6 a. Record of Warehouse Recepts To e ept by Propretor.
very propretor of an ndustra acoho pant or bonded warehouse who ses, or
offers for sae, acoho or other dsted sprts by warehouse recepts sha keep
a separate record, and render a monthy transcrpt, of a purchases and saes of
warehouse recepts on Form 2-F. There need not be reported on Form 2-F
transactons n warehouse recepts not nvovng the purchase or sae of acoho
or other dsted sprts, such as the recept from a warehouseman of warehouse
recepts coverng the depost of acoho or other dsted sprts n hs warehouse
or the surrender of warehouse recepts for the transfer, n bond, of acoho or
other dsted sprts, to another warehouse. ntres on Form 2-F sha be
made as ndcated by the headngs of the coumns and nes of the form and n
accordance wth the nstructons prnted thereon or ssued n respect thereto, and
as requred by ths part. The provsons of secton 1 2.0 (a) wth respect to
the tme of makng entres, and of secton 1 2.6 (e) wth respect to forms to
be provded by users, are hereby made appcabe to Form 2-F. The provsons
of secton 1 2.6 (6) wth respect to a separate record of sera numbers of cases
are hereby made appcabe to Form 2-F wth respect to sera numbers of pack-
ages and cases purchased or sod by warehouse recepts. The monthy transcrpt
on Form 2-F sha be forwarded to the dstrct supervsor on or before the tenth
day of the succeedng month. The physca remova of acoho from an ndustra
acoho pant sha be reported as prescrbed n secton 1 2. 6. The physca
remova of acoho from an ndustra acoho bonded warehouse sha be reported
on Forms 1 3- and 1 3- n accordance wth the provsons of sectons
1 2.6 and 1 2.6 6, respectvey. The physca recept and dsposton of acoho
at ta -pad premses sha be reported on Form 2- or Record 2, as the case
may be, n accordance wth te provsons of secton 1 2.6 . ( 3 Stat. 327, as
amended, 32 , 3 , 36 , 37 , 301; 20 U. S. C. 2 7, 2 9, 310 , 312 , 317G, 32 .)
Operaton of Industra coho Denaturng Pants
denaturng of acoho
Sec 1 2.719. ddno Denaturants. acoho sha be denatured n ap-
proved m ng tanks, e cept that, (a) by speca permsson of the dstrct
suwrvsor, denaturng n packages w be permtted to the e tent of preparng
speca formuas that are occasonay produced at the pant and In no ease
e ceedng 10 packages (not e ceedng 600 gaons n the aggregate) of any one
formua on the same day: Provded, That specay denatured acoho formuas
1 , 2 , 2 , and 2 aternatve, may, upon notce to the dstrct supervsor, be
m ed n packages n any quantty; (6) a mted quantty of competey de-
natured acoho may be prepared n packages, provded speca permsson of
the dstrct supervsor has frst been obtaned; (c) In cases of emergency ony
denaturng may be done n tank cars f permsson s frst obtaned from the
dstrct supervsor; and (d) the Commssoner may approve other methods of
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Regs. 3, 1 2.1, etc.
176
addng denaturants. ( 3 Stat. 3 , 3 7, 3 , 36 , 37 ; 20 U. S. C. 3070, 3102,
310 , 312 , 3176.)
TR NSF R IN P C G S ND T N C S OF D N TUR D LCO OL TW N
D N TURING PL NTS
Sec. 1S2.7 9. Intradtstrct Transfers. When denatured acoho Is shpped to
another denaturng pant n the same supervsory dstrct, n packages and tank
cars, the propretor w prepare two copes of Form 1 67 (n addton to the
copes prepared at the tme the packages were fed pursuant to secton 1S2.7S3)
and four copes of Form 1 73 reportng the shpment. When competey de-
natured acoho s so shpped, the Forms 1 73 w be modfed to rend Com-
petey, nstead of Specay, denatured acoho. The propretor w dever
a copes of the forms to the storekeeper-gauger n charge who sha at the tme
of shpment forward one copy each of Forms 1 67 and 1 73 to the supervsor of
the dstrct and two copes of Form 1 73 and one copy of Form 1 67 to the
storekeeper-gauger n charge of the recevng denaturng pant, and return the
remanng copy of Form 1 73 to the propretor for fng n accordance wth sec-
ton 1S2.7S . fter recept of the denatured acoho at the denaturng pant,
forms w be dsposed of n accordance wth secton 1 2.7 0a. ( 3 Stat. 3 ,
36 , 37 : 26 U. S. C. 310 , 312 , 3176.)
PORT TION OF SP CI LLY D N TUR D LCO OL
Sec. 1 2.7 9. pprova of Consent of Surety and Issuance of Permt. The
dstrct supervsor w e amne the consent of surety and f t s propery e e-
cuted as provded n sectons 1 2.1S to 1S2.190 and secton 1S2.7 , he w ap-
prove the consent, forward the orgna thereof to the Commssoner, retan a
copy and return a copy to the permttee together wth the permt. If there s
nothng ndcatng that the specay denatured acoho w not be e ported n
the manner stated n the appcaton, and proper certfcates of cearance and
andng have been fed n accordance wth secton 1 2.767, for prevous shp-
ments for e port, the dstrct supervsor w Issue the permt on Part II of
Form 1 , and w return a copes thereof to the appcant. ( 3 Stat. 3 ,
3 9, 36 , 37 ; U. S. C. 310 , 3109, 312 , 3176.)
rf.cords and reports of propretor
Sec. 1 2.7 . Form 1 3- . When specay denatured acoho s shpped to
the Unted States or .a governmenta agency thereof, the propretor of the
denaturng pant w prepare Form 1 3- n trpcate. Where shpment Is
made n a tank truck the data requred by secton 1 2.7 b or secton 1 2.7 c, as
the case may be, to be entered on Form 1 73 w be entered on Form 1 3- for
such transacton. The propretor w gve a copes of Form 1 3- to the
storekeeper-gauger who w check them wth the records and permt and f
found to agree therewth he w nta a copes. e w ma one copy of
Form 1 3- to the consgnee. In the case of tank truck shpments, he w
encose one copy n a seaed enveope addressed to the government offcer to whom
the specay denatured acoho s consgned and gve the same to the drver of
the tank truck for devery to such offcer. e w forward a copy of Form
1 3- to the supervsor of the dstrct n whch the consgnor s premses are
ocated. e w return the remanng copy to the propretor for fng n ac-
cordance wth secton 1 2.7 . Upon recept of the specay denatured acoho,
the recevng Government offcer w e ecute the certfcate of recept on Form
1 3- , after notng thereon any oss or defcency n the shpment, and w
forward t to the dstrct supervsor specfed at the bottom of the form. When
specay denatured acoho s not receved wthn a reasonabe tme after
shpment, or where any matera or une paned dfference e sts between the
knd and quantty shpped and that receved, the dstrct supervsor sha n-
vestgate each case and take approprate acton n respect thereto. In addton,
the dstrct supervsor w check day, on recept, the Form 1 3- coverng
tank truck shpments, and make any nqury whch he deems necessary wth
respect to any dscrepancy. In the event of faure to receve a form from the
consgnee wthn the tme normay requred for the truck to make the shpment
and the form to be receved by ma, the dstrct supervsor w make approprate
nvestgaton. ( 3 Stat. 3 , 3 , 361, 37 ; 26 U. S. C. 3070, 310 , 312 , 3170.)
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177
Regs. 3, 1 2.1, etc.
Operatons by Deaers n Specay Denatured coho
dsposton of specay denatured acoho
Sec. 1 2. 13. Sae. Specay denatured acoho may be sod by bonded deaers
hodng basc permt, Form 1 76, to manufacturers usng specay denatured
acoho, and to other bonded deaers n specay denatured acoho, pursuant to
wthdrawa permt, Form 1 , or Form 1 77, as the case may be. onded
deaers may aso furnsh sampes of specay denatured acoho to manufactur-
ers, other bonded deaers, and to prospectve permttees pursuant to sampe per-
mt, Form 1 12: Provded, That n the case of sampes, where the quantty n-
voved n any case does not e ceed fud ounces, permt, Form 1 12, w not be
requred. Saes of specay denatured acoho may aso be made to the Unted
States or governmenta agences thereof pursuant to permt. Form 1 6. The
provsons of sectons 1 2.7 to S2.7 e, respectng saes of specay denatured
acoho by denaturers, are hereby made appcabe to saes of specay denatured
acoho by bonded deaers. Specay denatured acoho sod by bonded deaers
must be transported n accordance wth secton 1 2.677. Record and report of
such transactons sha be reported on Form 1 7 , as provded n secton 1 2. 22.
Tank trucks used for the transportaton of specay denatured acoho by bonded
deaers, after ng, sha be seaed by approprate seas, seray numbered,
furnshed and aff ed by the shpper. The sea sha be dssmar n markng
from the cap seas used by the ureau of Interna Revenue. The sera numbers
of seas used and the data wth respect to the carrer set forth n secton 1 2.7 b
or 1 2.7 c w be recorded by the dener on Form 1 73 or Form 1 3- , as the
case may be. ( 3 Stat. 3 , 30 , 3 9, 300, 36 , 37 ; 20 U. S. C. 3070, 310 , 3109,
311 , 312 , 3176.)
Operatons by Users of Specay Denatured coho
propretary sovents and acquer thnners
Sec. 1 2. 7. Contaners.
(o) Labes. Where propretary sovents and acquer thnners are packaged
by producers for ther agents n contaners of one-haf gaon or more and not
more than wne gaons, such contaners must be abeed to show the producer s
name, address, and permt number: Provded, That where the product s pack-
aged for the deaer, the name and address of the deaer may be shown n eu
of the name and address of the producer, but the basc permt number of the
producer must be paced on the abes. Where deaers repackage propretary
sovents n contaners of one-haf gaon or more but not more than 0 wne ga-
ons, as authorzed n paragraph (d) of ths secton, the name, address, and
basc permt number of the producer or the name and address of the deaer and
the basc number of the producer, sha kewse be paced on the abes of such
contaners. When propretary sovents and acquer thnners are shpped n
tank cars, or tank trucks, a abe w be aff ed to the route board of each such
vehce, gvng the name of the product, the quantty, and the producer s name,
address, and permt number. Where such shpments are made by the producer s
bona fde agent, the name and address of the agent may be shown n eu of the
name and address of the producer, but the basc permt number of the producer
must be paced on the abe.

C NG IN PROPRI TORS IP, N M , TC. ; DISCONTINU NC OF US
Sec. 1 2. 77. Pboceduke. (a) Change n propretorshp, name, etc. Where
there s a change In propretorshp, or n the persons nterested n the busness,
or n the ndvdua, frm, or coporate name, trade name or stye, or n the oca-
ton of the premses, etc., procedure smar to that prescrbed n sectons 1 2.6 0
to 1 2.6 2 w be foowed nsofar as appcabe.
(6) Dscontnuance of use When the use of specay denatured acoho Is
dscontnued, the permttee sha gve notce thereof n wrtng, n trpcate, to
the dstrct supervsor, and sha surrender to the dstrct supervsor hs basc
and wthdrawa permts. ny specay denatured acoho remanng on hand
at the tme of such dscontnuance may be dsposed of n accordance wth sec-
tons 1 2. 67 and 1 2. 6 , or when authorzed by the dstrct supervsor, the
specay denatured acoho may be dsposed of to another person hodng permt
to use specay denatured acoho of the same formua, upon the fng of a con-
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Regs. 3, 1 2.1, etc.
17
sent of surety, Form 1 33, on the bond (f any), of the purchaser e tendng the
terms of hs bond to cover the transportaton to, and use by, hm of the specay
denatured acoho. Recovered denatured acoho and artces remanng on hand
sha be dsposed of ony as authorzed by the dstrct supervsor, after fu
advce respectng ther condton and the dsposton whch t s desred to make
of the recovered products has been submtted. When a specay denatured
acoho, recovered denatured acoho, and artces, remanng on hand at the
tme of dscontnuance of the use of specay denatured acoho, have been prop-
ery dsposed of, as heren provded, the dstrct supervsor w approve the
notce of dscontnuance, notng thereon the dsposton made of such specay
denatured acoho, recovered denatured acoho, and artces, retan one copy of
the notce for hs fes, and forward one copy to the Commssoner and one copy
to the permttee. ( 3 Stat. 3 , 36 , 37 ; 26 U. S. C. 310 , 312 , 3176.)
Denatured Rum
sae and use of denatured rum
Sec. 1 2. 79. Deaers n and Users of Specaty Denatured Rum. The pro-
vsons of ths part reatng to specay denatured acoho w appy, nsofar
as appcabe, to the procurement and sae by bonded deaers, and the procurement
and use by manufacturers, of specay denatured rum, e cept that deaers sha
make deveres n accordance wth Reguatons 16 (26 OFR, Part 1 7). ( 3
Stat. 3 , 3 S, 36 , 37 ; 26 U. S. C. 3070, 310 , 312 , 3170.)
Importaton of coho for Industra Purposes
Sec. 1 2.997. Gaugng Upon recept of the acoho at the ndustra acoho
pant, bonded warehouse, or denaturng pant from customs custody, t w be
gauged n accordance wth the provsons of ths part and the Gaugng Manua
(26 CFR, Part 1S6) : Provded, That where the bonded premses consst of storage
tanks ony, the sprts may be gauged upon recept at such premses by any of the
foowng three methods, preference to be gven n the order named:
(a) Weghed n scae tanks.
(h) Gauged by voume n accuratey cabrated storage tanks.
(c) Weghed on raroad car scaes ocated on bonded premses by weghng
tank cars before and after fng or emptyng, as the case may be.
( 3 Stat. 3 , 30 , 37 ; 20 U. S. C. 310 , 312 , 3170.)
2. The purposes of these amendments are as foows:
(a) To authorze the transfer of acoho, by ppene, after ta -
payment, to ta -pad bottng houses.
( ) To deegate to dstrct supervsors the authorty to approve the
estabshment of ndustra acoho pants, bonded warehouses, and
denaturng pants.
(c) To ncorporate, n ths part, reguatons appcabe to the
gaugng of acoho at ndustra acoho pants, bonded warehouses,
and denaturng pants, now contaned n the Gaugng Manua (26
CFR, Part 1 G), but whch are beng deeted from the current revson
of such manua.
(d) To modfy requrements for constructon of acoho tanks.
(e) To modfy the specfcatons concernng coors for ppenes n
ndustra acoho pants, bonded warehouses and denaturng pants.
(/) To requre testng and certfcaton by State, county, or cty
departments of weghts and measures, or by responsbe scae compa-
nes, of scaes used for weghng acoho n arge quanttes, and to
amend specfcatons for graduatons of beams or das of tank scaes
used for weghng acoho.
(g) To provde for the remova, n tank trucks, of ta -pad acoho
from an ndustra acoho pant or bonded warehouse.
(h) To beraze the requrements wth respect to fng an n-
demnty bond to cover the remova of equpment from an ndustra
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179
Regs. 3, 1 2.1, etc.
acoho pant or bonded warehouse premses to another bonded prem-
ses where the two premses are controed by the same nterests.
() To provde for the approva of aternate methods of addng
denaturants to ethy acoho under unusua crcumstances.
3. These reguatons are ssued under the authorty of -1 Stat. 122,
as amended; 6 U. S. C. 1 ; 3 Stat. 307. 311, 31 , 316, 31 , 327, as
amended, 32 , 33 , as amended, 336, 337, 310, 3 , 3 7, 3 7, 3 7, 3 ,
3 . 3 9,3 9, 360, 3G0, 3G0, 36 , 373, as amended, 37 , 7, as amended ;
26 U. S. C. 2 0 , 2 1 , 2 20, 2 23 2 29, 2 7, 2 9, 2 3, 2 , 2 6,
2 91, 3070, 3101, 3102, 3103, 310 , 3106, 3107, 3109 3112, 3113, 311 ,
312 , 3170, 3176, 36 6.
ffect: Ths Treasury Decson sha be effectve as of Septem-
ber 1, 19 0,
Geo. . Schoeneman,
Thomas . Lynch,
(Fed n the Dvson of the Federa Regster ugust 17, 19 0, : a. m.)
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Regs. , , 10. ISO
DISTILL D SPIRITS
INT RN L R NU COD
Reguatons , Reguatons , and 19 0-20-13 30
Reguatons 10. T. D. S0G
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RTS IS3, 1 .
ND 1
mendng Reguatons , Reguatons , and Reguatons 10
Washngton 2 , D. C.
1. Reguatons (26 CFR, Part 1 3; 1 F. R. 323 ), Producton
of Dsted Sprts, are hereby amended by addng a new secton
as foows:
Sudpart W Ta -Payment, Remova, and Transfer of Dsted Sprts
From Cstern Room
reease of sprts for transfer
Sec. S3. 2a. Ta -Payment by Stamps. If the sprts are to ba removed by
ppene to n contguous rectfyng pant or ta -pad buttng house, dsted
sprts stamps prescrbed by Reguatons 10 (2G CFR, Part 1 ) for the ta -
payment of dsted sprts botted n bond may be used, n eu of a ccrtf-ato
of ta -payment (Form 1 9 ), to ta -pay the sprts. When sprts are to be
so ta -pad, the dster, upon recept of the copes of Forms 179 and 1 20 from
the storekeeper-ganger pursuant to secton 1 3. 0, w cance the necessary
number of stamps n the e act amount of the ta due by egby wrtng or
stampng on eac stamp wth ndebe (nda) nk, hs name, the regstry number
of the dstery, and the date of Form 170. The dster w then attach the
stamps to one copy of Form 17 ) and submt a copes of Forms 170 and 1 20 to
the Government offcer. The Government offcer w further cance the stamps
by sgnng them, foowed by hs tte, and w e ecute a certfcate of recept on
Form 170 (usng the recept of the coector, propery modfed) evdencng the
recept and canceaton of stamps for the amount of ta due. The copy of
Form 170 to whch the stamps are attached and the accompanyng copy of Form
1 20 w be attached to the board on the weghng tank and reman thereon unt
the sprts covered by such stamps have been removed. The reease of the sprts
fr-om the tank and the dsposton of the forms w be In accordance wth the
provsons of secton 1 3. 2. The dster sha keep a record on Form 1697,
propery modfed, of a dsted sprts stamps receved nnd used at the ds-
tery for ta -payment of sprts authorzed by ths secton. The form sha be
dsposed of n accordance wth the nstructons prnted thereon. ( 3 Stat. 2 )S
as amended, 33 as amended, 37 , 37 , 30 ; 26 U. S. C. 2S00, 2 3, 3172, 317 ,
3300.)
2. Reguatons (26 CFR. Part 1 -1 F. R. 2), Producton
of randy, are hereby amended by addng a new secton as foows:
SunP RT Ta -Payment, Remova, and Transfer of randy
From Dstery-
reease of brandy- for transfer
Sec. 1 . 03a. Ta -Payment bt Stamps. If the brandy s to be removed by
ppene to a contguous rectfyng pant or ta -pad bottng house, dsted
sprts stamps prescrbed by Reguatons 10 (26 CFR, Part 1 ) for the ta -
payment of dsted sprts botted n bond may be used, n eu of a certfcate
of ta -payment (Form 1 0 ), to a -pay the sprts. When sprts are to be so
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egs. , , 10.
ta -pad, the dster, upon recept of the copes of Forms 170 and 1 20 from
the storekeeper-ganger pursuant to secton 1 . 7, w cance the necessary
number of stamps n the e act amount of the ta due by egby wrtng or
stampng on each stamp wth Indebe (Inda) nk, hs name, the regstry number
of the dstery, and the date of Form 170. The dster w then attach the
stamps to one copy of Form 179 and submt a copes of Forms 170 and 1 20 to
the Government offcer. The Government offcer w further cance the stamps
by sgnng them, foowed by hs tte, and w e ecute a certfcate of recept
on Form 170 (usng the recept of the coector, propery modfed) evdencng
the recept and canceaton of stamps for the amount of ta due. The copy of
Form 170 to whch the stamps are attached and the accompanyng copy of Form
1 20 w be attached to the board on the weghng tank and reman thereon
unt the sprts covered by such stamps have been removed. The reease of the
sprts from the tank and the dsposton of the forms w be n accordance wth
the provsons of secton 1 . 03. The dster sha keep a record on Form
1G07, propery modfed, of a dsted sprts stamps receved and u ed at the
dstery for ta -payment of brandy authorzed by ths secton. The form sha
be dsposed of n accordance wth the nstructons prnted thereon. ( 3 Stat.
29 as amended, 33 as amended, 37 , 37 , 30 ; 20 U. S. C. 2 00, 2 3, 3172, 317 ,
3300.)
3. muatons 10 (26 CFR, Part 1 :1 F. R. 233), Warehousng
of Dsted Sprts, are hereby amended by addng a new secton as
foows:
Subpabt CC Ta -Pad Wthdrawas by Gauge Tank
Sec. 1 .626a. Ta -Payment by Stamps. If the sprts are to be removed by
ppene to a contguous rectfyng pant or ta -pad bottng house, or are to be
drawn nto packages to whch whoesae quor deaer s stamps w be aff ed,
dsted sprts stamps prescrbed by secton 1 .672 may be used, n eu of a
certfcate of ta -payment (Form 1 9 ), to ta -pay the sprts. When sprts are
to be so ta -pad, the propretor, upon recept of the copes of Forms 179 and
1 20 from the storekeeper-gauger pursuant to secton 1 .622, w cance the
necessary number of stamps n the e act amount of the ta due by egby wrtng
or stampng on each stamp wth ndebe (nda) nk, hs name, the regstry
number of the warehouse, and the date of Form 179. The propretor w then
attach the stamps to one copy of Form 179 and submt a copes of Forms 179
and 1 20 to the Government offcer. The Government offcer w further cance
the stamps by sgnng them, foowed by hs tte, and w e ecute a certfcate
of recept on Form 179 (usng the recept of the coector, propery modfed)
evdencng the recept and canceaton of stamps for the amount of ta due.
The copy of Form 179 to whch the stamps are attached and the accompanyng
copy of Form 1 20 w be attached to the hoard on the gaugng tank and reman
thereon unt the sprts covered by such stamps have been removed. The re-
ease of the sprts from the tank and the dsposton of the forms w be n
accordance wth the provsons of secton 1 .626. The propretor sha keep a
separate record on Form 1097, propery modfed, of a dsted sprts stamps
receved and used at the warehouse for ta -payment of sprts authorzed by
ths secton. The form sha be dsposed of n accordance wth the nstructons
prnted thereon. ( 3 Stat. 29 as amended, 33 as amended, 37 , 37 , 39 ; 26
U. S. C. 2 00, 2 3, 3172,317 , 3300.)
. The purpose of these amendments s to permt dsted sprts
stamps (.prescrbed by secton 1 .672 of Reguatons 10 (26 CFR,
Part 1 ; 1 F. R. 233) for the ta -payment of dsted sprts botted
n bond) to be used for the ta -payment of dsted sprts trans-
ferred by ppene from regstered and frut dsteres and nterna
revenue bonded warehouses to contguous rectfyng pants and ta -
pad bottng houses, and for dsted sprts ta -pad n buk gaugng
tanks n nterna revenue bonded warehouses and drawn nto packages
to whch whoesae quor deaer s stamps are to be aff ed. Such
dsted sprts stamps may be used n eu of a certfcate of ta -
payment, Form 1 9 , prescrbed by e stng reguatons. Snce the
stamps can be purchased n advance, ta -payment can be accompshed
mmedatey foowng the gaugng of the sprts and therefore the
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Regs. 7, 17 . , etc.
1 2
deay ncdent to obtanng a certfcate of ta -payment from the co-
ector after the sprts are gauged, w be obvated.
. It s found that compance wth the notce, pubc rue-makng
procedure, and effectve date requrements of the dmnstratve Pro-
cedure ct ( U. S. C. 1000 et seq.) s unnecessary n connecton wth
the ssuance of these reguatons for the reason that the changes made
are of a berazng character.
6. Ths Treasury Decson w be effecth e September 1, 19 0, or
upon the date of pubcaton n the Federa Regster, whchever date
s ater.
(Ths Treasury Decson s ssued under the authortv contaned n
3 Stat. 29 as amended. 33 as amended, 37 ,37 , 37 ,39 ; 26 U. S. C.
2 00, 2 3, 3172,317 , 3176, 3300.)
Fred S. Martn,
, ctng Commssoner of Interna Revenue.
pproved September , 19 0.
Thomas . Lynch,
ctng Secretary/ of the Treasury.
(Pubshed n the Federa Regster September , 19 0)
Reguatons 7, Sectons 17 . , tc. 19 0-17-1310
T. D. 79
TITL 2C INT RN L R NU . C PT R I, SU C PT R C, P RT 17S.
WIN
mendng Reguatons 7
Washngton 2 , D. C.
To Dstrct Supervsors and Other Concerned:
1. The ct of February 21,19 0 (Fubc Law , ghty-frst Con-
gress) C. . 19 0-1, 2 9 , effectve September 1, 19 0, amendng the
Interna Revenue Code, provdes n part as foows:
Secton 2901 of the Interna Revenue Code, as amended, s amended to read as
foows:
(a) tent. No ta sha be coected n respect of dsted sprts ost or de-
stroyed whe n bond, e cept that such ta sha be coected
(1) Theft. In tho case of oss by theft uness the Commssoner sha
fnd that the theft occurred wthout connvance, couson, fraud, or neggence
on the part of the dster, warehouseman, owner, consgnor, consgnee,
baee, or carrer, or the empoyees of any of them; and
(2) ountary destructon. In the case of vountary destructon un-
ess the dsted sprts were unft for use for beverage purposes and the
dster, v arehouseman, or other person responsbe for the ta , obtaned
the wrtten permsson of the Commssoner for such destructon n each
case.
(b) Proof of Loss. In any case In whch sprts are ost or destroyed,
whether by theft or otherwse, the Commssoner may requre the dster or
warehousman or other person responsbe for the ta to fe a cam for reef
from the ta and submt proof as to the cause of such oss. In every case where
It appears that the oss was by theft, the burden sha be upon the dster or
warehouseman or other person responsbe for the ta to estabsh to the sats-
facton of the Commssoner that such oss dd not occur as the resut of con-
nvance, couson, fraud, or neggence on the part of the dster, warehouseman,
owner, consgnor, consgnee, baee, or carrer, or the empoyees of any of theu.
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egs. 7, 17 . , etc.
(c) Refund of Ta . When, n any ease where the ta woud not be co-
ectbe by vrtue of subsecton (a), but such ta has been pad, the Commssoner
sha refund such ta . Nothng n secton 2901 as hereby amended, or as here-
tofore amended, sha be construed to authorze refund of the ta where the oss
occurred after the ta was pad.
(d) Insurance Coverage. The abatement or refund of tn es provded for
by subsectons (a) and (c) n the case of oss of dsted sprts by theft sha
ony be aowed to the e tent that the camant s not ndemnfed aganst or
recompensed for suc oss.
(e) Transfer of Dutes. For transfer of powers and dutes of Comms-
soner and hs ageuts, see secton 3170.
2. Pursuant to the foregon.fr provson of aw, Reguatons 7, ap-
proved September 21,19 (2G CFR, Part 1 7), as amended, are hereby
amended as foows:
(a) Sectons 17 . , 17 .3 . 17 .G7, 17 .70, 17 . 6. 17 .90. 17 .97,
17 .11 , 17 .121, 17 .122, 17 .123, 17 . 36, 17 . 67, 17 . 77, 17 . 0.
17 . 2, 17 . 3. 17 . , 17 . , 17 . 6, 17 . 7, 17 . , 17 . 90,
17 . 91. and 17 . 92 are amended;
(6) Sectons 17 .106b, 17 . 0a. 17 . 0b, 17 . 2a, 17 . 3a,
17 . 3b, 17 . : c. and 17 . 3d are added; and
(c) Sectons 17 .107a and 17 . 1 are revoked.
Defntons
Sec. 17 . . Defntons.
( ) Gaon or wne gaon sha mean a Unted States gaon of qud
measure equvaent to the voume of 231 cubc nches.

(r-1) Proof sha mean the ethy acoho content of a qud at 60 F., stated
as twce the percent ot ethy acoho by voume.
(r-2) Proof gaon sha mean the acoho equvaent of a Unted States
gaon at 60 F., contanng 0 percent of ethy acoho by voume.
(r-3) Proof sprts sha mean that acohoc quor whch contans 0 per-
cent of ethy acoho by voume at 60 F. and whch has a specfc gravty of
0.93 1 n ar at 60 F. referred to water at 00 F. as unty.

( 3 Stat. 307, 37 , 77. 2G C. S. C. 2 09, 3176, 3901.)
Other qupment, Instruments, and Measures
ec. 17S.3 . Testng Scaes. Scaes (other than wagon, truck, or raroad
car patform scaes) used tc wegh wne, brandy, or wnemakng or ameoratng
nateras receved, used, or removed, w be tested from tme to tme by wne-
makers. Tests of scaes, by State, county, or muncpa authortes, or by
responsbe scae companes, w be accepted n eu of the prescrbed tests by
the wnemaker, but f such tests are not made from tme to tme, as heren re-
qured, addtona tests must be made by the wnemaker. In case a scae Is
found to be naccurate for any reason, t sha not be used whe t s n such
condton. Where a Government offcer s assgned to the wnery or storeroom,
the test sha be made under the offcer s supervson.

( 3 Stat. 37 , 77 ; 26 U. S. C. 3176, 3901.)
ecuton of onds and Consents of Surety
Sec. 17 .67. Indvdua Suretes.
(/) Investgaton. The dstrct supervsor must cause an nvestgaton to
be made of a the facts stated n the surety s tffdavt on Form 33 and support-
ng documents, and sha forward one copy of the report of such nvestgaton to
the Commssoner wth the quafyng documents specfed n secton 17 .113.
Dstrct supervsors shoud e ercse great care n decdng upon the suffcency
of the securty afforded by ndvdua suretes, and shoud from tme to tme
make such nqures as are deemed necessary to determne that such securty
s st suffcent.
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Regs 7, 17 . , etc.
1S

( 3 Stat. 3 as amended, 3 0 as amended, 3 1, 3 , 37 , 77; 26 U. S. C. 3031,
3032, 3033, 30 0, 3170, 3901.)
Sec. 17 .70. Consents of Surety.- Consents of surety to a change n the terms
of a bond must be e ecuted on Form 1 33, In as many copes as are requred of
the bond whch they affect, by the prncpa and a suretes -wth the same
formaty and proof of authorty tc e ecute as are requred for the e ecuton
of bonds. Form 1 33 w be used by obgors on coatera bonds as we as
those on surety bonds. The Form 1 33 must propery dentfy the bond affected
thereby and state specfcay and precsey what s covered by the e tended
terms thereof. If the surety s a corporaton, the consent may be e ecuted by
an agent or attorney n fact duy authorzed so to do by power of attorney
fed by the surety wth the approprate dstrct supervsor, or the consent may
be e ecuted by the home offce offcas of such corporate surety: Provded, That
n cases where the savng of tme s an eement, the consent may be e ecuted by
an agent or attorney n fact where the home offce offcas, by specfc drecton,
order ts e ecuton. copv of such specfc drecton shoud be attached to
each copy of such consent. ( 3 Stat. 37 , 77; 26 U. S. C. 3176, 3001.)
Change n oND n Premses
Sec. 17 . 6. tenson or Curtament of Premses. Where t s desred to
e tend or curta the bonded premses or to take n or cut off a room or budng
on the bonded premses, a new appcaton, Form 69 , pat and pan, or suppe-
menta pat and pan, must be fed by the propretor. The addtona premses
covered by an e tenson may not be used for wnery purposes, and the porton of
the wnery premses to be e cuded by curtament may not be used for other
than wnery purposes pror to approva of the appcaton, Form 09S. pnt and
pan, f requred, fed n connecton therewth. ( 3 Stat. 3 , 37 , 77; 20 U. S. C.
30 0, 3170, 3901.)
Changes n Propretorshp
Sec. 17 .96. Change n Partnershp. The wthdrawa of one or more mem-
bers of a partnershp or the takng In of a new partner, whether actve or sent,
sha consttute a change n propretorshp. Lkewse, e cept as provded n
paragraph (a) of ths secton, the death, bankruptcy, or ad|udcated nsovency
of one or more of the copartners resuts n a dssouton of the partnershp and,
consequenty, a change n propretorshp. Where such a change n propretor-
shp of the premses occurs, the successor must quafy In the same manner as a
new appcant, e cept that he may adopt the pat and pan on fe, as provded
n secton 17S.9 .

(63 Stat. 3 as amended, 3 0 as amended, 3 1, 3 , 37 , 77; 26 U. S. C 3031,
3032, 3033, 30 0, 3176, 3901.)
Sec. 17S.97. Rencorporaton. Where a corporaton s reorganzed and a new
charter or certfcate of ncorporaton s secured, the new corporaton must qua-
fy n the manner prescrbed bv secton 17S.9 . ( 3 Stat. 3 as amended, 3 0 as
amended, 3 1, 3 , 373, 37 , 77; 26 D. S. C 3031, 3032, 3033, 30 0, 3171, 3176,
3901.)
cton by Dstrct Supervsor
Sec. 17 .100b. uthorty To pprove. Dstrct supervsors are authorzed to
approve a appcatons, bonds, consents of surety, and other quafyng docu-
ments requred by ths part. ( 3 Stat. 373 as amended, 37 , 77; 26 U. S. C.
3170, 3170, 3901.)
orgna estabsh ment
Sec. 17 .11 . Dsapprova of uafyng Documents. If the dstrct super-
vsor fnds that the appcant has not comped n a respects wth the requre-
ments of the aw and ths part, or that the bond shoud be dsapproved under
secton 17 .7 , he w note hs dsapprova on the appcaton, and sha return
to the appcant by regstered ma, one copy of the dsapproved appcaton,
together wth a copes of the quafyng documents and a copes of the bond
wthout acton thereon. The dstrct supervsor sha forward one copy of
the dsapproved appcaton to the Commssoner and w advse hm fuy re-
spectng the dsapprova thereof. e sha retan the remanng papers n hs
fes. If the appcant s not entted to a basc permt, the dstrct supervsor
w, upon dsapprova of the appcaton therefor, return a copes of the qua-
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tegs. 7, 17 . , etc.
tyng documents to the appcant wthout acton thereon. ( 3 Stnt. 311. 3 ,
37 , 77 ; 26 U. S. C. 2 1 , 30 0, 3176, 3901.)
Termnaton of onds
Sec. 17 .121. cton on ppcaton for Notce f Termnaton. ( ) Wne-
maker s bond. When an appcaton for the Issuance of notce of the termnaton
of a wnemaker s bond, as to abty for future transactons, s fed wth the
dstrct supervsor In accordance wth the provsons of secton 17 .120, the
dstrct supervsor w make a compete e amnaton of the records of hs offce
to determne whether there Is any abty outstandng aganst the bond. e
w aso ascertan from the coector of nterna revenue whether there are
any outstandng, unpad assessments or demands for ta es on wnes produced
or receved, or brandy receved, under the bond. If t s found that any such
wnes or brandy have not been accounted for, or that outstandng assessments
or demands for payment of ta es chargeabe aganst the bond have not been
pad, the dstrct supervsor w dsapprove the appcaton, uness the abty
s setted. If the dstrct supervsor fnds thnt the bond may propery be ter-
mnated, he w ssue notce of termnaton thereof n accordance wth secton
173.122.

( 3 Stat. 37 , 77; 26 U. S. C. 3176, 3901.)
Sec 17 .122. Notce of Termnaton. (a) Wnemaker s bond. Upon ap-
prova of an appcaton for the ssuance of notce of the termnaton of a wne-
maker s bond. Form 700- , as to abty for future transactons, the dstrct
supervsor w e ecute Notce of Termnaton on Form 1 90 where a super-
sedng bond has been approved, or Notce of Reease on Form 1 91 where the
prncpa has dscontnued busness and removed a the wnes and brandy from
the bonded wnery or storeroom, n quadrupcate (n quntupcate f there are
two suretes), and w forward the orgna, together wth one copy of the app-
caton, to-the Commssoner, one copy to each obgor on the bond, and retan
one copy on fe n hs offce wth the bond to whch t reates.

( 3 Stat. 37 , 77 ; 26 U. S. C. 3176, 3901.)
Sec. 17 .123. Reease of Coatera. (a)Wnemakcr t bond. The reease of
coatera pedged and deposted wth the Unted States to support bonds requred
by ths part w be n accordance wth the provsons of Department Crcuar
1 , revsed (31 CFR, Part 22 ), sub|ect to the condtons governng the ssuance
of notces on Forms 1 90 and 1 91 of the termnaton of such bonds. Upon ap-
prova of an appcaton for the ssuance of notce of the termnaton of a wne-
maker s bond supported by coatera securty, the dstrct supervsor w f
the date or dates on whch r. part or a of the securty may be reeased. In f ng
such date, whch ordnary w be .ot ess than 6 months from the date of
determnaton that there s no outstandng abty aganst the bond, the dstrct
supervsor w satsfy hmsef that the nterests of the Government w not be
|eopardzed. Coatera pedged and deposted to support a wnemaker s bond,
w not be reeased by the dstrct supervsor unt abty under the bond has
been termnated. t any tme pror to the reease of such coatera securty, the
dstrct supervsor may, n hs dscreton, and for proper cause, further e tend the
date of reease of the securty for such addtona ength of tme as n hs
|udgment may be approprate.
(6) port or transfer to customs manufacturng bonded warehouse bonds.
Coatera pedged and deposted to support an e port bond, or a bond coverng
transportaton to customs manufacturng bonded warehouse, w ordnary be
reeased by the dstrct supervsor upon ssuance of notce of reease o the bond,
Torm 1 91. ( Stat. 122, as amended ; 6 U. S. C. 1 ; 3 Stat. 37 , 77 ; 2G U. S. C.
3176, 3901.)
Foutfyno Room
Sec. 17 . 36. Scaes and Weghnq Tanks. The propretor must provde n
the fortfyng room sutabe and accurate scaes for gaugng brandy receved and
used, e cept where a brandy used s conveyed by ppene drecty to the for-
ayng tank mmedatey after gaugng at the dstery or bonded warehouse.
Where brandy s receved n tank cars, or by ppene (e cept as provded n
ths secton), a weghng tank of sutabe sze must be provded n the fortfyng
room. eams or das of scaes used to wegh packages must ndcate weght n
02.3S30 1 13
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Regs. 7, 17 . , etc.)
1 6
haf-pound graduatons. The beams or das of weghng tank scaes must nd-
cate weght n 1-pound graduatons, f of ess than 10 tons capacty, and n
-pound graduatons, f of 10 tons or more capacty. In case a scae or weghng
tank s found to be naccurate for any reason, t sha not be used whe t s ;u
such condton. ( 3 Stat 31 , 3 as amended, 3 0 as amended, 3 1, 3 , 7T;
26 U. S. C. 2 29, 3031, 3032, 3033, 3176, 3901.)
Manner of Pbocurno randt From Frut Dsteres and Interna evf.nue
onded Warehouses
procurement of brandy n tank cars
Sec 17 . 67. Report of Gauge at Wnery. If the gauge of the brandy upon
recept at the wnery dscoses a oss n transt other than that whch may be
ascrbed to varaton In gauge, the offcer w prepare a report of hs gauge on
Form 1 20, and attach a copy of the form to each copy of Form 2 7 receved from
the offcer at the dstery or warehouse. If the oss e ceeds 1 percent, or there
s evdence that the tank car was tampered wth n transt, the offcer w make
a report of hs gauge on Form 1 20 n each nstance, wth a statement respectng
hs nspecton of the tank car and the apparent cause of the oss. ( 3 Stat. 3 0
as amended, 31 as amended, 3 1, 37 , 77; 26 U. S. C. 2901, 3031, 3033, 3176, 3901.)
Fortfcaton of Wne
Sec 17 . 77. Report of Losses of randy.
(6) From storage tanks. Losses from storage tanks w be reported by the
Government offcer on Form 276, gvng the sera numbers of the tanks from
whch the oss was sustaned, the quantty ost from each tank, and the apparent
cause of the oss n suffcent deta to brng out a the known matera facts and
crcumstances surroundng the oss. Losses from storage tanks w be deter-
mned at the end of the month durng whch wnes are fortfed or upon com-
peton of fortfcaton for the month, as provded n secton 17 . 2a. ( 3 Stat.
3 0 as amended, 3 ns amended, 37 , 77; 26 U. S. C. 2 )1, 3031, 3176, 3901.)
Losses of randy
osses n transt or n fohtfyno room
Sec. 17 . 0. y Theft. The ta on brandy wthdrawn for fortfcaton and
ost by theft whe beng transferred to the fortfyng room or whe n .he for-
tfyng room, not as the resut of connvance, couson, fraud, or neggence on
the part of the dster, warehouseman, owner, consgnor, consgnee, baee, or
carrer, or the empoyees of any of them, may be remtted to the e tent that the
camant s not ndemnfed aganst or recompensed for such oss. ( 3 .Stat. 3 0
as amended, 37 , 77; 26 U. S. C. 2901, 3176, 3901.)
Sec. 17 : 0a. y ountary Destructon. The ta on brandy wthdrawn
for fortfcaton and ost by vountary destructon whe beng transferred to the
fortfyng room or whe n the fortfyng room, may be remtted: Provded. That
the brandy was unft for use for beverage purposes, and the dster, warehouse-
man, or other person responsbe for the tu , obtaned the wrtten permsson of
the dstrct supervsor for such destructon n each case. ( 3 Stat. 3 0 as
amended, 373 as amended, 37 , 77: 26 U. S. C. 2901, 3170, 3176, 3901.)
Sec 17 .1 0b. y Other Causes. The ta on brandy wthdrawn for fortf-
caton and ost, due to causes other than by theft or vountary destructon (as
provded n sectons 17 . 0 and 17S. 0n. respectvey), whe beng transferred
to the fortfvng room or whe n the fortfyng room, may be remtted. ( 3 Stat.
3 0 as amended, 37 , 77 ; 26 17. S. C. 2901, 3176, 3901.)
determnaton of osses
Sec. 17 . S2. In Transt. Losses n transt to the wnery w be ascertaned
at the tme the brandv s receved at the wnery, as provded n sectons 17 . ,
17 . 06, and 17 . 67. ( 3 Stat. 3 0 as amended, 37 , 77; 26 U. S. C. 2901, 3176,
3901.)
Sec 17 . 2a. 1 Fortfyng Room. Losses by theft or unauthorzed vountary
destructon or from other causes n the fortfyng room w be determned and
reported at the tme the oss s dscovered. physca nventory of storage tanks
sha be taken at the cose of the month durng whch wnes are fortfed or upon
competon of fortfcaton for the month and any osses whch have not prev-
ousy been ascertaned w be determned. ( 3 Stat. 310 as amended, 37 , 77;
26 U. S. C. 2901, 3176, 3901.)
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1 7
Regs. 7, 17 . , etc.
CL IMS FO LOSS S
Sec. 17 . S3. When Requred Where any oss by theft occurs, cam for re-
msson of ta must be made hy the wnemaker. Where the oss from any pack-
age or raroad tank car n transt to the wnery e ceeds 1 percent of the quantty
shpped theren, cam for remsson of ta on the entre quantty ost from the
package or raroad tank car must be made by the wnemaker. Where the oss
on anv ot of brandy transferred to the fortfyng room by ppene e ceeds 1
percent, cam for remsson of ta on the entre quantty ost must kewse be
made by the wnemaker. Where the oss n the fortfyng room from any
package e ceeds 1 percent of the quantty contaned n the package at the tme
of recept, or where the oss from storage tanks e ceeds 1 percent of the tota
quantty contaned n such tanks durng the month, cam for remsson of ta
on the entre quantty ost from each such package or from such storage tanks
must be made by the wnemaker. ( 3 Stat. 3 0 as amended, 373, 37 , 77;
26 L . S. C. 2001, 3171, 3176, 3901.)
Sec. 17S. S3a. When Not Requred. Where the oss n transt or n the fort-
fyng room does not e ceed 1 percent, cacuated n accordance wth secton
17 . S3, cam for remsson of ta w not be requred, provded there are no
crcumstances ndcatng that the oss s not aowabe under the aw.- ( 3 Stat.
3 0, as amended, 373, 37 , 77 ; 26 U. S. C. 2)01, 3171, 3170. 3901.)
Sec. 17 . S3b. Form of Cams. No speca forms have been prescrbed for
nse n fng cams for remsson of ta . Such cams sha be made on etter
sze paper, n dupcate, showng the name, address, and capacty of the camant,
and sha set forth, under oath, the foowng nformaton :
(a) The name of the frut dster who produced the brandy, and the
regstry number and ocaton of the dstery ;
(6) The sera numbers of the packages or other contaners from whch
the brandy was ost, the quantty ost from each, and the tota quantty of
brandy covered by the cam ;
(c) The tota amount of ta for whch the cam s fed;
Id) The date of the oss or, f such date s not known, the date on whch
the oss was dscovered, and the nature and cause of the oss, together wth
a the known, matera facts and crcumstances surroundng the oss;
(e) The name of the carrer, f any ;
f) If ost by theft, the facts estabshng whether the oss occurred as the
resut of any neggence, connvance, couson, or fraud on the part of the ds-
ter, warehouseman, owner, consgnor, consgnee, baee, or carrer, or the
empoyees of any of them; and
(fr) If ost by theft, whether the camant s ndemnfed or recompensed for
the oss, and, f so, the amount and nature of such ndemnty, or recompense.
The actua vaue of the brandy, ess the ta , must be stated e pcty, and
certfed copes of a poces of nsurance or other documents of ndemnty
coverng the brandy must be furnshed where requred.
( 3 Stat. 3 0 ns amended, 373, 37 , 77 ; 26 U. S. C. 2901, 3171, 3176, 3901.)
Sec. 17 . 3c. Supportng Documents. Cams for remsson of ta on brandy
ost whe beng transferred to the fortfyng room sha, f the transfer was made
by carrer, be supported whenever possbe by a copy of the b of adng and
statements of the agents of the carrer havng persona knowedge of the oss.
Cams coverng osses n the fortfyng room must be supported by affdavts
of persons havng persona knowedge of the oss. ( 3 Stat. 3 0 as amended,
373. 37 . 77 ; 26 U. S. C. 2901, 3171, 3176, 3901.)
Sec. 17 . 3d. Fno of Cams. Cams for remsson of ta on brandy ost
In transt or n the fortfyng room must be fed prompty by the wnemaker
wth the dstrct supervsor of the dstrct n whch the wnery s ocated ( 3
Stat. 3 0 as amended, 373, 37 , 77; 20 U. S. C. 2901, 3171, 3176, 3901.)
R PORT OF I.OSS S
Sec 17S. S . Procedure Losses of brandy requrng the fng of cams pur-
suant to the provsons of secton 17 . 3, must be reported to the dstrct super-
vsor by the wnemaker or other persons concerned mmedatey after the osses
are dscovered. Where osses of brandy occur whe n transt and are ascer-
taned by an offcer at the tme of recept at the bonded wnery, or where osses
occur whe n the fortfyng room of the bonded wnery and are ascertaned whe
an offcer s on duty, the offcer w mmedatey gauge the contents of the pack-
a f r 0ter aPProved contaner and prepare Form 1 20 n quadrupcate. The
offcer w prepare a etter report n trpcate to the dstrct supervsor settng
ortn the nature, cause, and e tent of the oss n suffcent deta to brng out
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Iegs. 7, 17 . , etc.
1
a the known, matera facts and crcumstances. Tbe condton of each package
or other contaner from whch the oss was sustaned, and the quantty ost
therefrom, shoud be stated n such report. The offcer w forward two copes
of Form 1 20 and two copes of the etter report to the dstrct supervsor, dever
one copy of Form 1 20 to the wnemaker, and retan one copy of Form 1 20 and
the etter report for hs fe. ( 3 Stat. 3 0 as amended, 373, 37 , 77: 20 U S. C.
2 01, 3171, 3176, 901.)
CTION Y DIST ICT UPF.R I60
Sec. 17S. S . Investgaton. Where osses of brandy are reported, the dstrct
supervsor w mmedatey make such nvestgaton and requre such evdence
to be submtted as he may deem necessary. ( 3 Stat. 3 0 as amended, 373 37
77 ; 26 C. S. C. 2901. 3171. 3176. 3901.)
Sec. 17 . 6. amnaton of Cams. When a cam for remsson of ta s
receved by tbe dstrct supervsor, he w carefuy e amne t and cause such
nvestgaton to be made or requre such addtona evdence to be submtted as
he may deem necessary, and w forward the cam to the Commssoner, together
wth a statement settng out hs recommendaton and hs reasons therefor, as
e pedtousy as possbe. The dstrct supervsor w transmt to the Comms-
soner wth the cam copes of any reports of nvestgaton of the oss submtted
by Government offcers. ( 3 Stat. 3 0 as amended, 373, 37 , 77; 20 U. S. C. 2001,
3171. 3176. 3901.)
Sec. 17 . 7. Dstrct Supervsor s ccounts. Dstrct supervsors w
enter a tems of oss of brandy n the fortfyng room or n transt thereto n
ther accounts. Form 290. Credt w be taken n the account n whch the oss
s frst entered for those osses for whch cam s not requred by secton 17S. S3a.
Losses for whch cam s requred by secton 17 . 3 w be carred n the
account as not aowed unt the oss s aowed by the Commssoner or the ta
s pad thereon. Where the oss s e cessve, for whch cam s requred, the
entre oss w be carred as not aowed. ( 3 Stat. 3 0 as amended, 37 , 77;
20 . S. C. 2901, 317G, 3901.)
otuntary Destructon of randy I nft for everage Purposes
Sec 17 . . Genf-Ra. randy wthdrawn for fortfcaton whch s found
by the dstrct supervsor to be unft for use for beverage purposes may be vo-
untary destroyed wthout payment of ta by the wnemaker n accordance wth
the procedure prescrbed bv sectons 17( . 9 to 17S. 92. ( 3 Stat. 3 0 as amended,
37 , 77: 26 U. S. C. 2901, 3176, 3901.)
Sec. 17 . 90. Investgaton and nayss. Upon recept of the appcaton,
the dstrct supervsor w have a Government offcer nspect the brandy to verfy
the correctness of the appcaton and to procure a sampe from each barre or
tank n whch the brandy s contaned for submsson to the dstrct chemst
for anayss to determne whether tte brandy s unt for use for beverage pur-
poses . ach sampe sha consst of 1 pnt, or f defned advsabe, 1 quart.
Tc offcer w abe the sampes so as to ready dentfy the brandy, and w
forward them to the dstrct chemst at the e pense oZ the wnemaker. The
chemst w anayze tbe sampes and furnsh a report of hs anayss to the
dstrct supervsor. The unused portons of the sampes w be retaned by the
chemst for further e amnaton shoud such be found necessary. ( 3 Stat. 3 0
ns amen ed. 37 . 77 ; 20 U. S. C. 2901, 3176. 3901.)
Sec. 17 . 91. cton by Dstrct Supervsor. (a) Unft for beverage pur-
poses. If tbe dstrct supervsor fnds that the brandy s unft for beverage pur-
poses, he w authorze the brandy to be destroyed by the wnemaker under the
supervson of a Government offcer.
( ) Ft or beverage purposes. If the dstrct supervsor fnds that the brandy
s ft for beverage purposes he w dsapprove the appcaton nnd notfy the
wnemaker that the brandy has been found to be ft for beverage purposes and
may not be destroyed wthout pavment of ta . ( 3 Stat. 3 0 as amended, 373
as amended. 37 , 77 ; 20 U. S. C. 2901, 3170, 3176, 3901.)
Sec 17 .192. Gauge and Destructon. randy authorzed to be destroyed w
be gauged by the Government offcer and reported for that purpose on Fcrm
1 20, n trpcate. Foowng such gauge, the brandy may be destroyed under the
mmedate supervson of the Government offcer by runnng the same nto the
sewer or by other sutabe means. The Government offcer w then certfy to
such destructon and the manner thereof on each copy of Form 1 20, furnsh one
copy of the form to the wnemaker, retan one copy at the fortfyng room, and
forward one copy to the dstrct supervsor. The offcer w enter the brandy
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1S9
Regs. 10, 11, 1 .
so destroyed at a speca ne n Part of Form 270. The dstrct supervsor w
take approprate credt at speca nos n the approprate part of hs account.
Form 200, for the brandy so destroyed. ( 3 Stat. 310, as amended, 37 , 77;
26 U. S. C. 2901, 317C, 3901.)
3. The purposes of the amendments are as foows:
(a) To conform to the ct of February 21, 10 0 (Pubc Law ,
ghty-frst Congress), effectve September 1, 19 0.
(b) To ncorporate reguatons appcabe to the gaugng of brandv
at bonded wneres now contaned n the Gaugng Manua (26 CFR,
Part 1 6). but whch are beng deeted from the current revson of
such manua.
. These reguatons are ssued under the authorty of Stat. 122, as
amended; 6 U. S. C. 1 ; 3 Stat. 307. 311, 31 , 3 0, as amended, 3 , as
amended. 3 0, as amended. 3 1. 3 , 373, as amended, 373. 37 . and 77;
26 U. S. C. 2 09, 2 1 , 2 29, 2901, 3031, 3032, 3033, 30 0, 3170, 3171.
3176. and 3901.
ffect: Thes3 reguatons sha be effectve as of September 1, 19 0.
Geo. . Schoe eman,
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster uy 26, 19 0, 9 : 00 a. m.)
Reguatons 10. Reguatons 11, and 19 0-22-13 06
Reguatons 1 . T. D. 09
TITL 20 INT RN L R NU . C PT R I, SU C PT R C, P RTS 1S ,
1 9, ND 100
mendng Reguatons 10, Reguatons 11, and Reguatons 1
Washngton 2- , D. 0.
1. Reguatons 10 (26 CFR, part 1 ; 1 F. R. 233), Warehous-
ng of Dsted Sprts, are hereby amended by addng two new sec-
tons as foows:
Subpart Ta -Pad Wthdrawas n Packages
Sec. 1 .602a. Ta -Payment of Rnsngs. In eu of the procedure prescrbed
In secton 1S .602 concernng the rnsng of packages, propretors of ta -pad
bottng houses and rectfyng pants may rnse and save the rnsngs from pack-
ages, to any e tent desred, whch were not rnsed n the nterna revenue bonded
warehouse at the tme of ta -pr.yment and are so marked n accordance wth
secton 1 .009: Provded, That the rnsngs are run nto a cosed, ocked tank
for ta -payment of the proof gaon contents through the use of the dsted
sprts stamps prescrbed by secton 1 .672 for the ta -payment of dsted
sprts botted n bond. Such rnsngs may be used for reducton purposes or n
the manufacture of rectfed sprts or products sub|ect to the rectfcaton ta .
The constructon of the tank and the gaugng, ta -payment, and use of the
rnsngs w be In accordance wth the provsons of Reguatons 11 (26 CFR,
Part 1 9) or Reguatons 1 (26 CFR, part 190), as the case may be. ( 3 Stat. 29S
as amended, 33 as amended ; 26 U. S. C. 2S00, 2 S3.)
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Regs. 10, 11, 1 .
190
Subpart CC Ta -Pad Wthdrawas by Gauge Tank
Sec. 1 .G22a. Ta -Payment op Rnsngs. In eu of the procedure pro-
scrbed n secton 1 .022 concernng the rnsng of packages, propretors of ta -
pad bottng houses and rectfyng pants may rnse and save the rnsngs from
packages, to any e tent desred, whch were not rnsed n the nterna revenue
bonded warehouse at the tme of ta -payment and are so marked n accordance
wth secton 1 .62 : Provded, That the rnsngs are run nto a cosed, ocked
tank for ta -payment of the proof gaon contents through the use of the dsted
sprts stanns prescrbed by secton 1 .072 for the ta -payment of dsted sprts
botted n bond. Such rnsngs may be used for reducton purposes or In the
manufacture of rectfed sprts or products sub|ect to the rectfcaton ta . The
constructon of the tank and the gaugng, ta -payment, and use of the rnsngs w
be n accordance wth the provsons of Reguatons 11 (20 CFR. part 1 9) or
Reguatons 1 (20 CFR, part 190), as the case may be. ( 3 Stat. 20 as amended,
330 as amended ; 26 U. S. C. 2S00, 2 3.)
2. Reguatons 11 (26 CFR, part 1 9; 1 F. R. 1), ottng of
Ta -Pad Dsted Sprts, are hereby amended by addng a new
secton as foows:
Subpart S Dumpng and ottng
Sec. 1 9.20 a. Ta -Payment of Rnsngs. In eu of the procedure prescrbed
n secton 1 9.20 concernng the rnsng of packages, the propretor may rnse
and save the rnsngs from packages, to any e tent desred, whch were not
rnsed n the nterna revenue bonded warehouse at the tme of ta -payment and
are so marked n accordance wth the provsons of Reguatons 10 (20 CFR,
part 1S ) : Provded, That the rnsngs are run nto a cosed, ocked tank for ta -
payment of the proof gaon contents. Such rnsngs may be used for reducton
purposes n the ta -pad bottng house, or n a contguous rectfyng pant n the
manufacture of rectfed sprts or products sub|ect to the rectfcaton ta . When
used for reducton, the rnsngs must be used n smar sprts. When used n
the manufacture of rectfed sprts or products, the rnsngs may be used wth
any other approprate sprts. The tank nto whch the rnsngs are run w be
mounted on accurate scaes, or equpped wth a sutabe measurng devce whereby
the contents can be accuratey determned. Upon competon of the rnsng
of the packages, the contents of the tank w be gauged by the Government offcer
and the proof gaon contents determned. The gauge of the tank w be made
by weght (where the tank s mounted on scaes) or oy measure. The Govern-
ment ocer w prepare Form 1 20, n trpcate, coverng the gauge of the tank
showng the proof gaons, and the knd and age of the sprts from whch the
rnsngs were obtaned and w dever a copes to the propretor. The pro-
pretor w cance the necessary number of dsted sprts stamps prescrbed
by Reguatons 10 (20 CFR, part 1 ) for the ta -payment of dsted sprts
botted n bond, n the e net amount of the ta due by egby wrtng or stampng
on each stamp wth ndebe (nda) nk, hs name, the regstry number of the
ta -pad bottng house, and the date of the Form 1 20. The propretor w then
attach the stamps to the orgna copy of Form 1 20 and submt t wth a copes
of Form 1 20 to the Government offcer. The Government offcer w sgn the
stamps, foowed by hs tte, and w e ecute on the back of Form 1 20, a certf-
cate of recept evdencng the recept and canceaton of stamps for the amount
of ta due. attach the orgna copy of Form 1 20 an 1 the canceed stamps to
the tank, and then reease the rnsngs for reducton purposes or for transfer
by ppene to a contguous rectfyng pant for use In rectfcaton, as au-
thorzed heren. The Government offcer w gve one copy of Form 1 20 to the
propretor and retan the remanng copy. To dentfy propery the sprts n the
tank, Form 1 20 to whch the stamps are attached w contnue to reman on
the tank unt a the rnsngs covered by such stamps have been removed, at
whch tme such form wth the stamps w be forwardeC to the dstrct super-
vsor. Where the rnsngs are transferred by ppene to a contguous rectfyng
pant, an addtona copy of Form 1 20 w be forwarded to the Government
offcer assgned to such pant. When so transferred, the rnsngs w be ac-
counted for In the rectfyng pant n the same manner as other sprts receved
for rectfcaton. Packages of mported sprts may smary be rnsed and the
rnsngs saved If ta -pad In accordance wth ths procedure. The propretor
sha keep a record on Form 1097, propery modfed, of a dsted sprts stamps
receved and used at the ta -pad bottng house for ta -payment of rnsngs an-
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191
Regs. 10, 11, 1 .
thorzed by ths secton. The form sha be dsposed of In accordance wth the
nstructons .prnted thereon. ( 3 Stat. 29 as amended, 33 as amended; 26
U. S. C. 2 00, 2 3.)
3. Reguatons 1 (26 CFR, part 190:1 F. R. 790), Rectfcaton
of Sprts and Wnes, are hereby amended by addng two new sectons
as foows:
Subpart Gaugng and Dumpng Sprts for Rectfcaton
Skc. 190.-(- 3a. Ta -Payment of Rnsngs. In eu of the procedure prescrbed
n secton 190. 3 concernng the rnsng of packages, the propretor may rnse
and save tte rnsngs from packages, to any e tent desred, whch were not
rnsed n the nterna revenue bonded warehouse at the tme of ta -payment
and are so marked n accordance wth the provsons of Reguatons 10 (2(
CFR, part 1 ) : Provded, That the rnsngs are run nto a cosed, ocked tank
for ta -payment of the proof gaon contents. Such rnsngs may be used for
reducton purposes, or n the manufacture of rectfed sprts or products sub|ect
to the rectfcaton ta . When used for reducton, the r sngs must be used
n smar sprts. When used n the manufacture of rectfed sprts or products,
the rnsngs may be used wth any other approprate sprts. The tank nto
whch the rnsngs arc run w be mounted on accurate scaes, or equpped wth
a sutabe measurng devce whereby the contents can be accuratey determned.
L pon competon of the rnsng of the packages, the contents of the tank w
be gauged by the Government offcer and the proof gaon contents determned.
The gauge of the tank w be made by weght (where the tank s mounted on
scaes) or by measure. The Government offcer w prepare Form 1 20, n
trpcate, coverng the gauge of the tank showng the proof gaons, and the
knd and age of the sprts from whch the rnsngs were obtaned and w
dever a copes to the propretor. The propretor w cance the necessary
number of dsted sprts stamps prescrbed by Reguatons 10 (26 CFR, part
1 ) for the ta -payment of dsted sprts botted In bond, n the e act amount
of the ta due, by egby wrtng or stampng or. each stamp wth ndebe
(nda) nk, hs name, the regstry number of the rectfyng pant, and the date
of the Form 1 20. The propretor w then attach the stamps to the orgna
copy of Form 1 20 and submt t wth a copes of Form 1 20 to the Government
offcer. The Government offcer w sgn the stamps, foowed by hs tte, and
w e ecute, on the back of Form 1 20, a certfcate of recept evdencng the
recept and canceaton of stamps for the amount of ta due, attach the orgna
copy of Form 1 20 and the canceed stamps to the tank, and then reease the
rnsngs for reducton purposes or for use u rectfcaton, as authorzed heren.
The Government offcer w gve one copy of Form 1 20 to the propretor and
retan the remanng copy. To dentfy propery the sprts n the tank. Form
1 20 to whch the stamps are attached w contnue to reman on the tank unt
a the rnsngs covered by such stamps hnve been removed, at whch tme such
form wth the stamps w be forwarded to the dstrct supervsor. Packages
of mported sprts may smary be rnsed and the rnsngs saved f ta -pad
n accordance wth ths procedure. The propretor sha keep a record on Form
1097, propery modfed, of a dsted sprts stamps receved and used at the
rectfyng pant for ta -payment of rnsngs authorzed by ths secton. The
form sha be dsposed of n accordance wth the nstructons prnted thereon.
( 3 Stat. 29 as amended, 33 as amended; 26 U. S. C. 2S00, 2S 3.)
Subpart FF ottng of Unrectfed Sprts and Wnes
Sec. 190.696a. Ta -Payment of Rnsngs. In eu of the procedure prescrbed
n secton 190.696 concernng the rnsng of packages, the propretor may rnse
and save the rnsngs from packages, to any e tent desred, whch were not
rnsed n the nterna revenue bonded warehouse at the tme of ta -payment and
are so marked n accordance wth the provsons of Reguatons 10 (26 CFR,
Part 1 ) : Provded, That the rnsngs are run nto a cosed, ocked tank for
ta -payment of the proof gaon contents. Such rnsngs may be used for re-
ducton purposes, or n the manufacture of rectfed sprts or products sub|ect
to the rectfcaton ta . When used for reducton, the rnsngs must be used n
smar sprts. When used n the manufacture of rectfed sprts or products,
the rnsngs may be used wth any other approprate sprts. The constructon of
the tank, the gaugng, ta -payment and use of the rnsngs, and the accountng
for dsted sprts stamps receved and used for the ,a -payment of such rns-
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Regs. 20.1
192
ngs, w be In accordance wth the provsons of secton 190. 3a. Packages of
mported sprts may smary be rnsed and the rnsngs saved f ta -pad n
accordance wth ths procedure. ( 3 Stat. 29 as amended, 33 as amended; 26
. S. C. 2 00, 2 3.)
. It s found that compance wth the notce, pubc rue-makng
procedure, and effectve date requrements of the dmnstratve Pro-
cedure ct ( U. S. C. 1001 et seq.) s unnecessary n connecton wth
the ssuance of these reguatons for the reason that the changes made
are of a berazng and optona character.
. The purpose of these amendments s to authorze propretors of
ta -pad bottng houses and rectfyng pants to ca -pay sprts con-
taned n rnsngs obtaned from (1) packages dumped for bottng
or rectfcaton whch were not rnsed n the nterna revenue bonded
warehouse at the tme of ta -payment, and (2) packages of mported
sprts whch are not rnsed at- the tme of wthdrawa from customs,
and to use such rnsngs for reducton purposes, or n the manufacture
of rectfed sprts or products sub|ect to the rectfcaton ta .
6. Ths Treasury Decson w be effectve upon the date of pub-
. S. 161, 3 Stat. 29 as amended, 33 as amended, 37 ; U. S. C. 22,
26 U. S. C. 2 00, 2 3,3176.)
Dane . otch,
pproved October 6,19 0.
ohn S. Graham,
(Pubshed n the Federa Regster October 12,19 0)
Reguatons 20. 19 0-2 -13
Mm.6 S
Sae of acohoc quors by agences and nstrumentates of
the Unted States.
Washngton 2 , D. C, November 3, 19 0.
Dstrct Supervsors, Coectors of Interna Revenue, and Others
Concerned:
1. Reference s made to the Revenue ct of 19 0 Pubc Law 1 ,
ghty-frst Congress , approved Septemher 23,19 0, and partcuary
to secton 60 thereof whch provdes as foows:
Subchapter of chapter 27 (reatng to occupatona ta es) s hereby
amended by addng at the end thereof the foowng new secton:
S C. 32 3. F D R L G NCI S OR INSTRUM NT LITI S.
ny ta mposed by ths chapter sha appy to any agency or n-
strumentaty of the Unted States uness such agency or nstrumentaty
s granted by statute a specfc e empton from such ta .
2. Secton 60 of sad ct has the effect of nufyng paragraph (a)
of secton 19 .26 of Reguatons 20 (26 CFR, part 19 ), as of Septem-
ber 23,19 0. Ths paragraph reads as foows:
Sec. 19 .26. Saes at Natona Mtary stabshments. (a) empt
from speca ta . Post e changes, shp s stores, shp s servce stores and com-
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193
Regs. 2 , IS 176.17d, etc.
mssares estabshed and conducted under reguatons of a department of the
Natona Mtary stabshment, and under the compete contro of such depart-
ment, are not sub|ect to speca ta for the sae of quors, provded saes are
not made to the genera pubc but are restrcted to members of the mtary
estabshment and ther guests.
3. Speca (occupatona) ta w, therefore, be coected from a
agences or nstrumentates of the Unted States, ncudng post e -
changes, shp s stores, shp s servce stores and commssares estabshed
and conducted under reguatons of any department of the Natona
Mtary stabshment, for speca ta abtes ncurred on or after
September 23,19 0, uness e empted by statute from such ta . Under
the provsons of secton 3271(b), Interna Revenue Code, the speca
ta abtes ncurred before October 1. 19 0, by such agences or n-
strumentates, whch pror to September 23, 19 0, were consdered
to be e empt from speca ta es, w be reckoned from the 1st day of
September 19 0. No speca ta abty shoud be asserted for perods
pror to September 19 0, e cept n the case of such agences or nstru-
mentates whch pror to September 23, 19 0, were consdered to be
sub|ect to speca ta es.
. Reguatons 20 w be amended n accordance wth the provsons
of secton 60 of the Revenue ct of 19 0.
. Correspondence n regard to ths mmeograph shoud refer to
ts number and the symbos T: PR.
Geo. . Schoeneman,
Commssoner.
Reguatons 2 , Sectons I76.7d, tc. 19 0-19-13 27
T. D. 0
TITL 26 INT RN L R NU . C PT R I. SURCII PT R C, P RT 17C
DR W C ON DISTILL D SPIRITS ND WIN S
mendng Reguatons 2
Washngton 2 , D. C.
1. Sectons 176.7d, I76.7h, I76.7, 176.21(a), 176.3 (a), 176.70,
176.71,176.73,176. 0, and 176.91 of Reguatons 2 (26 CFR, Part 176),
approved ugust 29, 19 0, as amended, are hereby further amended
to read as foows:
Drawback on Dsted Sprts and Wnes otted or Packaged specaty
for port
packagng of dsted sprts and wnes wthout rectfcaton
Sec. 176.17d. Transfer of Sprts or Wnes to Package Fng Tank. Upon
approva of the Form 16 by the storekeeper-ganger, as provded n secton
17( .17c, the dsted sprts or wnes sha be transferred to a package tng
tank where, after reducton to the desred proof (f reduced n proof), the
packer sha gauge the dsted sprts or wnes n accordance wth the app-
cabe provsons of secton 176.17| and enter the detas of hs gauge (cacuated
or corrected to voume n accordance wth the provsons of the Gaugng Manua
(26 CFR, Part 1 0) ) on a copes of the Form 16 and attach one copy of the
form to the tank: Provded, That (1) where the dumpng and reducng tank
s constructed n accordance wth the provsons of Reguatons 1 (26 CFR,
Part 190) or Reguatons 11 (20 CFR, Part 1 9), ns the case may be, and s
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Regs. 2 , 176.17d, etc. 19
equpped for ockng wth Government ocks, or (2) where the bottng tank s
equpped wth nn approved outet for fng packages and such outet s equpped
for ockng wth a Government ock when not n use, such tank may he used as
the package fng tank. The proof determned by gangng the contents of the
tank sha be regarded as the proof of the sprts run nto a packages fed from
the tank. cept as provded n secton 17G.17f. a unrectfed sprts and wnes
packaged especay for e port sha be packaged from an approved package
tng tank, dumpng and reducng tank or bottng tank. ( 6 Stat. 690, as
amended, 3 Stat. 377. as amended; 19 U. S. C. 1309. 20 U. S. C. 3179.)
Sec 170.17b. Rnsng of arres, Destructon of Stamps. Marks. tc. When
sprts or wnes are dumped for packagng wthout rectfcaton the provsons
of Reguatons 1 (20 CFR, Part 190) and Reguatons 11 (20 CFR, Part 1 9)
respectng the destructon of stamps and marks and brands, the rnsng of
barres and woodchps contaned theren, and dsposton of woodchps. when
packages are dumped, sha be appcabe. ( 3 Stat. 37 , 377, as amended ; 26
U. S. C. 3176. 3179.)
Skc. 176.171. Funq of Packac.es. Packages of dsted sprts or wnes,
for e portaton wth beneft of drawback, may be fed ony under the mme-
date persona supervson of the storokeeper-gnuger. Where there are nsuff-
cent snrts or wnes at the end of the operaton to f the ast packace the
remanng quor may be removed for domestc purposes or drawn nto a
remnant package contanng not ess than wne gaons for e portaton.
Proper notaton sha be made on Form 16S of the dsposton of any snrts
or wnes not drawn nto packages for e portaton. ( 3 Stat. 37 , 377, as
amended ; 26 U. S. C. 3176, 3179.)
rectfcaton and bottng or packagng
Sec. 176.21. pcaton. Fohm 237. (a) Procedure. The rectfer sha make
appcaton on Form 237 to botte or package rectfed sprts especay for
e port or package such sprts for subsequent bottng esnecay for e port n
accordance wth the appcabe provsons of Reguatons 1 (20 CFR, Part 190),
and an addtona copy of such form sha be prepared n each case. notce
of ntenton sha be nserted by the rect fer n each copy of Form 237, after
the descrpton of the sprts or wnes, as foows:
The above-descrbed sprts (or wnes), rectfed pursuant to Form
122. sera number dated , 19 , are to e
botted (or were packaged) especay for e port wth beneft of drawback.
When the process of manufacturng sprts or wnes n accordance wth the
prevsons of secton 170.20 has been competed, the rectfer sha note on Form
237 the quanttes of dsted sprts, or wnes, or both (cacuated on a proof-
gaon bass as to sprts and on a wne-gaon bn s as to wnes) used n manufac-
turng the strts or wnes. If commerca favorng e tracts, contanng acoho,
not prepared by the rectfer on hs rectfyng premses, are used n manufacturng
the sprts or wnes, the rectfer sha nso show on Form 237, as to each knd of
favorng matera, the quantty thereof n wne gaons, the percentage of acoho
by voume n such favorng e tracts, and whether drawback under secton
32. 0(1), Interna Revenue Code, has been or w be camed on the acoho
contaned theren. The rectfcaton ta and wne ta . f due, w then be pad
and Form 237 dsposed of n accordance wth the appcabe provsons of Regua-
tons 1 (20 CFR. Part 190). The addtona copy of Form 237 w be forwarded
to the dstrct supervsor wth the orgna copy of Form 237. Upon competon
of the bottng or packagng operatons, the storekeeper-ganger sha supervse
the depost of the sprts or wnes n the e port storage room, e cept us provded
n secton 170.22.
(1) ach package of dsted sprts or wnes fed by rectfers for e port
wth beneft of drawback sha be marked and branded n accordance wth the
provsons of secton 170.31.

( G Stat. 693, as amended; 19 U. S. C. 1313.)
NTRY for drawback
Sec. 170.3 . Cam and ntrt. (a) Form 1 2 or Form 1 2- . Cam for
aowance of drawback of nterna revenue ta es on dsted sprts or wnes
manufactured or produced n the Unted States and botted or packaged especay
for e port, and entry for the e portaton of such sprts or wnes wth beneft of
drawback, sha be prepared by the e porter on Form 1 S2, In quadrupcate, for
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19
Regs. 2 , 176.17d, etc.
dsted sprts, and Form 1 2- , In quadrupcate, for wnes. copes of
Form 1 S2 or Form 1 2- , wth Part 1 and Part 2, e ecuted, sha be fed by
the e porter wth the dstrct supervsor of the dstrct wheren s ocated the
e port storage room n whch the sprts or wnes are stored at the tme of e -
portaton. of the nformaton ndcated by the headngs of the varous
coumns and nes of the form, and the Instructons prnted thereon or ssued n
respect thereto, and as requred by ths part, sha be furnshed. Forms 1 2
and 1 2- must be verfed under oath by the e porter or hs authorzed agent:
Provded, That f the forms ofcay prescrbed for such use contan theren pro-
vson for verfcaton by a wrtten decaraton that such cams are made under
penates of per|ury, such cams sha be verfed by the e ecuton of such decara-
ton and such decaraton so e ecuted sha be n eu of the oath requred heren
for verfcaton. Where Form 1 2 or 1 S2- s sgned by an agent, proper power
of attorney authorzng the agent to e ecute the cam for the e porter must be
fed wth the dstrct supervsor.

( 6 Stat. 690, as amended. 3 Stat. 377, as amended, 63 Stat. 667; 19 U. S. C.
1309, 26 U. S. C. 3179, 3 09.)
Drawback on Dsted Sprts ported n Dsters Orgna Packages
requrements governng e portaton
Sec. 176.70. ppcaton to port. ny person desrng to e port sprts
upon whch the ta has been pad as provded by aw, must at east 6 hours pror
to the tme for nspectng, gaugng, and adng the packages ntended for e port,
on whch he sha desre to cam a drawback of nterna revenue ta es, present to
the coector of customs for the port of entry from whch such e portaton s to
be made, an appcaton n trpcate on Form 1629, settng forth hs ntenton to
e port the artces descrbed theren, specfyng the whoe number of packages,
the marks and sera numbers thereon, the knd of sprts, the ta abe gaons
at tme of wthdrawa from bond and the amount of ta pad thereon, as shown
by the marks and stamps; the name, ocaton, and number of the dstery, pant,
or warehouse from whch the sprts were wthdrawn upon payment of ta , and
the name of the vesse at whch-the sprts are to be nspected and gauged, and by
whch, and the port to whch, the sprts are ntended to be e ported. ( 3 Stat.
33 , as amended. 37 ; 26 U. S. C. 2 7, 3176.)
Sec. 176.71. ntry for portaton. The entry for e portaton sha be n
trpcate on Part 2 of Form 1629, and sha contan the name of the person ap-
pyng to e port; the name of the dster; the number and ocaton of the
dstery at whch the sprts were dsted; the name, number, and ocaton of
the dstery or warehouse from whch the sprts were wthdrawn upon pay-
ment of ta ; and the name of the vesse by whch, and the name of the port to
whch, the sprts are to be e ported. nd the entry sha specfy the voe
number of packages, the marks and sera numbers thereon, the knd of sprts,
the number of proof gaons; and the amount of ta on such sprts sha be ver-
fed by the oath of the owner of the sprts and that the ta has been pad thereon
and that they are truy ntended to be e ported to the port desgnated theren and
are not to be reanded wthn the mts of the Unted States. ( 3 Stat. 33 , as
amended, 37 ; 20 U. S. C. 2 7, 3176.)
Sec 176.73. Inspecton, Gaugng, and Ladng. The adng of such sprts on
board the vesse sha be ony after the recept of an order sgned by the coector
of customs and drected to a customs gauger (nspector) and after each package
sha have been dstncty marked or branded by the gauger, For e port from
U. S. ., and , 19 , from port of , ,
to port of , (suppyng the date of nspecton and gaugng
and the names of the respectve ports), and the ta -pad stamps thereon have
been scaped and obterated by the gauger. The packages sha be nspected,
gauged, and marked pror to adng by the gauger so desgnated, n accordance
wth these reguatons. The customs gauger sha make a fu return of such
nspecton and gaugng on Form 696 modfed to such e tent as may be necessary,
showng by whom each package of such sprts was dsted; the sera number
of the package and by the ta -pad stamp attached thereto, the proof and quantty
of such sprts accordng to the wthdrawa gauge marks on each package, and
the quantty n proof and ta abe gaons, as per the gauge then made by hm.
e sha aso certfy that the sprts are the same knd as shown by the marks
on the packages. ( 3 Stat. 33 , as amended, 27 ; 26 U. S. C. 2 7, 3176.)
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Regs. 2 , 176.17d, etc.
196
DR W C CL IM ND CUSTOMS PROC DUR
Sec. 176. 0. ntry for port. Upon concuson of the foregong proceedngs,
the coector of customs w dever Form 1629 to the e porter for e ecuton of
Part 2, ntry for Interna Revenue Drawback on Sprts n Dsters Orgna
Packages. Such entry w cover the merchandse descrbed by the customs
gauger and nspector. The e porter s affdavt n respect to such entry n Part 2
w be subscrbed and sworn to before the coector of customs or other offcer
authorzed to admnster oaths and havng an offca sea: Provded, That f the
form offcay prescrbed for such entry contans theren a provson for verfca-
ton by a wrtten decaraton that such entry s made under penates of per|ury,
such entry sha be verfed by the e ecuton of such decaraton, and such decara-
ton so e ecuted sha be In eu of the oath requred heren for verfcaton.
Where Form 1629 s sgned by an agent, proper power of attorney authorzng
the agent to e ecute the cam for the e porter must be fed wth the dstrct
supervsor. ( 3 Stat 33 , as amended, 37 , 63 Stat. 667; 26 U. S. C. 2 S7, 3176,
3 09.)
F ILUR TO COMPLY WIT L W ND R GUL TIONS
Sec. 176.91. Dsaowance of Cam. In case of faure of the e porter to
compy n a respects wth the aw and reguatons reatve to the e portaton
of dsted sprts wth beneft of drawback, the cam for drawback w be ds-
aowed. Drawback w not be aowed for ta es camed to have been pad on
dsted sprts e ported n packages not stamped, or upon whch the name of
the dster, the dstrct, the date of payment of the ta , and number of proof
gaons have not been branded or marked, as requred by aw and the provsons
of ths part. ( 3 Stat. 33 , as amended, 37 ; 26 U. S. C. 2 7, 3176.)
2. The purposes of these amendments are
(a) to make edtora changes to conform to Reguatons 11, ottng of
Ta -pad Dsted Sprts (26 CFR, Part 1 9), Reguatons 1 , Rectfca-
ton of Sprts and Wnes (26 CFR, Part 190), and the Gaugng Manua
(20 CFR, Part 1 6) as revsed pursuant to the ct of February 21, 19 0
(Pubc Law , ghty-frst Congress), effectve September 1, 19 0; and
(6) to prescrbe, n eu of an oath, a decaraton sub|ect to the penates of
per|ury for the foowng forms:
Form 1 2, Cam for Interna Revenue Drawback on Dsted Sprts
ported, and ntry for portaton Thereof.
Form 1 2- , Cam for Interna Revenue Drawback on otted Wnes
ported, and ntry for portaton Thereof.
Form 102 ), Cam for Interna Revenue Drawback on Dsted Sprts
ported n Dsters Orgna Packages, and ntry for portaton
Thereof.
3. It s found that compance wth the notce and pubc rue-makng
procedure of the dmnstratve Procedure ct ( U. S. C. 1001 et
seq.) s unnecessary n connecton wth the ssuance of these amend-
ments for the reason that the changes made are of a berazng and
admnstratve nature.
. Ths Treasury Decson sha be effectve September 1, 19 0.
. Ths Treasury Decson s ssued under the authorty of 6 Stat.
690, as amended. 693, as amended; 19 U. S. C. 1309.1313: 3 Stat. 33 ,
as amended, 37 . 377, as amended; 26 U. S. C. 2 7, 3176, 3179; 63
Stat. 667; 26 U. S. C. 3 09.
Geo. . Scoeneman,
pproved ugust 2 , 19 0.
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster ugust 29, 19 0, 9 : 31 a. m.)
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197 Part 171, Msc. Regs.
19 0-1 -13 19
T. D. 00
tte 26 nterna revenue. chapter . subchapter c. part 171.
msceaneous reguatons reatng to quor
11 ashng ton 2 , D. C.
To Dstnct Super sors and Others Concerned:
1. Pursuant to secton 2 3,1. . C. (2G U. S. C. 2 3), as amended
by Pubc Law -1 , ghty-frst Congress C. . 19 0-1, 2 9 , effec-
tve September 1, 19 0, Treasury Decson 111 C. . 19 2-1 32
(approved anuary 2 ,19 2) concernng producton, wthdrawa, etc.,
of dsted sprts of 100 or more of proof at regstered dsteres,
frut dsteres, and nterna revenue bonded warehouses (26 CFR,
sectons 171.20-171.30), and Treasury Decson 132 C. . 19 2-1,
333 (approved pr 1, 19 2) and Treasury Decson 1 C. .
19 2-2, 31 (approved November 27, 19 2) concernng producton,
remova, etc., of unfnshed sprts for redstaton (26 CFR, sectons
171. 0-171. ) are revoked effectve September 1, 19 0.
2. The revocaton of these reguatons sha not affect or mt any
act done or any abty ncurred thereunder, or any sut, acton, or
proceedng had or commenced n any cv, admnstratve, or crm-
na cause or proceedng pror to the effectve date of such revocaton,
nor sha such revocaton reease, acqut, affect, or mt any offense
commtted n voaton of the reguatons, or any penaty, abty or
forfeture ncurred pror to such date.
Geo. . Schoenf.man,
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster ugust 1C, 19 0, : a. m.)
Part 171: Msceaneous reguatons reat- 19 0-2 -13
ng to quor. T. D. 1
tte 20 nterna revenue. chapter , subchapter c, part 171.
msceaneous reguatons reatng to quor
Offce of Commssoner of Interna Rf.venue.
Washngton 2 , D. C.
1. In order to permt the wthdrawa of dsted sprts free of ta
from regstered dsteres and nterna revenue bonded warehouses
for use of the Unted States, and to authorze the use of ppenes,
tank cars, tank trucks, tank barges, and other conveyances approved
by the Commssoner, for the transportaton of dsted sprts so
wthdrawn and for the transportaton of acoho wthdrawn free of
ta from ndustra acoho pants and ndustra acoho bonded ware-
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Part 171, Msc. Regs.)
19
houses for use of the Unted States pursuant to Reguatons 3 (26 CFR,
part 1 2), the foowng reguatons are hereby prescrbed:
Subpart F Wthdrawa of Dsted Sprts Free of Ta From Regstered
Dsteres and Interna Revenue onded Warehouses and of coho
Free of Ta From Industra coho Pants and onded Warehouses fob
Use of the Unted States
wthdrawa of dsted sprts free of ta from regstered dsteres and
nterna revenue bonded warehouses fob use of the unted states
Sec. 171.1 0. Genera. Dsted sprts of any proof may bo wthdrawn, free
of ta , for use of the Unted States from the cstern room of a regstered ds-
tery or from tanks n an nterna revenue bonded warehouse, by the head of
the department or ndependent bureau or agency by whch the sprts are to
be used.
Sec. 171.1 1. Types of Conveyances. Dsted sprts may be transported by
ppene, or n raroad tank cars, tank trucks, tank barges, or other conveyances
approved by the Commssoner, controed and opera_ed by the consgnor, the
consgnee, or a pubc carrer. The conveyance must be sutabe for the trans-
portaton of dsted sprts and a openngs sha be so equpped for seang
as to prevent unauthorzed access to the dsted sprts.
Sec. 171.1 2. ppcaton. Form 1 . The head of the department or nde-
pendent bureau or agency, as the case may be. desrng to wthdraw dsted
sprts, free of ta , w fe appcaton. In quadrupcate, on Form 1
(appropratey rnodSed), drecty wth the Commssoner. The appcaton
must state the name of the department or ndependent bureau or agency, the
name of the propretor, the regstry number, and the ocaton of the regstered
dstery or nterna revenue bonded warehouse from whch the dsted sprts
w be wthdrawn free of ta . and the names and addresses of the consgnees
to whom shpments w be made. The appcaton sha be sgned by the
head of the department or ndependent bureau or agency, as the case may be,
or by another offca duy authorzed by hm. vdence of such authorty sha
be furnshed the Commssoner.
Sec. 171.1 3. Issuance of Permt. Form 1 . Upon recept of an appcaton
on Form 1 , the Commssoner w ssue a permt on such form (appropr-
atey modfed). The orgna and one copy of F- rm 1 -1 sha be forwarded
to the head of the department or ndependent bureau or agency makng app-
caton for the permt who n turn sha retan a copy and forward the orgna
to the consgnor dster or warehouseman, as the case may be. 0:e copy
w be retaned by the Commssoner for hs fes and the remanng copy sha
be forwarded to the dstrct supervsor of the dstrct n whch the regstered
dstery or nterna revenue bonded warehouse, named as consgnor n the
appcaton, s ocated.
Sec. 171.1 . Wthdrawa of Dsttep. Sprts. When wthdrawas of ds-
ted sprts are to be made, free of ta , for use of the Unted States, the
dster or warehouseman, as the case may be, w present the permt, Form
1 . to the storekeeper-ganger and desgnate the sprts to be wthdrawn. The
storekecper-gaugcr w then gauge the sprts and prepare Form 1 20 n quad-
rupcate. If the sprts to be wthdrawn are contaned n a tank whch s not
mounted on scaes, the quantty may be determned by voumetrc gauge. Pror
to fng, the storekeeper-gauger sha e amne the conveyance and determne
whether t s sutabe for the transportaton of sprts and whether a open-
ngs affordng access to the sprts are so equpped that they may be effectvey
seaed. If the conveyance does not meet such requrements, ts use for the
transportaton of dsted sprts w not be permtted. The propretor w
prepare Form 1 3. n quntupcate and gve a copes to the storekeeper-gauger.
Immedatey after fng, the storekeeper-gauger w sea the conveyance, wth
cap seas furnshed by the Government, n such a manner as w secure a
openngs affordng access to the sprts. The sera numbers of the cap seas
so used w be entered by the storekeeper-gauger on the reverse sde of Form
1 3, foowed by hs sgnature and tte. If the conveyance s a tank car, tank
truck, or tank barge, a abe sha be securey aff ed to the route board of the
tank car or tank truck, or at a sutabe ocaton on the tank barge or other
conveyance, on whch sha be pany marked the proof and temperature ascer-
taned at the tme of gauge for wthdrawa, the number of nches above or
beow the fu mark (or other ceary desgnated gauge mark on the convey-
ance), the date and purpose of wthdrawa (for use of the Unted States),
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199
Part 171, Msc. Regs
the number of proof pons, and the name and address of the consgnee. Upon
reease of the shpment, the storekeeper-gauger w retan one copy of Form
1 3 and one copy of Form 1 20, dever one copy of each form to the dster
or warehouseman, as the case may be, forward two copes of Form 1 3 and one
copy of Form 7 20 to h; consgnee, and forward the remanng copy of each form
to the dstrct supervsor. Where shpment s by tank truck the copes of Forms
1 3 an 1 20 for the consgnee w be seaed n an enveope addressed to such
consgnee and handed to the person n charge of the truck for devery.
Sec. 171.1 . of Latno. Where the dsted sprts are to be trans-
ported by a pubc carrer, the consgnor sha furnsh to the storekeeper-
gauger, for forwardng to the dstrct supervsor wth Form 1 3 and Form
1 20, a copy of the b of adng, coverng transportaton of the sprts from the
pont of shpment to destnaton.
Sec. 171.1 G. Certfcate of Recept. Recept of each shpment of dsted
sprts wthdrawn for use of the Unted States under ths part sha be
prompty certfed to on Form 1 3, n dupcate, by the offca representatve
of the Unted States or governmenta agency thereof to whom devery of such
shpment was made. Where nspecton at destnaton dscoses a oss n transt
such oss w be noted on each copy of Form 1 3 by the recevng offcer, who
w state whether the condton of the conveyance when receved ndcated
that the oss was due to theft or to other cause.
Sec 171.1 7. Dsposton of Recepted Form 1 3. One copy of the re-
cepted Form 1 3 sha be forwarded prompty to the dstrct supervsor from
whose dstrct the wthdrawa was made and the remanng copy sha be
retaned by the consgnee.
WIT DR W L OF LCO OL FR OF T FROM INDUSTRI L LCO OL PL NTS ND
OND D W R OUS S FOR US OF T UNIT D ST T S
Sec 171.1 . Genera. coho wthdrawn, free of ta , from ndustra
acoho pants and bonded warehouses for use of the Unted States, pursuant
to Reguatons 3 (26 CFR, part 1 2), may be transported by ppene, or n
tank cars, tank trucks, tank barges, and other conveyances approved by the
Commssoner, controed and operated by the consgnor, the consgnee, or a
pubc carrer. The conveyance must be sutabe for the transportaton of aco-
ho and a openngs sha be so equpped for seang as to prevent unauthorzed
access to the acoho. Such conveyances sha be seaed and abeed n accord-
ance wth secton 171.1 of ths part. If the acoho to be wthdrawn s con-
taned n a tank not mounted on scaes, the quantty may be determned by
voumetrc gauge.
2. It s found that compance wth the notce, pubc rue-makng
procedure, and effectve date requrements of the dmnstratve
Procedure ct ( U. S. C. 1000 et seq.) s unnecessary n connecton
wth the ssuance of these reguatons for the reason that the changes
made are of a berazng character.
3. Ths Treasury Decson w be effectve upon the date of pub-
n 3 Stat. 3 9, 360, 37 , 03; 26 U. S. C. 310 , 311 , 3176, 3331.)
Geo. . Schoeneman,
pproved November 2, 19 0.
Thomas . Lynch,
(Pubshed n the Federa Regster November , 10 0)
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Regs. No. .
200
INTO IC TING LI UORS
Reguatons No. , coho Ta ct. 19 0-16-13 03
T. D. 797
TITL 27 INTO IC TING LI UORS. C PT R 1, P RT . L LING ND
D RTISING OF WIN
mendng Reguatons No. , under the Federa coho dmns-
traton ct.
Trf.asurt Department,
Washngton 2 , D. 0.
Motce of a pubc hearng to be hed n Washngton, D. C, on Oc-
tober 27, 19 , and n San Francsco, Caf., on October 7, 19 , wth
respect to certan proposas to amend Reguatons No. , Reatng to
Labeng and dvertsng of Wne, was pubshed n the Federa
Regster on ugust 2 , 19 (13 F. R. 923).
Upon the concuson of the sad hearng and after consderaton of
a reevant matera submtted by nterested persons n connecton
therewth regardng proposas numbered 1-7, ncusve, 9, 11, and 12
of sad notce, the foowng amendments to secton 21, casses 1(a),
2 (a), (6), and (c), (a), (a), and 6(a), secton 22(6), secton 3 (a)
and (6), secton 39 (6) and (ff), secton 6 (), and secton 72(a) are
hereby adopted. Secton 21 s further amended by the addton of sub-
secton (d) to cass 2 thereof, and by the addton of cass 9 thereto.
These amendments sha become effectve as stated beow:
1. In order to change the ma mum mtaton on the ameoraton
of wne by the addton of sugar or sugar souton to a tota sods
content of 22 grams per 100 cubc centmeters from the present ma -
mum on resdua sugar content derved from added sugar of 1 per-
cent by weght; to rase the percentage of dry sugar whch may be
added for ameoraton from 1 percent to 20 percent; and to requre
that any wnes whch have a tota sods content of over 17 grams per
100 cubc centmeters be conspcuousy abeed e tra sweet, specay
sweetened, specay sweet1 or sweetened wth e cess sugar, the
foowng provsons of the reguatons are amended:
Secton21.cass a) (1) (27CFR.Cum. Supp., .21 (a) (1) ()),
cass (a) (27 CFR, Cum. Supp.. .21(d)(1)), cass (a) (27
CFR, Cum. Supp., .21(e)(1)), and cass 6(a) (27 CFR. Cum.
Supp., .21(f)(1)) are amended by deetng the phrase or an
unfermented resdua sugar content, derved from added sugar, of
more than 1 percent by weght , where t appears theren, and n-
sertng, n eu thereof, the phrase or a tota sods content of
more than 22 grams per 100 cubc centmeters ;
Secton 21, cass 1(a)(2) (27 CFR, Cum. Supp., .21
(a) (1) ()), s amended by deetng the fgure 1 n the phrase
not more than 1 percent by weght of dry sugar and nsertng
n eu thereof the fgure 20 ;
Secton 22(6) ( ) (27 CFR. Cum. Supp., .22(b)( )) s
amended by deetng the phrase f the unfermented resdua
sugar content, derved from added sugar, s not more than 20
percent by weght and nsertng n eu thereof the phrase f
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201
Regs. No. .
the tota sods content s not more than 22 grams per 100 cubc
centmeters ;
Secton 3 (a) (27 CFR .3 (a)) s amended by nsertng be-
tween the thrd and fourth sentences thereof the foowng new
sentence:
In the case of wne whch has a tota sods content of more than 17 grams
per 100 cubc centmeters the words e tra sweet , specay sweetened ,
specay sweet or sweetened wth e cess sugar sha be stated as a part
of the cass and type desgnaton. The ast of these quoted phrases sha
appear where requred by Interna Revenue Reguatons 7, Wne (2G CFR,
Part 17 ). on wnes sweetened wth sugar n e coss of the ma mum quan-
ttes specfed n such reguatons.
These amendments sha become effectve 6 months after the date of
2. In order to provde a standard of dentty for retsna wne,
secton 21 (27 CFR .21) s amended by addng at the end th.eof a
new cass 9 to read as foows:
Cass 9. Retsna tcne. Retsna wne s grape tabe wne fermented or
favored wth resn.
Ths amendment sha become effectve on the thrty-frst day after the
date of ts pubcaton n the Federa Regster.
3. In order to provde a standard of dentty for crackng wne
as a type of sparkng wne, secton 21, cass 2 (27 CFR. Cum. Supp.,
.21(b)) s amended by deetng the word secondary from subsec-
ton (a) thereof and by addng at the end of sad secton 21, cass 2,
a new subsecton (d) as foows:
(d) Crackng wne, petant wne, frzzante wne (Incudng cremant,
perant, recotto, and other smar wne) s sparkng ght wne normay ess
effervescent than champagne or other smar sparkng wne, but contanng
suffcent carbon do de n souton, derved soey from mted fermentaton
wthn the botte, to produce, upon pourng under norma condtons, after the
dsappearance of ar bubbes, a sow and steady effervescence evdenced by the
formaton of gas bubbes fowng up through the wne.
and secton 3 (a) (27 CFR, Cum. Supp., .3 (a)) s further amended
by deetng the thrd sentence and nsertng n eu thereof the
foowng:
In the case of champagne, or crackng wnes, the type desgnaton champagne
or crackng wne petant wne, frzzante wne ) may appear n eu of the
cass desgnaton sparkng wne.
These amendments sha become effectve 6 months after the date of
. In order to emnate the requrement n the present standards of
dentty for champagne and champagne type sparkng wnes that such
wnes must be whte wnes so that sparkng pnk and red wnes may
bear these desgnatons, secton 21, cass 2 (b) and (c) (27 CFR, Cum.
Supp.. .21(b) (2) and (3)) are amended by deetng the phrase
sparkng ght whte wne , now appearng n both these subsectons,
and nsertng n eu thereof the phrase sparkng ght wne .
Ths amendment reeves restrctons n the present reguatons and
sha become effectve on the date of pubcaton n the Federa
Regster.
. In order to mt the present requrement, that wnes abeed wth
representatons ndcatng or nferrng orgn bear an appeaton ds-
cosng the true orgn of the wne, to stuatons n whch the nference
of orgn conveyed by such representatons s fase, secton 3 (6)
023 30 61 1
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Regs. No. .
202
(27 CFR, Cum. Supp., .3 (b)) s amended by deetng cause num-
bered (3) and nsertng n eu thereof the foowng:
(3) f the abe bears any statement, desgn, devce, or representaton whch
ndcates or nfers an orgn other than the true pace of orgn of the wne.
Ths amendment reeves a restrcton n the present reguatons and
Regster.
6. In order to permt domestc wnes to be botted n one-haf pnt
bottes of the tradtona chant and round shapes and n the trad-
tona magnum and doube magnum szes secton 72(a) (27 CFR.
Cum. Supp., .72(a)) s amended to read:
(a) The stnndnrds of f for wne sha be the foowng, sub|ect to the toer-
ances herenafter aowed:
(1) For a wnes:
.9 gaons, 1 pnt.
3 gaons, pnt.
1 gaon, pnt.
gaon, pnt.
gaon, ounces.
gaon, 3 ounces.
1 quart, 2 ounces.
quart.
(2) In addton, for apertf wnes ony: quart.
Provded, however. That the standards of f for the , and gaon sha be
appcabe ony to wne contaned n bottes of the tradtona bordeau or
burgundy shapes, and the a pnt standard sha be appcabe ony to wne
contaned n bottes of tradtona chant or round shapes.
Regster.
7. In order to permt, under certan condtons, mported vntage
wne botted n ths country to state the vntage year upon ts abes,
secton 39(6) (27 CFR .39(b)) s amended by deetng subparagraph
(3) and nsertng n eu thereof the foowng:
(3) In the case of mported wne, the year of vntage may be stated f Mch
wne was botted pror to mportaton n contaners of 1 gaon or ess, or, f
such wne s botted n the Unted States n contaners of 1 gaon or ess from
the orgna contaner of the product and such contaner bears the vntage date
upon the brand abe thereof and the botter possesses a certcae, ssued by
a duy authorzed offca of the country of orgn of such wne, dentfyng that
contaner as contanng vntage wne as defned n rtce I (ft) of these regu-
atons and certfyng (1) that the aws of such country reguate the appearance
of vntage dates upon the abes of wne produced for consumpton theren,
(2) that the wne n queston has been produced n conformty wth suc aws,
and (3) that such wne woud be entted, under such aws, to bear the vntage
date f sod n such country.
Ths amendment sha become effectve G months after the date of
. In order to permt the word mporter or smar words to
appear on abes and n advertsements of domestc wne when such
words are part of the name of a permttee or retaer by whom the
wnes are dstrbuted, secton 39( ) (27 CFR .39(g)) and secton
6 () (27 CFR .6 ()) are amended by deetng the phrase such
wne s botted or packed , whch appears n each of these subsectons,
and nsertng n eu thereof the phrase such wne s botted, packed
or dstrbuted .
sha become effectve on the date of pubcaton n the Federa Regster.
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203
(Regs. No. .
(Ths Treasury Decson s ssued pursuant to and under the author-
ty contaned n secton (e) and (/) of the Federa coho dmn-
straton ct, as amended (27 U. S. C. 20 (e) and (f)), Reorganza-
ton Pan No. I, paragraph 2 ( Stat. 1232), secton 3170 of the
Interna Revenue Code ( 3 Stat. 373), and secton 1G1 of the Revsed
Statutes ( U. S. C.22).)
Carro . Mf.aey,
Deputy Commssoner of Interna Revenue.
pproved uy 1 , 19 0.
Fred S. Martn,
Thomas . Lynch,
(Pubshed n the Federa Regster uy 2 , 19 0)
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20
G UGING M NU L
Gaugng Manua. 19 0-19-13 2
T. D. 03
tte 20 nterna revenue. chapter , subchapter c, part 1 6.
gaugng manua
Washngton 2 , D. C.
1. TheWSO edton of the Gaugng Manua (26 CFR. Part 1 6: 1
F. R. 7 7), effectve September 1, 19 0, w not be avaabe n book
form for dstrbuton unt some tme after that date. ccordngy,
pendng ts recept, tabes 1 through 7 of the 193 edton of the
Gaugng Manua (26 CFR. Part 1 0; F. R. 121 ) w be foowed
n gaugng sprts, e cept, that n order to conform to the 19 0 ed-
ton, tabes 2 and 3 of the 193 edton w be modfed by droppng
the fractona gaons beyond the frst decma f ess than 0.0 . or
by addng as 0.1 f 0.0 or more. Fractona gaons beyond the frst
decma, ascertaned through use of tabe , w kewse be dropped
f ess than 0.0 , or w be added as 0.1 f 0.0 or more.
2. It s found that compance wth the notce and pubc rue-
makng procedure of the dmnstratve Procedure ct ( U. S. C.
1001 et. seq.) s unnecessary n connecton wth the ssuance of these
reguatons for the reason that they are of an admnstratve character.
3. Ths Treasury Decson sha be effectve September 1, 19 0.
. Ths Treasury Decson s ssued under the authorty contaned
n 3 Stat. 333. 33 . as amended, 373, as amended, 37 , 67; 26 U. S. C.
2 7 , 2 3, 3170, 3176, 3791.
Geo. . Schoenf.man,
pproved ugust 2 , 19 0.
Thomas . Lynch,
(Fed wth the Dvson of the Federa Regster ugust 29, 19G0, 9:31 a. m.)
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Msc.
OL OM RG RIN
19 0-1 -1339
MS. 3
Schedue of oeomargarne produced and materas used durng the month of
May 19 0, as compared wth May 19 9

May 19 0
May 19 9
Tota prod acton of uncoorcd oeomargarne
Pound
37,713, 97
U s 73
Ingredent schedue of oncoored oeomargarne:
39,2 ,
60.362.9 0
Cottonseed o
3, 31
10,0 0
17,963,
67,1 3
3
76.777
6, 96,019
31,760
231,071
339.1
23 , 3
,0
7,3 1
1,1 9,
27,97
7,6 2
6, 0
2 , , 07
71,0 1
7
Dervatve of gycerne
,0 9
,296,11
3,3 1
33 ,1 9
27 ,7 3
270,011
67,7 0
1,213
1, 1,3
3 , 10
0
11,7 ,2 2
13,621,0 0
,191
6,99
7, 73
3 . 1 .2 2
60,167,96
Tota producton of coored oeomargarne
1 , 6 3.166
10, 27, 6
Tota wthdrawn ta pad
16,73 .0G1
10.0 2, 6 7
Ingredent schedue of coored oeomargarne:
,010
9, 626
,200
9, 123, 0 0
2 ,07
12
,901
,
33, 23
3,1 0, 3 2
13,
22.3 1
3 . 91
12.900
, 73, 71
1 , 202
12
19,139
1,7 9,9 S
S. 21
16, 20
2 ,9 0
. 1
Sat
6 909
12,62
,92 , 9
1.130
3,1 6
I, 60
319. 291
6,01
3, 2 ,703
tamn concentrate
1, 90
Tota
1 ,9 2, 0
10. 0, 737
fgures arc sub|ect to revson unt pubshed n the Commssoner s annua rewrt.
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206
19 0-17-13 13
MS. 3 9
Schedue of oeomargarne produced and materas used durng the month of
une 19 0, as compared -wth une 19 9
une 13 0
une 19 9
Tota producton of uncoored oeomargarne..
Tota wthdrawn ta pad
Ingredent schedue of unco orcd oeomargarne:
utter favor _
Corn o __
Cottonseed o..
Dervatve o gycerne.
Dacety
ecthn
Mk
Monostearnc
Neutra ard
Oeo o
Oeo stearne
Oeo sock
Peanut o
Sat
Soda (benoatc of) -
Soya bean fakes
Soyn bean o
tamn concentrate
Tota.
Tota producton of coored oeomargarne.
Tota wthdrawn tan-pad
Ingredent schedue of coored oeomargarne:
utter favor
Coor
Corn o..
Cottonseed o
Dervatve of gycerne
Daccty
Lecthn
Mk
Monostearnc
Neutra ard
Oeo o
Oeo stock
Feanut o
Sat
Soda (benoate of)
Soya bean o
Soya bean fakes
tamn concentrate
Pound;
2 ,6 3, 7
22, 7 3.337
66
37, 207
12,12 . 90
1,023
2
2, M
,166,06
23,070
210, 73
16 , 97
303,160
26,1 0
,031
773. 7 1
16,996
1,09
7,323. 6
3,7 6
2 , 277.070
.6 7.032
12. 737, 692
Tota.
,6 6
1 ,702
10, 00
21, 913, 9
7,2 9
27
7 ,
7, 9, 1 3
1, 2 7
6. 92
66, 32
2 . 1 0
13, 99
1. 319.137
33. 27
1 , 1 2. 2
2. 01
.0
, 37 ,007
1. 1,(
60, 33. 267
, 762
27,023 1 C
M
67
92. 77
,6 . 70
6,221
33 ,962
27 . 09
29 , 11
6,930
91
1, 6 6. 77
3 , 9
2
13, 72 . 7 0
,330
2,199. 0S2
12.1 6. S3
11.136, 736
, 01
7,13
6, 70 , 1 2
1 .933
3
22,329
2,01 .92
2 .2 3
3. 26
f, a
2.112
37 .033
.910
,061. M
ISO
1.7W
12, 31 , 20
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207
I Msc.
TO CCO ND SNUFF-
19 0-1 -1339
T. 267
Tobacco and snuff manufactured n and removed from domestc factores durng
the month of May 19 0, compared wth the same month of 19 9
Manufactured
Ta -pad
Removed
Ta -free
May 19 0
May 19 9 | May 19 0
May 1C 0
May 19 C
May 1 0
Pounds
Pounds
Pounds
3,3 6. 6 3
369.176
2 , 12
2, 71. 19
. 933.0 1
3.39 . 979
Pounds
Pounds
29.166
77,910
Pounds
Png-
3. .;92
70. 0 2
232,722
2,371,279
9. ISO. 216
3. 01. 3
3.01 , 07
90, 2
2 0. OfcS
3, 19. 0
392. 900
2 . 226
2,93 ,1
9, 777, 307
3.3 0. 061
30. 0
103,3 0
Twst-
2, 2 , 76
10, 119, 7
. 9
27 . 30(
1.330
967
1 . 100
1.660
Smokng
3. 2 . 67
Tota
19,1 9,10 20, 91, 17 1 , 7 , 63 20,11 , 707
3 ,167 321.21
19 0-17-13 12
T. 270
the month of une 19 0, compared wth the same month of 19 9
Manufactured
Ta -pad
Removed
Ta -free
une 19 0
une 19 9
une 19 C
une 19 0
une 19 0
une 19 9
Pounds
Pound
Pound
3, S ,622
371, 136
2 . 909
3.906. 7
9,000.0 1
3.7 7.071
Pounds
Pounds
61. 1 0
1 9. 1
Pounds
1 0 336
St. 179
Pce
3, 21, 63
72,2 9
2P , 302
. 1 . 201
9.333,1 9
S. 766. 922
, 000. 0
00, 9 7
2 0. 12
3. 0 , 00
9,7 6.967
3. 3 . 133
3,72 . 6
21. 9S
2 1,99
Scran chewng
. 767, 9
33
3 .616
1.6
1. 69
ISO. |
1.210
Snuf
9, MO. 66
3,379. 0
Tata
, 979, 6
21. 7 0, 1 20. 13,367
21,1 , 7 1
601. 761
20. 001
U fgures are sub|ect to revson unt pubshed n the Commssoner s annua report.
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Msc.)
20
19 0-19-13 30
T. 272
Tobacco and snuff manufactured n and removed f-om domestc factores durng
the month of uy 19 0, compared toth the same month of 19 9
Manufactured
Ta -pad
Removed
Ta -free
uy 10 0
uy 10 0
uy 10 0
uy 19 9
uy 19 0
uy 19
Pug
Pounds
3,0 . 32
33, 00
21 , 20
3,101,36
6,011,267
2, 2 , 3 1
Pounds
3,360,673
3 , 1
207,231
2, 061, 2 7
7,311,200
2,30 , 732
Pounds
3,167, 2 9
33 , 3
20 ,0
3, 201. 0
6, , 2 1
2, 30,0-,0
Pounds
3, 91,19
32 , 9
199,
3, 2 6, 9
7, 202. 132
2, 1 ,030
Pounds
.33,333
2,030
Pounds
132.23
,000
Twst
1, 37
329,3
1.7 7
17 17
1 7.0 3
1.01
SnuT
Tota...
16. 7 , 3
10,62 ,097
16,329, 61
16,92 , 902
0 , 32
336,162
19 0-21-13
T. 27
the month of ugust 19 0, compared wth the same month of 19)9
Manufactured
Ta -pad
Removed
Ta -free
ugust 19 0
ugust 19 9
ugust 19 0
ugust 19 9
ugust 19 0
ugust 19 9
Pounds
Pounds
Pounds
Pounds
Pounds
79. 3 9
99, 1
Pounds
Pug
3, 0. S
0 . 9
2 , 696
, 019. 00
6. 3 9
26 . 0 1
3, 920, 316
3 ,
261,396
3, 3 ,13
3 9, 63
270, 2
31,02
79,2
Twst.
Fne-cut chewng
Scrap chewng _
. 270, 012
10, 206.
,09 ,
10, 30 ,102
, 202, 1
9, 6 , 67
3. 93 ,310
, 02 . 9
9, 796. 66
3. 79 . 00
12,10
10.1 9
.7
:. 97
27 . 3
2. 36
Smokng
Snuf
3.932, 9
3. 3 .167
Tota
23. 069, 3 6
22, 9 , 731 22, 1 ,9
22, US, 9
706,2 6 39 ,96
19 0-23-13 79
T. 279
the month of September 19 0, compared wth the same month of 19 9
Manufactured
Ta -pad
Removed
Ta -free
September
19 0
September
19 9
September
19 0
September
19 9
September
10 0
September
10 9
Pounds
3, 03,1 3
69. 12
212.9 3
3, 1, 7f .
10, 000, 710
3, 203. O02
Pounds
3, 60,000
70. 10
2 9, 200
3, 76 .3 7
10, 79. 2 9
3, 6 0, 6
Pounds
3,312, 127
Pounds
Pounds
6. 206
137. 110
Pounds
13 . 33
, 7
Pug
3, 1 .99
3 7,1 0
2 9, 91
3, 073, 312
10, 70,020
3, 667, 320
Twst
3 .900
223.673
no-cut chewng..
Scrap chewng
3, 0, 6S
10,0 9, 773
7.0 6
33.600
1061
,332
211, 9
1,1 7
Smokng _
Snuf
3,20 . 107
Tota
21, (30, 702
22. 01. 071
20, 706,0
22, 262, 661
627,0 2
3 , 21
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209 (M c.
19 0-2 -13 96
T. 2 1
the month of October 19 0, compared wth the same month of 19 9
Manufactured
Ta -pad
Removed
Ta-free
October
1060
October
19 9
Oetorer
I960
Octorer
10 b
October
1060
October
10 0
Poundt
Pounds
Poundt
Poundt
PounCt
113.902
76,626
Poundt
1 ,92
06.603
3,716.6
76. 33S
232, 73
3. 66,702
62.736
237.679
3,361. 963
362. 13
22 .0S3
3.2 a 672
376,603
232, 07
3. 0.9 9
11, 91 . 101
3, 06.7 9
10, 096. 671
3.336.619
11, 7 . 00
3, 2 2. 96
10, 617. 2
0.923
361.6 7
2,2 2
2.302
200,
2, 1
3, 621. 9 6
3.663. 7
3. 601. 626
3,632. 3
Tota
23, 16, 00 1 22, 3 , 293 1 22, 370,603 1 21, 391, 6 1 60 , 9 1 320,366
1 1 1 1 1
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Msc. 210
CIG R TT S ND SM LL CIG RS
19 0-16-13 0
T. 26
Cgarettes and sma cgars manufactured n and removed from domestc fac-
tores durng the month of une 19 0, compared wth the same month of 19 9
Sma cgarettes
Large cgarettes
Sma cgars
1960
19 9
19 0
19 9
19 0
19 9
Manufactured.
3 , f02,12 , 3
32, 1 ,372,300
2, 9 , 72, 1 0
30,112, 1, 30
32, , 79 . 0
3, 236,117, 602
3, 10
2,760
92, 00
9 , 00
.7 ,690
6, 1 ,620
2,000
6, 11,190
7.006,
,000
Removed ta -pad
19 0-1 -13 21
T. 271
tores (urng the month of uy 19 0, compared wth the same month of 191)9
Sma cgarettes
Largo cgarettes
Sma cgars
19 0
19 9
19 0
19 9
19 0
10 9
Manufactured
30,13 .966. 6
27,373,9 2, 0
2, 19, 21, 0
27, 0 , 0,3 3
2 , 06. 12, 3
2, 1 ,0 1,
27,7 0
, 1 0
2 ,6 0
30, 00
,0 2,0 0
, 66,010
. 9, 3 0
, 76,100
Removed ta -free
1 0
19 0-20-131 3
T. 27
Cgarettes and sma cgars manufactured n and removed from domestc
factores durng the month of ugust 19 0, compared wth the same month
of 19|9
Sma cgarettes
Large cgarettes
Sma cgars
19 0
19 9
1960
19 9
19 0
19 9
Manufactured
3,2 1.0 3,379
39, 126, 127. 606
3 , 17,321, 29
3 , 3 6, , 0
3, 0 1,17 , 710
9 .030
7. 1 0
,100
76,3 0
7 ,0 0
7,911,660
7, 7 , 30
3,000
, 20,3 0
7. , 30
2.000
Removed u -pad
Removed ta -free
fgures arc sub|ect to revson unt pubshed u tho Commssoner s annua report.
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#
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211
(Msc.
19 0-23-10-176
T. 277
tores durng the month of September 19 0, compared wth the same month
of 19W
Sma cfnrv tes
Lnrpe cgarettes
Sma
cgars
19 0
19
19 0
19 9
19 0
19 9
. ..
7 2.607. t9
3 . 36. 323, W17
21.200
17.1 0
6, 933. 330
, 376. 70
Removed ta-pad
- f. D37. 133
31. 712. 00. 231
22.000
1 , 7 0
6, 732, G20
. 1. 30
Removed ta- rec.
;
0 .06.33
2,6 0, 30 . 3tO
1
1
19 0-2 -131 7
T. 2S0
Cgarettes and sma cgars manufactured n and removed from domestc facto-
res durng the month of October 10 0, compared wth the same month of 10 9
Sma cgarettes
Large cgarettes
Sma cgars
19 0 19 9
19 0
19 9
t 0
19 9
32, 0,0 , 772 31, 3, 0 1,23
29, 737,61 , 37 29, 19 ,0 , 767
3,223,36 ,2 7 2,777,327,633
Manufactured..
9 ,900
7 , 00
7 ,200
6, 707, 2R0
7,2 . 100
2,000
9, ISO. 070
0 6.1 0
Pemnved fft-pn-
19,900
SCO
R|rnnvM a-rw
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#
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Msc. 212
L RG CIG RS
19 0-1 -133S9
T. 266
Large cgars manufactured n and removed from domestc factores durng the
month of pr 19 0, compared wth the same month of 19 9
prU 19 0
prU 19 9
Removed:
Ta -pad:
379,97 , 3S
393, 1 2. 1
Cnss
1, 3 ,71
1 , 37,201
136,163. 99
2, 9 , 0
17 , 3, 70
7.2 .7 3
, 7. 2
1,13 . 2
1 ,992,02
1 , 0 2, 29
0,1 0,063
20 , 1 . 02
.176, 10
. 27 . 170
Cass n
Cass G.
Cass D
Cass
Cass F
Cass (1__
Tota ta -pad
3 3,13 , 96
3. . 20
09, .00
T -frco
19 0-17-13 10
T. 269
month of May 19 0, compared wth the same month of 19)9

May 19 0
May 19 9
Removed:
Ta --ad:
39,9 0,23
31,232,7
Cass _
1, 6 ,12
1 ,269, 706
1 , 12, 32
1,126,92
196,9 1,2 9
, 72 ,21
6, 23, 79
1,216, 0
16, 292,7 0
1 3, 61,9 9
3, UU, 97S
229,736,67
,71 ,0
7,00 ,6 0
Cass
Cass (
Cass D
Cass F
Tota ta -pad
3 ,60 ,3 2
3,160, 169
9, 32, 27
3,1 6,62
Ta -free
19 0-19-13 31
T.273
month of une 19 0, compared wth the same month of 19 9

une 19 9
ane 19 0
Manufactured
61,102, 2
09, 2 ,072
Removed:
Ta -md:

1,931, 00
20,307,12
161.200, 7
, 61, 79
20 , 2,627
9,307,3 3
6, 2 ,62
1, ,22
17.79 .300
162, 799, W3
7, 2S7.060
229,0 . 99
6,971.0
7. 09,69
Tns 11
( nss C
C . 1)
Cass
Cass F ,
Cnss (1
Tntn tn -pad _ ....
60,019, 76
3,7 2,3
72. , 0
3,799,069
Tnr.frm.
fgures arc sub|ect to revson unt pubshed n the Commssoner s annua report
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e
213
Msc.
19 0-22-13 71
T. 276
month of uy 19 0, compared wth the same month of 1919
uy 19 0
uy 19 9
Manufactured
Removed:
Ta-pad:
Cass
Cass II
Cass C
Cass D
Cass F,
Cass F
Cass O
Tota ta -pad
Ta free
3 ,0 , 63
1.9 1,133
1C, 00, 03
103.2 .31
,106.716
172,1 , 0
6. 6. 66
, 206. 663
13, 7 0,690
1, 73, 33
1,931,9 0
16.733,900
1 7,316,196
, 3,92
170, 36.0 0
7,12 .023
6. 90.000
39 .9 0,077
3, 2,209
19 0-23-13 7
T. 27
month of ugust 19 0, compared cth the same month of 19 9
ugust 19 0
Rcmo
Manufactured.
ved:
Ta -pad
Cass .
Cas; .
Cass C.
Ccss D.
Cass
Cass F.
6 . 29 . 122
2 , 09. OS-
Cass G
Tota ta -pad
Ta -free
3, 611,700
2 , 6, 730
1 , 00 ,130
3s. 73
2 0, 72 , 1 1
10. 6 .333
7. 6. 7 6
2, 1 1, 60
21,90 ,630
17 . 10.606
66,976, 76
231, 96, 2
I.097.6
6, 1 .032
3. 07 . 971
,0 . 3 1
60S, 29 , 3
3, 127,912
19 0-2 -13 97
T. 2 2
month of September 19 0, compared cth the same month of 1919
September
19 0
Scptembor
10 0
Manufactured
2, 20. 12
2 ,00 .02
emoved:
Ta -pad
Cass ..
1, 7 . 1 9
1 ,392,
171. 912, 922
63, 7. 70
213, 01, 0
9. 202. 0
6, 77.72
2. 0 .97
16, 703, 390
17 . 932, 723
6,31 , 11
Cass C
Cass D
Cass
cass f ::
Cass O..
6, 626, 66
Tota ta -pad
71. 70,
, 90 , 1 1
. 221, 9 1
2,172,17
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L GISL TION
19 0-1 -13396
. . R S. 0. PU LIC L W 7 , IG TY-FIRST CONGR SS
C PT R 371, S COND S SSION
ont Resouton tendng the tme for the reease, free of estate
and gft ta , of certan powers.
States of merca n Congress assembed, That sectons 03(d) (3)
and 2(c) of the Revenue ct of 19 2 (reatng to reease of certan
powers of appontment n the case of the estate and gft ta es) are
hereby amended by strkng out 19 0 wherever appearng theren
and nsertng n eu thereof 19 1 .
pproved une 27,19 0.
19 0-17-13 11
. R. 7273. PU LIC L W 630, IG TY-FIRST CONGR SS
n ct To provde a cv government for Guam, and for other
purposes.
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That ths ct may
be cted as the Organc ct of Guam .
Sec. 2. The terrtory ceded to the Unted States n accordance wth
the provsons of the Treaty of Peace between the Unted States and
Span, sgned at Pars, December 10, 1 9 , and procamed pr 11,
1 99, and known as the sand of Guam n the Maranas Isands, sha
contnue to be known as Guam.
Sec. 3. Guam s hereby decared to be an unncorporated terrtory
of the Unted States and the capta and seat of government thereof
sha be ocated at the cty of gana, Guam. The government of
Guam sha have the powers set forth n ths ct and sha have power
to sue by such name. The government of Guam sha consst of three
branches, e ecutve, egsatve, and |udca, and ts reatons wth
the Federa Government sha be under the genera admnstratve
supervson of the head of such cvan department or agency of the
Government of the Unted States as the Presdent may drect.

Sec. 30. customs dutes and Federa ncome ta es derved from
Guam, the proceeds of a ta es coected under the nterna-revenue
aws of the Unted States on artces produced n Guam and trans-
ported to the Unted States, ts Terrtores, or possessons, or consumed
n Guam, and the proceeds of any other ta es whch may be eved
by the Congress on the nhabtants of Guam, and a quarantne, pass-
port, mmgraton, and naturazaton fees coected n Guam sha be
covered nto the treasury of Guam and hed n account for the gov-
ernment of Guam, and sha be e pended for the beneft and govern-
ment of Guam n accordance wth the annua budgets.
(21 )
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21
Sec. 31. The ncome-ta aws n force n the Unted States of
merca and those whch may hereafter be enacted sha be hed to
be kewse n force n Guam.
.
Sec. 3 . Upon the 21st day of uy 19 0, the annversary of the
beraton of the sand of Guam by the rmed Forces of the Unted
States n Word War II, the authorty and powers conferred by ths
ct sha come nto force. owever, the Presdent s authorzed, for
a perod not to e ceed one year from the dae cf enactment of ths
ct, to contnue the admnstraton of Guam n a or n some respects
as provded by aw. ecutve order, or oca reguaton n force oa
the date of enactment of ths ct. The Presdent may. n hs dscre-
ton, pace n operaton a or some of the provsons of ths ct f
practcabe before the e praton of the perod of one year.
19 0-1 -13-120
. R. 6073. PU LIC L W 6 0, IG TY-FIRST CONGR SS
C PT R 6 7, S COND S SSION
n ct mendng secton 01(b)(6) of the Interna Revenue
Code.
e. t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed. That secton
01 (b) (G) of the Interna R3venue Code s amended to read as foows :
(G) ( ) censed persona fnance company under State supervson. 0
per centum or more of the gross ncome of whch s awfu nterest receved
from oans made to ndvduas n accordance wth the provsons of appcabe
State aw f at east 60 per centum of such gross ncome s awfu nterest
() receved from ndvduas each of whose ndebtedness to such company
dd not at any tme durng the ta abe year e ceed n prncpa amou the
mk prescrbed for sma oans by such aw (or, f there s no such mt,
00), and () not payabe n advance or compounded and computed ony on
unpad baances, and f the oans to a person, who s a sharehoder n such
company durng the ta abe year by or for whom 10 per centum or more n
vaue of ts outstandng stock s owned drecty or ndrecty (ncudng n
the case of an ndvdua, stock owned by the members of hs famy as def ed
n secton 03(a)(2)), outstandng at any tme durng such year do not
e ceed ,000 n prncpa amount; and
( ) endnc company, not otherwse e cepted by secton 01(b), author-
zed to engage n the sma oan busness under one or more State statutes
provdng fur the drect reguaton of such busness, SO per centum or more
of the gross ncome of whch s awfu nterest, dscount or other authorzed
charges () receved from oans maturng n not more than thrty-s months
made to ndvduas n accordance wth the provsons of appcabe State
aw, and () whch do not, n the case of any ndvdua oan, e ceed n the
aggregate an amount equa to smpe nterest at the rate of 3 per centum
per month not payabe n advance and computed ony on unpad baances, f
at east 60 per centum of the gross ncome s awfu nterest, dscount or other
authorzed charges receved from ndvduas each of whose ndebtedness to
such company dd not at any tme durng the ta abe year e ceed n prncpa
amount the mt prescrbed for sma oans by such aw (or, f there s no
such mt, 00), and f the deductons aowed to such company under
secton 23(a) (reatng to e penses), other than for compensaton for
persona servces rendered by sharehoders (ncudng members of the
sharehoder s famy as descrbed In secton 03(a)(2)) consttute 1 per
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216
centum or more of ts gross ncome, and the oans to a person, who s a
sharehoder n such company durng the ta abe year by or for whom 10
per centum or more n vaue of ts outstandng stock s owned drecty or
ndrecty (ncudng n the case of an ndvdua, stock owned by the nen-
. bers of hs famy as defned n secton 03(a) (2)), outstandng at any tme
durng such year do not e ceed ,000 n prncpa amount.
Sec. 2. That secton 01(b) of the Interna Revenue Code s
amended by addng at the end thereof the foowng new paragraph:
( ) fnance company, actvey and reguary engaged n the busness of
purchasng or dscountng accounts or notes recevabe or nstament obgatons,
or makng oans secured by any of the foregong or by tangbe persona property,
at east 0 per centum of the gross ncome of whch s derved from such busness
n accordance wth the provsons of appcabe State aw or does not consttute
persona hodng company ncome as defned n secton 02, f 60 per centum of
the gross ncome s derved from one or more of the foowng casses of
transactons:
( ) Purchasng or dscountng accounts or notes recevabe, or nstament
obgatons evdenced or secured by contracts of condtona sae, chatte
mortgages, or chatte ease agreements, arsng out of the sae of goods or
servces n the course of the transferor s trade or busness;
( ) Makng oans, maturng n not more than thrty-s months, to, and for
the busness purposes of, persons engaged n trade or busness, secured by
() accounts or notes recevabe, or nstament obgatons, descrbed
n subparagraph (a) above;
() warehouse recepts, bs of adng, trust recepts, chatte mort-
gages, baments, or factor s ens, coverng or evdencng the borrower s
nventores;
() a chatte mortgage on property used n the borrower s trade or
busness;
e cept oans to any snge borrower whch for more than nnety days n the
ta abe year of the company e ceed 1 per centum of the average funds
empoyed by the company durng such ta abe year;
(C) Makng oans, n accordance wth the provsons of appcabe State
aw, secured y chatte mortgages on tangbe persona property, the orgna
amount of each of whch s not ess than the mt referred to n, or prescrbed
by, subsecton (b) (6) ( ) (), and the aggregate prncpa amount of whch
owng by any one borrower to the company at any tme durng the ta abe
year of the company does not e ceed ,000; and
(D) If 30 per centum or more of the gross ncome of the company s
derved from one or more of the casses of transactons descrbed n sub-
paragraphs ( ), ( ) and (C) of ths paragraph, purchasng, dscountng,
or endng upon the securty of, nstament obgatons of ndvduas where
the transferor or borrower acqured such obgatons ether n transactons
of the casses descrbed n subparagraphs ( ) and (C) of ths paragraph or
as a resut of oans made by such transferor or borrower n accordance wth
the provsons of causes () and () of paragraph 6( ) or of causes ()
and () of paragraph 6( ) of ths subsecton, f the funds so supped at
a Lmes bear an agreed rato to the unpad baance of the assgned nsta-
ment obgatons, and documents evdencng such obgatons are hed by
the company;
provded that the deductons aowabe under subsecton 23(a) (reatng to
e penses), other than compensaton for persona servces rendered by share-
hoders (ncudng members of the sharehoder s famy as descrbed n secton
03(a)(2)), consttute 1 per centum or more of the gross ncome, and that
oans to a person who s a sharehoder n such company durng such ta abe
year by or for whom 10 per centum or more n vaue of ts outstandng stock s
owned drecty or ndrecty (ncudng n the case of an Indvdua, stock owned
by members of hs famy as defned n secton 03(a)(2)) outstandng at any
tme durng such year do not e ceed ,000 n prncpa amount.
pproved ugust 0,19 0.
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217
19 0-19-13 29
. R. 9120. PU LIC L W 716, IG TY-FIRST CONGR SS
C PT R 7 , S COND S SSION
n ct To amend secton 322(b) (3) of the Interna Revenue
Code.
Unted States of merca n Congress assembed, That (a) secton
322(b) (3) of the Interna Revenue Code s hereby amended by strk-
ng out the ast sentence and nsertng n eu thereof the foowng:
Notwthstandng the foregong provsons of ths paragraph, the pe-
rod wthn whch a cam for credt or refund may be fed, or credt
or refund aowed or made f no cam s fed, sha not e pre pror
to two years after the tme the ta was pad, but f a cam s fed,
or credt or refund aowed or made f no cam s fed, more than s
months after the e praton of the perod wthn whch the Comms-
soner may make an assessment pursuant to such agreement or any
e tenson thereof, the amount of the credt or refund sha not e ceed
the porton of the ta pad durng the two years mmedatey precedng
the fng of the cam, or, f no cam s fed, mmedatey precedng
the aowance of the credt or refund.
(b) The amendment made by subsecton (a) sha be appcabe to
ta abe years begnnng after December 31, 19 1, and, sub|ect to the
provsons of the second sentence of secton 169(c) of the Revenue
ct of 19 2 (added by secton 09(a) of the Revenue ct of 19 3 and
amended by secton 2 of ths ct), the amendment sha aso be app-
cabe to ta abe years begnnng after December 31, 1923, and before
anuary 1, 19 2.
Sec. 2. The second sentence of secton 169(c) of the Revenue ct
of 19 2 s hereby amended to read as foows: provson havng the
effect of secton 322(b)(3), as amended, of the Interna Revenue
Code and a provson havng the effect of the amendment made by
subsecton (b) of ths secton, sha be deemed to be ncuded n the
revenue aws respectvey appcabe to ta abe years begnnng after
December 31, 1923, but such provsons sha be effectve wth respect
to ta abe years begnnng pror to anuary 1, 19 2, ony f at some
tme after February 2 , 19 , the Commssoner may assess the ta
for such ta abe year soey by reason of havng made (ether before,
on, or after February 2 , 19 ) an agreement wth the ta payer pur-
suant to secton 276(b) of the Interna Revenue Code or the cor-
respondng provson of the appcabe pror revenue aw to e tend
beyond the tme prescrbed n secton 27 of such Code or the corre-
spondng provson of such pror revenue aw the date wthn whch
the Commssoner may assess the ta .
pproved ugust 1 ,19 0.
19 0-20-13 0
. R. 6000. PU LIC L W 73 , IG TY-FIRST CONGR SS
n ct To e tend and mprove the Federa Od- ge and Sur-
vvors Insurance System, to amend the pubc assstance and chd
wefare provsons of the Soca Securty ct, and for other purposes.
923S30 1 1
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21
e t enacted by the Senate and ouse of Representatves of the Unted tates
of merca n Congress assembed. That ths ct, wth the foowng tabe of
contents, may be cted as the Soca Securty ct mendments of 19 0 .
T L OF CONT NTS
Secton of ths ct
Secton ofamended
Soca Securty ct
eadng
100
10
10 ( )..
10 (b)..
10 (c)...
10 (d).
109
100(a).
109(b)-
109(c)...
110
Tte 11.
20 (f)....
20 (g)...
20 (a)...
20 (b)...
206
206(-.)...
21 ...
21S(a)..
2 (h) .
21 (c).-
21 (d)..
219(e)..
21 (f)
21 (1 -
21
21 1
21 (1)
21 (1t)
21 0).
to
(h)
(0
20
20 (b -
20 (c)..
20 (0)..
20 (P)-
201
20 -200..
20 .
Secton 01 amended
Interna Revenue
Code
1 00..
1 10..
1 12....
1 20(e)-
1 11
1 26(a)
1 01(d)(2).
1 01(d).
1633
1033(a)..
16.13(h).
1633(c)..
M NDM NTS TO TITL II OF T SOCI L
S CURITY CT.

OLUNT RY GR M NTS FOR CO R G
OF ST T ND LOC L MPLOY S.
Purpose of greement.
Defntons.
Servces Covered.
cuson of Postons Covered by I
Payments and Reports by States.
ffectve Dnteor greement.
Termnaton of greement.
Depost n Trust Fund; d|ustments.
Reguatons.
Faure To Make Payments.
Instrumentates of Two or More States.
Deegaton of Functons.
R CORDS OF W G S ND S LF- MPLOYM NT
INCOM .
ddton o Interested Partes.
Wages and Sef- mpoyment Income Records.
Credtng of Compensaton Under the Raroad Retre-
ment ct.
Speca Rues n Case of Federa Servce.
ffectve Date of mendments.
MISC LL N OUS M NDM NTS.
mendments- Reatng to Trust Fund.
Substtuton of Federa Securty dmnstrator for Soca
Securty oard.
Change n Reference From Federa Insurance Contrbu-
ton ct to Interna Revenue Code.
S R IC S FOR COOP R TI S PRIOR TO 19 1.
M NDM NTS TO INT RN L R NU
COD .
R T OF T ON W G S.
Ta on mpoyee.
Ta on mpoyer.
F D R L S R IC
Instrumentates of the Unted
S ca Rues n Case of Federa f
d|ustment of Ta .
ffectve Date.
D FINITION OF W G S.
Refunds Wth Respect to Wages Receved Durnr
19 7. 19 . 19 9. and 19f0.
Refunds Wth Respect to Wages Receved /tcr I960.
ffectve Date of Subsecton (a).
D FINITION OF MPLOYM NT.
mpoyment.
State, otc.
mercan esse and rcraft.
grcutura Labor.
mercan mpoyer.
Computaton of Wages n Ccrta
Covered Transportaton Servce.
empton of Regous. Chartabe,
tons.
Technca mendment.
ffectve Date.
D FINITION OF MPLOY .
ffectve Date.
R C IPTS FOR MPLOY S; SP CI L R -
FUNDS.
R C IPTS FOR MPLOY S.
Requrement.
Statements to Consttute Informaton Returns.
tenson of Tme.
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219
T L OF CONT NTS Contnued
Secton of ths ct
Secton of amended
Interna Revenue
Code
eadng
206(a) Contnued.
06(b)(1).
163 ____
163 (a).
06(b)(2).
206(b)(3).
06(c)
207..
207(a).
163 (b),..
322(a)( ).
1 03(a)...
1626(d)...
163 ..
163 (a).
163 (b).
163 (c).
163 (d).
1631(e).
163 (f)..
1 36(g).
1636
207(b).
20
20 (a).
20S(b).
1636(a).
1636(b).
1636(c).
1636(d).
1636(e).
SO
1
1(a)...
1(b)...
1(c)...
1(d)...
2
3 10
3 11.
3 12..
20 (C)_ _.
20 (d)
3 12(a).
3 12(b).
3 01(g).
209..
209(a)
209(b)
209(c)
209(d)(1)..
209(d)(2)..
209(c)
1607(b).
1607(c)..
1621(a).
1631
Tte I ...,
03.
03(d)
03(e)
0
0
1106....
1107(a).
1201(a)...
to
P N LTI S.
Penates for Frauduent Statement or Faure
Furnsh Statement.
ddtona Penaty.
Credt for Speca Refunds of mpoyee Soca
Securty Ta .
Recepts for mpoyees Pror to 19 1.
ppcaton of Secton.
ffectve Dates o( mendments.
P RIODS OF LIMIT TION ON SS SSM NT
ND R FUND OF C RT IN MPLOYM NT
T S.
P RIOD OF LIMIT TION UPON SS SSM NT
ND COLL CTION OF C RT IN MPLOY-
M NT T S.
Genera Rue.
Fase Return or No Return.
Wfu ttempt to vade Ta .
Coecton fter ssessment.
Date of Fng of Return,
ppcaton of Secton.
ffectve Date.
P RIOD OF LIMIT TION UPON R FUNDS ND
CR DITS OF C RT IN MPLOYM NT
T .
Genera Rue.
Penates, tc.
Date of Fng Return and Date of Payment o Ta .
ppcaton of Secton.
ffectve Date.
Technca mendments.
S LF- MPLOYM NT INCOM .
R T OF T .
D FINITIONS.
Net arnngs From Sef- mpoyment.
Sef- mpoyment Income.
Trade or usness.
mpoyee and Wages.
MISCF.LL N OUS PRO ISIONS.
FF CTI D T IN T C S OF PU RTO
RICO.
COLL CTION OF T S IN IRGIN ISL NDS
ND PU RTO RICO.
MITIG TION OF FF CT OF ST TUT OF
LIMIT TIONS ND OTII PRO ISIONS IN
C S OF R L T D T S UND R DIFF R-
NT C PT RS.
Sef- mpoyment Ta and Ta on Wages.
Defntons.
Ta es Imposed by Chapter 9,
Technca mendments.
MISC LL N OUS M NDM NTS.
Defnton of Wages for Federa Unempoyment Ta
ct.
Defnton of mpoyment for Federa Unempoy-
ment Ta ct.
Defnton of Wages for coecton of Income Ta at
source on wages.
F ILUR OF MPLOY R TO FIL R TURN.
ffectve Date.
Change n Domce of mpoyer Corporaton.

MISC LL N OUS PRO ISIONS.
M NDM NTS TO TITL I OF T SOCI L
S CURITY CT.
Dscosure of Informaton n Possesson of gency.
Change n Reference to Federa Insurance Contrbutons
ct.

D NC S TO ST T UN MPLOYM NT FUNDS.
PRO ISIONS OF ST T UN MPLOYM NT COM-
P NS TION L WS.
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TITL I M NDM NTS TO TITL II OF T SOCI L S CURITY CT

CO R G OF ST T ND LOC L MPLOY S
Sec. 106. Tte II of the Soca Securty ct s amended by addng after sec-
ton 217 (added by secton 10 of ths ct) the foowng:
OLUNT RY GR M NTS FOR CO R G OF ST T ND LOC L MPLOY S
Purpose of greement
Sec. 21 . (a) (1) The dmnstrator sha, at the request of any State, enter
nto an agreement wth such State for the purpose of e tendng the nsurance
system estabshed by ths tte to servces performed by ndvduas as empoyees
of such State or any potca subdvson thereof. ach such agreement sha
contan such provsons, not nconsstent wth the provsons of ths secton, as
the State may request.
(2) Notwthstandng secton 210(a). for the purposes of ths tte the term
empoyment ncudes any servce ncuded under an agreement entered nto
under ths secton.
Defntons
(b) For the purposes of ths secton
(1) The term State does not ncude the Dstrct of Coumba.
(2) The term potca subdvson ncudes an nstrumentaty of ( )
a State, ( ) one or more potca subdvsons of a State, or (C) a State
and one or more of ts potca subdvsons.
3) The term empoyee ncudes an offcer of a State or potca
subdvson.
( ) The term retrement system means a penson, annuty, retrement,
or smar fund or system estabshed by a State or by a potca subdvson
thereof.
( ) The term coverage group means ( ) empoyees of the State other
than those engaged n performng servce n connecton wth a propretary
functon; ( ) empoyees of a potca subdvson of a State other than
those engaged n performng servce n connecton wth a propretary func-
ton: (C) empoyees of a State engaged In performng servce n connecton
wth a snge propretary functon; or (D) empoyees of a potca subdv-
son of a State engaged n performng servce n connecton wth a snge
propretary functon. If under the precedng sentence an empoyee woud
be ncuded n more than one coverage group by reason of the fact that he
perforns servce n connecton wth two or more propretary functons or
n connecton wth both a propretary functon and a nonpropretary func-
ton, he sha be ncuded n ony one such coverage group. The determna-
ton of the coverage group n whch such empoyee sha be ncuded sha
be made n such manner as may be specfed n the agreement.
Servces Covered
(c)(1) n agreement under ths secton sha be appcabe to any one
or more coverage groups desgnated by the State.
(2) In the case of each coverage group to whch the agreement appes, the
agreement must ncude a servces (other than servces e cuded by or pur-
suant to subsecton (d) or paragraph (3), ( ), or (C) of ths subsecton) per-
formed by ndvduas as members of such group.
(3) Such agreement sha, f the State requests It, e cude (n the case of
any coverage group) any servces of an emergency nature or a servces n any
cass or casses of eectve postons, part-tme postons, or postons the com-
pensaton for whch s on a fee bass.
( ) The dmnstrator sha, at the request of any State, modfy the agree-
ment wth such State so as to ( ) ncude any coverage group to whch the
agreement dd not prevousy appy, or ( ) ncude, n the case of any coverage
group to whch the agreement appes, servces prevousy e cuded from the
agreement; but the agreement as so modfed may not be nconsstent wth the
provsons of ths secton appcabe n the case of an orgna agreement wth
a State.
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221
( ) Such agreement sha, f the State requests t, e cude (In the case of
any coverage group) any agrcutura abor, or servce performed by a student,
desgnated by the State. Ths paragraph sha appy ony wth respect to servce
whch s e cuded from empoyment by any provson of secton 210(a) other
than paragraph (S) of such secton.
(6) Such agreement sha e cude
( ) servce performed by an ndvdua who Is empoyed to reeve hm
from unempoyment,
( ) servce performed In a hospta, home, or other nsttuton by a
patent or nmate thereof,
(C) covered transportaton servce (as determned under secton 210(1)),
and
(D) servce (other than agrcutura abor or servce performed by a
student) whch s e cuded from empoyment by any provson of secton
210(a) other than paragraph ( ) of such secton.
cuson of Postons Covered by Retrement Systems
(d) No agreement wth any State may be made appcabe (ether In the
orgna agreement or by any modfcaton thereof) to any servce performed
by empoyees as members of any coverage group n postons covered by a
retrement system on the date such agreement s made appcabe to such
coverage group.
Payments and Reports by States
(e) ach agreement uuder ths secton sha provde
(1) that the State w pay to the Secretary of the Treasury, at such
tme or tmes as the dmnstrator may by reguatons prescrbe, amounts
equvaent to the sum of the ta es whch woud be mposed by sectons
1 00 and 1 10 of the Interna Revenue Code f the servces of empoyees
covered by the agreement consttuted empoyment as defned n secton 1 26
of such Code; and
(2) that the State w compy wth such reguatons reatng to pay-
ments and reports as the dmnstrator may prescrbe to carry out the
purposes of ths secton.
ffectve Date of greement
(f) ny agreement or modfcaton of an agreement under ths secton sha
be effectve wth respect to servces performed after an effectve date specfed
n such agreement or modfcaton, but n no case pror to anuary 1, 19 1, and
n no case (other than n the case of an agreement or modfcaton agreed to
pror to anuary 1, 19 3) pror to the frst day of the caendar year n whch
such agreement or modfcaton, as the case may be, s agreed to by the dmn-
strator and the State.
Termnaton of greement
(g) (1) Upon gvng at east two years advance notce n wrtng to the
dmnstrator, a State may termnate, effectve at the end of a caendar quarter
specfed n the notce, ts agreement wth the dmnstrator ether
( ) n ts entrety, but ony f the agreement has been n effect from ts
effectve date for not ess than fve years pror to the recept of such notce;
or
( ) wth respect to any coverage group desgnated by the State, but
ony f the agreement has been n effect wth respect to such coverage group
for not ess than fve years pror to the recept of such notce.
(2) If the dmnstrator, after reasonabe notce and opportunty for hear-
ng to a State wth whom he has entered nto an agreement pursuant to ths
secton, fnds that the State has faed or s no onger egay abe to compy
substantay wth any provson of such agreement or of ths secton, he sha
notfy such State that the agreement w be termnated n ts entrety, or wth
respect to any one or more coverage groups desgnated by hm, at such tme,
not ater than two years from the date of such notce, as he deems approprate,
uness pror to such tme he fnds that there no onger s any such faure or that
the cause for such ega nabty has been removed.
(3) If any agreement entered nto under ths secton s termnated n ts
entrety, the dmnstrator and the State may not agan enter Into an agreement
pursuant to ths secton. If any such agreement s termnated wth respect
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222
to any coverage group, the dmnstrator and the State may not thereafter
modfy such agreement so as to agan make the agreement appcabe wth respect
to such coverage group.
Deposts n Trust Fund ; d|ustments
(h) (1) amounts receved by the Secretary of the Treasury tnder an
agreement made pursuant to ths secton sha be deposted n the Trust Fund.
(2) If more or ess than the correct amount due under an agreement made
pursuant to ths secton s pad wth respect to any payment of remuneraton,
proper ad|ustments wth respect to the amounts due under such agreement sha
be made, wthout nterest, n such manner and at such tmes as may be prescrbed
by reguatons of the dmnstrator.
(3) If an overpayment cannot be ad|usted under paragraph (2), the amount
thereof and the tme or tmes t s to be pad sha be certfed by the dmnstra-
tor to the Managng Trustee, and the Managng Trustee, through the Fsca
Servce of the Treasury Department and pror to any acton thereon by the Gen-
era ccountng Offce, sha make payment n accordance wth such certfcaton.
The Managng Trustee sha not be hed personay abe for any payment or
payments made n accordance wth a certfcaton by the dmnstrator.
Reguatons
() Reguatons of the dmnstrator to carry out the purposes of ths
secton sha be desgned to make the requrements mposed on States pursuant
to ths secton the same, so far as practcabe, as those mposed on empoyers
pursuant to ths tte and subchapter or of chapter 9 of the Interna
Revenue Code.
Faure To Make Payments
(|) In case any State docs not make, at the tme or tmes due, the payments
provded for under an agreement pursuant to ths secton, there sha be added,
as part of the amounts due. nterest at the rate of 0 per centum per annum from
the date due unt pad, and the dmnstrator may, n hs dscreton, deduct
such amounts pus nterest from any amounts certfed by hm to the Secretary
of the Treasury for payment to such State under any other provson of ths
ct. mounts so deducted sha be deemed to have been pad to the State under
such other provson of ths ct. mounts equa to-the amounts deducted under
ths subsecton are hereby approprated to the Trust Fund.
Instrumentates of Two or More States
(k) The dmnstrator may, at the request of any nstrumentaty of two
or move States, enter nto an agreement wth such nstrumentaty for the pur-
pose of e tendng the nsurance system estabshed by ths tte to servces per-
formed by ndvduas as empoyees of such nstrumentaty. Such agreement,
to the e tent practcabe, sha be governed by the provsons of ths secton
appcabe n the case of an agreement wth a State.
Deegaton of Functons
(1) The dmnstrator s authorzed, pursuant to agreement wth the head
of any Federa agency, to deegate any of hs functons under ths secton to any
offcer or empoyee of such agency and otherwse to utze the servces and
factes of such agency n carryng out such functons, and payment therefor
sha be n advance or by way of rembursement, as may be provded n such
agreement,

R CORDS OF W 0F.6 ND S LF- MPLOYM NT INCOM

(b) Subsecton (c) of secton 20 of the Soca Securty ct s amended to
read as foows:
(c) (1) For the purposes of ths subsecton
( ) The term year means a caendar year when used wth respect to
wages and a ta abe year (as defned n secton 211(e)) when used wth re-
spect to sef-empoyment Income.
( ) The term tme mtaton means a perod of three years, two months,
and ffteen days.

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223
(2) On the bass of nformaton obtaned by or submtted to the dmnstra-
tor, and after such verfcaton thereof as he deems necessary, the dmnstrator
sha estabsh and mantan records of the amounts of wages pad to, and the
amounts of sef-empoyment ncome derved by, each ndvdua and of the perods
n whch such wages were pad and such ncome was derved and, upon request,
sha nform any Indvdua or hs survvor, or the ega representatve of such
ndvdua or hs estate, of the amounts of wages and sef-empoyment ncome
of such ndvdua and the perods durng whch such wages were pad and such
ncome was derved, as shown by such records at the tme of such request.
(3) The dmnstrator s records sha be evdence for the purpose of proceed-
ngs before the dmnstrator or any court of the amounts of wages pad to, and
sef-empo.vment ncome derved by, an ndvdua and of the perods n whch
such wages were pad and such ncome was derved. The absence of nn entry
n such records as to wafes aeged to have been pad to, or as to sef-empoyment
ncon:e aeged to have been derved by, an ndvdua n any perod sha be
evdence that no such aeged wages were pad to, or that no such aeged ncome
was derved by, such ndvdua durng such perod.
( ) Pror to the e praton of the tme mtaton foowng any year the
dmnstrator may, f t s brought to hs attenton thnt any entry of wages or
sef-empoyment ncome n hs records for such year s erroneous or that any
tem of wages or sef-empo.vment ncome for such year has been omtted from
such records, correct such entry or ncude such omtted tem n hs records, as
the case may be. fter the e praton of the tme mtaton foowng any year
( ) the dmnstrator s records (wth changes, f any, made pursuant
to paragraph ( )) of the amounts of wnges pad to, and sef-empoyment
ncome derved by, an ndvdua durng any perod n such year sha be
concusve for the purposes of ths tte;
( ) the absence of an entry n the dmnstrator s records as to the
wages aeged to have been pad by an empoyer to an ndvdua durng
any perod n such year sha be presumptve evdence for the purposes of
ths tte that no such aeged wages were pad to such ndvdua n such
perod; and
(O) the absence of nn entry n the dmnstrator s records as to the sef-
empo.vment ncome aeged to have been derved by an ndvdua n such
year sha be concusve for the purposes of ths tte that no such aeged
sef-empoyment ncome was derved by such ndvdua n such year uness
t s shown thnt he fed a ta return of hs sef-empo.vment ncome for such
year before the e praton of the tme mtaton foowng such year, n
whch case the dmnstrator sha ncude n hs records the sef-empoy-
ment ncome of such ndvdua for such year.
( ) fter the e praton of the tme mtaton foowng any year n whch
wages were pad or aeged to have been pad to, or sef-empoyment ncome was
derved or aeged to have been derved by, an ndvdua, the dmnstrator may
change or deete any entry wth respect to wages or sef-empo.vment ncome n
hs records of such year for such ndvdua or ncude n hs records of such year
for such ndvdua any omtted tem of wages or sef-empoyment ncome but
ony
( ) f an appcaton for monthy benefts or for a ump-sum death pay-
ment was fed wthn the tme mtaton foowng such year; e cept that no
such change, deeton, or ncuson may be made pursuant to ths subpara-
graph after a fna decson upon the appcaton for monthy benefts or
ump-sum death payment;
( ) f wthn the tme mtaton foowng such year an ndvdua or
hs survvor makes a request for a change or deeton, or for an ncuson
of an omtted tem, and aeges n wrtng that the dmnstrator s records
of the wages pad to, or the sef-empoyment ncome derved by, such nd-
vdua n such year are n one or more respects erroneous; e cept that no
such change, deeton, or ncuson may be made pursuant to ths subpara-
graph after a fna decson upon such request. Wrtten notce of the d-
mnstrator s decson on any such request sha be gven to the ndvdua
who made the request;
(C) to correct errors apparent on the face of such records;
(D) to transfer tems to records of the aroad etrement oard f such
tems were credted under ths tte when they shoud have been credted
under the aroad etrement ct, or to enter tems transferred by the
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Raroad Retrement oard whch have been credted under the Raroad
Retrement ct when they shoud have been credted under ths tte;
( ) to deete or reduce the amount of any entry whch s erroneous as a
resut of fraud;
(F) to conform hs records to ta returns or portons thereof (Incudng
Informaton returns and other wrtten statements) fed wth the Comms-
soner of Interna Revenue under tte III of the Soca Securty ct, un-
der subchapter of chapter 1 or subchapter of chapter 9 of the Interna
Revenue Code, or under reguatons made under authorty of such tte or
subchapter, and to nformaton returns fed by a State pursuant to an agree-
ment under secton 21 or reguatons of the dmnstrator thereunder;
e cept that no amount of sef-empoyment ncome of an ndvdua for any
ta abe year (f such return or statement was fed after the e praton of
the tme mtaton foowng the ta abe year) sha be ncuded In the d-
mnstrator s records pursuant to ths subparagraph n e cess of the amount
whch has been deeted pursuant to ths subparagraph as payments errone-
ousy ncuded n such records as wages pad to such ndvdua n such ta -
abe year;
(G) to correct errors made n the aocaton, to ndvduas or perods,
of wages or sef-empoyment ncome entered n the records of the d-
mnstrator;
( ) to ncude wages pad durng any perod n such year to an n-
dvdua by an empoyer f there s an absence of an entry n the dmn-
strator s records of wages havng been pad by such empoyer to such n-
dvdua n such perod; or
(I) to enter tems whch consttute remuneraton for empoyment un-
der subsecton (o), such entres to be n accordance wth certfed reports
of records made by the Raroad Retrement oard pursuant to secton
(k) (3) of the Raroad Retrement ct of 1937.
(6) Wrtten notce of any deeton or reducton under paragraph ( ) or ( )
sha be gven to the ndvdua whose record s nvoved or to hs survvor,
e cept that ( ) n the case of a deeton or reducton wth respect to any entry
of wages such notce sha be gven to such Indvdua ony f he has prevousy
been notfed by the dmnstrator of the amount of hs wages for the perod
nvoved, and ( ) such notce sha be gven to such survvor ony f he or
the ndvdua whose record s nvoved hns prevousy been notfed by the d-
mnstrator of the amount of such ndvdua s wages and sef-empoyment ncome
for the perod nvoved.
(7) Upon request n wrtng (wthn such perod, after any change or re-
fusa of a-request for a change of hs records pursuant to ths subsecton, as the
dmnstrator may prescrbe), opportunty for hearng wth respect to such
change or refusa sha be afforded to any ndvdua or hs survvor. If a
hearng s hed pursuant to ths paragraph the dmnstrator sha make fnd-
ngs of fact and a decson based upon the evdence adduced at such hearng
and sha ncude any omtted tems, or change or deete any entry, n hs records
as may be requred by such fndngs and decson.
( ) Decsons of the dmnstrator under ths subsecton sha be revew-
abe by commencng a cv acton n the Unted States dstrct court as pro-
vded n subsecton (g).
(c) Secton 20 of the Soca Securty ct s amended by addng at the end
thereof the foowng subsectons:
Credtng of Compensaton Under the Raroad Retrement ct
(o) If there s no person who woud be entted, upon appcaton therefor,
to an annuty under secton of the Raroad Retrement ct of 1937, or to a
ump-sum payment under subsecton (f) (1) of such secton, wth respect to the
death of an empoyee (as defned In such ct), then, notwthstandng secton
210(a) (10) of ths ct, compensaton (as defned In such Raroad Retrement
ct, but e cudng compensaton attrbutabe as havng been pad durng any
month on account of mtary servce credtabe under secton of such ct
If wages are deemed to have been pad to such empoyee durng such month
under secton 217(a) of ths ct) of such empoyee sha consttute remu-
neraton for empoyment for purposes of determnng ( ) enttement to and
the amount of any ump-sum death payment under ths tte on the bass of
such empoyee s wages and sef-empoyment ncome and ( ) enttement to and
the amount of any monthy beneft under ths tte, for the month n whch
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such empoyee ded or for any month thereafter, on the bass of such wages
and sef-em poy men t ncome. For such purposes, compensaton (as so defned)
pad n a caendar year sha, n the absence of evdence to the contrary, be
presumed to have been pad n equa proportons wth respect to n months
n the year n whch the empoyee rendered servces for such compensaton.
Speca Rues In Case of Federa Servce
(p)() Wth respect to servce ncuded as empoyment under secton 210
whch s performed n the empoy of the Unted States or n the empoy of any
Instrumentaty whch s whoy owned by the Unted States, the dmnstrator
sha not make determnatons as to whether an ndvdua has performed such
servce, the perods of such servce, the amounts of remuneraton for such servce
whch consttute wages under the provsons of secton 209, or the perods n
whch or for whch such wages were pad, but sha accept the determnatons
wth respect thereto of the head of the approprate Federa agency or nstru-
mentaty, and of such agents as such head may desgnate, as evdenced by
returns fed n accordance wth the provsons of secton 1 20(e) of the In-
terna Revenue Code and certfcatons made pursuant to ths subsecton. Such
determnatons sha be fna and concusve.
(2) The head of any such agency or nstrumentaty s authorzed and d-
rected, upon wrtten request of the dmnstrator, to make certfcaton to
hm wth respect to any matter determnabe for the dmnstrator by such
head or hs agents under ths subsecton, whch the dmnstrator fnds neces-
sary n admnsterng ths tte.
(3) The provsons of paragraphs (1) and (2) sha be appcabe n the
case of servce performed by a cvan empoyee, not compensated from funds
approprated by the Congress, n the rmy and r Force change Servce,
rmy and r Force Moton Pcture Servce, Navy changes, Marne Corps
changes, or other actvtes, conducted by an nstrumentaty of the Unted
States sub|ect to the |ursdcton of the Secretary of Defense, at nstaatons
of the Department of Defense for the comfort, peasure, contentment, and men-
ta and physca mprovement of personne of such Department; and for pur-
poses of paragraphs (1) and (2) the Secretary of Defense sha be deemed to
be the head of such nstrumentaty.
(d) The amendments made by subsectons (a) and (c) of ths secton sha
take effect on September 1, 19 0. The amendment made by subsecton (b) of
ths secton sha take effect anuary 1, 19 1, e cept that, effectve on September
1, 19 0, the husband or former wfe dvorced of an ndvdua sha be treated
the same as a parent of such ndvdua, and the ega representatve of an
ndvdua or hs estate sha be treated the same as the ndvdua, for pur-
poses of secton 20 (c) of the Soca Securty ct as n effect pror to the enact-
ment of ths ct:
MISC LL N OUS M NDM NTS
Sec. 109. (a) (1) The second sentence of secton 201(a) of the Soca Se-
curty ct s amended by strkng out such amounts as may be approprated
to the Trust Fuud and nsertng n eu thereof such amounts as may be appro-
prated to, or deposted n, the Trust Fund .
(2) Secton 201(a) of the Soca Securty ct s amended by strkng out
the thrd sentence and by nsertng n eu thereof the foowng: There s hereby
approprated to the Trust Fund for the fsca year endng une 30, 19 1, and
for each fsca year thereafter, out of any moneys n the Treasury not otherwse
approprated, amounts equvaent to 100 per centum of
(1) the ta es (ncudng nterest, penates, acd addtons to the ta es)
receved under subchapter of chapter 9 of the Interna Revenue Code (and
covered nto the Treasury) whch are deposted nto the Treasury by coec-
tors of nterna revenue before anuary 1,19 1; and
(2) the ta es certfed each month by the Commssoner of Interna Rev-
enue as ta es receved under subchapter of chapter 9 of such Code whch
are deposted nto the Treasury by coectors of nterna revenue after De-
cember 31, 19 0, and before anuary 1, 19 3, wth respect to assessments of
such ta es made before anuary 1,19 1; and
(3) the ta es mposed by subchapter of chapter 9 of such Code wth
respect to wages (as defned n secton 1 26 of such Code) reported to the
Commssoner of Interna Revenue pursuant to secton 1 20(c) of such Code
after December 31, 19 0, as determned by the Secretary of the Treasury by
appyng the appcabe rates of ta under such subchapter to such wages,
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whch wages sha be certfed by the Federa Securty dmnstrator on the
bass of the records of wages estabshed and mantaned by such dmns-
trator n accordance wth such reports; and
( ) the ta es mposed by subchapter of chapter 1 of such Code wth
respect to sef-empoyment ncome (as defned n secton 1 of such Code)
reported to the Commssoner of Interna Revenue on ta returns under such
subchapter, as determned by the Secretary of the Treasury by appyng the
appcabe rate of ta under such subchapter to such sef-empoyment ncome,
whch sef-empoyment ncome sha be certfed by the Federa Securty d-
mnstrator on the bass of the records of sef-empoyment ncome estabshed
and mantaned by the dmnstrator n accordance wth such returns.
The amounts approprated by causes (3) and ( ) sha be transferred from tme
to tme from the genera fund n the Treasury to the Trust Fund on the bass of
estmates by the Secretary of the Treasury of the ta es, referred to n causes (3)
and ( ), pad to or deposted nto the Treasury; and proper ad|ustments sha be
made n amounts subsequenty transferred to the e tent pror estmates were n
e cess of or were ess than the amounts of the ta es referred to n such causes.
(3) Secton 201(a) of the Soca Securty ct s amended by strkng out the
foowng: There s aso authorzed to be approprated to the Trust Fund such
addtona sums as may be requred to fnance the benefts and payments provded
under ths tte.
( ) Secton 201(b) of such ct s amended by strkng out Charman of the
Soca Securty oard and nsertng n eu thereof Federa Securty dmn-
strator .

(9) Secton 201 (f) of such ct s amended to read as foows:
(f) (1) The Managng Trustee s drected to ;)ay from the Trust Fund nto
the Treasury the amount estmated by hm and the Federa Securty dmnstra-
tor whch w be e pended durng a three-month perod by the Federa Securty
gency and the Treasury Department for the admnstraton of ttes II and
III of ths ct and subchapter of chapter 1 and subchapter of chapter 9 of
the Interna Revenue Code. Such payments sha be covered nto the Treasury
as repayments to the account for rembursement of e penses ncurred n connec-
ton wth the admnstraton of ttes II and III of ths ct and subchapter
of chapter 1 and subchapter of chapter 9 of the Interna Revenue Code.
(2) The Managng Trustee s drected to pay from tme to tme from the
Trust Fund nto the Treasury the amount estmated by hm as ta es whch are
sub|ect to refund under secton 1 01 (d) of the Interna Revenue Code wth respect
to wnges (as defned n secton 1 26 of such Code) pad after December 31. 19 0.
Such ta es sha be determned on the bass of the records of wages estabshed
and mantaned by the Federa Securty dmnstrator n accordance wth the
wnges reported to the Commssoner of Interna Revenue pursuant to secton
3 0(c) of such Code, and the dmnstrator sha furnsh the Managng Trustee
such nformaton as may be requred by the Trustee for such purpose. The pay-
ments by the Managng Trustee sha be covered nto the Treasury as repayments
to the account for refundng nterna revenue coectons.
(3) Repayments made under paragraph (1) or (2; sha not be avaabe for
e pendtures but sha be carred to the surpus fund of the Treasury. If t sub-
sequenty appears that the estmates under ether such paragraph n any partcu-
ar perod wgre too hgh or too ow, approprate ad|ustments sha be made by
the Managng Trustee n future payments.

(c) Secton 20 of such ct s amended by strkng out the words the Federa
Insurance Contrbutons ct and nsertng n eu thereof the foowng: sub-
chapter of chapter 1 or subchapter or of chapter 9 of the Interna
Revenue Code .
6F. ICF.S FO COOP R TI S P I0 TO 19u
Sec. 110. In any case n whch
(1) an ndvdua has been empoyed at any tme pror to 19 1 by organza-
tons enumerated n the frst sentence of secton 101(12) of the Interna
Revenue Code.
(2) the servce performed by such ndvdua durng the tme he was so
empoyed consttuted agrcutura abor as defned n secton 209(1) of the
Soca Securty ct and secton 1 26(h) of the Interna Revenue Code, as
n effect pror to the enactment of ths ct, and such servce woud, but
for the provsons of such sectons, have consttuted empoyment for the
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purposes of tte II of the Soca Securty ct and subchapter of chapter
9 of such Code,
(3) the ta es mposed by sectons 1 00 and 1 10 of the Interna Revenue
Code have been pad wth respect to any part of the remuneraton pad
to such ndvdua by such organzaton for such servce and the payment
of such ta es by such organzaton has been made n good fath upon the
assumpton that such servce dd not consttute agrcutura abor as so
denned, and
( ) no refund of such ta es has been obtaned,
the amount of such remuneraton wth respect to whch such ta es have been
pad sha be deemed to consttute remuneraton for empoyment as defned n
secton 209(b) of the Soca Securty ct as n effect pror to the enactment of
ths ct (but t sha not consttute wages for purposes of deductons under
secton 203 of such ct for months for whch benefts under tte II of such
ct have been certfed and pad pror to the enactment of ths ct).
TITL II M NDM NTS TO INT RN L R NU COD
R T OF T ON W G S
Sec. 201. (a) Causes (2) and (3) of secton 1 00 of the Interna Revenue
Code are amended to read as foows:
(2) Wth respect to wages receved durng the caendar years 19 0 to
19 3, both ncusve, the rate sha be 1 per centum.
(3) Wth respect to wages receved durng the caendar years 19 to
19 9, both ncusve, the rate sha be 2 per centum.
( ) Wth respect to wages receved durng the caendar years 1900 to
196 , both ncusve, the rate sha be 2,/ per centum.
( ) Wth respect to wages receved durng the caendar years 196 to
1969, both ncusve, the rate sha be 3 per centum.
(6) Wth respect to wages receved after December 31,1969, the rate sha
be S per centum.
(b) Causes (2) and (3) of secton 1 10 of the Interna Revenue Code are
(2) Wth respect to wages pad durng the caendar years 19 0 to 19 3,
both ncusve, the rate sha be y2 per centum.
(3) Wth respect to wages pad durng the caendar years 19 to 19 9,
both ncusve, the rate sha be 2 per centum.
( ) Wth respect to wages pad durng the caendar years 1960 to 196 ,
( ) Wth respect to wages pad durng the caendar years 196 to 1909,
(6) Wth respect to wages pad after December 31, 1969, the rate sha
be 3 per centum.
F O R L S R IC
Sec. 202. (a) Part II of subchapter of chapter 9 of the Interna Revenue
Code s amended by addng after secton 1 11 the foowng new secton:
S C. 1 12. INSTRUM NT LITI S OF T UNIT D ST T S.
Notwthstandng any other provson of aw (whether enacted before or after
the enactment of ths secton) whch grants to any nstrumentaty of the Unted
States an e empton from ta aton, such nstrumentaty sha not be e empt
from the ta mposed by secton 1 10 uness such other provson of aw grants
a specfc e empton, by reference to secton 1 10, from the ta mposed by such
secton.
(b) Secton 1 20 of the Interna Revenue Code s amended by addng at the
end thereof the foowng new subsecton:
(e) Federa Servce. In the case of the ta es mposed by ths subchapter
wth respect to servce performed n the empoy of the Unted States or n the
empoy of any nstrumentaty whch s whoy owned by the Unted States, the
determnaton whether an ndvdua has performed servce whch consttutes
empoyment as denned n secton 1 26, the determnaton of the amount of
remuneraton for such servce whch consttutes wages as defned n such secton,
and the return and payment of the ta es mposed by ths subchapter, sha be
made by the head of the Federa agency or nstrumentaty havng the contro
of such servce, or by such agents as such head may desgnate. The person
makng such return may, for convenence of admnstraton, make payments of
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the ta Imposed under secton 1 10 wth respect to such servce wthout regard
to the 3,000 mtaton n secton 1 20(a)(1), and he sha not be requred to
obtan a refund of the ta pad under secton 1 10 on that part of the remunera-
ton not ncuded n wages by reason of secton 1 26(a) (1). The provsons of
ths subsecton sha be appcabe n the case of servce performed by a cvan
empoyee, not compensated from funds approprated by the Congress, n the
rmy and r Force change Servce, rmy and r Force Moton Pcture
Servce, Navy changes, Marne Corps changes, or other actvtes, conducted
by an nstrumentaty of the Unted States sub|ect to the |ursdcton of the
Secretary of Defense, at nstaatons of the Department of Defense for the
comfort, peasure, contentment, and menta and physca mprovement of per-
sonne of such Department; and for purposes of ths subsecton the Secretary
of Defense sha be deemed to be the head of such nstrumentaty.
(c) Secton 1 11 of the Interna Revenue Code Is amended by addng at the
end thereof the foowng new sentence: For the purposes of ths secton, n
the case of remuneraton receved from the Unted States or a whoy owned
Instrumentaty thereof durng any caendar year after the caendar year OoO,
each head of a Federa agency or nstrumentaty who makes a return pursuant
to secton 1 20(e) and each agent, desgnated by the head of a Federa agency
or nstrumentaty, who makes a return pursuant to such secton sha be deemed
a separate empoyer. .
(d) The amendments made by ths secton sha be appcabe ony wth respect
to remuneraton pad after 19 0.
O FINITION OF W G S
Sec. 203. (a) Secton 1 26(a) of the Interna Revenue Code s amended to
read as foows:
(a) Wages. The term wages means a remuneraton for empoyment, In-
e cept that such term sha not ncude
(1) That part of the remuneraton whch, after remuneraton (other than
remuneraton referred to n the succeedng paragraphs of ths subsecton)
equa to 3,600 wth respect to empoyment has been pad to an ndvdua
by an empoyer durng any caendar year, s pad to such ndvdua by such
empoyer durng such caendar year. If an empoyer (herenafter referred
to as successor empoyer) durng any caendar year acqures substantay
a the property used n a trade or busness of another empoyer (heren-
after referred to as a predecessor), or used n a separate unt of a trade or
busness of a predecessor, and mmedatey after the acquston empoys
n hs trade or busness an ndvdua who mmedatey pror to the acqus-
ton was empoyed n the trade or busness of such predecessor, then, for
the purpose of determnng whether the successor empoyer has pad re-
muneraton (other than remuneraton referred to n the succeedng para-
graphs of ths subsecton) wth respect to empoyment equn to 3,000 to
such Indvdua durng such caendar year, any remuneraton (other than
remuneraton referred to n the succeedng paragraphs of ths subsecton)
wth respect to empoyment pad (or consdered under ths paragraph as
havng been pad) to such ndvdua by such predecessor durng such
caendar year and pror to such acquston sha be consdered as havng
been pad by such successor empoyer;
(2) The amount of any payment (ncudng any amount pad by an
empoyer for nsurance or annutes, or Into a fund, to provde for any such
payment) made to, or on behaf of, an empoyee or any of hs dependents
under a pan or system estabshed by an empoyer whch makes provson
for hs empoyees generay (or for hs empoyees generay and ther de-
pendents) or for a cass or casses of hs empoyees (or for a cass or casses
of hs empoyees and ther dependents), on account of ( ) retrement, or
( ) sckness or accdent dsabty, or (C) medca or hosptazaton e -
penses n connecton wth sckness or accdent dsabty, or (D) death;
(3) ny payment made to an empoyee (ncudng any amount pad by
an empoyer for nsurance or annutes, or nto a fund, to provde for any
such payment) on account of retrement;
( ) ny payment on account of sckness or accdent dsabty, or medca
or hosptazaton e penses n connecton wth sckness or accdent ds-
abty, made by an empoyer to, or on behaf of, an empoyee after the e -
praton of s caendar months foowng the ast caendar month n whch
the empoyee worked for such empoyer;
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229
( ) ny payment made to, or on behaf of, an empoyee or hs benefcary
( ) from or to a trust e empt from ta under secton 16 (a) at the tme of
such payment uness such payment s made to an empoyee of the trust as
remuneraton for servces rendered as such empoyee and not as a benefcary
of the trust, or ( ) under or to an annuty pan whch, at the tme of such
payment, meets the requrements of secton 16 (a) (3), ( ), ( ), and (6) ;
(6) The payment by an empoyer (wthout deducton from the remunera-
ton of the empoyee) ( ) of the ta mposed upon an empoyee under secton
1 00, or ( ) of any payment requred from an empoyee under a State un-
empoyment compensaton aw;
(7) ( ) Remuneraton pad n any medum other than cash to an em-
poyee for servce not n the course of the empoyer s trade or busness or for
domestc servce n a prvate home of the empoyer;
( ) Cash remuneraton pad by an empoyer n any caendar quarter
to an empoyee for domestc servce n a prvate home of the empoyer, f the
cash remuneraton pad n the quarter for such servce s ess than 0 or
the empoyee s not reguary empoyed by the empoyer n such quarter of
payment. For the purposes of ths subparagraph, an empoyee sha be
deemed to be reguary empoyed by an empoyer durng a caendar quarter
ony f () on each of some twenty-four days durng the quarter the empoyee
performs for the empoyer for some porton of the day domestc servce n a
prvate home of the empoyer, or () the empoyee was reguary empoyed
(as determned under cause ()) by the empoyer n the performance of
such servce durng the precedng caendar quarter. s used n ths sub-
paragraph, the term domestc servce n a prvate home of the empoyer does
not ncude servce descrbed n subsecton (h) ( ) ;
( ) Remuneraton pad n any medum other than cash for agrcutura
abor;
(9) ny payment (other than vacaton or sck pay) made to an em-
poyee after the month n whch he attans the age of s ty-fve, f he dd
not work for the empoyer n the perod for whch such payment s made;
or
(10) Remuneraton pad by an empoyer n any caendar quarter to an
empoyee for servce descrbed n subsecton (d) (3) (C) (reatng to home
workers), f the cash remuneraton pad n such quarter by the empoyer
to the empoyee for such servce s ess than 0.
(b) So much of secton 1 01(d) (2) of the Interna Revenue Code as precedes
the second sentence thereof s amended to read as foows:
(2) Wages receved durng 19 T, 19 , 19 9, and 19 0. If by reason
of an empoyee recevng wages from more than one empoyer durng the
caendar year 19 7, 19 , 19 9, or 19 0, the wages receved by hm durng
such year e ceed 3,000, the empoyee sha be entted to a refund of any
amount of ta , wth respect to such wages, Imposed by secton 1 00 and
deducted from the empoyee s wages (whether or not pad to the coector),
whch e ceeds the ta wth respect to the frst 3,000 of such wages receved.
(c) Secton 1 01(d) of the Interna Revenue Code s amended by addng at
the end thereof the foowng new paragraphs:
(3) Wages receved after 19 0. If by reason of an empoyee recevng
wages from more than one empoyer durng any caendar year after the
caendar year 19 0, the wages receved by hm durng such year e ceed
3,600, the empoyee sha be entted to a refund of any amount of ta ,
wth respect to such wages, mposed by secton 1 00 and deducted from the
empoyee s wages (whether or not pad to the coector), whch e ceeds
the ta wth respect to the frst 3,600 of such wages receved. Refund
under ths secton may be made n accordance wth the provsons of aw
appcabe n the case of erroneous or ega coecton of the ta ; e cept
that no such refund sha be made uness ( ) the empoyee makes a cam,
estabshng hs rght thereto, after the caendar year n whch the wages
were receved wth respect to whch refund of ta s camed, and ( )
such cam s made wthn two years after the caendar year n whch such
wages were receved. No nterest sha be aowed or pad wth respect to
any such refund.
( ) Speca bu.es n the case of federa and state empoyees.
( ) Federa mpoyees. In the case of remuneraton receved from
the Unted States or a whoy owned nstrumentaty thereof durng
any caendar year after the.caendar year 19 0, each head of a Federa
agency or nstrumentaty who makes a return pursuant to secton
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1 20(e) and each agent, desgnated by the head of a Federa agency or
nstrumentaty, who makes a return pursuant to such secton sha,
for the purposes of subsecton (c) and paragraph (3) of ths subsecton,
be deemed a separate empoyer; and the term wages Incudes, for the
purposes of paragraph (3) of ths subsecton, the amount, not to e ceed
3,600, determned by each such head or agent as consttutng wages
pad to an empoyee.
( ) State mpoyees. For the purposes of paragraph (3) of ths
subsecton, In the case of remuneraton receved durng any caendar
year after the caendar year 19 0, the term wages ncudes such
remuneraton for servces covered by an agreement made pursuant to
secton 21 of the Soca Securty ct as woud be wages f such servces
consttuted empoyment; the term empoyer ncudes a State or any
potca subdvson thereof, or any nstrumentaty of any one or
more of the foregong; the term ta or ta Imposed by secton 1 00
ncudes, n the case of servces covered by an agreement made pur-
suant to secton 21 of the Soca Securty ct, an amount equvaent
to the ta whch woud be mposed by secton 1 00, f such servces
consttuted empoyment as defned n secton 1 26: and the provsons
of paragraph (3) of ths subsecton sha appy whether or not any
amount deducted from the empoyee s remuneraton as a resut of an
agreement made pursuant to secton 21 of the Soca Securty ct
has been pad to the Secretary of the Treasury.
(d) The amendment made by subsecton (a) of ths secton sha be appcabe
ony wth respect to remuneraton pad after 19 0. In the case of remuneraton
pad pror to 19 1, the determnaton under secton 1 26(a)(1) of the Interna
Revenue Code (pror to ts amendment by ths ct) of whether or not such
remuneraton consttuted wr.ges sha be made as f subsecton (a) of ths sec-
ton had not been enacted and wthout nferences drawn from the fact that the
amendment made by subsecton (a) s not made appcabe to perods pror to 10 1.
Sec. 20 . (a) ffectve anuary 1, 19 1, secton 1 20(b) of the Interna
evenue Code s amended to read as foows:
(b) mpoyment. The term empoyment means any servce performed
after 1936 and pror to 19 1 whch was empoyment for the purposes of ths
subchapter under the aw appcabe to the perod n whch such servce was
performed, and any servce, of whatever nature performed after 19 0 ether
( ) by an empoyee for the person empoyng hm, rrespectve of the ctzen-
shp or resdence of ether, () wthn the Unted States, or () on or n con-
necton wth an mercan vesse or mercan arcraft under a contract of
servce whch s entered nto wthn the Unted States or durng the perform-
ance of whch and whe the empoyee s empoyed on the vesse or arcraft It
touches at a port n the Unted States, f the empoyee s empoyed on and n
connecton wth such vesse or arcraft when outsde the Unted States, or ( )
outsde the Unted States by a ctzen of the Unted States as an empoyee for
an mercan empoyer (as defned n subsecton () of ths secton) ; e cept
that, n the case of servce performed after 19 0, such term sha not ncude
(1) ( ) grcutura abor (as defned n subsecton (h) of ths sec-
ton) performed n any caendar quarter by an empoyee, uness the cash
remuneraton pad for such abor (other than servce descrbed n subpara-
graph ( )) s 0 or more and such abor s performed for an empoyer
by an ndvdua who s reguary empoyed by such empoyer to perform
such agrcutura abor. For the purposes of ths subparagraph, an ndvdua
sha be deemed to be reguary empoyed by an empoyer durng a caendar
quarter ony f
(1) such ndvdua performs agrcutura abor (other than serv-
ce descrbed In subparagraph ( )) for such empoyer on a fu-tme
bass on s ty days durng such quarter, and
(II) the quarter was mmedatey preceded by a quafyng quarter.
For the purposes of the precedng sentence, the term quafyng quarter
means (I) any quarter durng a of whch such ndvdua was contnuousy
empoyed by such empoyer, or (II) any subsequent quarter whch meets the
test of cause (1) If, after the ast quarter durng a of whch such ndvdua
was contnuousy empoyed by such empoyer, each Intervenng quarter met
the test of cause (). Notwthstandng the precedng provsons of ths sub-
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231
paragraph, an ndvdua sha aso be deemed to be reguary empoyed by
an empoyer durng a caendar quarter f such ndvdua was reguary
empoyed (upon appcaton of causes () and ()) by such empoyer durng
the precedng caendar quarter.
( ) Servce performed n connecton wth the producton or harvestng
of any commodty defned as an agrcutura commodty n secton 1 (g) of
the grcutura Marketng ct, as amended, or n connecton wth the
gnnng of cotton;
(2) Domestc servce performed n a oca coege cub, or oca chapter
of a coege fraternty or sororty, by a student who s enroed and s reg-
uary attendng casses at a schoo, coege, or unversty;
(3) Servce not n the course of the empoyer s trade or busness per-
formed n any caendar quarter by an empoyee, uness the cash remuneraton
pad for such servce s 0 or more and such servce s performed by an
ndvdua who s reguary empoyed by such empoyer to perform such
servce. For the purposes of ths paragraph, an ndvdua sha be deemed
( ) on each of some twenty-four days durng such quarter such ndvdua
performs for such empoyer for some porton of the day servce not n the
course of the empoyer s trade or busness, or ( ) such ndvdua was
reguary empoyed (as determned under cause ( )) by such empoyer
n the performance of such servce durng the precedng caendar quarter.
s used n ths paragraph, the term servce not n the course of the empoy-
er s trade or busness does not ncude domestc servce n a prvate home of
the empoyer and does not ncude servce descrbed n subsecton (h)( ) ;
( ) Servce performed by an ndvdua n the empoy of hs son, daugh-
ter, or spouse, and servce performed by a chd under the age of twenty-one
n the empoy of hs father or mother;
( ) Servce performed by an ndvdua on or n connecton wth a vesse
not an mercan vesse, or on or n connecton wth an arcraft not an
mercan arcraft, f the ndvdua s empoyed on and n connecton wth
such vesse or arcraft when outsde the Unted States;
(6) Servce performed n the empoy of any nstrumentaty of the
Unted States, f such nstrumentaty s e empt from the ta mposed by
secton 1 10 by vrtue of any provson of aw whch specfcay refers to such
secton n grantng such e empton ;
(7) ( ) Servce performed n the empoy of the Unted States or n
the empoy of any nstrumentaty of the Unted States, f such servce s
covered by a retrement system estabshed by a aw of the Unted States;
( ) Servce performed n the empoy of an Instrumentaty of the
Unted States f such an nstrumentaty was e empt from the ta mposed
by secton 1 10 on December 31, 19 0, e cept that the provsons of ths
subparagraph sha not be appcabe to
() servce performed n the empoy of a corporaton whch s
whoy owned by the Unted States;
() servce performed n the empoy of a natona farm oan asso-
caton, a producton credt assocaton, a Federa Reserve bank, or a
Federa Credt Unon;
( ) servce performed n the empoy of a State, county, or com-
munty commttee under the Producton and Marketng dmnstra-
ton ; or
(v) servce performed by a cvan empoyee, not compensated
from funds approprated by the Congress, In the rmy and r Force
change Servce, rmy and r Force Moton Pcture Servce, Navy
changes, Marne Corps changes, or other actvtes, conducted by
an nstrumentaty of the Unted States sub|ect to the |ursdcton of
the Secretary of Defense, at nstaatons of the Department of Defense
for the comfort, peasure, contentment, and menta and physca mprove-
ment of personne of such Department;
(C) Servce performed n the empoy of the Unted States or n the
empoy of any nstrumentaty of the Unted States, f such servce s
performed
(I) as the Presdent or ce Presdent of the Unted States or as a
Member, Deegate, or Resdent Commssoner, of or to the Congress;
(II) n the.egsatve branch;
( ) n the fed servce of the Post Offce Department uness per-
formed by any ndvdua as an empoyee who s e cuded by ecutve
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232
order from the operaton of the Cv Servce Retrement ct of 1930
because he s servng under a temporary appontment pendng fna
determnaton of egbty for permanent or ndefnte appontment;
(v) n or under the ureau of the Census of the Department of
Commerce by temporary empoyees empoyed for the takng of any
census;
(v) by any ndvdua as an empoyee who Is e cuded by ecutve
order from the operaton of the Cv Servce Retrement ct of 1930
because he s pad on a contract or fee bass;
(v) by any ndvdua as an empoyee recevng nomna compensa-
ton of 12 or ess per annum;
(v) n a hospta, home, or other nsttuton of the Unted States
by a patent or nmate thereof;
(v) by any ndvdua as a consuar agent apponted under author-
ty of secton 1 of the Foregn Servce ct of 19 6 (22 U. S. C, sec.
9 1) ;
( ) by any ndvdua as an empoyee ncuded under secton 2 of
the ct of ugust , 19 7 (reatng to certan nterns, student nurses,
and other student empoyees of hosptas of the Federa Government;
U. S. C, sec. 10 2) ;
( ) by any ndvdua as an empoyee servng on a temporary bass
In case of fre, storm, earthquake, food, or other smar emergency;
( ) by any ndvdua as an empoyee who Is empoyed under a
Federa reef program to reeve hm from unempoyment;
( ) as a member of a State, county, or communty commttee under
the Producton and Marketng dmnstraton or of any other board,
counc, commttee, or other smar body, uness such board, counc,
commttee, or other body s composed e cusvey of ndvduas other-
wse n the fu-tme empoy of the Unted States; or
( ) by an ndvdua to whom the Cv Servce Retrement ct
of 1930 does not appy because such ndvdua s sub|ect to another
retrement system;
( ) Servce (other than servce whch, under subsecton (k), consttutes
covered transportaton servce) performed n the empoy of a State, or any
potca subdvson thereof, or any nstrumentaty of any one or more of
the foresong whch s whoy owned by one or more States or potca
subdvsons;
(9) ( ) Servce performed by a duy ordaned, commssoned, or censed
mnster of a church n the e ercse of hs mnstry or by a member of a
regous order n the e ercse of dutes requred by such order;
( ) Servce performed n the empoy of a regous, chartabe, educa-
tona, or other organzaton e empt from ncome ta under secton 101(6),
but ths subparagraph sha not appy to servce performed durng the perod
for whch a certfcate, fed pursuant to subsecton (1), Is n effect f such
servce s performed by an empoyee (1) whose sgnature appears on the
st fed by such organzaton under subsecton (1), or () who became an
empoyee of such organzaton after the caendar quarter n whch the
certfcate was fed;
(10) Servce performed by an ndvdua as an empoyee or empoyee
representatve as defned n secton 1 32;
(11) ( ) Servce performed n any caendar quarter n the empoy of
any organzaton e empt from ncome ta under secton 101, f the remu-
neraton for such servce s ess than 0;
( ) Servce performed n the empoy of a schoo, coege, or unversty
f such servce s performed by a student who s enroed and s reguary
attendng casses at such schoo, coege, or unversty;
(12) Servce performed n the empoy of a foregn government (Incud-
ng servce as a consuar or other offcer or empoyee or a nondpomatc
representatve) ;
(13) Servce performed n the empoy of an Instrumentaty whoy
owned by a foregn government
( ) If the servce s of a character smar to that performed In
foregn countres by empoyees of the Unted States Government or of
an nstrumentaty thereof; and
( ) If the Secretary of State sha certfy to the Secretary of the
Treasury that the foregn government, wth respect to whose nstrumen-
taty and empoyees thereof e empton s camed, grants an equvaent
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233
e empton wth respect to smar servce performed n the foregn
country by empoyees of the Unted States Government and of Instru-
mentates thereof;
(1 ) Servce performed as a student nurse In the empoy of a hospta
or a nurses tranng schoo by an Indvdua who s enroed and s reguary
attendng casses n a nurses tranng schoo chartered or approved pur-
suant to State aw; and servce performed as an nterne n the empoy of
a hospta by an ndvdua who has competed a four years course n a
medca schoo chartered or approved pursuant to State aw;
(1 ) Servce performed by an ndvdua n (or as an offcer or member
of the crew of a vesse whe t s engaged n) the catchng, takng, harvestng,
cutvatng, or farmng of any knd of fsh, shefsh, Crustacea, sponges, sea-
weeds, or other aquatc forms of anma and vegetabe fe (ncudng servce
performed by any such ndvdua as an ordnary ncdent to any such
actvty), e cept ( ) servce performed n connecton wth the catchng or
takng of samon or habut, for commerca purposes, and ( ) servce per-
formed on or n connecton wth a vesse of more than ten net tons (deter-
mned n the manner provded for determnng the regster tonnage of mer-
chant vesses under the aws of the Unted States) ;
(16) ( ) Servce performed by an ndvdua under the age of eghteen
n the devery or dstrbuton of newspapers or shoppng news not ncudng
devery or dstrbuton to any pont for subsequent devery or dstrbuton;
( ) Servce performed by an ndvdua n, and at the tme of, the sae
of newspapere or magaznes to utmate consumers, under an arrangement
under whch tne newspapers or magaznes are to be sod by hm at a f ed
prce, hs compensaton beng based on the retenton of the e cess of such
prce over the amount at whch the newspapers or magaznes are charged
to hm, whether or not he s guaranteed a mnmum amount of compensaton
for such servce, or s entted to be credted wth the unsod newspapers or
magaznes turned back; or
(17) Servce performed n the empoy of an nternatona organzaton.
(b) ffectve anuary 1,10 1, secton 1 26(e) of the Interna Revenue Code s
(e) State, tc.
(1) The term State ncudes aska, awa, the Dstrct of Coumba,
and the rgn Isands; and on and after the effectve date specfed n
secton 3 10 such term ncudes Puerto Rco.
(2) Unted States. The term Unted States when used n a geo-
graphca sense ncudes the rgn Isands; and on and after the effectve
date specfed n secton 3 10 such term ncudes Puerto Rco.
(3) Ctzen. n ndvdua who s a ctzen of Puerto Rco (but not
otherwse a ctzen of the Unted States) and who s not a resdent of the
Unted States sha not be consdered, for the purposes of ths secton, as
a ctzen of the Unted States pror to the effectve date specfed n secton
3 10.
(c) Secton 1 26(g) of the Interna Revenue Code Is amended by strkng
out (g) mercan esse. and nsertng n eu thereof (g) mercan
esse and rcraft. , and by strkng out the perod at the end of such sub-
secton and nsertng n eu thereof the foowng: ; and the term mercan
arcraft means an arcraft regstered under the aws of the Unted States.
(d) Secton 1 26(h) of the Interna Revenue Code s amended to read as
foows:
(h) grcutura Labor. The term agrcutura abor ncudes a servce
performed
(1) Ob a farm, n the empoy of any person, n connecton wth cut-
vatng the so, or n connecton wth rasng or harvestng any agrcutura
or hortcutura commodty, ncudng the rasng, shearng, feedng, carng
for, tranng, and management o vestock, bees, poutry, and fur-bearng
anmas and wdfe.
(2) In the empoy of the owner or tenant or other operator of a farm,
n connecton wth the operaton, management, conservaton, mprovement,
or mantenance of such farm and ts toos and equpment, or n savagng
tmber or cearng and of brush and other debrs eft by a hurrcane, f
the ma|or part of such servce s performed on a farm.
023 30 1 16
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23
(3) In connecton wth the producton or harvestng of any commodty
defned as an agrcutura commodty n secton 1 (g) of the grcutura
Marketng ct, as amended, or n connecton wth the gnnng of cotton, or
n connecton wth the operaton or mantenance of dtches, canas, reser-
vors, or waterways, not owned or operated for proft, used e cusvey for
suppyng and storng water for farmng purposes.
( ) ( ) In the empoy of the operator of a farm n handng, pantng,
dryng, packng, packagng, processng, freezng, gradng, storng, or dever-
, ng to storage or to market or to a carrer for transportaton to market, n ts
unmanufactured state, any agrcutura or hortcutura commodty; but
ony f such operator produced more than one-haf of the commodty wth
respect to whch such servce s performed.
( ) In the empoy of a group of operators of farms (other than a
cooperatve organzaton) n the performance of servce descrbed n sub-
paragraph ( ), but ony f such operators produced a of the commodty
wth respect to whch such servce s performed. For the purposes of ths
subparagraph, any unncorporated group of operators sha be deemed a
cooperatve organzaton f the number of operators comprsng such group
s more than twenty at any tme durng the caendar quarter n whch such
servce s performed.
(C) The provsons of subparagraphs ( ) and ( ) sha not be deemed
to be appcabe wth respect to servce performed n connecton wth com-
merca cannng or commerca freezng or n connecton wth any agrcu-
tura or hortcutura commodty after ts devery to a termna market for
dstrbuton for consumpton.
( ) On a farm operated for proft f such servce s not n the course of
the empoyer s trade or busness or s domestc servce n a prvate home
of the empoyer.
s used n ths secton, the term farm ncudes stock, dary, poutry, frut,
fur-bearng anma, and truck farms, pantatons, ranches, nurseres, ranges,
greenhouses or other smar structures used prmary for the rasng of agr-
cutura or hortcutura commodtes, and orchards.
(e) Secton 1 26 of the Interna Revenue Code s amended by strkng out
subsectons () and (|) and nsertng n eu thereof the foowng:
() mercan mpoyer. The term mercan empoyer means an empoyer
whch s (11 the Unted States or any nstrumentaty thereof, (2) an ndvdua
who s a resdent of the Unted States, (3) a partnershp, f two-thrds or more
of the partners are resdents of the Unted States, ( ) a trust, f a of the
trustees are resdents of the Unted States, or ( ) a corporaton organzed under
the aws of the Unted States or of any State.
(|) Computaton of Wages n Certan Cases. For purposes of ths sub-
chapter, n the case of domestc servce descrbed n subsecton (a)(7)( ),
any payment of cash remuneraton for such servce whch s more or ess than
a whoe-doar amount sha, under such condtons and to such e tent as may
be prescrbed by reguatons made under ths subchapter, be computed to the
nearest doar. For the purpose of the computaton to the nearest doar, the
payment of a fractona part of a doar sha be dsregarded uness t amounts
to one-haf doar or more, n whch case t sha be ncreased to 1. The amount
of any payment of cash remuneraton so computed to the nearest doar sha,
n eu of the amount actuay pad, be deemed to consttute the amount of cash
remuneraton for purposes of subsecton (a) (7) ( ).
(k) Covered Transportaton Servce.
(1) stng transportaton systems Genera rue. cept as pro-
vded n paragraph (2), a servce performed n the empoy of a State or
potca subdvson n connecton wth ts operaton of a pubc transporta-
ton system sha consttute covered transportaton servce f any part of
the transportaton system was acqured from prvate ownershp after 1936
and pror to 10 1.
(2) stng transportaton systems Cases n whch no transportaton
empoyees, or ony certan empoyees, are covered. Servce performed In
the empoy of a State or potca subdvson In connecton wth the opera-
ton of ts pubc transportaton system sha not consttute covered trans-
portaton servce f
( ) any part of the transportaton system was acqured from pr-
vate ownershp after 1936 and pror to 19 1, and substantay a servce
n connecton wth the operaton of the transportaton system s, on
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December 31. 19 0, covered und r a genera retrement system provdng
benefts whch, by reason of a provson of the State consttuton deang
specfcay wth retrement systems of the State or potca subdvsons
thereof, cannot be dmnshed or mpared ; or
( ) no part of the transportaton system operated by the State or
potca subdvson on December 31, 19 0, was acqured from prvate
ownershp after 1936 and pror to 19 1;
e cept that f such State or potca subdvson makes an acquston after
19 0 from prvate ownershp of any part of ts transportaton system, then,
In the case of any empoyee who
(C) became an empoyee of such State or potca subdvson n con-
necton wth and at the tme of ts acquston after 19 0 of such part,
and
(D) pror to such acquston rendered servce n empoyment (n-
cudng as empoyment servce covered by an agreement under secton 21
of the Soca Securty ct) n connecton wt.) the operaton of such part
of the transportaton system acqured by the State or potca sub-
dvson,
the servce of such empoyee In connecton wth the operaton of the trans-
portaton system sha consttute covered transportaton servce, commencng
wth the frst day of the thrd caendar quarter foowng the caendar quarter
In whch the acquston of such part took pace, uness on such frst day such
servce of such empoyee s covered by a genera retrement system whch
does not, wth respect to such empoyee, contan speca provsons appcabe
ony to empoyees descrbed n subparagraph (C).
(3) Transportaton systems acqured after 19 0. servce performed
n the empoy of a State or potca subdvson thereof n connecton wth
ts operaton of a pubc transportaton system sha consttute covered trans-
portaton servce f the transportaton system was not operated by the State
or potca subdvson pror to 19 1 and, at the tme of ts frst acquston
(after 19 0) from prvate ownershp of any part of ts transportaton system,
the State or potca subdvson dd not have a genera retrement system
coverng substantay a servce performed n connecton wth the opera-
ton of the transportaton system.
( ) Defntons. For the purposes of ths subsecton
( .) The term genera retrement system means any penson, an-
nuty, retrement, or smar fund or system estabshed by a State or by
a potca subdvson thereof for empoyees of the State, potca sub-
dvson, or both; but such term sha not ncude such a fund or system
whch covers ony servce performed n postons connected wth the
operaton of ts pubc transportaton system.
( ) transportaton system or a part thereof sha be consdered to
have been acqured by a State or potca subdvson from prvate own-
ershp f pror to the acquston servce performed by empoyees n con-
necton wth the operaton of the system or part thereof acqured con-
sttuted empoyment under ths subchapter or was covered by an agree-
ment made pursuant to secton 21 of the Soca Securty ct and some
of such empoyees became empoyees of the State or potca subdvson
n connecton wth and at the tme of such acquston.
(C) The term potca subdvson ncudes an nstrumentaty of
() a State, () one or more notca subdvsons of a State, or () a
State and one or more of ts potca subdvsons.
(1) empton of Rkgofs, Chartabe, tc., Obganzatons.
(1) Waver of e empton by organzaton. n organzaton e empt
from Income ta under secton 101(6) may fe a certfcate (n such form
and manner and wth such offca, as may be prescrbed by reguatons made
under ths subchapter) certfyng that t desres to have the nsurance system
estabshed by tte II of the Soca Securty ct e tended to servce performed
by ts empoyees and that at east two-thrds of ts empoyees concur n the
fng of the certfcate. Such certfcate may be fed ony If t s accom-
paned by a st contanng the sgnature, address, and soca securty account
number (f any) of each empoyee who concurs n the fng of the certfcate.
Such st may be amended, at any tme pror to the e praton of the frst
month foowng the frst caendar quarter for whch the certfcate s n
effect, by fng wth such offca a suppementa st or sts contanng the
sgnature, address, and soca securty account number (f any) of each
addtona empoyee who concurs n the fng of the certfcate. The st and
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236
any suppementa st sha be fed In such form and manner as may be
prescrbed by reguatons made under ths subchapter. The certfcate sha
be n effect (for the purposes of subsecton (b) (9) ( ) and for the purposes
of secton 210(a) (9) ( ) of the Soca Securty ct) for the perod begnnns
wth the frst day foowng the cose of the caendar quarter n whch such
certfcate s fed, but n no case sha such perod begn pror to anuary 1.
19 1. The perod for whch the certfcate s effectve may be termnated by
the organzaton, effectve at the end of a caendar quarter, upon gvng two
years advance notce n wrtng, but ony f, at the tme of the recept of such
notce, the certfcate has been n effect for a perod of not ess than eght
years. The notce of termnaton may be revoked by the organzaton by
gvng, pror to the cose of the caendar quarter specfed n the notce of
termnaton, a wrtten notce of such revocaton. Notce of termnaton or
revocaton thereof sha be fed n such form and manner, and wth such
offca, as may be prescrbed by reguatons made under ths subchapter.
(2) Termnaton of waver perod by commssoner. If the Comms-
soner fnds that any organzaton whch fed a certfcate pursuant to ths
subsecton has faed to compy substantay wth the requrements of ths
subchapter or s no onger abe to compy therewth, the Commssoner sha
gve such organzaton not ess than s ty days advance notce n wrtng that
the perod covered by such certfcate w termnate at the end of the caendar
quarter specfed n such notce. Such notce of termnaton may be revoked
by the Commssoner by gvng, pror to the cose of the caendar quarter
specfed n the notce of termnaton, wrtten notce of such revocaton to the
organzaton. No notce of termnaton or of revocaton thereof sha be
gven under ths paragraph to an organzaton wthout the pror concurrence
of the Federa Securty dmnstrator.
(3) No renewa of waver. In the event the perod covered by a certf-
cate fed pursuant to ths subsecton s termnated by the organzaton, no
certfcate may agan be fed by such organzaton pursuant to ths
subsecton.
(f) Sectons 1 26(c) and 1 2 of the Interna Revenue Code are each amended
by strkng out paragraph (9) and nsertng n eu thereof paragraph (10) .
(g) The amendments made by subsectons (c), (d) (e), and (f) of ths
secton sha be appcabe ony wth respect to servces performed after 19 0.
defnton of empoyee
Sec. 20 . (a) Secton 1 26(d) of the Interna Revenue Code s amended to
read as foows:
(d) mpoyee. The term empoyee means
(1) any offcer of a corporaton; or
(2) any ndvdua who, under the usua common aw rues appcabe
n determnng the empoyer-empoyee reatonshp, has the status of an
empoyee; or
(3) any ndvdua (other than an ndvdua who s an empoyee under
paragraph (1) or (2) of ths subsecton) who performs servces for remu-
neraton for any person
( ) as an agent-drver or commsson-drver engnged n dstrbutn;
meat products, vegetabe products, frut products, bakery products,
beverages (other than mk), or aundry or dry-ceanng servces, for
hs prncpa;
( ) as a fu-tme fe nsurance saesman;
(C) as a home worker performng work, accordng to specfcatons
furnshed by the person for whom the servces are performed, on
materas or goods furnshed by such person whch are requred to be
returned to such person or a person desgnated by hm, f the perform-
ance of such servces s sub|ect to censng requrements under the aws
of the State n whch such servces are performed; or
(D) as a traveng or cty saesman, other than as an agent-drver
or commsson-drver, engaged upon a fu-tme bass n the soctaton
: on behaf of, and the transmsson to, hs prncpa (e cept for sde-ne
saes actvtes on behaf of some other person) of orders from wboe-
I saers, retaers, contractors, or operators of hotes, restaurants, or
other smar estabshments for merchandse for resae or suppes for
use n ther busness operatons;
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237
If the contract of servce contempates that substantay a of such servces
are to be performed personay by such ndvdua; e cept that an ndvdua
sha not be Incuded n the term empoyee under the provsons of ths
paragraph If such ndvdua has a substanta Investment n factes used
n connecton wth the performance of such servces (other than n factes
for transportaton), or f the servces are n the nature of a snge transac-
ton not part of a contnung reatonshp wth the person for whom the
servces are performed.
(b) The amendment made by ths secton sha be appcabe ony wth respect
to servces performed after 10 0.
R C IPTS FO MPLOY S ; SP CI L R FUNDS
Sec. 206. (a) Subchapter of chapter 9 of the Interna Revenue Code Is
amended by addng at the end thereof the foowng new sectons:
S C 1633. R C IPTS FOR MPLOY S.
(a) Requrement. very person requred to deduct and wthhod from an
empoyee a ta under secton 1 00 or 1622, or who woud have been requred to
deduct and wthhod a ta under secton 1622 f the empoyee had camed no more
than one wthhodng e empton, sha furnsh to each such empoyee n respect
of the remuneraton pnd by such person to such empoyee durng the caendar
year, on or before anuary 31 of the succeedng year, or, f hs empoyment s
termnated before the cose of such caendar year, on the day on whch the ast
payment of remuneraton Is made, a wrtten statement showng the foowng:
(1) the name of such person, (2) the name of the empoyee (and hs soca
securty account number f wages as defned n secton 1 20(a) have been pad),
(3) the tota amount of wages as defned n secton 1621(a), ( ) the tota amount
deducted and wthhed as ta under secton 1622, ( ) the tota amount of wages
as defned n secton 1 26(a), and (6) the tota amount deducted and wthhed
as ta under secton 1 00.
(b) Statements to Consttute Infomaton Returns. The statements
requred to be furnshed by ths secton n respect of any remuneraton sha be
furnshed at such other tmes, sha contan such other nformaton, and sha
be n such form as the Commssoner, wth the approva of the Secretary, may
by reguatons prescrbe. dupcate of any such statement f made and fed
n accordance wth reguatons prescrbed by the Commssoner wth the approva
of the Secretary sha consttute the return requred to be made n respect of
such remnneraton under secton 1 7.
(c) tenson of Tme. The Commssoner, under such reguatons as he
may prescrbe wth the approva of the Secretary, may grant to any person a
reasonabe e tenson of tme (not n e cess of thrty days) wth respect to the
statements requred to be furnshed nnder ths secton.
S C 163 . P N LTI S.
(a) Penattes for Frauduent Statement of Faure to Furnsh State-
ment. In eu of any other penaty provded by aw (e cept the penaty provded
ny subsecton (b) of ths secton), any person requred under the provsons of
secton 1633 to furnsh a statement who wfuy furnshes a fase or frauduent
statement, or who wfuy fas to furnsh a statement n the manner, at the
tme, and showng the nformaton requred under secton 1633, or reguatons,
prescrbed thereunder, sha for each such faure, upon convcton thereof, be
fned not more than 1,000, or mprsoned for not more than one year, or both.
(b) ddtona Penaty. In addton to the penaty provded by subsecton
(a) of ths secton, any person requred under the provsons of secton 1633 to
furnsh a statement who wfuy furnshes a fase or frauduent statement, or
who wfuy fas to furnsh a statement n the manner, at the tme, and showng
the nformaton requred under secton 1633, or reguatons prescrbed thereunder,
sha for each such faure be sub|ect to a cv penaty of 0. Such penaty
sha be assessed and coected n the same manner as the ta mposed by
secton 1 10.
(b) (1) Secton 322(a) of the Interna Revenue Code Is amended by addng
at the end thereof the foowng new paragraph:
( ) Credt for speca refunds of empoyee soca securty ta . The
Commssoner s authorzed to prescrbe, wth the approva of the Secretary,
reguatons provdng for the credtng aganst the ta mposed by ths chap-
ter for any ta abe year of the amount determned by the ta payer or the
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23
Commssoner to be aowabe under secton 1 01(d) as a speca refund
of ta mposed on wages receved durng the caendar year n whch such
ta abe year begns. If more than one ta abe year begns n such caendar
year, such amount sha not be aowed under ths secton as a credt aganst
the ta for any ta abe year other than the ast ta abe year so begnnng.
The amount aowed as a credt under such reguatons sha, for the pur-
poses of ths chapter, be consdered an amount deducted and wthhed at
the source as ta under subchapter D of chapter 9.
(2) Secton 1 03(a) of the Interna Revenue Code s amended by strkng out
the frst sentence and Insertng n eu thereof the foowng: very empoyer
sha furnsh to each of he empoyees a wrtten statement or statements, n a
form sutabe for retenton by the empoyee, showng the wages pad by hm to
the empoyee before anuary 1, 19 1. (For correspondng provsons wth re-
spect to wages pad after December 31,19 0, see secton 1633.)
(3) Secton 162 of the Interna Revenue Code s amended by addng at the
end thereof the foowng new subsecton:
(d) ppcaton or Secton. Ths secton sha appy ony wth respect to
wages pad before anuary 1, 10 1. For correspondng provsons wth respect
to wages pad after December 31,19 0, see secton 1633.
(c) The amendments made by ths secton sha be appcabe ony wth respect
to wages pad after December 31, 19 0, e cept that the amendment made by
subsecton (b) (1) of ths secton sha be appcabe ony wth respect to ta abe
years begnnng after December 31, 19 0, and ony wth respect to speca re-
funds n the case of wages pad after December 31,19 0.
P RIODS OF LIMIT TION ON SS SSM NT ND R FUND OF C RT IN MPLOYM NT T S
Sec. 207. (a) Subchapter of chapter 9 of the Interna Revenue Code s
amended by Insertng at the end thereof the foowng new sectons:
S C, 163 . P RIOD OF LIMIT TION UPON SS SSM NT ND COL-
L CTION OF C RT IN MPLOYM NT T S.
(a) Genera Rue. The amount of any ta mposed by subchapter of ths
chapter or subchapter D of ths chapter sha (e cept as otherwse provded n
the foowng subsectons of ths secton) be assessed wthn three years after
the return was fed, and no proceedng n court wthout assessment for the
coecton of such ta sha be begun after the e praton of such perod.
(b) Fase Return or No Return. In the case of a fase or frauduent
return wth ntent to evade ta or of a faure to fe a return, the ta may be
assessed, or a proceedng n court for the coecton of such ta may be begun
wthout assessment, at any tme.
(c) Wfu ttempt to vade Ta . In case of a wfu attempt n any
manner to defeat or evade ta , the ta may be assessed; or a proceedng n
court for the coecton of such ta may be begun wthout assessment, at any tme.
(d) Coecton fter ssessment. Where the assessment of any ta m-
posed by subchapter of ths chapter or subchapter D of ths chapter has been
made wthn the perod of mtaton propery appcabe thereto, such ta may
be coected by dstrant or by a proceedng n court, but ony f begun (1)
wthn s years after the assessment of the ta , or (2) pror to the e praton
of any perod for coecton agreed upon n wrtng by the Commssoner and
the ta payer.
(e) Date of Fng of Return. For the purposes of ths secton, f a return
for any perod endng wth or wthn a caendar year s fed before March 1
of the succeedng caendar year, such return sha be consdered fed on March
1 of such succeedng caendar year.
(f) ppcaton of Secton. The provsons of ths secton sha appy ony
to those ta es mposed by subchapter of ths chapter, or subchapter D of ths
chapter, whch are requred to be coected and pad by makng and fng returns.
(g) ffectve Date. The provsons of ths secton sha not appy to any
ta mposed wth respect to remuneraton pad durng any caendar year
before 19 1.
S C. 1636. P RIOD OF LIMIT TION UPON R FUNDS ND CR DITS
OF C RT IN MPLOYM NT T S.
(a) Genera Rue. In the case of any ta mposed by subchapter of ths
chapter or subchapter D of ths chapter
(1) Perod of mtaton. Uness a cam for credt or refund s fed
by the ta payer wthn three years from the tme the return was fed or
wthn two years from the tme the ta was pad, no credt or refund sha
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239
be aowed or made after the e praton of whchever of snch perods e pres
the ater, f no return s fed, then no credt or refund sha be aowed
or made after two years from the tme the ta was pad, uness before the
e praton of such perod a cam therefor s fed by the ta payer.
(2) Lmt on amount of crkdt ok refund. The amount of the credt
or refund sha not e ceed the porton of the ta pad
( ) If a return was fed, and the cam was fed wthn three years
from the tme the return was fed, durng the three years mmedatey
precedng the fng of the cam.
( ) If a cam was fed, and (1) no return was fed, or () f the
cam was not fed wthn three years from the tme the return was
fed, durng the two years mmedatey precedng the fng of the cam.
(C) If no cam was fed and the aowance of credt or refund s
made wthn three years from the tme the return was fed, durng the
three years mmedatey precedng the aowance of the credt or refund.
(D) If no cam was fed, and () no return was fed or () the
aowance of the credt or refund s not made wthn three years from
the tme the return was fed, durng the two years mmedatey pre-
cedng the aowance of the credt or refund.
(b) Penates. tc. The provsons of subsecton (a) of ths secton sha
appy to any penaty or sum assessed or coected wth respect to the ta m-
posed by subchapter of ths chapter or subchapter D of ths chapter.
(c) Date of Fng Return and Date of Patment of Ta . For the pur-
poses of ths secton
(1) If a return for any perod endng wth or wthn a caendar year Is
fed before March 1 of the succeedng caendar year, such return sha be
consdered fed on March 1 of such succeedng caendar year; and
(2) If a ta wth respect to remuneraton pad durng any perod end-
ng wth or wthn a caendar year s pad before March 1 of the succeedng
caendar year, such ta sha be consdered pad on March 1 of such suc-
ceedng caendar year,
(d) ppcaton of Secton. The provsons of ths secton sha appy ony
to those ta es mposed by subchapter of ths chapter, or subchapter D of ths
chapter, whch are requred to be coected and pad by makng and fng returns.
(e) ffectve Date. The provsons of ths secton sha not appy to any
ta pad or coected wth respect to remuneraton pad durng any caendar
year before 19 1 or to any penaty or sum pad or coected wth respect to such
ta .
(b) (1) Secton 3312 of the Interna Revenue Code Is amended by Insertng
mmedatey after the words gft ta es (whch words mmedatey precede
subsecton (a) thereof) a comma and the foowng: and e cept as otherwse
provded n secton 1G3 wth respect to empoyment ta es under subchapters
and D of chapter 9 .
(2) Secton 3313 of the Interna Revenue Code Is amended as foows:
( ) y nsertng mmedatey after the words and gft ta es, , where
those words frst appear n the secton, the foowng: and e cept as other-
wse provded by aw n the case of empoyment ta es under subchapters
and D of chapter 9, ; and
( ) y nsertng mmedatey after the words and gft ta es , where
those words appear n the parenthetca phrase, a comma and the foowng:
and other than such empoyment ta es .
(3) Secton 36 of the Interna Revenue Code Is amended by strkng out
mpoyment ta es, secton 3312. and nsertng n eu thereof the foowng:
mpoyment ta es, sectons 163 and 3312.
( ) Secton 371 (a) of the Interna Revenue Code s amended by Insertng
at the end thereof the foowng:
mpoyment ta es, see sectons 163 (d) and 3312(d).
( ) Secton 3770(a) (6) of the Interna Revenue Code Is amended by nsertng
at the end thereof the foowng:
mpoyment ta es, see sectons 1636 and 3313.
(6) Secton 3772(c) of the Interna Revenue Code Is amended by Insertng at
the end thereof the foowng:
mpoyment ta es, see sectons 1636 and 3313.
sef-empoyment ncome
Sec. 20 . (a) Chapter 1 of the Interna Revenue Code s amended by addng
at the end thereof the foowng new subchapter:
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2 0
SU C PT R T ON S LF- MPLOYM NT INCOM
S C. 0. R T OF T .
In addton to other ta es, there sha be eved, coected, and pad for each
ta abe year begnnng after December 31, 19 0, upon the sef-empoyment n-
come of every ndvdua, a ta as foows:
(1) In the case of any ta abe year begnnng after December 31, 19 0,
and before anuary 1, 19 , the ta sha be equa to 2 per centum of the
amount of the sef-empoyment ncome for such ta abe year.
(2) In the case of any ta abe year begnnng after December 31, 19 3,
and before anuary 1, 1960, the ta sha be equa to 3 per centum of the
(3) In the case of any ta abe year begnnng after December 31, 19 9.
and before anuary 1, 196 , the ta sha be equa to 3 per centum of the
( ). In the case of any ta abe year begnnng after December 31, 196 ,
and before anuary 1, 1970, the ta sha be equa to per centum of he
amount of the sef-empoyment Income for such ta abe year.
( ) In the case of any ta abe year begnnng after December 31, 19C9,
the ta sha be equa to per centum of the amount of the sef-empoy-
ment ncome for such ta abe year.
S C. 1. D FINITIONS.
For the purposes of ths subchapter
(a) Net arnngs From Sef- mpoyment. The term net earnngs from
sef-empoyment means the gross ncome derved by an ndvdua from any
trade or busness carred on by such ndvdua, ess the deductons aowed by
ths chapter whch are attrbutabe to such trade or busness, pus hs dstrbu-
tve share (whether or not dstrbuted) of the ordnary net ncome or oss, as
computed under secton 1 3, from any trade or busness carred on by a partner-
shp of whch he s a member; e cept that n computng such gross ncome and
deductons and such dstrbutve share of partnershp ordnary net ncome or
oss
(1) There sha be e cuded rentas from rea estate (ncudng persona
property eased wth the rea estate) and deductons attrbutabe thereto,
uness such rentas are receved n the course of a trade or busness as a
rea estate deaer;
(2) There sha be e cuded Income derved from any trade or busness
n whch, f the trade or busness were carred on e cusvey by empoyees,
the ma|or porton of the servces woud consttute agrcutura abor as de-
fned n secton 1 26(h) ; and there sha be e cuded a deductons at-
trbutabe to such Income;
(3) There sha be e cuded dvdends on any share of stock, and nterest
on any bond, debenture, note, or certfcate, or other evdence of ndebtedness,
ssued wth nterest coupons or n regstered form by any corporaton (n-
cudng one ssued by a government or potca subdvson thereof), uness
such dvdends and nterest (other than nterest descrbed n secton 2 (a))
are receved n the course of a trade or busness as a deaer n stocks or
securtes;
( ) There sha be e cuded any gan or oss ( ) whch Is consdered as
gan or oss from the sae or e change of a capta asset, ( ) from the cut-
tng or dsposa of tmber f secton 117(|) s appcabe to such gan or oss,
or (C) from the sae, e change, nvountary converson, or other dsposton
of property f such property s nether () stock n trade or other property
of a knd whch woud propery be ncudbe n Inventory f on hand at the
cose of the ta abe year, nor () property hed prmary for sae to cus-
tomers n the ordnary course of the trade or busness;
( ) The deducton for net operatng osses provded n secton 23(s)
sha not be aowed;
(6) ( ) If any of,the Income derved from a trade or busness (other
than a trade or busness carred on by a partnershp) s communty ncome
under communty property aws appcabe to such Income, a of the gross
ncome and deductons attrbutabe to such trade or busness sha be treated
as the gross ncome and deductons of the husband uness the wfe e ercses
substantay a of the management and contro of such trade or busness, n
whch case a of such gross ncome and deductons sha be treated as the
gross ncome and deductons of the wfe;
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( ) If any porton of a partner s dstrbutve share of the ordnary net
ncome or oss from a trade or busness carred on by a partnershp s com-
munty ncome or oss under the communty property aws appcabe to
such share, a of such dstrbutve share sha be Incuded n computng the
net earnngs from sef-empoyment of such partner, and n- part of such
share sha be taken nto account n computng the net earnngs from sef-
empoyment of the spouse of such partner;
(7) In the case t any ta abe year begnnng on or after the effectve ate
specfed n secton 3 10, ( ) the term possesson of the Unted States as
used n secton 2 1 sha not ncude Puerto Rco, and ( ) a ctzen or res-
dent of Puerto Rco sha compute hs net earnngs from sef-empoyment n
tne same manner as a ctzen of the Unted States and wthout regard to the
provsons of secton 2 2.
If the ta abe year of a partner s dfferent from that of the partnershp, the
dstrbutve share whch he s requred to ncude n computng hs net earnngs
from sef-empoyment sha be based upon the ordnary net Income or oss of the
partnershp for nny ta abe year of the partnershp (even though begnnng pror
to anuary 1, 19 1) endng wthn or wth hs ta abe year.
(b) Sef- mpoyment Income. The term sef-empoyment ncome means
the net earnngs from sef-empoyment derved by an ndvdua (other than a
nonresdent aen ndvdua) durng any ta abe year begnnng after December
31, 1 0; e cept that such term sha not ncude
(1) That part of the not earnngs from sef-empoyment whch Is n e cess
of: ( ) 3,600, mnus ( ) the amount of the wages pad to such ndvdua
durng the ta abe year; or
(2) The net earnngs from sef-empoyment, f such net earnngs for the
ta abe year are ess than -100.
For the purposes of cause (1) the term wages ncudes such remuneraton pad
to an empoyee for servces ncuded under an agreement entered nto pursuant
to the provsons of secton 21 of the Soca Securty ct (reatng to coverage
of State empoyees) as woud be wages under secton 1 20(a) f such servces
consttuted empoyment under secton 1 26(b). In the case of any ta abe year
begnnng pror to the effectve date specfed n secton 3S10, an ndvdua who Is
a ctzen of Puerto Rco (but not otherwse a ctzen of the Unted States) and
who s not a resdent of the Unted States or of the rgn Isands durng such
ta abe year sha be consdered, for the purposes of ths subchapter, as a non-
resdent aen ndvdua. n ndvdua who s not a ctzen of the Unted States
but who s a resdent of the rgn Isands or (after the effectve date specfed
n secton 3 10) a resdent of Puerto Rco sha not. for the purposes of ths sub-
chapter, be consdered to be a nonresdent aen ndvdua.
(c) Traoe ob RtrsN SS. The term trade or busness, when used wth ref-
erence to sef-empoyment ncome or net earnngs from sef-empoyment, sha
have the same meanng as when used n secton 23, e cept that such term sha
not ncude
(1) The performance of the functons of a pubc offce;
(2) The performance of servce by an ndvdua as an empoyee (other
than servce descrbed n secton 1 26(b) (16) ( ) performed by an ndvdua
who has attaned the age of eghteen) ;
(3) The performance of servce by an ndvdua as an empoyee or em-
poyee representatve as defned n secton 1 32;
( ) The performance of servce by a duy ordaned, commssoned, or
censed mnster of a church n the e ercse of hs mnstry or by a member
of a regous order n the e ercse of dutes requred by such order: or
( ) The performance of servce by an ndvdua n the e ercse of hs
professon as a physcan, awyer, dentst, osteopath, veternaran, chro-
practor, naturopath, optometrst. Chrstan Scence practtoner, archtect,
certfed pubc accountant, accountant regstered or censed as an account-
ant under State or muncpa aw, fu-tme practcng pubc accountant,
funera drector, or professona engneer; or the performance of such servce
by a partnershp.
(d) mpoyee and Wages. The term empoyee and the term wages sha
have the same meanng as when used n subchapter of chapter 9.
S C 2. MISC LL N OUS PRO ISIONS.
(a) Returns. very ndvdua (other than a nonresdent aen Indvdua)
havng net earnngs from sef-empoyment of 00 or more for the ta abe year
sha make a return contanng such nformaton for the purpose of carryng
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out the provsons of ths subchapter as the Commssoner, wth the approva of
the Secretary, may by reguatons prescrbe. Such return sha be consdered
a return requred under secton 1(a). In the case of a husband and wfe
fng a |ont return under secton 1(b), the ta mposed by ths subchapter
sha not be computed on the aggregate ncome but sha be the sum of the ta es
computed under ths subchapter on the separate sef-empoyment ncome of
each spouse.
(b) Tte op Subchapter. Ths subchapter may be cted as the Sef- m-
poyment Contrbutons ct .
(c) ffectve Date n Case of Puerto Rco. For effectve date n case of
Puerto Rco, see secton 3 10.
(d) Coecton of Ta es n kgn Isands and Puerto Rco. For prov-
sons reatng to coecton of ta es n rgn Isands and Puerto Rco, see
secton 3 11.
(b) Chapter 3 of the Interna Revenue Code s amended by addng at the
end thereof thr foowng new sectons:
S C. 3 10. FF CTI D T IN C S OF PU RTO RICO.
If the Governor of Puerto Rco certfes to the Presdent of the Unted States
that the egsature of Puerto Rco has, by concurrent resouton, resoved that
t desres the e tenson to Puerto Rco of the provsons of tte II of the Soca
Securty ct, the effectve date referred to In sectons 1 26(e), 1(a) (7), and
1(b) sha be anuary 1 of the frst caendar year whch begns more than
nnety days after the date on whch the Presdent receves such certfcaton.
S C. 3 11. COLL CTION OF T S IN IRGIN ISL NDS ND PU RTO
RICO.
Notwthstandng any other provson of aw respectng ta aton n the rgn
Isands or Puerto Rco, a ta es mposed by subchapter of chapter 1 and by
subchapter of chapter 9 sha be coected by the ureau of Interna Revenue
under the drecton of the Secretary and sha be pad nto the Treasury of the
Unted States as nterna revenue coectons. provsons of the nterna
revenue aws of the Unted States reatng to the admnstraton and enforce-
ment of the ta mposed by subchapter of chapter 1 (ncudng the provsons
reatng to The Ta Court of the Unted States), and of any ta mposed by
subchapter of chapter 0, sha, n respect of such ta , e tend to and be
appcabe n the rgn Isands and Puerto Rco n the same manner and to
the same e tent as f the rgn Isands and Puerto Rco were each a State, and
as f the terra Unted States when used n a geographca sense ncuded the
rgn Isands and Puerto Rco.
S C. 3 12. MITIG TION OF FF CT OF ST TUT OF LIMIT TIONS
ND OT R PRO ISIONS IN C S OF R L T D T S UND R
DIFF R NT C PT RS.
(a) Sef- mpoymf.nt Ta and Ta on Wages. In the case of the ta
Imposed by subchapter of chapter 1 (reatng to ta on sef-eupoynent n-
come) and the ta mposed by secton 1 00 of subchapter of chapter 9 (reat-
ng to ta on empoyees under the Federa Insurance Contrbutons ct)
(1) () f an amount s erroneousy treated as sef-empoyment ncome,
or
() f an amount s erroneousy treafed as wages, and
(2) f the correcton of the error woud requre an assessment of one
such ta and the refund or credt of the other ta , and
(3) f at any tme the correcton of the error s authorzed as to one
such ta but s prevented as to the other ta by any aw or rue of aw
(other than secton 3701, reatng to compromses),
then, f the correcton authorzed s made, the amount of the assessment, or
the amount of the credt or refund, as the case may be, authorzed as to the one
ta sha-be reduced by the amount of the credt or refund, or the amount of
the assessment, as the case may be, whch woud be requred wth respect to
such other ta for the correcton of the error f such credt or refund, or such
assessment, of such other ta were not prevented by any aw or rue of aw
(other than secton 3701, reatng to compromses) :
(b) Defntons. For the purposes of subsecton (a) of ths secton, the
terms sef-empoyment ncome and wages sha have the same meanng as
when used n secton 1(b).
(c) Secton 3 01 of the Interna Revenue Code s amended by addng at the
end thereof the foowng new subsecton :
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(g) Ta es Imposed by Chapter 9. The provsons of ths secton sha not
be construed to appy to any ta mposed by chapter 9.
(d) (1) Secton 3 of the Interna Revenue Code s amended by nsertng at
Subchapter Ta on Sef- mpoyment Income (the Sef- mpoyment
Contrbutons ct), dvded nto sectons.
(2) Secton 12(g) of the Interna Revenue Code s amended by nsertng at
(6) Ta on Sef- mpoyment Income. For ta on sef-empoyment
ncome, see subchapter .
(3) Secton 31 of the Interna Revenue Code s amended by nsertng mmed-
atey after the words the ta the foowng: (other than the ta mposed by
subchapter , reatng to ta on sef-empoyment ncome) ; and secton 131(a)
of the Interna Revenue Code s amended by nsertng mmedatey after the
words e cept the ta mposed under secton 102 the foowng: and e cept
the ta mposed under subchapter .
( ) Secton (b)(1) of the Interna Revenue Code s amended by nsertng
mmedatey after the words wthhed at source the foowng: and wthout
regard to the ta mposed by suhcnpter on sef-empoyment ncome .
( ) Secton 107 of the Interna Revenue Code s amended by nsertng at
the end thereof the foowng new subsecton :
(e) Ta ok Sef- mpoyment Income. Ths secton sha be apped wth-
out regard to, and sha not affect, the ta mposed by subchapter , reatng to
ta on sef-empoyment ncome.
(6) Secton 120 of the Interna Revenue Code s amended by nsertng m-
medatey after the words amount of ncome the foowng: (determned
wthout regard to subchapter . reatng to ta on sef-empoyment ncome) .
(7) Secton 161(a) of the Interna Revenue Code s amended by nsertng
mmedatey after the words The ta es mposed by ths chapter the foow-
ng: (other than the ta mposed by subchapter , reatng to ta on sef-
empoyment ncome) .
( ) Secton 29 (d) of the Interna Revenue Code s amended by nsertng at
the end thereof the foowng new paragraph :
(3) Ta on sef-empoyment ncome. Ths subsecton sha be ap-
ped wthout regard to the ta mposed by subchapter , reatng to ta
on sef-empoyment ncome.
msceaneous amendments
Sec. 209. (a) (1) Secton C07(b) of the Interna Revenue Code s amended
to read as foows:
(b) Wages. The term wages means a remuneraton for empoyment, n-
e cept that stc term sha not ncude
(1) That part of the remuneraton whch, after remuneraton (other
than remuneraton referred to n the succeedng paragraphs of ths sub-
secton) equa to 3,000 wth respect to empoyment has been pad to an n-
dvdua by an empoyer durng any caendar year, s pad to such ndvdua
by such empoyer durng such caendar year. If an empoyer (herenafter
referred to as successor empoyer) durng any caendar year acqures sub-
stantay a the property used n a trade or busness of another empoyer
(herenafter referred to as a predecessor), or used n a separate unt of a
trade or busness of a predecesssor, and mmedatey after the acquston
empoys n hs trade or busness an ndvdua who mmedatey pror to
the acquston was empoyed In the trade or busness of such predecessor,
then, for the purpose of determnng whether the successor empoyer has
pad remuneraton (other than remuneraton referred to n the succeedng
paragraphs of ths subsecton) wth respect to empoyment equa to 3,000
to such ndvdua durng such caendar year, any remuneraton (other
than remuneraton referred to n the succeedng paragraphs of ths sub-
secton) wth respect to empoyment pad (or consdered under ths para-
graph as havng been pad) to such ndvdua by such predecessor durng
such caendar year and pror to such acquston sha be consdered as hav-
ng been pad by such successor empoyer;
(2) The amount of any payment (ncudng any amount pad by an
empoyer for nsurance or annutes, or nto a fund, to provde for any
such payment) made to, or on behaf of, an empoyee or any of hs depend-
ents under a pan or system estabshed by an empoyer whch makes pro-
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vson for hs empoyees generay (or for hs empoyees generay and ther
dependents) or for a cass or casses of hs empoyees (or for a cass or
casses of hs empoyees and ther dependents), on account of ( ) retre-
ment, or ( ) sckness or accdent dsabty, or (C) medca or hosptazaton
e penses In connecton wth sckness or accdent dsabty, or (D) death:
(3) ny payment made to an empoyee (ncudng any amount pad
by an empoyer for nsurance or annutes, or Into a fund, to provde for any
such payment) on account of retrement;
( ) ny payment on account of sckness or accdent dsabty, or
medca or hosptazaton e penses n connecton wth sckness or accdent
dsabty, made by an empoyer to, or on behaf of, an empoyee after the
e praton of s caendar months foowng the ast caendar month n
whch the empoyee worked for such empoyer;
( ) ny payment made to, or on behaf of. an empoyee or hs benefcary
( ) from or to a trust e empt from ta under secton 16 (a) at the tme
of such payment uness such payment s made to an empoyee of the trust
as remuneraton for servces rendered as such empoyee and not as a bene-
fcary of the trust, or ( ) under or to an annuty pan whch, at the tme
of such payment, meets the requrements of secton 16 (a) (3), ( ), ( ),
and (6):
(6) The payment by an empoyer (wthout deducton from the remu-
neraton of the empoyee) ( ) of the ta Imposed upon an empoyee under
secton 1 00, or ( ) of any payment requred from an empoyee under a
State unempoyment compensaton aw;
(7) Remuneraton pad n any medum other than cash to an em-
poyee for servce not n the course of the empoyer s trade or busness;
( ) ny payment (other than vacaton or sck pay) made to an em-
poyee after the month n whch he attans the age of s ty-fve, f he dd
not work for the empoyer n the perod for whch such payment s made;
(9) Dsmssa payments whch the empoyer s not egay requred to
make.
(2) The amendment made by paragraph (1) sha be appcabe ony wth re-
spect to remuneraton pad after 19 0. In the case of remuneraton pad pror
to 19 1, the determnaton under secton 1607(b)(1) of the Interna Revenue
Code (pror to ts amendment by ths ct) or whether or not such remunera-
ton consttuted wages sha be made as f paragraph (1) of ths subsecton
had not been enacted and wthout nferences drawn from the fact that the
amendment made by paragraph (1) s not made appcabe to perods pror to
19 1.
(3) ffectve wth respect to remuneraton pad after December 31, 19 1,
secton 1607(b) of the Interna Revenue Code s amended by changng the sem-
coon at the end of paragraph ( ) to a perod and by strkng out paragraph
(9) thereof.
(b) (1) Secton 1607(c) (3) of the Interna Revenue Code s amended to read
as foows:
(3) Servce not n the course of the empoyer s trade or busness per-
formed n any caendar quarter by an empoyee, uness the cash remunera-
ton pad for such servce s 0 or more and such servce s performed by an
performs for suc empoyer for some porton of the day servce not n the
course of the empoyer s trade or busness, or ( ) such Indvdua was
reguary empoyed (as determned under cause ( )) by such empoyer
In the performance of such servce durng the precedng caendar quarter; .
(2) Secton 1607(c) (10) ( ) () of the Interna Revenue Code Is amended by
strkng out does not e ceed and nsertng n eu thereof s ess than 0 .
(3) Secton 1607(c) (10) ( ) of the Interna Revenue Code s amended by
strkng out n any caendar quarter and by strkng out , and the remunera-
ton for such servce does not e ceed (e cusve of room, board, and tuton) .
( ) The amendments made by paragraphs (1), (2), and (3) sha be appcabe
ony wth respect to servce performed after 19 0.
(c) (1) Secton 1021(a)( ) of the Interna Revenue Code s amended to
read as foows:
( ) for servce not n the course of the empoyer s trade or busness per-
formed n any caendar quarter by nn empoyee, uness the cash remuneraton
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pad for such servce s f 0 or more and such servce s performed by an
performs for such empoyer for some porton of the day servce not n the
course of the empoyer s trade or busness, or ( ) such ndvdua was
reguary empoyed (as determned under cause ( )) by such empoyer n
the performance of such servce durng the precedng caendar quarter, or .
(2) Secton 1021(a) of the Interna Itevenue Code s amended by strkng
out paragraph (9) thereof and nsertng n eu thereof the foowng:
(9) for servces performed by a duy ordaned, commssoned, or censed
mnster of a church n the e ercse of hs mnstry or by a member of a
regous order u the e ercse of dutes requred by such order, or
(10) ( ) for servces performed by an ndvdua under the age of
eghteen n the dever or dstrbuton of newspapers or shoppng news, not
ncudng devery or dstrbuton to any pont for subsequent devery or
dstrbuton, or
( ) for servces performed by an ndvdua n, and at the tme of, the
sae of newspapers or magaznes to utmate consumers, under an arrange-
ment under whch the newspapers or magaznes are to be sod by hm at a
f ed prce, hs compensaton beng based on the retenton of the e cess of
such prce over the amount at whch the newspapers or magaznes are
charged to hm, whether or not he s guaranteed a mnmum amount of com-
pensaton for such servce, or s entted to be credted wth the unsod
newspapers or magaznes turned back, or
(11) for servces not n the course of the empoyer s trade or busness,
to the e tent pad n any medum other than cash, or
(12) to, or on behaf of, an empoyee or hs benefcary ( ) from or to
a trust e empt from ta under secton 16 (a) at the tme of such payment
uness such payment s made to an empoyee of the trust as remuneraton for
servces rendered as such empoyee and not as a benefcary of the trust, or
( ) under or to an annuty pan whch, at the tme of such payment, meets
the requrements of secton 16 (a) (3), ( ), ( ), and (6).
(3) The amendments made by paragraphs (1) and (2) sha be appcabe
ony wth respect to remuneraton pad after 19 0.
(d) (1) Secton 1031 of the Interna evenue Code s amended to read as
foows:
S C. 1631. F ILUR OF MPLOY R TO FIL R TURN.
In case of a faure to make and fe any return requred under ths chapter
wthn the tme prescrbed by aw or prescrbed by the Commssoner n pur-
suance of aw, uness t s shown that such faure s due to reasonabe canse and
not to wfu negect, the addton to the ta or ta es requred to be shown on
such return sha not be ess than .
(2) The amendment made by paragraph (1) sha be appcabe ony wth
respect to returns fed after December 31, 19 0.
(e) If a corporaton (herenafter referred to as a predecessor) ncorporated
under the aws of one State s succeeded after 19 and before 19 1 by another
corporaton (herenafter referred to as a successor) ncorporated under the aws
of another State, and f mmedatey upon the successon the busness of the
successor s dentca wth that of the predecessor and, e cept for quafyng
shares, the proportonate nterest of each sharehoder n the successor s dentca
wth hs proportonate nterest n the predecessor, and f n connecton wth the
successon the predecessor s dssoved or merged nto the successor, and f the
predecessor and the successor are empoyers under the Federa Insurance Con-
trbutons ct and the Federa Unempoyment Ta ct n the caendar year n
whch the successon takes pace, then
(1) the predecessor and successor corporatons, for purposes ony of the
appcaton of the 3,000 mtaton n the defnton of wages under such
cts, sha be consdered as one empoyer for such caendar year, and
(2) the successor sha, sub|ect to the appcabe statutes of mtatons,
be entted to a credt or refund, wthout nterest, of any ta under secton
1 10 of the Federa Insurance Contrbutons ct or secton 1600 of the
Federa Unempoyment Ta ct (together wth any nterest or penaty
thereon) pad wth respect to remuneraton pad by the successor durng
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such caendar year whch woud not have been sub|ect to ta under such
cts f the remuneraton had been pad by the predecessor.

TITL I MISC LL N OUS PRO ISIONS

M NDM NTS TO TITL I OF T SOCI L S CURITY CT

(d) Secton 1106 of the Soca Securty ct s amended to read as foows:
OISCLOSU OF INFORM TION IN POSS SSION OF O NCT
Sec. 1106. (a) No dscosure of any return or porton of a return (ncudng
nformnton returns and other wrtten statements) fed wth the Commssoner
of Interna Revenue under tte III of the Soca Securty ct or under sub-
chapter of chapter 1 or subchapter of chapter 9 of the Interna Revenue
Code, or under reguatons made under authorty thereof, whch has been trans-
mtted to the dmnstrator by the Commssoner of Interna Revenue, or of
any fe, record, report, or other paper, or any Informaton, obtaned at any tme
by the dmnstrator or by any offcer or empoyee of the Federa Securty
gency n the course of dschargng the dutes of the dmnstrator under ths
ct, and no dscosure of any such fe, record, report, or other paper, or
nformaton, obtaned at any tme by any person from the dmnstrator or from
any offcer or empoyee of the Federa Securty gency, sha be made e cept as
the dmnstrator may by reguatons prescrbe. ny person who sha voate
any provson of ths secton sha be deemed guty of a msdemeanor and. upon
convcton thereof, sha be punshed by a tne not e ceedng 1,000, or by
mprsonment not e ceedng one year, or both.
(b) Requests for nformaton, dscosure of whch s authorzed by regua-
tons prescrbed pursuant to subsecton (a) of ths secton, may be comped
wth f the agency, person, or organzaton makng the request agrees to pay for
the nformaton requested n such amount, f any (not e ceedng the cost of
furnshng the nformaton), as may be determned by the dmnstrator. Pay-
ments for nformaton furnshed pursuant to ths secton sha be made n ad-
vance or by way of rembursement, as may be requested by the dmnstrator,
and sha be deposted n the Treasury as a speca depost to be used to rem-
burse the appropratons (ncudng authorzatons to make e pendtures from
the Federa Od- ge and Survvors Insurance Trust Fund) for the unt or unts
of the Federa Securty gency whch prepared or furnshed the nformaton.
(e) Secton 1107(a) of the Soca Securty ct s amended by strkng out the
Federa Insurance Contrbutons ct, or the Federa Unempoyment Ta ct,
and nsertng n eu thereof the foowng: subchapter of chnpter 1 or sub-
chapter , C, or of chapter 0 of the Interna Revenue Code, .

D NC S TO ST T UN MPLOYM NT FU DS
Sec. 01. (a) Secton 1201(a) of the Soca Securty ct s amended by strkng
out anuary 1, 19 0 and nsertng In eu thereof anuary 1, 19 2 .
(b) (1) Cause (2) of the second sentence of secton 90 (h) of the Soca
Securty ct s amended to read: (2) the e cess of the ta es coected n each
fsca year begnnng after une 30, 19 6, and endng pror to uy 1, 19 1, under
the Federa Unempoyment Ta ct, over the unempoyment admnstratve e -
pendtures made n such year, and the e cess of such ta es coected durng the
perod begnnng on uy 1, 19 1, and endng on December 31, 19 1, over the un-
empoyment admnstratve e pendtures made durng such perod.
(2) The thrd sentence of secton 90 (h) of the Soca Securty ct s amended
by strkng out pr 1, 19 0 and nsertng n eu thereof pr 1, 19 2 .
(c) The amendments made by subsectons (a) and (b) of ths secton sha
be effectve as of anuary 1, 19 0.
PRO ISIONS OF ST T UN MPLOYM NT COMP NS TION L WS
Sec 0 . (a) Secton 1003(c) of the Interna Revenue Code s amended (1)
by strkng out the phrase changed ts aw and nsertng n eu thereof
amended ts aw , and (2) by addng before the perod at the end thereof the
foowng: and such fndng has become effectve. Such fndng sha become
effectve on the nneteth dny after the Governor of the State has been notfed
thereof uness the State has before such nneteth day so amended ts aw that
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t w compy substantay wth the Secretary of Labor s nterpretaton of the
provson of subsecton (a), In whch event such fndng sha not become effectve.
No fndng of a faure to compy substantay wth the provson In State aw
specfed In paragraph ( ) of subsecton (a) sha be based on an appcaton or
Interpretaton of State aw wth respect to whch further admnstratve or
udca revew Is provded for under the aws of the State .

pproved ugust 2S, 19 0.
19 0-20-13 1
. . R S. 97. PU LIC L W T 9. IG TY-FIRST CONGR SS
ont Resouton cudng from gross estate of a nonresdent
aen works of art on oan to the Trustees of the Natona Gaery
of rt.
States of merca n Congress assembed, That secton 63 of the
Interna Revenue Code (reatng to property wthout the Unted
States) s amended by addng at the end thereof the foowng new
subsecton:
(c) Wobks of bt on Loan for n ToN. Works of art owned by a non-
resdent not a ctzen of the Unted States mported nto the Unted States soey
for e hbton purposes, oaned to the Trustees of the Natona Gaery of rt
for such purpose, and, at the tme of the death of the owner, on e hbton, or
en route to or from e hbton, ether n the Natona Gaery of rt or n such
other pubc gaery or museum as the Trustees of the Natona Gaery of rt
may have desgnated.

Sec. . The amendments made by secton 1 of ths |ont resouton
sha be appcabe ony wth respect to estates of decedents dyng
after the date of enactment.
19 0-20-13 2
. R. 327 . PU LIC L W 7 6, IG TY-FIRST CONGR SS
n ct To amend secton 22(d)(6)( ) of the Interna Revenue
Code, reatng to nvountary qudaton and repacement of nventory.
Unted States of merca n Congress assembed, That secton
22(d)(6)( ) (reatng to the nvountary qudaton and repace-
ment of eectve nventores) s hereby amended as foows:
(1) y amendng that porton thereof precedng cause () to read
as foows :
( ) d|ustment of Net Income and Resutng Ta If, for any ta abe
year begnnng after December 31, 19 0, and pror to anuary 1, 19 , the
cosng nventory of a ta payer nventoryng goods under the method pro-
vded n ths subsecton refects a decrease from the openng nventory
of such goods for such year, and f the ta payer eects, at such tme and
n such manner and sub|ect to such reguatons as the Commssoner wth
the approva of the Secretary may prescrbe, to have the provsons of ths
paragraph appy, and f t estabshed to the satsfacton of the Comms-
soner, n accordance wth such reguatons, that such decrease s attrb-
utabe to the nvountary qudaton of such nventory as defned n
subparagraph ( ), and f the cosng nventory of a subsequent ta abe year,
endng pror to anuary 1, 19 1, refects a repacement, n whoe or n part,
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of the goods so prevousy qudated, the net ncome of the ta payer other-
wse determned for the year of such nvountary qudaton sha be ad|usted
as foows:
(b) The amendments made by ths secton sha be appcabe wth
respect to ta abe years begnnng after December 31, 19 0.
pproved September , 19 0.
19 0-20-13
. R. 77 6. PU LIC L W 7 9. IG TY-FIRST CONGR SS
n ct Makng appropratons for the support of the Government
for the fsca year endng une 30,19 1, and for other purposes.
Unted States of menca n Congress assembed,

Sec. 61 . (a) negotated contracts for procurement n e cess of
1,000 entered nto durng the current fsca year by or on behaf of the
Department of Defense (ncudng the Department of the rmy,
Department of the Navy, and Department of the r Force), and a
subcontracts thereunder n e cess of 1,000, are hereby made sub|ect to
the Renegotaton ct of 19 n the same manner and to the same
e tent as f such contracts and subcontracts were requred by such ct
to contan the renegotaton artce prescrbed n subsecton (a) of such
ct. ach contract and subcontract made sub|ect to the Renegota-
ton ct of 19 by ths secton sha contan an artce statng that t
s sub|ect to the Renegotaton ct of 19 . In determnng whether
the amounts receved or accrued to a contractor or subcontractor durng
hs fsca year from contracts and subcontracts sub|ect to the Renego-
taton ct of 19 amount n the aggregate to 100,000, recepts or
accruas from contracts and subcontracts made sub|ect to such ct by
ths secton sha be added to recepts or accruas from a other con-
tracts and subcontracts sub|ect to such ct.
(b) Notwthstandng any agreement to the contrary, the proft m-
taton provsons of the ct of March 27, 193 ( Stat. 03 , 0 ), as
amended and suppemented, sha not appy to any contract or sub-
contract whch s sub|ect to the Renegotaton ct of 19 .

Ths ct may be cted as the Genera ppropraton ct, 19 1 .
pproved September 6,19 0.
19 0-20-13
. R. 7 0. PU LIC L W 761, IG TY-FIRST CONGR SS
n ct To provde for the refund of certan estate ta es
Unted States of merca n Congress assembed, That secton 7(c)
of Pubc Law 37 , ghty-frst Congress, frst sesson, s hereby
(c) If refund or credt of any overpayment resutng from the appcaton of
subsectons (a) and (b) s prevented on the date of the enactment of ths ct,
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or wthn one year from such date, by the operaton of any aw or rue of aw
(other than secton 3700 of the Interna Revenue Code, reatng to cosng agree-
ments, and other than secton 37G1 of such Code, reatng to compromses), re-
fund or credt of such overpayment may, nevertheess, be made or aowed f
cam therefor s fed wthn one year from the date of the enactment of ths
ct. Ths subsecton sha not appy wth respect to a transfer of property n
case (1) the decedent retaned for hs fe or for any perod not ascertanabe
wthout reference to hs death or for any perod whch dd not n fact end
before hs death ( ) the possesson or en|oyment of, or the rght to the ncome
from, the property, or ( ) the rght, ether aone or n con|uncton wth any
person, to desgnate the persons who shoud possess or en|oy the property or the
ncome therefrom, and (2) refund or credt of any overpayment resutng from
the appcaton of subsectons (a) and (b) was prevented on or before anuary
16,19 9, by the operaton of any aw or rue of aw.
19 0-21-13 6
. R. 7 01. I U LIC L W 0 , IG TY-FIRST CONGR SS
n ct To amend secton 322 (b) of the Interna Revenue Code,
reatng to the transportaton of narcotc drugs.
Unted States of merca n Congress assembed, That secton 322 (b)
of tbe Interna Revenue Code s hereby amended to read as foows:
(b) Transportaton. cept as otherwse provded n ths subsecton, t
sha be unawfu for any person to send, shp, carry, or dever any of the afore-
sad drugs from any State or Terrtory or the Dstrct of Coumba, or any nsuar
possesson of the Unted States, nto any other State or Terrtory or the Dstrct
of Coumba, or any nsuar possesson of the Unted States. Nothng contaned
n ths subsecton sha appy
(1) to any person who sha have regstered and pad the speca ta as
requred by sectons 3220 and 3221;
(2) to common carrers engaged n transportng the aforesad drugs;
(3) to any empoyee actng wthn the scope of hs empoyment for any
person who sha have regstered and pad the speca ta as requred by
sectons 3220 and 3221, or to any contract carrer or other agent actng
wthn the scope of hs agency for such regstered person;
( ) to any person who sha dever any such drug whch has been
prescrbed or dspensed by a physcan, dentst, veternaran, or other pract-
toner requred to regster under the terms of ths part or secton 2 1(a)
and empoyed to prescrbe for the partcuar patent recevng such drug;
( ) to any person carryng any such drug whch has been obtaned by
the person from a regstered deaer n pursuance of a prescrpton, wrtten
for egtmate medca uses, ssued by a physcan, dentst, veternaran, or
other practtoner regstered under secton 3221 f tbe botte or other con-
taner n whch such drug s carred bears the name and regstry number
of the druggst, sera number of prescrpton, name and address of the
patent, and name, address, and regstry number of the person wrtng such
prescrpton;
(6) to any person carryng any such drug whch has been obtaned by
the person as a patent from a regstered physcan, dentst, or other pract-
toner n the course of hs professona practce f such drug s dspensed
to the patent for egtmate medca purposes; or
(7) to any Unted States, State, county, muncpa, dstrct. Terrtora,
or nsuar offcer or offca actng wthn the scope of hs offca dutes.
023 30 1 17
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19 0-22-13 70
. R. 9 90. PU LIC L W 31, IG TY-FIRST CONGR SS
n ct To protect the Unted States aganst certan un- mercan
and subversve actvtes by requrng regstraton of Communst
organzatons, and for other purposes.
Unted States of merca n Congress assembed, That ths ct may
be cted as the Interna Securty ct of 19 0 .

R GISTR TION ND NNU L R r-ORTS OF COMMUNIST ORG NIZ TIONS
Sec. 7. (a) ach Communst-acton organzaton (ncudng any
organzaton requred, by a fna order of the oard, to regster as a
Communst-acton organzaton) sha, wthn the tme specfed n
subsecton (c) of ths secton, regster wth the ttorney Genera, on
a form prescrbed by hm by reguatons, as a Communst-acton
organzaton.
(b) ach Communst-front organzaton (ncudng any organza-
ton requred, by a fna order of the oard, to regster as a Communst-
front organzaton) sha, wthn the tme specfed n subsecton (c)
of ths secton, regster wth the ttorney Genera, on a form pre-
scrbed by hm by reguatons, as a Communst-front organzaton.
(c) The regstraton requred by subsecton (a) or (b) sha be
made
(1) n the case of an organzaton whch s a Communst-acton
organzaton or a Communst-front organzaton on the date of
the enactment of ths tte, wthn thrty days after such date;
(2) n the case of an organzaton becomng a Communst-
acton organzaton or a Communst-front organzaton after the
date of the enactment of thn tte, wthn thrty days after such
organzaton becomes a Communst-acton organzaton or a
Communst-front organzaton, as the case may be; and
(3) n the case of an organzaton whch by a fna order of the
oard s requred to regster, wthn thrty days after such order
becomes fna.
(d) The regstraton made under subsecton (a) or (b) sha be
accompaned by a regstraton statement, to be prepared and fed n
such manner and form as the ttorney Genera sha by reguatons
prescrbe, contanng the foowng n maton:
(1) The name of the organzaton and the address of ts prnc-
pa offce.
(2) The name and ast-known address of each ndvdua who
s at the tme of fng of such regstraton statement, and of eac
ndvdua who was at any tme durng the perod of tweve fu
caendar months ne t precedng the fng of such statement, an
offcer of the organzaton, wth the desgnaton or tte of the
offce so hed, and wth a bref statement of the dutes and func-
tons of such ndvdua as such offcer.
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(3) n accountng, n such form and deta as the ttorney
Genera sha by reguatons prescrbe, of a moneys receved and
e pended (ncudng the sources from whch receved and the
purposes for whch e pended) by the organzaton durng the
perod of tweve fu caendar months ne t precedng the fng of
such statement.
( ) In the case of a Communst-acton organzaton, the name
and ast-known address of each ndvdua who was a member of
the organzaton at any tme durng the perod of tweve fu
caendar months precedng the fng of such statement.
( ) In the case of any offcer or member whose name s requred
to be shown n such statement, and who uses or has used or who
s or has been known by more than one name, each name whch
such offcer or member uses or has used or by whch he s known
or has been known.
(e) It sha be the duty of each organzaton regstered under ths
secton to fe wth the ttorney Genera on or before February 1 of the
year foowng the year n whch t regsters, and on or before Feb-
ruary 1 of each succeedng year, an annua report, prepared and fed
n such manner and form as the ttorney Genera sha by reguatons
prescrbe, contanng the same nformaton whch by subsecton (d)
s requred to be ncuded n a regstraton statement, e cept that the
nformaton requred wth respect to the tweve-month perod referred
to n paragraph (2), (3), or ( ) of such subsecton sha, n such
annua report, be gven wth respect to the caendar year precedng
the February 1 on or before whch such annua report must be fed.
(f) (1) It sha be the duty of each organzaton regstered under
ths secton to keep, n such manner and form as the ttorney Gen-
era sha by reguatons prescrbe, accurate records and accounts of
moneys receved and e pended (ncudng the sources from whch
receved and purposes for whch e pended) by such organzaton.
(2) It sha be the duty of each Communst-acton organzaton
regstered under ths secton to keep, n such manner and form as the
ttorney Genera sha by reguatons prescrbe, accurate records of
the names and addresses of the members of such organzaton and of
persons who actvey partcpate n the actvtes of such organzaton.
(g) It sha be the .duty of the ttorney Genera to send to each
ndvdua sted n any regstraton statement or annua report, fed
under ths secton, as an offcer or member of the organzaton n
respect of whch such regstraton statement or annua report was
fed, a notfcaton n wrtng that such ndvdua s so sted; and
such notfcaton sha be sent at the earest practcabe tme after
the fng of such regstraton statement or annua report. Upon
wrtten request of any ndvdua so notfed who denes that he hods
any offce or membershp (as the case may be) n such organzaton,
the ttorney Genera sha forthwth ntate and concude at the
earest practcabe tme an approprate nvestgaton to determne the
truth or fasty of such dena, and, f the ttorney Genera sha be
satsfed that such dena s correct, he sha thereupon strke from
such regstraton statement or annua report the name of such nd-
vdua. If the ttorney Genera sha decne or fa to strke the
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name of such ndvdua from such regstraton statement or annua
report wthn fve months after recept of such wrtten request, such,
ndvdua may fe wth the oard a petton for reef pursuant to
secton 13(b) of ths tte.
(h) In the case of faure on the part of any organzaton to regster
or to fe any regstraton statement or annua report as requred by
ths secton, t sha be the duty of the e ecutve offcer (or ndvdua
performng the ordnary and usua dutes of an e ecutve offcer) and
of the secretary (or ndvdua performng the ordnary and usua
dutes of a secretary) of such organzaton, and of such offcer or
offcers of such organzaton as the ttorney Genera sha by regu-
atons prescrbe, to regster for such organzaton, to fe such regs-
traton statement, or to fe such annua report, as the case may be.

D NI L OF T D DUCTIONS ND MPTIONS
Sec. 11. (a) Notwthstandng any other provson of aw, no deduc-
ton for Federa ncome-ta purposes sha be aowed n the ease of
a contrbuton to or for the use of any organzaton f at the tme of
the makng of such contrbuton (1) such organzaton s regstered
under secton 7, or (2) there s n effect a fna order of the oard
requrng such organzaton to regster under secton 7.
(b) No organzaton sha be entted to e empton from Federa
ncome ta , under secton 101 of the Interna Revenue Code, for any
ta abe year f at any tme durng such ta abe year (1) such organ-
zaton s regstered under secton 7, or (2) there s n effect a fna
order of the oard requrng such organzaton to regster under
secton 7.

In the ouse of Representatves, U. S.,
September 2 ,19 0.
The ouse of Representatves havng proceeded to reconsder the
b ( . R. 9 90) entted n ct to protect the Unted States aganst
certan un- mercan and subversve actvtes by requrng regstra-
ton of Communst organzatons, and for other purposes, returned
by the Presdent of the Unted States wth hs ob|ectons, to the
ouse of Representatves, n whch t orgnated, t was
Resoved, That the sad b pass, two-thrds of the ouse of Rep-
resentatves agreeng to pass the same.
ttest:
Raph R. Roberts,
Cerk.
I certfy that ths ct orgnated n the ouse of Representatves.
Raph R. Roberts,
Cerk.
In the Senate of the Unted States,
September 23 (egsatve day, September 22), 19 0.
The Senate havng proceeded to reconsder the b ( . R. 9 90)
entted n ct to protect the Unted States aganst certan un-
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mercan and subversve actvtes by requrng regstraton of
Communst organzatons, and for other purposes , returned by the
Presdent of the Unted States wth hs ob|ectons, to the ouse of
Representatves, n whch t orgnated, and passed by the ouse of
Representatves on reconsderaton of the same, t was
Resoved, That the sad b pass, two-thrds of the Senators present
havng voted n the affrmatve.
ttest:
Lf.se L. rrn| ,
Secretary.
19 0-22-13 67
. R. 226. PU LIC L W 2. IG TY-FIRST CONGR SS
n ct To amend paragraph 207 of the Tarff ct of 1930 and
secton 3 2 (a) of the Interna Revenue Code.
Unted States of merca n Congress assembed,
Sec. 2. (a) The ast sentence of secton 3 2 (a) of the Interna
Revenue Code (reatng to the e empton of certan umber from the
mport ta ) s hereby amended by strkng out and Western whte
spruce and nsertng n eu thereof Western whte spruce, and
ngemann spruce .
(b) The amendment made by ths secton sha be appcabe wth
respect to umber entered for consumpton or wthdrawn from ware-
house for consumpton on or after the tenth day foowng the date of
19 0-22-13 6
. R. 327. PU LIC L W S69, IG TY-FIRST CONGR SS
n ct To contnue unt the cose of une 30,19 1, the suspenson
of dutes and mport ta es on meta scrap, and for other purposes.
Unted States of merca n Congress assembed, That the ct of
March 13,19 2 (ch. 1 0, 6 Stat. 171), as amended, s hereby amended
t c read as foows:
Sec. 1. (a) No dutes or mport ta es sha be eved, coected, or payabe
under the Tarff ct of 1930, as amended, or under secton 3 2 of the Interna
evenue Code wth respect to meta scrap, or reayng and rerong ras.
(b) The word scrap , as used n ths ct, sha mean a ferrous and non-
ferrous materas and artces, of whch ferrous or nonferrous meta s the
component matera of chef vaue, whch are second-hand or waste or refuse,
or are obsoete, defectve or damaged, and whch are ft ony to be
remanufactured.
Sec. 2. rtces of whch meta s the component matera of chef vaue, other
than ores or concentrates or crude meta, mported to be used n remanufacture
by metng, sha be accorded entry free of duty and mport ta , upon submsson
of proof, under such reguaton.1- and wthn such tme ns the Secretary of the
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Treasury may prescrbe, that they have been used n remanufacture by metng:
Provded, however, That nothng contaned n the provsons of ths secton sha
be construed to mt or restrct the e empton granted by secton 1 of ths
ct.
Sec. 2. The amendment made by ths ct sha be effectve as to
merchandse entered, or wthdrawn from warehouse, for consumpton
on or after the day foowng the date of the enactment of ths ct
and before the cose of une 30, 19 1. It sha aso be effectve as to
merchandse entered, or wthdrawn from warehouse, for consumpton
before the perod specfed where the qudaton of the entry or wth-
drawa coverng the merchandse, or the e acton or decson reatng
to the rate of duty appcabe to the merchandse, has not become fna
by reason of secton 1 , Tarff ct of 1930.
pproved September 30,19 0.
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COMMITT R PORTS
19 0-21-13
SOCI L S CURITY CT M NDM NTS OF 19 9 19 0
ouse of Representatves Report No. 1300, ghty-frst Congress, Frst Sesson
ugust 22, 19 9
Mr. Doughton, from the Commttee on Ways and Means, submtted the
foowng report to accompany . R. 0000 :
The Commttee on Ways and Means, to whom was referred the b ( . R.
6000) to e tend and mprove the Federa od-age and survvors nsurance system,
to amend the pubc assstance and chd wefare provsons of the Soca Securty
ct, and for other purposes, havng consdered the same, report fnvoraby thereon
wthout amendment and recommend that the b do pass.
Introducton
. purpose and scope op the b
The Presdent advsed the Congress n hs message on the state of the Unon
on anuary , 19 9:
The present coverage of the soca securty aws s atogether nadequate, and
beneft payments are too ow. One-thrd of our workers are not covered. Those
who receve od-age and survvors nsurance benefts receve an average payment
of ony 23 a month. Many others who cannot work because they are physcay
dsabed are eft to the mercy of charty. We shoud e pand our soca securty
program, both as to sze of benefts and e tent of coverage, aganst the economc
hazards due to unempoyment, od age, sckness, and dsabty.

II. C GROUND ND ISTORY OF L GISL TION
. Soca Securty ct of 19S .
Ths ct provded a system of od-age nsurance for persons workng n
ndustry and commerce as a ong-run safeguard aganst the occurrence of od-
age dependency. To hep aevate mmedate needs, Federa grants were pro-
vded to States for three forms of pubc assstance: For the needy aged, the
needy bnd, and dependent chdren. The od-age nsurance pan provded
monthy benefts (begnnng n 19 2) ony for the nsured worker n hs od
age and aso ump-sum death benefts. ta was mposed on empoyers and
empoyees at a rate of 1 percent each for 1937-39, 1 percent for 19 0- 2, 2
percent for 19 3- , 2 percent for 19 6- , and 3 percent thereafter. n od-age
reserve account was created, to whch Congress annuay approprated funds n
amounts determned on a reserve bass n accordance wth accepted actuara
prncpes ; n actua practce these appropratons cosey appro mated the ta
recepts ess admnstratve costs whch were met out of the genera treasury.
. 1039 revson of the Soca Securty ct.
The amendments consderaby broadened the protecton of the od-age nsur-
ance system. Suppementary benefts were provded for the egbe wfe and
chdren of a retred worker and for the survvng wdow and chdren (n
certan nstances aso for survvng depeudent parents). The begnnng date for
payment of monthy benefts was advanced to anuary 19 0. enefts payabe
n the eary years were ncreased, whe benefts were reduced for unmarred
workers wth hgh earnngs who woud retre after many years of coverage.
(2 )
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Ths was accompshed by basng the benefts on average covered wages rather
than on tota covered wages. The ta rate on empoyers and empoyees was
hed at 1 percent each through 19 2, and was then to foow the orgna schedue.
Further, t was provded that an amount equa to the ta coectons woud be
approprated to the fund and the requrement as to annua appropratons bens
determned on a reserve bass n accordance wth accepted actuara prncpes
was removed.

C. Legsaton durng 19 0- .
In 19 3 and n subsequent years egsaton was passed to mantan the od-
age and survvors nsurance contrbuton rate at 1 percent each on empoyers
and empoyees, rather than ettng t rse as schedued n the 1939 amendments.
In 19 3 the aw was changed to authorze appropraton from genera revenues to
the trust fund of such addtona sums as may be requred to fnance the benefts
and payments under the nsurance program (to date no appropratons have
been made under ths provson).
D. The 19 6 amendments.
Provson was made for survvors nsurance benefts n respect to Word
War II veterans who de wthn 3 years of dscharge from the armed forces,
provded that such survvors are not entted to pensons under veterans aws.
The amendments aso froze the od-age and survvors nsurance contrbuton rate
at 1 percent for 19 7 and made a number of technca changes whch sghty
berazed benefts and smpfed certan aspects of the program.
. mendments after 19 6.
In 19 7 the od-age and survvors nsurance contrbuton rate was agan frozen
at 1 percent effectve through 19 9; the rate was to be /| percent n 19: 0- 1
and 2 percent thereafter. The ncreased grants for pubc assstance provded n
the 19 0 amendments, schedued to e pre n .December, were e tended through
une 19 0.
In 19 S Congress amended the Soca Securty ct by passng two bs over
the Presdent s veto. Pubc Law 92, ghteth Congress, e cuded certan
newspaper vendors from the coverage of od-age and survvors nsurance. Pubc
Law C 2. ghteth Congress, amended the defnton of empoyee so as to
deprve of coverage those who were not empoyees under the usua common-aw
rues appcabe n determnng empoyer-empoyee reatonshp.
F. earngs of 19 9.
Your commttee has attentvey foowed the operaton of the soca securty
program throughout the years and had a thorough study prepared by a speca
staff of e perts n 19 . It has had the advantage of the studes of speca com-
mttees composed of outstandng ctzens such as the Soca Securty dvsory
Counc of the Senate Commttee on Fnance whch submtted an e tensve and
e haustve report and recommendatons n 19 . It has studed the annua
recommendatons of the Soca Securty dmnstraton. It has conducted
e tended pubc hearngs on severa occasons.
Ths year your commttee conducted pubc hearngs on the pubc assstance
and wefare features of soca securty from February 2 through March 23.
and on od-age, survvors, and dsabty nsurance from March 2 through
pr 27. t the hearngs on pubc assstance and pubc wefare, ora test-
mony was gven by persons, ncudng 1 Members of Congress, 22 offcas of
State and oca wefare organzatons, Federa offcas, and other persons,
most of whom represented speca groups nterested n wefare actvtes. t
the hearngs on od-age, survvors, and dsabty nsurance ttfe commttee heard
10 ndvduas who testfed n person, among whom were Members of Congress,
9 Federa offcas, 7 offcas of State and oca governments, 0 representatves of
empoyee and abor organzatons. 30 empoyer representatves, and 2 other
persons representng themseves or varous organzed groups of ctzens. In
addton to the drect testmony, severa wtnesses fed suppementary state-
ments at both hearngs, and a number of persons who were unabe to appear before
your commttee paced statements n the record. In a, your commttee took
1,079 pages of testmony on pubc assstance and pubc wefare and 1, 71 pages
on od-age, survvors, and dsabty nsurance.
Your commttee has hed e ecutve sessons over a perod of 16 weeks and has
panstakngy consdered the soca securty program both as to the operaton
of specfc proposas and the effect of the program on the economy. Your com-
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mttee s convnced that a sound and effectve soca-ns-.rance program s
essenta to the smooth functonng of our democratc socety.
III. SUMM RY OF PRINCIP L PRO ISIONS OF T ILL
. Od-age and survvors nsurance.
1. tenson of coverage. Od-age and survvors nsurance coverage woud be
e tended to add appro matey 11,000,000 new persons to the 3 ,000,000 persons
now covered durng an average week. The groups added to the system under the
b are as foows:
(a) Nonfarm sef-empoyed persons (other than physcans, awyers, dentsts,
osteopaths, veternarans, chropractors, optometrsts. ChrstnT Scence prac-
ttoners, pubshers, and aeronautca, chemca, cv, eectrca, mechanca,
metaurgca, or mnng engneers) whose net earnngs from sef-empoyment
tota 100 or more per year (about . mon).
(6) mpoyees of State and oca governments, f the State enters nto a
vountary compact wth the Federa Securty gency (e cept for certan transt
workers who are covered compusory), provded that such empoyees who are
under an e stng retrement system sha be covered ony f such empoyees and
adut benefcares of the retrement system sha so eect by a two-thrds ma-
|orty (about 3. mon).
(c) Domestc servants n a prvate home (but not f empoyed on a farm
operated for proft), whose cash earnngs are 2 or more per quarter, and who
work 26 days or more per quarter, for one empoyer (about 9 0,000).
(d) mpoyees of nonproft nsttutons other than mnsters and members of
regous orders, but, f the empoyer does not eect vountary to pay the
empoyer s ta , the empoyee woud receve credt wth respect to ony one-haf
hs wages for the empoyee s ta whch s compusory mposed upon hm (about
600,000).
(e) grcutura processng workers off the farm and certan other types of
essentay commerca or ndustra border-ne agrcutura abor; aso em-
poyees of nonproft agrcutura and hortcutura organzatons (about 200,000).
(f) Federa empoyees not covered under any retrement system e cept
temporary workers, eectve offcas, doar-a-year empoyees, etc.; empoyees
of farm oan and producton credt organzatons (about 100,000).
(g) mercans empoyed by mercan empoyer outsde the Unted States
and empoyees on mercan arcraft outsde the Unted States (about 1 0,000).
(ft) mpoyees and sef-empoyed n the rgn Isands (about ,000) and, f
requested by the egsature, n Puerto Rco (about 2 0,000).
() Saesmen, and certan other empoyees, who were deprved of status as
empoyees by Pubc Law 6 2, ghteth Congress, the so-caed Gearhart resou-
ton (about 00,000 to 7 0,000).

D. Fnancng of od-age, survvors, and dsabty nsurance.
1. Ta abe wage base. The tota annua earnngs on whch benefts woud be
computed and contrbutons pad s rased from 3,000 to 3,600.
2. Contrbuton schedue. mpoyers and empoyees woud contnue to share
equay, wth the rate for each beng as foow (snce 1936 the rate has been
1 percent) :
Caendar years: Rate,
-O O percent
19 0
19 1- 9 _ 2
1060-6 ::::: 2y,
196 -69 z
1970 and after 3|
The sef-empoyed who are covered woud pay 1 tmes the above rates.

Or.n- G and Survvors Insurance
I . T NSION OF OLD- G ND SUR I ORS INSUR NC CO R G
. Genera.
The od-age and survvors nsurance system now covers some 3 ,000,000 workers
dU 2S nthe oonrse of an average week. The b woud e tend coverage to about
11,000,000 of the 2 ,000,000 workers not now covered. Specfcay, coverage
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woud be e tended to sef-empoyed persons other than farmers and certan pro-
fessona groups, empoyees of State and oca governments, domestc servants
empoyed on a reguar bass n otner than farm homes, empoyees of nonproft
organzatons, and certan other smaer groups that w be descrbed hereafter.
e b woud not e tend coverage to persons engaged n agrcuture (whether
as sef-empoyed ndvduas or as empoyees), Federa empoyees covered under
retrement systems, members of the rmed Forces, raroad empoyees, the sef-
empoyed professona groups mentoned prevousy, and certan other smaer
groups of workers.
Your commttee has gven e tensve consderaton to the advsabty of e tend-
ng coverage to agrcutura empoyees, to sef-empoyed farm operators, and to
other sef-empoyed groups e cuded under the b. owever, your commttee
beeves that further study must be gven to the speca probems nvoved n the
coverage of these groups.
. Specfc coverage groups added.
1. The nonfarm sef-empoyed. Durng the hearngs on the 1939 amendments
to the Soca Securty ct, testmony vas presented to the effect that coverage
of sef-empoyed persons appeared to nvove dffcut probems of admnstraton
and that t shoud therefore be postponed unt the admnstratve agences had
further e perence wth the coverage of empoyees n ndustry and commerce.
Snce that tme, practcabe admnstratve procedures for coverage of the sef-
empoyed have been deveoped. fter a carefu consderaton of the proposed
methods for e tendng coverage to the nonfarm sef-empoyed, your commttee
eeves that the nsurance system shoud now be e tended to ths group, e cept
for certan professona casses.
Under the b the coverage of the sef-empoyed Is compusory. Your com-
mttee gave thorough consderaton to the possbty of coverage on a vountary
bass, hut there are fundamenta ob|ectons to that approach. The hstory of
vountary soca Insurance In the Unted States and n other countres ndcates
defntey that ony a very sma proporton of a egbe ndvduas actuay
eect to partcpate. Moreover, those who do eect are usuay not persons of
beow-average ncome who are n the greatest need of such protecton. In add-
ton, vountary coverage woud probaby attract amost e cusvey peope who
are aready aged and others who can foresee a arge possbe return for ther
contrbutons; as a resut, the program woud be faced wth adverse seecton of
rsks, and consequenty there woud be a serous dran on the trust fund.
The tota number of nonfarm sef-empoyed persons who woud be covered
durng an average week fs about . mon. etween 3 and 0 percent of the
tota number are storekeepers and other retaers, ncudng, for e ampe, pro-
pretors of unncorporated shoe stores, cothng stores, grocery stores, restaurants,
and fng statons. ppro matey 20 to 2. percent are propretors of such
servce estabshments as hotes, boardng houses, garages, aundres, barber
shops, and paces of amusement. From 12 to 1 percent are engaged n the
constructon Industry, ncudng sma-scae pumbng, pantng, and eectrca
contractors. The remanng 2 to 30 percent s made up of whoesae merchants,
agents and brokers, sma-scae manufacturers, Independent ta cab owners, and
propretors of rea estate and nsurance enterprses. The professona groups
whch are e cuded namey, doctors, dentsts, osteopaths, chropractors. Chrs-
tan Scentst practtoners, optometrsts, veternarans, awyers, pubshers, and
aeronautca, chemca, cv, eectrca, mechanca, metaurgca, and mnng
engneers number appro matey 00.000 persons.
n ndvdua w report hs sef-empoyment ncome by transferrng the
nformaton from hs Income ta return to a smpe suppementary form, or an
addtona tem on the ncome ta return mght be provded. Uness hs net earn-
ngs from sef-empoyment amount to 00 or more n any gven year, he pays no
sef-empoyment ta on such ncome and receves no credt toward od-age, sur-
vvors, and dsabty nsurance benefts.
If wages are earned In covered empoyment (upon whch empoyment ta
Is payabe), such wages are deducted from the 3,600 annua ma mum n deter-
mnng the amount of net earnngs from sef-empoyment that s ta abe and
credtabe In any year. Thus, as far as practcabe, sef-empoyment Income s
taken nto account for beneft purposes to the same e tent as wages, but Income
from casua sef-empoyment woud not be ta ed or credted.
2. mpoyees of State and oca governments. State and oca governmenta
unts n ths country empoy about 3. mon workers n an average week.
cept for certan transt-company empoyees, coverage of empoyees of State
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and oca governments woud be effected ony by a vountary compact between
a State and the Federa Securty dmnstrator.
Tbe vountary agreements are made wth respect to defned coverage groups.
In genera, a coverage group comprses a the empoyees of a State or of a
potca subdvson of a State. For any group to be covered, a of the em-
poyees n that group (wth certan possbe specfed e ceptons such as part-
tme workers or eected offcas) woud have to be covered. Ths s necessary
n order to avod adverse seecton. Members of an e stng retrement system
woud be treated as a separate coverage group, and coverage coud not be
e tended to them uness the empoyees and benefcares so eect by a two-thrds
ma|orty vote n a wrtten referendum, and t s ntended that ths be accom-
pshed by secret baot. The provson for a referendum s ncuded so as to
assure those covered by adequate e stng systems (such as fremen, pocemen,
and teachers) that adequate safeguards are present so that ther present penson
pans w not be destroyed. Many empoyees n prvate ndustry have the pro-
tecton of both the soca nsurance system and suppementary prvate pans. The
Federa program may provde types of protecton not avaabe under a State or
oca pan and, n a nstances, can serve as a basc protecton to empoyees who
shft between pubc and prvate empoyment.
Provsons are aso ncuded for the ordery termnaton of Federa-State
compacts. In order to safeguard the Interest of a partes concerned the States
woud not be aowed to termnate unt the agreement had been n force for
years, and then woud have to gve advance notce of at east 2 years. In order
to prevent n-and-out movements dsadvantageous to the fnancng of the pro-
gram, f coverage of a partcuar group s termnated, that group can never
be covered agan.
If a State fas to pay the requred contrbutons whe a compact s n effect,
the Federa Government may deduct such amount pus nterest from payments
otherwse due to the States under other ttes of the Soca Securty ct (chefy
Federa grants for pubc assstance).
Compusory coverage has been provded for certan empoyees of prvatey
owned transt companes taken over by governmenta unts. Such empoyees
are frequenty n an unfortunate poston snce ther coverage s termnated
under present aw when the company becomes pubcy owned, even though ther
dutes may reman the same. Where the transt company was acqured by a
governmenta unt after 1936 but before 19 0, persons workng for such company
on the date when t was taken over woud be covered, begnnng n 19 0, uness
the empoyng governmenta unt eects aganst such coverage wthn a specfed
perod. If a transt company s acqured by a governmenta unt after 19 9,
coverage of those empoyees taken over from the prvate empoyer woud contnue
to be compusory.
3. mpoyees n domestc servce. From the begnnng of the nsurance pro-
gram, t has been recognzed that domestc workers need the protecton of soca
nsurance as much as any other occupatona group. Your commttee beeves
that reguary empoyed domestc workers can now be covered wthout undue
admnstratve dffcutes. Consstent wth the fact that coverage s not e -
tended to farm workers or farm operators, domestc workers n prvate homes on
farms operated for proft are not covered. In order for domestc servants n
other prvate homes to be covered, such workers must be pad 2 or more n
cash wages by the partcuar empoyer durng a caendar quarter and, n add-
ton, must be empoyed by such empoyer for at east 2G days durng such quarter
(or ese have been empoyed for at east 26 days by ths empoyer n the prevous
caendar quarter). Under ths defnton of a reguar worker, most domestc
empoyees who are hred on a weeky or monthy bass w be covered, whe
most part-tme workers, and a casua or ntermttent workers, w be e cuded
from coverage.
The b aso e tends coverage to nonstudent domestc workers of oca coege
cubs, fraterntes, and sorortes, whose remuneraton s at east 100 n a caen-
dar quarter. Students performng domestc work for such empoyers w
contnue to be e cuded from coverage.
There are certan types of nonbusness servces whch are not, strcty speakng,
domestc servce n prvate homes but whch are dffcut to dstngush from
domestc servce. To factate coverage determnatons, the same requrements
for coverage are apped to both domestc and other nonbusness servce, namey,
cash remuneraton of at east 2 n a caendar quarter and empoyment n at
east 26 days of such quarter.
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It Is dffcut to estmate what the effects of the restrctons on coverage of
domestc servce w have on the tota number of domestc workers who are
covered, but t s beeved that there w be about 9 0,000 covered.
. mpoyees of nonproft organzatons. The b woud cover a empoyees
of regous, chartabe, and other nonproft organzatons e cept members of the
cergy and regous orders. bout 600,000 such empoyees woud be covered
n the course of an average week. Such organzatons have e pressed amost
unanmousy a desre for coverage provded that ther tradtona ta -e empt
status woud not thereby be threatened. Under the b, ther e empt status
woud be safeguarded. though the reguar compusory empoyee contrbuton
of the program woud be mposed on ther empoyees, e empton from the em-
poyer ta of the program woud be contnued for nonproft organzatons uness
the organzaton eects to pay the empoyer ta by wavng the ta e empton.
In such case, the empoyees woud be gven fu credt toward benefts for wages
receved. Otherwse, ony one-haf of the empoyee s wages woud be credted
toward benefts.
waver of ta e empton woud be appcabe to a empoyees and coud not
be termnated by the empoyer unt t had been n effect for at east years, and
then the empoyer woud have to gve 2 years advance notce. Statements by
nonproft organzatons ndcate that the great ma|orty of such organzatons
woud eect to pay the empoyer contrbuton, and so provde fu nsurance protec-
ton for ther empoyees..
The b woud contnue to e cude servce performed for nomna amounts In
the empoy of ta -e empt nonproft organzatons, servce performed by student
nurses and nternes, and servce performed by students n the empoy of coeges
and unverstes. These e cusons smpfy admnstraton wthout deprvng
any sgnfcant number of peope of needed protecton. On the other hand,
coverage woud be e tended, e cept where the servces are performed for nomna
amounts, to certan rtuastc or dues-coectng servces for fraterna benefcary
socetes, servce for agrcutura and hortcutura organzatons, and for voun-
tary empoyees benefcary assocatons, and certnn servces performed by
students n the empoy of ta -e empt organzatons.
. order-ne agrcutura abor. Certan types of servces now e cuded as
agrcutura are essentay commerca and ndustra. The b woud modfy
the defnton of agrcutura abor to provde nsurance protecton for nd-
vduas performng such servces. It s estmated that ths change woud e tend
coverage to about 200,000 persons n the course of an average week.
Coverage has been e tended under ths new defnton to servces performed
off the farm n connecton wth the rasng or harvestng of mushrooms, the
hatchng of poutry, and the operaton or mantenance of rrgaton dtches, and
to servces performed n the processng of mape sap nto mape srup or mape
sugar (as dstngushed from the gatherng of mape sap).
Coverage woud aso be provded for ndvduas performng post-harvestng
servces n the empoy of commerca handers of frut and vegetabes, or n the
empoy of farmers cooperatves, rrespectve of the agrcutura commodty n
connecton wth whch the servces are performed.
6. Federa cvan empoyees not covered under any retrement system. The
b woud e tend coverage to about 100,000 cvan empoyees of the Federa
Government and ts nstrumentates n the course of an average week. m-
poyees who are now covered by a federay estabshed retrement system woud
not be Incuded. Certnn empoyees who are not under retrement systems
woud aso reman e cuded; they are, n genera, empoyees who are temporary
workers or whose empoyment w eventuay be covered under some other Fed-
era beneft system. The purpose of the e cusons s to avod the nusance of
reportng nconsequenta amounts for whch no sgnfcant beneft rghts woud
be gven. Members of the egsatve branch and eected offcas n the e ecu-
tve branch of the Government woud aso be e cuded.
7. mercans empoyed outsde the Unted States. Durng the course of an
average week abont 1 0,000 mercan ctzens work outsde the Unted States
for mercan empoyers, and the number s ncreasng. ecause od-age and
survvors nsurance coverage does not, n genera, e tend beyond the geographca
boundares of the Unted States, the nsurance protecton of persons who take
such |obs s nterrupted. The b woud e tend coverage to ths group.
The b woud aso e tend coverage to empoyment performed on mercan
arcraft outsde the Unted States, under the condtons whch now appy to
martme servce performed outsde the Unted States.
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Puerto Rco an,1 the rgn Isands. y. e tendng the defnton of the
terms Stnte and Unted States, coverage woud be e tended to ncude serv-
ces performed n the rgn Isands of the Unted States and, f requested by
the egsature, n Puerto Itco. bout ,000 persons woud be covered n the
rgn Isands and about 2r 0,000 c Puerto ISco durng the course of an aver-
age week. These areas of our mercan economy are among those most n need
of the soca nsurance system. ecause average earnngs are reatvey ow,
workers there are generay unabe to provde for ther own future securty.
I espte ow wages and some rreguarty of empoyment, t appears that most
such workers n covered occupatons woud be abe to quafy for nsurance
benefts.
9. Defnton of empoyee. The defnton of empoyee used n the b has
two sgnfcant resuts. Frst t provdes coverage as empoyees for from 00,000
to 7 0,000 persons who are not covered under the defnton n the present aw.
Secondy, by provdng n more precse defnton of the term than that n the
present aw t woud go a ong way toward carfyng the coverage status of nd-
vduas n the twght zone between empoyment and sef-empoyment.
The new defnton, whch s effectve wth respect to servces performed after
19 9, has four parts. The frst part provdes (as does e stng aw) that an
offcer of a corporaton s an empoyee of the corporaton. The second provdes
that the usua common-aw rues are to be used to determne whether an nd-
vdua s an empoyee. Thus a persons who have been determned to be em-
poyees under e stng aw w contnue to be consdered empoyees.
The second part of the defnton aso provdes that fu force and effect be
gven to a wrtten contract e pressy rectng that the person for whom the
servce s performed sha have compete contro over the performance of such
servce and that the ndvdua, n the performance of such servce (ether aone
or as a member of a group), s the empoyee of such person. The defnton does
not, however, gve force or effect tc a contract whch e pressy provdes that the
person for whom the servces are performed sha not have the rght to contro
and drect the ndvdua who performs the servce or whch provdes that such
ndvdua s not the empoyee of such person. In the atter type of contract
a the facts and crcumstances of the partcuar case must be consdered to
determne whether such ndvdua s an empoyee ether under the usua common-
aw rues or under the other tests of the defnton.
The usua common-aw rues for determnng the empoyer-empoyee reaton-
shp fa short of coverng certan ndvduas who shoud be covered as em-
poyees for the purposes of the od-age, survvors, and dsabty nsurance
program. The thrd and fourth parts of the defnton of empoyee correct ths
defcency n the e stng aw by e tendng coverage to ndvduas who, athough
not empoyees under the usua common-aw rues, occupy a status not materay
dfferent from those who are empoyees under such rues.
The thrd part of the defnton e tends coverage to ndvduas who perform
servces, under prescrbed crcumstances, n seven occupatona groups. Your
commttee has desgnated these groups to assure the coverage of ndvduas
who fa wthn them even though such ndvduas may be covered as empoyees
under other tests of the defnton. If such ndvduas are not cassfabe as
empoyees under ths part of the defnton, they may nevertheess be empoyees
under an appcaton of one of the other parts.
Under the thrd part of the defnton an ndvdua who performs servces for
remuneraton for any person n an occupaton fang wthn one of the enumer-
ated groups s an empoyee f hs contract of servce contempates that sub-
stantay a of such servces (other-than n the case of a mnng essee) are to
be performed personay by such ndvdua, uness (1) such ndvdua has a
substanta nvestment (other than the nvestment by a saesman n the factes
for transportaton) n the factes of the trade, occupaton, busness, or pro-
fesson, wth respect to whch the servces are performed, or (2) the servces are
n the nature of a snge transacton not part of a contnung reatonshp wth
the person for whom the servces are-performed.
Your commttee beeves that, whe paragraph (3) of the defnton w prove
hepfu to empoyers and empoyees as we as to the admnstratve agences n
dentfyng certan groups of ndvduas who shoud be covered as empoyees,
such paragraph n tsef s nadequate to correct the defcences n the usua
common-aw rues. The nfnte and subte varatons n servce reatonshps
wthn our economy make t mpractcabe to desgnate n the statute by occupa-
tona abe a the groups whch shoud have empoyee coverage. ccordngy,
your commttee has added paragraph ( ) to the defnton of empoyee.
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The fourth test of empoyee status dfferentates between ndvduas who are
empoyees and those who are not empoyees on the bass of factua consderatons
and not on the bass of technca ega consderatons. Under ths test the status
of an ndvdua n the performance of servce for any person for remuneraton
s determned from the combned effect of the foowng enumerated factors: (1)
Contro over the ndvdua; (2) permanency of the reatonshp; (3) reguarty
and frequency of performance of the servce; ( ) Integraton of the ndvdua s
work n the busness to whch he renders servce; ( ) ack of sk requred of
the ndvdua; (6) ack of Investment by the ndvdua n factes for work;
and (7) ack of opportuntes of the ndvdua for proft or oss.
If the combned effect of a such factors ndcates that the ndvdua s per-
formng the servce n the pursut of hs own busness he w not be consdered
an empoyee under ths test of the defnton.
ampes of the way In whch the fourth test of the defnton appes n
partcuar stuatons are gven n the secton-by-secton anayss of the b.

Cost op Insubance Pkograms
. actuara cost estmates and fnancng of od-age. survvors.
ND DIS ILITY INSUR NC
stmates of the future costs of the od-age, survvors, and dsabty nsur-
ance program are effected by toany factors that are dffcut to determne.
ccordngy the assumptons used may dffer wdey and yet be reasonabe. The
cost estmates because of the tme eement necessary have been made on a
premnary bass. It woud be desrabe to present the cost estmates as a range
tc ndcate the severa resuts that mght occur n the future dependng upon
how condtons and e perence occur. owever, under the crcumstances the
estmates have been deveoped on an ntermedate bass whch s, of course,
sub|ect to a sgnfcant range. Your commttee recognzes and, n fact, wshes
to stress the dffcutes nvoved n estmatng the ong-range costs of the system.
ecause of numerous factors such as the agng of the tota popuaton of the
country and the nherent sow but steady growth of the beneft ro n any
retrement program, beneft payments may be e pected to ncrease contnuousy
for at east the ne t 0 years.
In genera, the costs are shown as a percentage of covered payro. It Is
beeved that ths s the best measure of the fnanca cost of the program.
Doar fgures taken aone are mseadng because, for e ampe, e tenson of
coverage and rasng the wage base w ncrease not ony the outgo but aso the
Income of the system.
Your commttee has very carefuy consdered the probems of cost n de-
termnng the beneft provsons recommended. so your commttee s frmy
of the beef that the od-age, survvors, and dsabty nsurance program shoud
be on a competey sef-supportng bass. ccordngy, the b emnates the
provson added n 19 3 authorzng appropratons to the program from genera
revenues. t the same tme, your commttee has recommended a ta schedue
whch t beeves w make the system sef-supportng (or n other words,
actuaray sound) as neary as can be foreseen under present crcumstances.
Future e perence may dffer from the estmates so that ths ta schedue, at
east n the dstant future, may have to be modfed sghty ether upward or
downward. Ths may ready be determned by future Congresses after the
revsed program has been n operaton for a decade or two.
The ta schedue recommended s as foows:
Caendar year
mpoyee
mpoyer
Sef-
empoyed
Percent
Percent
1 2
S
1
19 1- 9
2
3
M
OfO-f ...
2
2
196 -69. .
3
S

3M
Ths ta schedue has been determned on the bass of the foowng actuara
cost fgures. Tabe 6 gves an estmate of the eve-premum cost of the pro-
gram recommended by your commttee, tracng through the Increase n cost
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263
over the present program accordng to the ma|or types of changes proposed.
eve-premum cost may be defned as the contrbuton rate whch, f charged
from 19 0 on, woud meet a beneft payments after 19 9 (ncudng the beneft
payments to those on the ro pror to 19 0 and the ncreases whch they receve
through the converson tabe). Ts eve-premum rate woud produce a very
consderabe amount of e cess ncome n the eary years whch. Invested at
nterest, woud hep consderaby In meetng the hgher beneft outgo utmatey.
It shoud be emphaszed that your commttee does not recommend that the
system be fnanced by a hgh, eve ta rate from 19 0 on but rather has recom-
mended an ncreasng schedue, whch of necessty w utmatey have to
rse hgher than the eve-premum rate. Nonetheess, ths graded ta schedue
w produce a consderabe e cess of ncome over outgo for many years so that
a szabe trust fund w arse; ths fund w be nvested n Government secur-
tes (|ust as s much of the reserves of fe Insurance companes and banks,
and as s aso the case for the trust funds of the cv servce retrement, raroad
retrement, natona servce fe nsurance, and Unted States Government fe
nsurance systems), and the resutng Interest ncome w hep to bear part of
the ncreased beneft costs of the future. For comparng the costs of varous
possbe aternatve pans and provsons, the use of eve-premum rates s hepfu
as a convenent yardstck.
Tabe 6. Premnary estmate of eve-premum costs as percentage of payro,
by type of change
Percent
Cost of benefts of present aw .
ffect of proposed changes In b:
eneft formua 1-3
(a) New beneft percentages ncudng mnmum
and ma mum beneft provsons 3.10
(6) New average wage bass and contnuaton
factor 6
(c) Reducton In ncrement . 0
(d) Increase n wage base to 3,000 .30
Lberazed egbty condtons .0
Lberazed work cause .20
Revsed ump-sum death payment .0
ddtona survvor benefts 1 10
tenson of coverage 0
Permanent and tota dsabty benefts . 0
Net tota for a changes 1- 7
Cost of benefts of b - 20
dmnstratve costs e pressed as eve-premum . 1
Interest on present trust fund as eve-premum . 20
Net eve-premum cost of b 6.1
1 gher rate for frst survvor chd nnd for parents, and more bera egbty cond-
tons for determnng chd dependency on marred women workers.
Note. These fgures are premnary and sub|ect to change.- They represent an Inter-
medate estmate whch s sub|ect to a sgnfcant range because of the possbe varaton
n the cost factors nvoved n the future. The computatons are based on a compound
nterest rate of 2 percent per annum. The order n whch these varous changes are con-
sdered n the tabe affects how much of the ncrease n cost s attrbuted to a specfc
eement.
s w be seen from tabe C, the eve-premum cost of the present aw takng
nto account 2 percent nterest s about percent of payro; ths s con-
sderaby ower than the cost was estmated to be when the program was revsed
n 1939, argey because of the rse n the wage eve whch has occurred n the
past decade (hgher wages resut n ower cost as a percentage of payro because
of the weghted nature of the beneft formua). Whe the ncrease n benefts
for those now on the ro w resut n a consderabe outgo from the trust fund
over the ne t 10 to 1 years, the cost ncrease due to ths s ony a sma fracton
of the reducton In cost of the over-a program resutng from the hgher genera
wage eve.
If In the future the wage eve shoud be consderaby above that whch now
prevas, and If the benefts for those on the ro were at some tme ad|usted
upward on ths account, the ncreased outgo resutng w, n the same fashon,
be far more than offset. The cost estmates, however, have not taken nto
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account the possbty of a rse n wage eves, as has consstenty occurred over
the past hstory of ths country. If such an assumpton were used n the cost
estmates, the cost reatve to payro woud naturay be ower.
Under the beneft provsons of the b the eve-premum cost s ncreased to
amost 6 L percent of payro. owever, ths fgure must be ad|usted sghty
for two factors, namey, the admnstratve costs, whch are charged drecty
to the trust fund, and the nterest earnngs on the present trust fund, whch s
now about 12,000,000,000. Consderng a these eements the net eve-premum
cost of the b Is shown to be 6.1 percent of payro.
s an ndcaton of the effect of varous factors on the estmated actuara
costs, t may be ponted out that f an nterest rate of 2 percent were used
rather than 2 percent, the net eve-premum cost of the b woud be reduced
to COO percent. (The nterest rate whch determnes the yed of new nvest-
ments for the trust fund s now 2.23 percent, but unt t rses to 2.2 percent,
such nvestments contnue to be made at 2 percent.)
Tabe 7 compares the year-by-year cost of the beneft payments, both for the
present ct and under the b. These fgures are based on a eve wage trend
n the future and do not consder cycca busness trends (booms and depres-
sons) whch over a ong perod of years w tend to average out. though
the doar amount of the ncrease n 10 0 of the b over the present ct s sub-
stanta, the cost as a percentage of payro does not rse much. Ths resuts
from the ncrease n the tota covered payro, both due to the newy covered
categores and to the change n the wage base from 3,000 to 3,600. The beneft
costs e pressed as a percentage of payro do not e ceed the empoyer-empoyee
combned ta rate unt about 19 0. In other words, for appro matey the ne t
. three decades, accordng to ths estmate, ncome to the system w e ceed outgo;
under the most unfavorabe pausbe crcumstances outgo coud not e ceed
Income n ess than 1 years.
T n- 7. Premnary estmate of cost of beneft payments under present ct and
under . R. 6000
In percent of payro
mount (n bons)
Caendar year
Present ct
. R. 6000
Present ct
. . 6000
Percent
0.9
1.6
2.1
3.1
.3
6.6
6.2
Percent
1.1
2.2
3.2
.
6.2
7.6
.1
19 0
0.7
1.
1.
2.9
.3
6.
6.
1.3
3.6
3.
6.2
.
10.6
11.7
19 6
1900
1970
19 0
1990
2O0O.
Leve-premum:
t 2 percent nterest
. 6
.36
6.20
6.09
Note. Those fpures are premnary and sub|ect to chnnpe. They represent an ntermedate estmate
whch Is sub|ect to a sgnfcant range because or the possbe varaton n the cost factors nvoved n the
future. For defnton of eve-premum, sec te t.
Tabe presents estmates of the sze of the trust fund whch w resut under
the b accordng to the ta schedue provded theren. t a 2 percent Interest
rate, the trust fund rses steady and reaches a ma mum of over 90,000,000,000
at some tme shorty after 1 )90. t a 21 percent nterest rate, ths ma mum s
about 100,000,000,000 and s reached a few years ater. owever, t w be
noted that under ether Interest bass the trust fund shows an .eventua decrease
whch ndcates that the system s not qute sef-supportng. owever, as men-
toned prevousy, your commttee defntey beeves that the system shoud
be sef-supportng, and the ta rates were chosen so that ths woud be ac-
compshed as cosey as possbe.
In evauatng the utmate sze of the trust fund, there shoud be kept In mcd
the fact that the abtes of the system kewse are correspondngy arge.
Ffty years hence estmated beneft payments (as sho vn by tabe ) w be amost
12,000,000,000 per year; the actuara abty for the benefts then n current
payment status (dsregardng those whch w fa due or be camed thereafter 1
w be 100,000,000,000 to 12 ,000,000,000, and an nsurance company woud
have to hod reserves of comparabe amounts to meet ts ega abty under
smar crcumstances.
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26
Tabe . Premnary estmate of sze of trust fund under II. R. 6000
fgure n bons of doars
Caendar year
Payro
n year
Contrbu-
tons for
year
eneft
payments
for year
Trust fund at begnnng
of year, based on n-
terest at
2 percent 2 percent
311.
h
121)
130
13
1 (1
1 0
3. 3
t c.
. M
.3
. 0
.9
9.2
SI.3
2.0
3.
6.2
.
10. 6
11.7
12. 2
23.7
3 . 1
00. 1
3.
111. 1
.
12.2
2 .0
3 .7
62. 1
7.
0 . 0
9 .
Note. These fgures are premnary and sub|ect to change. They represent an ntermedate estmate
whch s sub|ect to a sgnfcant range because of tbc possbe varaton n the cost factors nvoved n the
future.
It woud not be possbe reastcay to set down a ong-range ta schedue
whch woud make the system e acty sef-supportng. ven f a of the facts
about the future were known, the resutng ta schedue woud contan an utmate
rate of an unwedy, fractona amount. ccordngy, your commttee has seected
the utmate empoyer-empoyee ta rate of 6 percent as producng to a
ntents and purposes a sef-fnanced od-age, survvors, and dsabty nsurance
system. It shoud be noted that because the ta rate for the sef-empoyed s
ower than the empoyer-empoyee combned rate, a system wth a C.1 percent
eve-premum cost coud not be sef-supportng wth a 6.1 percent contrbuton
rate from empoyer and empoyee. Rather the empoyer-empoyee rate woud
have to be about 6.3 percent and the sef-empoyed rate about .7 percent.
If a 7 percent utmate empoyer-empoyee rate had been chosen, the cost
estmates deveoped woud have ndcated that the system woud be sghty
overfnanced. Your commttee beeves that t s not necessary n such a ong-
range matter to attempt to be unduy conservatve and provde an ntentona
overcharge especay when t s consdered that t w be many, many years
before any defct or e cess n the utmate rate w be determned and even at
that tme t w probaby be of ony a sma amount.
Tabe 9 presents an estmate of the cost of the benefts n the b for varous
future years as a percentage of payro for each of the dfferent types of benefts
separatey.
Tabe 9.-
-Premnary estmate of annua costs of . R. 6000, by type of beneft,
as percentages of payro
19 0
1966
1960
1970
19 0
1990
2000
Leve-premum at 2 percent
Od
age
Ds-
abty
Wfe s
Wd-
ow s
Par-
ent s
Chd s
Moth-
er s
Lump
sum
Tota
Percent
Percent
Percent
Percent
Percent
Percent
Percent
Percent
0.6
0.1
0.1
0)
0.2
to
0.1
1.1
1.0
0.2
.2
.3
( )
.
0.1
.1
2.2
1.
.
.3
.
( )
.
.1
.1
3.2
2.
.6
.
.9
( )
.
.1
.1
.
3.
.6
.
1.1
.
.1
.1
6.2
.7
.6
.
1.2
C)
.
.1
.1
7.6
.3
.6
.
1.2
( )
.3
.1
.1
.1
3.7
.6.
.
1.0
( )
.
.1
.1
.2
1 Less than 0.0 percent.
Note. These fgures are premnary and sub|ect to change. They represent an ntermedate estmate
whch s sub|ect to a sgnfcant range because of the possbe varaton n the cost factors nvoved n the
future. For defnton of eve-premum, see te t.
The precedng cost estmates do not take nto account the speca benefts
provded for veterans, snce the addtona costs therefor are met from the genera
treasury from tme to tme as they arse, rather than from contrbutons of the
923 30 1 1
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partepnnts In the program. The benefts contaned n present aw (namey, In
secton 210, whch n genera provdes survvor benefts for veterans who de
wthn 3 years after dscharge) w, over the course of the ne t 0 years, resut
n ncreased outgo of about 7 ,000,000 (to date, ess than 12,000,000 has been
e pended under ths provson).
Under the b t s proposed to gve wage credts of 160 for each month of
mtary servce, not ony to veterans but aso n respect to those who ded n
servce. Your commttee beeves that the addtona cost entaed shoud
be met by appropratons from genera funds as the addtona beneft payments
resutng from ths provson occur, rather than by a snge arge mmedate
appropraton whch woud necessary be an estmate and therefore mght be
more or ess than suffcent.
It s estmated that the tota cost of these veterans benefts w amount to
about 1, 00,000,000 spread over the ne t 0 years, wth most of ths outgo comng
some 0 to 0 years hence. owever, there w be a very consderabe outgo over
the ne t 10 years n respect to the chdren and wdows of men who ded n
servce. For ths group, the ncreased outgo from the trust fund w be about
20,000,000 n 19 0 and w average about 1 ,000,000 a year over the ne t decade.
owever, snce by 1000 vrtuay a of these chdren w have attaned age 1 ,
the dsbursements for ths group w fa off qute sharpy and w not there-
after be of any sgnfcant sze unt about 3 years from now when the wdows
w be reachng retrement age.
I. IN STM NTS OF T OLD- G ND SUR I ORS INSUR NC TRUST FUND
The trust fund has been nvested n Unted States Government securtes, whch
represent the proper form of nvestment. Your commttee does not agree wth
those who crtcze ths form of Investment on the ground that the Government
spends for genera purposes the money receved from the sae of securtes to the
fund. ctuay such nvestment s as reasonabe and proper as s the nvestment
by fe nsurance companes of ther own reserve funds n Government securtes.
The fact that the Government uses the proceeds receved from the saes of
securtes to pay the costs of the war and ts other e penses s entrey egtmate.
It no more mpes mshandng of moneys receved from the sae of securtes
the trust fund than s the case for money receved from the sae of Unted States
securtes to fe nsurance companes, banks, and ndvduas.
The nvestment of the e cess ncome of the trust fund n Government securtes
does not mean that peope have been or w be ta ed twce for the same benefts,
as has been charged. The foowng e ampe ustrates ths pont: Suppose some
year n the future the outgo under the od-age and survvors nsurance system
shoud e ceed payro recepts by 100,000,000. If there were then ,000,000,-
000 of Unted States 2 percent bonds n the trust fund, they woud produce nterest
amountng to 100,000,000 a year. Ths nterest woud, of course, have to be
rased by ta nton. ut suppose there were no bonds In the trust fund. In that
event, the 100,000,000 to cover the defct n the od-age and survvors nsurance
system woud have to be rased by ta aton. In addton, another 100,000,000
woud have to he rased by ta aton to pay nterest on ,000,000,000 of Govern-
ment bonds owned by someone ese; f the Government had not been abe to
borrow from the trust fund, t woud have had to borrow the same amount from
other sources. In other words, the ownershp of the ,000,000,000 n bonds by
the od-age and survvors nsurance system woud prevent the 100,000,000 from
havng to be rased twce qute the opposte from the doube ta aton crtcsm
that has been rased.
It mght be approprate to agan pont out that funds of nsurance systems
whch have been set up by the Congress are nvested n the same manner as the
od-age and survvors nsurance trust fund. Moreover, most of these other trust
funds receve for ther nvestments a hgher rate of Interest (usuay 3 to per-
cent) as compared wth the rate on securtes sod to the od-age and survvors
nsurance trust fund whch s based on the average rate of nterest on a nterest-
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267
bearng obgatons of the Unted States. Pertnent data on the most mportant
of these other trust funds are as foows:
Fun.
Cv servce
U. . Government fe Insurance
Od-age and survvors nsurance.
Unempoyment nsurance
Raroad retrement
Natona servce fe nsurance...
Year oTc ab
shment
1(12(1
It .
vas
1 S
1S 7
IU 0
Investments
as of uno
30, 1 9
(n bons)
S3. 2
1.3
11. 2
h. 1
1.7
7.3
S CTION Y S CTION N LYSIS OF T ILL
The frst secton of the b contans a short tte. Soca Securty ct mend-
ments of 19 9, and a tabe of contents. The remander of the b s dvded nto
four ttes: Tte I, whch amends tte II of the Soca Securty ct; tte II,
whch amends the Interna Revenue Code;
Tte I mendments to Tte II of the Soca Securty ct

CO O OF ST T ND LOC L MPLOY S
Secton 106 of the b woud add to the Soca Securty ct a new secton,
numbered 21 , under whch the protecton of the nsurance program coud be
e tended to empoyees of States and ther potca subdvsons and nstrumen-
tates by means of agreements negotated between the States and the Federa
Securty dmnstrator.
Purpose of agreement.
Subsecton (a) of secton 21 provdes that the Federa Securty dmnstrator
sha enter nto an agreement at the request of a State for the purpose of e tend-
ng od-age, survvors, and dsabty nsurance coverage to the empoyees of the
State or of any potca subdvson or nstrumentaty of the State. The agree-
ment s to Incude such provsons, not nconsstent wth those specfed n the b,
as the State may request. The subsecton aso provdes that, notwthstandng
the genera e cusons of agrcutura abor, domestc servce, or servce per-
formed by a student, such servce may be covered (at the opton of the State) If
t s ncuded under an agreement.
Defntons.
Subsecton (b) of secton 21 defnes certan sgnfcant terms used n the sec-
ton.
Paragraph (1) provdes that the term State sha not ncude the Dstrct
of Coumba. s a consequence, no agreement coud be made wth the Dstrct.
greements coud be made, however, for coverng the empoyees of Terrtora and
oca governments n awa, aska, and the rgn Isands, and aso (sub|ect
to the provsons of secton 221) n Puerto Rco.
Paragraph (2) defnes potca subdvson to ncude nstrumentates of
the State, of a potca subdvson, or of any combnaton of the foregong.
Paragraph (3) defnes empoyee to ncude an offcer of a State or potca
subdvson.
Paragraph ( ) defnes retrement system as any penson, annuty, retre-
ment or smar fund or system estabshed by a State or potca subdvson.
For purposes of determnng the permtted coverage under an agreement, a
State-wde retrement system s defned as a retrement system estabshed by
a State whch covers (a) empoyees of the State and empoyees of one or more
potca subdvsons, or (6) empoyees of at east two potca subdvsons.
Paragraph ( ) defnes coverage group prmary for purposes of subsecton
(c), whch governs the coverage of groups whch may be ncuded n or e cuded
under an agreement. coverage group n genera woud consst of empoyees
of the State or empoyees of a snge potca subdvson, but, because of the
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26
speca treatment accorded to members of retrement systems, a empoyees
(whether State or oca) covered by a State-wde retrement system woud be
e cuded from the genera coverage groups and regarded as consttutng a sepa-
rate coverage group.
Servces covered.
Subsecton (c) of secton 21 of the Soca Securty ct as amended by the
b specfes the servces whch may be covered by an agreement or modfcaton
of an agreement.
Paragraph (1) requres an agreement to cover any one or more coverage groups
desgnated by the States.
Paragraph (2) provdes that f any empoyees of a coverage group are to be
covered by an agreement, then a empoyees n that coverage group (e cept for
certan casses whch ngbt be e cuded pursuant to paragraphs (3) or ( ) of
subsecton (c) or pursuant to subsecton (d)) woud have to be ncuded under
the agreement. Ths provson s necessary to protect the system from adverse
seecton.
Paragraph (3) of subsecton (c) permts the State to e cude from the agree-
ment a servces n any cass or casses of eectve or part-tme .obs, or |obs com-
pensated on a fee bass, n any coverage group. The State woud nso be per-
mtted to e eude any servces of an emergency nature.
Paragraph ( ) gves the State the rght to have the agreement amended to
cover addtona coverage groups or servces not prevousy covered, so ong as
the e tenson s consstent wth the other provsons of the secton.
Paragraph ( ) permts the State to e cude from any coverage group agr-
cutura abor, domestc servce or servce performed by a student, f such servce
woud be e cuded from compusory coverage under the ct f performed for an
empoyer other than a governmenta unt.
Paragraph (6) prevents the agreement from appyng to any servces per-
formed n a hospta, home, or other nsttuton by a patent or nmate thereof or
any servces performed by an ndvdua n a work reef or other program de-
sgned to reeve hm from unempoyment.
Referendum n case of retrement systems.
Subsecton (d) of secton 21S outnes the condtons under whch servces
performed n |obs covered by retrement systems may be ncuded n an agreement.
Paragraph (1) requres that before |obs covered by a retrement system n
effect when the agreement was entered nto may be ncuded n the orgna agree-
ment, the State must request that they be ncuded, and the governor of the State
must certfy that a wrtten referendum wns hed and that not ess than two-
thrds of the voters voted n favor of beng ncuded. The voters must be em-
poyees n affected postons and persons 21 years of age or oder who were
recevng perod payments under the retrement system.
Paragraph (2) estabshes the same requrement regardng modfcatons of
agreements; the requrement woud appy to retrement systems n effect when
the modfcaton was agreed to.
Paragraph (3) specfes the perod of tme wthn whch the wrtten referen-
dum must be hed. It provdes that the referendum must be hed wthn the
perod begnnng 1 year before the effectve date of the agreement (or modfca-
ton) and endng on the date the agreement (or modfcaton) s entered nto.
Payments and reports by States.
Subsecton (e) of secton 21S requres the State to agree to pay amounts equv-
aent to the sum of the empoyee and empoyer ta es whch woud be mposed
under sectons 1 00 and 1 10 of the Interna Revenue Code f the servces covered
under the agreement consttuted empoyment under secton 1 26 of such Code.
It aso requres the State to agree to compy wth reguatons, reatng to pay-
ments and reports, prescrbed by the dmnstrator to carry out the purposes of
the secton.
ffectve date, of agreement.
Secton 21 (f) provdes that an agreement or modfcaton of an agreement
mght be made effectve on a date specfed n the agreement. owever, no agree-
ment or modfcaton coud be effectve pror to anuary 1. 10 0, or, e cept for an
agreement or modfcaton agreed to pror to anuary 1, 10 2, pror to the caen-
dar year n whch t was consummated. Ths atter e cepton to the genera
roe for agreements or changes made pror to 19 2 s ntended to gve the States
suffcent tme to negotate the agreements n the eary days of the new program
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wthout unduy penazng ther empoyees under the egbty and beneft-com-
putaton provsons of the system because of unavodabe deay n ths process.
Termnaton of agreement.
Subsecton (g) of secton 21 of the Soca Securty ct as amended by the
b specfes the condtons under whch an agreement may be termnated.
Paragraph (1) authorzes the State to termnate an agreement n Its entrety
or wth respect to any coverage group. owever, an agreement cannot be term-
nated n ts entrety unt the agreement has been n effect for at east years,
nor can t be termnated for any coverage group unt the affected group has been
covered for at east years; furthermore, any such termnaton woud be con-
dtoned upon the recept by the dmnstrator, after the end of the -year perod,
of 2 years advance notce n wrtng. Consequenty, the mnmum duraton of
an agreement woud be 7 years, and the mnmum perod of coverage for a snge
coverage group (as ong as the agreement tsef remaned n effect) woud aso
be 7 years.
Paragraph (2) woud drect the dmnstrator to termnate an agreement n ts
entrety, or wth respect to any coverage group, f t appeared, after reasonabe
notce and opportunty for hearng, that the State had faed, or was not abe
egay, to compy substantay wth the terms of the agreement. The agreement
woud be termnated In ts entrety f the ack of compance affected a the
servces covered under the agreement; otherwse ony those coverage groups
affected woud have ther coverage termnated. The dmnstrator mght gve
the State as ong as 2 years to rectfy the defcency. If the State faed to do so,
the termnaton woud be effected.
Paragraph (3) provdes that f an agreement wth a State s termnated n
ts entrety no agreement wth such State may be made agan. If the termna-
ton affects ony partcuar groups, those groups may not be ncuded under
an agreement. Ths restrcton s necessary to protect the nsurance trust fund
from e cessve drans caused by movement Into and out of the system.
Deposts n trust fund; ad|ustments.
Secton 21 (h) specfes that a payments receved by the Secretary of the
Treasury under State agreements sha be deposted n the trust fund. Over-
payments or underpayments of amounts due woud be ad|usted, wthout nterest,
n accordance wth reguatons prescrbed by the dmnstrator. Where over-
payments cannot be ad|usted n ths manner the amounts overpad w be pad
out of the trust fund to the State.
Reguatons.
Secton 21 (1) of the Soca Securty ct as amended by the b provdes
that the reguatons of the dmnstrator under the secton sha be desgned ro
make the requrements mposed on the States smar, so far as practcabe, ro
requrements mposed on empoyers under the Federa Insurance Contrbutons
ct and tte II of the Soca Securty ct.
Faure to make payment .
Secton 21 (|) estabshes penates for faure by the States to pay the amounts
due under the agreement on tme. Interest at the rate of 6 percent per annum
woud be added where the State dd not make payments when due. In addton,
the dmnstrator mght deduct the amount of such denquent payments, pus
nterest, from grants to the State under any other provson of the Soca Securty
ct; for e ampe, matchng grants for pubc assstance. The amounts so
deducted are to be deemed to have been pad to the State under that other pro-
vson, and are approprated to the trust fund.
Instrumentates of two or more States.
Subsecton (k) of secton 21 provdes that, at the request of any nstrumen-
taty of two or more States, the Federa Securty dmnstrator may enter nto
an agreement wth that nstrumentaty for coverage of ts empoyees. s far as
practcabe, such an agreement must conform to the other provsons of the
secton.
Deegaton of functons.
Secton 21 (1) of the Soca Securty ct, as amended by the b, authorzes
the dmnstrator, pursuant to agreement wth the head of any Federa agency,
to deegate any of hs functons under the secton to any offcer or empoyee of
that agency, or to utze the servces and factes of that agency n the admns-
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270
traton of te secton. The purpose of ths provson Is to enabe the Federa
Securty dmnstrator to deegate routne dutes n connecton wth the securng
of wage records and smar functons. The e penses ncurred by the agency
whose servces or factes are utzed woud be pad In advance or by way of
rembursement, as mght be agreed upon.

R CORDS OF W G S ND S LF- MPLOYM NT INCOM
Secton 100 of the b makes a number of technca amendments n secton 20
of the Soca Securty ct and s ntended prncpay to carfy the statute of
mtatons n the present ct whch governs the crcumstances under whch
correctons or changes may be made n earnngs records mantaned by the
dmnstrator.

Secton 100(b) of the b revses secton 20 (c) of the ct n severa respects
Incudng changes necessary to provde for mantanng records of earnngs
of sef-empoyed persons. Paragraph (1) of the revsed 20 (c) Incudes defn-
tons of accountng perod and of tme mtaton for convenence of refer-
ence and because of certan necessary dfferences between the reportng of wages
and of sef-empoyment ncome. The tme mtaton apped to wages and
sef-empoyment ncome s coordnated wth the correspondng perod wthn
whch ta es may be assessed. defnton of survvor s ncuded to smpfy
references throughout the subsecton.
The term accountng perod s defned as a caendar quarter n the case of
wages and a ta abe year n the case of sef-empoyment ncome. The term
tme mtaton s defned as years 1 month n the case of wages and years
2 months 1 days n the case of sef-empoyment ncome. The term survvor
Is defned to mean a spouse, former wfe dvorced, chd, or parent who survves
the wage earner or sef-empoyed person.
Paragraphs (2) and (3) of the revsed secton 20 (c) contnue the provsons
of e stng aw as now contaned In secton 20 (c) (1) of the Soca Securty ct
and make such provsons appcabe to sef-empoyment ncome. They drect
the dmnstrator to estabsh and mantan records of the earnngs of n-
dvduas and to nform them, upon request, of the amounts n such records.
They aso make the records evdence of the earnngs of ndvduas and the
absence of entres for any perod evdence that no wages were pad or sef-
empoyment ncome derved durng such perod.
Paragraph ( ) states the condtons under whch the dmnstrator s records
may be revsed. Pror to the e praton of the tme mtatons, the dmn-
strator may revse hs records f any error n them s brought to hs attenton.
Ths s the same as e stng aw. Changes, however, have been made n the
provsons reatng to the effect of the records and revsons whch may be made
n them after the e praton of the tme mtatons. s changed, the provsons
reatng to the dmnstrator s records after the -year tme mtaton provde
that, after such perod, (1) the amounts of wages or sef-empoyment ncome
as shown on the records for any perod sha e concusve for such perod;
(2) the absence of any entry n the records as to the wages aeged to have
been pad by an empoyer n an accountng perod sha be presumptve evdence
that no wages were pad by such empoyer n the accountng perod; and (3)
the absence of a entry as to sef-empoyment ncome n an accountng perod s
concusve uness t s shown that a ta return of such ncome was ted before
the e praton of the tme mtaton foowng the accountng perod. ow-
ever, certan correctons are specfcay permtted after the end of the tme
mtaton.
The presumpton that no wages were pad an ndvdua by an empoyer n a
quarter n the absence of an entry of such wages n the records may be over-
come by proof that the wages had been pad.
Where no entry of sef-empoyment ncome appears on the records and It Is
shown that a ta return was fed by the ndvdua wthn the tme mtaton,
the dmnstrator s requred to enter upon the record the sef-empoyment
ncome for such perod.
The present provson of 20 (c)(3) of ,the Soca Securty ct, permttng
revson of the records after the tme mtaton f the dmnstrator was on
notce of an error before the end of the perod, s deeted. Determnaton of
what consttutes notce has proved admnstratvey cumbersome. Instead
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paragraph ( ) of secton 203(c) as revsed by the b authorzes correctons
after the tme mtaton f an appcaton for monthy benefts or a ump-sum
payment s fed wthn the tme mtaton and no fna decson has been made
on t, or f a wrtten request for a revson of the records s made wthn the
tme mtaton, but no such revson may be made after fna decson upon
snch appcaton or upon such request.
In addton, the condtons under whch the dmnstrator may correct hs
records after the end of the tme mtaton, even though no appcaton for
benefts or revson was fed whn the perod, are e panded n ways desgned
to correct certan anomaes occurrng under e stng aw. The revsed secton
20 (c) woud permt revson after the end of the tme mtaton
(1) To correct any mechnnca, cerca, or other errors apparent on the
face of the records.
(2) To transfer tems to or from records of the Raroad Retrement
oard, f such tems were reported to the wrong agency.
(.3) To deete or reduce any tems entered through fraud.
( ) To conform the dmnstrator s records wth specfed ta returns
or nformatona statements fed wth the Commssoner of Interna Revenue.
owever, n the case of a ta or nformaton return In respect of sef-
empoyment ncome fed after the end of the tme mtaton foowng the
ta abe year, correctons of the dmnstrator s records w not be made
e cept to ncude sef-empoyment ncome for such year n an amount not
n e cess of the amount (f any) whch has been deeted (after the end
of the tme mtaton) as payments erroneousy ncuded n such records
as wages pad to such ndvdua durng such ta abe year. Ths prohb-
ton aganst entres wth respect to sef-empoyment ncome after the end
of the tme mtaton appes not ony to cases n whch the Indvdua voun-
tary fes a ta return, but aso to cases n whch the Commssoner as-
serts an underpayment of ;he sef-empoyment ta .
( ) To ncude wages pad by an empoyer to an Indvdua n an ac-
countng perod where there s a compete absence of any entry n the
records of wages havng been pad by such empoyer durng such perod.
(6) To enter certfed tems transferred by the Raroad Retrement oard
In cases n whch survvors benefts under the Soca Securty ct are to be
based on a combnaton of soca securty wages and raroad compensaton.
Paragraph (6) of the revsed secton 20 (c) contnues the requrement n
e stng aw that wrtten notce of any deeton or reducton of wages be gven
to the ndvdua whose record s nvoved where he has prevousy been notfed
by the dmnstrator of hs wages for the accountng perod nvoved. Notce
of a deeton or reducton of sef-empoyment ncome s requred to be gven to
the ndvdua nvoved n a cases because such ndvduas, havng made out
ther own returns, have notce of the amount of sef-empoyment ncome that
shoud be shown on the records. n ndvdua s survvor s aso to be notfed
of any deeton or reducton f ether the ndvdua or the survvor has pre-
vousy been notfed of the amount of wages and sef-empoyment ncome ap-
pearng on the dmnstrator s records for the accountng perod nvoved.
Paragraph (7) of the revsed secton 20 (c) gves the dmnstrator dscreton
to .|rescrbe the perod, after any change or refusa to change hs records, wthn
whch an ndvdua or hs survvor may be granted a hearng upon request.
Under the present aw, the hearng must be requested before the runnng of the
tme mtaton or wthn 00 days thereafter; but may not be requested thereafter.
Thus ffme ndvduas have a very ong perod wthn whch to make a request
whe other ndvduas have no opportunty to request a hearng. Under the
amendment, the dmnstrator w have the authorty to estabsh reasonabe
and equtabe reguatons governng the perod wthn whch a hearng must be
requested.
Paragraph ( ) contnues e stng aw provdng for udca revew (as pro-
vded n secton 20 (g) of the dmnstrator s decsons under secton 20 (c).
Secton 109(c) of the b further amends secton 20 of the Soca Securty ct
by the addton of three new subsectons. These dea wth speca probems
nrsng out of e tenson of coverage to empoyees of nonproft Insttutons and
certan Federa empoyees and the necessty for contnung the provsons of e st-
ng aw for the coordnaton between survvors benefts under the Soca Securty
ct and the Raroad Retrement ct.
The new subsecton (o) gves effect to the speca arrangements for coverng
empoyees of nonproft organzatons wthout eopardzng the ta -e empt status
of these organzatons. In the provsons of the b amendng the Interna
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Revenue Code t s provded that nonproft organzatons are entted to an
e empton from the empoyer ta of the program, but that an organzaton may
wave ts e empton and pay the empoyer ta . Subsecton (o) provdes that f
the empoyer has waved hs e empton the empoyee w receve fu credt
toward benefts for wages pad for empoyment for the nonproft organzaton;
otherwse the empo| ee w receve credt for ony haf the wages pad for such
empoyment.
The new subsecton (p) provdes that f no person e sts who coud, upon
appcaton, become entted to a monthy survvors annuty under secton of
the Raroad Retrement ct of 1037, or to a ump-sum payment under subsecton
(f) (1) of that secton, wth respect to the death of an empoyee (as defned n such
ct), raroad compensaton sha be counted on the same bass as od-age and
survvors nsurance wages or sef-empoyment ncome n determnng the rghts
of the empoyee s survvors to a ump-sum death payment or to monthy sur-
vvors benefts under the Soca Securty ct. The subsecton woud not permt
transfer of compensaton credted by reason of mtary servce where the em-
poyee s credted wth wages under tte II of the Soca Securty ct for such
servce for the same perod of tme. None of the provsons of the subsecton
woud be appcabe where arger benefts woud be payabe under tte II wthout
ts appcaton. Ths secton, ke the new secton 202(|) provded for n secton
101 (a) of the b, s necessary to contnue the e stng coordnaton of survvors
benefts under the raroad retrement and od-age and survvors nsurance
programs.
I arngrnph (1) of the new subsecton (q) provdes that the Federa Securty
dmnstrator sha not make determnatons as to empoyment or wages wth
respect to servce n the empoy of the Unted States or ts whoy owned nstru-
mentates, but sha accept the determnatons of the head of the approprate
Federa agency or nstrumentaty. Ths provson represents an e tenson of
present provsons of tte II of the Soca Securty ct appcabe to servces
for the Martme Commsson and the onneve Power dmnstraton. eads
of agences or nstrumentates are authorzed by paragraph (2) to make
necessary certfcatons to the Federa Securty dmnstrator wth respect to
servces under ther |ursdcton. Paragraph (3) makes the subsecton appcabe
to servce n certan actvtes conducted by an nstrumentaty of the Unted
States sub|ect to the |ursdcton of the Secretary of Defense (such as post e -
changes) and desgnates the Secretary of Defense as the head of such nstru-
mentates for the purposes of the tte.
Secton 110 of the b makes severa changes of a technca nature n the re-
manng provsons of tte II of the Soca Securty ct.
Snce States enterng nto agreements wth the Federa Securty dmnstrator
for coverage of the State and oca empoyees are requred (under the new secton
21 of the Soca Securty ct) to pay amounts equvaent to the empoyer and
empoyee ta es to the Secretary of the Treasury, provson s made for ncudng
such amounts as part of the trust fund (secton 201(a)).

Under the present aw a ta es coected for the od-age and survvors program
are approprated to the trust fund, but any requred refunds of such ta es are
made from genera revenues. The b woud change ths by authorzng such
refunds to be made from the trust fund after 19 9 (secton 201(f)).

The b woud emnate from provsons reatng to the trust fund the author-
zaton to approprate to t from the genera funds of the Treasury such addtona
sums as may be requred to fnance the benefts and payments provded by the
nsurance program.

Tte II mendments to Interna Revenue Code
T OF T ON W G S
Secton 201: Ths secton amends causes (2) and (3) of sectons 1 00 and 1 10
of the Interna Revenue Code. Under e stng aw the rate of the empoyees tar
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and of the empoyers ta for the caendar years 19 0 and 19 1 Is 1 percent; and
the rate of each such ta for the caendar year 19 2 and subsequent caendar years
s 2 percent. Under the amendment the rates of each ta are as foows:
Percent
For the caendar year 19 0 1
For the caendar years 19 1 to 19 9, Incusve 2
For the caendar years I960 to 190 , Incusve 2
For the caendar years 190 to 1909, ncusve 3
MPTION OF NONPROFIT ORG NIZ TIONS
Secton 202: Subsecton (a) of ths secton makes a technca amendment to
secton 1 10 of the Interna Revenue Code, whch secton prescrbes the rates of
empoyers ta . The amendment substtutes Sec. 1 10. Imposton of Ta .
for Sec. 1 10. Rate of Ta . and adds the subheadng (a) Rate of Ta .
Ths subsecton of the b aso adds secton 1 10(b) whch contans a reference to
secton 1 12, added by the b, contanng an e empton from the ta mposed
by secton 1 10 of the Code.
Subsecton (b) of ths secton of the b amends part II of subchapter of
chapter 9 of the Interna Revenue Code by addng at the end thereof a new
secton 1 12. Secton 1 12(a) e empts from the ta mposed by secton 1 10
certan organzatons organzed and operated e cusvey for regous, chartabe,
scentfc, terary, or educatona purposes, or for the preventon of cruety to
chdren or anmas, provded a waver fed by such an organzaton-empoyer
pursuant to secton 1 12(b) s not n effect. ( stng aw provdes no e emp-
ton to such organzatons from the empoyers ta mposed by secton 1 10, but
such organzatons are not now ta ed under such secton because secton
1 26(b)( ), whch s changed by secton 20 (a) of the b, e cudes servces
performed n the empoy of such organzatons from the defnton of empoy-
ment.) Secton 1 12(b) permts empoyers descrbed n secton 1 12(a) to fe
wavers of the e empton accorded them by secton 1 12(a). n organzaton-
empoyer whch has duy fed a waver of ts e empton from the empoyers ta
Is abe for such ta wth respect to wages pad durng the perod such waver
s n effect. The abty of such empoyer for the ta s n a respects the
same as the abty of any other empoyer for the ta and s coectbe and
enforceabe n the same manner as the abty of any other empoyer. The
waver and any notce of termnaton or of revocaton of the notce of termna-
ton are requred to be red n such form and manner, and wth such offca
of the ureau of Interna Revenue, as may be prescrbed by reguatons made
under the Federa Insurance Contrbutons ct. The waver sha be effectve
for the perod begnnng after the cose of the caendar quarter In whch fed,
but n no case pror to anuary 1, 19 0. The organzaton may termnate the
waver, effectve at the end of a caendar quarter, upon gvng 2 years advance
notce, provded the waver has been n effect for not ess than years pror
to the recept of such notce. n organzaton whch fes a notce of termnaton
tnay revoke such notce by gvng, pror to the cose of the caendar quarter
specfed n the notce of termnaton, a wrtten notce of revocaton. Secton
1 12(c) provdes for the termnaton of the waver by the Commssoner of
Interna Revenue under crcumstances nvovng faure or nabty of the em-
poyer to compy wth the provsons of the Federa Insurance Contrbutons ct.
The Commssoner s requred to gve such empoyer not ess than 60 days
advance notce n wrtng that the perod covered by suc waver w termnate
at the end of the caendar quarter specfed n such notce. The Commssoner
may revoke such notce of termnaton by gvng to the empoyer, pror to the
cose of the caendar quarter specfed n the notce of termnaton, wrtten notce
of such revocaton. Nether notce of termnaton nor notce of revocaton may
be gven by the Commssoner to an empoyer wthout the pror concurrence of
the Federa Securty dmnstrator. Secton 1 12(d) provdes that f a waver
s termnated by the empoyer, no waver may agan be made by such empoyer
pursuant to secton 1 12.
Subsecton (c) of ths secton of the b provdes that the amendments made
by secton 202 of the b sha be appcabe ony wth respect to remuneraton
pad after December 31,19 9.
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F D R L S R IC
Secton 203: Subsecton (a) of ths secton amends part II of subchapter
of chapter 9 of the Interna Revenue Code by addng after secton 1 12 (added
by secton 202 of the b) a new secton 1 13. Secton 1 13 makes neffectua
as to the ta mposed by secton 1 10 of the Code (wth respect to remuneraton
pad after 19 9) those provsons of any statute (rrespectve of the date of
enactment thereof) whch grant to any nstrumentaty of the Unted States an
e empton from ta aton, uness such statute grants a specfc e empton from
the ta mposed by secton 1 10 by an e press reference to such secton. The
e emptons from Federa ta aton granted by varous e stng statutes to certan
Federa nstrumentates wthout specfc reference to the ta mposed by secton
1 10 are rendered noperatve nsofar as the e emptons reate to the ta mposed
by secton 1 10, wthout the necessty of specfcay amendng such e empton
statutes. Some Federa nstrumentates whose e empton from the ta m-
posed by secton 1 10 s rendered noperatve by secton 1 13 are as foows:
Federa Reserve banks, Federa Dopost Insurance Corporaton, Federa Savngs
and Loan Insurance Corporaton, Reconstructon Fnance Corporaton, the Fed-
era Natona Mortgage ssocaton, Federa and banks, natona farm-oan
assocatons, Federa Farm Mortgage Corporaton, Federa ntermedate credt
banks, Centra ank for Cooperatves, producton credt corporatons, producton
credt assocatons, regona banks for cooperatves, Federa home-oan banks, and
Federa credt unons. Wth respect to subsequent egsaton of Congress whch
mght grant a genera e empton from ta aton to an nstrumentaty of the
Unted States, secton 1 13 provdes, as a rue of constructon, that such genera
e empton (ackng a specfc reference to the ta mposed by secton 1 10) s
not to be construed as provdng an e empton from the ta mposed by secton
1 10.
Subsecton (b) of ths secton of the b amends secton 1 20 of the Code,
reatng to the coecton and payment of the ta es mposed by sectons 1 00 and
1 10 of the Code, by addng at the end thereof a new subsecton (e). Secton
1 20(e) reates to the empoyees and empoyers ta es mposed wth respect to
certan servces performed n the empoy of the Unted States or n the empoy
of any nstrumentaty whch s whoy owned by the Unted States. The head
of the Federa department, agency, or nstrumentaty, havng contro over the
servces parforncd n the empoy of such department, agency, or nstrumentaty,
or such agent or agents as may be desgnated by such head, sha (1) determne
whether an ndvdua has performed servces whch consttute empoyment as
defned n secton 1 26 of the Code, (2) determne the amount of remuneraton
whch consttutes wages as defned n secton 1 26, and (3) make the requred
return and payment of the ta es mposed by sectons 1 00 and 1 10. person
makng such return may, for convenence of admnstraton, make payments of
the empoyers ta mposed under secton 1 10 wthout regard to the 3,600
mtaton n secton 1 20(a)(1) (as amended by secton 20 (a) of the b),
and e sha not be requred to fe a cam for refund, or obtan a refund, of
any amount pad as ta under secton 1 10 on that part of the remuneraton not
ncuded n wages by reason of secton 1 20(a)(1). Ths provson does not
authorze such person to dsregard the 3,600 mtaton as to remuneraton pad
for servces ncuded n returns made by hs reportng unt.
The provson w reeve a person makng a return on behaf of any Federa
department or agency of ascertanng whether any wages have been reported
for the partcuar empoyee durng the caendar year by any other -eportng
unt of any Federa department or agency and w reeve any person makng a
return on behaf of a whoy owned nstrumentaty of ascertanng whether
any wages pad the partcuar empoyee durng the caendar year by such
nstrumentaty have been reported by any other reportng unt of such nstru-
mentaty. The head or agent of an nstrumentaty n determnng the amount
of remuneraton for servces performed n empoyment whch consttutes wages
as defned n secton 1 26 may not take nto consderaton amounts of remunera-
ton pad by any other nstrumentaty or any Federa department or agency.
Secton 1 20(e) Is aso made appcabe to servces, performed by a cvan
empoyee who s not compensated from funds approprated by the Congress, n
the rmy and r Force change Servce, the rmy and r Force Moton Pc-
ture Servce, Navy Shp s Servce Stores, Marne Corps Post changes, or any
other actvty, conducted at nstaatons of the Natona Mtary stabshment
for the beneft and morae of personne of the rmed Forces by an nstrumentaty
of the Unted States sub|ect to the |ursdcton of the Secretary of Defense. For
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purposes of secton 1 20(e) the Secretary of Defense Is deemed to be the head
of any snch Instrumentaty.
Subsecton (c) of secton 203 of the b amends secton 1 11 of the Code,
reatng to ad|ustments of the empoyers ta mposed by secton 1 10 of the
Code, by addng thereto a speca provson wth respect to remuneraton receved
from the Unted States or a whoy owned nstrumentaty thereof durng any
caendar year after the caendar year 19 9. The amendment provdes that, tor
the purposes of secton 1 11, each head of a Federa department, agency, or
Instrumentaty who makes a return pursuant to secton 1 20(e) of the Code
and each agent, desgnated by the head of a Federa department, agency, or n-
strumentaty, who makes a return pursuant to secton 1 20(e) sha be deemed
a separate empoyer. Thus, ad|ustments of the ta mposed by secton 1 10
w be made by the reportng unt by whch the erroneous underpayment or
overpayment was made. For the correspondng amendment wth respect to the
empoyees ta mposed by secton 1 00 of the Code and for the provsons wth
respect to speca refunds of empoyees ta n the case of Federa servces, see
secton 1 01(d) ( ) of the Code, as added by secton 20 (c) of the b.
Subsecton (d) of secton 203 of the b provdes that the amendments made
by such secton sha be appcabe ony wth respect to remuneraton pad after
December 31, 19 9.
D FINITION OF W G S
Secton 20 : Ths secton, appcabe ony wth respect to remuneraton pad
after 19 9, amends secton 1 26(a) of the Interna Revenue Code, whch defnes
the term wages for the purposes of the Federa Insurance Contrbutons ct,
gnc. aso amends secton 1 01(d) of the Code, reatng to speca refunds of
empoyees ta mposed by secton 1 00 of the Code. Subsecton (a) of ths
secton of the b amends secton 1 26(a), whch contans the defnton of wages.
Under e stng aw the term wages means a remuneraton for empoyment,
ncudng the cash vaue of a remuneraton pad n any medum other than
cash, wth certan specfc e ceptons. The amendment retans ths provson of
e stng aw whch precedes the numbered paragraphs contanrg the e ceptons.
The b Increases the 3,000 mtaton contaned n secton 1 26(a)(1) of
e stng aw to 3,600, and adds thereto an amendment whch provdes that
remuneraton specfcay e cepted from wages sha be dsregarded n comput-
ng the amount of remuneraton wth respect to empoyment whch consttutes
wages. Thus, If durng a caendar year an empoyee receves remuneraton
from hs empoyer on account of medca or hosptazaton e penses n connec-
ton wth sckness or nccdent dsabty, and f such remuneraton s e cuded
from the defnton of wages under the provsons of secton 1 26(a) (2-) or ( )
(as amended by the b), such remuneraton pad to the empoyee w not be
taken nto account n appyng the 3,600 mtaton. Secton 20 (a) of the
b aso adds a provson wth respect tc the computaton of the 3,600 mtaton
where one empoyng entty s succeeded by another empoyng entty under
certan prescrbed condtons.
The annua 3,100 mtaton on the amount of remuneraton wth respect to
empoyment thnt consttutes wages apped ony to remuneraton receved by
an empoyee from the same empoyer. Under e stng aw, where durng a
caendar year an empoyee s empoyed by a new empoyer, the frst 3,000 of
remuneraton wth respect to empoyment pad to hm by the new empoyer
durng that year consttutes wages and s sub|ect to ta regardess of the
amount of such remuneraton whch mght have been pad to hm n the same
year by a pror empoyer. In appyng ths rue, the ureau of Interna Revenue
has hed that, f a member of a partnershp des and the trade or busness s
contnued wthout nterrupton by the survvng partners who retan a the
empoyees who have been performng servces for the former partnershp, the
dssouton of the od partnershp by operaton of aw and the organzaton of
the new partnershp resut n the new partnershp beng consdered as a new
empoyer. The new partnershp, under the ureau s rungs, s ta ed on the
frst 3,000 of remuneraton wth respect to empoyment pad, durng the caendar
year n whch It was formed, to an empoyee who had been empoyed by the
predecessor partnershp and whose servces were retaned, athough the predeces-
sor may n the same year have aready pad ta on wages of 3,000 pad to such
empoyee. Smar resuts have been reached as a consequence of a corporate
merger or consodaton, or where an ndvdua Incorporates hs busness and
contnues to operate the same enterprse through ownershp of a the stock of
the corporaton.
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The amendment made by ths secton of the b prevents the dupcaton of
ta n cases such as those descrbed above and n n other cases where an
empoyer .acqures substantay a the property used n a trade or busness of
another person, or used -n a separate unt of such a trade or busness, f mme-
datey after the acquston the empoyer empoys n hs trade or busness
(whether or not n the same trade or busness n whch the acqured property was
used) an empoyee who mmedatey pror to the acquston was empoyed n
the trade or busness of the predecessor. If the acquston nvoves ony a
separate unt of the trade or busness of the predecessor, the empoyee need not
have been empoyed by the predecessor n that unt provded that he was
empoyed n the trade or busness of whch the acqured unt wns a part. Under
the amendment remuneraton wth respect to empoyment pad to such empoyee
by the predecessor (o r consdered as havng been pad by the predecessor)
durng the caendar year n whch the acquston occurs (and pror to the
acquston) s attrbuted to the successor empoyer for the purpose of deter-
mnng whether such empoyer has n such caendar year pad 3,000 wages to
such empoyee. The appcaton of the amendment may be ustrated by te
foowng e ampe:
ampe: The Y corporaton acqures a the property of the manufactur-
ng company and mmedatey after the acquston empoys n ts trade or bus-
ness empoyee , who, mmedatey pror to the acquston, was empoyed by the
company. The company has n the caendar year n whch the acquston
occurs (and pror to the acquston) pad 2,000 of wages to . If the Y cor-
poraton pays to n that year remuneraton wth respect to empoym nt of
2,000, ony 1,000 of such remuneraton w be consdered to be wages. For
the purposes of the 3,000 mtaton, the Y corporaton w be credted wth the
2,000 pad to by the company. If, n the same caendar year, the property
s acqured by the Z company from the Y corporaton and mmedatey after
the acquston s empoyed by the Z company n ts trade or busness, no part
of the remuneraton pad to by the Z company n the year of the acquston
w be consdered to be wages. The Z company w be credted wth the remu-
neraton pad to by the Y corporaton and aso wth the wages pad to y
the company (consdered for the purposes of the amendment as havng aso
been pad by the Y corporaton).
In the case of a transfer or acquston of property by a corporaton e empt
from ncome ta under secton 101(0) of the Code, the actvty n whch such
corporaton s engasred s consdered to be ts trade or busness for the purpose
of determnng whether the transferred property was used n the trade or bus-
ness of the predecessor and for the purpose of determnng whether the empoy-
ment by the predecessor and the successor of an ndvdua whose servces were
retaned by the successor consttuted empoyment n a trade or busness. Thus,
f a chartabe or a regous organzaton acqures a the property of another
such organzaton and retans the servces of empoyees of the predecessor,
remuneraton pad to such empoyees by the predecessor n the year of the
acquston (and pror to such acquston) w be attrbuted to the successor
for the purposes of the 3,000 mtaton.
successor empoyer may receve the credt for remuneraton pad to an
empoyee by a predecessor ony f the acquston ncuded substantay a the
property used n a trade or busness of the predecessor, or n a separate unt
of such a trade or busness. the property used n the separate unt of a
trnde or busness may consst of a the property used n the performance of an
essenta operaton of the trade or busness, or t may consst of a the property
used n a reatvey sef-sustanng entty formng a part of the trade or busness.
For e ampe, f the company, whch manufactures a type of motor-drven
machne, dscontnues the manufacturng of motors and transfers a the property
used n such manufacturng to the S company, the S company w be consdered
to have acqured the motor manufacturng unt of the R company. Smary,
the acquston of one of a chan of reta stoves w consttute the acquston of
a separate unt of the trnde or busness of the predecessor.
Paragraph (2) of secton 1 20(a) as amended by the b retans the prov-
son of e stng aw whch e cudes from the term wages the amount of any
payment made to, or on behnf of, an empoyee under a pan or system estabshed
by an empoyer whch makes provson for hs empoyees generay or for a cass
or casses of hs empoyees (ncudng any amount pad by au empoyer for nsur-
ance or annutes, or nto a fund, to provde for any such payment), on account
of (1) an empoyee s retrement, or (2) an empoyee s sckness or accdent
dsabty, or (3) medca or hosptazaton e penses n connecton wth sck-
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277
ness or accdent dsabty of an empoyee, or ( ) the death of an empoyee.
Under present aw payments made under a pan or system provdng for death
benets are not e cuded from wages f the empoyee has certan optons or
rghts, such as the opton to receve. Instead of the provson for such death
beneft, any part of such payment made by the empoyer, or the rght to assgn
the death beneft or to receve a cnsh consderaton n eu thereof. The amend-
ment removes such condtons mposed under e stng aw wth respect to pay-
ments provdng for death benefts. Paragraph (2) e cudes from wages ony
those payments whch are made for one or more of the stated purposes.
Paragraph (3) of secton 1 26(a) as amended by the b e cudes from wages
any payment made to an empoyee (Incudng any amount pad by an empoyer
for nsurance or annutes, or nto a fund, to provde for any such payment) on
account of retrement, Irrespectve of whether such payment s made pursuant to
a pan or system such as s contempated under secton 1 20(a) (2).
Paragraph ( ) of secton 1 20(a) ns amended by the b e cudes from wages
any payment on account of sckness or accdent dsabty, or medca or hos-
ptazaton e penses n connecton wth sckness or accdent dsabty, made by
an empoyer to, or on behaf of, an empoyee after the e praton of s caendar
months foowng the ast caendar month n whch the empoyee worked for such
empoyer. Ths provson of aw w have appcaton n any nstance where the
payment s not made pursuant to a pan or system and therefore s not e cepted
from wages by secton 1 26(a) (2). In order for a payment to be e cepted under
ths provson, the payment made by the empoyer to, or on behaf of, the
empoyee must be made by reason of the empoyee s sckness or accdent dsab-
ty or by reason of medca or hosptazaton e penses n connecton wth such
empoyee s sckness or accdent dsabty and there must have eapsed mme-
datey pror to the caendar month n whch the payment s made at east s
consecutve caendar months durng whch the empoyee dd no work for the
empoyer.
Paragraph ( ) of the amended secton 1 20(a) contans an addtona e cu-
son from the term wages wth respect to certan payments from or nto a
trust e empt from ta under secton 10 (a) of the Code or under or to an
annuty pan whch meets the requrements of secton 10 (a) (3), ( ), ( ), and
(0). Under ths paragraph a payment made by an empoyer nto a trust or
annuty pan s e cepted from wages at the tme of such payment, f the trust s
e empt from ta under secton 10 (a) of the Code or the annuty pan meets the
requrements of secton 10 (a) (3), ( ), ( ), and (0) at the tme the payment
Is made thereto. payment to, or on behaf of, an empoyee from a trust or
under an annuty pan s aso e cepted from wages under ths paragraph f at
the tme of the payment to, or on behaf of, the empoyee, the trust s e empt
from ta under secton 10 (a) or the annuty pan meets the requrements of
secton 16 (a) (3), ( ), ( ), and (0). owever, a payment made to an
empoyee of an e empt trust as remuneraton for servces rendered as such
empoyee and not as a bene fcary of the trust Is not wthn the e cuson.
Paragraph (0) of the amended secton 1 20(a) contnues wthout change the
e stng e cuson from wages (secton 1 20(a) (3)) of payments by an empoyer
(wthout deducton from the remuneraton of, or other rembursement from, the
empoyee) of the empoyees ta mposed by secton 1 00 of the Code and
empoyee contrbutons under State unempoyment-compensaton aws.
Paragraphs (7) and ( ) of the amended secton 1 20(a) contan addtona
e cusons from the term wages. Paragraph (7) e cudes any payment of
remuneraton made n any medum other than cash (as, for e ampe, odgng,
food, cothng, or car tokens or weeky transportaton passes) to an empoyee
for servces not n the course of the empoyer s trade or busness (ncudng
domestc servce n a prvate home of the empoyer). The addtona e cuson
provded by paragraph ( ) emnates from the term wages the remuneraton
(other than vacaton or sck pay) of a stand-by empoyee who has attaned age 6
and whose empoyment reatonshp has not termnated, f the empoyee does no
work for the empoyer n the perod for whch such remuneraton s pad.
Secton 1 26(a) as amended by the b contans no provson comparabe to
paragraph ( ) of e stng aw whch e cudes from the term wages dsmssa
payments whch the empoyer s not egay requred to make. Therefore, a ds-
mssa payment, whch s any payment made by an empoyer on account of nvo-
untary separaton of the empoyee from the servce of the empoyer, w const-
tute wages sub|ect, of course, to the 3,600 mtaton, rrespectve of whether
the empoyer s, or s not, egay requred to make such payment.
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27S
Secton 1 26(a) as amended by e b e pressy Incudes as remuneraton
pad to an empoyee by hs empoyer cash tps or other cash remuneraton custo-
mary receved by an empoyee n the course of hs empoyment from persons
other than the person empoyng hm; e cept that, n the case of cash tps, ony
so much of the amount thereof receved durng any caendar quarter as the
empoyee, before the e praton of 10 days after the cose of such quarter, reports
n wrtng to hs empoyer as havng been receved by hm n such quarter s
consdered as remuneraton pad by hs empoyer, and payment of the amount
so reported s consdered as havng been made to the empoyee on the date on
whch such report s made to the empoyer. The determnaton of whether cash
tps or other cash remuneraton s customary receved by an empoyee w
depend, not on the dentty of the empoyee, but n a arge part, on whether the
servce s of such a nature and s rendered under such crcumstances and n such
pace or busness estabshment as makes the recept of such payment by the
ndvdua performng the servces not unusua. If a restaurant, hote, or other
estabshment ncudes a specfed amount n the b presented to the customer
or patron as a charge n eu of tppng, the amount thereof coected by the
empoyer and turned over to the empoyee s remuneraton to the empoyee at the
tme pad by the empoyer and w not be treated, under the amendment, as a
tp whch consttutes remuneraton ony when reported to the empoyer by tte
empoyee. n e ampe of an empoyee recevng other cash remuneraton
(I. e., other than tps) s found n the case of an ndvdua havng the status
of an empoyee who pays for merchandse obtaned from hs empoyer for resae
and retans the tota amount for whch such merchandse s sod.
Subsecton (b) of secton 20 of the b amends secton 1 01(d)(2) of the
Code, reatng to speca refunds of empoyees ta pad on aggregate wages n
e cess of 3,000 receved by an empoyee from more than one empoyer durng
any caendar year after the caendar year 19 0. The amendment restrcts the
scope of secton 1 01(d)(2) to wages receved durng the caendar year 19 7,
19 S, or 19 9.
Subsecton (c) of secton 20 of the b amends secton 1 01(d) of the Code
by addng thereto new paragraphs (3) and ( ). Secton 1 01(d)(3) as the
effect of conformng the speca refund provsons to the ncrease n the mtaton
on wages from 3,000 to 3,000. Paragraph (3), reatng to wages receved after
19 9, provdes that f by reason of an empoyee recevng wages from more than
one empoyer durng any caendar year after the caendar year 19 9, the wages
receved by hm durng such year e ceed 3,600, the empoyee sha be entted
to a refund of any amount of ta , wth respect to such wages, mposed by secton
1 00 of the Code and deducted from the empoyee s wages, whether or not pad
to the coector, whch e ceeds the ta wth respect to the frst 3,000 of such
wages, receved.
The new secton 1 01(d) ( ), appcabe to remuneraton pad after 19 9, con-
tans speca rues reatng to speca refunds and ad|ustments of empoyees
ta n the case of Federa empoyees and speca rues reatng to speca refunds
of empoyees ta n the case of State empoyees. Under subparagraph ( ) of
secton 1 01(d)( ) each head of a Federa department, agency, or nstrumen-
taty who makes a return pursuant to secton 1 20(e) of the Code and each agent,
desgnated by the head of a Federa department, agency, or nstrumentaty,
who makes a return pursuant to such secton are deemed to be separate empoyers
for the purposes of secton 1 01(c) of the Code, reatng to ad|ustments of
empoyees ta , and secton 1 01(d) (3), reatng to speca refunds of empoyees
ta ; and, for the purposes of secton 1 01(d) (3), the term wages ncudes the
amount, not to e ceed 3,000, determned by each such head or agent as const-
tutng wages pad to an empoyee. d|ustments of the empoyees ta mposed
by secton 1 00 of the Code sha be made by the reportng unt by whch the
erroneous underpayment or overpayment was made. (For provsons reatng to
ad|ustments of empoyers ta n the case of Federa empoyees, see secton 1 11
of the Code, as amended by secton 203 (c) of the b.) The amount of remunera-
ton of each empoyee reported on a return of a reportng unt to be ncuded as
wages sha under no crcumstances be n e cess of 3,000 for a caendar year
and sha ncude ony such amounts of remuneraton as the reportng unt sha
have determned to consttute wages .as defned n secton 1 26. The amend-
ment s ntended to.protect fuy an empoyee of the Unted States or of an
nstrumentaty whoy owned by the Unted States from the payment of ta
Imposed under secton 1 00 n an amount n e cess of the ta mposed wth respect
to the frst 3,000 of remuneraton whch s determned to consttute wages r.s
defned n secton 1 26.
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270
Subparagraph ( ) of secton 1 01(d) ( ) makes the speca refund provsons
n secton 1 01(d)(3) appcabe to amounts equvaent to empoyees ta
deducted n any caendar year after the caendar year 19 9 from empoyees
remuneraton by States, potca subdvsons, or nstrumentates pursuant to
agreements made under secton 21 of the Soca Securty ct (added by secton
10( of the b).
Subsecton (d) of secton 20 of the b provdes that the amendment made by
subsecton (a) sha be appcabe ony wth respect to remuneraton pad after
December 31, 19 9; and that, n the case of remuneraton pad pror to anuary
1, 19 0, the determnaton under secton 1 20(a)(1) of the Code (pror to ts
amendment by the b) of whether or not such remuneraton consttuted wages
sha be made as f subsecton (a) of secton 20 of the b had not been enacted
and wthout nferences drawn from the fact that the amendment made by such
subsecton s not made appcabe to perods pror to anuary 1, 19 0.
Secton 20 : Ths secton amends subsecton (b) of secton 1 26 of the Interna
Revenue Code, whch defnes the term empoyment fur the purposes of the
Federa Insurance Contrbutons ct. and aso amends subsectons (c), (e), (g),
(h), (), and (|) of secton 1 2G of the Code, whch contan defntons pertnent
to determnatons of empoyment.
Subsecton (a) of ths secton of the b, effectve anuary 1, 19 0, amends
secton 1 20(b). Under the amendment the term empoyment s dfned to
mean any servce performed after December 31, 1936, and pror to anuary 1,
19 0, whch consttuted empoyment under the aw appcabe to the perod n
whch such servce was performed; and aso to mean (1) any servce performed
after December 31, 19 9, by an empoyee for the person empoyng hm, rrespec-
tve of the ctzenshp or resdence of ether, ( ) wthn the Unted States,
or ( ) on or n connecton wth an mercan vesse or mercan arcraft (both
as defned n secton 1 20(g) under a contract of servce entered nto wthn the
Unted States or durng the performance of whch the vesse or arcraft touches
at a port n the Unted States (ncudng an arport, n the case of an arcraft),
f the empoyee s empoyed on and n connecton wth the vesse or arcraft
when ontsde the Unted States, and (2) any servce performed outsde the Unted
States after December 31, 19 9, by a ctzen of the Unted States as an empoyee
of an mercan empoyer (as defned n secton 1 C6()).
That porton of secton 1 26(b) (of e stng aw) whch precedes the numbered
paragraphs (these contan the e cusons from the term empoyment ) s
changed substantvey n ony two respects. Frst, the defnton s e tended to
ncude servce on or n connecton wth an mercan arcraft to the same e tent
as servce, aready ncuded n the defnton, on or n connecton wth an mer-
can vesse. Second, the defnton s e tended to ncude servce performed out-
sde the Unted States by a ctzen of the Unted States as an empoyee of an
mercan empoyer (the defnton of the term mercan empoyer s dscussed
beow. In the e panaton of subsecton (e) of ths secton of the b). Under
e stng aw servce performed wthn or wthout the Unted States (whch
otherwse consttutes empoyment) s covered rrespectve of the ctzenshp or
resdence of the empoyer or empoyee. Under the amendment ths s true wth
respect to servce performed ether wthn the Unted States or on or n connecton
wth an mercan vesse or mercan arcraft, but n the ease of servce per-
formed outsde the Unted States, other than on or n connecton wth an mer-
can vesse or arcraft, ony servce (whch otherwse consttutes empoyment)
performed by a ctzen of the Unted States for an mercan empoyer s covered.
The defnton of the term empoyment under the amendment, as apped to
servce performed pror to anuary 1, 19 0, s sub|ect to the pertnent e ceptons
under the aw appcabe to the perod n whch the servce was performed.
The defnton appcabe to servce performed on and after that date contnues
unchanged some of the e ceptons contaned n the present aw, omts or revses
others, and adds certan addtona ones.
Paragraph (1) contnues the e stng e cepton of agrcutura abor, but the
defnton of the term contaned n subsecton (h) of the e stng secton 1 26
s amended by subsecton (d) of ths secton of the b.
Paragraphs (2) and (3) take the pace of the e cusons set forth n para-
graphs (2) and (3) of e stng aw. The e stng paragraph (2) e cudes from
empoyment domestc servce n a prvate home, oca coege cub, or oca
chapter of a coege fraternty or sororty; and the e stng paragraph (3) e -
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eudes from empoyment casua abor not In the course of the empoyer s trade
or busness. Subparagraph ( ) of the new paragraph (2) e cudes from em-
poyment servces not n the course of the empoyer s trade or busness (ncudng
domestc servce n a prvate home of the empoyer) performed on a farm (as
defned n secton 1 26(h)) whch s operated for proft. Generay, a farm s not
operated for proft, f It s occuped prmary for resdenta purposes, or s used
prmary for the peasure of the occupant or hs famy such as for the entertan-
ment of guests or as a hobby of the occupant or hs famy. Sbpara graph ( )
of the new paragraph (2) e cudes from empoyment domestc servce performed
n a oca coege cub, or oca chapter of a coege fraternty or sororty, by a
student who s enroed and s reguary attendng casses at a schoo, coege,
or unversty.
The new paragraph (3) e cudes from empoyment servce not n the course
of the empoyer s trade or busness (ncudng domestc servce n a prvate home
of the empoyer) performed n any caendar quarter by an empoyee, but ony f
the cash remuneraton pad to an ndvdua for such servce s ess than 2
or such servce s performed by an ndvdua who s not reguary empoyed by
the empoyer to perform such servce. The amendment substtutes a ensh and
reguarty-of-empoynent test for the test set forth n e stng aw governng
casua abor. The cash test refers to the cash pad for servces performed durng
a caendar quarter, regardess of when pad. Paragraph (3) provdes that an
ndvdua sha be deemed, for the purposes of such paragraph, to be reguary
empoyed by an empoyer durng a caendar quarter ony f (1) such ndvdua
performs for such empoyer servce of the prescrbed chnracter durng some
porton of at east 26 days durng the caendar quarter, or (2) such ndvdua
was reguary empoyed (determned n accordance wt the test herenbefore
referred to n ths sentence) by such empoyer n the performance of servce of
the prescrbed character durng the precedng caendar quarter. s used n
paragraph (3), the term cash remuneraton ncudes checks and other monetary
meda of e change.
Paragraph ( ) contnues wthout change the present famy empoyment
e cuson.
Paragraph ( ) contnues wthout change the present e cuson of servce
performed on or n connecton wth a vesse not an mercan vesse, but e tends
/he e cuson to servce performed by nn ndvdua on or n connecton wth an
arcraft not an mercan arcraft f such ndvdua s empoyed on and n
connecton wth such arcraft when t s outsde the Unted States.
Paragraphs (6) and (7) supersede paragraph (6) of e stng aw. The e st-
ng paragraph e cudes from empoyment servce n the empoy (1) of the
Unted States or (2) of an nstrumentaty of the Unted States whch s ether
whoy owned by the Unted States or e empt from the empoyers ta mposed by
secton 1 10 of the Code by vrtue of any other provson of aw. The effect of
the new paragraphs (6) and (7) s to ncude ns empoyment a porton of the
Federa servces e cuded from empoyment under e stng aw.
The new paragraph (6) e cudes from empoyment servce performed n the
empoy of any nstrumentaty of the Unted States, f such nstrumentaty s
e empt from the empoyers ta mposed by secton 1 10 of the Code by vrtue
of nny other provson of aw whch specfcay refers to secton 1 10 of the
Code In grantng the e empton from the ta mposed by such secton. (In
connecton wth paragraph (6), see the e panaton of secton 1 13, added by
secton 203(a) of the b.)
The new paragraph (7) e cudes from empoyment servce performed In the
empoy of the Unted States Government, or n the empoy of any nstrumentaty
of the Unted States whch s party or whoy owned by the Unted States, but
ony f (1) such servce s covered by a retrement system, estabshed by a aw
of the Unted States, for empoyees of the Unted States or of such nstru-
mentaty, or (2) the servce s of the character descrbed n any one of a st
of 13 speca casses of e cepted servces. Determnatons as to whether the
partcuar servce s covered by a retrement system of the requste character
are to be made on the bass of whether such servce s covered under a aw
enacted by the Congress of the Unted States whch specfcay provdes for the
estabshment of such retrement system.
The speca casses of e cepted Federa servces (n addton to servces
covered under a federay estabshed retrement system) are as foows:
( ) Servce performed by the Presdent or ce Presdent of the Unted States
or by a Member of the Congress of the Unted States, a Deegate to the Congress,
or a Resdent Commssoner;
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( ) Servce performed n the egsatve branch of the Unted States Govern-
ment (servce n the |udca brnnch of the Unted States Government s e cuded
from empoyment under paragraph (7) by reason of the fact that a servce
performed n such branch s covered by a retrement system estabshed by
congressona enactment) ;
(C) Servce performed n the fed servce of the Post Of ce Department;
(D) Servce performed n or under the ureau of the Census of the Depart-
ment of Commerce by temporary empoyees empoyed for the actua takng of any
census (e cusve of cerca or other empoyees empoyed for work other than
n the actua takng of the census) ;
( ) Servce performed by an empoyee who s e cuded by ecutve order
from the operaton of the Cv Servce Retrement ct of May 29, 1930, because
of payment on a contract or fee bass ;
(F) Servce performed by an empoyee for nomna compensaton of 12 or
ess per annum;
(G) Servce performed n a hospta, home, or other nsttuton of the Unted
States by a patent or nmate thereof;
( ) Servce performed by an empoyee who Is e cuded by ecutve order
such empoyee s servng under a temporary appontment pendng fna determna-
ton of egbty for permanent or ndefnte appontment;
(I) Servce performed by a consuar agent apponted under the authorty of
secton 1 of the Foregn Servce ct of 19 6;
( ) Servce performed by student nurses, medca or denta nterns, resdents-
n-tranng, student dettans, student physca therapsts, or student occupa-
tona therapsts, assgned or attached to a hospta, cnc, or medca or denta
aboratory operated by any department, agency, or nstrumentaty of the Federa
Government, or by certan other student empoyees descrbed n secton 2 of the
ct of ugust , 19 7;
( ) Servce performed n the empoy of the Tennessee aey uthorty n a
poston whch s covered by a retrement system estabshed by such uthorty;
(L) Servce performed by an empoyee servng on a temporary bass In case
of fre, storm, earthquake, food, or other emergency; or
(M) Servce performed by an empoyee who s empoyed under a Federa reef
program to reeve hm from unempoyment.
The now paragraphs (G) and (7) have the effect of e tendng coverage to
Federa servce (ncudng servce n the empoy of nstrumentates of the
Unted States) not covered under a Federa retrement system and not ncuded
n one of the speca casses sted above n paragraphs ( ) to (M), ncusve.
vServce performed by most cvan and a mtary personne of the Dnted
States w be e cuded from empoyment snce such servces are covered by a
retrement system estabshed by a aw of the Unted States. On the other
hand, servce (whch otherwse consttutes empoyment) n the empoy of some
nstrumentates of the Unted States, such as Federa credt unons, Federa
home oan banks, Federa Reserve banks, natona farm oan assocatons, and
producton credt assocatons, w be covered empoyment under the amend-
ments made by the b.
Paragraph ( ) supersedes the e stng e cuson from empoyment of servce
performed for State governments, ther potca subdvsons, and certan of
ther nstrumentates. The new paragraph ( ) s dvded nto subparagraphs
( ) and ( ). Subparagraph ( ) e cudes from empoyment servce (other than
servce to whch subparagraph ) s appcabe that s, certan servce per-
formed n the empoy of a potca subdvson of a State n connecton wth the
operaton of a pubc transportaton system) performed n the empoy of a State,
or any potca subdvson thereof, or any nstrumentaty of any one or more of
the foregong whch s whoy owned by one or more States or potca subdv-
sons. though State and oca government empoyees (other than those to whom
coverage s e tended under subparagraph ( )) are not covered for the purposes
of the ta es mposed under the Federa Insurance Contrbutons ct, provson s
made under tte II of the Soca Securty ct for the coverage of such empoyees
for purposes of benefts by means of State compacts. Subparagraph ( ) e cudes
from empoyment servce performed n the empoy of any potca subdvson
of a State (ncudng an nstrumentaty of one or more potca subdvsons
of a State) n connecton wth the operaton of any pubc transportaton system,
sub|ect to the e cepton set forth n such subparagraph.
923 30 1 19
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The effect of snch e cepton Is to Incude as empoyment servce performed
by an empoyee In the empoy of any potca subdvson of a State (ncudng
an nstrumentaty of one or more potca subdvsons) n connecton wth the
operaton of any pubc transportaton system whose servce s not ncuded
under an agreement entered nto pursuant to secton 21 of the Soca Securty
ct (reatng to the coverage of State and oca government empoyees for the
purposes of tte II of the Soca Securty ct) and (1) who became an empoyee
of such potca subdvson n connecton wth and at the tme of ts acquston
after 1936 of such transportaton system or any part thereof; and (2) who pror
to such acquston rendered servces whch consttuted empoyment n con-
necton wth the operaton of such transportaton system or part thereof. ow-
ever, n the case of an empoyee descrbed n causes (1) and (2) of the precedng
sentence who became such an empoyee n connecton wth an acquston made
pror to anuary 1, 19 0, servce of the prescrbed character performed by such
empoyee w not consttute empoyment f the potca subdvson empoyng
hm fes wth the Commssoner of Interna Revenue pror to anuary 1, 19 0,
a statement that t does not favor the ncuson under subparagraph ( ) of any
empoyee acqured n connecton wth any such acquston made pror to
anuary 1,19 0.
Paragraph (9), whch takes the pace of the e stng e cuson from empoy-
ment of servce performed for certan regous, chartabe, scentfc, terary,
educatona, or humane organzatons, e cudes servce performed by a duy
ordaned, commssoned, or censed mnster of a church n the e ercse of hs
mnstry or by a member of a regous order n the e ercse of dutes requred
by such order. The change n ths provson e tends coverage to servce per-
formed for such nonproft organzatons, e cept as such servce may be e cuded
under the new paragraph (9) or other numbered paragraphs of secton 1 26(b)
of the Code. The e cuson contaned n the new paragraph (9) appes to the
performance of servces whch are ordnary the dutes of such mnsters or
members of regous orders. The dutes of mnsters ncude the mnstraton
of sacerdota functons and the conduct of regous worshp, and the contro,
conduct, and mantenance of regous organzatons (Incudng the regous
boards, socetes, and other ntegra agences of such organzatons), under the
authorty of a regons body consttutng a church or church denomnaton.
Paragraph (10) contnues wthout change the e stng e cuson of servce
performed by an empoyee or empoyee representatve covered by the raroad
retrement system.
Paragraph (11) revses certan e cusons contaned In paragraph (10) of
e stng aw, and omts others. Subparagraph ( ) of paragraph (11) e cudes
servce performed n any caendar quarter n the empoy of any organzaton
e empt from Income ta under secton 101 of the Code, f the remuneraton for
such servce s ess than 100 ( or ess under e stng aw). The doar test
under subparagraph ( ) s the amount earned n a caendar quarter and not the
amount pad In a caendar quarter. Subparagraph ( ) e cudes servce per-
formed n the empoy of a schoo, coege, or unversty, whether or not e empt
from ncome ta under secton 101. f such servce s performed by a student who
s enroed and s reguary attendng casses at such schoo, coege, or unversty.
Paragraphs (12) and (13) contnue wthout change the present e cuson of
servce performed n the empoy of a foregn government or of a whoy owned
Instrumentaty of a foregn government under certan prescrbed condtons.
Paragraph (1 ) contnues wthout change the e cuson of servce performed
by certan student nurses and nterns.
Paragraph (1 ) contnues wthout change the present e cuson of certan
fshng servces.
Paragraph (16) contnues wthout change the present e cuson of servces
performed n the devery and dstrbuton of newspapers, shoppng news, and
magaznes under certan prescrbed condtons.
Paragraph (17) contnues wthout change the present e cuson of servce per-
formed for an nternatona organzaton.
Paragraph (IS) e cudes from empoyment servce performed by an Indvdua
In the sae or dstrbuton of goods or commodtes for another person, off the
premses of such person, under an arrangement whereby such ndvdua receves
hs entre remuneraton (other than przes) for such servce drecty from the
purchasers of such goods or commodtes, f such person makes no provson
(other than by correspondence) wth respect to the tranng of such ndvdua
for the performance of such servce and mposes no requrement upon such
ndvdua wth respect to (1) the ftness of such ndvdua to perform such
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servce, (2) the geographca area n whch such servce s to be performed,
(3) the voume of goods or commodtes to be sod or dstrbuted, or ( ) the
seecton or soctaton of customers. The requrement as to ftness does not
ncude a requrement as to the age or se of the ndvdua.
Subsecton (b) of secton 20 of the b, effectve anuary 1, 19 0, amends
subsecton (e) of secton 1 26 of the Code, whch defnes the term State. The
new subsecton (e) contans three separate numbered paragraphs. The new
paragraph (1) defnes the term State. Under the e stng aw the term
State ncudes aska, awa, and the Dstrct of Coumba. The amend-
ment aso ncudes wthn such term the rgn Isands and, on and after the
effectve date specfed n secton 1633 of the Code (. e., the date on whch the
provsons of tte II of the Soca Securty ct are e tended to Puerto Rco),
Puerto Rco. The new paragraph (2) provdes that the term Unted States
when used n a geographca sense ncudes the rgn Isands and, on and
after the effectve date specfed n secton 1033, Puerto Rco. The new para-
graph (3), reatng to the term ctzen of the Unted States, provdes that an
ndvdua who s a ctzen of Puerto Rco (but not otherwse a ctzen of the
Unted States) and who s not a resdent of the Unted States sha not be
consdered, for the purposes of secton 1 26 of the Code, as a ctzen of the
Unted States pror to the effectve date specfed n secton 1633. Paragraph
(3) s desgned to e cude from empoyment (pror to the effectve date specfed
n secton 1033) servces performed by such a ctzen of Puerto Rco who works
n Puerto Rco (or esewhere outsde the Unted States) as an empoyee for an
mercan empoyer (as defned n secton 1 20()).
Subsecton (c) of secton 20 of the b amends subsecton (g) of secton 1 26
of the Code, whch defnes the term mercan vesse, by makng a change n
the headng of such subsecton and by addng a defnton of the term mercan
arcraft. The term mercan arcraft s defned, for purposes of the Federa
Insurance Contrbutons ct, to mean an arcraft regstered under the aws of
the Unted States. Subsecton (g) of ths secton of the b provdes that the
amendment made by subsecton (c) sha be appcabe ony wth respect to
servces performed after December 31, 19 9.
Subsecton (d) of secton 20 of the b amends subsecton (h) of secton 1 26-
of the Code, whch defnes the term agrcutura abor for purposes of the
Federa Insurance Contrbutons ct. Subsecton (h) of e stng aw contans
four numbered paragraphs. The new subsecton (h) kewse contans four
numbered paragraphs. Paragraph (1) of e stng aw reates prmary to servce
performed on a farm, n the empoy of any person, n cutvatng the so or n
rasng or harvestng any agrcutura or hortcutura commodty. Paragraph
(2) of e stng aw reates prmary to servce performed n the empoy of the
owner, tena t, or other operator of a farm n connecton wth the operaton, man-
agement, conservaton, mprovement, or mantenance of such farm and ts toos
and equpment, f the ma|or porton of the servce s performed on a farm. The
new paragraphs (1) and (2) contnue wthout change the provsons of para-
graphs (1) and (2) of e stng aw.
Paragraph (3) of e stng aw ncudes as agrcutura abor the foowng
servces even though not performed on a farm: Servces performed n connecton
wth the producton or harvestng of mape srup or mape sugar or any commod-
ty defned as an agrcutura commodty n secton 1 (g) of the grcutura
Marketng ct, as amended, or n connecton wth the rasng or harvestng of
mushrooms, or n connecton wth the hatchng of poutry, or n connecton wth
gnnng of cotton, or n connecton wth the operaton or mantenance of dtches,
canas, reservors, or waterways used e cusvey for suppyng and storng
water for farmng purposes. The new paragraph (3) ncudes as agrcutura
abor ony servces performed n connecton wth the producton or harvestng of
any commodty defned as an agrcutura commodty n secton 1 (g) of the
grcutura Marketng ct, as amended, or n connecton wth the gnnng of
cotton. The effect of the amendment to paragraph (3) s to e cude from the
defnton of agrcutura abor servces performed n connecton wth the pro-
ducton or harvestng of mape sap, or n connecton wth the rasng or harvest-
ng of mushrooms, or n connecton wth the hatchng of poutry, uness such
servces are performed on a farm (as defned n secton 1 20(h)). Thus, serv-
ces performed n connecton wth the operaton of a hatchery, f not operated
as part of a poutry or other farm, w be covered empoyment. Under the
amendment servces performed n the processng (as dstngushed from the
gatherng) of mape sap nto mape srup or mape sugar do not consttute agr-
cutura abor, even though such servces are performed on a farm. Servces
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performed In connecton wth the operaton or mantenance of dtches, canas,
reservors, or waterways used e cusvey for suppyng and storng water for
farmng purposes, do not consttute agrcutura abor, uness the ma|or part of
such servces s performed on a farm and such servces are performed n the
empoy of the owner, tenant, or other operator of a farm, n connecton wth
the operaton, conservaton, mprovement, or mantenance of such farm.
Paragraph ( ) of e stng aw ncudes as agrcutura abor servce performed
n the handng, pantng, dryng, packng, packagng, processng, freezng, grad-
ng, storng, or deverng to storage or to market or to a carrer for transportaton
to market, any agrcutura or hortcutura commodty, provded such servce
s performed as an ncdent to ordnary farmng operatons or, n the case of
fruts or vegetabes, as an ncdent to the preparaton of such fruts and vegetabes
for market. Subparagraphs ( ) and (13) of the new paragraph ( ) are a com-
pete revson of the afore-mentoned provsons of paragraph ( ) of e stng aw.
Under such subparagraph ( ) the term agrcutura abor ncudes servce per-
formed n the empoy of the owner-operator, tenant-operator, or other operator of
a farm n handng, pantng, dryng, packng, packagng, processng, freezng,
gradng, storng, or deverng to storage or to market or to a carrer for trans-
portaton to market, any agrcutura or hortcutura commodty n ts unmanu-
factured state, provded such operator produced more than one-haf of the com-
modty wth respect to whch such servce s performed. Under such subpara-
graph (1 ) the term agrcutura abor ncudes servce of the character de-
scrbed n the precedng sentence performed n the empoy of a group of operators
of farms (other than a cooperatve organzaton), provded such operators pro-
duced a of the commodty wth respect to whch such servce s performed.
The tests as an ncdent to ordnary farmng operatons and as an ncdent
to the preparaton of fruts or vegetabes for market have been strcken by the
amendment and n eu thereof three tests have been substtuted, namey, the
status of the person for whom the servce s performed, the state of the commodty
wth respect to whch the servce s performed, and the e tent to whch such
commodty was produced by the operator or group of operators n whose empoy
the servce s performed.
Under e stng aw servce of the prescrbed character performed wth respect
to fruts or vegetabes n the empoy of any person consttutes agrcutura abor,
provded such servce Is performed as an ncdent to the preparaton of such
fruts or vegetabes for market ; and such servce wth respect to a other agrcu-
tura or hortcutura commodtes consttutes agrcutura abor, If the servce
s performed as an ncdent to ordnary farmng operatons. Under the
amendment servce of the character prescrbed theren Is Incuded ns agrcutura
abor ony f performed n the empoy of the operator of a farm or a group of
operators of farms (other than a cooperatve organzaton). The term operator
of a farm as used n paragraph ( ) means an owner, tenant, or other person n
possesson of a farm and engaged n the operaton of such farm. Servce of the
prescrbed character performed n the empoy of a cooperatve organzaton does
not consttute agrcutura abor. The term organzaton as used n sub-
paragraph ( ) ncudes corporatons, |ont-stock companes, and assocatons
whch are treated as corporatons under the Interna Revenue Code. For the
purposes of such subparagraph, any unncorporated group of operators sha be
deemed a cooperatve organzaton f the number of operators comprsng such
group Is more than 20 ft any tme durng the caendar quarter n whch the servce
Invoved s performed.
Under the amendment servce of the prescrbed character wth respect to an
agrcutura or hortcutura commodty consttutes agrcutura abor ony f
the servce s performed wth respect to such commodty In ts unmanufactured
state. The effect of ths provson s to e cude from the defnton of agrcu-
tura abor under paragraph ( ) any servce of the prescrbed character per-
formed wth respect to a commodty the character of whch has been changed
from ts raw or natura state by a processng operaton. For e ampe, the scng
and sun-dryng or dehydraton of appes |.re not processng operatons whch
change the character of the appes, but the grndng of dred appes or the
pressng of raw appes nto cder s a processng operaton whch changes the
character of the appes from ther raw or natura state. Where the servce of
the prescrbed character s performed n the empoy of the operator of a farm,
such servce does not consttute agrcutura abor under the amendment uness
such operator produced more than one-haf of the commodty wth respect to
whch the servce s performed. Where the servce s performed n the empoy
of a group of operators of farms (other than a cooperatve organzaton), such
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servce does not consttute agrcutura abor under the amendment uness such
operators produced a of the commodty wth respect to whch the servce s
performed. The term commodty refers to a snge agrcutura or hortcutura
product, that s, a appes are to be treated as a snge commodty, whe appes
and peaches are to be treated as two separate commodtes. The servce wth
respect to each such commodty s to be consdered separatey.
Subparagraph (C) provdes n effect that servce of the prescrbed character
performed n connecton wth commerca cannng or commerca freezng or n
connecton wth any agrcutura or hortcutura commodty after ts devery
to a termna market for dstrbuton for consumpton does not consttute agr-
cutura abor under pnragraph ( ). Ths provson s n a matera respects
the same as that u e stng aw.
The new paragraph ( ) contnues wthout change the defnton of the term
farm, but e tends the appcaton of such defnton to the entre secton 1 26
of the Code, rather than mtng t to the defnton of the term agrcutura
abor as n e stng aw.
Subsecton (g) of secton 20 of the b provdes that the amendments to
secton 1 26(h) made by subsecton (d) of ths secton of the b sha be
appcabe ony wth respect to servces performed after December 31, 19 9.
The amendment of the defnton of agrcutura abor for the purposes of
the Federa Insurance Contrbutons ct w automatcay be appcabe for
the purposes of ncome ta wthhodng on wages (for servces performed after
39 9), .snce secton 1021(a)(2) of the Code (defnng wages for ncome ta
wthhodng) provdes that the term wages sha not ncude remuneraton
pad for agrcutura abor as defned n secton 1 20(h).
Subsecton (e) of secton 20 of the b amends secton 1 26 of the Code by
strkng out subsectons () and (|), reatng respectvey to certan servces
performed for the War Shppng dmnstraton or the Unted States Martme
Commsson and to certan servces performed for the onneve Power dmn-
strator (these provsons are superseded by the new sectons 1 20(e) and
1 20(h) of the Code), and by nsertng n eu thereof a new subsecton (). The
new subsecton () defnes the term mercan empoyer, for purposes of the
Federa Insurance Contrbutons ct, to mean an empoyer whch s (1) the
Unted States or any nstrumentaty thereof, (2) an ndvdua who s a resdent
of the Unted States, (3) a partnershp, f two-thrds or more, of the partners
are resdents of the Unted States, ( ) a trust a the trustees of whch are
resdents of the Unted States, or ( ) a corporaton organzed under the aws of
the Unted States or of any State. Subsecton (g) of ths secton of the b
provdes that the amendment made by subsecton (e) sha be appcabe ony
wth respect to servces performed after December 31, 19 9.
Subsecton (f) of secton 20 of the b conforms secton 1 26(c) of the Code,
reatng to the ncuded-e cuded rue for determnng empoyment, to the
change n the paragraph number of the e cuson from empoyment of servce
performed by an ndvdua covered under the raroad retrement system.
D FINITION OF MPLOY
Secton 206: Subsecton (a) of ths secton amends subsecton (d) of secton
1 20 of the Interna Revenue Code, whch defnes the term empoyee for the
purposes of the Federa Insurance Contrbutons ct,
The provsons of subsecton (d) of secton 1 26, as amended by the b, are
dentca wth the provsons of secton 210(k) of the Soca Securty ct as
amended by secton 10 (a) of the b. The term empo. e, for the purposes
of the Federa Insurance Contrbutons ct, has e acty the same meanng as
when used n tte II of the Soca Securty ct as amended by the b. de-
taed dscusson of the new defnton appears n the e panaton n ths report
of the term empoyee as defned n secton 210(k) of the Soca Securty ct
(added by secton 10 (a) of the b).
The matera referred to s as foows:
Defnton of empoyee.
Secton 210(k) of the Soca Securty ct as amended by the b defnes the
term empoyee for the purposes of tte II of such ct. The e stng defnton
of empoyee (secton 1101(a) (6) of the Soca Securty ct) s repeaed by secton
03(a) of the b, effectve wth respect to servces performed after December
31,19 9.
Paragraphs (1), (2), (3), and ( ) of the defnton provde separate and
ndependent tests for determnng who are empoyees. If an ndvdua s an
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2 6
empoyee under any one of the paragraphs, he s to be consdered an empoyee
whether or not he s an empoyee under any of the other paragraphs.
Paragraph (1) of the defnton contnues wthout change the present pro-
vson that any offcer of a corporaton s an empoyee.
Under paragraph (2) of the defnton the usua common-aw rues appcabe
n determnng the empoyer-empoyee reatonshp are to be used to determne
whether an ndvdua s an empoyee. Thus, admnstratve and udca
determnatons that ndvduas are empoyees under e stng aw reman un-
dsturbed. The second sentence of paragraph (2) s desgned to change the
effect of the Unted States Supreme Court s hodng n artes v. rmngham
((19 7 ) 332 U. S. 126), by requrng that fu force and effect be gven to a
wrtten contract e pressy rectng that the person for whom the servce s
performed sha have compete contro over the performance of such servce and
that the ndvdua, n the performance of such servce (ether aone or as a
member of a group), s the empoyee of such person; but f such person s an
agent or empoyee of another person wth respect to the e ecuton of the con-
tract, the ndvdua s an empoyee of such other person. It s further provded,
but ony for purposes of the second sentence of paragraph (2) of the defnton,
that no effect sha be gven to the modfcaton of such a wrtten contract pror to
ts e praton date uness the contract s termnated or otherwse modfed n
wrtng. Ths provson s desgned to prevent the empoyer under such wrtten
contract from successfuy contendng that the contract has been termnated or
modfed by a subsequent ora agreement or by the mere conduct of the partes.
Paragraph (2), on the other hand, s not ntended to gve force or effect to a
contract whch e pressy provdes that the person for whom the servces are
performed sha not have the rght to contro and drect the ndvdua who per-
forms the servce or that suc ndvdua s not the empoyee of such person.
Despte such a contract a the facts and crcumstances of the partcuar ense
must be consdered to determne whether such ndvdua s an empoyee ether
under the usua common-aw rues or under paragraph (3) or ( ) of the defn-
ton.
Your commttee beeves that the usua common-aw rues for determnng
the empoyer-empoyee reatonshp fa short of coverng certan ndvduas
who shoud be ta ed at the empoyee rate under the od-age, survvors, and ds-
abty nsurance program. The statutory provsons set forth n paragraphs
(3) and ( ) are desgned to correct ths defcency n e stng aw by e tendng
the defnton to ncude those ndvduas who, athough not empoyees under
the usua common-aw rues, occupy the same status as those who are empoyees
under such rues.
Paragraph (3) of the defnton covers ndvduas n the foowng occupa-
tona groups who perform servces for remuneraton under certan prescrbed
crcumstances:
( ) s an outsde saesman n the manufacturng or whoesae trade;
( ) s a fu-tme fe nsurance saesman;
(C) s a drver-essee of a tn cab;
(D) s n home worker on materas or goods whch are furnshed by the person
for whom the servces are performed and whch are requred to be returned to
such person or to a person desgnated by hm ;
( ) s a contract ogger;
(F) s a essee or censee of space wthn a mne when substantay a of
the product of such servces s requred to be sod or turned over to the essor or
censor; or
( ) s a house-to-house saesman f under the contract of servce or n fact
such ndvdua () s requred to meet a mnmum saes quota, or () s e pressy
or mpedy requred to furnsh the servces wth respect to desgnated or reguar
customers or customers aong a prescrbed route, or () s prohbted from
furnshng the same or smar servces for any other person.
The appcaton of ths paragraph of the defnton requres the dentfyng
of the Indvdua as one who performs servces n a desgnated occupatona
group. If the servces are not performed n one of the desgnated occupatona
groups, paragraph (3) s nappcabe wth respect to such servces. The an-
guage used n the b to desgnate the respectve occupatona groups reates to
feds of endeavor n whch partcuar desgnatons are not necessary n unversa
use wth respect to the same servce. The desgnatons are addressed to the
actua servces wthout regard to any technca or cooqua abes whch mny
be attached to such servces. The purpose n stng these severa categores s
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2 7
not to defne but to dentfy each occupatona group. Thus, a determnaton
whether servces fa wthn one of these categores depends upon the facts of
the pactcuar stuaton.
The factua stuatons set out beow are ustratve of some of the Indvduas
fang wthn each of the occupatona groups enumerated n paragraph (3) of
the defnton. The mere fact that an ndvdua fas wthn an enumerated
occupatona group, however, does not n tsef make such ndvdua an empoyee
under ths paragraph of the defnton, uness the contract of servce contempates
that substantay a of the servces (other than servces by mnng essees)
are to be performed personay by such ndvdua, there s no substanta nvest-
ment (other than the nvestment by a saesman n factes for transportaton)
n the factes of the trade or busness wth respect to whch the servce s
performed, and the servce s not n the nature of a snge transacton. The
ustratve factua stuatons are as foows:
( ) Outsde saesman n the manufacturng or whoesae trade. Cty and
traveng saesmen who se at whoesae to retaers or others, operate oft
the company s premses, and are generay compensated on a commsson
bass, are ncuded wthn ths occupatona group. Such saesmen are
generay not controed as to the detas of ther servce or the means by
whch they cover ther terrtores, but n the ordnary case they are e pected
to ca on reguar customers wth a far degree of reguarty.
( ) Fu-tme fe nsurance saesman. n ndvdua whose reguar
occupaton conssts of soctng appcatons prmary for one fe-nsurance
company s wthn ths occupatona group, regardess of the types of nsur-
ance contracts (such as annuty contracts) ssued by the company.
(C) Drver-essee of a ta cab. n ndvdua who rents a cab from a cab
company for a specfed amount per day, hs remuneraton beng the dffer-
ence between the renta he pays the company and the amount receved durng
the day from the operaton of the cab, s wthn ths occupatona group.
(D) ome worker. Incuded wthn ths occupatona group are nd-
vduas who fabrcate quts, buttons, goves, bedspreads, cothng, neede-
craft products, etc., or who address enveopes, off the premses of the person
for whom such servce s performed, under arrangements whereby they
obtan from such person the materas or goods wth respect to whch they
are to perform such servce and are requred to return the processed materas
to such person or to a person desgnated by hm.
( ) Contract ogger. n ndvdua who contracts wth a company, en-
gaged n the busness of producng and seng umber and other forest
products, to perform servce as a tmber cutter, skdder, or hauer, s ncuded
wthn ths occupatona group, but woud not, however, be covered as an
empoyee under paragraph (3), uness he personay s to do substantay
a the work, has no substanta nvestment n equpment, and the servces
are part of a contnung reatonshp wth the company.
(F) Mnng essee or censee. n ndvdua who under a ease or cense
from the owner or operator of a mne undertakes to e tract the ore or other
product therefrom s ncuded wthn ths occupatona group (together
wth a ndvduas assocated wth hm n such undertakng as partners,
ont venturers, or empoyees), when substantay a of the product so
e tracted s requred to be sod or turned over to such owner or operator.
(G) ouse-to-house saesman. n ndvdua engaged n the house-to-
house or door-to-door seng or rentng of goods, commodtes, or servces
at reta (ncudng, among others, saesmen who drve trucks on reguar
routes seng mk, bakery products, beverages, other foods, etc., or seng
servces such as aundry or dry-ceanng servces) s ncuded wthn ths
occupatona group, f such ndvdua, under the contract of servce or n
fact, (1) s requred to meet a mnmum saes quota, or (2) s e pressy or
mpedy requred to furnsh the servces wth respect to desgnated or
reguar customers or customers aong a prescrbed route, or (3) s prohbted
from furnshng the same or smar servces for any other person.
In order for an ndvdua to be an empoyee under paragraph (3), the nd-
vdua must perform servces for remuneraton n an occupaton fang wthn
one of the enumerated groups, and the contract of servce must contempate
that substantay a the servces to whch the contract reates n the partcuar
desgnated occupaton (other than the servces descrbed n subparagraph (F))
are to be performed personay by such ndvdua. owever, even though ths
condton s met, the ndvdua s not an empoyee wthn the meanng of
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2 S
paragraph (3), f (1) such ndvdua has a substanta Investment (other than
the nvestment by a saesman n factes for transportaton) n the factes
of the trade, occupaton, busness, or professon wth respect to whch the servces
are performed, or (2) the partcuar servces are n the nature of a snge
transacton not part of a contnung reatonshp wth the person for whom
the servces are performed.
For the purposes of paragraph (3) of the defnton, the term contract of
servce means an arrangement, forma or Informa, under whch the partcuar
servces are performed. The requrement that the contract of servce sha
contempate that substantay a of the servces are to be performed personay
means that t s not contempated that any matera part of the servces to whch
the contract reates w be deegated to any other person by the ndvdua who
undertakes to perform such servces. The condton that the contract of servce
sha contempate persona performance of substantay a the servces s not
appcabe wth respect to subparagraph (F), reatng to mnng essees.
In order for an Indvdua to be an empoyee under paragraph (3) of the
defnton, he must not have a substanta nvestment (other than the Invest-
ment by a saesman In factes for transportaton) n the factes of the
trade, occupaton, busness, or professon wth respect to whch the servces
are performed. The factes here pertnent ncude equpment and premses
avaabe for the work or enterprse as dstngushed from educaton, tranng,
and e perence, but do not ncude such toos, nstruments, equpment, or cothng
as are commony or frequenty provded by empoyees. n nvestment n an
automobe by an ndvdua whch Is used prmary for hs own transportaton
n connecton wth performance of servces for another person has no sgnfcance
under ths paragraph snce such nvestment Is comparabe to outays for trans-
portaton by an ndvdua performng smar servces who does not own an
automobe. Moreover, under paragraph (3), the nvestment by a saesman
n factes for the transportaton of the goods or commodtes to whch the
servces reate Is to be e cuded n determnng the nvestment n a partcuar
case.
If an ndvdua has a substanta nvestment n factes of the requste
character, he s not an empoyee wthn the meanng of paragraph (3) of the
defnton, snce a substanta nvestment of the requste character standng
aone s suffcent to e cude the Indvdua from the empoyee concept under
such paragraph.
If the servces are not performed as part of a contnung reatonshp wth
the person for whom the servces are performed, but are n the nature of a
snge transacton, the ndvdua performng such servces s not an empoyee
wthn the meanng of paragraph (3) of the defnton.
The groups sted n paragraph (3) of the defnton, whe mted In ther
aggregate scope, comprehend seven we-known occupatona areas from whch
much of the present uncertanty and past tgaton on ths queston has evoved.
Your commttee has desgnated these groups to assure the appcaton of the
empoyee ta rate to ndvduas who work n these occupatons, wth the e cep-
tons dscussed above.
The statutory concept set forth n paragraph ( ) of the defnton s desgned
to dfferentate between ndvduas who are empoyees and ndvduas who are
not empoyees on the bass of factua consderatons and not on the bass of
technca ega consderatons. Under ths test the status of an ndvdua as an
empoyee n the performance of servce for any person for remuneraton s deter-
mned from the combned effect of seven enumerated factors.
In seectng these factors, your commttee has carefuy consdered the dec-
sons of the Unted States Supreme Court n U. S. v. Sk and arrson v. Grey can
Lnes, Inc. (19 7) (331 U. S. 70 ), as we as the factors whch seem to have
entered nto determnatons under the common aw rues.
The Supreme Court decsons set forth a number of factors to be consdered
n determnng whether an ndvdua performng servce for another person
Is the empoyee of such person. ma|or dffcuty whch your commttee found
wth the Supreme Court decsons s the ndcaton by the Court that the factors
consdered by t were not e cusve, thus eavng the adu nstratve agences
free to consder other uneuumerated factors n reachng ther determnatons
n partcuar cases. The common aw rues, on the other hand, by over-empha-
szng the factor of contro, partcuary the ega rght to contro, have per-
mtted many empoyers at ther dscreton to f the status of ther empoyees and
avod soca securty ta es by a mere forma shft n ther contractua arrange-
ments. In ths paragraph of the defnton, your commttee has attempted to
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2 9
chart a more defnte course than that ad down by the Supreme Court for the
admnstratve agences To foow n the admnstraton of the soca securty
egsaton; and, at the same tme, has mted the possbtes of ta avodance
by empovers. Your commttee has prescrbed the factors whch t beeves shoud
be consdered under paragraph ( ) of the defnton n determnng the e stence
of an empoyer-empoyee reatonshp for soca securty purposes. These factors
are: (1) contro over the ndvdua; (2) permanency of the reatonshp; (3)
reguarty and frequency of performance of the servce; ( ) ntegraton of the
.dvdua s work n the busness to whch he renders servce; (u) ack of sk
requred of the ndvdua; (6) ack of nvestment by the ndvdua n factes
for work ; and (7) ack of opportuntes of the ndvdua for proft or oss.
The combned effect of a the factors w contro the determnatons under
ts paragraph of the defnton. For nstance, the combned effect of a the
factors may ndcate that an ndvdua s performng the servce n pursuance
of hs own busness. In such case, he w not be consdered an empoyee under
ths paragraph of the defnton. Lkewse, the combned effect of the factors,
ncudng the rreguarty and nfrequency of the performance of the servce,
may be such that the ndvdua w not be consdered an empoyee under ths
paragraph, even though he s not engaged n a busness of hs own n the per-
formance of such servce.
Contro of the type pertnent to the frst factor may n partcuar cases be
evdenced by one or more of a varety of crcumstances, ncudng the perform-
ance by the ndvdua of hs servce n accordance wth procedures, or at tmes,
f ed by the person for whom the servce s performed; the furnshng by the
person for whom the servce s performed of the pace, toos, or equpment
for the work; or by the fact that the person for whom the servce s performed
has the rght to termnate the servce of the ndvdua wthout cause or on
short notce. Lack of ths type of contro s ndcatve of the none stence
of the empoyer-empoyee reatonshp.
Wth respect to the second factor, a reatonshp s permanent f the arrange-
ment contempates the performance of servce under a contnung reatonshp,
even though n fact the ndvdua works ony a short tme. It s not necessary
that the servce be performed on consecutve workdays.
The thrd factor requres consderaton of the constancy and rate of recur-
rence of the servce for a partcuar person. Reguarty and frequency of per-
formance of the servce s ntended to be read n con|uncton wth and n con-
tradstncton to the factor permanency of the reatonshp. If t s con-
tempated that the performance of servce w be merey a sporadc part-tme
actvty, that fact s evdence that the performance of the servce s rreguar
and nfrequent and that the reatonshp s not permanent, and s ndcatve of
the none stence of the smpoyer-empoyee reatonshp.
Integraton of the ndvdua s work n the busness to whch he renders serv-
ce means the merger of the ndvdua s servce nto the busness of a person so
that such servce consttutes a part of the unt or whoe whch comprses such
busness. It s mmatera whether the servce s performed at the begnnng
or end or at any ntermedate pont, so ong as t fas wthn the mts of the
scope and functon of the busness. Integraton n partcuar cases may be
evdenced by one or more of a varety of crcumstances, such as the fact that the
servce s essenta to the operaton of the busness; the fact that the servce
s performed n the course of such busness; the fact that the servce of the
ndvdua s performed n or under the name or trade name of the person
for whom the servce s performed; and the fact that the servce of the ndvdua
supports or affects the good w of the person for whom the servce s per-
formed and not the separate good w of the ndvdua.
Sk means the technca or artstc profcency requred of an ndvdua
to perform hs servce. Lack of sk s ordnary ndcatve of the empoyer-
empoyee reatonshp, but a requrement of a hgh degree of sk for the per-
formance of servce s not necessary nconsstent wth the e stence of an
empoyer-empoyee reatonshp where the combned effect of a seven factors
ndcates that the ndvdua, n the performance of such servce, s an empoyee.
Investment by the ndvdua n factes for work means nvestment n
equpment and premses avaabe for the work or enterprse as dstngushed
from educaton, tranng, and e perence. It does not ncude nvestment n
such toos, nstruments, equpment, or cothng as are commony provded by
ndvduas who are admttedy empoyees. n nvestment n an automobe
by an ndvdua whch s used prmary for hs own transportaton n connec-
ton wth performance of servces for another person has no sgnfcance under
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290
ths factor, snce stch Investment s comparabe to outays for transportaton by
an ndvdua performng smar servces who does not own an automobe.
Ownershp of a separate estabshment n connecton wth the performance of
servce, dstnct from the premses of the person for whom such servce s per-
formed, s ndcatve of the none stence of the empoyer-empoyee reatonshp.
On the other hand, ack of such nvestment tends to ndcate that the ndvdua
performng servce s an empoyee.
Proft or oss Invoves the reazaton of gans or the sufferng of osses
through the use of capta by an ndvdua In connecton wth the performance
of hs servces. Mere opportunty for hgher earnngs such as from pay on a
pecework bass, or the possbty of gan or oss from a commsson arrange-
ment, wthout capta as an ncome-producng eement, s not wthn the mean-
ng of the term opportuntes for proft or oss used n paragraph ( ). Op-
portunty for proft or oss may n partcuar cases be estabshed, n varyng
degrees, by one or more of a varety of crcumstances, such as the fact that the
ndvdua has contnung and recurrng abtes or obgatons wth rsk of
ess and opportunty for proft, dependng upon the reaton of recepts to e -
pendtures and charges. Lack of such opportunty for proft or oss s ndcatve
or the e stence of the empoyer-empoyee reatonshp.
ampes under paragraph ( ):
The foowng e ampes ustrate the status of certan ndvduas under
paragraph ( ) of the defnton:
ampe (1), automobe deaer. Is an authorzed automobe deaer
under contract wth an automobe manufacturer. e provdes hs own es-
tabshment, has a showroom and mantenance and repar factes, and ses the
manufacturer s cars at prces f ed by the manufacturer. e may hande ac-
cessores of other manufacturers. e empoys hs own personne, bears a e -
penses nvoved n the operaton of the deaershp, and operates under hs own
name.
Whe s servces are Integrated to some degree nto the dstrbuton end
of the manufacturer s busness, he operates under hs own name, has hs own
snes organzaton and repar crew, and the servces performed by hs organza-
ton support hs own good w as we as the good w of the manufacturer.
Though he must conform to company pocy wth respect to the seng prce of
the manufacturer s cars, he s not controed n hs choce of personne or wth
respect to the manner n whch he operates hs busness. s reatonshp wth
the manufacturer s permanent and hs servces are performed frequenty and
reguary. owever, he has a substanta nvestment n an estabshment of
hs own, ncudng a showroom, mantenance and repar factes, and acces-
sores of other manufacturers. Such nvestment, together wth hs operatng
e penses and hs abty ar common aw for certan acts of hs personne, sug-
gests a substanta rsk of oss. s opportunty for proft s smary e tensve
snce hs profts depend argey upon hs own sk n deveopng and mantanng
an ecent organzaton.
The combned effect of the foregong factors ceary shows that under para-
graph ( ) of the defnton s engaged n a busness of hs own and s ac-
cordngy not an empoyee.
ampe (2), contract ogger. The company owns tracts of tmberand
or tmer rghts on ands of others and engages n the producton and sae of
umber and oer forest products Operatons are carred on ny the company
pursuant to contracts made wth tmber cutters, skdders, and hauers. The com-
pany enters nto a wrtten contract wth to fe certan trees on a defntey
descrbed tract of tmberand, cut the trees nto ogs, and saw the ops nto
rough umber. Specfcatons for the work are stated n the contract. The con-
tract provdes that sha compete the work wthn a defnte perod; and that
the company w pay semmonthy at a specfed rate per thousnnd feet of
rough umber. personay performs servces under the contract and engages
other Indvduas who perform servces as cutters wth hm. has suffcent
capta, ncudng equpment, to carry on the operatons under hs contract wth
the company, e keeps hs own records and perodcay receves from the com-
pany the amount due under the terms of the contract.
though ntegraton of s servce nto the company s busness Is present,
and some degree of contro may e st over s servces, manages hs own af-
fars, conducts hs actvtes through the use of hs own factes, and s at
berty to deegate such servce to assstants of hs own choce. e has nn
opportunty for proft snce the amount of hs net gan from the servce depends
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npon hs sk and effcency and the effcency of hs organzaton. e aso
undertakes a rsk of oss by reason of hs nvestment n and the cost of man-
tanng factes. though may enter nto successve contracts wth the
company, there s no permanency n the reatonshp of the type contempated
under paraprah ( ) of the defnton. s servces are reguar and frequent
n the sense that they are performed day. owever, under the contract,
the servces are not to contnue on an ndefnte bass but are to termnate au-
tomatcay upon the competon of a specfc amount of work. The combned
effect of a the factors ceary shows that s pursung a busness of hs own
and s accordngy not an empoyee under paragraph ( ) of the defnton.
In another type of arrangement, the company enters nto a contract wth
who owns tmberand or tmber rghts, under whch wth hs own equpment
and empoyees undertakes to cut tmber therefrom and dever t to the com-
pany s premses for sae to the company at a mutuay agreed upon devered
prce. devers and ses tmber to the company pursuant to the contract.
s ceary not an empoyee under paragraph ( ) of the defnton. servce
reatonshp, whch s prerequste to the appcaton of ths paragraph, does not
e st, snce , athough one of the company s suppers, s not performng serv-
ces for the company, but s ceary engaged n the seng of tmber n pursut
of hs own busness.
ampe (3), buk o-pant operator. The o company Is engaged n the
busness of marketng petroeum products and enters nto a contract wth
under whch s to operate a dstrbuton staton. provdes hs own tanks
and trucks. e operates the staton as hs own and empoys assstants of hs
own choce. pays a e penses arsng from the operaton of the staton, and
f es the hours and days durng whch the pant sha be open.
The combned effect of a the factors specfed n paragraph ( ) of the
defnton as apped n ths case ceary shows, as n the case of the automobe
deaer descrbed n e ampe (1), that s engaged n a busness of hs own and
s not an empoyee.
ampe ( ), part-tme nursery stock saesman. The company socts the
part-tme servces of farmers to canvass farm owners and operators for the
purchase of nursery stocks of the company. Upon recept of a repy from ,
a farmer, the company furnshes hm wth a cataog and other materas
descrbng ts products, and order banks. , n the off farmng season, and at
such rreguar ntervas as he fnds convenent, socts orders for the company s
products from other farmers and farm operators. s not requred to meet any
saes quota. e may or may not receve nstructons from the company reatve
to saes technques to be used n securng orders for ts products. Upon obtan-
ng an order, s pad a commsson by the company ether upon ts recept of
the order or after ts recept of payment from the purchaser.
s work s ntegrated n the busness of the company. I-tte sk, f any,
s requred n the performance of the work, and there s no nvestment n the
seng actvty conducted by . has an opportunty to proft from the
servce, but there s tte or no chance of oss. The reatonshp contempates
the performance of sporadc part-tme servces ony, havng no connecton wth
s reguar occupaton of farmng. The performance of the servce s nether
reguar nor frequent; nor s the reatonshp permanent. Moreover, there s
no supervson e ercsed by the company over the performance of the servce.
The combned effect of a the factors, despte the fact that s not engaged
n a busness of hs own n seng nursery stocks, ceary shows that s not an
empoyee of the company.
ampe ( ), constructon worker. , through newspaper and other adver-
tsng, offers hs servces to the genera pubc as a pasterng contractor. e has
a busness offce and a property yard where materas, toos, and equpment are
kept. e does repar work as we as new work, and operates under hs own
name. Z, a genera contractor, asks for a bd on the pasterng work re-
qured n the constructon of a new hote. gves Z a ump-sum bd for compe-
ton of the pasterng work accordng to the pans and specfcatons for the
work. s awarded the contract. When the budng operaton progresses to
the pont at whch the pasterng work can be done, devers the requred ma-
teras to the |ob and performs the work wth such of hs men as are necessary.
has an nvestment n factes for work suffcent to carry on the busness
of a pasterng contractor and the necessary sk requred of any such contractor.
s net return from the performance of the contract s the dfference between
the contract prce and hs cost of abor and materas, as a resut of whch he may
reaze a proft or suffer oss. though s actvty s ntegrated n the opera-
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tons conducted by Z, the genera contractor, n carryng out hs contract s
furtherng hs own good w and s actng under hs own trade name. Of neces-
sty, s actvty must to some e tent be controed by the genera contractor, but
such contro as s e ercsed reates prmary to the competon of the pro|ect as a
whoe, and Is not of the type contempated by paragraph ( .) of the defnton.
The reatonshp, moreover, s not a permanent one, and such reatonshp as has
been entered nto does not contempate recurrent servces but w end upon
competon of the specfc |ob. ased on the combned effect of a the factors,
s not an empoyee under paragraph ( ) of the defnton but s engaged n a
busness of hs own.
ampe (6), genera fe nsurance agent. fe nsurance company enters
Into an agreement wth an ndvdua generay known as a genera agent after
recevng satsfactory proof of hs fnanca responsbty whereby he s gven a
rght to soct appcatons, both personay and through soctng agents, for
fe nsurance and annuty poces of the company wthn the terrtory covered by
hs contract. e s e pected to devote hs entre busness actvty to the socta-
ton of appcatons for poces of the company, and, n conformty wth proce-
dures estabshed by the company, to process and servce the company s poces.
e must use the company s forms In such soctaton, and the appcatons are
sub|ect to the approva of the company. though he s not requred to procure a
defnte voume of nsurance, the company estabshes a quota whch he s e pected
to meet The genera agent may soct and pace appcatons for nsurance,
wthout approva from hs company, wth other companes when the form of
Insurance Is not wrtten by hs company or when the appcant s known to be
unacceptabe to hs company. e s requred to keep adequate records and books
of account. The genera agent pays for hs agency offce space, stenographc
assstance, and teephone factes, but the company sometmes furnshes books,
statonery, and other matera. One of the prncpa actvtes of the genera
agent s the obtanng of soctng agents. The soctng agents contract through
or wth the genera agent and consttute hs saes force, and generay the com-
pany ether sgns the soctng agent s contract or guarantees to the soctng
agent that the commssons provded for by the fnanca terms of the agreement
w be pad.
Whatever saares, advances aganst future commssons, or oans are made
to the soctng agents are borne soey or chefy by and nt the rsk of the
genera agent, who s e pected to make a substanta persona nvestment n the
deveopment of the agency. The compensaton of the genera agent s n the
form of commssons on a poces sod by hm or by hs soctng agents, and
fees on the busness handed n hs agency. The reatonshp may be termnated
by ether party on short notce.
Under the arrangement between the company and the genera agent, the
company e ercses some degree of contro over the performance of the servces.
Permanency s present snce the reatonshp mpes contnuty and s not to
termnate upon the performance of a specfc |ob. The performance of servce
s both reguar and frequent. The actvtes of the genera a - ont and hs staff
are ceary Integrated Into the company s system of wrtng fe nsurance. On
the other hand, the type of genera agent descrbed above depends for much of
hs success upon the sk In busness management whch he must e ercse n
organzng and pursung hs actvtes and n tranng and supervsng hs per-
sonne. Moreover, he has a substanta Investment In factes for the work.
In the case of the genera agent there are sgnfcant opportuntes for proft and
rsk of oss. Large sums may be rsked n the mantenance of the agency
factes and n the fnancng of soctng agents. The successfu soctor s
a source of substanta proft to the genera agent, who receves commssons on
the soctor s work. Consderaton of a the facts ndcates, as n the case
of the automobe deaer n e ampe (1) and the buk o pant operator n
e ampe (3), that ths s a norma busness reatonshp n whch one busness
organzaton obtans the servces of another busness organzaton to perform a
porton of producton and dstrbuton. The combned effect of a the factors
estabshes that the genera agent descrbed s performng servce n the pursut
of hs own busness, and that he s therefore not an empoyee under paragraph
( ) of the defnton.
ampe (7), door-to-door saemcn. The company, a manufacturer, s
engaged n the manufacture and sae of househod products. Sae by d oo| -to:
door vendors s the usua method of dstrbutng the company s products. The
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company enters nto an agreement wth a saesman gvng hm the rght to
purchase the company s products at whoesae on short-term credt for door-to-
door resae at prces suggested by the company. The agreement specfes the
terrtory of the saesman, and provdes that the proft from the sae s hs soe
remuneraton for the servces. Whe no requrement s mposed ether under
the contract or n fact wth respect to a saes quota, dscounts are aowed for
mantanng a specfed voume of busness; and the saesman devotes fu tme
to the sae of company s products. cash depost s requred of the saesman
to estabsh credt wth the company and to cover sampes. The agreement states
that the company sha not have any rght to e ercse contro over the perform-
ance of the servces or methods empoyed n effectng saes, and e pressy
negates any requrement to make reports or attend saes meetngs. There s no
requrement ether e press or mped that the saesman s to furnsh servces
wth respect to desgnated or reguar customers or customers aong a prescrbed
route. The agreement e pressy denes the e stence of the empoyer-empoyee
reatonshp, and desgnates the saesman an ndependent contractor. The com-
pany, however, provdes tranng courses, seng ads, advertsng, forms, eads,
and other servces for ts saesmen. Such servces are utzed by the saesman.
The agreement s termnabe by the company on CO days notce and provdes
for a refund to the saesman of hs depost and of the prce pad for products
unsod and returned. s earnngs from the reatonshp are dependent upon
the voume of hs saes. e has no pace of busness dstnct from hs home,
and he s not prohbted from furnshng the same or smar servces for any
other person.
Though the saesman mght not be consdered an empoyee under paragraph
(2) or (3) of the defnton, he s nevertheess an empoyee under paragraph ( ).
The servces of door-to-door vendors are the essence of the dstrbuton system
of the company. The rght of the company to termnate the reatonshp on short
notce s evdence of some degree of contro of the type contempated by para-
graph ( ) of the defnton.
The agreement between the company and the saesman contempates a con-
tnung or permanent reatonshp. The cash depost requred s not such an
outay as to consttute an nvestment for the carryng on of an ndependent
busness. though some sk may be requred, he devotes no capta to a gong
busness of hs own. s reatonshp wth the company s permanent and the
performance of servce for the company s both frequent and reguar. Snce the
cash depost s refundabe and unsod goods are returnabe, the saesman under-
takes tte or no rsk of oss. Despte the decaratons of the partes n the
contract, the combned effect of the factors ceary shows that the saesman Is an
empoyee.
Subsecton (b) of secton 206 of the b provdes that the amendment made
by subsecton (a) sha be appcabe ony wth respect to servces performed
after December 31, 19 9.
S LF- MPLOYM NT INCOM
Secton 207: Subsecton (a) of ths secton amends chapter 9 ofrthe Interna
Revenue Code by addng thereto subchapter F, entted Ta on Sef- mpoyment
Income. Subchapter F, the short tte of whch s the Sef- mpoyment Con-
trbutons ct, s comprsed of sectons 16 0 to 16 7, both ncusve.
Rate of taw.
Secton 16 0 mposes an ncome ta for each ta abe year begnnng after
December 31, 19 9, upon the sef-empoyment ncome of every ndvdua. (The
term sef-empoyment ncome s defned n secton 16 1(b), whch secton s
dscussed beow.) The rates of the ta on such ncome for the respectve ta abe
years are as foows:
For ta abe years: Percent
egnnng n 19 0 2
egnnng after Dec. 31, 19 0, and before an. 1, 1960 3
egnnng after Dec. 31,19 9, and before an. 1,196 3
egnnng after Dec. 31,196 , and before an. 1,1970
egnnng after Dec. 31,1969
Defntons.
Secton 16 1 defnes certan terms for the purposes of the Sef- mpoyment
Contrbutons ct
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29
Defnton of net earnngs from sef-empoyment.
Subsecton (a) of secton 16 1 defnes the term net earnngs from sef-empoy-
ment for purposes of the ef- mpoyment Contrbutons ct. Such term s
defned to mean
(1) the gross Income, as computed under chapter 1 of the Interna Revenue
Code, derved by an ndvdua from any trade or busness carred on by such
ndvdua, ess the deductons aowed under chapter 1 whch are attrbutabe
to such trade or busness; pus
(2) the dstrbutve share of such ndvdua (whether or not dstrbuted
of the net ncome or oss, as computed under chapter 1 of the Code, from any
trade or busness carred on by a partnershp of whch he s a member;
sub|ect to the e cuson of certan trades and busnesses provded n secton
16 1(c) and to certan speca rues set forth n paragraphs (1) through ( ) of
secton 16 1(a) for computng such gross ncome and deductons and such ds-
trbutve share of partnershp net ncome or oss.
The gross ncome and deductons of an ndvdua attrbutabe to a trade or
busness, for the purpose of ascertanng hs net earnngs from sef-empoyment,
are to be determned by reference to the appcabe ncome ta provsons n
chapter 1 of the Code. The trade or busness must be carred on by the nd-
vdua, ether personay or through agents or empoyees, n order for the ncome
to be ncuded n hs net earnngs from sef-empoyment. ccordngy, gross
ncome derved by an ndvdua from a trade or busness carred on by hm
does not ncude ncome derved by a benefcary from an estate or trust even
though such ncome s derved from a trade or busness carred on by the estate
or trust.
n ndvdua may be engaged n more than one trade or busness. If so. hs
net earnngs from sef-empoyment are the aggregate of hs net earnngs from
sef-empoyment of each trade or busness carred on by hm. Tms, a oss sus-
taned n one trade or busness of an ndvdua w operate to reduce the ncome
derved from another trade or busness of such ndvdua.
The net earnngs from sef-empoyment of an ndvdua ncude, n addton
to the earnngs from a trade or busness carred on by hm, hs dstrbutve
share of the net ncome or oss from any trade or busness carred on by each
partnershp of whch he s a member. The ndvdua s dstrbutve share of the
net ncome or oss of the partnershp means hs share of such net ncome or oss
as computed under chapter 1 of the Code, sub|ect to the speca rues set forth n
secton 16 1(a) (1) to ( ) and the e emptons provded n secton 16 1(c). In
computng the net earnngs from sef-empoyment of a partner, f the ta abe
year of the partner s dfferent from that of the partnershp, the dstrbutve
share to be ncuded n computng the net earnngs from sef-empoyment of the
partner sha be based upon the net ncome or oss of the partnershp for any
ta abe year of the partnershp (even though begnnng pror to anuary 1, 19 0)
endng wthn or wth the ta abe year of the partner. Ony a partnershp recog-
nzed as such for the purposes of chapter 1 s treated as a partnershp for the
purposes of determnng the net earnngs from sef-eupoynent of the partner.
ccordngy, a partnershp whch consttutes an assocaton ta abe as a corpora-
ton under the provsons of chapter 1 s not recognzed as a partnershp for such
purposes. Moreover, ony the net ncome or oss derved by the partnershp from
carryng on a trade or busness Is taken nto account. ny net ncome or oss of
the partnershp derved from sources ceary unreated to the trade or busness
carred on by t s e cuded n determnng the net earnngs from sef-empoy-
ment of the partners. The net earnngs from sef-empoyment of a partner ncude
hs dstrbutve share of the net ncome or oss of a partnershp of whch he s
a member, rrespectve of the nature of hs membershp, as for e ampe, as a
mted or nactve member.
Speca rues for computng the gross ncome and deductons of an ndvdua
from a trade or busness and hs dstrbutve share of the net ncome or oss of
a partnershp from a trade or busness are set forth n paragraphs (1) to (S),
both ncusve, of secton 16 1(a).
Paragraph (1) e cudes rentas from rea estate, ncudng persona property
eased wth the rea estate, and deductons attrbutabe thereto, uness such
rentas are receved n the course of a trade or busness as a rea estate deaer.
If the ndvdua s not n a trade or busness as a rea estate deaer, a rentas
from rea estate, and deductons attrbutabe thereto, are e cuded n computng
hs net earnngs from sef-empoyment. For the purpose of determnng whether
the ndvdua s a rea estate deaer, the tests are those apped under chapter 1
of te Code n determnng whether a person s engaged n the busness of seng
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29
rea estate to hs customers. person who merey owns rea estate and receves
rentas therefrom s not consdered a rea estate deaer. On the other hand, a
person who s engaged n the busness of seng rea estate to customers wth a
vew to the gans and profts that may be derved therefrom s a rea estate deaer,
and rentas receved by hm from such rea estate are ncuded for the purposes
of determnng hs net earnngs from sef-empoyment.
Payments for the use or occupancy of entre prvate resdences or vng unts
n dupe or mutpe-housng unts are generay rentas from rea estate. cept
n the case of rea estate deaers, such payments are e cuded under paragraph
(1) , even though n part attrbutabe to persona property furnshed under the
ease. On the other hand, payments for the use or occupancy of rooms or other
space where servces are aso rendered to the occupant, such as for the use or
occupancy of rooms or other quarters n hotes, boardng houses, or apartment
houses furnshng hote servces, or n tourst camps or tourst homes, or for the
use or occupancy of space n parkng ots, warehouses, or storage garages do not
consttute rentas from rea estate.
Paragraph (2) e cudes the ncome, and deductons attrbutabe to such
ncome, derved from any trade or busness n whch, f the trade or busness were
carred on e cusvey by empoyees, the ma|or porton of the servces woud
consttute agrcutura abor as defned n secton 1 20(h) of the Code. In case
the servces are n part agrcutura and n part nonagrcutura, the tme devoted
to the performance of each type of servce s the test to be used to determne
whether the ma|or porton of the servces woud consttute agrcutura abor.
If more than haf of the tme spent n performng a the servces s spent n
performng servces whch woud consttute agrcutura abor under secton
1 26(h), a ncome, and deductons attrbutabe to the ncome, sha be e cuded.
If ony haf, or ess, of the tme spent n performng a the servces s spent n
performng servces whch woud consttute agrcutura abor under secton
1 26(h), a ncome, and deductons attrbutabe to the ncome, sha be ncuded.
In every case the tme spent n performng the servces w be computed by
addng the tme spent n the trade or busness durng the ta abe year by every
ndvdua (ncudng the ndvdua carryng on such trade or busness and the
members of hs famy) n performng such servces. The operaton of paragraph
(2) s not affected by secton 1 26(c), reatng to the ncuded-e cuded rue for
determnng empoyment.
Paragraph (3) e cudes dvdends on any share of stock, and nterest on any
bond, debenture, note, certfcate, or other evdence of ndebtedness, ssued wth
nterest coupons or n regstered form by any corporaton (ncudng one ssued
by a government or potca subdvson thereof), uness such dvdends and
nterest are receved n the course of a trade or busness as a deaer n stocks or
securtes. The effect of ths paragraph s to e cude a dvdends e cept dv-
dends receved by a deaer n stocks or securtes n the course of hs trade or
busness. Ony nterest of the specfed character s categorcay e cuded for
a persons other than deaers n stocks or securtes. Other nterest receved
In the course of any trade or busness (such as nterest receved by a pawn-
broker on hs oans or nterest receved by a merchant on hs accounts or notes
recevabe) s not e cuded n computng net earnngs from sef-empoyment.
deaer n stocks or securtes s a merchant of stocks or securtes, whether
an ndvdua or a partnershp, wth an estabshed pace of busness, reguary
engaged n the busness of purchasng stocks or securtes and reseng them to
customers; that s, one who as a merchant buys stocks or securtes and ses
them to customers wth a vew to the gans and profts that may be derved there-
from. Persons who buy and se or hod stocks or securtes for nvestment or
specuaton, rrespectve of whether such buyng or seng consttutes the carry-
ng on of a trade or busness, are not deaers n stocks or securtes.
Paragraph ( ) e cudes (1) gans or osses whch are consdered under chapter
1 of the Code as gans or osses from the sae or e change of capta assets,
(2) gans or osses from the cuttng or dsposa of tmber f secton 117(|) of the
Code s appcabe to such gans or osses, and (3) gans or osses from the sae,
e change, nvountary converson, or other dsposton of property f such prop-
erty s nether ( ) stock n trade or other property of a knd whch woud propery
be ncudbe n nventory f on hand at the cose of the ta abe year, nor ( )
property hed prmary for sae to customers n the ordnary course of a trade
or busness.
The effect of ths provson s to e cude from the computaton of net earnngs
from sef-empoyment a gans or osses whch are treated as capta gans or
osses under chapter 1 of the Code, as we as gans or osses arsng from the
dsposton or converson of property whch s not consdered as ether (1) stock
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n trade or other property of a knd whch woud propery be Incudbe In Inven-
tory f on hand at the cose of the ta abe year, or (2) property hed prmary
for sae to customers n the ordnary course of a trade or busness. so In the
case of tmber, even though hed prmary for sae to customers, gan or oss s
e cuded f secton 117(|) of the Code Is appcabe to such gan or oss. For the
purpose of paragraph ( ) (C) of secton 10 1(a), t s Immatera whether the
property consttutes a capta asset wthn the meanng of secton 117(a) of the
Code or whether such property was hed for more or ess than 6 months. More-
over, t s mmatera for the purposes of paragraph ( ) (C) whether a gan or
oss s treated as a capta gan or oss or as an ordnary gan or oss for the
purposes of chapter 1. For nstance, where the character of the oss for ncome
ta purposes s governed by the provsons of secton 117(|) of the Code, such
oss s e cuded under paragraph ( ) (C) even though such oss Is treated under
secton 117(|) as an ordnary oss.
s used n paragraph ( ), the term Invountary converson means a com-
pusory or nvountary converson of property Into other property or money as a
resut of ts destructon n whoe or n part, theft or sezure, or an e ercse of
the power of requston or condemnaton or the threat or Immnence thereof. s
used n such paragraph the term other dsposton ncudes the destructon of
property by re, storm, shpwreck, or other casuaty, even though there s no
converson of such property Into other property or money.
Paragraph ( ) provdes that the deducton for net operatng osses under
secton 23(s) of the Code sha not be aowed.
Paragraph (6) prescrbes the treatment to be accorded ncome sub|ect to com-
munty-property aws. Subparagraph ( ) provdes that f any of the Income
derved by an Indvdua from a trade or busness (other than a trade or busness
carred on by a partnershp) Is communty Income under communty-property
aws appcabe to such Income, a of the gross ncome and deductons attrbu-
tabe to the trade or busness sha be treated as the gross ncome and deductons
of the husband uness the wfe actuay e ercses substantay a of the manage-
ment and contro of such trade or busness, n whch case a of such gross ncome
and deductons sha be treated as the gross Income and deductons of the wfe.
Management and contro of the type to whch reference s made n paragraph
(C) Is not the management and contro Imputed to the husband under the com-
munty-property aws but management and contro n fact. For e ampe, a wfe
who operates a beauty paror wthout any apprecabe coaboraton on the part
of her husband w be consdered as havng substantay a of the management
and contro of such busness, despte the provson of any communty-property aw
vestng the rght of management and contro over communty property In the
husband, and the Income and deductons attrbutabe to the operaton of such
benuty paror w be consdered the ncome and deductons of the wfe.
Subparagraph ( ) provdes that f any porton of a partner s dstrbutve
share of the net ncome or oss from a trade or busness carred on by a partner-
shp Is cemmunty ncome or oss under the communty-property aws appcabe
to such share, a of such dstrbutve share sha be ncuded n computng the
net earnngs from sef-empoyment of such partner; and no part of such share
sha be taken nto account In computng the net earnngs from sef-empoyment
of the spouse of such partner.
Paragraph (7) provdes that, n the case of any ta abe year begnnng on or
after the effectve date specfed n secton 1C33 (. e., the date on whch the pro-
vsons of tte II of the Soca Securty ct are e tended to Puerto Rco), the
term possesson of the Unted States, as used n secton 2 1 of the Code, sha
not ncude Puerto Rco; and a ctzen or resdent of Puerto Rco sha compute
hs net earnngs from sef-empoyment n the same manner as a ctzen of the
Unted States and wthout regard to the provsons of secton 2 2 of the Code.
In appyng the provsons of paragraph (7), a ctzen of the Unted States who
engages n the actve conduct of a trade or busness n Puerto Rco may nd that
hs ncome from such trade or busness s e empt from the ncome ta Imposed
by chapter 1 (by reason of the provsons of secton 2 1 of the Code) but that the
same ncome (sub|ect to the 3,600 mtaton) s ta ed as sef-empoyment ncome.
Paragraph ( ) e cudes from net earnngs from sef-empoyment ncome
derved from the busness of pubshng a newspaper or other pubcaton, together
wth ncome derved from other actvtes conducted n connecton therewth,
where the newspaper or other pubcaton has a pad crcuaton. The paragraph
aso e cudes a deductons attrbutabe to the producton of such ncome. Under
ths paragraph an ndvdua who, ether aone or In partnershp, pubshes a
newspaper, mngzne, or perodca whch Is dstrbuted at a prce must e cude
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297
a ncome and deductons attrbutabe to such pubshng busness n computng
hs net earnngs from sef-empoyment. Income from other actvtes conducted
as an Incdent to the pubshng busness, such as ob prntng or the furnshng
of news reeases to rado statons, as we as the deductons attrbutabe thereto,
s kewse e cuded under ths paragraph.
In computng net earnngs from sef-empoyment, the rues appcabe under
chapter 1 of the Code must be apped n determnng the ta abe year n whch
tems of gross Income are to be ncuded and the ta abe year for whch deductons
sha be taken. Thus, f an ndvdua uses the accrua method of accountng n
computng net ncome from a trade or busness for the purposes of chapter 1, he
must use the same method In computng the gross Income and deductons for sef-
empoyment ta purposes. Lkewse, f the ta payer s engaged In a trade or
busness of seng property on the nstament pan and he eects, under the pro-
vsons of secton of the Code, to use the nstament bass n computng ncome
for the purposes of chapter 1 of the Code, he must use the same bass In com-
putng the gross ncome and deductons attrbutabe to such trade or busness
for sef-empoyment ta purposes.
Defnton of sef-empoyment ncome.
Subsecton (b) of secton 10 1 defnes the term sef-empoyment ncome for
the purposes of the Sef- mpoyment Contrbutons ct. Such term s defned to
mean the net earnngs from sef-empoyment derved by an ndvdua, other than
a nonresdent aen ndvdua, durng any ta abe year begnnng after Decem-
ber 31, 19 0, e cept for the e cusons provded n causes (1) and (2) of such
subsecton.
Cause (1) e cudes from sef-empoyment ncome of an ndvdua that part
of the net earnngs from sef-empoyment whch e ceeds 3,600 reduced by the
amount of the wages pad to the ndvdua durng the ta abe year. Thus, the
ma mum sef-empoyment ncome of any ndvdua for any ta abe year
(whether a perod of 12 months or ess) s 3,600; or, f wages are receved, ths
ma mum s reduced by the amount of such wages. For e ampe, f durng the
ta abe year no wages are receved and the ndvdua has ,000 of net earnngs
from sef-empoyment, he has 3,600 of sef-empoyment Income for such ta abe
year; or f the ndvdua receves 1,000 of wages and aso has ,000 of net
earnngs from sef-empoyment, he has ony 2,600 of sef-empoyment ncome
for the ta abe year. For the purposes of cause (1), the term wages ncudes
remuneraton pad to an empoyee for servces ncuded under an agreement
entered Into pursuant to secton 21 of the Soca Securty ct (reatng to the
coverage of State empoyees). Cause (2) provdes n effect that f an ndvdua s
net earnngs from sef-empoyment for the ta abe year are ess than 00, such
ndvdua has no sef-empoyment ncome for such ta abe year. It shoud be
noted, however, that t s possbe for an ndvdua to have ess than 00 of
sef-empoyment ncome. Ths woud occur n a case n whch the ndvdua s
net earnngs from sef-empoyment are 00 or more for a ta abe year and the
ndvdua aso receves more than 3,200 but ess than 3,600 of waaes durng
the ta abe year. For e ampe. If an ndvdua has net earnngs from sef-
empoyment for a ta abe year of 1,000 and s aso pad wages of 3, 00 durng
the ta abe year, hs sef-empoyment ncome for such ta abe year s 200.
Secton 16 1(b) further provdes that, n the case of any ta abe year begn-
nng pror to the effectve date specfed n secton 1633, an ndvdua who s a
ctzen of Puerto Itco (but not otherwse a ctzen of the Unted States) and who
s not a resdent of the Unted States (. e., the States, aska, awa, and
the Dstrct of Coumba) or of the rgn Isands durng the ta abe year sha
be consdered, for the purposes of computng sef-empoyment ncome, as a non-
resdent aen ndvdua. ccordngy, the net earnngs from sef-empoyment
of an ndvdua descrbed n the precedng sentence woud not consttute sef-
empoyment Income. Secton 10 1(b) aso provdes that an ndvdua who s not
a ctzen of the Unted States but who s a resdent of the rgn Isands or,
after the effectve date specfed n secton 1633, s a resdent of Puerto Rco sha
not, for purposes of computng sef-empoyment ncome, be consdered to be a
nonresdent aen ndvdua. ccordngy, the net earnngs from sef-empoy-
ment of such an ndvdua may consttute sef-empoyment ncome. The net
earnngs from sef-empoyment of a ctzen or resdent of the Unted States
(ncudng the rgn Isands and, after the effectve date specfed n secton
1633, Puerto Rco) consttute sef-empoyment ncome, e cept to the e tent that
such net earnngs are e cuded from sef-empoyment ncome under cause (1)
or (2) of secton 16 1(b),
023 30 61 20
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29
Whe a nonresdent aen ndvdua who derves ncome from a trade or
busness carred on wthn the Unted States (whether by hs agents or empoyees
or by a partnershp of whch he s a member) s ta ed on such ncome under
chapter 1 of the Code, such ndvdua (f he s treated under the Sef- mpoyment
Contrbutons ct as a nonresdent aen) w not pay a sef-empoyment ta on
any porton of such ncome.
Trade or busness.
Subsecton (c) of secton 16 1 provdes that, for the purposes of the Sef-
mpoyment Contrbutons ct, the term trade or busness sha have the same
meanng as when used n secton 23 of the Code, e cept that such term sha not
ncude the performance of certan functons and servces descrbed n paragraphs
(1) to ( ), both ncusve.
Paragraph (1) provdes that the performance of the functons of a pubc
offce does not consttute a trade or busness. The term pubc offce ncudes
any eectve or appontve offce of the Federa Government or of a State or
Its potca subdvson or of a whoy owned nstrumentaty of any one or more
of the foregong, such as Presdent, ce Presdent, governor, mayor, secretary
of state, Member of Congress, State representatve, county commssoner, |udge,
county or cty attorney, marsha, sherff, regster of deeds, or notary pubc.
Paragraph (2) provdes that the performance of servce by an ndvdua as
an empoyee as defned n the Federa Insurance Contrbutons ct, wth two
e ceptons, does not consttute a trade or busness. The e ceptons are as foows:
(1) Servce performed by an empoyee, who has attaned the age of 1 , n,
and at the tme of, the sae of newspapers or magaznes to utmate consum-
ers, under an arrangement under whch the newspapers or magaznes are
to be sod by the empoyee at a f ed prce, hs compensaton beng based on
the retenton of the e cess of such prce over the amount at whch the news-
papers or magaznes are charged to hm, whether or not he s guaranteed a
mnmum amount of compensaton for such servce, or s entted to be
credted wth the unsod newspapers or magaznes turned back; or
(2) Servce performed by an empoyee, who has attaned the age of 1 ,
n the sae or dstrbuton of goods or commodtes for an empoyer, oft the
premses of the empoyer, under an arrangement whereby the empoyee
receves hs entre remuneraton (other than przes) for such servce drecty
from the purchasers of such goods or commodtes, f such empoyer makes
no provson (other than by correspondence) wth respect to the tranng of
the empoyee for the performance of such servce and mposes no requrement
upon the empoyee wth respect to hs ftness to perform such servce, the
geographca area n whch such servce s to be performed, the voume of
goods or commodtes to be sod or dstrbuted, or the seecton or soctaton
of customers.
Paragraph (3) provdes that the performance of servce by an ndvdua as an
empoyee or empoyee representatve as defned n secton 1 32 of the Code, that
s, an ndvdua covered under the raroad retrement system, does not con-
sttute a trade or busness.
Paragraph ( ) provdes that the performance of servce by a duy ordaned,
commssoned, or censed mnster of a church n the e ercse of hs mnstry or
by a member of a regous order n the e ercse of dutes requred by such order
does not consttute a trade or btsness. Ths e cepton appes to the perform-
ance of servces whch are ordnary the dutes of such mnsters or members of
regous orders. The dutes of mnsters ncude the mnstraton of sacerdota
functons and the conduct of regous worshp, and the contro, conduct, and
mantenance of regous organzatons (ncudng the regous boards, socetes,
and other Integra agences of such organzatons), under the authorty of a
regous body consttutng a church or church denomnaton.
Paragraph ( ) provdes that the performance of servce by an ndvdua
In the e ercse of a professon as a physcan, awyer, dentst, osteopath, vet-
ernaran, chropractor, or optometrst, or as a Chrstan Scence practtoner,
or as an aeronautca, chemca, cv, eectrca, mechanca, metaurgca, or
mnng engneer, or the performance of such servce by a partnershp, does not
consttute a trade or busness. The desgnatons n ths paragraph are to be
gven ther commony accepted meanng. Thus, the term physcan means an
ndvdua who s egay quafed to practce medcne; and the term awyer
means an ndvdua who s egay quafed to practce aw. In the case of a
partnershp whose trade or busness conssts n the performance of servce n
the e ercse of any of the desgnated professons, the partnershp sha not be
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299
consdered ns carryng on a trade or busness for purposes of the Sef- mpoy-
ment Contrbutons ct, and none of the dstrbutve shares of ncome or oss
of such partnershp sha be Incuded n computng net earnngs from sef-
empoyment of any member of the partnershp. On the other hand, where a
partnershp s engaged n a trade or busness not wthn any of the desgnated
professons, each partner must Incude hs dstrbutve share of the ncome
or oss of such parttershp n computng hs net earnngs from sef-empoy-
ment, rrespectve of whether such partner s aso engaged n the practce of
one of such professons and contrbutes hs professona servces to the partner-
shp.
Defnton of empoyee and wages.
Subsecton (d) of secton 16 1 provdes that, for the purposes of the Sef-
mpoyment Contrbutons ct, the term empoyee and the term wages
sha have the same meanng as when used n the Federa Insurance Contrbu-
tons ct. (For an e panaton of these terms, see the dscusson of sectons 20
and 206 of the b.)
Defnton of ta abe year.
Subsecton (e) of secton 16 1 provdes that, for the purposes of the Sef-
mpoyment Contrbutons ct, the term ta abe year sha have the same
meanng as when used n chapter 1 of the Code. The subsecton further pro-
vdes that the ta abe year of an ndvdua for the purposes of the Sef- mpoy-
ment Contrbutons ct sha be a caendar year uness the ndvdua has a
dfferent ta abe year for the purposes of chapter 1, n whch case the ta abe
year of such ndvdua for the purposes of the Sef- mpoyment Contrbutons
ct sha be the same as hs ta abe year under chapter 1. Thus, f a ta -
payer s net ncome under chapter 1 s computed upon the bass of a fsca year,
hs ta abe year for the purposes of the Sef- mpoyment Contrbutons ct
sha be such fsca year. Lkewse, f by reason of a change n accountng
perod or for some other reason a ta payer makes a return under chapter 1
for a fractona part of a year, hs ta abe year for the purposes of the Sef-
mpoyment Contrbutons ct sha be the same perod as that for whch hs
return s made under chapter 1. owever, secton 7(c) of the Code, reatng
to pacng net Income on an annua bass for purposes of chapter 1 due to a
change n accountng perod, s not appcabe to the computaton of net earn-
ngs from sef-empoyment for purposes of the Sef- mpoyment Contrbutons
ct. If a ta abe year of a ta payer under chapter 1 of the Code s ter-
mnated by the Commssoner of Interna Revenue under secton 1 6 of the
Code, the ta abe year of the ta payer for purp.oses of the Sef- mpoyment
Contrbutons ct s kewse termnated.
ondcductbty of ta .
Secton 10 2 provdes that the ta Imposed by secton 16 0 upon sef-empoy-
ment ncome sha not be aowed as a deducton to the ta payer n computng
hs net ncome for any ta abe year for the purposes of the ncome ta Im-
posed by chapter 1 of the Code or by any ct of Congress n substtuton therefor.
Coecton and payment of ta .
Secton 16 3 makes provson for the coecton and payment of the ta on
sef-empoyment ncome. Subsecton (a) of secton 16 3 provdes that the ta
on sef-empoyment ncome mposed by secton 10 0 sha be coected by the
ureau of Interna Revenue, under the drecton of the Secretary of the Treasury,
and sha be pad nto the Treasury of the Unted States as nterna revenue
coectons.
Subsecton (b) of secton 10 3 provdes that, f the ta on sef-empoyment
ncome Is not pad when due, there sha be added as part of the ta nterest
at the rate of 6 percent per annum from the date the ta became due unt
pad.
Subsecton (e) of secton 16 3 authorzes the Commssoner of Interna Reve-
nue, wth the approva of the Secretary of the Treasury, to prescrbe the man-
ner, tmes, and condtons, not nconsstent wth the Sef- mpoyment Contrbu-
tons ct, under whch the ta on sef-empoyment ncome sha be coected
and pad.
Subsecton (d) of secton 10 3 provdes that n the payment of the ta on
sef-empoyment ncome a fractona part of a cent sha be dsregarded uness
It amounts to one-haf cent ur more, n whch case t sha be ncreased to 1 cent.
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Overpayments and underpayments.
Secton 10 provdes that f the ta on sef-empoyment ncome s overpad
or underpad wth respect to any ta abe year, the amount of the overpayment
sha be refunded, and the amount of the underpayment sha be coected. In
such manner and at such tmes, sub|ect to the appcabe statute of mtatons
provded n secton 3312 or 3313 of the Code, as may be prescrbed by regua-
tons made under the Sef- mpoyment Contrbutons ct.
Rues and reguatons. ,
Secton 10 authorzes and drects the Commssoner of Interna Revenue,
wth the approva of the Secretary of the Treasury, to make and pubsh such
rues and reguatons as may be necessary for the enforcement of the Sef-
mpoyment Contrbutons ct.
Other acs appcabe.
Secton 10 0 provdes that a provsons of aw, ncudng penates and stat-
utes of mtatons, appcabe wth respect to the ta mposed by secton 2700
of the Code sha, nsofar as appcabe and not nconsstent wth the prov-
sons of the Sef- mpoyment Contrbutons ct, be appcabe wth respect
to the ta mposed by such ct.
Tte of subchapter.
Secton 16 7 provdes that subchapter F of chapter 9 of the Code may be cted
as the Sef- mpoyment Contrbutons ct.
Msceaneous provsons.
Secton 207(b) of the b amends subchapter of chapter 9 of the Code by
addng at the end thereof two new sectons, namey, sectons 1033 and 163 .
ffectve date n case of Puerto Rco.
Secton 1033 provdes that, f the Governor of Puerto Rco certfes to the Pres-
dent of the Unted States that the egsature of Puerto Rco has resoved, by
concurrent resouton, that t desres the e tenson to Puerto Rco of the prov-
sons of tte II (od-age. survvors, and dsabty nsurance benefts) of the
Soca Securty ct. then the effectve date referred to n secton 1 26(e) of the
Code (reatng to the terms State, Unted States, and ctzen of the Unted
States ), secton 1.6 1(a)(7) of the Code (reatng to the computaton of net
earnngs from sef-empoyment n certan eases), and secton 16 1(b) of the Code
(reatng to the computaton of sef-empoyment ncome) sha be anuary 1 of the
frst caendar year whch begns more than 90 days after the date on whch the
Presdent of the Unted States receves such certfcaton.
Coecton of ta es n rgn Isands and Puerto Rco.
Secton 103 provdes that, notwthstandng any other provson of aw respect-
ng ta aton n the rgn Isands or Puerto Rco, a ta es mposed by the Federa
Insurance Contrbutons ct and the Sef- mpoyment Contrbutons ct sha be
coected by the ureau of Interna Revenue under the drecton of the Secretary
of the Treasury and sha be pad nto the Treasury of the Unted States as nter-
na revenue coectons.
Nonappcabty of secton 3 01.
Secton 207(c) of the b amends secton 3S01 of the Code by addng at the end
thereof a new subsecton (g). Subsecton (g) provdes that the provsons of
secton 3S01 sha not be construed to appy to any ta mposed by chapter 9 of the
Code.
Your commttee consders t desrabe that the defnton of the terms wages
and empoyment, as used n the Federa Unempoyment Ta ct (subchapter C
of chapter 9 of the Interna Revenue Code), and the defnton of the term
wages, as used n subchapter D of chapter 9 of the Code, reatng to the wth-
hodng of ncome ta at the source on wages, shoud be conformed n many
respects to the defntons of those terms as used n the Federa Insurance Con-
trbutons ct, as amended by sectons 20 (a) and 20 (a) of the b.
Secton 20 (a) (1) of the b amends secton 1007(b) of the Code, reatng to
the defnton of the term wages, so as to conform the provsons thereof, wth
two e ceptons, to the provsons of secton 1 20(a) of the Code, as amended by
secton 20 ( ) of. the b. The frst e cepton s that under the amendment to
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secton 1607(b)(1) there s e cuded from the defnton of the term wages
the amount of remuneraton pad to the empoyee durng any cnendar year n
e cess of 3,000, rather than the amount n e cess of 3,000 as provded n the
amendment of secton 1 26(a) (1). The second e cepton s that the amendment
to secton 1607(b)(7) (reatng to remuneraton pad n nny medum other than
cash for servce not n the course of the empoyer s trade or busness) does not
Incude the reference to domestc servce n a prvate home of the empoyer whch
s contaned n the amendment to secton 1 26(a) (7), snce no change as been
made n the domestc servce e cepton under the Federa Unempoyment Ta ct.
For an e panaton of the amendment to secton 1607(b), see the e panaton n
ths report of the amendment to secton 1 26(a) made by secton 20 (a) of the
b. The amendment to secton 1607(b) s appcabe ony wth respect to remun-
eraton pad after December 31. 19 9; however, t s provded n the b that n
the case of remuneraton pad pror to anuary 1, 19 0, the determnaton under
secton 1607(b) (1) of the Code (pror to ts amendment by the b) of whether
or not such remuneraton consttuted wages sha be made as f ths amendment
had not been enacted and wthout nferences drawn from the fact that the amend-
ment s not made appcabe to perods pror to anuary 1, 19 0.
Secton 20 (b) (1) of the b amends secton 1607(c) (3) of the Code, reatng
to the e cuson from the defnton of the term empoyment of casua abor not
In the course of the empoyer s trade or busness, so as to conform such provson
(wth one e cepton) to the provsons of secton 1 26(b)(3) of the Code, as
amended by secton 20 (a) of the b. The one e cepton s that the amendment
to secton 1607(c) (3) does not contan the ast sentence of the amendment to
secton 1 20(b)(3), reatng to domestc servce n a prvate home of the em-
poyer, snce no change has been made n the domestc-servce e cepton under the
Federa Unempoyment Ta ct. For an e panaton of the amendment of secton
1607(c)(3), see the e panaton In ths report of the amendment of secton
1 26(b) (3) made by secton 20 (a) of the b. The amendment s appcabe ony
wth respect to servces performed after December 31, 19 9.
Secton 1607(c) (10) ( ) () of the Code e cudes from the defnton of the
term empoyment servce performed In any caendar quarter n the empoy
of any organzaton e empt from ncome ta under secton 101 of the Code, f
tha remuneraton for such servce does not e ceed . Secton 20 (b)(2)
of the b amends secton 1007(c) (10) ( ) () so as to e cude from such
defnton servce parformed n any caendar quarter In the empoy of such an
organzaton f the remuneraton for such servce s ess than 100. Secton
1607(c) (10) ( ) of the Code e cudes from the defnton of the term em-
poyment servce performed n any caendar quarter n the empoy of a schoo,
coege, or unversty, not e empt from ncome ta under secton 101 of the
Code, f such servce s performed by a student who s enroed and s reguary
attendng casses at such schoo, coege, or unversty, and the remuneraton
for such servce does not e ceed (e cusve of room, board, and tuton).
Secton 20 (b) (3) of the b amends secton 1607(c) (10) ( ) so as to e cude
such servce regardess of the amount of the remuneraton. These amendments
to secton 1007(c) (10) are appcabe ony wth respect to servces performed
after December 31, 19 9, and w more cosey conform the treatment of such
servces under the Federa Unempoyment Ta ct to that accorded to such serv-
ces under the Federa Insurance Contrbutons ct as amended by secton 20 (a)
of the b.
Secton 20 (c)(1) of the b amends secton 1021(a)( ) of the Code, re-
atng to the e cuson from the defnton of the term wages of remuneraton
pad for casua abor not n the course of the empoyer s trade or busness, so
as to conform such ncome ta wthhodng provson (wth one e cepton) to
the provsons of secton 1 26(b) (3) of the Code, as amended by secton 20 (a)
of the b. The one e cepton s that the amendment to secton 1021(a) ( ) does
not contan the reference to domestc servce contaned n the amendment to
secton 1 20(b)(3), snce no change has been made n the domestc servce
e cepton under the ncome ta wthhodng provsons. For an e panaton of
the amendment of secton 1021(a) ( ), see the e panaton n ths report of the
amendment of secton 1 20(b)(3) made by secton 20 (a) of the b. The
amendment s appcabe ony wth respect to remuneraton pad after December
31, 19 9.
Secton 20 (c)(2) of the b amends secton 1621(a)(9) of the Code, re-
atng to the e cuson from the defnton of the term wages of remuneraton
pad for servces performed as a mnster of the gospe, by conformng such
ncome ta wthhodng provsons to the provsons of secton 1 26(b) (9)
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of the Code, as amended by secton 20 (a) of the b. For an e panaton of the
amendment of secton 1621(a)(9), see the e panaton n ths report of the
amendment of secton 1 20(h)(9) made by secton 20 (a) of the b. Secton
20 (c) (2) of the b aso amends secton 1621(a) of the Code by addng thereto
a new paragraph (10), reatng to the e cuson from the defnton of the term
wages of remuneraton pad for servces performed by newspaper carrers
and newspaper and magazne vendors, whch provson conforms to the pro-
vsons of secton 1 26(b) (1 ) of the Code, redesgnated secton 1 20(b) (16)
by secton 20 (a) of the b. Secton 20S(c) (2) of the b aso adds at the end
of secton 1621(a) of the Code a provson reatng to the treatment as remu-
neraton pad by the empoyer of tps and other cash remuneraton customary
receved by an empoyee n the course of hs empoyment from persons other
than the person empoyng m. Ths provson s dentca wth the provson
at the end of the secton 1 20(a) of the Code, as amended by secton 20 (a)
of the b. For an e panaton of the provson, see the e panaton n ths
report of the amendment by secton 20 (a) of the b. These amendments are
appcabe ony wth respect to remuneraton pad after December 31, 19 9.
Secton 1 03(b) of the Code provdes a cv penaty of not more than for
each wfu faure of an empoyer to furnsh to an empoyee a wage statement
as requred by secton 1 03(a) of the Code. Secton 20 (d) of the b amends
secton 1 03(b) so as to make the penaty for each such wfu faure e acty
, and to provde that such penaty sha be assessed and coected n the same
manner as the ta mposed by secton 1 10 of the Code. The amendment s
effectve wth respect to voatons of secton 1 03(a) occurrng on or after
anuary 1, 19 0.
19 0-22-13 09
SOCI L S CURITY CT M NDM NTS OF 19 0
Senate Report No. 1C09, ghty-frst Congress, Second Sesson. Caendar No. 1G 0
May 17 (egsatve day, March 29), 19 0
Mr. George, from the Commttee on Fnance, submtted the foowng report
to accompany II. R. 0000 :
The Commttee on Fnance, to whom was referred the b (II. R. 6000) to e -
tend and mprove the Federa od-age and survvors nsurance system, to amend
the pubc assstance and chd-wefare provsons of the Soca Securty ct, and
for other purposes, havng consdered the same, report favoraby thereon wth an
amendment n the nature of a substtute and recommend that the b as amended
do pass.
Introducton and Summary
. purpose and scope of the b
More than a decade has passed snce the Congress amended the Soca Securty
ct and estabshed the present beneft provsons under od-age and survvors n-
surance. In the nterm, tremendous changes have taken pace In our economy.
The onrush of broad soca and economc deveopments as competey unbaanced
the Naton s soca securty system. Congressona acton s, therefore, urgenty
needed to reestabsh the proper reatonshp among the basc programs u ths
system.
Your commttee s greaty dsturbed by the ncreasng burden ou the genera
revenues caused by dependency In the Unted States. Currenty Federa e -
pendtures are runnng at a rate of 1.1 bon a year for pubc assstance as
contrasted to e pendtures of ess than S00 mon under the od-age and sur-
vvors nsurance program.
We recommend partcuary that further e tenson of coverage to
farm groups be gven attenton. In the absence of cear-cut e pressons on the
part of farm operators that they want ths protecton the provsons of the com-
mttee-approved b seem to us to be as far as t s desrabe to go wthout fuer
consutaton wth the farm groups. Ths shoud be a matter for further study.
nother queston whch s not resoved by ths b but whch w be a matter of
Increasng mportance s the reatonshp of the pubc soca securty program to
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prvate penson pans, partcuary those now beng estabshed through coectve
barganng to cover ma|or groups of Industra workers. Your commttee Is
aware that there are many dsadvantages n the coectve-barganng approach to
retrement pans. From the standpont of the worker, as we as the economy,
these pans have serous weaknesses. Most of these pans do not gve the worker
rghts whch he can take wth hm from |ob to |ob. They tend to dscourage the
hrng of oder workers. They requre ong perods of servce wth one empoyer
and, n addton, empoyment wth the partcuar empoyer |ust before retrement.
Most younger workers w never quafy for benefts because they w not meet
these ong-servce requrements. The ong-run reatonshp between the Federa
program and the movement n coectve barganng deserves the most carefu
study.

Your commtteee beeves that further study shoud aso be gven to the prob-
ems nvoved n the ong-range fnancng of an od-age and survvors nsurance
system, partcuary the ssue of reserve fnancng versus pay-as-you-go.
though your commttee recognzes that the b does not sove a the probems,
we beeve that ts passage woud consttute a very sgnfcant step forward In the
estabshment of a sound soca securty program.
II. C GROUND ND ISTORT OF L GISL TION

F. earngs of 19 9- 0.
. R. 6000 was referred to your commttee on October 6, 19 9. Its passage by
the ouse of Representatves foowed e tensve hearngs on soca securty before
the Commttee on Ways and Means. These hearngs asted from February 2
through pr 27. 19 9, and consderaton by the ouse commttee n e ecutve
sesson contnued for a perod of 16 weeks.
Ths year, your commttee conducted pubc hearngs from anuary 17 through
March 23. Your commttee as receved and prnted 2,3 3 pages of testmony and
addtona Informaton submtted for the record by ndvduas and groups nter-
ested n varous phases of wefare actvtes and od-age and survvors nsurance
and consdered the b n e ecutve sesson from pr 3 through May 17.
In consderng the ouse-approved b your commttee aso had the beneft of
a comprehensve report prepared by an outstandng advsory counc apponted
under authorty of a Senate resouton of une 23,19 7.
III. SUMM RY OF PRINCIP L PRO ISIONS OF T COMMITT - PPRO D
ILL
. Od-age and survvors nsurance.
I. tenson of coverage. Od-age and survvors nsurance coverage woud be
e tended to about 10 mon persons durng the course of an average week; .3
mon of them woud be covered on a compusory bass, and the remander on
a vountary bass (at the eecton of the empoyer). The specfc addtons to
coverage are as foows:
(a) Nonfnrm sef-empoyed: Covered f sef-empoyment yeds annua net
ncome of at east 00, e cept for physcans, awyers, dentsts, osteopaths, chro-
practors, optometrsts, Chrstan Scence practtoners, naturopaths, veternar-
ans, certfed pubc accountants, archtects, and professona engneers.
(6) grcutura workers: Covered f on a farm and reguary empoyed (de-
fned as empoyment by a snge empoyer for at east 60 days n a caendar
quarter, wth cash wages of at east 0 for servces n the quarter). Certan
agrcutura processng work off the farm and certan essentay commerca or
ndustra border-ne agrcutura abor are aso covered.
(c) Domestc workers: Covered f In a prvate home (but not on a farm
operated for proft) and f empoyed by a snge empoyer for at east 2 days
n a caendar quarter wth cash wages of at east 0 for servce n the quarter.
(If empoyed on a farm operated for proft, woud be covered as agrcutura
workers see above.)
( ) mpoyees of nonproft organzatons: Covered on a compusory bass
both as to empoyers and empoyees, e cept for empoyees of regous denom-
natons and of organzatons owned and operated by a regous denomnaton.
regous denomnaton woud be afforded an opportunty to obtan coverage
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for ts ay empoyees on a vountary bass f t so desred, but mnsters nnd mem-
bers of regous orders woud contnue to be e cuded on a mandatory bass.
(e) mpoyees of State and oca governments: Covered ony f not under a
retrement system and f State enters nto an agreement wth the Federa Gov-
ernment. pubc empoyees under a retrement system woud be e cuded on
a mandatory bass.
(/ ) mpoyees outsde of the Unted States: Covered f Unted States ctzens
empoyed by an mercan empoyer outsde of the Unted States. Certan
empoyees on mercan arcraft outsde the Unted States are covered rrespectve
of ctzenshp.
(g) mpoyment n Puerto Rco and rgn Isands: mpoyment and sef-
empoynent n the rgn Isands covered, and aso n Puerto Rco, f requested
by the Puerto Rcan egsature.
(t) Federa cvan empoyees: mpoyees servng under temporary appont-
ment pendng fna determnaton of egbty for permanent or ndefnte ap-
pontment and other Federa empoyees not under a retrement system, e cept
certan temporary workers, eectve offcas, certan pocy makng commttee
members, etc., are covered. so covered are empoyees of farm oan nnd pro-
ducton credt assocatons, empoyees of post e changes and smar organza-
tons, empoyees of Federa credt unons, etc.
( ) Tps and gratutes: cuded as n present aw.
(/) Defnton of empoyees Retans defnton based on usua common-aw
rues, and e tends coverage as empoyees to fu-tme fe nsurance saesmen
and certan agent-drvers.
(fc) ffectve date: For coverage changes, anuary 1, 19 1.

. Fnancng of od-age and survvors nsurance. (a) Ta abe wage base:
The tota annua earnngs on whch benefts woud be computed and contrbutons
pad s retaned, as at the present, at 3,000.
(6) Contrbuton schedue: mpoyers and empoyees w contnue to share
equay, wth the rate on each beng as foows:
Caendar vears : Rae percent)
19 0-
19 6- 9 2
19S0-0 2 .
196 -G9 3
1970 and after 3 1
The sef-empoyed who are covered woud pay 1 tmes the above rate for any
year after 19 0.

D. Unempoyment nsurance.
Tte II of the Soca Securty ct aowng advances to the accounts of States
In the Unempoyment Trust Fund whch e pred on anuary 1, 19 0, s reenacted
for a 2-year perod.
Od- ge and Survvors Insurance
I . T NSION OF OLD- G ND SUR I O S INSUR NC CO R G
. Genera.
The od-age and survvors nsurance program now covers 3 mon workers
durng the course of an average week. The commttee-approved b woud cover
about 10 mon addtona workers; .3 mon of them woud be covered on a
compusory bass, nnd coverage woud be avaabe to the remander on a voun-
tary bass. Tabe 1 gves a detaed breakdown of the new coverage provded by
the commttee-approved b as compared wth the ouse-approved b. ach
of the new groups covered s dscussed In deta under the approprate headngs
beow.
Coverage under the present aw Is mted entrey to workers n ndustry and
commerce n the contnenta Unted States, aska, and awa.
Under the commttee-approved b, coverage woud be e tended to sef-em-
poyed persons other than farmers and certan-named professona groups:
empoyees of State and oca governments at the eecton of the State, provded
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the empoyees are not under an e stng retrement system; certan border-ne
agrcutura abor; pad farm workers and domestc servants on a farm who are
empoyed by a gven empoyer for at east 60 days n a caendar quarter; nonfarm
domestc servants who are empoyed by a gven empoyer for at east 2 days n
a caendar quarter; empoyees of nonproft organzatons (those empoyed by
regous denomnatons and organzatons owned and operated by a regous
denomnaton woud be covered ony f the regous denomnaton eected such
coverage; empoyees of other nonproft organzatons woud be covered com-
pusory) ; Unted States ctzens empoyed outsde the Unted States by an
mercan empoyer; certan empoyees on mercan arcraft outsde the Unted
States; and certan Federa cvan empoyees not under an e stng retrement
system (e cudng varous short-term and pocy-makng empoyees). Fu-tme
fe-nsurance saesmen and certan agent-drvers are specfcay desgnated as
empoyees for coverage purposes. In addton, empoyees and sef-empoyed per-
sons n Puerto Rco and the rgn Isands woud be covered on the same bass
as those n the Unted States.
The commttee-approved b woud not cover farmers; farm workers and
domestc servants who are not reguary empoyed by an empoyer; Federa,
State, and oca government empoyees covered under retrement systems;
members of the rmed Forces; raroad empoyees; the sef-empoyed profes-
sona groups mentoned prevousy; and certan other smaer groups of workers.
Tabe L Comparson of ncreases n od-age and survvors nsurance coverage
Catego-y
Nonfarm sef-empoyed -
grcutura workers
orderne empoyment.- .
Reguary empoyed on arm
Domestc workers
mpoyees of nonproft organzatons
Compusory coverage .
ountary coverage
mpoyees of State and oca governments
ountary, not under a retrement system...
ountary, under a retrement system ....
Federa cvan empoyees not under a retrement system-.
mpoyees outsde the Unted F
mpoyment n Puerto Rco and rgn Isands
New defnton -f empoyee
Tota under compusory coverage
Tota under vountary coverage.
Grand tota.
ouse-ap-
proved bn
Commttee-
approved b
, 00, MO
,000,000
:oo,ooo
1,000,000
(200,000)
( 00,000)
(200,000)
0,000
600,000
(000,000)
( )
1,000,000
600,000
( 00,000)
(2W1.OO0)
., 00,000
(1, 00,000)
. (2, 00,000)
100,000
1 0,000
3 0,000
6 0,000
1, 00,000
(1, 00,000;
1:00, out
1 0,000
00,000
1 0,000
7, 00,000
3, 00,000
,300,000
1,600.000
11,300,
9,900,000
cusve of a reatvcy sma number of transt workers who woud be compusory covered.
Note. Fgures n parentheses are subtota fgures.
Your commttee has gven e tensve consderaton to the advsabty of e tend-
ng coverage to the farm workers, domestc workers, and professona sef-
empoyed groups e cuded under the commttee-approved b and, as we, to
farm operators. Your commttee beeves, however, that further study must be
gven to the speca probems nvoved n coverng these groups.
The ouse-approved b woud cover substantay the same new groups as
the commttee-approved b. The dfferences are as foows: Under the ouse
b, reguar farm workers woud not be covered, and coverage woud be per-
mtted for State and oca government empoyees who are under an e stng
retrement system f the empoyees and the benefcares of the system voted for
such coverage. Under the ouse-approved b, empoyees of a nonproft
organzatons, ncudng the regous, woud be covered on a compusory bass,
but the empoyer coud eect whether or not to pay hs share of the ta . Under
the commttee-approved b, empoyees of a regous organzaton woud not be
covered uness the organzaton eects coverage, n whch case both woud pay
the requred ta es, and empoyees of other nonproft organzatons woud be
covered compusory. oth bs woud contnue the mandatory e cuson of
mnsters and members of regous orders. Under the ouse-approved b, the
term empoyee was defned to ncude many ndvduas who are not empoyees
under the usua common-aw rues. The defnton n the comutec-approved
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b goes beyond the common-aw rues ony wt| respect to fu-tme fe-nsurance
saesmen and certan agent-drvers. The remanng groups defned as em-
poyees under the ouse b woud be covered as sef-empoyed under the
commttee b.
. Specfc coverage groups added.
1. The nonfarm sef-empoyed. No sef-empoyed persons are covered by
present aw. cept for farmers and certan professona groups, the sef-
empoyed woud be covered by the commttee b. Coverage woud be compusory.
Tour commttee gave thorough consderaton to the possbty of coverage on a
vountary bass, but found fundamenta ob|ectons to that approach. The hstory
of vountary soca nsurance n other countres ndcates defntey that ony a
very sma proporton of a egbe ndvduas actuay eect to partcpate.
Moreover, the ones who do eect to partcpate are usuay not those n the
greatest need of such protecton; that s, those of average or beow-average
ncome. In addton, vountary coverage woud probaby attract amost e cu-
svey peope who are aready aged and others who can foresee a arge possbe
return for ther contrbutons; as a resut, the program woud be faced wth
adverse seecton of rsks and a serous dran on the trust fund.
etween 3 and 0 percent of the tota number of nonfarm sef-empoyed who
woud be covered are n the reta trade. ppro matey 20 to 2 percent are
propretors of servce estabshments. From 12 to 1 percent are engaged n
the constructon ndustry. The remanng 2 to 30 percent are engaged n manu-
facturng, n wnoesae trade, or n transportaton, rea estate, or nsurance
enterprses. The professona groups whch are e cuded namey, doctors,
dentsts, osteopaths, chropractors, naturopaths, Chrstan Scence practtoners,
optometrsts, veternarans, awyers, certfed pubc accountants, archtects,
and professona engneers number appro matey 2 ,000 persons.
Practcabe admnstratve procedures for coverage of the sef-empoyed have
been deveoped. n ndvdua woud report hs sef-empoyment ncome by
transferrng certan nformaton from the trade or busness schedue of hs
ncome ta return to a soca securty schedue on the same return. If the
ndvdua s net earnngs from sef-empoyment amounted to ess than 00 n
any year, he woud pay no sef-empoyment ta on such ncome and receve no
credt toward od-age and survvors nsurance benefts. Thus, coecton of
ta es from persons whose sef-empoyment s of a casua nature woud be
avoded. ny wages pad the ndvdua n covered empoyment woud be
deducted from the 3,000 annua ma mum n determnng the amount of net
earnngs from sef-empoyment ta abe and credtabe n any year.
Under the ouse-approved b, coverage of the sef-empoyed woud be
vrtuay the same as n the commttee-approved b e cept that pubshers
woud be e cuded by the former and covered by the atter, whe naturopaths,
certfed pubc accountants, archtects, and certan casses of professona eng-
neers woud be covered by the ouse b and e cuded by the commttee b.
2. grcutura abor. In genera, present aw e cudes from coverage a
servce performed on a farm (defned to ncude pantatons, ranches, nurseres,
ranges, greenhouses, and orchards), n connecton wth cutvatng the so or
harvestng any agrcutura or hortcutura commodty or n connecton wth
the operaton and mantenance of a farm and ts equpment. so e cuded are
border-ne agrcutura actvtes such as the producton of mape srup, mape
sugar, and nava stores; mushroom growng; poutry hatchng; cotton gnnng;
the operaton of rrgaton systems used e cusvey for farmng purposes; post-
harvestng servces performed n the empoy of a farmer; servces performed n
the empoy of a fanners cooperatve; and, n the case of fruts and vegetabes,
servces performed n the empoy of a commerca hander.
The commttee-approved b woud e tend coverage to most of the now
e cuded border-ne agrcutura empoyment other than the producton of nava
stores and the gnnng of cotton. In addton, t woud cover any agrcutura
worker who earned 0 wth an empoyer n a caendar quarter and was em-
poyed by that empoyer on at east 60 days of ether that quarter or the
prevous quarter.
Tour commttee beeves that Its proposa wth regard to reguary empoyed
agrcutura workers woud cover a substanta part (about 00,000) of the
agrcutura abor force of the Naton wthout mposng an undue record-keepng
burden on farm operators. It s estmated that ths e tenson of coverage woud
affect ony about 000,000 of the amost 6,000,000 farm operators n the country.
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The farm operator woud know that he has no responsbty for reportng the
wages of an empoyee and payng the ta thereon uness the empoyee performed
servces for hm on 60 days or more of a caendar quarter and was pad at east
0 n wages or was empoyed by hm for CO days or more n the prevous quarter
and earned 0 or more n both qunrters. For e ampe, works for Farmer
GO days and s pad 0 or more n cash wages durng the anuary-March quarter ;
then Farmer woud have to report and pay the ta on the cas wages pad
for that perod. Farmer woud aso have to report wages pad to n the
pr- une quarter even f dd not work for 00 days, provded that he earned
cash wages n the empoy of Farmer of 0 or more. If eft the empoy of
Farmer wthout havng worked 00 days n the pr- une quarter and then
returned to work n the uy-September quarter, he woud be covered n the
atter quarter ony f he then met both the days-worked and cash-wages tests.
In addton, servces n connecton wth the operaton or mantenance of an
Irrgaton system woud be covered wthout regard to the number of days worked
or amount of wages earned by the worker f the system s operated for proft.
If t s a nonproft system used e cusvey for farmng purposes, the 60-day
test and the 0 cash-wages test woud have to be met for the worker to be
covered.
Servces n connecton wth the gnnng of cotton and the producton of nava
stores woud contnue to be e cuded from coverage under a crcumstances.
Under the ouse-approved b, coverage of border-ne agrcutura empoy-
ment woud be vrtuay the same as n the commttee-approved b e cept that
the former woud cover a servces, n connecton wth the operaton or mante-
nance of an agrcutura rrgaton system. Wth respect to agrcutura abor
other than n the border-ne area, the ouse-approved b woud provde no
coverage at a.
3. mpoyees of State and oca governments. Under present aw, empoy-
ment by State and oca government unts s not ncuded n the coverage of the
od-age and survvors nsurance system. Under the commttee-approved b, a
such empoyment whch s not under an e stng retrement system coud be
covered through vountary agreements between the States and the Federa
Securty dmnstrator.
The vountary agreements woud be made wth respect to defned coverage
groups. In genera, a coverage group woud comprse a the empoyees of a
State or of a potca subdvson not under an e stng retrement system.
owever, smaer groups made up of empoyees of a State or potca subdvson
who perform servce n connecton wth a propretary functon coud aso be
covered. For nstance, under a State agreement, coverage coud be e tended to
empoyees of a transportaton system of a gven cty wthout coverage beng
e tended to any other empoyees of the cty. For any group to be covered, a of
the empoyees n the group (wth certan possbe specfed e ceptons, such as
part-tme workers or eected offcas) woud have to be covered.
Provson s aso made for the ordery termnaton of Federn-State agreements.
In order to safeguard the nterest of a partes concerned, the agreement coud
not be termnated unt t had been n force for years, and then at Ienst 2 years
advance notce of the termnaton woud have to be gven. In order to prevent
In-and-out movements dsadvantageous to the fnancng of the program, the b
woud provde that f a group s coverage were termnated, the group coud not
be covered agan.
If a State faed to pay the requred contrbutons whe an agreement was n
effect, the Federa Government coud deduct the amount due (pus nterest) from
payments otherwse due to the States under other ttes of tbe Soca Securty
ct (chefy Federa grants for pubc assstance).
The ouse-approved b has substantay the same provsons wth respect to
State and oca government empoyees not covered by retrement systems as has
the commttee-approved b. In addton, however, the former woud permt
members of an e stng retrement system to be covered f such members and the
benefcares of the system so eected by a two-thrds ma|orty vote. Your com-
mttee receved overwhemng testmony aganst permttng such coverage and
so has specfcay probed t. Furthermore, the ouse-approved b contaned
a provson for the compusory coverage of certan transportaton workers. Your
commttee s of the opnon that a coverage of State and oca empoyees must be
on a vountary bass.
. mpoyees n domestc servce. Ths group, whose need for the protecton
of soca nsurance Is very great, s not covered under present aw. They have
been e cuded many because of the admnstratve dffcutes whch were be-
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30
eved to be nvoved n ther coverage. Tour commttee s convnced that regu-
ary empoyed domestc workers can now be covered wthout undue admns-
tratve dffcutes. Domestc servants n prvate homes, other than those on
farms operated for proft, woud be covered wth respect to ther servces n a
caendar quarter for a partcuar empoyer f they earned at east 0 n cash
wages and ether (a) worked at east 2 days for that empoyer n the current
quarter or (b) had worked for the empoyer on 2 days or more and had earned
cash wages of 0 or more n the precedug quarter. Under ths defnton of a
reguar worker, most nonfarm domestc empoyees who are hred on a weeky
or monthy bass w be covered, whe most part-tme workers, and a casua
or ntermttent workers, w be e cuded from coverage. Domestc workers on
farms operated for proft woud be covered to the same e tent as agrcutura
workers, that s, on the bass of a 60-day test rather than a 2 -day test.
The b aso e tends coverage to nonstudent domestc workers n oca coege
cubs, fraterntes, and sorortes, whose remuneraton s at east 0 n a caendar
quarter. Students performng domestc work for such empoyers w contnue
to be e cuded from coverage.
There are certan types of nonbusness servces whch are not, strcty speakng,
domestc servce n prvate homes but whch are dffcut to dstngush from
domestc servce. To factate coverage determnatons, the same requrements
for coverage are apped to such servces as to domestc servce, namey, there
must be cash remuneraton of at east 0 and empoyment on at east 2 days n
the quarter.
Under the ouse-approved b, coverage woud be e tended to domestc servce
and nonbusness servces n a home other than one on a farm operated for proft,
n the same manner as s provded by the commttee-approved b e cept that the
former based coverage on 2 rather than 0 n cash wages and on 26 days rather
than 2 days of empoyment. The commttee-approved b woud rase the 2
requrement to 0 to make certan that no domestc worker woud be ta ed
uness he or she receved credt for a quarter of coverage, whch under the com-
mttee b woud be gven for 0 of wages. On the other hand, the 26-day requre-
ment was reduced to 2 days to permt coverage of the domestc worker who has
a twce-a-week |ob, but who msses 1 or 2 days n a 3-month perod.
. mpoyees of nonproft organzatons. Under present aw, empoyees of
nonproft organzatons operated e cusvey for regous, chartabe, scentfc,
terary, or educatona purposes or for the preventon of cruety to chdren or
anmas, are not covered by the od-age and survvors nsurance program. The
commttee-approved b woud cover part of ths group on a compusory bass and
part on a vountary bass.. In no event, however, coud members of the cergy
and regous orders be covered.
Under the commttee-approved b empoyees of regous denomnatons and
of organzatons owned and operated by a regous denomnaton woud contnue
to be e cuded from compusory coverage, but a regons denomnaton coud
eect to cover ts empoyees and an organzaton owned and operated by a re-
gous denomnaton coud eect to cover ts empoyees. Once a regous denom-
naton or an organzaton owned and operated by a regous denomnaton had
eected to cover ts empoyees, they woud be compusory covered thereafter.
Other nonproft empoyment woud be covered on a compusory bass.
The b woud contnue to e cude servce performed for nomna amounts
(ess than 0 n a quarter) n the empoy of nonproft organzatons, servce per-
formed by student nurses and nternes, and servce performed by students n the
empoy of coeges and unverstes. Those e cusons woud smpfy admns-
traton wthout deprvng a sgnfcant number of peope of the protecton of the
system. On the other hand, coverage woud be e tended, e cept where the serv-
ces are performed for nomna amounts of remuneraton, to certan rtuastc
or dues-coectng servces for fraterna benefcary socetes, to servce for agr-
cutura and hortcutura organzatons and for vountary empoyees benefcary
assocatons, and to servces performed by students n the empoy of nonproft
organzatons other than schoos, coeges, or unverstes.
Under the ouse-approved b a empoyees of nonproft organzatons, n-
cudng those n the empoy of a regous organzaton, woud be covered on a
compusory bass, but payment by the empoyer of hs share of the contrbuton
woud be vountary. If the empoyer dd not pay the ta , the empoyees woud
receve ony haf wage credts, whch, on the average, woud entte them to bene-
fts 70 percent as arge as they woud be entted to on the bass of fu wage credts.
Your commttee beeves that for the nonproft organzatons other than the
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309
regous there f- no reason why coverage shoud not bo e tended on a compusory
bass wth respect to both the empoyer and empoyee contrbutons. On the
other band, your commttee beeves that vountary coverage shoud be provded
for empoyees of regous denomnatons and organzatons owned and operated
by such denomnatons.
6. Federa cvan empoyees not covered under a retrement system. Under
present aw a empoyees of the Federa Government and most empoyees of
Federa nstrumentates are e cuded from od age and survvors nsurance.
The commttee-approved b woud e tend the coverage to some of these workers
who are not now under retrement systems. The new groups brought n woud be :
(a) Temporary empoyees of the Unted States whether they are awatng
permanent appontment or are n postons not ntended to be permanent, other
than temporary empoyees n postons not Intended to be permanent n the fed
servce of the Post Offce Department and those engaged n takng the census;
(6) empoyees of natona farm oan assocatons (other than drectors) ; (c)
empoyees of the rmy and r Force change Servce, rmy and r Force
Moton-Pcture Servce, Navy shp s servce stores, Marne Corps post e changes,
and smar organzatons; (d) empoyees of the Tennessee aey uthorty
other than those covered by ts rerrement system, (e) empoyees of federa
credt unons; (f) empoyees of county and communty commttees under the
Producton and Marketng dmnstraton; (|7) empoyees of producton credt
assocatons party owned by the Unted States (those assocatons from whch
Federa funds have been retred are aready covered).
Your commttee beeves that the ouse-approved b requres amendment n
order to carfy the coverage e tenson n ths area. For e ampe, there s doubt
under the ouse-approved b about the poston of many ndvduas n pocy-
maknc and advsory postons such as commttee members under the Producton
and Marketng dmnstraton. Under the b as approved by your commttee
such persons woud be e cuded.
The ouse-approved b does not ncude temporary empoyees of the Unted
States awatng permanent appontment. Snce many of these persons do not
stay wth the Federa Government but return to work n empoyment covered by
od-age and survvors nsurance, your commttee beeves that they shoud be
covered by od-age and survvors nsurance unt they receve a permanent
appontment.
Members of the egsatve branch and eected offcas of the Government woud
contnue to be e cuded under both the ouse b and the b as approved by
your commttee.
7. mercans empoyed outsde the Unted States. Under present aw such
empoyment outsde the Unted States s not covered uness t s performed on or
In connecton wth an mercan vesse. The commt ee-approved b woud cover
the servce of mercan ctzens outsde of the Unted States f performed n the
empoy of mercan empoyers. Ths seems desrabe because more and more
mercan ctzens are beng sent beyond the boundares of the Unted States to
contnue ther work for mercan empoyers and the nsurance protecton of
such persons shoud not be nterrupted.
The commttee-approved b woud aso e tend coverage to empoyment on
mercan arcraft outsde.of the Unted States under the same condtons whch
now appy to mercan shps. Thus, there w be no ta ncentve for empoyers
to empoy foregn natonas nstead of mercan ctzens on arcraft trps between
the Unted States and foregn countres. The commttee-approved b, however,
woud not cover such servce as that performed by a foregn natona empoyed
as a mechanc to servce an mercan arcraft at a foregn arport f the contract
of servce was entered nto outsde of the Unted States and If such foregn
natona was not part of the fght crew of the arcraft. The ouse-approved
b contaned the same coverage provsons as the commttee-approved b.
. .Puerto Rco and the n|n Isands. mpoyment n these sands Is not
now covered under the od-age and survvors nsurance program. The commttee-
approved b woud cover empoyment n the sands n the same manner and to
the same e tent as smar empoyment s covered n the contnenta Unted
States. Coverage woud be effectve n the rgn Isands wthout any acton by
the rgn Isands authortes, but n the case of Puerto Rco t woud become
effectve ony f requested by the Puerto tcan Legsature. Puerto Itco and the
rgn Isands are a part of our mercan economy, and ther popuatons are
ceary n need of soca-nsurance protecton. s a resut of reatvey ow aver-
age earnngs, workers there are generay unabe to provde for ther own future
securty. Despte ow wages and rreguarty of empoyment, however, t appears
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310
that wth the egbty provsons proposed by. your commttee, the great ma|or-
ty of the workers n covered occupatons woud be abe to quafy for nsur-
ance benefts.
Under the ouse-approved b coverage was e tended to these sands n the
same fashon as n the commttee-approved b|. owever, the hgher requre-
ments for obtanng quarters of coverage In the former woud have resuted n a
consderabe area of empoyment n these sands where ow-pad workers woud
have to pay ta es and yet woud not acqure beneft rghts.
9. Tps and gratutes. Tps and gratutes woud be e cuded as wages In the
commttee-approved b to the same e tent as n present aw. On the other hand,
the ouse-approved b woud ncude a tps and gratutes n the amounts
reported n wrtng to the empoyer by the empoyee. Your commttee beeves
that such a change woud ntroduce admnstratve compcatons.
10. Defnton of empoyee. In e stng aw the term empoyee s defned by
reference to the usua common-aw rues. Tour commttee beeves that the
common-aw rues for determnng the empoyer-empoyee reatonshp shoud be
retaned, but that the meanng of empoyee for od-age and survvors nsurance
purposes shoud be e panded to ncude certan categores of servce whch are
sub|ect to cear-cut defnton. These categores are: servces performed by
Indvduas as fu-tme fe-nsurance saesmen, and servces performed by agent
drvers and commsson drvers engaged n the dstrbuton of bakery products,
meat products, or aundry or dry-ceanng servces.
Snce the usua common-aw rues woud contnue to be appcabe for ascertan-
ng the empoyer-empoyee reatonshp under the commttee-approved b, the
ncuson of ndvduas performng servces n these categores as empoyees
for od-age and survvors nsurance purposes w not have the effect of removng
from coverage as an empoyee any ndvdua who s covered under e stng aw.
The ouse-approved b woud contnue to cassfy as an empoyee an offcer
of a corporaton and woud contnue the test based on the usua common-aw
rues. In these respects the commttee-approved b and the ouse-approved
b are dentca. The atter, however, woud provde severa addtona tests
whch are descrbed brefy beow.
The ouse-approved b woud provde that fu force and effect be gven to a
wrtten contract e pressy rectng that the person for whom the servce s per-
formed sha have compete contro over the performance of such servce and
that the ndvdua, n the performance of such servce (ether aone or as a
member of a group), s the empoyee of such person. Ths provson was desgned
to change the effect of the Unted States Supreme Court hodng n artcs v.
rmngham ((19 7), 332 U. S. 126). so the ouse-approved b woud desg-
nate as empoyees ndvduas performng seven categores of servce. Moreover
that b woud provde a test for determnng the empoyer-empoyee reatonshp
based on seven factors the so-caed economc reaty test. Your commttee has
concuded on the bass of overwhemng weght of testmony that the common-
aw rues for determnng the empoyer-empoyee reatonshp shoud be retaned
e cept for the speca provsons for the categores of servce performed by nd-
vduas as fu-tme fe-nsurance saesmen and servces performed by certan
agent drvers and commsson drvers as descrbed above.
The persons who woud be covered as empoyees by the defnton n the ouse-
approved b and who woud not be so covered under the commttee-approved
b woud, n genera, be covered under the atter as sef-empoyed ndvduas;
thus there woud not be a mtaton of the e tent of coverage because of your
commttee s acton.
11. ffectve date. Under the commttee-approved b the effectve date for
the coverage changes descrbed prevousy woud be anuary 1, 19 1, whereas
under the ouse-approved b (passed on October , 19 9), the correspondng
date woud be anuary 1, 19 0.

Cost of Insurance Program
I . CTU RI L COST STIM T S ND FIN NCING OF OLD- G ND SUR I ORS
INSUR NC
. Genera.
stmates of the future costs of the od-age and survvors Insurance program
are affected by many factors that are dffcut to determne. ccordngy, the
assumptons used n the actuara cost estmates may dffer wdey and yet be
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reasonabe. Your commttee recognzes and. In fact, wshes to stress the dff-
cutes Invoved n any attempt at precsey estmatng the ong-range costs for
the program. ecause of numerous factors, such as the agng of the popuaton
of the country and the nherent sow but steady growth of the beneft ro n any
retrement nsurance program, beneft payments may be e pected to ncrease
contnuousy for at east the ne t 0 years.
The cost estmates are presented here frst on a range bass so as to ndcate
the pausbe varaton n future costs dependng upon the actua trend deveop-
ng for the varous cost factors n the future. oth the ow-cost and hgh-cost
estmates are based on hgh economc assumptons, whch are ntended to rep-
resent cose to fu empoyment, wth average annua wages at about the eve
prevang n 19 - 6, whch s somewhat beow current e perence. Foowng
the presentaton of the cost estmates on a range bass, ntermedate estmates
deveoped drecty from the ow-cost and hgh-cost estmates (by averagng them)
are shown so as to ndcate the bass for the fnancng provsons of the com-
mttee-approved b.
In genera, the costs are shown as a percentage of covered payro. It s
beeved that ths s the best measure of the fnanca cost of the program. Doar
fgures taken aone are mseadng because, for e ampe, e tenson of coverage
w ncrease not ony the outgo but aso the ncome of the system.
Your commttee has very carefuy consdered the probems of cost n deter-
mnng the beneft provsons recommended. so your commttee s of the beef
that the od-age and survvors nsurance program shoud be on a competey sef-
supportng bass. ccordngy, the commttee-approved b, |ust as the ouse-
approved b, emnates the provson added n 19 3 authorzng appropratons
to the program from genera revenues. t the same tme, your commttee has
recommended a ta schedue whch t beeves w make the system sef-support-
ng as neary as can be foreseen under present crcumstances. Future e perence
may be e pected to dffer from the e perence assumed n the estmates so that
ths ta schedue, at east n the dstant future, may have to be modfed sghty.
Ths may ready be determned by future Congresses after the revsed program
has been n operaton for a decade or two.
. asc assumptons for actuara cost estmates.
The foowng estmates have been prepared on the bass of hgh-empoyment
assumptons somewhat beow condtons now prevang. The estmates are based
on eve-wage assumptons (somewhat beow the present eve). If n the future
the wage eve shoud be consderaby above that whch now prevas, and f the
benefts for those on the ro are at some tme ad|usted upward on ths account,
the ncreased outgo resutng w, n the same fashon, be offset. The cost est-
mates, however, have not taken nto account the possbty of a rse n wage eves,
as has consstenty occurred over the past hstory of ths country. If such an
assumpton were used n the cost estmates, aong wth the assumpton that the
benefts nevertheess woud not be changed, the cost reatve to payro woud
naturay be ower.
s n the cost estmates for the pan proposed by the dvsory Counc on Soca
Securty of your commttee (S. Doc. 20S, ghteth Congress, second sesson), two
separate cost ustratons have been deveoped n order to show possbe ranges
n beneft costs.
The ow-cost and hgh-cost assumptons reate to the cost as a percent of pay-
ro n the aggregate and not to the doar costs. The two cost assumptons are
based on possbe varatons n fertty rates, mortaty rates, retrement rates,
remarrage rates, etc.
In genera, the cost estmates have been prepared accordng to the same assump-
tons and technques as those contaned n ctuara Studes Nos. 23, 27, and 2
of the Soca Securty dmnstraton, and aso the same as n the estmates pre-
pared for the dvsory Counc. It may be mentoned here that n a those est-
mates as we as the present ones there are the foowng mportant eements:
(1) In ater years many women w be potentay egbe for both od-age
benefts and ether wfe s or wdow s benefts. In such Instances, these nd-
vduas have been assumed to receve fu od-age benefts and any resdua
amount from the wfe s or wdow s benefts, f arger than the od-age beneft.
The numbers of such ndvduas recevng resdua wfe s or wdow s benefts
and the average szes of such benefts are not shown, but the tota amount of
such benefts s ncuded n the tabes gvng the amounts of benefts n doars
and as percentages of payro.
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312
(2) The effect of the ma mum-beneft provsons w be consderabe. It
has been assumed that the number who woud receve benefts n a partcuar
case woud ncude ony those who woud receve benefts at the fu rate pus
one ndvdua who woud receve parta benefts competng the ma mum,
and wth n other potentay egbe benefcares beng dsregarded.
The assumptons as to the ma|or eements, popuaton, empoyment, and wages,
may be summarzed as foows:
(1) Popuaton. The ow-cost estmates assume Unted States 1939- mor-
taty rates constant by age and se throughout a years. The hgh-cost est-
mates are based on mprovng mortaty smar to the Natona Resources Pan-
nng oard ow-mortaty bases, wth nn assumed further mprovement wth tme
for ages over 0 to aow for possbe gans due to geratrc medca research.
The ow-cost estmates assume brth rates whch n the aggregate are about the
same as those for the Unted States 19 0- e perence, whch was reatvey
hgh. The hgh-cost estmates assume a decreasng brth rate n the future smar
to the Natona Resources Pannng oard s medum estmate.
For both the ow-cost and hgh-cost estmates no net mmgraton s assumed.

(2) mpoyment. oth the ow-cost and hgh-cost estmates assume cose to
fu empoyment, athough somewhat beow the eve prevang at the end of 19 ).
The prevous estmates were, n genera, based on condtons n 191 - 6. change
made n these estmates to aow partay for the hgher empoyment snce then
has been to assume that a coverage fgures (and thus resutng benefcary
fgures) are about percent hgher. Cvan empoyment averaged about
3,000,000 n 19 - 6, but n 19 averaged 9, 00,000, whe n 19 9 the average
was ,700,000, both ncreases of over 10 percent
(3) Yagcs. oth the ow-cost and hgh-cost estmates are based on wage
eves sghty beow e stng ones. n average annua wage of 2, 00 s used for
men workng n covered empoyment n a four quarters of the year, and 1,02
for women.
The actua recorded wages for four-quarter workers may be compared wth
those used n the cost estmates, as foows:
Used n cost estmates
ctua 191
ctua OIS
ctua 19 0
ctua 19 7
ctua 19
2, 00
1,62
2,300
1, 02
2,203
1,3
2,262
1, 7
2,372
1,69
2, 60
1,700
The tabe beow compares the estmated proporton of the popuaton age 6
and over who are fuy nsured under the present mted coverage and under
the e panded coverage recommended n the ouse-approved b and n the
commttee-approved b:
Caendar year
19 1
19
1960
1970
19 0....
1990
2000
Present coverage
ouse-approved b
Commttee-approved
b
Men
Women
Men
Women
Men
Women
Percent
3 -3
39-
- 9
6 -62
6 -73
72- 1
7 -
Percent
-
Percent
37- 2
7- 3
66-03
6 -7
73- 2
7 - 7
1-90
Percent
-6
7-10
10-13
13-19
20-27
30-37
39- 7
Percent
3- 0
61-
67-6
06-7
73- 3
7 - 7
1-90
Percent
7- 9
6-7
- 11
10-13
13-19
20-27
30-37
39- 7
7- 10
10-1
10-22
27-3
3 - 3
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313
It w be noted that the above fgures for women Incude ony those nsured
by ther own empoyment and not those egbe through ther husband s earnngs.
If the atter group had aso been ncuded, the resutng fgures woud have been
somewhat arger than those shown for men.
s n prevous cost estmates, no account s taken of the 19 7 amendment to
the Raroad Retrement ct, whch provdes for coordnaton of od-age and
survvors Insurance and raroad wages n determnng survvor benefts.
Under the commttee-approved b vountary coverage s permtted for two
groups, namey. State and oca government empoyees who are not under an
e stng retrement system and empoyees of regous denomnatons and organ-
zatons owned and operated by regous denomnatons. For the purpose of these
cost estmates t has been assumed that over the ong range vrtuay a of these
grcups w be covered as a resut of vountary acton on the part of the empoyers
nvoved.
C. Resuts of cost estmates on range bass.
Tabe gves the estmated ta abe payros for the coverage provded under
the commttee-approved b and n accordance wth the assumptons made prev-
ousy as to partcpaton by State and oca governments and by regous
denomnatons. s ndcated n the prevous secton, the assumptons made as to
wage rates are on the ow sde (n order to be conservatve) so that the tota
payros resutng here are aso somewhat on the ow sde.
Tare . stmated ta abe payros under commttee-approved b
In bons
Caendar year
Low-cost
estmate
gh-cost
estmate
Caendar year
Low-cost
estmate
gh-rost
estmate
19 1
10
106
110
121
103
106
111
121
19 0
129
137
1 6
126
12S
129
19
1990
I960
20O0
1970
1 ased on hgh-empoyment assumptons.
Snce both the ow-cost and the hgh-cost estmates assume a hgh future eve
of economc actvty, the payros are substantay the same under the two est-
mates n the eary years. ccordngy, there s tte dfference In the contrbu-
ton ncome n the two estmates. The assumptons whch affect benefts, however,
have wdey dfferent effects even n the eary years of the program. The range
of error n the estmates, nevertheess, may be fuy as great for contrbutons as
t s for benefts.
The ta abe payros under the commttee-approved b are sghty ower
than under the ouse-approved b. The effect of retanng the ma mum ta -
abe wage at 3,000 per year, as n present aw, rather than ncreasng t to 3,600
as n the ouse-approved b, more than offsets the factor of the greater coverage
n the commttee-approved b.
Tabe 9 shows the estmated number of monthy benefcares n current pay-
ment status under the commttee-approved b. ecause of the new start
provson for determnng nsured status the number of benefcares under the
commttee-approved b n the eary years of operaton s materay hgher than
under the ouse-approved b. Thus n 19 1 ths ncrease s about 700,000 persons
(ncudng 1 0,000 dependents and survvors as we as about 0,000 retred
workers). In subsequent years ths dfference decreases but even eventuay t
s st present, though very sma, chefy due to the somewhat arger compu-
sory coverage under the commttee-approved b.
923S30 1 21
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31
Tabe 9. stmated numbers of monthy benefcares1 under commttee-
approved b
fn thousands
Od-age benefcares2
Survvor benefcares
-
Caendar year
Prmary
Wfe s
Chd s
Wdow s1
Parent s
Mother s Chad s
LOW-COST STIM T
19 1
2,033
9
7
3
19
200
TOO
19
2,203
66
60
6 0
2
262
9 6
1960
2,727
793
6
1,101
37
30
1,13
1970
,0 9
1,063

2,031
2
3 9
1,317
19 0
,6
1,2 3
11
2,709
2
3
1, 6
7,760
1,260
130
3,029
39
17
1, 7
2000
,910
1.1 7
129
3,003

1.71
nan-cosT estmate
19 1
2,3 0
6 2
7
363
31
2 2
est
19
3,000
30
3
669

303
71
1960
, 0
1,190
101
1,133
69
320
901
1970
6,9 3
1,661
119
2,07
90
302
SU
19 0
10,332
2,1 3
130
2,7
97
2 0
71
1990
1 , 39
2, 7
121
3,1 1
9
26
6 3
2000
17, 6
2, 99
6
3,0 3
90
2
602
s of mdde of year.
I. e., for benefts pad n respect to retred workers.
s Does not ncude benefcares who arc aso egbe for prmary benefts. For wfe s and wdow s t
fts, ncudes husband s and wdower s benefts, respectvey.
ased on hgh-empoyment assumptons.
Tabe 10 shows the estmated average benefts under the commttee-approved
b. These are gven ony for the caendar years 19 1, 1960, and 2000, snce n
genera there s a smooth trend In the ntervenng perods. For 1901 the average
od-age beneft w be over per month for a retred worker.
It w be noted that for od-age benefcares separate fgures are gven for
men and women, snce the resuts dffer greaty and snce a combnaton woud
obscure the trend. For men the average od-age beneft w reman reatvey
constant after 1960; from 19 1 to 1960 there w be some ncrease due to the
effect of the new start average wage. On the other hand, for women the aver-
age od-age beneft shows a decrease over the ong-range future because there w
utmatey be a arge number of women recevng such benefts who dd not en-
gage n covered empoyment for ther entre adut fetme after 19 0.
Tabe 10. stmated average monthy beneft payments and average ump-sum
death payments under commttee-approved b
Category
19 1
nt .
2000
Mae.
1 M
SO- 0
0- 0
26- 26
37- 37
30- 30
3 - 3
2- 2
I 0-S 0
63- S3
3C- 39
27- 27
39- 39
29- 29
3 - 3
3- 3
f - 6
6- 7
36- 3
Wfe s ;
2 -
3- 3
Wdow s 1
29- 29
3 - 3
Chd s 1
160-1 0
1 0-1 2
9 MMI
1 1-1
1 Docs not ncude those egbe for prmary benefts. Incudes husband s and wdower s benefts.
1 Does not ncude those egbe for prmary, wdow s or wdower s benefts.
Incudes both chd s benefts for chdren of od-age benefcares and chd survvor benefcares.
1 verage amount per death.
Note. Lower fgure of range shown s . or hgh-cost estmate, whe hgher fgure Is for ow-cost estmate.
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31
Tabe 11 beow presents costs as a percentage of payro for each of the va-
rous types of benefts. The eve-premum cost shown for the commttee-approved
b s roughy to 7 percent of payro, or about the same as for the ouse-
approved b and for the pan of the dvsory Counc. These eve-premum
costs are somewhat hgher than those for the orgna Soca Securty ct of
193 namey, to 7 percent because of two factors not specfed n the pans
themseves: frst, a ower nterest rate Is used here namey, 2 percent as aganst
3 percent and, second, the program proposed s nearer maturty snce the
beneft ro Is now qute szabe; n other words, some of the perod of ow cost
has been passed through wthout budng up the substanta funds whch woud
have been accumuated f the orgna ta schedue or orgna eve-premum
rate had been n effect n the past.
s woud be antcpated, the commttee-approved b has a hgher
cost throughout a years than the present ct. snce benefts are berazsd
consderaby. Smary, the commttee-approved b has a hgher cost n the
eary years and a somewhat ower cost ater than the Iouso-approved b. Ths
resuts for the eary years because of the much more bera egbty and bene-
ft condtons, whe for the mdde and ater years these factors are offset by the
emnaton of the ncrement and the permanent and tota-dsabty provsons.
In the utmate condton (year 2000) the cost under the commttee-approved b
approaches more cosey the cost under the ouse-approved b snce, under the
atter, benefts for nsured persons who are out of covered empoyment for a
substanta perod of tme (e. g., marred women) w be sharpy reduced by the
harsh effect of the so-caed contnuaton factor (not ncorporated n the com-
mttee-approved b).
Tabe 13 (see p. 310) presents the estmated operatons of the trust fund under
the e panded program. The trust fund at the end of 19 0 s estmated to be about
13 bon. The fgures for 19 0 refect the operaton of the present act for the
entre year as to contrbuton recepts, but as to beneft dsbursements the fgure
ncudes payments made under the present ct for the frst months of the year
and under the b for the remander of the year; the assumpton s made here
Tabe 11. stmated reatve costs n percentage of payro for commttee-
approved b, by type of beneft
Percent
Lump-
sum
death
Caendar year
O I-age
WUo s
Wdow s1
Parent s
Mother s
Chd s
Tota
LOW-COST STIM T
19 1
1.11
0.17
0.1
0.01
0.10
0.31
0.0
1. 9
1
1.22
.19
.27
.01
.13
. 1
.06
2.30
1960
1. 0
.2
. 7
.01
.1
.
.07
2.90
1970 _._
2.11
.30
.
.01
.1
.61
.09
.01
19S0
2.71
.3
1.10
.01
. 16
.62
.10
.9
3.3
.33
1.20
.01
.16
.
.11
.73
a
3. 6
.20
LIS
.01
.17
.6
.12
.
Leve premum
2. 2
.2
.96
.01
.10
. 1
.10
. 3
11IOU-COST STIM T
16 1
1.30
. 20
a c
0.01
0.12
a 3
0.0
2.1
o
1.67
.2
.29
.02
.1
.3
.06
2. 0
19 0...
2.39
.3
.
.02
.1
.3
.06
3.
1970...
3.
. 7
. 7
.03
.13
.32
.0
.36
19 0
.91
.69
1.17
.03
. 12
.2
.09
7.19
1090...
6.61
.6
1.3
.02
.11
.2
.11
9.13
2000...
7.7
.73
1.3
.02
. -10
.22
.12
10.32
Leve premum1 ..
. 7
.
1.06
.02
.12
.2
.10
7.03
1 Incuded arc e cesses of wfe s and wdow s benefts over prmary benefts for . cnme prmary benefcares
aso egbe for wfe s or wdow s benefts. so ncudes husband s and wdower s benefts, respectvey.
1 Incudes both chd s benefts for chdren of od-age benefcares and chd-survvor benefcares.
1 ased on hgh-empoyment assumptons.
1 Leve-premum conrtuon rate (1 cfed on 2 percent nterest) for beneft payments after 10 0 and nto
perpetuty., not takng nto account the accumuated funds at the end of 1 0 or admnstratve e penses.
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316
Tabe 13. stmated progress of trust fund for commttee-approved btt
In mons
Caendar year
Contrbu-
tons
eneft pay
merts
dmnstra-
tve e penses
Interest on
fund
Fund at end
of year
LOW-COST STIM T
19 0
2, 7
3.097
6, 167
7, 22
, 127
,0 1
9,233
t. 11
2, 1
66
69
2
111
137
163
176
26
362
630
1,101
1, 1
2, 6
3,113
13, 7
1 .7
2 .002
7, 1 .
93, 1
126,027
1 9,02
19
1960
3, 190
, 36
6,367
7, 39
,63
1970
19 0 _
1990_
2000
mO -COST STIM T
I960
2, 7
3.0 2
6.1 9
7, 32
7.933
,0 6
,129
31,11
2,962
,2 3
6, 0
9,037
11.702
13,29
6
26
32
13. 76
16. 10
20,967
3 ,03
39,321
1 .3 6
19
9
12
169
219
270
301
1960
1970
6 9
7
39
19 0
1990
2000

1 Combned empoyer, empoyee, and sef-empoyed contrbutons. The combned empoyer-empoyee
rate s 3 percent for 19 0- , percent for 19 6- 9, percent tor 1960-6 , 6 percent for 1966-69, and 6 percent
for 1970 and after. The sef-empoyed pay 9 of these rates.
Interest s fpured at 2 percent on avera e baance n fund durng year.
ased on hph-empoymcnt assumptons.
See te t for descrpton of assumptons made as to I960,
Fund e hausted n 199 .
that the enactment date w be some tme In une so that the berazed beneft
condtons w be effectve n ugust, wth the frst payments comng out of the
trust fund n September (some such assumpton must necessary be made n
deveopng cost estmates athough the enactment date mght be somewhat
earer or ater).
The future progress of the trust fund has been deveoped on the bass of a
2 percent nterest rate; foowng, some consderaton w be gven as to the effect
of a hgher nterest rate. Throughout, there s the assumpton that no Govern-
ment contrbuton to the system s made, snce both the ouse-approved b and
the commttee-approved b strke out the provson of present aw whch woud
permt ths.

Undpr the ow-cost estmate the trust fund buds up qute rapdy and even
some 0 years hence t s growng at n rate of 3 /- bon per year and at
that tme s about 100 bon n magntude; n fact, under ths estmate beneft
dsbursements never e ceed contrbuton ncome and even n the year 2000 are
about percent smaer. On the other hand, under the hgh-cost estmate
the trust fund buds up to a ma mum of about 0 bon n 197 but decreases
thereafter unt It s e hausted n 199 ; n each of the years pror to the schedued
ta ncreases (namey, 19 , 19 9, 19G , and 1969) accordng to ths estmate
the benet dsbursements are about 10 percent ower than contrbuton ncome,
whe after 197 beneft dsbursements e ceed contrbutons n a years.
These resuts are consstent and reasonabe, snce the system on an nter-
medate-cost estmate bass s ntended to be appro matey sef-supportng, as
w be Indcated hereafter. ccordngy, a ow-cost estmate shoud show that
the system s more than sef-supwrtng, whereas a hgh-cost estmate shoud
show that a defcency woud arse ater on. In actua practce under the
phosophy adopted n . II. 0000 and as set forth n ths report, the ta schedue
woud be ad|usted n future years so that nether of the deveopments of the
trust fund shown n tabe 13 woud ever eventuute. Thus, f e perence foowed
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317
the ow-cost estmate, the contrbuton rates woud probaby be ad|usted down-
ward or perhaps woud not be ncreased In future years accordng to schedue.
On the other hand, f the e perence foowed the hgh-cost estmate, the con-
trbuton rates woud have to be rased above those schedued n the commttee-
approved b. t any rate, the hgh-cost estmate does ndcnte that under the
tn schedue adopted there woud be ampe funds for severa decades even under
reatvey unfavorabe e perence.
The effects of the new egbty condtons and the new concept of computng
the average monthy wage, when combned wth the arge number of new persons
brought nto coverage, are partcuary dffcut to estmate durng the eary
years of operaton. The number of persons who w quafy and retre to get
benefts s more uncertan on the new bass than t s under present aw because
the quafyng perod s reatvey short. Whe an attempt has been made to
aow for the very mportant factor of ag n the fng of cnms, the beneft
estmates used for the eary years n deveopng the trust-fund progresson
may be overstatements to some e tent, and ths mght e tend to the fgures
shown for 1960.
D. Intermedate cost estmates.
In ths secton there w be gven Intermedate-cost estmates, deveoped from
the ow-cost and hgh-cost estmates of ths report. These ntermedate costs
are based on an average of the ow-cost and hgh-cost estmates (usng the
doar estmates and deveopng therefrom the correspondng estmates reatve
to payro). It shoud be recognzed that these Intermedate-cost estmates do
not represent the most probabe estmates, snce t s mpossbe to deveop
any such fgures. Rather, they have been set down as a convenent and ready
avaabe snge set of fgures to use for comparatve purposes.
so, a snge ntermedate fgure s necessary n the deveopment of a ta
schedue whch w make the system sef-supportng. Your commttee, n settng
up a specfc schedue, fuy recognzes that ths s sghty dfferent from what
w actuay be requred to obtan e act baance between contrbutons and
benefts. owever, ths procedure does make the ntenton specfc, even though
n actua practce future changes n the ta schedue mght be necessary. Lke-
wse, your commttee recognzes that e act sef-support cannot be obtaned from
a specfc set of ntegra or rounded fractona rates, but rather that ths
prncpe of sef-support shoud be amed at as cosey as possbe.
The ta schedue contaned n the commttee-approved b Is as foows:
Caendar year
mpoyee
mpoyer
Sef-
empoyed
Percent
Percent
Percent
2
3
1
3
2
3
3
ft
3
3
The above schedue dffers from that n the ouse-approved b ony In that
under the atter the frst ncrease from the present rates woud occur n 19 1
nstead of n 19 6. Ths ta schedue has been determned on the bass of the
foowng actuara cost anayss.
Tabe 1 gves an estmate of the eve-premum cost of the program recom-
mended by your commttee, tracng through the ncrease n cost over the present
program accordng to the ma|or types of changes proposed, as we as a smar
comparson for the ouse-approved b. eve-premum cost may be defned
as the contrbuton rate charged from 19 1 on, whch together wth nterest woud
meet a beneft payments after 19 0 (ncudng the beneft payments to those on
the ro pror to 19 1 and the Increases whch they receve through the converson
tabe). Ths eve-premum rate woud produce a very consderabe amount of
e cess ncome n the eary years whch, nvested at nterest, woud hep con-
sderaby n meetng the hgher beneft outgo utmatey.
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31
Tabe 1 . stmated eve-premum coets as percentage of payro by type
of change
ouse-ap-
proved b
Commttee-
approved b
Cost of benefts of present aw
Percent
. 0
Percent
. 0
ffect of proposed changes:
encft formua
(a) New beneft percentages 1
1-30
( 3.00)
(-.60)
.71
( 3.70)
( .0 )
(-2.9 )
O
(o) New average wage bass .
hf
(c) Reducton n ncrement-_._
Lberazed egbty condtons.....
(d) Increase n wage base ...
.0
.1
-.0
.10
-.30
.
.10
.1
-. 10
Revsed ump-sum death payment
ddtona survvor benefts .
t
tenson of coverage
Cost of benefts under b.
Dsabty benefts
6.30
.1
-.20
m
u
Interest on trust fund at end of 19 0
.1
-.20
Net eve-premum cost of b
6.2
e.o
Incudng mnmum and ma mum beneft provsons.
1 For nouse-approved b, ncudng so-caed contnuaton factor.
Not n commttee-approved b.
Incudng hgher rate for frst survvor chd, more bera egbty condtons for determnng chd
dependency on marred women workers, hgher rate for parents ( ousc-appreved b ony), wfe s benefts
for wves under 6 wth chdren ( ouse-approved b ony), and husband s and wdower s benefts (com-
mttee-approved b ony).
Note. Fgures reate ony to beneft payments after 19 0. Fgures n parentheses are subtota fgures.
These fgures represent an ntermedate estmate whch s sub|ect to a sgnfcant range because of the possbe
varaton n the cost factors nvoved n the future. The computatons are based on a compound nterest
rate of 2 percent per annum. The order n whch these varous changes are consdered n ths tabe affects
how much of the ncrease n cost s attrbuted to a specfc eement.
It shoud be emphaszed that your commttee does not recommend that the
system be fnanced b| a hgh, eve ta rate from 19 1 on but rather has recom-
mended an ncreasng schedue, whch of necessty w utmatey have to
rse hgher than the eve-premum rate. Nonetheess, ths graded ta schedue
w produce a consderabe e cess of ncome over outgo for many years so that
a szabe trust fund w arse; ths fund w be Invested In Government securtes
(|ust as s much of tne reserves of fe nsurance companes and banks, and as s
aso the case for the trust funds of the cv servce retrement, raroad retre-
ment, natona servce fe nsurance, and Unted States Government fe nsur-
ance systems), and the resutng nterest ncome w hep to bear part of the
ncreased beneft costs of the future. For comparng the costs of varous possbe
aternatve pans and provsons, the use of eve-premum rates Is hepfu as a
convenent yardstck.
It shoud be emphaszed that the order n whch the varous changes n tabe
1 are consdered determnes n many nstances how much of the ncrease n
cost Is attrbuted to a specfc recommendaton. For e ampe, for the ouse-
approved b the ncreased cost arsng from the revsed ump-sum death pay-
ment s shown as a negatve fgure or, n other words, as a savngs n cost. Under
the ouse-approv d b there are three mportant cost factors n respect to the
ump-sum death payment, namey, (1) the hgher genera beneft eve due to the
change n the beneft formua; (21 the reducton n the reaton that such pay-
ment bears to the prmary nsurance amount (from 6 tmes such amount under
present aw to 3 tmes) ; and (3) the grantng of such payment for a nsured
deaths, rather than ony for deaths where no mmedate monthy beneft s ava-
abe. If the combned effect of a three factors s consdered, there woud be an
Increase n cost of 0.0 percent of payro, but snce the frst of these factors had
prevousy been consdered n tabe 1 . the net effect of the other two factors a
the ndcated reducton In cost of 0.0 percent of payro. On the other hand,
under the commttee-approved b, the thrd factor s not ncuded, so that the
net effect n reaty s vrtuay no change n cost, but a reducton of 0.10 percent
s sted n the tabe snce an ncrease of about 0.10 percent was ncuded for the
ump-sum death payment n the ncreased cost due to the revsed beneft formua
shown above.
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319
From tabe 1 It may be noted that the net eve-premum cost of the com-
mttee-approved b s about 0.1 percent of payro ower than the ouse-
approved b. There are a number of changes n the commttee-approved b
from the ouse-approved b whch ncrease costs, whe there are somewhat
more offsettng changes n the opposte drecton. Increases n cost (taken as a
whoe, rather than consdered n any partcuar order) as a percentage of payro
are appro matey as foows:
Increase
Item: (percent)
New beneft formua gvng 1 percent of average wage beyond 100
nstead of 10 percent 0.
More bera bass for determnng average wage, not usng the so-caed
contnuaton factor . C
Retenton of the ma mum ta abe and credtabe wage base at the
present 3,000 per year . 1
More bera survvor benefts for marred women . 0
More bera mmedate egbty condtons . 0
Tota 1. 3
Correspondngy, decreases n cost as a percenta.ee of payro for the commt-
tee-approved b as compared wth the ouse-approved b are appro matey
as foows:
Decrease
Item: (.percent)
mnaton of dsabty benefts 0.
mnaton of ncrement . 9
Retenton of present bass of egbty for ump-sum death payment . 0
Greater e tenson of coverage . 0
Tota 1.
s w be seen from tabe 1 , the eve-premum cost of the present aw takng
nto account 2 percent nterest Is about /C percent of payro; ths Is consd-
eraby ower ban the cost was estmated to ba when the program was revsed
n 1939, argey because of the rse n the wase eve whch has occurred n the
past decade (hgher wages resut n ower cost as a percentage of payro because
of the weghted nature of the beneft formua).
Under the commttee-approved b the eve-premum cost of the benefts s
ncreased to amost percent of payro. owever, ths fgure must be ad|usted
sghty for two factors, namey, the admnstratve costs, whch are charged
drecty to the trust fund, and the nterest earnngs on the present trust fund,
whch w be about 13 /| bon at the end of 19 0. Consderng a of these
eements the net eve-premum cos: of the commttee-approved b s shown to
be about 6.10 percsnt of payro as compared wth about 0.2 percent for the
ouse-approved b.
s an ndcaton of the effect of varous factors on the estmated actuara
costs, t may be ponted out that t an nterest rate of 21/0 percent were used
rather than 2 percent, the net eve-premum cost of the commttee-approved
b woud be reduced to about . percent. (The nterest rate whch determnes
the yed of new nvestments for the trust fund s now 2.23 percent, but unt t
rses to 2.2 percent, such nvestments contnue to be made at 2 p rcent.)
Tabe 1 compare the year-by-year cost of the beneft payments
accordng to the ntermedate-cost estmate, not ony for the commttee-approved
b but aso for the present ct and the ouse-approved b. These fgures are
based on a eve-wage trend n the future and do not consder cycca busness
trends (booms and depressons) whch over a ong perod of years w tend to
average out. The doar amount of the ncreased cost n 19 1 of the commttee-
approved b over the present ct s substanta (about 1 bon), but the
cost as a percentage of payro does not rse greaty. Ths resuts from the
ncrease of the tota covered payro due to the newy covered categores. In
contrast wth the ouse-approved b, the beneft dsbursements n 19 1 w be
about 00 mon hgher, prncpay due to the more bera egbty cond-
tons whch w brng onto the ros many now negbe and aso n part due
to the somewhat more bera treatment accorded the e stng benefcares now
on the ro.
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320
Tabe 1 . stmated cost of beneft payments under present ct, ouse-approved
b, and commttee-approved b, ntermedate-cost estmate
mount (In mons)
In percent of payro
Caendar year
Present
ct
ouse-
approved
b
Commttee-
approved
b
Present
ct
ouse-
approved
b
Commttee-
n
1961

1,26
1,766
2,932
,332
.N17
6,76
1,71
2,679
,061
6,221
,3 2
10,33
11,32
2,0 2
2,701
3,716
,6
7,702
9,770
Percent
1.02
Pacent
1.S2
2. 6
Percent
2.02
, 1.69
2.10
zss
I 60
3.
.01
6.37
7.69
3.37
.
1970
3. 11
19 0
. 2
. 1
6.03
D.0
7.37
7.9
1990
2000
10,919
M
Leve-premum:
. 0
. 0
.2
S.32
6.1
6.99
61
6.01
6. 3
t 2U percent nterest.
t 2 percent nterest
1
1 1
1 Incudes cost of permanent and tota dsabty benefts, whch are not ncuded n commttee-approved
b. These amount to about 0 mon s 19 1, 260 mon n 196 , 00 mon In 1960, and 00 to 90u
mon n 19 0 and after.
Note. These fgures represent an ntermedate estmate whch s sub|ect to a sgnfcant range because
of the possbe varaton n tbe cost factors nvoved n the future. For defnton of evc-prenum, see
te t.

Under the commttee-approved b beneft costs e pressed as a percentage
of payro, accordng to the ntermedate estmate, do not e ceed the empoyer-
empoyee combned ta rate unt about 10 . In other words, accordng to ths
estmate, for appro matey the ne t four decades ncome to the system w
e ceed outgo; subsequenty there w be dscussed the possbe effects over the
ne t few years of unfavorabe economc condtons.
Tabe 16 beow presents costs of benefts under the commttee-approved b
as a percent of payro for each of the varous types of benefts and s comparabe
wth tabe 11 of the prevous secton.
Tabe 17 (see p. 321) gves the doar fgures for varous future years for each of
the dfferent types of benefts for the ntermedate cost estmate and s comparabe
to tabe 12 of the prevous secton. Tota beneft payments are shown to rse
from about 2 bon In 19 1 to 11 bon 0 years hence.
Tabe 16. stmated reatve costs n percentage of payro for commtttee-
approved b, by type of beneft, ntermedate-cost estmate1
IPeroent
Lump-
sum
death
Caendar year
Od-age
Wfe s
Wdow s
Parent s
Mother s
Chd s
Tota
19 1
1.20
0.1
0.1
0.01
an
0.31
0.0
2.02
19
1.
.22
.2
.01
.1
.39
.06
1
1960
L9
.29
.
.02
.16
. 3
.07
3.37
1970
2.79
.3
.
.02
.1
. 1
.0
.6
19 0
3. 0
. 6
1.1
.02
.1
. 0
.09
6.06
1990
.9
. 0
1.27
.02
.1
. 0
.11
7.37
2000
.62
. 0
1.26
.02
.1
.39
.12
7.9
Leve-prem.um
.10
. 3
LOO
.02
.1
. 0
.10
(LIS
ased on hgh-empoyment assumptons. These ntermedate costs arc based on an average of the
doar costs under the ow-cost and hgh-cost estmates.
: Incuded are e cesses of wfe s and wdow s benefts over prmary benefts for femae prmary benefcares
aso egbe for wfe s or wdow s benefts. so ncudes husband s and wdower s benefts, respectvey.
Incudes both chd s benefts for chdren of od-age benefcares and chd-survvor benefcares.
Leve-premum contrbuton rate (based on 2 percent nterest) for beneft payments after 13 0 and nto
perpetuty, not takug nto account the accumuated funds at the end o I960 or admnstratve e pense .
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321
Tabe 17. stmated absoute costs for commttee-approved b, by type of
beneft, ntermedate-cost estmate1
In mons
Lump-
sum
death
Caendar year
Od-age
Wfe s
Wdow s
Parent s
Mother s
Chd s
Tota
19 1
1,2 0
(190
1 9
9
112
31
6
2,0 2
19
1, 32
23
296
1
1
1
02
2,701
1960
2,1
3,372
32
6
2
1,030
1
160
172
73
99
73
9
3, 71
6,6
1970
23
7,702
9.770
19 0
, 33
90
1, 6
2
176
1
119
6, 7
662
1,6 6
23
1 0
30
1 2
2O00
7, 9
6 6
1,730
22
1
1
163
10, 910
1 ased on hgh-empoyment assumptons. These ntermedate costs are based on an average of the
doar costs under the ow-cost and hgh-cost estmates.
1 Incuded are e cesses of wfe s and wdow s benefts over prmary benefts for femae prmary benef-
cares aso egbe for wfe s or wdow s benefts. so ncudes husband s and wdower s benefts, re
Incudes both chd s benefts Tor chdren of od-age benefcares and chd survvor benefcares.
Tabe 1 . stmated progress of trust fund for commttee-approved b,
ntermedate-cost estmate1
fn mons)
Caendar year
Contrbutons
eneft pay-
ments
dmnstra-
tve e penses
Interest on
fund
Fund at end
of year
I960
2, 76
1, ua
Sfs
26
13, 7
19 1
2,71
2,0 1
72
27
1 ,31
19 2
3,02
2,236
7
293
1 ,321
19 3
3,0 6
2,392
7
312
16.209
19
3,06
2,6 7
SI
329
16,97
19
3,090
2,702

3 3
17,62
I960
6,17
3,716
(13
67
2 , 79
1970
7, 27
,6
1 0
0
,731
19 0
,030
7,702
17
1,301
66, 22
,363
9,770
210
1, 31
72,1 1
,6 1
10,91
23S
1,276
63, 36
1 ased on hgh-empoyment assumptons. These ntermedate costs are based on an average of the doar
costs under the ow-cost and hgh-cost estmates.
Combned empoyer-empoyee contrbuton schedue s as foows: 3 percent for 19 0- , percent (or
19 6- 9, pcroent for 1960-6 , C percent for 196 -69, and 6W percent for 1970 and after. The sef-empoyed
pay of these rates.
Interest s fgured at 2 percent on average baance n fund durng year.
See te t for descrpton of assumptons made as to 19 0.
Tabe 1 above presents the estmated operaton of the trust fund under the
commttee-approved b accordng to the ntermedate estmate (usng a 2 per-
cent nterest rate) and s comparabe to tabe 13 of the prevous secton e cept
that fgures are shown for snge caendar years from 19 0 to 19 . The estmated
contrbuton recepts for 19 1 are not greaty n e cess of those for 19 0, because
for the vast ma|orty of sef-empoyment covered by the b the ta return w
be made on an annua bass and thus n the foowng caendar year (before
March 1 , 19 2).
ccordng to tabe 1 the trust fund grows steady reachng a ma mum of
about 72 bon shorty before 1990, and then decnes sowy thereafter. Under
the ouse-approved b the trust fund grows somewhat more rapdy, n part,
because the frst ta ncrease over present rates s nsttuted n 19 1 nstead of
n 19 6 as n the commttee-approved, b and, n part, because beneft dsburse-
ments n the eary years are ower than under the commttee-appro7ed b.
Thus under the ouse-approved b, accordng to the ntermedate estmate,
the trust fund ncreases to 2 bon by the end of 19 as compared wth
17 bon at the same date for the commttee-approved b; ths dfference
of about bon s mantaned for amost 2 years. The ma mum sze of
the trust fund under the cuse-app oved b. accor;n-: to the ntermedate
estmate, s about 7 bon.
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322
The fact that the trust fund decnes sowy after 1990 ndcates, that under
the commttee-approved b, as s aso the case n the ouse-approved b, the
proposed ta schedue s not qute sef-supportng but s suffcenty cose for
a practca purposes consderng the uncertantes and varatons possbe n
the cost estmates. Thus n regard to the utmate 6 percent empoyer-
empoyee rate, the ouse Ways and Means Commttee stated as foows:
If a 7 percent utmate empoyer-empoyee rate had been chosen, the cost est-
mates deveoped woud have ndcated that the system woud be sghty over-
fnanced. Your commttee beeves that t s not necessary n such a ong-range
matter to attempt to be unduy conservatve and provde an ntentona over-
charge especay when t s consdered that t w be many, many years before
any defct or e cess n the utmate rate w be determned and even at that tme
t w probaby be of ony a sma amount.
Your commttee concurs In ths statement and has acted accordngy n Its b.
Detaed cacuatons have aso been made for the ntermedate-cost estmate
for the commttee-approved b to show the effect of usng a dfferent nterest rate
than 2 percent and the resuts are shown n the foowng tabe:
Caendar year
2 percent
Interest
2M percent
nterest
19S0
13.
13.
13.
1960
2 .
.7
66.
72.2
63.
2 .0
2 .
1P70
S
)
73.f
f.3
.
-90
7S.
73.6
Fund at end of year (In bons)
If the nterest rate Is taken as 2 percent (t Is now very cose to 2
percent), the trust fund woud reac a peak of 0,000,000,000 some years hence
and woud decne very sghty thereafter. In fact, the ta schedue n the
commttee-approved b woud, under the assumptons used under the nter-
uedate-cost estmate, pace the system vrtuay on a sef-supportng bass f
the nterest rate on the trust fund s as hgh as 2 percent.
Detaed computatons have aso been made as to the estmated progress of the
trust fund under the commttee-approved b up through 193 under unfavorabe
economc condtons. (See tabe 19.) It s assumed that the beneft dsburse-
ments woud foow those In the hgh-cost estmates prevousy presented e cept
that further ncreases have been arbtrary assumed, amountng to 20 percent
reatvey for 19 and proportonatey smaer reatve ncreases n the preced-
ng years. t the same tme It has been assumed that contrbuton ncome
woud be decreased by 10 percent n 19 1 and by 2 percent n each of the
foowng years (t shoud be mentoned agan that based on current condtons,
t woud appear that the estmates of contrbuton ncome used prevousy were
conservatve u that they tend to be somewhat on the ow sde anyway so that
these arbtrary reductons here represent even greater actua reductons over
present condtons).
Tabe 19. stmated progress of trust fund for commttee-approved b under
unfavorabe economc assumptons
n mons
Caendar year
Contrbu-
tons
eneft
pay-
ments
dmns-
tratve
e penses
Interest on
fund
Fond at
end of
year
19 0
2. 7
2. 6
2,2 9
2,270
2,29
2,312
1,11

1
2

96
26
270
273
267
2 6
237
13, 7
13. 30
13.6S7
19 1
2,290
2, 3
2. 92
3,216
3,
19 2
S
19 3-.-
19
101
11,362
19
See te t for assumptons an bases. . , .
Combned empoyer-empoyoc contrbuton rate s 3 percent for a years shown. The sef-empoyed
pay 2U percent,.
Interest s fgured at 2 percent on average baance n fund durng year.
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23
Under these unfavorabe economc assumptons, the beneft payments e ceed
the contrbutons for each year after 19 1, wth the dfference n 19 amountng
to over 1 bon. s a resut, the trust fund reaches a peak of 13. bon at
the end of 10 1 and decnes sowy thereafter, but remanng above 13 bon
unt after 19 3. t the end of 1 ) , the baance In the trust fund s 11. bon,
or ony sghty ess than the baance at the end of 19 9 ( 11. bon). ccord-
ngy, even wth unfavorabe economc condtons n the ne t enrs, the trust
fund, aong wth the ta ncome, w st be ampe to meet the beneft obgatons
of those years.
The precedng cost estmates take nto account the speca benefts provded for
veterans, snce, under the commttee-approved b, the addtona costs therefor
are met from the trust fund from tme to tme as tey arse; under the present
aw and under the ouse-approved b such addtona costs arc met from the
Genera Treasury as they arse. The benefts contaned n present aw (namey,
survvor benefts for veterans who de wthn 3 years after dscharge) are con-
tnued. Further, under the commttee-approved b t s proposed to gve wage
credts of 100 for each month of mtary servce, not ony to veterans but aso
n respect to those who ded n servce.
It s estmated that the tota cost of these veterans benefts w amount to
about 300,000,000 spread over the ne t 0 years. There w be a very consd-
erabe outgo over the ne t 10 years n respect to the chdren and wdows of
men who ded n servce. For ths group, the ncreased outgo from the trust
fund w be about 20,000,000 n 19 1 and w average about 1 ,000,000 a year
over the ne t decade. owever, snce by 1960 vrtuay a of these chdren w
have attaned age 1 , the dsbursements for ths group w fa off qute sharpy
and w not thereafter be of any sgnfcant sze unt about 3 years from now,
when the wdows w be reachng retrement age. The remander of the cost
of these Teterans benefts s In regard to veterans who dd not de n servce;
the buk of such cost w arse some 0 to 0 years hence.
Under the ouse-approved b, the cost for these veterans benefts woud have
been about 1 bon, a of whch woud be met, over the years, out of the
Genera Treasury. Under the commttee-approved b, ths beneft cost woud
be reduced by 0 percent (and none woud be met by the Genera Treasury),
prncpay because of the new start provsons as to average wage and nsured
status and because of the emnaton of the ncrement.
/ . Combned wthhodng of ncome and empoyee soca securty ta es.
The commttee-approved b woud make an mportant change n the ta -coec-
ton procedure whch, however, woud have no effect on the actuara bass of the
system, but woud resut n greater smpcty for the ta payer and n admns-
tratve economes. Ths change woud provde for a snge combned wthhodng
of ncome ta and empoyee soca securty ta appcabe generay n those cases
n whch wages pad to the empoyee arc sub|ect to wthhodng for both casses
of ta . If the empoyee s wages are not sub|ect to wthhodng for ncome ta
purposes, combned wthhodng w not appy. For e ampe, n the case of
wages pad for domestc servce n a prvate home or for agrcutura abor,
combned wthhodng s not appcabe, snce such wages are not sub|ect to
wthhodng for ncome ta purposes. Under these provsons for combned wth-
hodng, empoyers woud no onger be requred to make separate determnatons
of the amount of ncome ta and the amount of empoyee soca securty ta
to be wthhed on the same wage payments. Instead the combned empoyee
soca securty ta and ncome ta woud be determned from a wage bracket
tabe or, at the empoyer s eecton, on the bass of the percentage method.
The tota ta wthhed from each empoyee durng the caendar year woud be
aocated to empoyee soca securty ta and to ncome ta on the bass of
wages sub|ect to empoyee soca securty ta for the year. Under the aocaton
formua the e cess of the tota combned ta wthhed over 1 percent (the em-
poyee rate through 19 ) of the wages sub|ect to empoyee soca securty ta
woud be attrbuted to ncome ta wthhed.
Under the proposed provsons, empoyers w furnsh empoyees a snge
annua recept coverng both ta es, nstead of the two separate recepts now
requred. The recept w show the amount of wages sub|ect to empoyee soca
securty ta , the amount of empoyee soca securty ta , the amount of wages
sub|ect to Income ta wthhodng, and the amount of ncome ta wthhod. In
ad ton. under the proposed provsons, t s contempated that coectors w
bo permtted to make a snge assessment of soc securty ta and ncome ta
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32
wthhed, and w be reeved of dua nterest and penaty computatons as we
as ther present duty of keepng the soca securty ta coectons segregated from
the payments of ncome ta wthhed.
ppropratons to the trust fund of amounts equa to the soca securty tar
w be authorzed on the bass of ta abe wages reported to the ureau of
Interna Revenue.

Unempoyment Insdeance
. advances to states
Tte II of the Soca Securty ct, aowng advances to the accounts of
States n the Unempoyment Trust Fund, e pred on anuary 1,19 0. Durng the
operaton of ths tte no State has been egbe for such an advance. The com-
mttee s acton has contnued the operaton of tte II unt December 31, 19 1,
and provsons for advances w operate retroactvey wth respect to caendar
quarters e prng snce anuary 1, 19 0.
If the baance n the State s account In the Unempoyment Trust Fund does
not e ceed the tota contrbutons deposted durng the hgher of the two caendar
years precedng the caendar quarter under consderaton, the State s entted
to an advance. Such advance may equa the amount by whch the unempoyment
compensaton pad out by the State n the caendar quarter e ceeded 2.7 percent
of the tota wages whch were sub|ect to the State s unempoyment compensaton
aw.
dvances made to a State are to be repad, wthout Interest, to the Federa
unempoyment account automatcay, from the unempoyment fund of that State,
when and to the e tent that the baance n the State s account at the end of any
quarter e ceeds the tota contrbutons deposted durng the hgher of the two
caendar years precedng that quarter.
S CTION Y S CTION N LYSIS OF T ILL
The frst secton of the b contans a short tte, Soca Securty ct mend-
ments of 19 0, and a tabe of contents. The remander of the b s dvded nto
four ttes: Tte I, whch amends tte II of the Soca Securty ct; tte II,
whch amends the Interna Revenue Code;
Tte I mendments to Tte II of the Soca Sec bty ct

CO R G OF ST T ND LOC L MPLOY S
Secton 106 of the b woud add to the Soca Securty ct a new secton 21 ,
under whch the protecton of the od-age and survvors nsurance program coud
be e tended to empoyees of States and ther potca subdvsons and nstru-
mentates by means of agreements negotated between the States and the Federa
Securty dmnstrator.
Purpose of agreement.
Secton 21 (a) provdes that the Federa Securty dmnstrator sha enter
Into an agreement at the request of a State for the purpose of e tendng od-age
and survvors nsurance coverage to the empoyees of the State or of any potca
subdvson or nstrumentaty of the State. The agreement s to ncude snch
provsons, not nconsstent wth those specfed n the b, as the State may
request. The subsecton aso provdes that, notwthstandng the genera e cu-
sons of agrcutura abor, domestc servce, or servce performed by a student,
such servce may be covered (at the opton of the State) f t s ncuded under
an agreement.
Defntons.
Secton 21 (b) defnes certan sgnfcant terms used In the secton.
Paragraph (1) provdes that the term State sha not ncude the Dstrct of
Coumba. s a consequence, no agreement coud be made wth the Dstrct
greements coud be made, however, for coverng the empoyees of Terrtora
and oca governments n awa, aska, and the rgn Isands, and aso (sub-
|ect to the provsons of secton 219) n Puerto Rco.
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32
Paragraph (2) defnes potca subdvson to ncude nstrumentates of
the State, of a potca subdvson, or of any combnaton of the foregong.
Paragraph (3) defnes empoyee to ncude an offcer of a State or potca
subdvson.
Paragraph ( ) defnes retrement system as any penson, annuty, retre-
ment, or smar fund or system estabshed by a State or potca subdvson.
The defnton of State-wde retrement system ncuded n the ouse b s
not needed snce no empoyees n postons covered by any retrement system
may be covered by an agreement.
Paragraph ( ) defnes coverage group prmary for purposes of subsecton
c), whch governs the coverage of groups whch may be ncuded n or e cuded
from an agreement. Tour commttee has desgnated four coverage groups to
whch coverage may be e tended: ( ) mpoyees of the State other than those
engaged n performng servce n connecton wth a propretary functon, ( )
empoyees of a potca subdvson of a State other than those engaged n per-
formng servce n connecton wth a propretary functon, (0) empoyees of a
State engaged n performng servce n connecton wth a snge propretary
functon, or (D) empoyees of a potca subdvson of a State engaged n per-
formng servce n connecton wth a snge propretary functon. If an empoyee
woud be ncuded n more than one coverage group by reason of the fact that he
performs servce n connecton wth two or more propretary functons or n con-
necton wth both a propretary functon and a nonpropretary functon, he w
be ncuded n ony one such coverage group. The determnaton of whch cover-
age group such an empoyee w be ncuded n w be made n such manner as
may be specfed n the agreement.
Paragraph ( ) makes severa sgnfcant changes from the paragraph n the b
as passed by the ouse. In the atter, whch permtted coverage of empoyees
covered by a retrement system under certan condtons (specfed n subsecton
(d) n that b), a State-wde retrement system consttuted a separate coverage
group. The compete e cuson of empoyees covered by any retrement system
makes such a coverage group unnecessary. On the other band, the b as reported
estabshes a separate coverage group for any empoyees engaged n the perform-
ance of a snge propretary functon.
Servces covered.
Subsecton (c) of secton 21 of the Soca Securty ct as amended by the
b specfes the servces whch may be covered by an agreement or modfcaton
of an agreement.
Paragraph (1) requres an agreement to cover any one or more coverage groups
desgnated by the State.
Paragraph (2) provdes that If any empoyees of a coverage group are to be
covered by an agreement, then a empoyees n that coverage group (e cept for
certan casses whch may be e cuded pursuant to paragraph (3) or ( ) of
subsecton (c) or pursuant to subsecton (d)) must be ncuded under the agree-
ment. Ths provson s necessary to protect the system from adverse seecton.
Paragraph (3) of subsecton (c) permts the State to e cude from the agree-
ment a servces n any cass or casses of eectve or part-tme |obs, or |obs
compensated on a fee bass, n any coverage group. The State woud aso be
permtted to e cude any servces of an emergency nature.
Paragraph ( ) gves the State the rght to have the agreement amended to
cover addtona coverage groups or servces not prevousy covered, so ong as
the e tenson s consstent wth the other provsons of the secton.
Paragraph ( ) permts the State to e cude from any coverage group agrcu-
tura abor, domestc servce, or servce performed by a student, f such servce
woud be e cuded from compusory coverage under the ct f performed for an
empoyer other than a governmenta unt.
Paragraph (6) prevents the agreement from appyng to any servces per-
formed n a hospta, home, or other nsttuton by n patent or nmate thereof or
any servces performed by an ndvdua n a work reef or other program
desgned to reeve hm from unempoyment.
cuson of postons covered by retrement systems.
Secton 21 (d) provdes that servces performed by empoyees as members
of any coverage group n postons covered by a retrement system on the date a
coverage agreement s made appcabe to the coverage group may not be ncuded
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326
under the agreement. Thus, f any members of a coverage group are n postons
under a retrement system when the group s brought under an agreement,
empoyees n those postons cannot subsequenty be brought under the agreement
even though ther retrement system shoud be dscontnued.
Ths provson s n substtuton for secton 21 (d) of the ouse b whch
provded that postons under retrement systems mght be ncuded n orgna
agreements or modfcatons of agreements f a referendum was hed wthn a
specfed perod among empoyees n and adut benefcares of the system and
not ess than two-thrds of the voters n the referendum favored ncuson.
Payments and reports by States.
Secton 21 (e) requres the State to agree to pay amounts equvaent to the
sum of the empoyee and empoyer ta es whch woud be mposed under sectons
1 00 and 1 10 of the Interna Revenue Code f the servces covered under the
agreement consttuted empoyment under secton 1 26 of such Code. It aso
requres the State to agree to compy wth reguatons, reatng to payments
and reports, prescrbed by the dmnstrator to carry out the purposes of the
secton.
ffectve date of agreement.
Secton 21 (f) provdes that an agreement or modfcaton of an agreement
may be made effectve on a date specfed n the agreement. owever, no agree-
ment or modfcaton coud be effectve pror to anuary 1, 19 1, or e cept for an
agreement or modfcaton agreed to pror to anuary 1,19 3, pror to the caendar
year n whch t was consummated. Ths atter e cepton to the genera rue
for agreements or changes made pror to 19 3 Is ntended to gve the States
suffcent tme to negotate the agreements In the eary days of the new program
wthout unduy penazng ther empoyees under the egbty and beneft-
computaton provsons of the system because of unavodabe deay n ths process.
Termnaton of agreement.
Secton 21 (g) specfes the condtons under whch an agreement may be
termnated.
Paragraph (1) authorzes the State to termnate an agreement In ts entrety
or wth respect to any coverage group. owever, an agreement cannot be term-
nated n ts entrety unt the agreement has been n effect for at east years,
nor can It be termnated for any coverage group unt the affected group has been
covered for at east years. Furthermore, any such termnaton woud be con-
dtoned upon the recept by the dmnstrator, after the end of the -year perod,
of 2 years advance notce n wrtng. Consequenty, the mnmum duraton of
an agreement woud be 7 years, and the mnmum perod of coverage for a snge
coverage group (as ong as the agreement tsef remaned n effect) woud aso
be 7 years.
Paragraph (2) woud drect the dmnstrator to termnate an agreement n
ts entrety, or wth respect to any coverage group, f t appeared, after reasonabe
notce and opportunty for hearng, that the State had faed, or was not abe
egay, to compy substantay wth the terms of the agreement. The agree-
ment woud be termnated n ts entrety f the ack of compance affected a the
servces covered under the agreement; otherwse ony those coverage groups
affected woud have ther coverage termnated. The dmnstrator mght gve
the State as ong as 2 years to rectfy the defcency. If the State faed to do
so, the termnaton woud be effected.
Paragraph (3) provdes that f an agreement wth a State s termnated n ts
entrety no agreement wth such State may be made agan. If the termnaton
affects ony partcuar groups, those groups may not agan be ncuded under an
agreement. Ths restrcton s necessary to protect the nsurance trust fund
from e cessve drans caused by movement nto and out of the system.
Deposts n trust fund ad|ustments.
Secton 21 (h) specfes that a payments receved by the Secretary of the
Treasury under State agreements sha be deposted n the trust fund. Over-
payments or underpayments of amounts due woud be ad|usted, wthout nterest,
In accordance wth reguatons prescrbed by the dmnstrator. Where over-
payments cannot be ad|usted n ths manner the amounts overpad w be pad
out of the trust fund to the State.
Reguatons.
Secton 21 (1) provdes that the reguatons of the dmnstrator under the
secton sha be desgned to make the requrements mposed on the States smar,
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327
so far as practcabe, to requrements Imposed on empoyers under subchapters
and of chapter 9 of the Interna Revenue Code and tte II of the Soca
Securty ct.
Faure to make payments.
Secton 21 (|) estabshes penates for faure by a State to pay the amounts
due under the agreement on tme. Interest at the rate of 6 percent per annum
woud be added where the State dd not make payments when due. In addton,
the dmnstrator mght deduct the amount of such denquent payments, pus
nterest, from grants to the State under any other provson of the Soca Securty
ct; for e ampe, matchng grants for pubc assstance. The amounts so de-
ducted are to be deemed to have been pad to the State under that other provson,
and are approprated to the trust fund. purey technca change has been made
n ths provson as t appeared n the ouse b.
Instrumentates of two or more States.
Secton 21 (k) provdes that, at the request of any nstrumentaty of two or
more States, the Federa Securty dmnstrator may enter nto an agreement
wth that nstrumentaty for coverage of ts empoyees. s far as practcabe,
such an agreement must conform to the other provsons of the secton.
Deegaton of functons.
Secton 21 (1) authorzes the dmnstrator, pursuant to agreement wth the
bead of any Federa agency, to deegate any of hs functons under the secton to
any offcer or empoyee of that agency, or to utze the servces and factes of
that agency n the admnstraton of the secton. The purpose of ths provson
s to enabe the Federa Securty dmnstrator to deegate routne dutes n
connecton wth the securng of wage records and smar functons. The e -
penses ncurred by the agency whose servces or factes are utzed woud be
pad n advance or by way of rembursement, as mght be agreed upon.

R CORDS OF W G S ND S LF- MPLOYM NT INCOM
Secton 10 of the b makes a number of technca amendments n secton 20
of the Soca Securty ct and s ntended prncpay to carfy the statute of
mtatons n the present ct whch governs the crcumstances under whch cor-
rectons or changes may be made n earnngs records mantaned by the dmn-
strator. cept as otherwse noted, your commttee concurs n the provsons
adopted by the ouse n ths secton.

Secton 10 (b) of the b revses secton 20 (c) of the ct n severa respects,
ncudng changes necessary to provde for mantanng records of earnngs of sef-
empoyed persons. Paragraph (1) of the revsed 20 (c) ncudes defntons of
year and of tme mtaton for convenence of reference and because of cer-
tan necessary dfferences between the reportng of wages and sef-empoyment
ncome. The tme mtaton s coordnated wth the correspondng mtaton
n the Interna Revenue Code on the wthhodng of ta es. defnton of sur-
vvor s ncuded to smpfy references throughout the subsecton.
The term year s defned as a caendar year n the case of wages and a ta -
abe year n the case of sef-empoyment ncome. (The ouse b used the term
accountng perod nstead of year . s used n that b, the term meant a
caendar quarter for wages and a ta abe year for sef-empoyment ncome.)
The term tme mtaton s defned as 3 years, 2 months, and 1 days, a
change from the provsons approved by the ouse. The change was made n
order to conform the statute of mtatons on changes n the dmnstrator s
records wth the new statute of mtatons n the Interna Revenue Code. The
term survvor s defned to mean a spouse, former wfe dvorced, chd or parent
who survves the wage-earner or sef-empoyed person.
Paragraphs (2) and (3) of the revsed secton 20 (c) contnue the provsons
of e stng aw as now contaned n secton 20 (c) (1) of the Soca Securty ct
and make such provsons appcabe to sef-empoyment ncome. They drect the
dmnstrator to estabsh and mantan records of the earnngs of ndvduas
and, upon request, to nform them, ther survvors, or ther agents desgnated n
wrtng, of the amounts n such records. They aso make the records n evdence
of the earnngs of ndvduas and the absence of entres for any perod evdence
that no wages were pad or sef-empoyment ncome derved durng such perod.
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The addton of the agent of an ndvdna desgnated n wrtng to the cass of
those who may obtan nformaton about such ndvdua s record dd not appear
n the b as passed by the ouse.
Paragraph ( ) states the condtons under whch the dmnstrator s records
may be revsed. Pror to the e praton of the tme mtatons, the dmnstra-
tor may revse hs records f any error n them Is brought to hs attenton. Ths
s the same as e stng aw. Changes, however, have been made n the provsons
reatng to the effect of the records and to the revsons whch may be made n
them after the e praton of the tme mtatons. s changed, the provsons
reatng to the dmnstrator s records after the tme mtaton provde that,
after the e praton of the tme mtaton foowng a year, (1) the amounts of
wages or sef-empoyment ncome as shown on the records for any perod n that
year sha be concusve; (2) the absence of any entry n the records as to the
wages aeged to have been pad by an empoyer durng any perod n that year
sha be presumptve evdence that no wages were pad to the ndvdua by such
empoyer durng such perod; and (3) the absence of an entry as to sef-empoy-
ment ncome n that year s concusve uness t s shown that a ta return of
such ncome was fed before the e praton of the tme mtaton foowng the
year. owever, certan correctons are specfcay permtted after the end of
the tme mtaton.
The pres|mpton that no wages were pad an ndvdua by an empoyer n any
perod n the absence of an entry of such wages n the records may be overcome
by proof that the wages had been pad.
Where no entry of sef-empoyment ncome appears on the records and t s
shown that a ta return was fed by the ndvdua wthn the tme mtaton,
the dmnstrator s requred to enter upon the record the sef-empoyment
ncome for such year.
The present provson of 20 (c)(3) of the Soca Securty ct, permttng
revson of the records after the tme mtaton f the dmnstrator was on
notce of an error before the end of the perod, s deeted. Determnaton of what
consttutes notce has proved admnstratvey cumbersome. Instead para-
graph ( ) of secton 20 (c) as revsed by the b authorzes correctons after
the tme mtaton f an appcaton for monthy benefts or a ump-sum death
payment s fed wthn the tme mtaton and no fna decson has been made
on t, or f a wrtten request for a revson of the records s made wtthn the tme
mtaton ; but no such revson may be made after fna decson upon such
appcaton or upon such request.
In addton, the condtons under whch the dmnstrator may correct hs
records after the end of the tme mtaton, even though no appcaton for
benefts or revson was fed wthn the perod, are e panded n ways desgned
to correct certan anomaes occurrng under e stng aw. The revsed secton
20 (c) woud permt revson after the end of the tme mtaton
(1) To correct any mechanca, cerca, or other errors apparent on the face
of the records.
(2) To transfer tems to or from records of the Raroad Retrement oard,
f such tems were reported to the wrong agency.
(3) To deete or reduce any tems entered through fraud.
( ) To conform the dmnstrator s records wth specfed ta returns or
nformatona statements fed wth the Commssoner of Interna Revenue.
owever, n the case of a ta or nformaton return n respect of sef-empoyment
ncome fed after the end of the tme mtaton foowng the ta abe year,
correctons of the dmnstrator s records w not be made e cept to ncude
sef-empoyment ncome for such year n an amount not n e cess of the amount
(f any) whch has been deeted (after the end of the tme mtaton) as pay-
ments erroneousy ncuded d such records as wages pad to such ndvdua
durng such ta abe year. Ths prohbton aganst entres wth respect to sef-
empoyment ncome after the end of the tme mtaton appes not ony to cases
In whch the ndvdua vountary fes a ta return, but aso to cases n whch
the Commssoner asserts an underpayment of the sef-empoyment ta .
( ) To correct errors resutng from the empoyer s reportng of wages for an
ncorrect perod, or from hs reportng wages for one Indvdua under the name
and account number of another ndvdua, or smar errors n the report of sef-
empoyment Income. (Ths s an addton to the provson approved by the
ouse.)
(6) To Incude wages pad by an empoyer to an Indvdua durng any perod
n a year where there s a compete absence of any entry n the records of wages
havng been pad by such empoyer durng such perod.
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(7) To enter certfed tems transferred by the Raroad Retrement oard
n cases n whch survvors benefts under the Soca Securty ct are to be based
on a combnaton of soca securty wages and raroad compensaton.
Paragraph (6) of the revsed secton 20 (c) contnues the requrement In
e stng aw that wrtten notce of any deeton or reducton of wages be gven
to the ndvdua whose record s nvoved where he has prevousy been notfed
by the dmnstrator of hs wages for the perod nvoved. Notce of a deeton,
or reducton of sef-empoyment Income s requred to be gven to the ndvdua
nvoved n a cases because such ndvduas, havng made out ther own
returns, have notce of the amount of sef-empoyment ncome that shoud be
shown on the records. n Indvdua s survvor s aso to be notfed of any
deeton or reducton f ether the ndvdua or the survvor has prevousy been
notfed of the amount of wages and sef-empoyment Income appearng on the
dmnstrator s records for the perod nvoved.
Paragraph (7) of the revsed secton 20 (c) gves the dmnstrator dscreton
to prescrbe the perod, after any change or refusa to change hs records, wthn
whch an ndvdua or hs survvor may be granted a hearng upon request.
Under the present aw, the hearng must be requested before the runnng of the
tme mtaton or wthn 60 days thereafter. Thus some ndvduas have a
very ong perod wthn whch to make a request whe other ndvduas have no
opportunty to request a hearng. Under the amendment, the dmnstrator w
have the authorty to estabsh reasonabe and equtabe reguatons governng
the perod wthn whch a hearng must be requested.
Paragraph ( ) contnues e stng aw provdng for |udca revew (as pro
vded n secton 20 (g) of the Soca Securty ct) of the dmnstrator s
decson under secton 20 (c).
cept as ndcated above the amendments of secton 20 (c) of the Soca
Securty ct n the b as reported are the same In substance as those n the
b as passed by the ouse.
Secton 10 (c) of the b further amends secton 20 of the Soca Securty
ct by the addton of two new subsectons. These dea wth speca probems
arsng out of e tenson of coverage to certan Federa empoyees and the neces-
sty for contnung the provsons of e stng aw for the coordnaton between
survvors benefts under the Soca Securty ct and the Raroad Retrement ct.
Subsecton (c) of the ouse-approved b woud have added a new subsecton
(o) to secton 20 of the Soca Securty ct, provdng for gvng empoyees
of nonproft organzatons ony haf wage credts f the organzaton dd not
wave ts ta e empton undsr secton 1 10 of the Interna Revenue Code. Ths
provson has been omtted as unnecessary n vew of the changes made by your
commttee n the coverage of empoyees of nonproft organzatons.
The new subsecton (o) n the b as reported provdes that f no person e sts
who coud, upon appcaton, become entted to a monthy survvors annuty
under secton of the Raroad Retrement ct of 1937, or to a ump-sum payment
under subsecton (f) (1) of that secton, wth respect to the death of an empoyee
(as defned n such ct), raroad compensaton sha be counted on the same
bass as od-age and survvors nsurance wages or sef-empoyment Income In
determnng the rghts of the empoyee s survvors to a ump-sum death payment
or to monthy survvors benefts under the Soca Securty ct. The subsecton
woud not permt transfer of compensaton credted by reason of mtary servce
where the empoyee s credted wth wages under tte II of the Soca Securty
ct for such servce for the same perod of tme. Ths secton, ke the new
secton 202(1) provded for n secton 101(a) of the b, Is necessary to contnue
the e stng coordnaton of survvors benefts under the raroad retrement and
od-age survvors nsurance programs.
The ouse b provded that raroad compensaton woud not be used uness
t was to the camant s advantage. (Under the commttee s b It coud be to hs
dsadvantage ony If the compensaton s ow n amount and Is credted for
perods pror to attanment of age 22.) Ths provson appears to gve survvors
of workers who partcpated n both programs an advantage over the survvors
of workers who partcpated n ony the od-age and survvors Insurance pro-
gram an advantage whch presumaby was not ntended. It Is aso an advantage
whch s not accorded to partcpants of both programs under e stng aw. The
b as reported, therefore, omts ths provson. In other respects the two
bs are dentca on ths matter.
Paragraph (1) of the new subsecton (p) provdes that the Federa Securty
dmnstrator sha not make determnatons as to empoyment or wages wth
923 30 1 22
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230
respect to servce n the empoy of the Unted States or Its whoy owned nstru-
mentates, but sha accept the determnatons of the head of the approprate
Federa agency or nstrumentaty. Ths provson represents an e tenson of
present provsons of tte II of the Soca Securty ct appcabe to servces for
the Martme Commsson and the onneve Power dmnstrator. eads of
agences or nstrumentates are authorzed by paragraph (2) to make necessary
certfcatons to the Federa Securty dmnstrator wth respect to servces
under ther |ursdcton. Paragraph (3) makes the subsecton appcabe to
servce n certan actvtes conducted by an nstrumentaty of the Unted States
sub|ect to the |ursdcton of the Secretary of Defense (such as post e changes)
and desgnates the Secretary of Defense as the head of such nstrumentates
for the purposes of the tte.
Ths provson Is the same as that contaned In the ouse b.
ffectve dates.
Secton 10 (d) of the b provdes that the amendments made by subsectons
(a) and (c) sha take effect on the 1st day of the second caendar month foow-
ng the month of enactment of the b. The amendments made by subsecton (b)
(reatng to the statute of mtatons on changes n the dmnstrator s records)
w be effectve anuary 1, 19 1, but provson Is made for enabng the survvng
husband and former wfe dvorced of an ndvdua to obtan nformaton as to
the ndvdua s record on the same bass as a survvng wfe, on and after the
date the new wdower s and mother s nsurance benefts go Into effect.
Secton 109 of the b makes severa changes of a technca nature n the
remanng provsons of tte II of the Soca Securty ct.
Snce States enterng nto agreements wth the Federa Securty dmnstrator
for coverage of State and oca empoyees are requred (under the new secton
21 of the Soca Securty ct) to pay amounts equvaent to the empoyer and
empoyee ta es to the Secretary of the Treasury, provson s made for ncudng
such amounts as part of the trust fund (secton 201 (a)).

The b woud emnate from provsons reatng to the trust fund the author-
zaton to approprate to t from the genera funds of the Treasury such add-
tona sums as may be requred to fnance the benefts and payments provded by
the nsurance program.
Ths secton of the b woud aso do what has aready been accompshed n
effect by the Reorganzaton P;n of 19 (1 by changng a references to the Soca
Securty oard n tte II of the Soca Securty t to the Federa Securty
dmnstrator. In addton, references n tte II to the Federa Insurance Con-
trbutons ct (the short tte of the Interna Revenue Code provsons reatng
to coecton of ta es for the od-age and survvors nsurance program) have been
changed to subchapter of chapter 9 and subchapter of chapter 1 of the
Interna Revenue Code n order to avod confuson and to ncude the new pro-
vsons of the Code reatng to the coecton of ta es from the sef-empoyed.
Paragraph (2) of secton 109(a) of the b reates to that porton of secton
201(a) of the Soca Securty ct whch approprates to the trust fund amounts
equvaent to 100 per centum of the ta es receved under the Federa Insurance
Contrbutons ct and covered nto the Treasury. The purpose of ths amend-
ment s ony to smpfy the accountng and coecton processes requred for
determnng the amounts approprated to the trust fund. Under the proposed
amendment, such amounts w be determned by reference to the ta es on the
tota ta abe wages and sef-empoyment ncome reported for ta purposes, rather
than by reference to the sum of the coectons of such ta es. Under the proposed
amendment, the amount approprated w be determned under the present
method wth respect to ta es deposted nto the Treasury by coectors of nterna
revenue before anuary 1, 19 1. owever, after that date and for an addtona
perod of 2 years endng wth the cose of 19 2, coectors of nterna revenue
w be requred to contnue to account separatey for coectons of such ta es
whch had been assessed but not coected before anuary 1, 19 1. It s beeved
that after 19 2 the uncoected porton of such outstandng assessments w be
so sma as not to |ustfy the admnstratve cost of separatey accountng
therefor.
The appropraton w be determned after D cember 31, 19 0, under a new
system that, e cept as noted above, avods the present requrement that coec-
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331
tors of nterna revenue separatey account for such ta es and depost such ta es
Into the Treasury under separate accountng cassfcatons. Under ths new
system, the schedue on the ta returns that shows the ta abe wages pad w,
as at present, be transferred by the Commssoner of Interna Revenue to the
Federa Securty dmnstrator, and a smar transfer of nformaton w be
made wth respect to returns showng the sef-empoyment ncome Wth respect
to such wages reported to the Commssoner after December 31, 19 0 (ether on
returns, or f some other system of payment s prescrbed under secton 1 20(c)
of the Interna Revenue Code, on such other report as the Commssoner requres
to be furnshed under such secton), and wth respect to the sef-empoyment n-
come reported to the Commssoner on ta returns after December 31, 19 0, the
dmnstrator w certfy to the Secretary of the Treasury from tme to tme
the totas of such wages and such sef-empoyment ncome for the varous perods
for whch such returns or other reports are made. The Secretary w appy the
proper rates of ta under the Federa Insurance Contrbutons ct (soca secu-
rty ta es) and under the Sef- mpoyment Contrbutons ct (sef-empoyment
ta ) to such totas, and the amount of the appropraton to the trust fund s to
be 10O per centum of the amount so determned. For e ampe, the Commssoner
w transmt to the dmnstrator the schedues from a soca securty ta re-
turns fed anuary 31, 19 1, showng wages pad durng the ast quarter of 19 0.
ssume that the dmnstrator thereafter certfes that a tota of of ta abe
wages was reported on such returns. The Secretary, by appyng the 1 percent
rate of secton 1 00 and the 1 percent rate of secton 1 10 determnes an amount
equa to 3 percent of . The amount so determned s approprated and trans-
ferred from the genera fund of the Treasury to the trust fund. Smary, f
denquent returns and other ta reports obtaned durng ugust, 19 2, show
that y of prevousy unreported wages were pad durng some quarter of 19 0
(the ta es wth respect to whch were not assessed before anuary 1, 19 1), the
Secretary w determne an amount equa to 3 percent (the sum of the appcabe
rates under the Federa Insurance Contrbutons ct) of y, and the appropra-
ton to the trust fund Incudes the amount so determned-. Smar totas of
sef-empoyment Income for the ta abe years referred to In secton 0 of the
Interna Revenue Code w be certfed by the dmnstrator to the Secretary,
and the appcabe rate under secton 0 w be apped to such totas, the
amounts ncuded n the appropraton to the trust fund beng equa to the
amounts so determned. It may be noted that ta reports transferred to the
dmnstrator w ncude ad|ustments wth respect to amounts prevousy er-
roneousy reported as wages or sef-empoyment ncome, and the subsequent
certfcaton of any tota of wages pad durng a certan perod or of sef-empoy-
ment ncome for a certan perod w refect such ad|ustments.
The proposed amendment In paragraph (2) makes one further change n secton
201(a) so as to contnue the present practce of current transfers to the trust
fund of soca securty ta es. Under ths amendment, the Secretary w estmate
from tme to tme the amounts receved and deposted nto the Treasury on
account of soca securty ta es, and the amounts so estmated w be transferred
from the genera fund of the Treasury to the trust fund. Such amounts are
estmates of the amounts approprated under causes (3) and ( ) of secton
201(a). Proper ad|ustments w be made n amounts subsequenty transferred
to the e tent pror estmates were In e cess of or were ess than the amounts
of the ta es referred to In such causes. .
Ths provson was not n the ouse b snce that b made no change n the
e stng system of coecton of ta es under the Federa Insurance Contrbutons
ct. On the other hand, one change whch the ouse bn woud have made n
secton 201 of the Soca Securty ct has been deeted. The b as reported does
not ncude, as dd the ouse b, an amendment to secton 201(f) authorzng
refunds of ta es coected under the od-age and survvors Insurance program to
be made from the trust fund. To some e tent the ad|ustment because of refunds
of ta es w automatcay be made through the new procedure of appropratons
outned above. In addton, the deeton of ths proposed amendment w resut
In consderabe admnstratve savngs.
Tte II mendments to Interna Revenue Code
R T OF T ON W G S
Secton 201: Ths secton, as n the ouse b, amends causes (2) and (3) of
sectons 1 00 and 1 10 of the Interna Revenue Code, reatng to the rates of the
ta es under the Federa Insurance Contrbutons ct. Under e stng aw the
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332
rate of the empoyees ta and of the empoyers ta for the caendar years 1930
and 19 1 s 1 percent; and the rate of each such ta for the caendar year 19 2
and subsequent caendar years s 2 percent. Under the ouse b the rate of each
ta woud have been ncreased on anuary 1, 19 1. Your commttee has post-
poned the ncrease n rates unt anuary 1, 19 6. Otherwse the rates n the
commttee b are the same as n the ouse b. Under the commttee b
the rates of each ta are as foows:
rercent
For the caendar years 19 0 to 19 , ncusve 1
For the caendar years 19 G to 19 9, ncusve 2
For the caendar years 1900 to 19G , ncusve 2
F D R L S R IC
Secton 202: Ths secton, e cept for severa amendments made necessary by
changes n other provsons of the ouse b, s the same as secton 203 of the
ouse b. (For a further dscusson of Federa servces as affected by ths b,
see n ths report the e panaton of paragraphs (6) and (7) of secton 1 26(b)
of the Interna Revenue Code, as amended by secton 20 (a) of the commttee
b.)
Subsecton (a) of ths secton of the b amends part II of subchapter of
chapter 9 of the Interna Revenue Code by addng after secton 1 11 a new
secton 1 12. Your commttee has changed the number of the new secton from
1 13 to 1 12 due to the emnaton from the ouse b of a new secton 1 12,
reatng to the e empton of certan nonproft organzatons from the empoyers
ta mposed by secton 1 10 of the Code. Secton 1 12 under the commttee b
makes neffectua as to the ta mposed by secton 1 10 of the Code (wth respect
to remuneraton pad after 19 0) those provsons of any statute (rrespectve
of the date of enactment thereof) whch grant to any nstrumentaty of the
Unted States an e empton from ta aton, uness such statute grants a specfc
e empton from the ta mposed by secton 1 10 by an e press reference to such
secton. The e emptons from Federa ta aton granted by varous e stng
statutes to certan Federa nstrumentates wthout specfc reference to the ta
mposed by secton 1 10 are rendered noperatve nsofar as the e emptons reate
to the ta mposed by secton 1 10, wthout the necessty of specfcay amendng
such e empton statutes. Some Federa nstrumentates whose e empton from
the ta mposed by secton 1 10 s rendered noperatve by secton 1 12 are
natona farm oan assocatons, producton credt assocatons, and Federa
credt unons. Wth respect to subsequent egsaton of Congress whch mght
grant a genera e empton from ta aton to an nstrumentaty of the Unted
States, secton 1 12 provdes, as a rue of constructon, that such genera e emp-
ton (ackng a specfc reference to the ta mposed by secton 1 10) s not to be
construed as provdng an e empton from the ta mposed by secton 1 10.
Subsecton (b) of ths secton of the b amends secton 1 20 of the Code,
reatng to the coecton and payment of the ta es mposed by sectons 1 00 and
1 10 of the Code, by addng at the end thereof a new subsecton (e). Your com-
mttee has amended secton 1 20(e) as passed by the ouse to conform the
provsons of such secton to the reducton from 3,600 to 3,000 whch your com-
mttee has made n the wage mtaton n secton 1 26(a) (1) of the Code, as
amended by secton 20 (a) of the ouse b. Secton 1 20(e) reates to the
empoyees and empoyers ta es mposed wth respect to certan servces per-
formed n the empoy of the Unted States or n the empoy of any nstrumentaty
whch s whoy owned by the Unted States. The head of the Federa depart-
ment, agency, or nstrumentaty, havng contro over the servces performed n
the empoy of such department, agency, or nstrumentaty, or such agent or
agents as may be desgnated by such head, sha (1) determne whether an nd-
vdua has performed servces whch consttute empoyment as defned n secton
1 26 of the Code, (2) determne the amount of remuneraton whch consttutes
wages as defned n secton 1 26, and (3) make the requred return and payment
of the ta es mposed by sectons 1 00 and 1 10. person makng such return
may, for convenence of admnstraton, make payments of the empoyers ta
mposed under secton 1 10 wthout regard to the 3,000 mtaton n secton
1 26(a) (1), and he sha not be requred to fe a cam for refund, or obtan a
refund, of any amount pad as ta under secton 1 10 on that part of the remu-
neraton not ncuded n wages by reason of secton 1 26(a) (1). Ths provson
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333
does not authorze such person to dsregard the 3,000 mtaton as to remunera-
ton pad for servces ncuded n returns made by hs reportng unt.
The provson w reeve a person makng a return on behaf of any Federa
department or agency of ascertanng whether any wages have been reported for
the partcuar empoyee durng the caendar year by any other reportng unt of
any Federa department or agency and w reeve any person makng a return
on behaf of a whoy owned nstrumentaty of ascertanng whether any wages
pad the partcuar empoyee durng the caendar year by such nstrumentaty
have been reported by any other reportng unt of such nstrumentaty. The
head or agent of an nstrumentaty In determnng the amount of remuneraton
for servces performed n empoyment whch consttutes wages as denned In sec-
ton 1 26 may not take nto consderaton amounts of remuneraton pad by any
other Instrumentaty or any Federa department or agency.
Secton 1 20(e) s aso made appcabe to servces, performed by a cvan
empoyee who Is not compensated from funds approprated by the Congress, n
the rmy and r Force change Servce, the rmy and r Force Moton Pc-
ture Servce. Navy shp s servce stores. Marne Corps post e changes, or any other
actvty, conducted at nstaatons of the Natona Mtary stabshment for
the beneft and morae of personne of the rmed Forces by an nstrumentaty
of the Unted States sub|ect to the ursdcton of the Secretary of D. fense. For
purposes of secton 1120(e) the Secretary of Defense s deemed to be the head of
any such Instrumentaty.
Subsecton (c) of secton 202 of the b amends secton 1 11 of the Code, reat-
ng to ad|ustments of the empoyers ta mposed by secton 1 10 of the Code, by
addng thereto a speca provson wth respect to remuneraton receved from the
Unted States or a whoy owned nstrumentaty thereof durng any caendar
year after the caendar year 10 0. The amendment to secton 1 11 provdes that,
for the purposes of such secton, each head of a Federa department, agency, or
nstrumentaty who makes a return pursuant to secton 1 20(e) of the Code
and each agent, desgnated by the head of a Federa department, agency, or
nstrumentaty, who makes a return pursuant to secton 1 20(e) sha be
deemed a separate empoyer. Thus, ad|ustments of the ta mposed by secton
1 10 w be made by the reportng unt by whch the erroneous underpayment or
overpayment was made. For the eerrespondng amendment wth respect to the
empoyees ta Imposed by secton 1 00 of the Code, and for the provsons wth
respect to speca refunds of empoyees ta n the case of Federa servces, see
secton 1 01(d)(3) of the Code, as added by secton 203(b) of the b.
Subsecton (d) of secton 202 of the b provdes that the amendments made by
such secton sha be appcabe ony wth respect to remuneraton pad after
December 31,10 0 (December 31, 1 9, under the ouse b).
D FINITION OP W G S
Secton 203: Ths secton, whch corresponds to secton 20 of the ouse b ,
amends secton 1 26(a) of the Interna Revenue Code, whch defnes the term
wages for the purposes of the Federa Insurance Contrbutons ct, and aso
amends secton 1 01(d) of the Code, reatng to speca refunds of empoyees ta
Imposed by secton 1 00 of the Code. The amendments are appcabe under the
commttee b wth respect to remuneraton pad after 19 0 nstead of 19 9 as
under the ouse b.
Subsecton (a) of ths secton of the b amends secton 1 26(a) of the
Code, whch contans the defnton of wages. Under e stng aw the term
wages means a remuneraton for empoyment, ncudng the cash vaue of a
remuneraton pad n any medum other than cash, wth certan specfc e cep-
tons. The amendment retans ths provson of e stng aw whch precedes the
numbered paragraphs contanng the e ceptons. The ouse b woud have
Increased the 3,000 mtaton contaned n secton 1 26(a)(1) of e stng aw
to 3,600. Your commttee has emnated ths provson n the ouse b and
restored the 3,000 mtaton under e stng aw. The b carfes e stng aw
by provdng e pressy that remuneraton specfcay e cepted from wages sha
be dsregarded n computng the mtaton on the amount of remuneraton wth
respect to empoyment whch consttutes wages. Thus, f durng a caendar year
an empoyee receves remuneraton from hs empoyer on account of medca or
hosptazaton e penses In connecton wth sckness or accdent dsabty, and
f such remuneraton s e cuded from the defnton of wages under the prov-
sons of secton 1 26(a) (2) or ( ) (as amended by the b), such remuneraton
pad to the empoyee s not taken nto account n appyng the 3,000 mtaton.
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Secton 203 (a) of the b aso adds a provson, as dd the ouse b, wth respect
to the computaton of the 3,000 mtaton where one empoyng entty s suc-
ceeded by another empoyng entty under certan prescrbed condtons. Your
commttee has changed the anguage of the provson to conform to a substantve
change whch your commttee has made n the provsons of secton 1607(b) (1)
of the Code (see secton 209(a) (1) of the b). In addton, your commttee has
made a carfyng change wth respect to remuneraton pad by the predecessor.
The annua 3,000 mtaton on the amount of remuneraton wth respect to
empoyment whch consttutes wages appes ony to remuneraton receved by an
empoyee from the same empoyer. Under e stng aw, where durng a caendar
year an empoyee s empoyed by a new empoyer, the frst 3,000 of remuneraton
wth respect to empoyment pad to hm by the new empoyer durng that year
consttutes wages and s sub|ect to ta regardess of the amount of such remun-
eraton whch mght have been pad to hm n the same year by a pror empoyer.
In appyng ths rue, the ureau of Interna Revenue has hed that f a member
of a partnershp des and the trade or busness s contnued wthout nterrupton
by the survvng partners who retan a the empoyees who have been performng
servces for the former partnershp, the dssouton of the od partnershp by
operaton of aw and the organzaton of the new partnershp resut n the new
partnershp beng consdered as a new empoyer. The new partnershp, under
the ureau s rungs, s ta ed on the frst 3,000 of wages pad, durng the caendar
year n whch t was formed, to an empoyee who had been empoyed by the
predecessor partnershp and whose servces were retaned, athough the prede-
cessor may n the same year have aready pad ta on wages of 3,000 pad to
such empoyee. Smar resuts have been reached as a consequence of a cor-
porate merger or consodaton, or where an ndvdua ncorporates hs busness
and contnues to operate the same enterprse through ownershp of a the stock
of the corporaton.
The amendment made by secton 203(a) of the b prevents the dupcaton of
ta n cases such as those descrbed above and n a other cases where an
empoyer acqures substantay a the property used n a trade or busness of
another empoyer, or used n a separate unt of such a trade or busness, f
mmedatey after the acquston the successor empoys n hs trade or busness
(whether or not n the same trade or busness n whch the acqured property was
used) an empoyee who mmedatey pror to the acquston was empoyed n
the trade or busness of the predecessor. If the acquston nvoves ony a
separate unt of the trade or busness of the predecessor, the empoyee need not
have been empoyed by the predecessor n that unt provded that he was em-
poyed n the trade or busness of whch the acqured unt was a part. Under
the amendment remuneraton wth respect to empoyment pad to such empoyee
by the predecessor (or consdered as havng been pad by the predecessor) durng
the caendar year n whch the acquston occurs (and pror to the acquston) s
attrbuted to the successor empoyer for the purpose of determnng whether
such empoyer has n such caendar year pad 3,000 of wages to such empoyee.
The appcaton of the amendment may be ustrated by the foowng e ampe:
ampe: The T corporaton acqures a the property of the manufacturng
company and mmedatey after the acquston empoys n ts trade or busness
empoyee . who. mmedatey pror to the acquston, was empoyed by the
company. The company has n the caendar year n whch the acquston
occurs (and pror to the acquston) pad 2,000 of wages to . If the Y
corporaton pays to n that year remuneraton wth respect to empoyment of
2,000. ony S1.0D0 of such remuneraton w be consdered to be wages. For the
purposes of the ,000 mtaton, the T corporaton w be credted wth the
2,000 pad to by the company. If, n the same caendar year, the property
s acqured by the Z company from the Y corporaton and mmedatey after
the acquston s empoyed by the Z company n ts trade or busness, no part of
the remuneraton pad to by the Z company n the year of the acquston w
be consdered to be wages. The Z company w be credted wth the remunera-
ton pad to by the Y corporaton and aso wth the wages pad to by the
company (consdered for the purposes of the amendment as havng aso been
pad by the Y corporaton).
In the case of a transfer or acquston of property by a corporaton e empt
from ncome ta under secton 101 (6) of the Code, the actvty n whch such
corporaton s engaged s consdered to be ts trade or busness for the purpose of
determnng whether the transferred property was used n the trade or busness
of the predecessor and for the purpose of determnng whether the empoyment
by the predecessor and the successor of an ndvdua whose servces were re-
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taned by the successor consttuted empoyment n a trade or busness. Thus, f
a chartabe, or a regous organzaton sub|ect to ta by vrtue of ts eecton,
acqures a the pro erty of another such organzaton kewse sub|ect to ta
and retans the servces of empoyees of the predecessor, wages pad to such
empoyees by the predecessor n the year of the acquston (and pror to such
acquston) w be attrbuted to the successor for the purposes of the 3,000
mtaton.
successor empoyer may receve the credt for remuneraton pad to an
empoyee by a predecessor empoyer ony f the acquston ncuded substantay
a the property used n a trade or busness of the predecessor, or n a separate
unt of such a trade or busness. the property used n the separate unt ot
a trade or busness may consst of a the property used n the performance of an
essenta operaton of the trade or busness, or t may consst of a the property
used n a reatvey sef-sustanng entty formng a part of the trade or busness.
For e ampe, f the R company, whch manufactures a type of motor-drven
machne, dscontnues the manufacturng of motors and transfers a the property
used n such manufacturng to the S company, the S company w be consdered
to have acqured the motor-manufacturng unt of the R company. Smary,
the acquston of one of a chan of reta stores w consttute the acquston
of a separate unt of the trade or busness of the predecessor.
Paragraph (2) of secton 1 26(a) as amended by the ouse b retans the
provson of e stng aw whch e cudes from the term wages the amount of
any payment made to, or on behaf of, an empoyee under a pan or system estab-
shed by an empoyer whch makes provson for hs empoyees generay or for
a cass or casses of hs empoyees (ncudng any amount pad by an empoyer
for nsurance or annutes, or nto a fund, to provde for any such payment), on
account of (1) an empoyee s retrement, or (2) an empoyee s sckness or acc-
dent dsabty, or (3) medca or hosptazaton e penses n connecton wth
sckness or accdent dsabty of an empoyee, or ( ) the death of an empoyee.
Under present aw payments made under a pan or system provdng for death
benefts are not e cuded from wages f the empoyee has certan optons or rghts,
such as the opton to receve, nstead of the provson for such death beneft, any
part of such payment made by the empoyer, or the rght to assgn the death
beneft or to receve a cash consderaton n eu thereof. The amendment made
by the ouse b removes such condtons mposed under e stng aw wth
respect to payments provdng for death benefts. Your commttee has further
amended secton 1 26(a) (2) so as aso to e cude from wages any payment made
to, or on behaf of, any dependents of an empoyee (ncudng husbands, wves,
chdren, and other members of the mmedate famy) under a pan or system
estabshed by an empoyer whch makes provson for hs empoyees generay
and ther dependents or for a cass or casses of hs empoyees and ther depend-
ents (ncudng any amount pad by an empoyer for nsurance or annutes, or
nto a fund, to provde for any such payment) on account of (1) an empoyee s
retrement, or (2) sckness or accdent dsabty of an empoyee or any of hs
dependents, or (3) medca or hosptazaton e penses n connecton wth sck-
ness or accdent dsabty of an empoyee or any of hs dependents, or ( ) the
death of an empoyee or any of hs dependents. Payments of the prescrbed
character under a pan or system estabshed by an empoyer soey for the
dependents of hs empoyees are not wthn ths e cuson from wages.
Paragraph (3) of secton 1 20(a) as amended by the ouse b e cudes from
wages any payment made to an empoyee (ncudng any amount pad by an
empoyer for nsurance or annutes, or nto a fund, to provde for any such pay-
ment) on account of retrement, rrespectve of whether such payment s made
pursuant to a pan or system such as s contempated under secton 1 26(a) (2).
Your commttee has made no change n ths paragraph.
Paragraph ( ) of secton 1 26(a) as amended by the ouse b e cudes from
wages any payment on account of sckness or accdent dsabty, or medca or
hosptazaton e penses n connecton wth sckness okaccdent dsabty, made
by an empoyer to, or on behaf of, an empoyee after the e praton of s caen-
dar months foowng the ast caendar month n whch the empoyee worked for
such empoyer. Your commttee has made no change n ths paragraph. Ths
provson of aw w have appcaton n any nstance where the payment s not
made pursuant to a pan or system and therefore s not e cepted from wages by
secton 1 26(a) (2). In order for a payment to be e cepted under ths provson,
the payment made by the empoyer to, or on behaf of, the empoyee must be made
by reason of the empoyee s sckness or accdent dsabty or by reason of medca
or hosptazaton e penses n connecton wth such empoyee s sckness or acc-
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dent dsabty and there must have eapsed mmedatey pror to the caendar
month n whch the payment s made at east s consecutve caendar months
durng whch the empoyee dd no work for the empoyer.
Paragraph ( ) of secton 1 26(a) as added by the ouse b e cudes from
wages certan payments from or nto a trust e empt from ta under secton
16 (a) of the Code or under or to an annuty pan whch meets the requrements
of secton 163(a) (3), ( ), ( ), and (6). Under ths paragraph a payment made
by an empoyer nto a trust or annuty pan s e cepted from wages at the tme
of such payment f the trust s e empt from ta under secton 16 (a) of the
Code or the annuty pan meets the requrements of secton 16 (a) (3), ( ). ( ),
and (6) at the tme the payment s made thereto. payment to, or on behaf of,
an empoyee from a trust or under an annuty pan s aso e cepted from wages
under ths paragraph f at the tme of the payment to, or on behaf of, the
empoyee, the trust s e empt from ta under secton 16 (a) or the annuty pan
meets the requrements of secton 16 (a) (3), ( ), ( ), and (6). Your com-
mttee has made a carfyng amendment to paragraph ( ) to assure the e cu-
son from wages of a payment of the prescrbed character made to, or on behaf
of, a benefcary of an empoyee. payment made to an empoyee of an e empt
trust as remuneraton for servces rendered as such empoyee and not as a ben3-
fcary of the trust s not wthn the e cuson.
Paragraph (6) of the amended secton 1 26(a) contnues wthout change the
e stng e cuson from wages (secton 1 26(a) (3)) of payments by an empoyer
(wthout deducton from the remuneraton of, or other rembursement from, the
empoyee) of the empoyees ta mposed by secton 1 00 of the Code and empoyee
contrbutons under State unempoyment-compensaton aws. Ths paragraph
remans the same as n the ouse b.
Paragraph (7) of secton 1 26(a) as added by the ouse b e cudes from
wages remuneraton pad n any medum other than cash to an empoyee for
servce not n the course of the empoyer s trade or busness or for domestc
servce n a prvate home of the empoyer. Your commttee has made a technca
change n ths paragraph.
Paragraph ( ) of secton 1 26(a) as added by your commttee e cudes from
wages remuneraton pad n any medum other than cash for agrcutura abor.
Remuneraton n any medum other than cash ncudes, for e ampe, odgng,
food, cothng, agrcutura or hortcutura commodtes, or car tokens or weeky
transportaton passes.
Paragraph (9) of secton 1 26(a), whch s the same as paragraph ( ) under
the onse b, e cudes from wages the remuneraton (other than vacaton or
sck pay) of a stand-by empoyee who has attaned age 6 and whose empoy-
ment reatonshp has not termnated, f the empoyee does no work for the
empoyer In the perod for whch such remuneraton s pad.
Secton 1 26(a) as amended by the b contans no provson comparabe to
paragraph ( ) of e stng aw whch e cudes from the term wages dsmssa
payments whch the empoyer s not egay requred to make. Therefore, a ds-
mssa payment, whch s any payment made by an empoyer on account of nvo-
untary separaton of the empoyee from the servce of the empoyer, w consttute
wages sub|ect, of course, to the 3,000 mtaton, rrespectve of whether the
empoyer s, or s not, egay requred to make such payment.
Your commttee has emnated those provsons of the ouse b whch woud
have e pressy ncuded as wages certan cash tps and any other cash remunera-
ton customary receved by an empoyee n the course of hs empoyment from
persons other than the person empoyng hm.
Your commttee has aso emnated those provsons of the ouse b whch
woud have (1) amended secton 1 01(d)(2) of the Code, reatng to speca
refunds of empoyees ta pad on aggregate wages n e cess of 3,000 receved
by an empoyee from more than one empoyer durng any caendar year after
the caendar vear 19 6, so as to mt the scope thereof to wages receved durng
the caendar year 19 7, 19 , or 19 9, and (2) added a new paragraph (3) to
secton 1 01(d) so as to conform the speca refund provsons to the ncrease
n the mtaton on wages from 3,000 to 3,000 for 19 0 and subsequent caendar
years. Those provsons of the ouse b are napproprate n vew of the
acton of your commttee n restorng the 3,000 mtaton on wages.
Subsecton (b) of secton 203 of the commttee b amends secton 1 01(d)
of the Code by addng thereto a new paragraph (3). Secton 1 01(d) (3), wth
the e cepton of the appcabty of the provsons to remuneraton pad after
19 0 nstead of 19 9, a conformng change to refect the change n the amount
of the mtaton on wages, and cerca changes n certan statutory references,
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s the same as secton 1 01(d)( ) of the Code under the ouse b. Secton
1 01(d) (3) under the commttee b, appcabe to remuneraton pad after 19 0,
contans speca rues reatng to speca refunds and ad|ustments of empoyees
ta n the case of Federa empoyees and speca rues reatng to speca refunds
of empoyees ta n the case of State empoyees. Under subparagraph ( ) of
secton 1 01(d) (3) each head of a Federa department, agency, or Instrumentaty
who makes a return pursuant to secton 1 20(e) of the Code and each agent,
desgnated by the head of a Federa department, agency, or nstrumentaty,
who makes a return pursuant to such secton are deemed to be separate empoyers
for the purposes of secton 1 01(c) of the Code, reatng to ad|ustments of em-
poyees ta , and secton 1 01(d)(2), reatng to speca refunds of empoyees
ta ; and, for the purposes of secton 1 01(d) (2), the term wages Incudes the
amount, not to e ceed ,000, determned by each such head or agent as consttut-
ng wages pad to an empoyee. d|ustments of the empoyees ta mposed by-
secton 1 00 of the Code sha be made by the reportng unt by whch the errone-
ous underpayment or overpayment was made. (For provsons reatng to ad|ust-
ments of empoyers ta In the case of Federa empoyees, see secton 1 11 of the
Code, as amended by secton 202(c) of the b.) The amount of remuneraton
of each empoyee reported on a return of a reportng unt to be ncuded as
wages sha under no crcumstances be n e cess of 3,000 for a caendar year
and sha ncude ony such amounts of remuneraton as the reportng unt sha
have determned to consttute wa.ws ns defned n secton 1 20. The amend-
ment s ntended to protect fuy an empoyee of the Unted States or of an n-
strumentaty whoy owned by the Unted States from the payment of ta
mposed under secton 1 00 n -an amount n e cess of the ta mposed wth
respect to the frst 3,000 of remuneraton whch s determned to consttute
wages as defned n secton 1 20.
Subparagraph ( ) of secton 1 01(d) (3) makes the speca refund provsons
n secton 1 01(d) (2) appcabe to amounts equvaent to empoyees ta under
secton 1 00(a) of the Code deducted n any caendar year after the caendar
year 19 0 from empoyees remuneraton by States, potca subdvsons, or
nstrumentates pursuant to agreements made under secton 21S of the Soca
Securty ct (added by secton 106 of the b).
Subsecton (c) of secton 203 of the commttee b, whch corresponds to sub-
secton (d) of secton 20 of the ouse b, reates to the appcabty of the
amendment made by subsecton (a) of ths secton of the b. Under the ouse
b the amendment woud have been appcabe wth respect to remuneraton
pad after December 31, 19 9. Subsecton (c) of secton 203 of the commttee
b provdes that the amendment made by subsecton (a) sha be appcabe
ony wth respect to remuneraton pad after December 31, 19 0, and that, n
the case of remuneraton pad pror to anuary 1, 19 1, the determnaton under
secton 1 26(a) (1) of the Code (pror to ts amendment by the b) of whether
or not such remuneraton consttuted wages sha bo made as f subsecton (a)
of secton 203 of the b had not be n enacted and wthout nferences drawn
from the fact that the amendment made by such subsecton s not made appcabe
to perods pror to anuary 1, 19 1.
Secton 20 : Ths secton, whch corresponds to secton 20 of the ouse b,
amends subsecton (b) of secton 1 20 of the Interna Revenue Code, whch defnes
the term empoyment for the purposes of the Federa Insurance Contrbutons
ct and aso amends subsectons (c), (e), (g), (h), (), and (|) of secton 1 26
of the Code, whch contan provsons pertnent to determnatons of empoy-
ment, and secton 1 2 of the Code, reatng to estmates of revenue reducton by
reason of the e cepton rom empoyment of servce covered under the Raroad
Retrement Ta ct.
Subsecton (a) of ths secton of the b amends secton 1 26(b). The amend-
ment s effectve anuary 1, 19 1, under the commttee b Instead of anuary 1,
19 0, as under the ouse b. Under the amendment the term empoyment s
defned to mean any servce performed after December 31, 1936, and pror to
anuary 1, 19 1, whch consttuted empoyment under the aw appcabe to the
perod n whch such servce was performed; and aso to mean (1) any servce
performed after December 31, 19 0, by an empoyee for the person empoyng
hm, rrespectve of the ctzenshp or resdence of ether, ( ) wthn the Unted
States, or ( ) on or n connecton wth an mercan vesse or mercan arcraft
(both as defned n secton 1 26(g)) under a contract of servce entered nto
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wthn the Unted States or durng the performance of whch and whe the
empoyee s empoyed on the vesse or arcraft t touches at a port n the Unted
States (Incudng an arport, n the case of an arcraft), f the empoyee s em-
poyed on and n connecton wth the vesse or arcraft when outsde the Unted
States, and (2) any servce performed outsde the Unted States after December
31,19 0, by a ctzen of the Unted States as an empoyee of an mercan empoyer
(as defned n secton 1 2C()).
That porton of secton 1 26(b) (of e stng aw) whch precedes the numbered
paragraphs (these contan the e ceptons from the term empoyment ) s
changed substantvey n ony two respects. Frst, the defnton s e tended to
ncude servce on or n connecton wth an mercan arcraft to the same e tent
as servce, aready ncuded n the defnton, on or n connecton wth an mercan
vesse. Wth respect to servce performed on or n connecton wth an mercan
vesse or mercan arcraft where the contract of servce s entered nto outsde
the Unted States, your commttee has made a carfyng amendment whch
e pressy requres that, n order that the servce consttute empoyment, the
empoyee he empoyed on the vesse or arcraft when t touches at a port wthn
the Unted States at some tme durng the performance of the contract of servce.
Second, the defnton s e tended to ncude servce performed outsde the Unted
States by a ctzen of the Unted States as an empoyee of an mercan empoyer
(the defnton of the term mercan empoyer s dscussed beow n the
e panaton of subsecton (e) of ths secton of the b). Under e stng aw the
ctzenshp or resdence of the empoyer or the empoyee has no effect upon the
determnaton of whether or not servce consttutes empoyment, e cept as the
ctzenshp or resdence of the empoyer may have a bearng n determnng
whether a vesse s an mercan vesse. Under the amendment ths s true wth
respect to servce performed ether wthn the Unted States or on or n connec-
ton wth an mercan vesse or mercan arcraft, but n the case of servce
performed outsde the Unted States, other than on or n connecton wth an
mercan vesse or arcraft, ony servce (whch otherwse consttutes empoy-
ment) performed by a ctzen of the Unted States for an mercan empoyer s
covered.
The defnton of the term empoyment tnder the amendment, as apped
to servce performed pror to anuary 1, 19 1, s sub|ect to the pertnent e cep-
tons under the aw appcabe to the perod n whch the servce was performed.
The defnton appcabe to servce performed on and after that date contnues
unchanged some of the e ceptons contaned n the present aw, omts or revses
others, and adds certan addtona ones. The commttee b wth respect to the
e ceptons from empoyment dffers from the ouse b In certan respects as
dscussed beow.
Paragraph (1) of secton 1 20(h) of the Code under the commttee b takes
the pace of the e ceptons contaned n paragraphs (1) and (2) ( ) of such
secton under the ouse b. Paragraph (1) under the ouse h woud have
contnued the e stng e cepton of agrcutura abor wth certan modfcatons
n the defnton of the term, and paragraph (2) ( ) woud have e cepted from
empoyment servce not n the course of the empoyer s trade or busness (ncud-
ng domestc servce n a prvate home of the empoyer) performed on a farm
operated for proft. Servce of the atter mentoned character s, by reason of
an amendment made by your commttee to the defnton of the term agrcutura
abor (whch s dscussed under subsecton (d) of ths secton of the b),
Incuded wthn the defnton of such term.
Subparagraph ( ) of paragraph (1) under the commttee amendment e cudes
from empoyment agrcutura abor (as defned n secton 1 20(h)) performed
n any caendar quarter by an empoyee, but ony f the cash remuneraton pad
for such servce s ess than 0 or the servce s performed by an ndvdua who
s not reguary empoyed by the empoyer to perform such servce. The cash test
of at east 0 refers to cas pad for servces performed durng a caendar
quarter, regardess of when pad. s used n subparagraph ( ), the term cash
remuneraton ncudes checkr and other monetary meda of e change. Sub-
paragraph ( ) provdes that an ndvdua sha be deemed, for the purposes
of such subparagraph, to be reguary empoyed by an empoyer durng a caendar
quarter ony f () on each of some 60 days durng the caendar quarter such
ndvdua performs agrcutura abor for such empoyer for some porton of the
day or () such ndvdua was reguary empoyed (determned n accordance
wth the test herenbefore referred to n ths sentence) by such empoyer n the
performance of servce of the prescrbed character durng the precedng caendar
quarter.
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Subparagraph ( ) of paragraph (1) under the commttee amendment e cudes
from empoyment servce performed n connecton wth the producton or harvest-
ng of any commodty denned as an agrcutura commodty n secton 1 (g) of
the grcutura Marketng ct, as amended, or n connecton wth the gnnng
of cotton. Servce of the character prescrbed n ths subparagraph s e cepted
from empoyment, regardess of the amount of the remuneraton pad for, or the
reguarty of the performance of, such servce. Wth respect to servce performed
In connecton wth the producton or harvestng of any commodty defned as an
agrcutura commodty n secton 1 (g) of the grcutura Marketng ct, as
amended, the e cepton under ths subparagraph w appy ony to servce per-
formed n connecton wth the producton or harvestng of crude gum (oeoresn)
from a vng tree or the processng of such crude gum nto gum sprts of
turpentne and gum resn, provded such processng Is carred on by the orgna
producer of such crude gum.
Paragraphs (2) and (3) under the commttee b correspond to paragraphs
(2) ( ) and (3) under the ouse b. Paragraph (2) of e stng aw e cudes
from empoyment domestc servce n a prvate home, oca coege cub, or
oca chapter of a coege fraternty or sororty; and paragraph (3) of e stng
aw e cudes from empoyment casua abor not n the course of the empoyer s
trade or busness. Paragraph (2) under the commttee b, whch s the same
as paragraph (2) ( ) under the ouse b, e cudes from empoyment domestc
servce performed n a oca coege cub, or oca chapter of a coege fraternty
or sororty, by a student who s enroed and s reguary attendng casses at
a schoo, coege, or unversty.
Paragraph (3) under the commttee b e cudes from empoyment servce not
In the course of the empoyer s trade or busness (ncudng domestc servce n
a prvate home of the empoyer) performed n any caendar quarter by an em-
poyee, but ony f the cash remuneraton pad for such servce Is ess than 0
or such servce s performed by an ndvdua who s not reguary empoyed by
the empoyer to perform such servce. The amendment substtutes a cash and
reguarty-of-empoyment test for the test set forth n e stng aw governng
casua abor. The cash test refers to the cash pad for servces performed durng
a caendar quarter, regardess of when pad. The term cash remuneraton
ncudes checks and other monetary meda of e change. Paragraph (3) pro-
vdes that an ndvdua sha be deemed, for the purposes of such paragraph, to
be reguary empoyed by an empoyer durng a caendar quarter ony If ( ) on
each of some 2 days durng such quarter such ndvdua performs for such em-
poyer for some porton of the day servce of the prescrbed character or ( )
such ndvdua was reguary empoyed (determned n accordance wth the
test herenbefore referred to n ths sentence) by such empoyer n the perform-
ance of servce of the prescrbed character durng the precedng caendar quarter.
Snce the defnton of agrcutura abor as amended by your commttee ncudes
servce not n the course of the empoyer s trade or busness, and domestc serv-
ce n a prvate home of the empoyer, f performed on a farm operated for proft,
paragraph (3) under the commttee b has practca appcaton ony to servce
of the prescrbed character performed other than on a farm operated for proft.
Paragraph (3) under the commttee b dffers from such paragraph under the
ouse b n severa matera respects. Your commttee has ncreased the cash
test from 2 to 0 and has substtuted 2 days for 26 days n the reguarty-
of-empoyment test, together wth a carfyng amendment to such atter-men-
toned test.
Paragraph ( ), whch Is the same as under the ouse b, contnues wthout
change the present famy empoyment e cuson.
Paragraph ( ), whch s the same as under the ouse b, contnues wthout
change the present e cuson of servce performed on or n connecton wth a
vesse not an mercan vesse, but e tends the e cuson to servce performed by
an ndvdua on or n connecton wth an arcraft not an mercan arcraft If
such ndvdua s empoyed on and n connecton wth such arcraft when It s
outsde the Unted States.
Paragraphs (6) and (7) of the b supersede paragraph (6) of e stng aw.
The e stng paragraph e cudes from empoyment servce In the empoy (1)
of the Unted States or (2) of an Instrumentaty of the Unted States whch s
ether whoy owned by the Unted States or e empt from the empoyers ta m-
posed by secton 1 10 of the Code by vrtue of any other provson of aw. The
effect of the new paragraphs (6) and (7) s to ncude as empoyment a porton
of the Federa servces e cuded from empoyment under e stng aw.
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The new paragraph (6), whch Is the same as n the ouse b, e cudes from
empoyment servce performed n the empoy of any nstrumentaty of the Unted
States, f such nstrumentaty s e empt from the empoyers ta mposed by
secton 1 10 of the Code by vrtue of any other provson of aw whch specfcay
refers to secton 1 10 of the Code n grantng the e empton from the ta mposed
by such secton. (In connecton wth paragraph (6), see the e panaton of sec-
ton 1 12, added by secton 202(a) of the b.) Paragraph (0) w not operate
to e cude from empoyment the servces referred to theren uness and unt the
Congress grants to a Federa nstrumentaty a specfc e empton from the ta
mposed by secton 1 10 of the Code.
The new paragraph (7), as amended by your commttee, contans four separate
subparagraphs. Subparagraph ( ) e cepts from empoyment servce performed
n the empoy of the Unted States, f the servce s covered by a retrement
system estabshed by a aw of the Unted States or by a retrement system estab-
shed by the agency for whch such servce s performed.
In the case of servce performed n the empoy of an nstrumentaty of the
Unted States, subparagraph ( ) e cepts from empoyment such servce, f the
servce s covered by a retrement system estabshed by a aw of the Unted
States. Subparagraph (C) e cepts from empoyment, wth certan e ceptons
herenafter referred to, servce performed n the empoy (1) of a whoy owned
nstrumentaty of the Unted States or (2) of an nstrumentaty of the Unted
States () whch has a genera ta e empton (. e., an e empton whch does not
specfcay refer to the ta mposed by secton 1 10 of the Code), n effect at the
tme the servce s performed and () whch was, on December 31, 19 0, e empt
from the ta Imposed by secton 1 10. The e cepton from empoyment under
subparagraph (C) does not appy to () servce performed n the empoy of a
natona farm-oan assocaton, a producton-credt assocaton, a State, county,
or communty commttee under the Producton and Marketng dmnstraton, a
Federa credt unon, the onneve Power dmnstrator, or the Unted States
Martme Commsson, or () servce performed n the empoy of the Tennessee
aey uthorty uness such servce s covered by a retrement system estab-
shed by such authorty, or () servce performed by a cvan empoyee, not
compensated from funds approprated by the Congress, n the rmy and r
Force change Servce, rmy and r Force Moton Pcture Servce, Navy
Shp s Servce Stores, Marne Corps Post changes, or other actvtes, con-
ducted by an nstrumentaty of the Unted States sub|ect to the |ursdcton of
the Secretary of Defense, at nstaatons of the Natona Mtary stabshment
for the comfort, peasure, contentment, and menta and physca mprovement of
personne of such estabshment.
Subparagraph (D) contans 12 speca casses of e cepted servces performed
In the empoy of the Unted States or of any nstrumentaty of the Unted States,
whch are n addton to the genera e ceptons contaned n subparagraphs
( ), ( ), and (C). These speca casses of e cepted servces are as foows:
() Servce performed as the Presdent or ce Presdent of the Unted States
or as a Member of the Congress of the Unted States, a Deegate to the Congress,
or a Resdent Commssoner;
() Servce performed n the egsatve branch of the Unted States Govern-
ment (servce n the |udca branch of the Unted States Government s e cuded
from empoyment under paragraph (7) ( ) by reason of the fact that a servce
performed n such branch s covered by a retrement system estabshed by con-
gressona enactment) ;
() Servce performed n the fed servce of the Post Offce Department uness
performed by any ndvdua as an empoyee who s e cuded by ecutve order
he s servng under a temporary appontment pendng fna determnaton of
egbty for permanent or ndefnte appontment;
(v) Servce performed n or under the ureau of the Census of the Depart-
ment of Commerce by temporary empoyees empoyed for the actua takng of
any census (e cusve of cerca or other empoyees empoyed for work other
than n the actua takng of the census) ;
(v) Servce performed by any ndvdua as an empoyee who Is e cuded by
ecutve order from the operaton of the Cv Servce Retrement ct of May
29,1930, because of payment on a contract or fee bass;
(v) Servce performed by an Indvdua as an empoyee for nomna com-
pensaton of 12 or ess per annum;
(v) Servce performed n a hospta, home, or other nsttuton of the Unted
States by a patent or nmate thereof;
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(v) Servce performed by any Indvdua as a consuar agent apponted under
the authorty of secton . 1 of the Foregn Servce ct of 19 6;
( ) Servce performed by student nurses, medca or denta nterns, res-
dents-n-tranng, student dettans, student physca therapsts, or student occu-
patona therapsts, assgned or attached to a hospta, cnc, or medca or denta
Inboratory operated by any department, agency, or Instrumentaty of the Federa
Government, or by certan other student empoyees descrbed n secton 2 of
the ct of ugust . 19 7;
( ) Servce performed by any ndvdua as an empoyee servng on a tempo-
rary bass n case of re. storm, earthquake, food, or other emergency;
) Servce performed by any ndvdua as an empoyee who s empoyed
under a Federa reef program to reeve hm from unempoyment; or
( ) Servce performed as a member of a State, county, or communty com-
mttee under the Producton and Marketng dmnstraton or of any other
board, counc, commttee, or other smar body, uness such board, counc,
commttee, or other body s composed e cusvey of ndvduas otherwse n the
fu-tme empoy of the Unted States.
Under the amendment servce performed n the empoy of the Unted States
whch s not covered by a retrement system estabshed ether by a aw of
the Unted Sntes or by the agency for whch the servce s performed const-
tutes empoyment, uness such servce s e cepted from empoyment by one of
the 12 speca casses of e cepted servces or by some provson of secton 1 26
of the Code other than paragraph (7). Servce performed n the empoy of a
whoy owned nstrumentaty of the Unted States consttutes empoyment under
the amendment, f the servce s specfcay mentoned n subparagraph (C)
as one of the casses of servces to whch the basc provsons of such subpara-
graph sha not be appcabe, uness the servce (1) s covered by a retrement
system estabshed by a aw of the Unted States (subparagraph ( ), or (2)
Is e cepted from empoyment by one of the 12 speca casses of e cepted servces
(subparagraph (D)), or (3) s e cepted from empoyment by some provson
of secton 1 26 other than paragraph (7). Servce performed n the empoy of
an nstrumentaty whch has a banket ta e empton and whch had such an
e empton on December 31. 19. ), s covered under the same condtons as those
appyng to servce performed n the empoy of a whoy owned nstrumentaty.
Servce performed n the empoy of any other nstrumentaty of the Unted
States consttutes empoyment, uness the servce (1) s covered by a retrement
system estabshed by a aw of the Unted States (subparagraph ( )), or (2)
Is e cepted from empoyment by one of the 12 speca casses of e cepted servces
(subparagraph (D) ). or (3) Is e cepted from empoyment by some provson of
secton 1 26 other than paragraph (7). Determnatons as to whether servces
are covered by a retrement system of the requste character are to be made
as of the tme the servces are performed.
Servce performed by most cvan and a mtary personne of the Unted
States w be e cepted from empoyment under the amendment snce such servce
s covered by a retrement system estabshed by a aw of the Unted States. On
the other hand, the amendment has the effect of e tendng coverage to certan
Federa empoyees, such as temporary empoyees of the Unted States who are
e cuded from coverage under the Federa cv-servce retrement system pendng
permanent or ndefnte appontment, and certan other short-duraton empoyees
kewse e cuded from coverage under the Federa cv-servce retrement system.
Servce (whch otherwse consttutes empoyment) performed by certan cvan
empoyees In the empoy of some nstrumentates of the Unted States, such as
natona farm-oan assocatons, producton-credt assocatons, Federa credt
unons, and certan mtary post e changes and smar organzatons, w be
covered empoyment under the amendments made by the b.
Paragraph ( ), as amended by your commttee, contnues wthout change the
e stng e cepton from empoyment of servce performed for State governments,
ther potca subdvsons, and certan of ther nstrumentates. Your com-
mttee has restored that porton of the e stng secton 1 26(b) (7) of the Code
whch was omtted from the ouse b, reatng to the e cepton from empoy-
ment of servce performed n the empoy of an Instrumentaty of one or more
States or potca subdvsons to the e tent that the nstrumentaty Is, wth
respect to such servce, mmune under the Consttuton of the Unted States from
the empoyers ta Imposed by secton 1 10 of the Code. Your commttee has
emnated that provson of the ouse b whch woud have e tended coverage
on a convpusory bass to certan empoyees of pubcy owned transt systems.
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Paragraph (9), as amended by your commttee, takes the pace of the e stng
e cepton from empoyment (n secton 1 26(b)( ) of the Code) of servce
performed for certan regous, chartabe, scentfc, terary, educatona, or
humane organzatons. Subparagraph ( ) of paragraph (9), whch s the same
as paragraph (9) under the ouse b, e cepts from empoyment servce per-
formed by a duy ordaned, commssoned, or censed mnster of a church n
the e ercse of hs mnstry or by a member of a regous order n the e ercse
of the dutes requred by such order. The e cepton contaned n subparagraph
( ) appes to the performance of servces whch are ordnary the dutes of
such mnsters or members of regous orders. The dutes of mnsters ncude
the mnstraton of sacerdota functons and the conduct of regous worshp,
and the contro, conduct, and mantenance of regous organzatons (ncudng
the regous boards, socetes, and other ntegra agences of such organzatons),
under the authorty of a regous body consttutng a church or church denom-
naton.
Subparagraph ( ), whch was added by your commttee to the ouse b,
e cepts from empoyment (1) servce performed n the empoy of a corporaton,
fund, or foundaton, whch s e empt from ncome ta under secton 101(6) of
the Code and whch s organzed and operated prmary for regous purposes;
and (2) servce performed n the empoy of a corporaton, fund, or founda-
ton, whch s e empt from ncome ta under secton 101(G) of the Code and
whch s owned and operated by one or more of the corporatons, funds, or
foundatons referred to n cause (1) of ths sentence. Ths e cepton from
empoyment, however, s not appcabe to servce n the empoy of any organza-
ton descrbed n ether cause (1) or (2) of the precedng sentence whch s
performed on or after the frst day of the caendar quarter foowng the caendar
quarter n whch such organzaton fes wth the Commssoner of Interna
Revenue a statement that t desres to have the nsurance system estabshed by
tte II of the Soca Securty ct e tended to servce performed by ts em-
poyees. The statement provded for under subparagraph ( ) must be fed
by each organzaton whch desres coverage for ts empoyees and must appy
to a ts empoyees other than those to whch subparagraph ( ) s appcabe.
Subparagraph ( ) further provdes that such statement may be fed on, before,
c after anuary 1, 19 1; however, because the effectve date of secton 20 (n
whch ths subparagraph s ncuded) Is anuary 1, 19 1, the eecton w not
be effectve wth respect to servces performed pror to anuary 1. 19 1. Servce
wth respect to whch an eecton s n effect consttutes empoyment, uness
e cepted from empoyment under some provson of secton 1 26 of the Code other
than paragraph (9) ( ) ; and the empoyers and empoyees ta es under the
Federa Insurance Contrbutons ct appy wth respect to remuneraton for
such servce n the same manner as wth respect to remuneraton for empoy-
ment for any other empoyer. The abty wth regard to the empoyers ta
and the empoyees ta of an organzaton whch has fed an eecton of coverage
s n a respects the same as the abty of any other empoyer wth regard
to such ta es and s coectbe and enforceabe n the same manner as the
abty of any other empoyer. The statement eectng coverage s to be fed
n such form and manner, and wth such offcas of the ureau of Interna
Revenue, as may be prescrbed by reguatons made pursuant to the Interna
Revenue Code. The eecton once duy made s rrevocabe.
The effect of the new paragraph (9) w be (1) to e tend coverage on a
compusory bass to servce whch s e cepted under present aw by the pro-
vsons of secton 1 26(b)( ) of the Code, other than servce performed n
the empoy of the organzatons descrbed n subparagraph ( ) of the new
paragraph (9) or servce otherwse e cuded under secton 1 26; and (2) to
e tend coverage on an eectve bass to servce performed In the empoy of the
organzatons descrbed n subparagraph ( ) of the new paragraph (9), e cept
as to servce by mnsters and members of regous orders referred to n sub-
paragraph ( ) of the new paragraph (9) or servce otherwse e cepted under
sect on 1 26.
Paragraph (9) under the commttee b dffers from and s n substtuton for
secton 202 of the ouse b and emnates the necessty for secton 109(c) (n
part) of the ouse b.
Paragraph (10), whch s the same as under the ouse b, contnues wthout
change the e stng e cuson of servce performed by an empoyee or empoyee
representatve covered by the raroad retrement system.
Paragraph (11) revses certan e cusons contaned n paragraph (10) of
e stng aw, and omts others. Subparagraph ( ) of paragraph (11) e -
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eudes servce performed In any caendar quarter n the empoy of any organza-
ton e empt from ncome ta under secton 101 of the Code, f the remuneraton
for such servce s ess than 0 ( or ess under e stng aw, and ess than
100 under the ouse b). The doar test under subparagraph ( ) s the
amount earned n a caendar quarter and not the amount pad n n caendar
quarter. Subparagraph ( ) e cudes servce performed n the empoy of a
schoo, coege, or unversty, whether or not e empt from ncome ta under
secton 101, f such servce s performed by a student who s enroed and s
reguary attendng casses at such schoo, coege, or unversty.
Paragraphs (12) and (13), whch are the same as under the ouse b,
contnue wthout change the present e cuson of servce performed n the
empoy of a foregn government or of a whoy owned nstrumentaty of a
foregn government under certan prescrbed condtons.
Paragraph (1 ), whch s the same as under the ouse b, contnues
wthout change the e cuson of servce performed by certan student nurses and
nterns.
Paragraph (1 ), whch s the same as under the ouse b, contnues wthout
chnnge the present e cuson of certan fshng servces.
change the present e cuson of servces performed n the devery and dstrbu-
ton of newspapers, shoppng news, and magaznes under certan prescrbed
condtons.
change the present e cuson of servce performed for an nternatona
organzaton.
our commttee has emnated paragraph (1 ), contaned n the ouse b,
whch woud have e cepted from empoyment servce performed by a partcuar
type of saesman. The e cepton s no onger necessary n vew of the acton
of your commttee n emnatng paragraph ( ) of the defnton of the term
empoyee contaned In secton 1 20(d) of the Code, as amended by secton
206(a) of the ouse b.
Subsecton (b) of secton 20 of the b, effectve anuary 1, 19 1, amends
subsecton (e) of secton 1 20 of the Code, whch defnes the term State.
cept for a change n the effectve date from anuary 1, 10 0, to anuary 1,
19 1, and a change n references to a secton whch has been renumbered by your
commttee, ths subsecton s the same as n the ouse b. The new subsec-
ton (e) contans three separate numbered paragraphs. The new paragraph
(1) defnes the term State. Under the e stng aw the term State ncudes
aska, awa, and the Dstrct of Coumba. The amendment aso ncudes
wthn such term the rgn Isands and, on and after the effectve date spec-
fed n secton 3 10 of the Code (1. e., the date on whch the provsons of tte
11 of the Soca Securty ct are e tended to Puerto Rco), Puerto Rco. The
new paragraph (2) provdes that the term Unted States when used n a
geographca sense ncudes the rgn Isands and, on and after the effectve
date specfed n secton 3 10, Puerto Rco. The new paragraph (3). reatng to
the term ctzen of the Unted States, provdes that an ndvdua who s a
ctzen of Puerto Rco (but not otherwse a ctzen of the Unted States) and
who s not a resdent of the Unted States sha not be consdered, for the
purposes of secton 1 26 of the Code, as a ctzen of the Unted States pror to
the effectve date specfed n secton 3 10. Paragraph (3) s desgned to e cude
from empoyment (pror to the effectve date specfed n secton 3 10) servces
performed by such a ctzen of Puerto Rco who works In Puerto Rco (or ese-
where outsde the Unted States) as an empoyee for an mercan empoyer (as
defned n secton 1 26(1)).
Subsecton (c) of secton 20 of the b, whch s the same as secton 20 (c)
of the ouse b, amends subsecton (g) of secton 1 26 of the Code, whch
defnes the term mercan vesse, by makng a change n the headng of such
subsecton and by addng a defnton of the term mercan arcraft. The
term mercan arcraft s defned, for purposes of the Federa Insurance
Contrbutons ct, to mean an arcraft regstered under the aws of the Unted
States. Subsecton (g) of ths secton of the b provdes that the amendment
made by subsecton (c) sha be appcabe ony wth respect to servces per-
formed after December 31, 19 0 (December 31, 19 9, under the ouse b).
Subsecton (d) of secton 20 of the b amends subsecton (h) of secton
1 26 of the Code, whch defnes the term agrcutura abor for purposes of
the Federa Insurance Contrbutons ct. Secton 20 (d) s the same as secton
20 (d) of the ouse b, e cept for a change n paragraph (3) of, and the
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addton of paragraph ( ) to, secton 1 26(h) and for a mnor technca change.
Secton 1 26(h) of e stng aw contans four numbered paragraphs. The new
subsecton (h) contans fve numbered paragraphs. Paragraph (1) of e stng
aw reates to servce performed on the farm, In the empoy of any person, n
connecton wth cutvatng the so or n connecton wth rasng or harvestng
any agrcutura or hortcutura commodty, ncudng the rasng, shearng,
feedng, carng for, tranng, and management of vestock, bees, poutry, and
fur-bearng anmas and wdfe. Paragraph (2) of e stng aw reates to
servce performed n the empoy of the owner, tenant, or other operator of a
farm n connecton wth the operaton, management, conservaton, mprovement,
or mantenance of such farm and ts toos and equpment, or n savagng tmber
or cearng and of brush and other debrs eft by a hurrcane, If the ma|or porton
of the servce s performed on a farm. The new paragraphs (1) and (2) contnue
wthout change the provsons of paragraphs (1) and (2) of e stng aw.
Paragraph (3) of e stng aw ncudes as agrcutura abor the foowng
servces even though not performed on a farm: Servces performed n connec-
ton wth the producton or harvestng of mape srup or mape sugar or any
commodty defned as an agrcutura commodty n secton 1 (g) of the
grcutura Marketng ct, as amended, or n connecton wth the rasng or
harvestng of mushrooms, or n connecton wth the hatchng of poutry, or
n connecton wth the gnnng of cotton, or n connecton wth the operaton or
mantenance of dtches, canas, reservors, or waterways used e cusvey for
suppyng and storng water for farmng purposes. The new paragraph (3).
as amended by your commttee, ncudes as agrcutura abor ony servces
performed n connecton wth the producton or harvestng of any commodty
defned as an agrcutura commodty n secton 1 (g) of the grcutura
Marketng ct, as amended, or n connecton wth the gnnng of cotton, or n
connecton wth the operaton or mantenance of dtches, canas, reservors,
or waterways, not owned or operated for proft, used e cusvey for suppyng
and storng water, for farmng purposes. Tour commttee has added to the
ouse b the provson wth respect to the operaton of dtches, canas, reser-
vors, or waterways. The effect of the amended paragraph (3) s to e cude
from the defnton of agrcutura abor servces performed n connecton wth
the producton or harvestng of mape sap, or n connecton wth the rasng or
harvestng of mushrooms, or n connecton wth the hatchng of poutry, uness
such servces are performed on a farm (as defned n secton 1 26(h)). Thus,
servces performed n connecton wth the operaton of a hatchery, f not operated
as part of a poutry or other farm, w be covered empoyment. Under the
amendment Servces performed n the processng (as dstngushed from the
gatherng) of mape sap nto mape srup or mape sugar do not consttute
agrcutura abor, even though such servces are performed on a farm. Servces
performed n connecton wth the operaton or mantenance of dtches, canas,
reservors, or waterways, not owned or operated for proft, used e cusvey
for suppyng and storng water for farmng purposes, consttute agrcutura
abor under the amendment made by your commttee. Servces referred to n
the precedng sentence woud not have consttuted agrcutura abor under the
ouse amendment, uness the ma|or part of such servces were performed on
a farm and such servces were performed n the empoy of the owner, tenant,
or other operator of a farm, n connecton wth the operaton, conservaton,
mprovement, or mantenance of such farm.
Paragraph ( ) of e stng aw ncudes as agrcutura abor servce performed
In the handng, pdntng, dryng, packng, packagng, processng, freezng,
gradng, storng, or deverng to storage or to market or to a carrer for
transportaton to market, any agrcutura or hortcutura commodty, provded
such servce s performed as an ncdent to ordnary farmng operatons or, n
the case of fruts or vegetabes, as an ncdent to the preparaton of such fruts
and vegetabes for market. Subparagraphs ( ) and ( ) of the new paragraph
( ) are a compete revson of the afore-mentoned provsons of paragraph ( )
of e stng aw. Under such subparagraph ( ) the term agrcutura abor
ncudes servce performed In the empoy of the owner-operator, tenant-operator,
or other operator of a farm In handng, pantng, dryng, packng, packagng,
processng, freezng, gradng, storng, or deverng to storage or to market or
to a carrer for transportaton to market, any agrcutura or hortcutura
commodty n ts unmanufactured state, provded such operator produced more
than one-haf of the commodty wth respect to whch such servce s performed
durng the pay perod. Under such subparagraph ( ) the term agrcutura
abor ncudes servce of the character descrbed n the precedng sentence
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performed n the empoy of n group of operators of farms (other than a coopera-
tve organzaton), provded such operators produced a of the commodty wth
respect to whch such servce s performed durng the pay perod. The tests
as an ncdent to ordnary farmng operatons and as an ncdent to the
preparaton of fruts or vegetabes for market have been strcken by the
amendment and n eu thereof three tests have been substtuted, namey, the
status of the person for whom the servce s performed, the state of the, com-
modty wth respect to whch the servce s performed, and the e tent to whch
such commodty was produced by the operator or group of operators n whose
empoy the servce s performed.
Under e stng aw servce of the prescrbed character performed wth respect
to fruts or vegetabes n the empoy of nny person consttutes agrcutura
abor, provded such servce s performed as an ncdent to the preparaton of
such fruts or vegetabes for market ; and such servce wth respect to a other
agrcutura or hortcutura commodtes consttutes agrcutura abor, f the
servce s performed as an ncdent to ordnary farmng operatons. Under
the amendment servce of the character prescrbed theren s ncuded as agrcu-
tura abor ony f performed n the empoy of the operator of a farm or a group
of operators of farms (other than a cooperatve organzaton). The term
operator of a farm as used n paragraph ( ) means an owner, tenant, or
other person, n possesson of a farm and engaged n the operaton of such farm.
Servce of the prescrbed character performed n the empoy of a cooperatve
organzaton does not consttute agrcutura abor. The term organzaton
as used n subparagraph ( ) ncudes corporatons, |ont-stock companes, and
assocatons whch are treated as corporatons under the Interna Revenue Code.
For the purposes of such subparagraph, any unncorporated group of operators
sha be deemed a cooperatve organzaton f the number of operators comprsng
such group s more than 20 at any tme durng the caendar quarter n whch
the servce nvoved s performed.
Under the amendment servce of the prescrbed character wth respect to an
agrcutura or hortcutura commodty consttutes agrcutura abor ony f
the servce s performed wth respect to such commodty n ts unmanufactured
state. The effect of ths provson s to e cude from the defnton of agrcutura
abor under paragraph ( ) any servce of the prescrbed character performed
wth respect to a commodty the character of whch has been changed from ts
raw or natura state by a processng operaton. For e ampe, the scng and sun
dryng or dehydraton of appes are not processng operatons whch change the
character of the appes, but the grndng of dred appes or the pressng of raw
appes nto cder s a processng operaton whch changes the character of the
appes from ther raw or natura state. Where the servce of the prescrbed
character s performed n the empoy of the operator of a farm, such servce does
not consttute agrcutura abor under the amendment uness such operator
produced more than one-haf of the commodty wth respect to whch the servce
s performed durng the pay perod. Where the servce s performed n the em-
poy of a group of operators of farms (other than a cooperatve organzaton),
such servce does not consttute agrcutura abor under the amendment uness
such operators produced a of the commodty wth respect to whch the servce
s performed durng the pay perod. The term commodty refers to a snge
agrcutura or hortcutura product, that s, a appes are to be treated as a
snge commodty, whe appes and peaches are to be treated as two separate
commodtes. The servce wth respect to each such commodty s to be con-
sdered separatey.
Subparagraph (C) provdes n effect that servce of the prescrbed character
performed n connecton wth commerca cannng or commerca freezng or n
connecton wth any agrcutura or hortcutura commodty after ts devery to a
termna market for dstrbuton for consumpton does not consttute agrcutura
abor under paragraph ( ). Ths provson s n a matera respects the same
as that n e stng aw.
Paragraph ( ), whch has been added by your commttee to secton 1 26(h)
of the Code, ncudes as agrcutura abor servce not n the course of the em-
poyer s trade or busness or domestc servce n a prvate home of the empoyer,
f such servce s performed on a farm operated for proft. The ncuson of these
servces as agrcutura abor emnates the necessty for any separaton of
servces performed wthn the resdence of the farm operator by hs empoyees
from those servces performed by such empoyees on any other part of the farm.
It aso emnates the necessty for any separaton of servces not n the course
923 30 1 23
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of an empoyer s trade or busness from those whch are In the course of hs
trade or busness. Generay, a farm Is not operated for proft. If t s occuped
prmary for resdenta purposes, or s used prmary for the peasure of the
occupant or hs famy such as for the entertanment of guests or as a bobby
of the occupant or hs famy.
The b contnues wthout change the defnton of the term farm, but e -
tend the appcaton of such defnton to the entre secton 1 26 of the Code,
rather than mtng t to the defnton of the term agrcutura abor as n
e stng aw.
Subsecton (g) of secton 20 of the b provdes that the amendments to sec-
ton 1 26(h) made by subsecton (d) of ths secton of the b sha b appcabe
ony wth respect to servces performed after December 31, 19 0 (December 31,
19 9, under the ouse b).
The amendment of the defnton of agrcutura abor for the purposes of
the Federa Insurance Contrbutons ct w automatcay be appcabe for
the purposes of ncome ta wthhodng on wages (for servces performed after
19 0), snce secton 1021(a)(2) of the Code (defnng wages for ncome ta
wthhodng) provdes that the term wages sha not ncude remuneraton pad
for agrcutura abor as defned n secton 1 2((h).
Subsecton (e) of secton 20 of the b, whch Is the same as secton 203(e)
of the ouse b, amends secton 1 20 of the Code by strkng out subsectons ()
and (|), reatng respectvey to certan servces performed for the War Shn-
png dmnstraton or the Unted States Martme Commsson and to certan
servces performed for the onneve Power dmnstrator (these provsons
are superseded by the new sectons 1 20(e) and 1 26(b) of the Code), and by
Insertng n eu thereof a new subsecton (). The new subsecton () defnes
the term mercan empoyer, for purposes of the Federa Insurance Contrbu-
tons ct, to mean an empoyer whch s (1) the Unted States or any nstru-
mentaty thereof, (2) an ndvdua who s a resdent of the Unted States, (3) a
partnershp, f two-thrds or more of the partners are resdents of the Unted
States, ( ) a trust, a the trustees of whch are resdents of the Unted States,
or ( ) a corporaton organzed under the aws of the Unted States or of any
State. Subsecton (g) of ths secton of the b provdes that the amendment
made by subsecton (e) sha be appcabe ony wth respect to servces per-
formed after December 31, 19 0 (December 31, 19 9, under the ouse b).
Subsecton (f) of secton 20 of the b conforms sectons 1 26(c) of the Code,
reatng to the ncuded-e cuded rue for determnng empoyment, and secton
1 2 of the Code, reatng to estmates of revenue reducton, to the change In
the paragraph number of the e cuson from empoyment of servce performed
by an Indvdua covered under the raroad retrement system. The amendment
to secton 1 2 was added by your commttee. Subsecton (g) of ths secton of
the b provdes that the amendments made by subsecton (f) sha be appcabe
ony wth respect to servces performed after December 31, 19 0 (December 31,
19 9, under the ouse b).
D FINITION OF MPLOY
Secton 20 : Ths secton corresponds to secton 206 of the ouse b. Sub-
secton (a) of ths secton amends subsecton (d) of secton 1 26 of the Interna
Revenue Code, whch defnes the term empoyee for the purposes of the Federa
Paragraphs (1), (2), and (3), of the defnton provde separate and nde-
pendent tests for determnng who are empoyees. If an Indvdua Is an empoyee
under any one of the paragraphs, he s to be consdered an empoyee whether or
not e s an empoyee under any of the other paragraphs.
Paragraph (1) of the defnton contnues wthout change the present provson
that any offcer of a corporaton s an empoyee.
Under paragraph (2) of the defnton the usua common-aw rues appcabe
In determnng the empoyer-empoyee reatonshp are to be used to determne
whether an ndvdua Is an empoyee. Your commttee has emnated the
second sentence of paragraph (2) of the defnton of the term empoyee n
the ouse b whch was desgned to modfy the effect of the Unted States
Supreme Court s hodng n artes v. rmngham (19 7) (332 U. S. 126).
Your commttee beeves that the usua common-aw rues for determnng the
empoyer-empoyee reatonshp fa short of coverng certan Indvduas who
shoud be ta ed at the empoyee rate under the od-age and survvors Insurance
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program. The statutory provsons set forth n paragraph (3) are desgned to
e tend the defnton to ncude those ndvduas who, athough not empoyees
under the usua common-aw rues, occupy substantay the same status as those
who are empoyees under such rues.
Paragraph (3) of the defnton covers ndvduas n the foowng occupatona
groups who perform servces for remuneraton under certan prescrbed cr-
cumstances :
( ) as an agent-drver or commsson-drver engaged n dstrbutng meat
products, bakery products, or aundry or dry-ceanng servces; or
( ) as a fu-tme fe-nsurance saesman.
The appcaton of ths paragraph of the defnton requres the dentfyng of
the ndvdua as one who performs servce n one of the desgnated occupatona
groups. If the servces are not performed n one of the desgnated occupatona
groups, paragraph (3) s nappcabe wth respeot to such servces. The anguage
used n the b to desgnate the respectve occupatona groups reates to feds
of endeavor n whch partcuar desgnatons are not necessary n unversa use
wth respect to the same servce. The desgnatons are addressed to the actua
servces wthout regard to any technca or cooqua abes whch may be
attached to such servces. The purpose n stng these categores s not to defne
but to dentfy each occupatona group. Thus, a determnaton whether servces
fa wthn one of the categores depends upon the facts of the partcuar stuaton.
The factua stuatons set out beow are ustratve of some of the ndvduas
fang wthn each of the occupatona groups enumerated n paragraph (3) of
the defnton. The mere fact that an ndvdua fas wthn an enumerated
occupatona group, however, does not n tsef make such ndvdua an empoyee
under ths paragraph, uness the contract of servce contempates that substan-
tay a of the servces are to be performed personay by such ndvdua, there
s no substanta nvestment n factes used n connecton wth the performance
of such servces (other than the nvestment n factes for transportaton), and
the servce s not n the nature of a snge transacton.
The Iustratve factua stuatons .are as foows:
( ) gent-drver or commsson-drver engaged n dstrbutng meat products,
oakery products, or aundry or dry-ceanng servces. Ths category ncudes an
ndvdua who operates hs own truck or the truck of the company for whch he
performs servces, serves customers desgnated by the company as we as those
socted on hs own, and whose compensaton s a commsson on hs saes or the
dfference between the prce he charges hs customers and the prce he pays to the
company for the product or servce.
( ) Fu-tme fe-nsurance saesman. ny ndvdua who s not an empoyee
under the usua common-aw rues and whose entre or prncpa busness actvty
s devoted to the soctaton of fe nsurance and annuty contracts prmary for
one fe-nsurance company s deemed to be an empoyee of such company or of
ts genera agent under paragraph (3) of the defnton. Such a saesman ord-
nary uses the offce space provded by the company or ts genera agent, and
stenographc assstance, teephone factes, and forms, rate books, and adver-
tsng materas are usuay made avaabe to hm wthout cost. e occupes a
genera status n many ways comparabe to that of common-aw empoyees. n
ndvdua who s engaged n the genera nsurance busness under a contract or
contracts of servce whch do not contempate that the ndvdua s prncpa
busness actvty w be the soctaton of fe nsurance and annuty contracts
for one company, or any ndvdua who devotes ony part tme to the soctaton
of fe nsurance or annuty contracts and s prncpay engaged n other
endeavors, s not an empoyee wthn paragraph (3) of the defnton.
In order for an ndvdua to be an empoyee under paragraph (3), the nd-
vdua must ) erform servces for remuneraton n an occupaton fang wthn
one of the enumerated groups, and the contract of servce must contempate that
substantay a the servces to whch the contract reates n the partcuar desg-
nated occupaton are to be performed personay by such ndvdua. owever,
even though ths condton s met, the ndvdua s not an empoyee wthn the
meanng of paragraph (3), f (1) such ndvdua has a substanta nvestment n
factes used n connecton wth the performance of such servces (other than
the nvestment n factes for transportaton), or (2) the partcuar servces are
n the nature of a snge transacton not part of a contnung reatonshp wth
the person for whom the servces are performed.
For the purposes of paragraph (3) of the defnton, the term contract of
servce means an arrangement, forma or nforma, under whch the partcuar
servces are performed. The requrement that the contract of servce sha con-
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tempate that substantay a of the servces are to be performed personay
means that t s not contempated that any matera part of the servces to whch
the contract reates w be deegated to any other person by the ndvdua who
undertakes to perform such servces.
In order for an ndvdua to be an empoyee under paragraph (3) of the
defnton, he must not have a substanta nvestment n factes used n connec-
ton wth the performance of such servces (other than the nvestment n factes
for transportaton). The factes here pertnent ncude equpment and premses
avaabe for the work or enterprse ns dstngushed from educaton, tranng,
and e perence, but do not ncude such toos, nstruments, equpment, or cothng
as are commony or frequenty provded by empoyees. n nvestment n an auto-
mobe by an ndvdua whch s used prmary for hs own transportaton n
connecton wth performance of servces for another person has no sgnfcance
under ths paragraph snce such nvestment s comparabe to outays for trans-
portaton by an ndvdua performng smar servces who does not own an auto-
mobe. Moreover, under paragraph (3), the nvestment n factes for the trans-
portaton of the poods or commodtes to whch the servces reate s to be e cuded
n determnng the nvestment n a partcuar case.
If an ndvdua has a substanta nvestment n factes of the requste
character, he s nor an empoyee wthn the meanng of paragraph (3) of the
defnton, snce a substanta nvestment of the requste character standng aone
s suffcent to e cude the ndvdua from the empoyee concept under sach
paragraph.
If the servces are not performed as part of a contnung reatonshp wth the
person for whom the servces are performed, but are n the nature of a snge
transacton, the ndvdua performng such servces s not an empoyee wthn
the meanng of paragraph (3) of the defnton.
The ouse b sted s other occupatona groups but dd not st a separate
category of agent-drver or commsson-drver. Your commttee has mted the
appcaton of paragraph (3) to the two groups sted. These groups have been
desgnated to assure the appcaton of the enpoyee ta rate to ndvduas who
work n these occupatons, wth the mtatons dscussed above.
Your commttee has emnated the statutory concept set forth n paragraph ( )
of the defnton of the term empoyee n the ouse b.
Subsecton (b) of secton 20 of the commttee b provdes that the amend-
ment made by subsecton (a) sha be appcabe ony wth respect to servces
performed after December 31, 10 0 (nstead of after December 31, 19 0, as
provded n the ouse b).
COM IN D WIT OLDING OF INCOM ND MPLOY SOCI L S CURITY
T S
Secton 206: Ths secton, for whch there s no correspondng provson n the
ouse b, amends subchapter of chapter 9 of the Code by addng at the end
thereof fve new sectons, namey, sectons 1633 to 1637, both ncusve.
Secton 1633 provdes under certan condtons for the combned wthhodng
of the ncome ta at source on wages under subchapter D of chapter 9 of the
Code and of the empoyees ta under the Federa Insurance Contrbutons ct.
Secton 1633 mposes a ta on wages as defned theren whch s n eu of the
two afore-mentoned ta es wth respect to such wages. Under e stng aw an
empoyer who makes a payment of wages to an empoyee s generay requred to
make separate determnatons of the ncome ta requred to be wthhed under
subchapter D of chapter 9 of the Code and of the empoyee ta under the Fed-
era Insurance Contrbutons ct. n empoyer who makes a payment of wapres
as defned n secton 1633 to an empoyee s requred to make ony one determna-
ton wth respect to the aggregate amount to be wthhed. Secton 1633 aso
contans a formua for apportonng annuay the ta requred to be deducted
and wthhed under such secton so as to show the porton of such ta appcabe
to the ncome ta , whch s consdered for a purposes as Imposed by subchapter
D of chapter 9 of the Code, and the porton appcabe to the empoyee soca
securty ta , whch s consdered for a purposes as Imposed by the Federa
Subsecton (a) of secton 1633 defnes, for the purposes of such secton, the
term wages. The term wages means a payment of remuneraton of a pre-
scrbed chnracter made (1) by a person who Is the empoyer wthn the meanng
both of the Federa Insurance Contrbutons ct and of subchapter D of chapter
0 of the Code or (2) by a person who s authorzed under secton 1632 of the
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3 9
Code to deduct nnd wthhod the tn mposed by secton 1G33 wth respect to such
payment. Secton 11)32 reates to the authorzaton by the Commssoner of
Interna Revenue of an agent of an empoyer to perform certan acts requred
of empoyers under chapter 0 of the Code, reatng to the empoyment ta es. For
the purpose of combned wthhodng, t s essenta that the empoyer or the
agent be the same for both ta es. payment of remuneraton consttutes wages
wthn the meanng of secton 1033 ony f such payment conssts e cusvey of
remuneraton whch consttutes wages both (1) as defned n secton 1021(a) of
the Code, whch defnes wages for the purposes of ncome ta wthhodng, nnd
(2) as defned n secton 1 26(a) of the Code, whch defnes wages for purposes
of the empovee soca securty ta , determned, however, wthout regard to
paragraphs ( ), (2) ( ), (C). and (D), and ( ) of such secton 1 26(a).
Paragraph (1) of secton 1 26(a) reates to the 3,000 mtaton on wages; nnd
paragraph (2) ( ), (C),and (D) nnd paragraph ( ) of such secton reate to
the e cuson from wages of certan payments on account of sckness, accdent,
dsabty, medca and hosptazaton e penses n connecton wth sckness or
accdent dsabty, and death.
The effect of the defnton of wages for the purpose of combned wthhodng
s to make such wthhodng appcabe ony f under both subchapter and
subchapter D of chapter 9
(1) the same person s the empoyer (or hs authorzed agent) for purposes of
both subchapters; and
(2) the same ndvdua s the empoyee wthn the meanng of both sub-
chapters ; and
(3) the remuneraton s for servces whch consttute empoyment wthn the
meanng of subchapter ; and
( ) the remuneraton s wages wthn the meanng of both subchapters or
woud be wages wthn the meanng of both subchapters but for the 3,000 m-
taton of secton 1 26(a) (1) and the e cuson of sckness, dsabty, medca
and hosptazaton, and death payments referred to n secton 1 26(a) (2) ( ),
(C), and (D) and secton 1 26(a) ( ).
Combned wthhodng w appy to a wages whch are sub|ect both to
ncome ta wthhodng and to wthhodng of soca securty ta . s ndcated
n ( ) above, combned wthhodng w aso appy .to wages sub|ect to ncome
ta wthhodng whch are not sub|ect to empoyee soca securty ta wthhodng
soey because of secton 1 26(a) (1), (2) ( ), (C), and (D), and ( ). Com-
bned wthhodng w appy to the atter cass of wages so as to reeve em-
poyers from the duty of makng dstnctons each payro perod as to the
payments descrbed n those provsons of secton 1 26(a). Ths appcaton of
combned wthhodng w, n most cases, avod the use of two wthhodng tabes
(or percentages) by empoyers. Thus, but for ths provson, one tabe woud be
used for the wthhodng of combned ta wth respect to empoyees whose
accumuated wages for the year do not e ceed 3,000, and another tabe for the
wthhodng of ncome ta wth respect to empoyees whose accumuated wages
e ceed 3,000. Smary, two tabes woud, but for these provsons, be requred
wth respect to payments descrbed n secton 1 26(a) (2) ( ), (C), and (D),
and ( ). y dsregardng the 3,000 mtaton for wthhodng purposes ony,
empoyers w be abe to determne the amount of ta to be wthhed wth
respect to a gven wage payment wthout reference to accumuated wages for
the year. Ths provson does not change the e empton of such payments from
soca securty ta , but the combned ta n the case of payments e empt from
soca securty ta s consdered under the apportonment formua dscussed
beow as ony ncome ta wthhed.
Secton 1633(b) mposes a ta on wages (as defned n secton 1633(a)) pad
after December 31, 19 0, whch ta the empoyer must deduct and wthhod.
The ta Is equa to the sum of the foowng:
(1) One and one-haf percent of the wages (as noted beow, ths rate w
change whenever the rate prescrbed by secton 1 00(a) changes, and w n
a cases be the same as the rate prescrbed by that secton), and
(2) Ffteen percent of the wages n e cess of an amount equa to one wth-
hodng e empton as determned under secton 1622(b) mutped by the number
of wthhodng e emptons camed, as defned n secton 1621 (e) (ths provson
corresponds to that f ng the rate of ta for ncome ta wthhodng under
secton 1622(a)).
Secton 1633(c) grants the empoyer an eecton to determne the ta by
reference to a wage-bracket wthhodng tabe prescrbed under secton 163 ,
nstead of usng the rates specfed n secton 1033(b).
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Secton 1633(d) provdes the rue for the apportonment of the combned ta
mposed by ths secton. Combned wthhodng has been adopted for the con-
venence of empoyers and to factate the admnstraton and coecton of
payro ta es. Under combned wthhodng, the dentty and the purposes of the
two payro ta es are preserved. Thus, the ta mposed by secton 1633 s
apportoned under secton 1633(d), and that apportonment determnes the
amount of ta mposed by secton 1622(a) (2) and the amount of ta mposed
by secton 1 00(b). Ordnary, ths apportonment of the ta mposed by secton
1633 (as dstngushed from the apportonment of the amount actuay deducted
and wthhed as ta under that secton) w have to be made ony for the pur-
pose of the provsons of secton 163 . Smary, the amount deducted and
wthhed as ta under secton 1633 s apportoned and that apportonment de-
termnes the amount whch s consdered as the amount deducted and wthhed
as ta under secton 1622(a) of subchapter D of chapter 9 of the Code (reatng
to ncome ta wthhodng) and the amount whch s consdered as the amount
deducted and wthhed as ta under secton 1 00 of subchapter of chapter
9 of the Code (reatng to empoyee soca securty ta under the Federa Insur-
ance Contrbutons ct). Ordnary, ths apportonment w ony have to be
made at the tme the recept requred by secton 1636 s furnshed the empoyee.
Under the apportonment formua of secton 1633(d)(1), there s frst deter-
mned the amount equa to 1 percent of that porton of the wages whch aso
consttutes wages as defned n secton 1 26(a). The amount by whch the
combned ta e ceeds the amount so determned s consdered ta mposed by
secton 1622(a) (2). The baance of the combned ta s consdered ta mposed
by secton 1 00(b). For e ampe, assume that a combned ta of 93.20 s
mposed wth respect to 3,600 of wages pad durng 19 1. y reason of the
mtaton of secton 1 26(a) (1), ony 3,000 of such wages consttute wages as
defned n secton 1 26(a). The amount of 1 percent of 3,000 s . The
e cess of 93.20 over , or .20, s consdered ncome ta requred to be
wthhed under secton 1622(a)(2). The baance of the combned ta ( 93.20
mnus .20) or , s consdered empoyee soca securty ta mposed under
secton 1 00(b). nother e ampe s the case of a combned ta of .7 mposed
wth respect to 600 of wages pad durng 19 1. The amount of 1 percent of
600 s 9. Snce the combned ta does not e ceed 9, no part of the combned
ta s consdered ncome ta requred to be wthhed under secton 1622(a) (2).
The baance of the combned ta ( .7 mnus 0), that Is, a of the .7 , s
consdered empoyee soca securty ta mposed under secton 1 00(b). -
though ths amount s ess than 1 percent of the tota wages, no addtona
empoyee soca securty ta s mposed thereon, snce the ta under secton
1 00(a) does not appy to wages ta abe under secton 1 00(b) and secton 1633.
Secton 1633(d) (2) provdes that amounts actuay deducted and wthhed as
ta under secton 1633 are to be apportoned n the same manner as that provded
n secton 1633(d)(1), but on the bass of the facts and crcumstances known
at the cose of the perod durng whch such amounts were deducted and wthhed.
Thus, f n the e ampes set forth above, the amounts mposed as ta under sec-
ton 1633 had been actuay deducted and wthhed, the amounts determned by
the apportonment set forth n those e ampes as ta mposed by secton
1622(a)(2) woud be consdered amounts deducted and wthhed as ta under
that secton, and the amounts determned by the apportonment set forth n those
e ampes as ta mposed by secton 1 00(b) woud be consdered amounts de-
ducted and wthhed as ta under secton 1 00(b). The apportonment s made
by the empoyer on the bass of the facts and crcumstances known at the cose
of the perod durng whch the amounts were deducted and wthhed. For e -
ampe, assume that durng the caendar year remuneraton of 2,700 was pad at
the rate of 22 per month. combned ta under secton 1633 of 3 .76 was
deducted and wthhed on the 2,700 pad. Under the crcumstances known at
the cose of the caendar year, ony 2, 00 of the remuneraton pad s consdered
wages as defned In secton 1 26(a). The apportonment at the cose of the year
of the amount deducted and wthhed as ta under secton 1633 Is made on that
bass. ccordngy 36 (1 percent of 2, 00) s consdered as the amount
deducted and wthhed as ta under secton 1 00(b), and 30 .76 ( 3 .76 mnus
36) Is consdered as the amount deducted and wthhed as ta under secton
1622. If t s thereafter determned that the wages as defned In secton 1633
were ony 1,600 and the wages as defned n secton 1 26(a) were ony 1, 00, no
change s made n the apportonment. In such a case, the amount of 36 deducted
and wthhed as ta under subchapter s greater than the ta of 21 mposed
by that subchapter, and approprate ad|ustments for such overpayment sha be
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made under that subchapter. The amount of 30 .76 deducted and wthhed as
ta under subchapter D s aowabe as a credt aganst the empoyees ncome
ta abty under chapter 1 of the Code.
Secton 1633(e) provdes that f for any caendar year the appcabe rate
under secton 1 00(a) s not 1 percent, then the rae prescrbed for such caen-
dar year under secton 1 00(a) sha be substtuted for the rate of y percent
wherever that rate s specfed n secton 1633. For e ampe, for 19 6 the rate
under secton 1 00(a) w be 2 percent. In secton 1633(b) (mposng the com-
bned ta ) that rate of 2 percent w be substtuted for the rate of percent
now specfed n that secton for the purpose of appyng secton 1033(b) to wages
pad durng the caendar year 19 0. Smary, n appyng secton 1633(d) to
apporton the combned ta mposed on wages pad durng 11) 6, or to apporton
the amount deducted and wthhed as ta on such wages, the rate of 2 percent
w be used n pace of the rate of / percent specfed n that secton.
Secton 1633(f) makes appcabe to the combned ta under secton 1033 a
provsons of aw, ncudng penates, appcabe wth respect to the ta requred
to be deducted and wthhed under secton 1022. Under ths provson, n def-
ntons n subchapter D, as we as a rues and other provsons thereof. Incud-
ng a provsons appcabe to subchapter D by reason of references theren :o
other sectons, subchapters, and chapters of the Code, w be appcabe to the
ta mposed by secton 1033 (e cept to the e tent nconsstent wth secton 1033).
Secton 163 provdes for the wage bracket wthhodng tabes referred to n
secton 1633(c). These tabes are to be dentca wth the ncome a wage
bracket wthhodng tabes under secton 1022(c), e cept that the amount to be
wthhed w be ncreased by the amount of the empoyee soca securty t
apped to the wages, and the specfed percentages of wthhodng are to be n-
creased by the rate of the empoyee soca securty ta . though the Comms-
soner w prescrbe the tabes, he has no dscreton wth respect to the amounts
shown theren, but must merey make the mathematca computatons requred
by secton 163 . In vew of the varyng empoyee soca securty ta rates be-
tween 19 1 and 1970, t s beeved mpractca to ncude a the necessary tabes
n the b.
Secton 103 , reatng to ta pad by recpent, s smar to secton 1622(d) of
e stng aw.
Secton 1036, reatng to recepts for empoyees, s smar to secton 102 of
e stng aw, reatng to recepts for ncome ta wthhed (the Form W-2 fur-
nshed to empoyees). Secton 1630 supersedes sectons 102 and 1 03 for 19 1 and
succeedng years, and provdes for one recept whch w gve the empoyee fu
nformaton (1) as to hs wages sub|ect to empoyee soca securty ta , and the
amount deducted and wthhed from hm as such ta , and (2) as to hs wages
sub|ect to ncome ta wthhodng and the amount deducted and wthhed as such
ta .
Secton 1037, reatng to penates, corresponds to secton 1626 (a) and (b) of
e stng aw. Secton 1637 provdes penates appcabe n the case of a fraudu-
ent statement and In the case : f a faure to fe a statement requred under
secton 1636 wth respect to wages pad after December 31, 19 0.
Secton 200(a) of the b, n conformty wth the provsons dscussed above,
amends secton 1 00 and secton 1622(a) so that each such ta ng secton s
dvded nto two parts, one mposng the ta snnr to that under e stng aw,
the other mposng the ta (determned by apportonment under secton 3633(d))
whch s eved, assessed, and coected as part of the combned ta under secton
1033.
Secton 206(e) (1) of the b amends secton 322(n) of the Code to authorze
the Commssoner under reguatons to permt specn refunds to be taken by
the ta payer as a credt aganst hs ncome ta . Those specn refunds so
credted w be treated for a purposes n the same manner as amounts wth-
hed as ta under subchapter D of chapter 9 of the Code. Speca refunds arc
refunds of empoyee soca securty ta mposed on wages n e cess of 3,000. In
the case of an empoyee recevng wages from more than one empoyer durng
the caendar year, amounts may be deducted and wthhed as empoyee soca
securty ta on more than 3,000 wages (for e ampe, on , 00 f the empoyee
s pad 2, 00 by one empoyer and 2,000 by another). Secton 1 01(d) per-
mts, under certan condtons, refund of the amount of ta wth respect to wages
n e cess of 3,000. It s beeved that snce the ta payer w attach to hs
ncome ta return the recepts under secton 1630, whch recepts w show that
empoyee soca securty ta was pad on more than 3,000 wages, and w show
the amount of such ta pad n e cess of the ta on 3,000, t s approprate to
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authorze the Commssoner to aow by reguatons the empoyee to cam credt
for such e cess through the same e pedtous procedure as that provded for
the ncome ta wthhed and shown on such recepts. These provsons are
ony appcabe wth respect to speca refunds of empoyee soca securtv
ta on wages pad after December 31, 10 0. The speca refund may not be
camed as a credt aganst the ta for a ta abe year begnnng before anuary
1, 10 1.
cept as noted above wth respect to speca refunds under secton 322(a)
of the Code, a other provsons of secton 206 of the b are appcabe ony
wth respect to wages pad after December 31,10 0.
P RIODS OF LIMIT TION ON SS SSM NTS ND R FUNDS
Secton 207: Under e stng aw, the perods of mtatons on the ta es
Imposed by chapter 0 are prescrbed n secton 3312 of the Interna Revenue
Code, reatng to assessments and coectons, and secton 3313, reatng-to re-
funds and credts. In genera, those sectons provde a -year perod of m-
taton on both assessments and refunds, and a -year perod for brngng a
proceedng n court for coecton wthout assessment. On the other hand, the
genera rue of the ncome ta s that assessment must be made and refund
must be camed n the 3-year perod after the return s fed, e cept that If
no return s fed refund must be camed wthn 2 years after the ta s pad,
and n any event refund may be camed wthn such 2-year perod. In vew
of the cose connecton between the ncome ta and the empoyment ta es ns a
resut of combned wthhodng and as a resut of the reatonshp between the
sef-empoyment ta and the ta under the Federa Insurance Contrbutons ct,
t appears preferabe to provde, wth respect to those empoyment ta es, a
genera perod of mtatons smar to that provded for the Income ta . c-
cordngy, secton 207 nserts n chapter 0 speca perods of mtaton, whch
are appcabe to such of the ta es under the Federa Insurance Contrbutons
ct, the ncome ta wthhodng provsons, and the combned wthhodng pro-
vsons, as are coected and pad under a return system. These provsons are
n eu of the provsons of secton 3312 and secton 3313 wth respect to those
ta es. owever, the provsons of secton 3312 and secton 3313 w be app-
cabe to any ta es mposed by subchapters , D, and of chapter 0 whch the
Commssoner may requre to be coected and pad, not by makng and fng
returns, but by stamp or by other authorzed methods. The perods of mta-
ton prescrbed by sectons 163 and 1639 are measured from the date the return
s fed, whch date s sub|ect to the concusve presumpton descrbed n the ne t
sentence. Returns for any perod n a caendar year, such as quartery returns,
whch are fed before March 1 of the succeedng caendar year, are deemed
fed (and ta pad at the tme of fng such returns s deemed pad) on March
1 of such succeedng caendar year, so that the perod of mtatons wth re-
spect to the ta for any part of a caendar year w run unformy from a
date n the succeedng year whch corresponds to the fng date for ncome
ta returns. Ths provson w not ony brng conformty wth the Income
ta but w smpfy the operaton of the appcabe statute of mtatons. For
e ampe, f quartery returns are fed, and the ta thereon pad, for the four
quarters of 19 1 on pr 30, uy 31, and October 31 of 19 1, and on anuary
31, 19 2, the perod of mtatons for assessment and for fng cam for refund
for a of such ta es w, n genera, be the 3-year perod begnnng March 1 ,
19 2.
Under secton 3312(b), the ta may be assessed at any tme f a tmey return
Is not fed. Under secton 163 , the fng of a ate return w start the runnng
of the 3-year perod of mtatons. owever, there s no change n the provsons
of e stng aw whch provdes that the ta may be assessed at any tme n the
case of a fase or frauduent return wth ntent to evade ta , and n the case
of a wfu attempt n any manner to defeat or evade ta .
The perods of mtaton prescrbed by sectons 163 and 1639 w be app-
cabe ony to ta es mposed wth respect to remuneraton pad durng caendar
years after 19 0. The ta es under chapter 0 mposed wth respect to remunera-
ton pad durng any caendar year before 19 1 w contnue to be sub|ect to
sectons 3312 and 3313.
S LF- MPLOYM NT INCOM
Secton 20 : Ths secton corresponds to secton 207 of the ouse b. Under
the ouse b, the provsons mposng the ta on sef-empoyment Income were
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ncuded n the Interna Revenue Code as subchapter F of chapter 9, so that such
ta was eved as one of the empoyment ta es sub|ect to the admnstratve
provsons reatng to msceaneous ta es. In vew of the cose connecton
between ths ta and the present ncome ta , your commttee has amended the
ouse b so that the provsons mposng the sef-empoyment ta w be n-
cuded n the Code as subchapter of chapter 1, reatng to the ncome ta , and
ths ta w be eved, assessed, and coected ns part of the ncome ta mposed
by chapter 1, e cept that t w not be taken nto account for purposes of the
estmated ta . In most nstances, tems whch requre ad|ustments n the sef-
empoyment ncome for sef-empoyment ta purposes w aso requre ad|ust-
ments n the net ncome for ncome ta purposes. Therefore, n the nterests of
smpcty for ta payers and economy n admnstraton, t s beeved preferabe
to have the ta on sef-empoyment ncome handed n n partcuars as an
ntegra part of the ncome ta . Thus, e cept as otherwse e pressy provded,
the sef-empoyment ta w te ncuded wth the norma ta and surta under
chapter 1 n computng any overpayment or defcency In ta under such chapter
and n computng the nterest and any addtons to such overpayment, defcency,
or ta . Snce the sef-empoyment ta s part of the ncome ta , t w be sub-
|ect to the |ursdcton of the Ta Court to the same e tent and In the same
manner as the other ta es under chapter 1.
The proposed subchapter of chapter 1 w have the same short tte as the
proposed subchapter F of chapter 9 n the ouse b, that s, the Sef- mpoy-
ment Contrbutons ct, and w be comprsed of sectons 0 to S2, ncusve,
n eu of sectons 16 0 to 1G 7, ncusve, In the ouse b.
Rate of ta .
Secton S0, correspondng to secton 1G 0 nserted by the ouse b, mposes
an ncome ta for each ta abe year begnnng after December 31, 19 0, upon
the sef-empoyment ncome of every ndvdua. (The term sef-empoyment
ncome s defned n secton S1, whch secton s dscussed beow.) Ths ta
w begn 1 year ater than the date specfed n the ouse b, and the dates
for the change n the rate of ths ta dffer from those n the ouse b so as
to correspond to the changes made by your commttee n the rates specfed n
secton 1 00. The rates of the ta on such ncome for the respectve ta abe years
are as foows:
For ta abe years Percent
egnnng after Dec. 31, 19 0, and before an. 1, 19. ( 2
egnnng after Dec. 31, 19 , and before an. 1, 1960 3
egnnng after Dec. 31, 19. ,9, and before an. 1, 190 3
egnnng after Dec. 31, 196 , and before an. 1, 1970
egnnng after Dec. 31, 1969
Defntons.
Secton 1, correspondng to secton 16 1 nserted by the ouse b, defnes
certan terms for the purposes of the Sef- mpoyment Contrbutons ct.
Defnton of net earnngs from scf-cmpoyment.
Subsecton (a) of secton S1 defnes the term net earnngs from sef-empoy-
ment for purposes of the Sef- mpoyment Contrbutons ct. Such term s
defned to mean
(1) the gross ncome derved by an ndvdua from any trade or busness
carred on by such ndvdua, ess the deductons aowed under chapter 1 whch
are attrbutabe to such trade or busness, pus
(2) the dstrbutve share of such ndvdua (whether or not dstrbuted) of
the ordnary net ncome or oss from any trade or busness carred on by a partner-
shp of whch he s a member,
sub|ect to the e cuson of certan trades and busnesses provded n secton
1(c) and to certan speca rues set forth n paragraphs (1) through (7) of
secton S1 (a) for computng such gross ncome and deductons and such dstrbu-
tve share of partnershp ordnary net ncome or osa.
Your commttee has changed the ouse b so that reference throughout sec-
ton 1 s made to the partner s dstrbutve share of the ordnary net ncome
or oss of the partnershp rather than to the net ncome or oss of the partner-
shp. The former term s df fned n secton 1 3 of the Code, and use of that term
avods some ad|ustments otherwse requred under secton S1 n computng such
amount (for e ampe, ad|ustments to e cude capta gans and osses and to
e cude the deducton for chartabe contrbutons) and aso avods some queston
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as to the meanng of the term net oss. The term ordnary net oss, sub-
sttuted for the term net oss, s defned n secton 1 3 of the Code as the e cess
of the deductons (computed wthout the so-caed chartabe-contrbutons
deducton of secton 23 (o) and wthout the standard deducton provded n
secton 23(na)) over the gross ncome, determned after e cudng a tems of
gan and oss from the sae or e change of capta assets.
The gross ncome and deductons of an ndvdua attrbutabe to a trade or
busness, for the purpose of ascertanng hs net earnngs from sef-empoyment,
are to be determned by reference to the appcabe ncome ta provsons n other
subchapters of chapter 1 of the Code. The trade or busness must be carred on
by the ndvdua, ether personay or through agents or empoyees, n order for
the ncome to be ncuded n hs net earnngs from sef-empoyment. ccord-
ngy, gross ncome derved by an ndvdua from a trade or busness carred
on by hm does not ncude ncome derved by a benefcary from an estate or
trust even though such ncome s derved from a trade or busness carred on by
the estate or trust.
n ndvdua may be engaged n more than one trade or busness. If so, hs
not earnngs from sef-empoyment are the aggregate of hs net earnngs from
sef-empoyment of each trade or busness carred on by hm. Thus, a oss sus-
taned n one trade or busness of an ndvdua w operate to reduce the ncome
derved from another trade or busness of such ndvdua.
The net earnngs from sef-empoyment of an Indvdua ncude, n addton to
the earnngs from a trade or busness carred on by hm, hs dstrbutve share
of the ordnary net ncome or oss from any trade or busness carred on by each
partnershp of whch he s a member. The ndvdua s dstrbutve share of the
ordnary net ncome or oss of the partnershp means hs share of such ordnary
net ncome or oss as computed under secton 1S3 of the Code, sub|ect to the
speca rues set forth n secton S(a) (1) to (7) and the e emptons provded
n secton 1(c). In computng the net earnngs from sef-empoyment of a
partner, f the ta abe year of the partner s dfferent from that of the partnershp,
the dstrbutve shnre to be ncuded n computng the net earnngs from sef-
empoyment of the partner sha be based upon the ordnary net ncome or oss
of the partnershp for any ta abe year of the partnershp (even though begnnng
pror to anuary 1, 19 1) endng wthn or wth the ta abe year of the partner.
Ony a partnershp recognzed as such for ncome ta purposes s treated as a
partnershp for the purposes of determnng the net earnngs from sef-empoy-
ment of the partner. ccordngy, a partnershp whch consttutes an assocaton
ta abe as a corporaton under the provsons of chapter 1 Is not recognzed as a
partnershp for such purposes. Moreover, ony the ordnary net ncome or oss
derved by the partnershp from carryng on a trade or busness Is taken nto
account. ny ordnary net ncome or oss of the partnershp derved from
sources ceary unreated to the trade or busness carred on by t s e cuded
n determnng the net earnngs from sef-empoyment of the partners. The net
earnngs from sef-empoyment of a partner ncude hs dstrbutve share of
the ordnary net ncome or oss of a partnershp of whch he s n mr-mber, rre-
spectve of the nature of hs membershp, as, for e ampe, a mted or nactve
member.
Speca rues for computng the gross Income and deductons of an ndvdua
from a trade or busness and hs dstrbutve share of the ordnary net ncome or
oss of a partnershp from a trade or busness are set forth n paragraphs (1) to
(7), both ncusve, of secton 1(a).
Paragraph (1) e cudes rentas from rea estate, Incudng persona property
eased wth the rea estate, and deductons attrbutabe thereto, uness such
rentas are receved n the course of a trade or busness as a rea-estate deaer.
If the ndvdua s not n a trade or busness as a rea-estate deaer, a rentas
from rea estate, and deductons attrbutabe thereto, are e cuded n computng
hs net earnngs from sef-empoyment. For the purpose of determnng whether
the Indvdua s a rea-estate deaer, the tests are those apped under the other
provsons of chapter 1 of the Code n determnng whether a person Is engaged
n the busness of seng rea estate to hs customers. person who merey
owns rea estate and receves rentas therefrom s not consdered a rea-estate
deaer. On the other hand, a person who s engaged n the busness of seng
rea estate to customers wth a vew to the gans and profts that may be derved
therefrom s a rea-estate deaer, and rentas receved by hm from such rea
estate are ncuded for the purposes of determnng hs net earnngs from sef-
empoyment.
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Payments for the use or occupancy of entre prvate resdences or vng unts
n dupe or mutpe-housng unts are generay rentas from rea estate. cept
n the case of rea-estate deaers, such payments are e cuded under paragraph
(1), even though n part attrbutabe to persona property furnshed under the
ease. On the other hand, payments for the use or occupancy of rooms or other
space where servces are aso rendered to the occupant, such as for the use or
occupancy of rooms or other quarters In hotes, boardng houses, or apartment
houses furnshng hote servces, or n tourst camps or tourst homes, or for the
use or occupancy of space n parkng ots, warehouses, or storage garages do not
consttute rentas from rea estate.
Paragraph (2) e cudes the ncome, and deductons attrbutabe to such ncome,
derved from any trade or busness n whch, f the trade or busness were
carred on e cusvey by empoyees, the ma|or porton of the servces woud
consttute agrcutura abor as denned n secton 1 26(h) of the Code. In
case the servces are n part agrcutura and n part nonagrcutura, the tme
devoted to the performance of eac type of servce s the test to be used to
determne whether the ma|or porton of the servces woud consttute agrcutura
abor. If more than haf of the tme spent n performng a the servces s spent
n performng servces whch woud consttute agrcutura abor under secton
1 26(h), a ncome, and deductons attrbutabe to the ncome, sha be
e cuded. If ony haf, or ess, of the tme spent n performng a the servces
s spent n performng servces whch woud consttute agrcutura abor under
secton 1 26(h), a ncome, and deductons attrbutabe to the ncome, sha
be ncuded. In every case the tme spent n performng the servces w be
computed by addng the tme spent n the trade or busness durng the ta abe
year by every ndvdua (ncudng the Indvdua carryng on such trade or
busness and the members of hs famy) n performng such servces. The
operaton of paragraph (2) s not affected by secton 1 26(c), reatng to the
ncuded-e euded rue for determnng empoyment.
Paragraph (3) e cudes dvdends on any share of stock, and nterest on any
bond, debenture, note, certfcate, or other evdence of ndebtedness, ssued wth
nterest coupons or n regstered form by any corporaton (ncudng one ssued
by a government or potca subdvson thereof), uness such dvdends and
nterest are receved n the course of a trade or busness as a deaer n stocks
or securtes. The effect of ths paragraph s to e cude a dvdends e cept
dvdends receved by a deaer n stocks or securtes n the course of hs trade
or busness. Ony nterest of the specfed character s categorcay e cuded
for a persons other than deaers n stocks or securtes. Other nterest receved
n the course of any trade or busness (such as nterest receved by a pawnbroker
on hs oans or nterest receved by a merchant on hs accounts or notes recevabe)
s not e cuded n computng net earnngs from sef-empoyment.
Your commttee has nserted an amendment to the ouse b so that nterest
e empt from norma ta (that s, nterest on certan obgatons of the Unted
States and ts nstrumentates) s not ncuded n the sef-empoyment ncome
of a deaer n stocks and bonds.
deaer n stocks or securtes s a merchant of stocks or securtes, whether
nn ndvdua or a partnershp, wth nn estabshed pace of busness, reguary
engaged n the busness of purchasng stocks or securtes and reseng them to
customers; that s, one who as a merchant buys stocks or securtes and ses
them to customers wth a vew to the gans and profts that may be derved there-
from. Persons who buy and se or hod stocks or securtes for Investment or
specuaton, Irrespectve of whether such buyng or seng consttutes the carryng
on of a trade or busness, are not deaers n stocks or securtes.
Paragraph ( ) e cudes (1) gans or osses whch are consdered as gans or
osses from the sae or e change of capta assets, (2) gans or osses from the
cuttng or dsposa of tmber f secton 117(|) of the Code s appcabe to such
gans or osses, and (3) gans or osses from the sae, e change, nvountary
converson, or other dsposton of property f such property s nether ( ) stock
n trade or other property of a knd whch woud propery be ncudbe n
nventory f on hand at the cose of the ta abe year, nor ( ) property hed
prmary for sae to customers n the ordnary course of a trade or busness.
The effect of ths provson s to e cude from the computaton of net earnngs
from sef-empoyment a gans or osses whch are treated as capta gans or
osses, as we as gans or osses arsng from the dsposton or converson of
property whch s not consdered as ether (1) stock n trade or other property
of a knd whch woud propery be ncudbe n nventory f on hand at the cose
of the ta abe year, or (2) property hed prmary for sae to customers n the
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ordnary course of a trade or busness. so In the case of Umber, even though
hed prmary for sae to customers, gan or oss s e cuded f secton 117(|)
of the Code s appcabe to such gan or oss. For the purpose of paragraph
( ) (C) of secton 1(a), t s Immatera whether the property consttutes a
capta asset wthn the meanng of secton 117(a) of the Code or whether such
property was hed for more or ess than 6 months. Moreover, t s mmatera
for the purposes of paragraph ( ) (C) whether a gan or oss s treated as a
capta gan or oss or as an ordnary gan or oss for the other purposes of
chapter 1. For nstance, where the character of the oss for Income ta purposes
s governed by the provsons of secton 117( ), such oss s e cuded under
paragraph ( ) (C) even though such oss s treated under secton 117(|) as an
ordnary oss.
s used n paragraph ( ), the term nvountary converson means a com-
pusory or Invountary converson of property nto other property or money as a
resut of ts destructon n whoe or n part, theft or sezure, or an e ercse of
the power of requston or condemnaton or the threat or mmnence thereof.
s used In such paragraph the term other dsposton Incudes the destructon
of property by fre, storm, shpwreck, or other casuaty, even though there s no
converson of such property nto other property or money.
Paragraph ( ) provdes that the deducton for net operatng osses under
secton 23(s) of the Code sha not be aowed.
Paragraph (6) prescrbes the treatment to be accorded ncome sub|ect to
communty-property aws. Subparagraph ( ) provdes that If any of the
ncome derved by an ndvdua from a trade or busness (other than a trade or
busness carred on by a partnershp) s communty Income under communty-
property aws appcabe to such Income, n of the gross ncome and deductons
attrbutabe to the trade or busness sha be treated as the gross ncome and
deductons of the husband uness the wfe actuay e ercses substantay a
of the management and contro of such trade or busness, In whch case a of
such gross ncome and deductons shn be treated as the gross ncome and
deductons of the wfe. Management and contro of the type to whch reference
s made n paragraph (6) s not the management and contro Imputed to the
husband under the communty-property aws but management and contro n
fact. For e ampe, a wfe who operates a beauty paror wthout any appre-
cabe coaboraton on the part of her husbnnd w be consdered as havng
substantay a of the management and contro of such busness despte the
provson of any communty-property aw vestng the rght of management and
contro over communty property In the husband, and the Income and deductons
attrbutabe to the operaton of such beauty paror w be consdered the ncome
and deductons of the wfe.
Subparagraph ( ) provdes that f any porton of a partner s dstrbutve
share of the ordnary net ncome or oss from a trade or busness carred on by
a partnershp s communty ncome or oss under the communty-property aws
appcabe to such share, a of such dstrbutve share sha be ncuded n
computng the net earnngs from sef-empoyment of such partner; and no part
of such share sha be taken nto account n computng the net earnngs from
sef-empoyment of the spouse of such partner.
Paragraph (7) provdes that, n the case of any ta abe year begnnng on or
nfter the effectve date specfed n secton 3R10 (I. e., the date on whch the
provsons of tte II of the Soca Securty ct are e tended to Puerto Rco), the
term possesson of the Unted States, as used In secton 2 1 of the Code, shn
not ncude Puerto Rco; and a ctzen or resdent of Puerto Rco shn compute
hs net enrnngs from sef-empoyment n the same manner as a ctzen of the
Unted States and wthout resnrd to the provsons of secton 2 2 of the Code.
In appyng the provsons of paragraph (7), a ctzen of the Unted States who
engages n the actve conduct of a trade or busness n Puerto Rco may fnd thnt
hs Income from such trade or busness s e empt from the ncome ta mposed
by the other subchapters of chapter 1 (by reason of the provsons of secton
2 1 of the Code) but that the same ncome (sub|ect to the 3,000 mtaton) s
ta ed as sef-empoyment ncome.
Your commttee has omtted paragraph ( ) of the correspondng secton In
the ouse b. Paragraph ( ) woud have e cuded from net earnngs from
sef-empoyment Income derved from the busness of pubshng a newspaper or
other pubcaton, together wth ncome derved from other actvtes conducted
n connecton therewth, where the newspaper or other pubcaton has a pad
crcuaton.
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In computng net earnngs from sef-empoyment, the rues appcabe under
chapter 1 of the Code must be apped n determnng the tn abe year In whch
tems of gross ncome are to be ncuded and the ta abe year for whch deduc-
tons sha be taken. If an ndvdua uses the accrua method of accountng In
computng net ncome from a trade or busness for the purposes of the other
ta es n chapter 1, he must use the same method n computng the gross ncome
and deductons for sef-empoyment ta purposes. Lkewse, f the ta payer
s engaged n a trade or busness of seng property on the nstament pan and
he eects, under the provsons of secton of the Code, to use the Instament
bass n computng ncome for the purposes of the other ta es In chapter 1 of
the Code, he must use the same bass n computng the gross Income nnd
deductons attrbutabe to such trade or busness for sef-empoyment ta pur-
poses.
Defnton of sef-empoyment ncome.
Subsecton (b) of secton S1 defnes the term sef-empoyment ncome for
the purposes of the Sef- mpoyment Contrbutons ct. Such term s defned
to mean the net earnngs from sef-empoyment derved by an ndvdua, other
than a nonresdent aen ndvdua, durng any ta abe year begnnng after
December 31, 19 0, e cept for the e cusons provded n causes (1) and (2)
of such subsecton.
Cause (1) e cudes from sef-empoyment Income of an ndvdua that part
of the net earnngs from sef-empoyment whch e ceeds 3,000 reduced by the
amount of the wages pad to the ndvdua durng the ta abe year. Thus, the
ma mum sef-empoyment Income of any ndvdua for any ta abe year
(whether a perod of 12 months or ess) s 3,000; or, f wages are receved,
ths ma mum s reduced by the amount of such wages. For e ampe, f durng
the ta abe year no wages are receved and the ndvdua has ,000 of net
earnngs from sef-empoyment, he has 3,000 of sef-empoyment ncome for
such ta abe year; or f the ndvdua receves 1,000 of wages and aso has
,000 of net earnngs from sef-empoyment, he has ony 2,000 of sef-empoy-
ment ncome for the ta abe year. For the purposes of cause (1), the term
wages ncudes remuneraton pad to an empoyee for servces ncuded under
an agreement entered nto pursuant to secton 21S of the Soca Securty ct
(reatng to the coverage of State empoyees). Cause (2) provdes n effect
that f an ndvdua s net earnngs from sef-empoyment for the ta abe year
are ess than 00, such ndvdua has no sef-empoyment ncome for such
ta abe year. It shoud be noted, however, that t s possbe for an ndvdua to
have ess than 00 of sef-empoyment ncome. Ths woud occur n a case
n whch the ndvdua s net earnngs from sef-empoyment are 00 or more
for a ta abe year and the ndvdua aso receves more than 2,000 but ess
than 3,000 of wages durng the ta abe year. For e ampe, f an ndvdua has
net earnngs from sefsempoyment for a ta abe year of 1,000 and s aso pad
wages of 2, 00 durng the ta abe year, hs sef-empoyment ncome for such
ta abe year s 200.
Secton 1(b) dffers from the correspondng provsons of secton 16 1(b)
n the ouse b by prescrbng .3,000 as the ma mum amount n determnng
sef-empoyment ncome, n eu of the 3,000 amount specfed n the ouse b.
Ths change corresponds to that made n the amendments to secton 1 26 of the
Code.
Secton 1(b) further provdes that, n the case of any ta abe year begnnng
pror to the effectve date specfed n secton 3S10, an ndvdua who s a ctzsn
of Puerto Rco (but not otherwse a ctzen of the Unted States) and who s
not a resdent of the Unted States (. e., the States, aska, awa, and
the Dstrct of Coumba) or of the rgn Isands durng the ta abe year sha
be consdered, for the purposes of computng sef-empoyment ncome, as a non-
resdent aen ndvdua. ccordngy, the net earnngs from sef-empoyment
of an ndvdua descrbed n the precedng sentence woud not consttute sef-
empoyment ncome. Secton 1(b) aso provdes that an ndvdua who s not
a ctzen of the Unted States but who s a resdent of the rgn Isands or,
after the effectve date specfed n secton 3S10, s a resdent of Puerto Rco sha
not, for purposes of computng sef-empoyment ncome, e consdered to be a
nonresdent aen ndvdua. ccordngy, the net earnngs from sef-empoy-
ment of such an ndvdua may consttute sef-empoyment ncome. The net
earnngs from sef-empoyment of a ctzen or resdent of the Unted States (n-
cudng the rgn Isands nnd, after the effectve date specfed n secton 3 10,
Puerto Rco) consttute sef-erupoynent ncome, e cept to the e tent that such
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net earnngs are e cuded from sef-empoyment ncome under cause (1) or
(2) of secton 1(b).
Whe a nonresdent aen ndvdua who derves ncome from a trade or bus-
ness carred on wthn the Unted States (whether by hs agents or empoyees
or by a partnershp of whch he s a member) s ta ed on such ncome under the
other subchapters of chapter 1 of the Code, such ndvdua (f he s treated
under the Sef- mpoyment Contrbutons ct as a nonresdent aen) w not
pay a sef-empoyment ta on any porton of such ncome.
Trade or busnesn.
Subsecton (c) of secton 1 provdes that, for the purposes of the Sef-
mpoyment Contrbutons ct, the term trade or busness sha have the same
meanng as when used n secton 23 of the Code, e cept that such term sha not
ncude the performance of certan functons and servces descrbed n para-
graphs (1) to ( ), both Incusve.
Paragraph (1) provdes that the performance of the functons of a pubc
offce does not consttute a trade or busness. The term pubc offce ncudes
any eectve or appontve offce of the Federa Government or of a State or ts
potca subdvson or of a whoy owned nstrumentaty of any one or more
of the foregong, such as Presdent, ce Presdent, governor, mayor, secretary
of State, Member of Congress, State representatve, county commssoner, |udge,
county or cty attorney, marsha, sherff, regster of deeds, or notary pubc.
Paragraph (2) provdes that the performance of servce by an ndvdua as
an empoyee as defned n the Federa Insurance Contrbutons ct, wth one
e cepton, does not consttute a trade or busness. The e cepton s as foows:
Servce performed by an empoyee, who has attaned the age of 1 , n, and at
the tme of, the sae of newspapers or magaznes to utmate consumers, under an
arrangement under whch the newspapers or magaznes are to be sod by the
empoyee at a f ed prce, hs compensaton beng based on the retenton of the
e cess of such prce over the amount at whch the newspapers or magaznes are
charged to hm whether or not he s guaranteed a mnmum amount of compensa-
ton for such servce, or s entted to be credted wth the unsod newspapers or
magaznes turned back.
The ouse b contaned an addtona e cepton reatng to secton 1 26(b) (1 )
of the Code, as amended by the ouse b, whch e cepton has been omtted n
vew of your commttee s acton on proposed secton 1 26(b) (1 ).
Paragraph (3) provdes that the performance of servce by an ndvdua as an
empoyee or empoyee representatve as defned n secton 1 32 of the Code,
that s, an ndvdua covered under the raroad retrement system, does not con-
sttute a trade or busness.
Paragraph ( ) provdes that the performance of servce by a duy ordaned,
commssoned, or censed mnster of a church n the e ercse of hs mnstry
or by a member of a regous order n the e ercse of dutes requred by such
order does not consttute a trade or busness. Ths e cepton appes to the
performance of servces whch are ordnary the dutes of such mnsters or
members of regons orders. The dutes of mnsters ncude the mnstraton
of sacerdota functons and the conduct of regous worshp, and the contro,
conduct, and mantenance of regous organzatons (ncudng the regous
boards, socetes, and other ntegra agences of such organzatons), under the
authorty of a regous body consttutng a church or church denomnaton.
Paragraph ( ) provdes that the performance of servce by an ndvdua n the
e ercse of a professon as a physcan, awyer, dentst, osteopath, veternaran,
chropractor, naturopath, or optometrst, or as a Chrstan Scence practtoner,
or as an archtect, certfed pubc accountant, or professona engneer, or the per-
formance of such servce by a partnershp, does not consttute a trade or busness.
The desgnatons n ths paragraph are to be gven ther commony accepted
meanng. Thus, the term physcan means an ndvdua who Is egay quafed
to practce medcne; and the term awyer means an ndvdua who s egay
quafed to practce aw. In the case of a partnershp whose trade or busness
conssts n the performance of servce In the e ercse of any of the desgnated
professons, the partnershp sha not be consdered ns carryng on a trade or
busness for purposes of the Sef- mpoyment Contrbutons ct, and none of the
dstrbutve shares of ncome or oss of such partnershp sha be ncuded In
computng net earnngs from sef-empoyment of any momber of the partnershp.
On the other hnnd, where a partnershp Is engaged n a trade or busness not
wthn any of the desgnated professons, each partner must Incude hs dstrbu-
tve share of the ncome or oss of such partnershp n computng hs net earnngs
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from sef-empoyment, Irrespectve of whether such partner s aso engaged In
the practce of one of such professons and contrbutes hs professona servces
to the partnershp. Your commttee has added to the desgnatons n the cor-
respondng provsons of the ouse b the foowng: naturopaths, archtects,
and certfed pubc accountants. In addton, the desgnaton professona eng-
neer- has been substtuted for the specfc st of certan knds of professona
engneers contaned n the ouse b. Professona engneers are those eng-
neers egay quafed to practce before the pubc n a consutng capacty.
Defnton of empoyee and wages.
Subsecton (d) of secton 1 provdes that, for the purposes of the Sef-
mpoyment Contrbutons ct, the term empoyee and the term wages
sha have the same meanng as when used n the Federa Insurance Contrbu-
tons ct. (For an e panaton of these terms, see the dscusson of sectons
203 and 20 of the b.)
Defnton of ta abe year ; admnstratve provsons; and so forth.
Certan provsons of the ouse b have been strcken out as unnecessary
snce under your commttee s b the ta on sef-empoyment ncome s mposed
as one of the ncome ta es under chapter 1 of the Code. Thus, the ta payer
has the same ta abe year for a ta es under that chapter, and a separate
defnton of ta abe year s unnecessary for the ta on sef-empoyment ncome.
Smary, speca provsons as to the nondeductbty of the ta on sef-empoy-
ment ncome for the purpose of computng net ncome for ncome ta purposes are
not needed, snce the sef-empoyment ta becomes one of the ncome ta es
referred to n secton 23(c) (1) ( ). Furthermore, speca provsons as to the
coecton and payment of that ta are not needed, snce the provsons now
appcabe to the ta es under chapter 1 w be appcabe to the ta on sef-
empoyment ncome.
Speca provsons as to the overpayment and underpayment of ths ta are
aso not needed, snce ths ta w be ncuded n determnng whether there
s an overpayment or underpayment of the sum of the ta es mposed by chapter 1,
and the provsons now appcabe to such overpayment (for e ampe, suppement
O of chapter 1) or such underpayment (for e ampe, suppements L, M, and N
of chapter 1) w contnue to be appcabe thereto after the ta on sef-empoy-
ment ncome s ncuded n determnng such overpayment or underpayment.
The authorty of the Commssoner to ssue rues and reguatons under secton 62
of the Code e tends to the ta on sef-empoyment ncome. Snce ths ta w,
as part of chapter 1, be sub|ect to a provsons of aw appcabe to the ta es
under that chapter, the provsons of the ouse b makng the provsons
appcabe to the ta under secton 2700 aso appcabe to ths ta have been
omtted.
Msceaneous provsons.
Subsecton (a) of secton S2 requres every ndvdua havng net earnngs
from sef-empoyment of 00 or more for the ta abe year to fe a return con-
tanng such nformaton for the purpose of carryng out the provsons of the
subchapter mposng ta on sef-empoyment ncome as the Commssoner, wth
the approva of the Secretary, sha by reguatons prescrbe. Such a return s
consdered a return requred under secton 1(a), and the provsons appcabe
to returns under secton 1(a) are appcabe to such return. owever, the ta
on sef-empoyment ncome, n the case of a |ont return of husband and wfe, s
the sum of the ta es computed on the separate sef-empoyment ncome of each
spouse. Wth respect to the ta on sef-empoyment ncome, the requrement of
secton 1(b) that n the case of a |ont return the ta s computed on the aggre-
gate ncome of the spouses s not appcabe. For e ampe, f the husband has
2,S00 wages and 00 net earnngs from sef-empoyment, and f the wfe has
1,200 wages and 000 net earnngs from sef-empoyment, the ta under sub-
chapter of chapter 1 to be shown on ther |ont return woud be the sum of the
ta under subchapter on the husband s 200 of sef-empoyment ncome and the
ta under subchapter on the wfe s 600 of sef-empoyment ncome. If the
wfe s net earnngs from sef-empoyment were ess than 00, such net earnngs
woud not be sub|ect to the ta on sef-empoyment ncome athough they woud
have to be shown on the |ont return for the purposes of the other ta es mposed
by chapter 1. Snce secton 1(b) s appcabe to the return of the ta on sef-
empoyment ncome, the abty wth respect to the ta of the husband and wfe
fng a |ont return s |ont and severa. It s contempated that returns requred
by secton S2(a) w be made as a part of the reguar ncome ta returns
requred by secton 1, for e ampe, as a schedue on or assocated wth such
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360
return, bnt n nny case In whch a ta payer s not requred to fe a return under
secton 1, a separate return for purposes of the ta on sef-empoyment ncome
w be requred under secton 2(a).
Subsecton (b) of secton 2 provdes that subchapter of chapter 1 of the
Code may be cted as the Sef- mpoyment Contrbutons ct
Subsectons (c) and (d) of secton 2 are cross-references to sectons 3 10
and 3 11, dscussed beow, reatng to effectve date n case of Puerto Rco and
to coecton of ta es n Puerto Rco and the rgn Isands. These provsons
were, n the ouse b, nserted at the end of chapter 9 of the Code as sectons
1033 and 103 . The provsons are appcabe both to the Sef- mpoyment Con-
trbutons ct, now nserted as part of chapter 1 of the Code, and to the Federa
Insurance Contrbutons ct of chapter 9 of the Code. ccordngy, the ouse
b has been changed to nsert these sectons n chapter 3 of the Code, reatng
to msceaneous provsons, and sectons 1033 and 103 have been renumbered
as sectons 3 10 and 3 11, respectvey.
ffectve date n case of Puerto Rco.
Secton 3 10 provdes that, f the Governor of Puerto Rco certfes to the
Presdent of the Unted States that the Legsature of Puerto Rco has resoved,
by concurrent resouton, that t desres the e tenson to Puerto Rco of the
provsons of tte II (od-age, survvors, and dsabty nsurance benefts) of the
Soca Securty ct, then the effectve date referred to n secton 1 20(e) of the
Code (reatng to the terms State, Unted States, and ctzen of the Unted
States ), secton 1(a)(7) of the Code (reatng to the computaton of net
earnngs from sef-empoyment n certan cases), and secton 1(h) of the
Code (reatng to the computaton of sef-empoyment ncome) sha be anuary 1
of the frst caendar year whch begns more than 90 days after the date on whch
the Presdent of the Unted States receves such certfcaton.
Coecton of ta es n rgn Isands and Puerto Rco.
Secton 3 11 provdes that, notwthstandng any other provson of aw respect-
ng ta aton n the rgn Isands or Puerto Rco, a ta es mposed by the
Federa Insurance Contrbutons ct and the Sef- mpoyment Contrbutons
ct sha be coected by the ureau of Interna Revenue under the drecton of
the Secretary of the Treasury and sha be pad nto the Treasury of the Unted
States as Interna revenue coectons.
Mtgaton of effect of statute of mtatons, etc.
Secton 20 of the b aso adds to the Code a new secton not ncuded n the
ouse b, namey, secton 3S12 reatng to the mtgaton of the effect of the
statute of mtatons and other provsons n case of reated ta es under dfferent
chapters. Ths secton s made necessary by the fact that ad|ustments to the
wages under the Federa Insurance Contrbutons ct may, by reason of the
effect of such wages on the 3,000 mtaton appcabe n determnng sef-
empoyment ncome, affect the ta under the Sef- mpoyment Contrbutons
ct, and by reason of the fact that an tem of ncome may be erroneousy reported
as ta abe under |ne ct when t shoud have been ta abe under the other ct.
If ad|ustment under ony one of the two cts s prevented by the statute of
mtatons or any other aw or rue of aw (other than secton 3701 of the Code,
reatng to compromses), then the ad|ustment (that s, the assessment or the
credt or refund) otherwse authorzed under the one ct w refect the ad|ust-
ment whch woud have been made under the other ct but for such aw or rue
of aw. For e ampe, assume that a ta payer reports wages of 3,000 and net
earnngs from sef-empoyment of 900. Uy reason of the mtatons of secton
1(b) he shows n: sef-empoyment ncome. ssume further that by reason
of a fna decson n the Ta Court, further ad|ustments to hs ncome ta
abty are barred. The queston of the amount of hs wages, as defned n
secton 1 20, was not n ssue n the Ta Court tgaton, but t s subsequenty
determned (wthn the perod of mtatons appcabe under the Federa Insur-
ance Contrbutons ct) that 700 of the 3,000 wages reported by hm were not
for empoyment as defned n secton 1 20(b), and he s entted to the aow-
ance of a refund of the 10. 0 ta pad on such remuneraton under secton 1 00
of the Federa Insurance Contrbutons ct. The reducton of hs wages from
3,000 to 2,300 woud resut n the determnaton of 700 sef-empoyment ncome
under the facts stated above, the ta on whch s 1 .7 . The overpayment of
10. 0 of ta under the Federa Insurance Contrbutons ct woud be offset
under secton 3 12 by the barred defcency of 1 .7 n the ta under the Sef-
mpoyment Contrbutons ct, thus emnatng the refund otherwse aowabe.
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C61
If the facts were changed so that the ta payer erroneousy pad sef-empoyment
ta on 700, havng been ta ed on ony 2,300 as wages, and wthn the perod
of mtatons under the Federa Insurance Contrbutons ct, t s determned
that hs wages were 3,000, the ta of 10. 0 under secton 1- 00 of that ct,
otherwse coectbe, woud b emnated by offsettng under secton 3 12 the
barred overpayment of 1 .7 under the Sef- mpoyment Contrbutons ct.
nother ustraton of the operaton of ths secton s the case of a ta payer
who s erroneonsy ta ed on 2, 00 as wages, the ta on whch s 37. 0, and who
reports no sef-empoyment ncome. fter the statute of mtatons has run on
the refund of the ta under the Federa Insurance Contrbutons ct, t s deter-
mned that the amount treated as wages shoud have been reported as net earnngs
from sef-empoyment. The ta payer s sef-empoyment ncome woud then be
2, 00 and hs sef-empoyment ta woud be 0.2 . ssume that the perod of
mtatons under chapter 1 of the Code has not e pred, and that a notce of
defcency may propery be ssued. Under secton 3 12, the amount of the
defcency of 6.2 must be reduced by the barred overpayment of 37. 0.
onappcabty of secton S 01.
Secton 20 (c) of the b amends secton 3 01 of the Code by addng at the
end thereof a new subsecton (g). Subsecton (g) provdes that the provsons
of secton 3 01 sha not be construed to appy to any ta mposed by chapter 9
of the Code.
Technca amendments.
Secton 20 (d) of the b makes a number of technca amendments to the
Code requred by the ncuson of the Sef- mpoyment Contrbutons ct n
chapter 1 of the Code.
Sectons 3 and 12(g) of the Coe are amended to nsert cross-references to the
Sectons 31 and 131(a) of the Code, reatng to the foregn ta credt, are
amended so that the foregn ta credt w not be appcabe as a credt aganst
the ta on sef-empoyment ncome.
Secton (b)(1) of the Code, reatng to estmated ta , s amended so that
the ta on sef-empoyment ncome w not be ncuded n the estmates of ta
requred under secton (a) of the Code. Such estmates w be made wthout
regard to the ta on sef-empoyment Income, and such ta s not requred to be
pad n advance of the date prescrbed for the fna payment of ta es under
chapter 1. There s no provson for nstament payments of the ta on sef-
empoyment ncome. Secton 20 (d), aso reatng to the estmated ta , s sm-
ary amended so that the provsons of that secton w be apped wthout
regard to the ta on sef-empoyment ncome.
Secton 107 of the Code, reatng to compensaton pad for servces rendered
for a perod of 30 months or more and back pay, s amended so that the prov-
sons of that secton w be apped wthout regard to the ta on sef-empoy-
ment ncome, and w not affect that ta . For e ampe, assume that a ta payer s
ony tem of ncome for the caendar year 19 2 (hs ta abe year) s 3,000, a of
whch Is sef-empoyment ncome and a of whch s sub|ect to secton 107. Sec-
ton 107 w not affect the ta of 07. 0 mposed by subchapter of chapter 1
for such ta abe year. Secton 107(a), n such a case, mts the ta attrbutabe
to the 3,000 to an amount equa to the aggregate of the ta es whch woud be
attrbutabe to thrf 3,000 had t been ncuded n the gross ncome of the ta payer
rataby over the perod of the servces descrbed n secton 107. For the purposes
of ths mtaton, the ta for 19 2 and the aggregate of the ta es for the years
of the servces are both computed wthout regard to the ta on sef-empoyment
ncome, and the mtaton appes to the ta es under chapter 1 other than the
Secton 120 of the Code, reatng to unmted deducton for chartabe and
other contrbutons, s amended so that the ta on sef-empoyment ncome s
not ncuded n the computaton to determne whether the tota of the ta es and
chartabe contrbutons pad durng the year e ceeds 90 percent of the ta payer s
net ncome (computed wthout the deductons for chartabe contrbutons).
Secton 101(a) of the Code, reatng to the ta on estates and trusts, Is amended
so that trusts and estates w not be sub|ect to the ta on sef-empoyment ncome.
Secton 209 of the b, whch corresponds to secton 20 of the ouse b,
(a) amends secton 1607(b) of the Interna Revenue Code, defnng the term
023 30 1 2
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3 32
wages for purposes of the Federa Unempoyment Ta ct (subchapter C of
chapter of the Code) ; (b) amends secton 1607(c) of the Code, defnng the
term empoyment for purposes of such ct; (c) amends secton 1621(a) of the
Code, defnng the term wages for purposes of the wthhodng of ncome ta
at the source on wages; (d) amends secton 1631 of the Code, reatng to a mn-
mum addton to the ta for faure to fe return or pay ta tmey under chap-
ter 9 of the Code; and (e) provdes retroactve reef from ta under subchap-
ters and C of chapter 9 of the Code n connecton wth the appcaton of the
3,000 wage mtaton n the case of certan corporate successons. The amend-
ments to sectons 1607 (b) and (c) and 1621(a) conform the defntons for
Federa unempoyment ta and ncome ta wthhodng purposes n a number of
| respects to correspondng defntons n secton 1 26(a), as amended by sec-
ton 203(a) of the b, defnng the term wages for purposes of the Federa
Insurance Contrbutons ct (subchapter , chapter 9, of the Code) and n sec-
ton 1 26(b), as amended by secton 20 (a) of the b, defnng the term em-
poyment for purposes of such ct Such conformng amendments n the
Federa payro ta es, to the e tent not substantay nconsstent wth the para-
mount poces appcabe to each, are consdered desrabe for reasons of fac-
tatng admnstraton of the ta es and ta payer understandng.
Secton 209(a) ) of the b amends secton 1607(b) of the Code, defnng
wages for Federa unempoyment ta purposes. Technca changes are made n
paragraph (1) of the defnton as amended by the ouse to precude a successor
empoyer, n computng hs ta for the caendar year n whch the successon takes
pace, from countng toward the 3,000 mtaton of wages any remuneraton pad
by the predecessor uness the predecessor aso s an empoyer as defned n sec-
ton 1607(a) of the Code for such caendar year and therefore abe for the ta ,
and uness the remuneraton pad by the predecessor consttutes ta abe wages.
cept n the foowng three respects, the defnton of wages n secton
1007(b), as contaned n secton 209(a) (1) of the b, s n conformty wth the
correspondng defnton n secton 203(a) of the b: (1) the e cepton from
wages of noncash remuneraton for servce not n the course of the empoyer s
trade or busness as been strcken from the amendment by the ouse to secton
1607(b) but s retaned n secton 1 26(a) ; (2) no e cepton from wages of
noncash remuneraton for agrcutura abor, correspondng to that added by
your commttee to secton 1 26(a), has been added to secton 1607(b) ; and
(3) the e stng aw e cepton from wages of dsmssa payments whch the
empoyer s not egay requred to make, strcken by the amendment made by the
ouse, has been restored by your commttee n secton 1007(b) unt anuary 1,
19 2, but not restored n secton 1 26(a).
Secton 209(a) (2) of the b provdes that the amendment to secton 1607(b)
of the Interna Revenue Code made by secton 209(a) (1) sha be appcabe ony
wth respect to remuneraton pad after 19 0. It further provdes that, n the
case of remuneraton pad pror to 19 1, the determnaton under secton
1007(b) (1) of the Code (pror to ts amendment by the b) of whether or not
such remuneraton consttuted wages sha be made as f secton 209(a)(1) of
the b had not been enacted and wthout nferences drawn from the fact that
the amendment made by such secton s not made appcabe to perods pror to
19 1.
Secton 209(a) (3) of the b deetes paragraph ( ) of secton 1607(b) of the
Interna Revenue Code, whch e cepts from wages dsmssa payments whch the
empoyer s not egay requred to make. Such deeton s made effectve wth
respect to remuneraton pad after December 31, 19 1. The defntons of wages
under subchapters and C of chapter 9 w thus be brought another desrabe
step toward conformty, but State egsatures w n the meantme have an
opportunty to nmend ther unempoyment compensaton aws to sub|ect dsmssa
payments to ta thereunder, f they so desre.
Secton 209(b) of the b amends, n two reatvey mnor respects, secton
1607(c) of the Interna Revenue Code, defnng the term empoyment for pur-
poses of the Federa Unempoyment Ta ct. The correspondng secton of the
ouse b (secton 20S(b) (1)) amended secton 1007(c) (3) of the Code, e cept-
ng from empoyment casua abor not n the course of the empoyer s trade or
busness, by substtutng the same cash and reguarty of performance of servce
tests as provded n secton 1 26(b)(3), as amended by secton 20 (a) of the
ouse b. Your commttee has strcken the ouse amendment to secton
1607(c)(3).
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363
Secton 209(b)(1) of the b amends secton 1607(c) (10) ( ) () of the
Interna Revenue Code, the present provsons of whch e cude from empoyment
servce performed n any caendar quarter n the empoy of any organzaton
e empt from ncome ta under secton 101 of the Code f the remuneraton for
such servce does not e ceed . Secton 20 (b) (2) of the ouse b struck
out the quoted phrase, and nserted n eu thereof s ess than 100. Your
commttee recommends the adopton of the changes In the ouse b, e cept that
0 shoud be substtuted for 100 to conform wth a correspondng change made
n secton 1 26(b) (11) ( ) of the Code by secton 20 (a) of the b.
Secton 209(b) (2) of the b amends secton 1607(c) (10) ( ) of the Interna
Revenue Code, the e stng provsons of whch e cude from empoyment servce
performed n any caendar quarter n the empoy of a schoo, coege, or unver-
sty, ot e empt from ncome ta under secton 101 of the Code, f such servce
s performed by a student who s enroed and s reguary attendng casses nt
such schoo, coege, or unversty, and the remuneraton for such servce does
not e ceed (e cusve of room, board, and tuton). Secton 209(b)(2) of
the b (as does aso secton 20 (b) ( ) of the ouse b) amends secton
1607(c) (10) ( ) so as to e cude such servce regardess of the amount of the
remuneraton.
Secton 209(b)(3) of the b provdes that the amendments made by secton
209(b) (1) and (2) sha be appcabe ony wth respect to servce performed
after 19 0.
Secton 209(c)(1) of the commttee b amends paragraphs (3) and ( ) of
secton 1621(a) of the Code, denng the term wages for purposes of ncome
ta wthhodng so as to conform (wth a ma|or e cepton) the provsons of
such paragraphs wth secton 1 26(b) (2) and (3) of the Code, as amended by
secton 20 (a) of the b. The e cepton s that the amended secton 1621(a)
(3) ( ) contnues for ncome ta wthhodng purposes the e stng e cepton of
domestc servce n a prvate home. Secton 20 (c) (1) of the ouse b amended
ony secton 1621(a) ( ) of the Code, reatng to servce not n the course of
the empoyer s trade or busness. Your commttee has added an amendment
to secton 1621(a) (3) whch has the effect of mtng the ncome ta wthhodng
e cuson from wages, n the case of domestc servce performed n a oca coege
cub, or oca chapter of a coege fraternty or sororty, to servce performed by
a student who s enroed and s reguary attendng casses at a schoo, coege,
or unversty. For an e panaton of the amendment of secton 1621(a) (3)
and ( ), see the e panaton n ths report of the amendment of secton 1 26(b)
(2) and (3), made by secton 20 (a) of the bL
Secton 209(c) (2) of the b aso amends secton 1021(a) of the Code defnng
the term wages for purposes of ncome ta wthhodng. The foowng para-
graphs of secton 1621(a) are amended and conform wth the correspondng
paragraphs ndcated beow of secton 1 26 (a) and (b) of the Code, defnng
wages and empoyment for purposes of the Federa Insurance Contrbutons ct,
as amended by sectons 203(a) and 20 (a), respectvey, of the b. Paragraph
(9) of secton 1621(a), conformng wth secton 1 26(b) (9) ( ), e cudes from
wages remuneraton for servces performed by mnsters and members of re-
gous orders. Paragraph (10) of secton 1621(a), conformng wth secton
1 26(b) (16), e cudes from wages remuneraton for certan servces n connec-
ton wth the devery, dstrbuton, or sae of newspapers, shoppng news, or
magaznes. Such paragraphs (9) and (10) were ncuded n the amendment to
secton 1621(a) made by secton 20 (c) (2) of the ouse b. Paragraph (11) of
secton 1621(a), added by your commttee n conformty, so far as approprate,
wth secton 1 26(a)(7), e cudes from wages such remuneraton for servces
not n the course of the empoyer s trade or busness as s pad n any medum
other than cash. Paragraph (12) of secton 1621(a), aso added by your com-
mttee, conforms wth secton 1 26(a)( ), and e cudes from wages under
specfed condtons remuneraton pad to, or on behaf of, an empoyee or hs
benefcary from or to a trust e empt from ta under secton 16 (a) of the Code,
or under or to an annuty pan meetng the requrements of secton 16 (a) (3),
( ) . ( ), and (6) of the Code. For a further e panaton of the paragraphs of
secton 1621(a) here amended or added, see the e panaton n ths report of the
correspondng paragraphs, referred to above, of secton 1 26 (a) and (b) of the
Code, as amended by sectons 203(a) and 20 (a), respectvey, of the b. Your
commttee has aso strcken from the b the e press provsons reatng to tps
and other cash remuneraton customary receved by an empoyee n the course
of hs empoyment from persons other than the person empoyng hm. Ths
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36
conforms wth the deeton by the commttee, n secton 203(a) of the com-
mttee b, of the correspondng provsons nserted by the ouse n secton
1 20(a) of the Code (secton 20 (a) of the ouse b).
Secton 209(c)(3) of the b provdes that the amendments made by secton
209(c) (1) and (2) to secton 1621(a) of the Interna Revenue Code, dennng
wages for purposes of the wthhodng of ncome ta at source on wages, sha be
appcabe ony wth respect to remuneraton pad after 19 0.
Secton 209(d) of the commttee b amends secton 1031 of the Code, reatng
to a mnmum addton to the ta for faure to fe return or pay ta tmey
under chapter 9 of the Code. The correspondng secton of the ouse b (secton
20 (d)) woud have amended secton 1 03(b) of the Code, reatng to the penaty
for faure to furnsh a wage statement. The ouse amendment to secton
1 03(b) s unnecessary because secton 1 03 s superseded, wth respect to wages
pad after December 31, 19 0, by secton 1636 of the Code, added by secton
206(d) of the commttee b. Your commttee has therefore strcken the ouse
amendment to secton 1 03(b). The amended secton 1631 contans two prn-
cpa changes from the e stng secton 1631. stng aw provdes a mn-
mum addton to the ta for faure to pay the ta tmey, as we as for faure
to fe the return tmey, uness such faure s due to reasonabe cause and not to
wfu negect. The commttee amendment strkes out the mnmum addton
to the ta for faure to pay. Other provsons of e stng aw provde an ade-
quate penaty for faure to pay the ta . Under secton 36 of the Code n ta -
payer who fas to pay ta after recevng a 10-day notce s sub|ect to a percent
addton to the ta for nonpayment, together wth nterest. Under secton
707(a) of the Code, a ta payer who wfuy fas to pay ta s sub|ect to a
penaty equa to the amount of the ta not pad. The commttee amendment
provdes ony one mnmum addton to the ta for faure to fe a return,
rrespectve of whether one or more ta es are requred to be reported on such
return; whe under e stng aw a mnmum addton s provded for each
cass of ta requred to be reported on the return. In the case of a return on
Form 9 1 on whch the empoyees and empoyers ta es under the Federa
Insurance Contrbutons ct and the ncome ta wthhed at source under sub-
chapter D of chapter 9 of the Code are requred to be reported, the mnmum
addton under the commttee amendment woud be nstead of 10 as under
e stng aw. Paragraph (2) of ths subsecton of the b provdes that the
amended secton 1031 sha be appcabe ony wth respect to returns the due
date (that s, the ast day on whch the return may be tmey fed) of whch fas
after the date of the enactment of the b.
Secton 209(e) of the b, or whch there s no correspondng provson n the
ouse b, provdes certan mted reef from the ta es under subchapters
and C of chapter 9 of the Interna Revenue Code, where a corporaton ncor-
porated under the aws of one Stae s succeeded by another corporaton ncorpo-
rated under the aws of another State. The reef s appcabe ony n the case
of successons takng pace at some tme durng the perod from anuary 1, 19 6,
to December 31,19 0. both dates ncusve. (Sectons 1 26(a) (1) and 1607(b) (1)
of the Interna Revenue Code, as amended by sectons 203(a) and 209(a), respec-
tvey, of the commttee b, provde comparabe reef n cases of ths type and
addtona types of successons occurrng after 19 0.) In order to quafy for the
reef under secton 209(e) the busness of the successor must, mmedatey upon
the successon, be dentca wth that of the predecessor; e cept for quafyng
shares, the proportonate nterest of each sharehoder n the successor must,
mmedatey upon the successon, be dentca wth hs proportonate nterest n
the predecessor; the predecessor must, n connecton wth the successon, be ds-
soved, or merged nto the successor; and both the predecessor and successor
must, n the caendar year n whch the successon takes pace, be empoyers
wthn the meanng of both subchapter and subchapter C of chapter 9 of the
Code. If a of the foregong condtons are met, the successor may under para-
graph (1) of secton 209(e) count toward the 3,000 mtaton n the defnton
of wages under such subchapters, before appyng such mtaton to remunera-
ton pad by the successor to ts empoyees, the amount of the ta abe wages pad
by the predecessor n such caendar year to the same empoyees, as though such
wages pad by the predecessor had been pad by the successor; and, sub|ect to
the appcabe statutes of mtatons, the successor may be entted under para-
graph (2) of secton 209(e) to a credt or refund, wthout nterest, of certan
ta es (together wth any nterest or penaty thereon) pad by t wth respect to
certan remuneraton whch t pad durng such caendar year. The credt or
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refund Is mted to empoyer ta under secton 1 10 of subchapter and em-
poyer ta under secton 1000 of subchapter C, and Is measured n amount by tbe
appcaton of a rue whch has the Identca effect upon the wage base of the
successor as that contaned In paragraph (1) of secton 209(e). mpoyee ta
under secton 1 00 of subchapter aready deducted wth respect to more than
3,000 of wages receved by an empoyee from two or more empoyers durng the
same caendar year s refundabe to the empoyee under e stng aw (secton
1 01 (d) of subchcapter , reatng to speca refunds ). The amount of abty
of the successor for any unpad empoyee ta , as we as for any unpad empoyer
ta es, above referred to, s mted by paragraph (1), n the case of any successon
meetng the specfed condtons whch takes pace after December 31, 191 , and
before anuary 1, 19 1.

D NC S TO ST T UN MPLOYM NT CCOUNTS
Tte II of the Soca Securty ct, aowng advances to the accounts of
States n the unempoyment trust fund when ther accounts go beow a certan
mnmum, e pred on anuary 1, 19 0. Secton 0 of the b as reported con-
tnues the opernton of ths tte unt December 31, 19 1. Ths amendment w
be effectve as of anuary 1, 19 0.
19 0-23-13 77
SOCI L, S CURITY CT M NDM NTS OF 19 0
ouse of Representatves Report No. 2771, ghty-frst Congress, Second Sesson
ugust 1,19 0
Mr. Doughton, from the commttee of conference, submtted the foowng
conference report I to accompany . 11. 0000 :
The commttee of conference on the dsagreeng votes of the two ouses on
the amendment of the Senate to the b ( . R. 0000) to e tend and mprove the
Federa Od- ge and Survvors Insurance System, to amend the pubc assstance
and chd wefare provsons of the Soca Securty ct, and for other purposes,
havng met, after fu and free conference, have agreed to recommend and do
recommend to ther respectve ouses ns foows :
That the ouse recede from ts dsagreement to the amendment of the Senate
and agree to the same wth nn amendment as foows:
In eu of the matter proposed to be nserted by the Senate amendment nsert
the foowng: That ths ct tnay be cted as the Soca Securty ct
mendments of 19 0.
See Pubc Law 73 ( ghty-frst Congress, second sesson), approved ugust
2 , 10 0 (page 217, ths uetn).

ST T M NT OF T M N G RS ON T P RT OF T OUS
The managers on the part of the ouse at the conference on the dsagreeng
votes of the two houses on the amendment of the Senate to the b ( . R. 0000)
to e tend and mprove the Federa Od- ge and Survvors Insurance System, to
amend the pubc assstance and chd wefare provsons of the Soca Securty
ct, and for other purposes, submt the foowng statement n e panaton of the
effect of the acton agreed upon by the conferees and recommended n the
accompanyng conference report.
The Senate amendment struck out a of the ouse b after the enactng cause
and nserted a substtute amendment. The conference agreement s a substtute
for both the ouse b and the Senate amendment. cept for carfyng,
cerca, technca, and necessary conformng changes, the foowng statement
e pans the dfferences between the ouse b, the Senate amendment, and the
substtute agreed to n conference:
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3r36
OLD- G ND SUR I ORS INSUR NC
CO R G
Defnton of mpoyment
grcutura abor.
The ouse b contnued the e cuson under e stng aw of agrcutura abor
from the defnton of empoyment, athough the ouse b narrowed the
defnton of agrcutura abor. The Senate amendment e cuded from the
defnton of empoyment agrcutura abor performed n any caendar quarter
by an empoyee, but ony f the cash remuneraton pad for such servce s ess
than 0 or the servce s performed by an ndvdua who s not reguary-
empoyed by the empoyer to perform such servce. The Senate amendment
further provded that for ths purpose an ndvdua s deemed to be reguary
empoyed by an empoyer durng a caendar quarter ony f () on each of some
60 days durng the caendar quarter such ndvdua performs agrcutura abor
for such empoyer for some porton of the day, or () such ndvdua was
reguary empoyed (determned n accordance wth the test n the precedng
cause) by such empoyer n the performance of servce of the prescrbed char-
acter durng the precedng caendar quarter. The amendment provded that
remuneraton pad for such servce n any medum other than cash woud not
consttute wages.
The Senate amendment, however, dd not appy n the case of servce performed
n connecton wth the producton or harvestng of any commodty defned as an
agrcutura commodty n secton 1 (g) of the grcutura Marketng ct, as
amended, or n connecton wth the gnnng of cotton. Such servce s specfcay
e cepted from empoyment under the Senate amendment, regardess of the amount
of the remuneraton pad for, or the reguarty of the performance of, such
servce. Ths specfc e cuson from empoyment under the Senate amendment
of servce performed n connecton wth the producton or harvestng of any
commodty defned as an agrcutura commodty n secton 1 (g) of the grcu-
tura Marketng ct, as amended, appes ony to servce performed n connec-
ton wth the producton or harvestng of crude gum (oeoresn) from a vng
tree or the processng of such crude gum nto gum sprts of turpentne and gum
resn, provded such processng s carred on by the orgna producer of suc
crude gum.
The conference agreement adopts the Senate provson wth a change n the
test of when an ndvdua s deemed to be reguary empoyed n performng
agrcutura abor for an empoyer. Under the conference agreement, an Ind-
vdua s deemed to be reguary empoyed by an empoyer durng a caendar
quarter (ncudng the frst quarter of 19 1) ony f () such ndvdua performs
agrcutura abor (other than servces n connecton wth the producton or
harvestng of any commodty defned as an agrcutura commodty n secton
1 (g) of the grcutura Marketng ct, as amended, or n connecton wth
the gnnng of cotton) for such empoyer on a fu-tme bass on 60 days (whether
or not consecutve) durng the quarter, and () the quarter was mmedatey
preceded by a quafyng quarter. quafyng quarter s defned as (I) any
quarter durng a of whch the ndvdua was contnuousy empoyed by the
empoyer, or (II) any subsequent quarter meetng the test of cause () above f,
after the ast quarter durng a of whch the ndvdua was contnuousy
empoyed by the empoyer, each ntervenng quarter met the test of cause (). n
ndvdua s aso deemed to be reguary empoyed by an empoyer durng a
caendar quarter f he was reguary empoyed (upon appcaton of causes ()
and ()) by the empoyer durng the precedng caendar quarter. Under the
conference agreement remuneraton for servces n connecton wth the produc-
ton or harvestng of any commodty defned as an agrcutura commodty n
secton 1 (g) of the grcutura Marketng ct, as amended, or n connecton
wt the gnnng of cotton, s not counted for purposes of the 0 cash wage test.
The Senate amendment adopted the defnton contaned n the ouse b of
the term agrcutura abor e cept that the Senate amendment adds to the
st of servce consttutng agrcutura abor the foowng: Servce performed
n connecton wth the operaton or mantenance of dtches, canas, reservors, or
waterways, not owned or operated for proft, used e cusvey for suppyng ann
storng water for farmng purposes ; and servce not n the course of the empoyer s
trade or busness or domestc servce n a prvate home of the empoyer, f such
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367
servce s performed on a farm operated for proft. The conference agreement
adopts the ouse provson wth the addtons made by the Senate amendment.
Domestc workers.
The ouse b e cuded from empoyment servce not n the course of the
empoyer s trade or busness (Incudng domestc servce n a prvate home of
the empoyer) performed n any caendar quurter by an empoyee, but ony f
the cash remuneraton pad to an Indvdua for such servce s ess than 2 ,
or such servce Is performed by an ndvdua who s not reguary empoyed by
the empoyer to perform such servce. For the purposes of the e cepton, an
ndvdua s deemed to be reguary empoyed by nn empoyer durng a caendar
quarter ony f () such ndvdua |wrforms for such empoyer servce of the
prescrbed character durng some porton of at east 20 nays durng the caendar
quarter, or () such ndvdua Is reguary empoyed (determned n accordance
wth cause ()) by such empoyer n the performance of servce of the prescrbed
character durng the precedng caendar quarter. The Senate amendment mod-
fed the ouse b by requrng 0 of cas wages nstead of 2 of cash wages
earned n the quarter; and provdng that the test of reguarty be bsL-d upon
performance of servces on each of some 2 days durng a quarter rather thuu
2G days.
The conference agreement adopts the Senate amendment as to servce not n
the course of the empoyer s trade or busness. The agreement aso conforms
wth the pocy of the Senate amendment wth respect to domestc servce, but
the cash test of 0 s changed from n remuneraton earned n the quarter bass
to a remuneraton pad n the quarter bass. Under the conference agreement,
cash remuneraton receved by an empoyee n a caendar quarter for domestc
servce n a prvate home of the empoyer does not consttute wages uness the
cash remuneraton for sv.ch servce receved by the empoyee from the empoyer
n such quarter s 0 or more, and the empoyee s reguary empoyed by the
empoyer n such quarter of payment n the performance of such servce.
The uu.se b e cepted from empoyment servce not n the course of the
empoyer s trade or busness (ncudng domestc servce n a prvate home of the
empoyer) performed on a farm operated for proft. The Senate amendment
omtted ths provson because of ts amendment (adopted under the conference
agreement) ncudng such servce wthn the defnton of agrcutura abor.
The conference agreement conforms wth the Senate acton.
Federa empoyees.
The ouse b e cuded from empoyment servce performed n the empoy
of the Unted States Government or n the empoy of any nstrumentaty of the
Unted States Government whch s party or whoy owned by the Unted States
but ony f (1) such servce s covered by a retrement system estabshed by a
aw of the Unted States for empoyees of the Unted States or of such nstru-
mentaty, or (2) the servce s of the character descrbed n any one of a st of
13 speca casses of e cepted servces. The Senate amendment adopted the
genera poces of the ouse b e cept for one area of Federa empoyment.
The arge group covered under the Senate amendment and not under the ouse
b conssts of empoyees servng under a temporary appontment pendng fna
determnaton of egbty for permanent or Indefnte appontment; and the
conference agreement e tends coverage to ths group.
The conference agreement contans three separate subparagraphs. Subpara-
graph ( ) e cepts from empoyment servce performed n the empoy of the
Unted States or of any nstrumentaty of the Unted States, f such servce s
covered by a retrement system estabshed by a aw of the Unted States.
Determnatons as to whether the partcuar servce s covered by a retrement
system of the requste character are to be made on the bass of whether such
servce s covered under a aw enacted by the Congress of the Unted States
whch specfcay provdes for the estabshment of such retrement system.
Subparagraph ( ) e cepts from.empoyment servce performed n the empoy
of an nstrumentaty of the Unted States f such an nstrumentaty was e empt
from the ta mposed by secton 1 10 of the Interna Revenue Code on December
31, 19 0. Ths provson can appy n the case of an nstrumentaty created
after 10 0 f such nstrumentaty, had t been n e stence on December 31,
19 0, woud have been e empt from such ta by reason of a provson of aw n
effect on that date. The e cepton from empoyment under subparagraph ( )
does .not appy to () servce performed n the empoy of a corporaton whch
s whoy owned by the Unted States (but such servce, of course, s not n-
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36
euded as empoyment If the servce s e cuded upon appcaton of the rues
contaned n subparagraph ( ) or (C)) ; () servce performed n the empoy
of a natona farm oan assocaton, a producton credt assocaton, a Federa
Reserve bank, or Federa credt unon; () servce performed n the empoy
of a State, county, or communty commttee under the Producton and Market-
ng dmnstraton; (v) servce performed by a cvan empoyee, who s not
compensated from funds approprated by the Congress, n the rmy and r
Force change Servce, rmy and r Force moton pcture servce, Navy
e changes, Marne Corps e changes, or other actvtes, conducted by an n-
strumentaty of the Unted States sub|ect to the |ursdcton of the Secretary
of Defense, at nstaatons of the Department of Defense for the comfort,
peasure, contentment, and menta and physca mprovement of personne of
such Department. Subparagraph (C) e cepts from empoyment servce per-
formed n the empoy of the Unted States or n the empoy of any nstru-
mentaty of the Unted States f the servce s of the character descrbed n
any one of a st of 13 speca casses of e cepted servces. These 13 speca
casses of e cepted servces ncude the 12 speca casses of e cepted servces
sted n the Senate amendment and, n addton, servce performed by an n-
dvdua to whom the Cv Servce Retrement ct of 1930 does not appy because
such ndvdua s sub|ect to another retrement system (ether estabshed by a
aw of the Unted States or by the agency or nstrumentaty for whch the
servce s performed).
mpoyees of transportaton systems operated by a State or potca subdvson.
The ouse b ncuded as empoyment servce performed n the empoy of
a potca subdvson of a State (ncudng an nstrumentaty of one or more
subdvsons) n connecton wth the operaton of a pubc transportaton system
f such servce s performed by an empoyee who () became an empoyee of
the potca subdvson n connecton wth and at the tme of ts acquston
after 1936 of the transportaton system or any part thereof, and () pror to
the acquston rendered servces whch consttuted empoyment (for soca
securty coverage purposes) n connecton wth the operaton of the transporta-
ton system or part thereof acqured by the potca subdvson. Under the
ouse provson f a cty acqured a transportaton system n 1930, and n 19 0
acqured from prvate ownershp a bus ne whch became part of the cty trans-
portaton system, ony the empoyees taken over from the prvatey owned bus
ne woud be covered for soca securty purposes. Other empoyees workng
for the cty n connecton wth the operaton of ts transportaton system, n-
cudng empoyees hred after the acquston of the bus ne, woud not have
been covered under the ouse provson.
owever, n the case of empoyees taken over by a potca subdvson n
connecton wth an acquston made pror to the effectve date of the provsons
n the ouse h amendng the defnton of empoyment, the ouse b pro-
vded that f the potca subdvson fed wt the Commssoner of Interna
Revenue pror to such effectve date a statement that t dd not favor the coverage
of any empoyee who became an empoyee n connecton wth acqustons made
before such effectve date, then the servces of such empoyees woud not
consttute empoyment.
The Senate nmendment provded for the ncuson as empoyment of a servce
performed n the empoy of a State or potca subdvson (or nstrumentaty)
n connecton wth the operaton of any pubc-transportaton system the whoe
or any part of whch was acqured after 1936. The Senate amendment dd not
mt coverage to those empoyees taken over from prvate empoyers at the tme
of such acquston.
The conference agreement adopts the provson of the Senate amendment
as the genera rue to be apped, but the agreement sets forth certan condtons
and crcumstances under whch none, or ony some, of the empoyees w be
covered.
Under the conference agreement, f the State or potca subdvson acqures
a transportaton system, or any part thereof, from prvate ownershp after 1936
and before 19 1, a empoyees (wth respect to servces rendered after 19 0
n connecton wth the operaton of the transportaton system) w be covered
uness
(1) The State or potca subdvson on December 31,19 0, has a genera
retrement system (a defned term) n effect, coverng substantay a
servces performed n connecton wth the operaton of the transportaton
system; and
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() Such genera retrement system provdes benefts whch are protected
from dmnuton or mparment under the State consttuton by reason
of an e press provson, deang specfcay wth retrement systems es-
tabshed by the State or subdvsons of the State, whch forbds such
dmnuton or mparment.
consttutona provson permttng dmnuton or mparment by acton of
the egsature woud not quafy, under the conference agreement, as a con-
sttutona provson descrbed n cause ().
If the State or potca subdvson made an acquston descrbed n the
precedng paragraph and the empoyees are not covered under a genera re-
trement system descr ed n cause () above, a servce n connecton wth
the transportaton system w consttute empoyment, ncudng the servce
of a empoyees hred after 19 0 nnd ncudng the servce of empoyees who
dd not work for the prvate empoyer from whom the State or potca sub-
dvson acqured ts transportaton system.
If the State or potca subdvson whch acqured part of ts transportaton
system after 193( and before 19 1 had on December 31, 19 0, a genera retre-
ment system coverng the servces of Its transportaton empoyees, and the
tests of cause () and () are oth satsfed, none of the empoyees (sub|ect
to a mted e cepton set forth n the foowng paragraph) woud be covered.
Ths e cuson from empoyment w appy even n the case of empoyees who
worked for the prvate empoyer from whom the State or potca subdvson
acqured the transportaton system (or part thereof) and who became empoyees
of the State or potca subdvson n connecton wth the acquston.
The conference agreement provdes, however, n the case of a transportaton
system n whch servce s not empoyment by reason of rues set forth n the
precedng paragraphs, th.t f the State or potca subdvson makes a new
acquston from prvate ownershp after 19 0 of an addton to ts transporta-
ton system, then n the case of any empoyee who
( ) ecame an empoyee of the State or potca subdvson n con-
necton wth and at the tme of ts acquston (after 19 0) of the addton
to ts transportaton system, and
( ) Pror to such acquston rendered servce whch consttuted em-
poyment (for soca securty coverage purposes) n connecton wth the
operaton of the addton to the transportaton system acqured by the State
or potca subdvson,
the servce of such empoyee (n connecton wth any part of the transportaton
system) sha consttute empoyment, commencng wth the frst day of the thrd
caendar quarter foowng the caendar quarter n whch the acquston of the
new addton took pace, uness on such frst day the servce of the empoyee s
covered by a genera retrement system whch does not contan speca provsons
appcabe ony to empoyees taken over by the State or potca subdvson n
connecton wth such acquston.
The rue of the mmedatey precedng paragraph s, under the conference
agreement, appcabe n one other stuaton. If a State or potca subdvson
s operatng a pubc transportaton system on December 31, 19 0, but no part
of the system was acqured after 1936 and before 19 1, none of the servce of the
empoyees w consttute empoyment uness the State or potca subdvson
makes an acquston on or after anuary 1, 19 1, from prvate ownershp of
an addton to ts e stng system. In the case of such an acquston of a part
of ts transportaton system, the empoyees taken over by a State or potca
subdvson at the tme and n connecton wth such acquston w be covered,
or not covered, upon appcaton of the rue set forth n the precedng paragraph.
mpoyees of the pubc transportaton system not taken over from prvate
ownershp at the tme of such acquston woud not be affected at a ther
servce woud reman e cuded from empoyment.
In the ease of a State or potca subdvson whch does not operate on De-
cember 31, 19 0, a transportaton system, but acqures a transportaton system
after such date, the conference agreement provdes that a servce performed
In connecton wth the operaton of the acqured transportaton system w con-
sttute empoyment, uness at the tme the frst part of such transportaton system
Is acqured by t from prvate ownershp the State or potca subdvson has
a genera retrement system coverng substantay a the servce performed n
the operaton of the transportaton system.
The term genera retrement system s defned to mean any p nson, annuty,
retrement, or smar fund or system estabshed by a State or potca sub-
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370
dvson for empoyees of the State, potca subdvson, or both, but does not
ncude a fund or system whch covers ony servce performed n postons con-
nected wth the operaton of Its pubc transportaton system.
transportaton system or part thereof s consdered to have been acqured
by a State or potca subdvson from prvate ownershp f pror to the acqus-
ton servce performed by empoyees n connecton wth the operaton of the
system or the acqured part consttuted empoyment (for soca securty coverage
purposes) and some of such empoyees became empoyees of the State or potca
subdvson n connecton wth and at the tme of such acquston.
The term potca subdvson s defned to Incude nn nstrumentaty of
a State, of one or more State potca subdvsons, or of a State and one or
more of ts potca subdvsons.
Coverage of State and oca empoyees under compacts.
The ouse b provded for the e tenson of od-age and survvors nsurance
coverage to empoyees of State and oca governments under agreements nego-
tated between the States and the Federa Securty dmnstrator. The ouse
b aso permtted the empoyees of State and oca governments, covered by
State or oca government retrement systems, to be ncuded n such agreements
f two-thrds of the empoyees consented to be covered under the program. The
Senate amendment modfed the ouse provsons. It e cuded from the purvew
of such agreements empoyees of States and oca governments covered by State
and oca government retrement systems. The Senate amendment further pro-
vded for the estabshment of separate coverage groups of empoyees engaged n
the performance of snge propretary functons. The conference agreement
adopts the Senate provsons.
mpoyees of regous, chartaoc, and certan other nonproft organsatons.
Under the ouse b, empoyees of regous, chartabe, educatona, and
other organzatons e empt from ncome ta under secton 101(0) of the Interna
Revenue Code were covered on a compusory bass. The ouse b, however,
granted an e empton to such organzatons from the ta mposed on the em-
poyer under secton 1 10 of such Code. Provson was made for waver by the
organzaton of such e empton. If the e empton from ta aton was not waved,
the empoyees of the organzaton woud, for the purpose of computng nsured
status and average monthy wage, receve wage credts for ony one-haf of the
wages pad. n organzaton wavng ts e empton from ta was permtted,
under the ouse b, to regan Its ta -e empt status by gvng a 2 years notce.
Such notce of termnaton coud not be gven pror to the e praton of years
foowng the effectve date of the waver perod.
The Senate amendment provded for compusory coverage of organzatons
whch are not organzed and operated prmary for regous purposes or whch
are not owned and opernted by one or more organzatons operatng prmary
for regous purposes. The organzatons whose empoyees were covered under
the compusory bass were, under the Senate amendment, sub|ect, on a com-
pusory bass, to the empoyers ta mposed under secton 1 10 of the Interna
Revenue Code. The empoyees of such organzatons were aso sub|ect, on a
compusory bass, to the empoyees ta mposed under secton 1 00 of the Code.
In the case of regous organzatons, or organzatons owned and operated
by regous organzatons, provson was made under the Senate amendment
for coverage of empoyees upon fng a statement wth the Commssoner of
Interna Revenue that the organzaton desred to have the od-age and survvors
nsurance system e tended to ts empoyees. If such a statement was once
fed, t coud not thereafter be revoked by the organzaton.
The conference agreement dffers from both the ouse b and the Senate
amendment. Under the conference agreement servce performed n the empoy
of an organzaton e empt from ncome ta under secton 101(6) s e cuded
from empoyment uness the organzaton fes a certfcate that t desres to have
the od-age and survvors nsurance system e tended to ts empoyees. If t does
not fe such a certfcate, nether the organzaton nor ts empoyees are sub|ect to
the soca securty ta es mposed by the Federa Insurance Contrbutons ct.
If t does fe such a certfcate, both the empoyer and the empoyee are, for
the perod durng whch the certfcate s n effect, sub|ect to such ta es n the
same manner as n prvate empoyer and hs empoyees. The certfcate fed by
the organzaton must certfy that at east two-thrds of ts empoyees concur
n the fng of the certfcate, and the certfcate must be accompaned by a st
contanng the sgnature, address, and soca securty account number (f any)
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371
of each empoyee who concurs n the fng of the certfcate. Such st may be
amended, at any tme pror to the e praton of the frst month foowng the
frst caendar quarter for whch the certfcate s effectve, by fng a suppe-
menta st or sts contanng the sgnature, address, and soca securty number
of each addtona empoyee who concurs In the fng of the certfcate. Com-
mencng wth the frst day foowng the cose of the caendar quarter In whch
the certfcate s fed, the empoyees who have concurred n the fng of such
certfcate w be covered for soca securty purposes. ny empoyee who s
hred on or after such frst day w be covered on a compusory bass. If an
Indvdua, who on such frst day was In the empoy of the organzaton, shoud
eave hs poston and thereafter reenter the empoy of such organzaton, such
empoyee w be covered on and after the date of such reentry, whether or not
he concurred n the fng of the certfcate when he was prevousy n the empoy
of the organzaton.
The conference agreement further provdes that the perod for whch the certf-
cate s effectve may be termnated by the organzaton upon gvng 2 years
advance notce In wrtng of ts desre to termnate the effect of the certfcate at
the end of a caendar quarter; but ony f the certfcate has been n effect for
a perod of not ess than years at the tme of the recept of the notce of
termnaton. The organzaton may revoke ts notce of termnaton by gvng
a wrtten notce of such revocat;on pror to the cose of the caendar quarter
specfed In the notce of termnaton. The certfcate (and any notce of term-
naton or revocaton of such notce) must be fed n such form and manner
and wth such offca as may be prescrbed by reguatons.
Provson s aso made, under the conference agreement, for termnaton of
the waver perod upon the ntatve of the Commssoner of Interna Revenue.
If the Commssoner fnds that an organzaton whch fed a certfcate has
faed to compy substantay wth the provsons of the Federa Insurance Con-
trbutons ct, or Is no onger abe to compy wth such provsons, the Com-
mssoner can gve such organzaton a 60 days advance notce n wrtng that
the perod covered by the certfcate w termnate at the end of the caendar
quarter specfed n the notce. Such notce by the Commssoner may be revoked
by hm by gvng, pror to the cose of the caendar quarter specfed n hs notce
of termnaton, wrtten notce of the revocaton. The Commssoner cannot gve
notce of termnaton or revocaton thereof wthout pror concurrence of the
Federa Securty dmnstrator.
If the perod covered by the certfcate Is termnated by the organzaton tsef,
t may not thereafter fe a certfcate wavng the e cuson from empoyment of
ts empoyees.
Servce performed by a duy ordaned, commssoned, or censed mnster of
a church n the e ercse of hs mnstry or by a member of a regous order n
the e ercse of dutes requred by such order woud not consttute empoyment
under the ouse b, the Senate amendment, or the conference agreement.
ffectve date.
The provsons of the conference agreement amendng the defnton of em-
poyment appy ony wth respect to servce performed after December 31, 19 0.
Defnton of Wages
The ouse b contnued the provsons of e stng aw whch e cude from
wages payments made to or on behaf of an empoyee under a pan or system
provdng for payments on account of (1) retrement, (2) sckness or accdent
dsabty, (3) medca or hosptazaton e penses, or ( ) death but provded
that such payments made for death benefts shoud be e cuded from wages
regardess of whether the empoyee has certan optons or rghts, such as the
opton to receve, Instead of the provson for such death beneft, any part of
such payment made by the empoyer, or the rght to assgn the death beneft
or to receve a cash consderaton n eu thereof. The Senate amendment
adopted the ouse provson, but n addton e cuded from wages any such
payment made to or on behaf of any dependents of an empoyee under a pan
or system provdng for the empoyee and hs dependents. The conference
agreement adopts the Senate provson.
The ouse b e cuded from wages certan payments made to, or on behaf
of, an empoyee from or to a trust e empt from ta under secton 16 (a) of
the Code or under or to an annuty pan whch meets the requrements of secton
16 (a) (3), ( ), ( ), and (6). The Senate amendment made a carfyng
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372
change n the ouse provson to assure the e cuson from wages of a payment
of the prescrbed character made to, or on behaf of, a benefcary of an empoyee.
The conference agreement adopts the Senate provson.
The Senate amendment added a new provson e cudng from wages remunera-
ton for agrcutura abor pad n any medum other than cash. The Senate
provson was necessary because under the Senate amendment agrcutura abor
may be covered under certan condtons. The ouse b contaned no comparabe
provson. The conference agreement adopts the Senate provson.
The ouse b contaned an e press provson reatng to tps and other cash
remuneraton customary receved by an empoyee n the course of hs empoy-
ment from persons other than the person empoyng hm. The Senate amend-
ment emnated ths provson of the ouse b. The conference agreement
conforms to the Senate amendment.
The Senate amendment contaned a provson desgned to make easer the
computaton of wages for servce not n the course of the empoyer s trade or
busness, partcuary wth respect to wages for domestc servce. The ouse
b contaned no comparabe provson. The conference agreement adopts the
Senate provson, but mts ts appcaton to remuneraton for domestc servce
n a prvate home of the empoyer. The agreement authorzes the ssuance of
reguatons n approprate cases for the roundng of remuneraton payments
for such servce to the nearest whoe doar. For e ampe, f a househod em-
poyee receves a cash remuneraton payment of 9. 0, or 10. 9, or any amount
n between, the payment coud, f the reguatons so provde, be consdered to
be 10. The roundng of cash wage payments to the nearest whoe doar w
ease the househoder s part In the soca securty program for purposes of appyng
the ta rate to the wage payment, for purposes of any requred record keepng,
and for purposes of determnng whether 0 or more has been pad to the
empoyee n any caendar quarter.
Under the ouse b, remuneraton pad to certan homeworkers woud
consttute wages, but the defnton of empoyee contaned n the Senate
amendment resuted n the e cuson of such remuneraton from wages. Under
the conference agreement, whch ncudes homeworkers as empoyees, remunera-
ton pad by an empoyer n any caendar quarter to a homeworker (f such
homeworker s an empoyee under the defnton of empoyee ) w consttute
wages, but ony f cash remuneraton of 0 or more s pad durng the caendar
quarter by the empoyer to such homeworker. If 0 or more of cash remunera-
ton Is pad by the empoyer to such homeworker durng the caendar quarter, t
s mmatera whether the 0 s n payment of servces rendered the empoyer
durng the quarter of payment or durng a prevous quarter.
The conference agreement aso makes certan amendments n the defnton of
wages for purposes of the Federa Unempoyment Ta ct and ncome ta
wthhodng to conform such defntons n certan respects wth the defnton
of wages under the Federa Insurance Contrbutons ct
ffectve date.
The provsons of the conference agreement amendng the defnton of wages
appy ony wth respect to remuneraton pad after December 31, 19 0.
Defnton of mpoyee
The defnton of the term empoyee n the ouse b requred that the usua
common-aw rues be used to determne whether an ndvdua s an empoyee.
The Senate accepted ths provson wthout change but struck out the second
sentence of the paragraph n the ouse b whch was desgned to change the
effect of the Unted States Supreme Court s hodng n the case of attes v.
rmngham (332 U. S. 126 (19 7)). The conference agreement accepts the
Senate amendment. Wth regard to the meanng of the phrase the usua com-
mon aw rues appcabe n determnng the empoyer-empoyee reatonshp,
ths opportunty s taken to reterate and endorse the statement nnde n the
Report of the Commttee on Ways and Means n connecton wth the Soca
Securty ct mendments of 1939:
restrcted vew of the empoyer-empoyee reatonshp shoud not be taken
In the admnstraton of the Federa od-age and survvors nsurance system n
makng coverage determnatons. The tests for determnng The reatonshp ad
down n cases reatng to tort abty and to the common-aw concept of master
and servant shoud not be narrowy apped (p. 76).
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Ths statement made n 1939 Is equay appcabe to the phrase In the b as
agreed upon n the conference agreement, whch contempates a reastc Inter-
pretaton of the common aw rues.
Provsons In both the ouse b and the Senate amendment added ndvduas
n certan specfed occupatona groups who are not necessary empoyees under
the usua common aw rues. owever, the Senate amendment made substanta
revsons n the addtons whch were provded In the ouse b.
The Senate amendment emnated entrey the ouse addtons wth respect
to drver-essees of ta cahs, contract oggers, mne essees, and house-to-house
saesmen. The conference agreement adopts these Senate amendments.
The Sennte amendment struck out the ouse provson whch added outsde
saesmen n the manufacturng or whoesae trnde, substtutng a more detaed
provson whch added cty and traveng saesmen performng servces under
certan specfed condtons. Under the conference agreement, cty and trave-
ng saesmen are ncuded (sub|ect to the genera mtatons whch appeared In
both the ouse b and Senate amendment and whch are appcabe to a of
the categores sted In paragraph (3)) If they are engaged upon a fu-tme
bass n the soctaton on behaf of, and the transmsson to, ther prncpas
(e cept for sde-ne saes actvtes on behaf of other persons) of orders from
whoesaers, retaers, contractors, or operators of hotes, restaurants, or other
smar estabshments for mercand.se for resae or suppes for use In ther
busness operatons. Cty and traveng saesmen who se to retaers or to the
others specfed, operate oft the companes premses, and are generay com-
pensated on a commsson bass, are ncuded wthn ths occupatona group.
Such saesmen are generay not controed as to the detas of ther servce or
the means by whch they cover ther terrtores, Imt n the ordnary case they
are e pected to ca on reguar customers wth a far degree of reguarty. The
conference agreement requres wth respect to a cty or traveng saesman that,
n order for hm to be ncuded wthn the term empoyee, hs entre or prnc-
pa busness actvty must be devoted to the soctaton of orders for one
|rncpn. Thus, the mutpe-ne saesman generay w not be wthn the
scope of ths subparagraph of the defnton. owever, the conference agree-
ment specfes that, f the saesman socts orders prmary for one prncpa,
he sha not be e cuded soey because of sde-ne saes actvtes on behaf of
one or more other persons. In such a case, the saesman woud be the empoyee
under paragraph (3) of the defnton ony of the person for whom he prmary
socts orders and not of such other persons.
The conference agreement specfcay e cudes agent-drvers and commsson-
drvers from the scope of ths subparagraph of the defnton.
The foowng e ampes ustrate the appcaton of the paragraph as t reates
to cty and traveng saesmen:
1. Saesman s prncpa busness actvty s the soctaton of orders from
reta pharmaces on behaf of the whoesae drug company. aso occason-
ay socts orders for drugs on behaf of the Y and Z companes. Wthn the
meanng of subparagraph (3) (D), s the empoyee of the company but not
of the Y and Z companes.
2. Saesman s prncpa busness actvty s the soctaton of orders from
reta hardware stores on behaf of the R too company and the S cookng
utens company. reguary socts orders on behaf of both companes. Wth-
n the meanng of subparagraph (3) (D), s not the empoyee of ether the R
or S company.
3. Saesman C s prncpa busness actvty s the house-to-house soctaton of
orders on behaf of the T brush company. C occasonay socts such orders
from reta stores and restaurants. Wthn the meanng of subparagraph
(3) (D), C s not the empoyee of the T company.
The Senate amendment added certan agent-drvers and commsson-drvers
to paragraph (3) of the defnton as t appeared n the ouse b. Under para-
graph (3) ( ) as t appears n the conference agreement, the defnton of em-
poyee Incudes agent-drvers or commsson-drvers who are engaged n ds-
trbutng meat products, vegetabe products, frut products, bakery products,
beverages (other than mk), or aundry or dry-ceanng servces, for ther
prncpas. Ths category Incudes an ndvdua who operates hs own truck
or the truck of the company for whch he performs servces, serves customers
desgnated by the company as we as those socted on hs own, and whose
compensaton Is a commsson on hs raes or the dfference between the prce he
charges hs customers and the prce he pays to the company for the product or
servce.
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37
The Senate amendment struck out the ouse provson whch added home
workers to the defnton of empoyee. Under paragraph (3) (C) of the defn-
ton agreed to by the conferees, a home worker s ncuded n the term f he
performs work, accordng to specfcatons furnshed by the person for whom
the servces are performed, on materas or goods furnshed by such person
whch are-requred to be returned to such person or a person desgnated by hm,
f the performance of such servces s sub|ect to censng requrements under
the aws of the State n whch such servces are performed. owever, as provded
n the defnton of wages adopted by the conference agreement, a home worker
who meets the requrements of ths defnton of empoyee st w not be
covered uness he s pad remuneraton n cash of 0 or more n any caendar
quarter by the person for whom the servces are performed. It s not requred
that such remuneraton must be pad n the quarter n whch the servces are
performed.
Wth respect to the requrement that the performance of servces by a home
worker must be sub|ect to censng aws In the State n whch the work s
performed as a prerequste to the ncuson of such ndvdua n the defnton
of empoyee, the conference agreement ntends that ths requrement w be
met ether n the case where the State requres a home-work cense on the part
of the person for whom the servces are performed or n the case where the
State requres a home-work certfcate on the part of the ndvdua who performs
the servces.
The ouse b contaned a paragraph ( ) of the defnton of empoyee
whch woud have ncuded wthn the meanng of the term any ndvdua who
had the status of an empoyee as determned by the combned effect of seven
enumerated factors. The Semte amendment struck out ths paragraph, and the
conference agreement foows the Senate amendment wth respect to ths matter.
Sef- mpoyed
In provdng coverage for the sef-empoyed, the ouse b e cuded from ta
(and from beneft coverage) ncome derved from the performance of servce by
an ndvdua (or partnershp) n the e ercse of hs professon as a physcan,
awyer, dentst, osteopath, veternaran, chropractor, Chrstan Scence prac-
ttoner, or as an aeronautca, chemca, cv, eectrca, mechanca, metaurg-
ca, or mnng engneer. The Senate amendment added to the st of e cusons
the foowng: naturopaths, archtects, certfed pubc accountants, and account-
ants regstered or censed as accountants under State or muncpa aw, and
funera drectors; and substtuted professona engneers n eu of the specfc
engneers sted n the ouse b. The conference agreement adopts the Senate
provson, wth an addton (to the group e cuded) of fu-tme practcng pubc
accountants.
The ouse b aso e cuded ncome drved from a trade or busness of pub-
shng a newspaper or other pubcaton havng a pad crcuaton. The Senate
amendment deeted such e cuson. The conference agreement conforms wth
the Senate acton n e tendng coverage n ths area.

FIN NCING ND DMINISTR TI PRO ISIONS
Ta Rates
Rate of ta on cages.
The ouse b ncreased the rate of the empoyees ta and of the empoyers
ta under the Federa Insurance Contrbutons ct from 1 to 2 percent on
anuary 1, 19 1. The Senate amendment postponed the ncrease n rates unt
anuary 1, 19 0. The conference agreement ncreases the rate of each ta to
2 percent on anuary 1, 19 . Otherwse the rates under the ouse b, the
Senate amendment, and the conference agreement are the same. Under the
agreement the rates of each ta are as foows:
Percent
For the caendar years 19 0 to 19 3, ncusve 1
For the caendar years 19 to 19 9, ncusve 2
For the caendar years 1960 to 190 , ncusve 2 6
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Rate of ta on ef-cmpoymcnt ncome.
Under the ouse b, the Senate amendment, and the conference agreement,
the rates of ta on sef-empoyment :come are one and one-haf tmes the rates
of the empoyees ta under the Federa Insurance Contrbutons ct.
The rates of the ta on such ncome for the respectve ta abe years under
the conference agreement are as foows:
For ta abe years Percent
egnnng after Dec. 31,19 0, and before an. 1,19 2
egnnng after Dec. 31, 19 3, and before an. 1. 19( 0 3
egnnng after Dec. 31,19 9, and before an. 1, 190 3
egnnng after Dec. 31, 196 , and before an. 1, 1970 U.
egnnng after Dec. 31, 1909
ppropratons to the Trust Fund
The Senate amendment changed that porton of secton 201(a) of th Soca
Securty ct whch approprates to the trust fund amounts equvaent to 100
percent of the ta es receved under the Federa Insurance Contrbutons ct
and covered nto the Treasury. Under the amendment amounts approprated
woud be determned by reference to the ta es on the tota ta abe wages and
sef-empoyment ncome reported for ta .purposes, rather than by reference
to the sum of the coectons of such ta es. owever, wth respect to ta es
deposted nto the Treasury by coectors of nterna revenue before anuary 1,
1 1, the amount approprated w be determned In the same manne as under
the present method. fter that date and for an addtona perod of 2 years
endng wth the cose of 19 2, coectors of nterna revenue woud be requred
to contnue to account separatey for coectons of such ta es whch had been
assessed but not coected b fore anuary 1, 19 1. The ouse b contaned no
comparabe provson. The conference agreement adopts the Semte amendment.
The ouse b contnued the provsons of e stng aw whch approprate to
the trust fund, n addton to the ta es, any nterest, penates, or addtons to
the ta es coected under the od-age and survvors nsurance program. The
Senate amendment dd not approprate to the trust fund any such nterest,
penates, or addtons to the ta es. Nor does the conference agreement appro-
prate to the trust fund any nterest, penates, or addtons to the ta es. It s
beeved, however, that the fact that no nterest, penates, or addtons to the
ta es are approprated to the trust fund shoud be gven consderaton n deter-
mnng the estmated amounts of admnstratve e pense s charged to the trust
fund by the Treasury Department for the performance of ts dutes n coectng
the ta es under the od-age and survvors nsurance program, athough It s
recognzed that no f ed amount can ba assgned to ths factor.
Payments of Speca Refunds From Trust Fund
The ouse b changed secton 201(f) of the Soca Securty ct to requre
that refunds of thy ta es coected for the od-age and survvors nsurance
program be made from the trust fund begnnng anuary 1, 19 0. The Senate
amendment contnued the provsons of e stng aw whch approprate to the
trust fund amounts equvaent to 100 percent of the ta es coected for the
od-age and survvors nsurance program, e cept that such amounts woud
be determned by reference to the ta es on the tota ta abe wages and sef-
empoyment ncome reported for ta purposes, rather than by reference to
the sum of the coectons of such ta es. The Senate amendment dd not e -
pressy authorze refunds of such ta es to be made from the trust fund. n
ad|ustment for erroneous payments of empoyer and empoyee ta es woud
automatcay have been made n the trust fund by means of the new appropra-
ton procedure provded under the Senate amendment.
The conference agreement requres the managng trustee to pay from the
trust fund nto the Treasury the amount estmated by hm as ta es whch are
sub|ect to refund under secton 1 01(d) of the Interna Revenue Code wth
respect to wages pad after December 31,19 0. Such ta es are to be determned
on the bass of the records of wages estabshed and mantaned by the Federa
Securty dmnstrator n accordance wth the wages reported to the Comms-
soner of Interna Revenue pursuant to secton 1 20(c) of the Interna Revenue
Code. The Federa Securty dmnstrator s requred to furnsh the managng
trustee such nformaton as may be requred by the trustee for makng such
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376
estmates. The payments by the managng trustee are requred to bo covered
nto the Treasury as repayments to the account for refundng nterna revenue
coectons.
Return of Sef- mpoyment Ta
Under the ouse b the provsons mposng the ta on sef-empoyment
ncome were ncuded n the Interna Revenue Code as subchapter F of chapter
0, so that such ta was eved as one of the empoyment ta es sub|ect to the
admnstratve provsons reatng to msceaneous ta es. The Senate amend-
ment ncuded the provsons mposng the sef-empoyment ta as subchapter
of chapter 1 of the Code, reatng to the ncome ta . Under the Senate amend-
ment the sef-empoyment ta woud be eved, assessed, and coected as part of
the ncome ta mposed by chapter 1 of such Code, e cept that t woud not be
taken nto account for purposes of the estmated ta . In vew of the cose
connecton between the sef-empoyment ta and the present ncome ta , and
n the nterests of smpcty for ta payers and economy n admnstraton, your
conferees beeve that t s preferabe to have the ta on sef-empoyment ncome
handed n a partcuars as an ntegra part of the ncome ta . The con-
ference agreement therefore adopts the provsons of the Senate amendment
wth respect to the ntegraton of the sef-empoyment ta wth the ncome ta
under chapter 1. Thus, e cept as otherwse e pressy provded, the sef-em-
poyment ta w be ncuded wth the norma ta and surta under chapter
1 n computng any overpayment or defcency n ta under suc chapter and
n computng the nterest and any addtons to such overpayment, defcency,
or ta . The sef-empoyment ta w be sub|ect to the |ursdcton of the Ta
Court to the same e tent and the same manner as other ta es under chapter 1.
Subsecton (a) of secton 2 of the Code, as added by the Senate amend-
ment, woud requre every ndvdua (other than a nonresdent aen) havng
net earnngs from sef-empoyment of 00 or more for the ta abe year to
te a return contanng such nformaton for the purpose of carryng out the
provsons of the subchapter mposng the ta on sef-empoyment ncome as
the Commssoner of Interna Revenue, wth the approva of the Secretary of
the Treasury sha by reguatons prescrbe. Such a return woud ba con-
sdered a return requred under secton 1(a), and the provsons appcabe to
returns under secton 1(a) woud be appcabe to such return. owever,
the ta on sef-empoyment ncome, n the case of a |ont return of husband
and wfe, s the sum of the ta es computed on the separate sef-empoyment
ncome of each spouse. Wth respect to the ta on sef-empoyment ncome,
the requrement of secton 1(b) that n the case of a |ont return the ta
s computed cn the aggregate ncome of the spouses s not appcabe. The
conference agreement adopts the Senate provson.
Recepts fob mpoyees
The fate amendment contaned a provson reatng to recepts for em-
poyees, whch s smar to the e stng secton 102 of the Code, reatng to
recepts for ncome ta wthhed (the Form W-2 furnshed to empoyees). The
provson woud supersede secton 102 , and secton 1 03 (reatng to empoyee
recepts for soca securty ta wthhed), of the Code wth respect to wages
pad after December 31, 10 0, and woud provde for one recept whch woud
gve the empoyee fu nformaton (1) as to hs wa cs sub|ect to empoyee
soca securty ta , and the amount deducted and wthhed from hm as such
ta , and (2) as to hs wages sub|ect to ncome ta wthhodng and the amount
deducted and wthhed as such ta . The ouse b contaned no comparabe
provson. The conference agreement, by addng a new secton 1033 to the Code,
adopts the provsons of the Senate amendment, reatng to recepts, wth
conformng amendments to reect the emnaton of the Senate provsons
reatng to combned wthhodng.
The Senate amendment contaned a provson, reatng to penates, whch
corresponds to the e stng secton 1020 (a) and (b) of the Code. The amend-
ment provded penates appcabe n the case of a frauduent statement and
n the case of a faure to fe a statement requred under the provson dscussed
n the precedng paragraph. The provson was appcabe wth respect to
wages pad after December 31, 10 0. The ouse b contaned no provson
wth respect to ths matter. The conference substtute, by addng a new secton
103 to the Code, adopts the provson of the Senate amendment.
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377
Speca Refunds Cbemtabe ganst Income Ta
The Senate amendment authorzed the Commssoner of Interna Revenue
under reguatons to permt speca refunds to be taken by the ta payer as a
credt aganst hs ncome ta . The Senate amendment amended secton 3212(a)
of the Code by authorzng the Commssoner of Interna Revenue, wth the
approva of the Secretary of the Treasury, to prescrbe r. fatons whch woud
permt the empoyee-ta payer to cam credt aganst hs ncome ta abty
under chapter 1 of the Code for empoyee soca securty ta wthhed on hs
wages n e cess of 3,000 receved durng the caendar year by reason of hs
empoyment by two or more empoyers. Speca refunds so credted wroud
be treated for a purposes n the same manner as amounts wthhed as ta
under subchapter D of chapter 9 of the Code. Ths provson of the Senate
amendment s ony appcabe wth respect to speca refunds of empoyee
soca securty ta on wages pad after December 31, 19 0. Nor may speca
refunds be camed as a credt aganst the ta for any ta abe year begnnng
before anuary 1, 19 1.
The ouse b contaned no comparabe provson. The conference agreement
adopts the anguage of the Senate provson.
Perods of Lmtaton on ssessments and Refunds
Under e stng aw, the perods of mtatons on the ta es mposed by chapter
9 are prescrbed n secton 3312 of the Interna Revenue Code, reatng to assess-
ments and coectons, and secton 3313, reatng to refunds and credts. In
genera, those sectons provde a -year perod of mtaton on both assessments
and refunds, nnd a -year perod for brngng a proceedng n court for coecton
wthout assessment. On the other hand, the genera rue of the ncome ta s
that assessment must be made and refund must be camed n the 3-year perod
after the return s fed, e cept that f no return s fed refund must be camed
wthn 2 years after the ta s pad, and n any event refund may be camed
wthn such 2-year perod. The Senate amendment provded speca perods of
mtaton smar to those provded for ncome ta n the case of those ta es
under the Federa Insurance Contrbutons ct, the ncome ta wthhodng pro-
vsons, and the combned wthhodng provsons, whch are coected and pad
under a return system. The ouse b contaned no provson wth respect to
ths matter. The conference agreement adopts the provsons of the Senate
amendment, wth conformng amendments to refect the emnaton of the pro-
vsons reatng to combned wthhodng.
The conference agreement provdes, by nsertng new sectons 163 and 1636
n chapter 9 of the Code, speca perods of mtaton whch are appcabe to
such of the ta es under the Federa Insurance Contrbutons ct, and the ncome
ta wthhodng provsons, as are coected and pad under a return system.
These provsons are n eu of the provsons of sectons 3312 and 3313 wth
respect to those ta es. owever, the provsons of sectons 3312 and 3313 w
be appcabe to any ta es mposed by the Federa Insurance Contrbutons ct
and subchapter D of chapter 9 of the Code (reatng to ncome ta wthhodng)
whch the Commssoner of Interna Revenue may requre to be coected and
pad, not by makng and fng returns, but by stamp or by other authorzed
methods. The perods of mtaton prescrbed by sectons 103 and 1630 are
measured from the date the return s fed, whch date s sub|ect to the concusve
presumpton descrbed n the ne t sentence. Returns for any perod n a caendar
year, such as quartery returns, whch are fed before March 1 of the succeedng
caendar year, are deemed fed (and ta pad at the tme of fng such returns
s deemed pad) on March 1 of such succeedng caendar year, so that the perod
of mtatons wth respect to the ta for any part of a caendar year w run
unformy from a date n the succeedng year whch corresponds to the fng
date for ncome ta returns.
The perods of mtaton prescrbed by sectons 163 and 1636 w be app-
cabe ony to ta es mposed wth respect to remuneraton pad durng caendar
years after 19 0. The ta es under chapter 9 mposed wth respect to remunera-
ton pad durng any caendar year before 19 1 w contnue to be sub|ect to
sectons 3312 and 3313.
Mtgaton of ffect of Statute of Lmtatons, tc.
The Senate amendment woud add to the Code a new secton (secton 3 12),
not ncuded n the ouse b, reatng to the mtgaton of the effect of the
923S.30- 1 2
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37S
statute of mtatons and other provsons n ease of reated ta es under dfferent
chapters. Ths secton s made necessary by the fact that ad|ustments to the
wa - Ps under the Federa Insurance Contrbutons ct may, by reason of the
effect of such wages on the 3,000 mtaton appcabe n determnng sef-
empoyment ncome, affect the ta under the Sef- mpoyment Contrbutons ct,
and by reason of the fact that an tem of Income may be erroneousy reported
as ta abe under one ct when It shoud have been ta abe under the other
ct. If ad|ustment under ony one of the two cts s prevented by the statute
of mtatons or any other aw or rue of aw (other than secton 3701 of the
Code, reatng to compromses), then the ad|ustment (that s, the assessment
or the credt or refund) otherwse authorzed under the one ct w refect
the ad|ustment whch woud have been made under the other ct but for such
aw or rue of aw. The conference agreement adopts the anguage of the Senate
amendment.
Coecton of Ta es n ron Isands and Puebto Rco
The ouse b and Senate amendment both provded that, notwthstandng
any other provson of aw respectng ta aton n the rgn Isands or Puerto
Rco, n ta es mposed by the Sef- mpoyment Contrbutons ct and the
Federa Insurance Contrbutons ct sha be coected by the ureau of Interna
Revenue under the drecton of the Secretary of the Treasury and sha be pad
nto the Treasury of the Unted States as nterna revenue coectons. Ths
provson s retaned n the conference agreement. In addton, the conference
agreement provdes that a provsons of the nterna revenue aws of the Unted
States reatng to the admnstraton and enforcement (such as the provsons
reatng to the ascertanment, return, determnaton, redetermnaton, assess-
ment, coecton, remsson, credt, and refund) of the ta mposed by the Sef-
mpoyment Contrbutons ct. ncudng the provsons reatng to The Ta
Court of the Unted States, and of any ta mposed by the Federa Insurance
Contrbutons ct sha, n respect of such ta , e tend to and be appcabe n the
rgn Isands and Puerto Rco n the same manner and to the same e tent as
f the rgn Isands and Puerto Rco were each a State, and as f the term
Unted States when used n a geographca sense ncuded the rgn Isands
and Puerto Rco.
Combned Wthhodng of Income and mpoyee Soca Securty Ta es
The Senate amendment provded under certan condtons for the combned
wthhodng of the ncome ta at source on wages under subchapter D of chapter
9 of the Code and of the empoyees ta under the Federa Insurance Contrbu-
tons ct. The ouse b contaned no provson wth respect to combned
wthhodng. The conference agreement contans no such provson.

D NC S TO ST T UN MPLOYM NT FUNDS
The Senate amendment contaned a provson, not n the ouse b, makng
operatve unt December 31, 19 1, tte II of the Soca Securty ct provdng
for advances to the accounts of States n the Unempoyment Trust Fund. The
conference agreement adopts the Senate provson.
S R IC S FOR COOP R TI S PRIOR TO 19 1
The Senate amendment provded that wages pad to an ndvdua, for servces
performed pror to 19 1 n the empoy of a farmers cooperatve shoud be
deemed to consttute remuneraton for empoyment for beneft purposes f (1)
the empoyer was a farmer cooperatve wthn the meanng of secton 101(12)
of the Interna Revenue Code; (2) the servces consttuted agrcutura abor
wthn the meanng of secton 209(1) of e stng aw and the correspondng
secton of the Interna Revenue Code and, e cept for such sectons, woud have
consttuted empoyment under e stng aw; (3) the empoyer pad the ta es
Imposed by sectons 1100 and 1 10 of the Interna Revenue Code wth respect to
the remuneraton pad for the servces upon the assumpton that the servces dd
not consttute agrcutura abor; and ( ) no refund of such ta es had been
obtaned. The ouse b contaned no comparabe provson. The conference
agreement adopts the Senate amendment.
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379
C RT IN R INCORPOR TIONS PRIOR TO 19 1
The Senate amendment provded certan mted reef from the ta es under
subchapters and C of chapter 0 of the Interna Revenue Code, where a corpora-
ton ncorporated under the aws of one State s succeeded by another corporaton
ncorporated under the aws of another State. There was no correspondng
provson n the ouse b. Th e conference agreement adopts the provsons of
the Senate amendment. The reef s appcabe ony n the case of successons
takng pace at some tme durng the perod from anuary 1, 19 0, to December
31, 1930, both dates ncusve. If a of the condtons specfed n the provson
are met, the successor may count toward the . 3,000 mtaton n the defnton of
wages under such subchapters, before appyng such mtaton to remuneraton
pad by the successor to ts empoyees n the caendar year n whch the suc-
cesson takes pace, the amount of the ta abe wages pad by the predecessor n
such caendar year to the same empoyees, as though such wages pad by the
predecessor had been pad by the successor; and, sub|ect to the appcabe
statutes of mtaton, the successor may be entted under the provson to a
credt or refund, wthout nterest, of certan ta es (together wth any nterest
or penaty thereon) pad by t wth respect to certan remuneraton whch t
pad durng such caendar year. The credt or refund s mted to empoyer ta
under secton 1 10 of subchapter and empoyer ta under secton 1000 of sub-
chapter C.
PRO ISIONS OP ST T UN MPLOYM NT
COMP NS TION L WS
The Senate added to the ouse b a new secton 0 reatng to fndngs under
secton 1603 of the Interna Revenue Code and under secton 303(b) (1) of the
Soca Securty ct. The conference agreement adopts the Senate amendment
n ths respect. The present authorty of the Secretary of Labor under secton
1603 of the Interna Revenue Code and secton 3011(b) of the Soca Securty ct
s not chanaed but woud merey be deayed n operaton by provdng:
(1) That no fndng sha be made under secton 1003(c) of the Interna
Revenue Code that a State aw no onger contans the provsons specfed
n subsecton 1003(a) uness the State has amended ts aw;
(2) That a fndng under secton 1003(c) of the Interna Revenue Code
sha become effectve on the nneteth day after the Governor of a State
s notfed thereof uness the State aw s sooner amended to compy sub-
stantay wth the Secretary s nterpretaton of the appcabe provson of
secton 1003(a), thus, where crcumstances requre, gvng retroactve effect
to the fndngs so as to nvadate any ntervenng temporary certfcaton to
the Secretary of the Treasury and at the same tme enabng the State to act
n the nterm to amend ts aw;
(3) That no fndng that the State s fang to compy substantay wth
the requrements of secton 1003(a)( ) of the Interna Revenue Code sha
be based on an appcaton or nterpretaton of State aw wth respect to
whch further admnstratve or |udca revew s provded for under the
aws of the State, thereby ensurng that no fndng may be made uness
further appea or revew s mpossbe n the partcuar case;
( ) That there sha be no fndng under secton 303(b) (1) of the Soca
Securty ct unt the queston of enttement to benefts s decded by
the hghest |udca authorty gven |ursdcton under State aw.
The amendment aso permts any costs of tgaton to State beneft camants,
f pad by the State, to be ncuded as part of the cost of admnstraton to be
pad for from granted funds.
The conference agreement s ntended as a temporary measure of a stop gap
nature pendng ree amnaton by the approprate commttees durng the ne t
sesson of Congress of the whoe fed of unempoyment nsurance egsaton to
ascertan the desrabty of approprate permanent egsaton.

R. L. DOUG TON,
W. D. MILLS,
. Sdney Camp,
Dane . Reed,
Rot O. Woodruff,
T o f s . enkns,
Managers on the Part of the ouse.
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3 0
19 0-2 -13 G
R NU CT OP 19 0
ouse of Representatves Report No. 2319, ghty-frst Congress, Second Sesson
une 23, 19 0
Mr. Doughton. from the Commttee on Ways and Means, submtted the foowng
report to accompany . R. 920 :
The Commttee on Ways and Means, to whom was referred the b ( . R.
. 920) to reduce e cse ta es, and for other purposes, havng consdered the same,
report favoraby thereon wthout amendment and recommend that the b do pass.
I. Genera Statement
The b provdes for substanta reductons n war e cse ta es amountng to
appro matey 1,010 mon and contans provsons whch make up for the oss
of revenue resutng from the e cse ta reductons. fter the effect of these
reductons on ncome ta es s taken nto consderaton, the net reducton n e cses
s ony 910 mon. The Federa budget as presented by the Presdent ndcated
a defct for the fsca year 19 1 and your commttee s of the opnon that the
defct shoud not be ncreased n ths perod of hgh busness actvty but rather
that every effort shoud be made to emnate the defct at the earest practca
date.
The war e cse ta es have been borne by our peope for a perod of 9 years,
fve of whch, ncudng ths year, are after the cessaton of hosttes wth both
Germany and apan. In the Revenue ct of 19 reductons were made In cor-
poraton ncome ta es, the corporate e cess profts ta was repeaed, and ndvd-
ua ncome ta es were reduced. Further reductons were made n the ndvdua
ncome ta es In the Revenue ct of 19 . owever, the e cse ta es are st
n effect at ther wartme eves.
The need for e cse ta reef was caed to the attenton of the Congress
by the Presdent of the Unted States n hs message of anuary 23, 1900. That
message ponted out that
The e cse ta es are st at substantay ther wartme eves. Some are de-
pressng certan nes of busness. Some burden consumpton and fa wth
partcuar weght on ow-ncome groups. St others add to the cost of vng by
ncreasng busness costs.
The b provdes for reductons n the e cse ta es, ncudng those on the
transportaton of property, transportaton of persons, teephone and teegraph
communcatons, the reta ta es on |ewery, toet preparatons, uggage and furs,
admssons and cabarets, and many of the manufacturers e cse ta es. It aso
makes mmedate correctons of numerous dscrmnatons whch have deveoped
n the e cse ta fed. Tour commttee has not restrcted the e cse reductons to
ta es where the rates were Increased n the Revenue ct of 1913. Increases
were aso made durng 19 1 and 19 2 whch are equay deservng of consderaton
snce they were made under wartme condtons.
Your commttee attempted to recoup, by the cosng of oophoes, as arge a
porton of the oss due to e cse reducton as possbe. The oophoe-cosng meas-
ures contaned n your commttee s b repace more than haf of the revenue
ost n the e cse reductons. The baance s accounted for by an ad|ustment n
the corporate ncome ta rates. s a resut there w be no permanent oss of
revenue under your commttee s b.
For the ne t years there w be a substanta not ncrease n coectons as a
resut of the ncuson n the b of a provson graduay cuttng down the ength
of tme durng whch corporatons may deay the payment of ther ta es beyond
the cose of the year n whch the ta abty was ncurred. In the fsca year
19 1 coectons under the b w e ceed those under e stng aw by more than
haf a bon doars, and the recepts n th years 19 2- w be substantay
arger.
It s estmated that n a fu year s operaton the offsettng revenues provded
under your commttee s b appro matey w baance the 1,010 mon e cse
ta reducton. The recepts from the corporate and ndvdua ncome ta es w
ncrease by 100 mon as a resut of the effect of the e cse ta reducton on the
voume of snes and the busness e pense deductons n the ta ed ndustres.
Thus, the net oss under the e cse ta es n a fu year of o eraton s n fact
ony 910 mon. The offsettng revenue-rasng provsons contaned n ths
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b are estmated to yed about 900 mon n a fu year of operaton. There-
fore, n the ong run there w be no net oss of revenue from ths b.
In the fsca year 19 1 the revenue whch w be pcked up under the b e -
ceeds substantay the reducton n e cse ta es. It s e pected that the e cse
ta reductons n such year, after takng nto account the antcpated ncrease
n ncome ta es, w amount to 670 mon. The revenue ncreases under the
b w amount to 1,21 mon, takng nto account the provson for the
speed-up of corporate and certan other ta payments, eavng a net addtona
revenue of mon.
The ma|or tems accountng for the addtona revenue are wthhodng on
dvdends, the changes n the ta treatment of chartabe and educatona n-
sttutons, the revson of the ta on fe nsurance companes, the change n the
treatment of osses from the sae of busness assets, the reducton n the nterest
rate on ta refunds, and the ncreases n the corporate rate. The effect n a fu
year s operaton of the oophoe-cosng amendments contaned n your commt-
tee s b s 6 mon, nnd the fu-year effect of the change n the corporate
rates s 33 mon.
Tour commttee beeves that the corporate ncome ta s the east ob|ectonabe
source for the addtona revenues whch must be rased by ncreasng rates.
Corporatons receved the argest ercentage ta reductons snce the end of the
war. Ther profts have been at very hgh eves for some tme and are trendng
upward. Moreover, the corporate rate ncrease s moderate n character, averag-
ng ess than 2 percent of the ta abe corporate ncome, after aowance s made
for the emnaton of the notch rate. Furthermore, there w be no ncrease
for corporatons wth ta abe ncomes of ess than appro matey 107,000 and
corporatons wth ncomes between ,000 and appro matey 167,000 w
have ther ta es decreased.
For the fsca year 19 1, the oophoe-cosng measures w ncrease ta co-
ectons by 23 mon; the ncrease n corporate rate w produce 170 mon,
and the acceeraton of payments of ta es on corporatons, trusts, and certan
nonresdent aens w ncrease the 19 1 coectons by 10 mon. There aso
w be substanta addtona coectons n the fsca years 19 2 through 19 ,
when the pan for speedng up the coecton of the corporate ncome ta s
operatve.
Tabe I. stmated revenue effect of commttee b
Increase ) or decrease ( ); In mons of doars
dse ta reducton:
Reducton before ad|ustment for Increased ncome ta es
Increase n come a , resutng from e cse ta reducton
Net e cse ta reducton
Offsettng addtona revenues and other ad|ustments:
Wthhodnft ta on dvdends
Chartabe trusts, famy wundatons, educatona nsttutons, etc.
Msceaneous oophoes etc.
Percentage depeton
Lfe nsurance companes . -
Interest rate on refunds
Corporate rate changes
cceerated payment of ncome ta es:
Corporatons
Trusts and nonresdent aens
Tota net offsettng addtona revenues
Tota net change
ssumng that e cse ta changes become effectve on Sept. 1, I960.
No change h ta abtes.
Fsca year
1961
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II. cse Ta Reductons
( ) SUMM RY
The reductons n e cse ta es are dvded under your commttee s b among
the varous casses of e cse ta es n the foowng manner:
Loss n e cse revenue

Reta e cse ta es
In a u year
In fsca. year
01 operaton
ata
M r-tw of
Mon a
doars
doar)
236.
172.1
20 o
132. -
Manufacturers a.tc .
19 .
12 . 2
117.0
SI.
2 0. u
160.1
21.0
11.
Tota __ ... __ ... ...
1,010.0
660. e
Tnbe II, appearng on page 391, shows the e cse tn reductons n deta.
Tabe III on page 39S compares tota e cse ta revenues under present aw wth
those under the b.
Generay, the e cse ta changes w become effectve on the 1st day of the frst
month whch begns more than 10 days after the date of enactment.
( ) RF.T II. CIS T S
(1) R T C NG S
The present ta rate on a tems sub|ect to reta e cse ta es s 20 percent
of the reta prce. There are ta es on four groups of such tems at the present
tme: uggage; |ewery, watches and cocks; furs; and toet preparatons.
Your commttee s b reduces the rate under a of these from the present 20
percent to 10 percent of the reta prce. The commttee has aso made certan
ad|ustments n the tems sub|ect to these reta ta es where t has found that
Inequtes or unusua hardshp e sts.
The present 20 percent reta e cse ta es are among the heavest now m-
posed. Snce they are eved on the reta rather than the manufacturers prce,
they are, n fact, anywhere from 30 to more than 100 percent hgher than a 20
percent manufacturers e cse ta woud be. Your commttee beeves that
e cse ta rates of ths sze are undesrabe n a peacetme economy. It aso fnds
that the ta es on |ewery, furs, and uggage are havng a serous effect upon
the saes and profts of the manufacturers and seers of these tems and upon
empoyment n these ndustres. Your commttee has been advsed that the re-
ducton n these ta es w be refected n ower prces to the consumer, whch
shoud, n turn, ncrease the voume of saes and empoyment.
(2) C NG S IN T T S
s prevousy ndcated, certan ad|ustments have aso been made n the ta
base upon whch these reta e cses are eved.
(a) Luggage.
In the case of the uggage ta , purses, handbags, pocketbooks, waets, b-
fods, and card, pass, and key cases are e cuded from the base. None of these
tems were sub|ect to the ta on uggage pror to the Revenue ct of 19 3. More-
over, those n the ower ncome groups purchase the great buk of the ades
handngs now produced. Therefore, ths represents a partcuary burdensome
ta .
Your commttee aso emnates, for admnstratve reasons, certan other
tems from the base of the uggage ta . The so-caed basket cause n the
Revenue ct of 19 3 e tended the ta on uggage to a wde msceany of tems.
Ths cause reads as foows:
(3) Toet cases and other cases, bags, and kts (wthout regard to sze, shape,
constructon, or matera from whch made) for use n carryng toet artces or
artces of wearng appare.
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Of a these tems ony ftted toet cases were prevousy ta ed under the
manufacturers ta on uggage. Ths basket cause sweeps n under the ta
many tems such as cardboard comb cases, cardboard fngerna-fe cases and
canvas bags, whch do not cosey resembe the eather goods upon whch the
ta was ntay Imposed. The basket cause has presented nusance probems
both for the ta payers and for the ureau of Interna Revenue.
Your commttee has remeded ths stuaton by removng the ta on a of the
tems n the basket cause e cept toet cases, whch were ta ed as uggage before
the war.
(6) ewery.
Your commttee as aso e cuded certan tems from the ta on |ewery.
Under e stng aw watches seng for not more than 6 and aarm cocks re-
tang for not more than have a ta rate of 10 percent nstead of 20 percent.
Ts can be attrbuted to the fact that ne pensve watches and aarm cocks
were beeved to represent necesstes and a ta on them was beeved to be
burdensome. Therefore, your commttee, n reducng the genera 20 percent rate
on |ewery to 10 percent, has removed the e stng 10 percent ta on these watches
and aarm cocks. Your commttee aso e empts cocks other than aarm cocks
retang for not more than snce these are aso necesstes.
It has been caed to the attenton of your commttee that handcraft or hobby
pro|ect kts consstng of unassembed parts of ne pensve |ewery are presenty
beng sub|ected to ta . Snce these tems are used prmary by chdren s or-
ganzatons and handcapped groups, your commttee has e empted them when
the kt s sod for not more than 10 cents.
t the present tme where fountan pens and pencs have caps whch are
ornamented wth precous metas and where ppes wth stems or bows are
smary ornamented, the entre pen, penc, or ppe Is sub|ect to the |ewery ta .
It s, of course, desrabe to ta the ornamented part as |ewery, and your com-
mttee beeves that t s practcabe n the case of pens, pencs, and ppes, to
mpose the |ewery ta ony on the reta vaue of the ornamented part. For
that reason your commttee has amended the |ewery tu to provde that n the
case of such artces the ta sha appy ony to the reta vaue of the ornamented
tap, bow, or stem, f such parts have a separate reta prce.
It has been caed to the attenton of your commttee that dscrmnaton e sts
n the case of certan advertsng sgns contanng cocks. The effect of e stng
aw frequenty s to ta as cocks certan tems whch are more propery cassfed
ns advertsng sgns. Your commttee remedes ths stuaton by ta ng as cocks
ony advertsng cock sgns where the vaue of the cock parts (movements,
hands, and numeras), represents more than 30 percent of the tota manu-
facturers cost of such advertsng cock sgns.
(c) uetnr saes.
Under e stng aw the ta on |ewery and furs appes to aucton of such
tems ony when the aucton takes pace n, or s conducted for, a reta estabsh-
ment. Otherwse artces sod at an aucton do not quafy as artces sod at
reta. s a resut, especay n the case of |ewery, many auctons are hed where
ta -free saes are made to ndvduas ntendng to use or wear the |ewery
themseves. Ths consttutes unfar competton wth the ordnary |ewery re-
taer who must charge the 20 percent ta . Your commttee s b treats as re-
ta saes artces sod at aucton wth an e empton of 100 for tems auctoned
n a prvate home. It shoud be ponted out that the queston of od or new
|ewery or furs Is not nvoved, snce under e stng aw a ta s mposed on
ether type of sae.
(d) Toet preparatons.
Three changes are made n the base of the ta on toet preparatons.
aby os, powder, otons, and other toet artces are e empted from ta
nness they are advertsed or sod as beng usabe by aduts. Your commttee
beeves that these tems fa wthn the category of necesstes and shoud not be
sub|ect to ta .
The second change e empts aromatc cachous from the ta on toet prepara-
tons. n aromatc cacbou s an aromatc peet such as Sen Sen made of corce,
cashew nuts, gum, etc., whch s chewed for the purpose of sweetenng the breath.
romatc cachous are more neary ke mouth washes and canded mnts than ke
the e ternay apped toet preparatons whch comprse the rest of the artces
under the toet preparatons ta . Thus, the ta on aromatc cachous paces
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them at a compettve dsadvantage wth nonta ed artces purchased for smar
use. so they are often sod n candy stores, confectoneres and other shops
whch do not hande any of the other artces sub|ect to the toet preparatons
ta , wth the resut that the propretors of these stores are burdened wth the
requrement of coectng and remttng neggbe amounts of ta .
The thrd change e empts from ta toet preparatons purchased by barber
shops and beauty parors for use n these estabshments. t the present tme
these tems are sub|ect to ta at the tme purchased by the barber shop or beauty
paror. Toet preparatons purchased for resae to customers are not ta abe
unt sod and the reta estabshment s requred to fe a certfcate that such
tems w not be used n the estabshment. Ths has resuted n consderabe
confuson among the barber shop and beauty paror operators. Your commttee s
b emnates ths probem by repeang the ta on toet preparatons purchased
by barber shops, beauty parors, and smar estabshments f ntended to be used
n such estabshments. Not ony w ths remove confuson n the present
appcaton of the ta , but t w aso take out of the ta base tems whch repre-
sent part of the barber shop or beauty paror operator s cost of dong busness.
13) R NU FF CT
The revenue effect of the commttee s acton wth respect to the reta e cse
ta es s shown n the foowng tabuaton, both wth respect to the oss whch It
s estmated w be ncurred when the reducton becomes fuy effectve and n
the fsca year 19 1, when the reductons w be ony partay effectve:
17n mons ot doars
Ta
In a u year
o operaton
In f-ca year
Lupsmtre _
N.t
10 . 0
22. C
SO. 0
3.3
7 . (
1 .;
Toet preparatons
ss.;
Tota
236.6
172.1
(C) G N L DMISSIONS ND C R TS
(1) T C NG S
The ta on genera admssons under your commttee s b s reduced from
20 percent to 10 percent of the admsson prce. The ta on cabarets, roof
gardens, etc., s reduced from 20 to 1 percent. The ta es for the use or ease of
seats or bo es and on the addtona prce of tckets purchased away from the
pace of amusement have not been changed by your commttee and reman at
the e stng 20 percent rates.
The reducton n the ta on genera admssons w restore the rate n effect
pror to the ncrease made by the Revenue ct of 19 3. It s beeved that a hgh
proporton of these admssons are pad by ndvduas wth modest ncomes,
whch means that ths ta s one of the reatvey more burdensome e cses.
Ths s not true of the ta es on bo seats and on the addtona prce of tckets
purchased away from the pace of amusement, whch are no reduced by ths b
Moreover, t s recognzed that there has been growng resstance on the part of
the genera pubc to the present hgh admssons prces whch ncude the gen-
era admssons ta .
The present rates on admssons are havng a serous effect on smn-theater
owners and other amusement operators throughout the country. Ths s partc-
uary true because of the competton they now receve from rado and tee-
vson. It was stated to the commttee by representatves of these ndustres
that the reducton n the admssons tu w resut n owerng prces and thus
stmuate attendance at paces of amusement.
The present 20 percent ta on cabarets, roof gardens, etc.. s one of the hgher
e cse rates now mposed. Your commttee s b redu. ts ths rate from 20 to
1 percent. It s beeved that ths s as great a reducton as shoud be made
at ths tme because of the need for revenue.
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(2) C NG S IN T T S
Tour commttee s b nso makes three other changes n the admssons ta es.
The b e empts admssons when a the proceeds nur . to nonprot regous,
educatona, and chartabe nsttutons; communty-supported symphony or-
chestras ; nonproft cooperatve or communty-center moton-pcture theaters;
natona guard organzatons, Reserve offcers organzatons and veterans or-
ganzatons ; and poce or fre departments, and funds set up for the beneft of
ther members and ther dependents. Your commttee ntends that the term
educatona organzatons be construed to ncude opera companes where
such organzatons are not run for the purpose of makng a prott. owever,
the b does not e empt admssons to wrestng and bo ng matches; carn-
vas, rodeos or crcuses where professonas partcpate for compensaton; or to
athetc contests uness the proceeds nure e cusvey to the beneft of eemen-
tary or secondary schoos. The b aso e empts admssons to nonproft agr-
cutura fars and to concerts conducted by nonproft cvc assocatons.
dmssons to swmmng poos and other paces provdng factes for physca
e ercse are aso e empt under the b f operated by a governmenta unt. The
b aso contans a provson whch has the effect of reevng any State or
potca subdvson thereof of abty for a faure to coect the admssons
ta wth respect to a swmmng poo or bathng beach pror to anuary 1,
19 0.
The second change n the admssons ta es reates to free or reduced rate
admssons. Under e stng aw persons admtted free or at reduced rates
are requred to pay the same amount of ta as a person who s charged the
reguar admsson prce, e cept n the case of an empoyee, a muncpa offcer
on offca busness, a chd under 12 or (f admsson s free) a hosptazed
servceman or veteran. It does not appear that the admnstraton of the ta
s factated, by ta ng free admssons and ta ng reduced admssons at the
estabshed prce. Moreover, ths s a source of rrtaton to the pubc and s
nequtabe to the amusement operators who desre to have reduced prces for
speca groups. The b, therefore, e empts from the admssons ta free ad-
mssons, and where persons are admtted at reduced rates the ta s mposed
ony on the amount actuay pad. Ths change does not appy to admssons
to horse and dog races.
The thrd change n the appcaton of the admssons ta reates to the app-
caton of the cabaret ta to barooms and dance has. Your commttee has
found that eome courts have construed the cabaret ta to appy n the case of
barooms and dance has merey because t was possbe to purchase ncdenta
refreshments, servces, or merchandse n such paces. The commttee b pro-
vdes that the cabaret ta sha not be apped n such cases.
The revenue effect of the commttee s acton wth respect to the admssons
ta ea s shown n the foowng tabuatons, both wth respect to the oss whch
t s estmated w be ncurred when the reducton becomes fuy effectve and
n the fsca year 19 1 when the reductons w be ony partay effectve:
(S) R NU FF CT
In a fu year In fsca year
of operaton 19 1
Genera admssons.
Mons of
doars
Mons of
doars
Cabarets, roo; gardens, etc.
Tota
192.0
9.0
126.
6.0
201.0
132.
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(D) M NUF CTUR RS CIS T S
Your commttee s b provdes for ta -rate reductons n the ease of seven
of the manufacturers e cse ta es and for ma|or revsons n the bases of two
of the other manufacturers e cse ta es. The rates under present aw and
under your commttee s b for the seven e cses where the rates are changed
are as foows:
Ta es
1. Photographc apparatus:
Cameras and camera enses.
Fm
2. Tros and nner tubes:
Tres
Tubes
3. utomotve parts or accessores.
. Musca nstruments
. Iousphod type refrgerators
f. usness and store machnes
7. Matches, ordnary
Present aw rates
2 percent..
1 percent..
cents per pound.
9 cents per pound.
percent
10 percent
10 percent
10 percent
2 cents per 1,000...
10 percent.
10 percent.
3 cents per pound.
O cents per pound.
3 percent.
percent.
7 percent.
crcen.
1 cent per 1.000.
The two addtona ta es n whch substanta chances are made n the ta
base arc those on sportng goods and eectrc, gas, and o appances. so n
the case of two of the ta es n whch rate changes are made, photographc
apparatus, and refrgerators, subs-.anta revsons are made n the tems ncud-
be n the bases of the ta es.
but one of the rate reductons n the manufacturers e cses made by your
commttee s b represents a reducton of appro matey one-haf of the percent-
age-pont ncrease made snce 19 0. The one e cepton s the ta on photo-
graphc apparatus. In ths case the ta on cameras and camera enses s reduced
by consderaby more than haf of the wartme ncrease, whe the ta on fms
s reduced by ony one-thrd of the wartme ncrease. ere your commttee s
b seeks to equaze the ta on cameras and fms by movng the ta rate n
both cases down to 10 percent. arge reducton n the case of cameras and
camera enses s made because ths partcuar tu s at 2 percent, a much hgher
rate than e sts n the case of amost a other manufacturers e cse ta es.
Whe t mght be desrabe to reduce a the manufacturers e cse ta es n-
creased durng the war, your commttee s abe to make reducton n ony about
haf of them because of the budgetary defct. In seectng these manufacturers
e cse ta es for reducton your commttee gave consderabe weght to the reatve
burdens mposed upon consumers.
In addton to the rate reductons, substanta revsons are made n the bases
of the ta es on photographc apparatus, sportng goods, eectrc, gas and o
appances, and refrgerators.
(1) potooraphc appa|atub
The present ta on photographc apparatus s mposed on cameras weghng
pounds or ess; enses; photographc apparatus and equpment, and any
apparatus or equpment desgned, especay for photographc purposes. so
photographc fms e cept -ray fm, photographc pates, and senstzed paper
are presenty sub|ect to ta . Dffcuty has arsen n the case of ths ta because
apparatus made by photographc manufacturers frequenty has been hed to be
desgned especay for photographc use, even when sod for nonphotographc
purposes. On the other hand, smar equpment sod by nonphotographc manu-
facturers and drecty competng wth products of the photographc manufac-
turers have been hed not to be sub|ect to the photographc ta suef n those
cases the apparatus was not desgned especay for photographc use. s a
resut your commttee s b revses the base of the ta on photographc apparatus
to e cude a apparatus and equpment e cept cameras and camera enses of
types commony used by amateurs. In a smar fashon fm of typos key
to e used for busness purposes s aso e cuded from the base of the ta .
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(2) SPORTING GOODS
The present manufacturers ta on sportng goods covers vrtuay a types
of sportng equpment. Toy or chdren-szed Items are e empted In the case of
certan types of sportng equpment. For e ampe, baseba bats are not ta ed
f they are ess than 2 Inches n ength. owever, some types of sportng goods,
such as seds and roer skates, whch are argey used by chdren, are ta ed
regardess of ther sze. number of the artces sub|ect to the sportng-goods
ta are used argey as a part of schoo and coege athetc programs. Saes for
use n the pubc schoos are e empt (as purchases by subdvsons of the State
governments) so that the net revenue from ta ng these artces s qute sma,
athough the admnstraton of the e empton mposes a consderabe burden
on the sportng-goods deaers. Moreover, noue empt saes of many of the ta ed
nrtces are argey to prvate and parocha schoos. Your commttee has re-
vsed the base of the sportng-goods ta to remove a artces whch are used
predomnanty for schoo sports and a artces whch are used predomnanty
by chdren. Ths revson removes the foowng artces from the base of the
sportng-goods ta :
asebas and other baseba equp- Lacrosse equpment
ment Mass bas
asketbas Pushbas
o ng goves and other bo ng equp- Skates
ment Snow toboggans and seds
Crcket bas and bats Soccer bas
Fencng equpment S ftba)s and other Softba equpment
Footbas and other footba equp- Track hurdes
ment autng equpment
Gymnasum equpment and apparatus oey bas and other voey-ba
ockey equpment equpment
Indoor basebas and other ndoor Water-poo equpment
baseba equpment Wrestng head harness
s a resut of the emnaton of the above tems from the sportng-goods ta ,
the ta woud contnue to appy to the foowng artces :
admnton equpment Gof cubs and other gof equpment
ard and poo tabes, bas, and cues Poo equpment
owng bas and pns Sks and sk poes
Cay pgeons Snowshoes
Croquet bas and maets Squash equpment
Cung stones Tenus equpment
Peck-tenns equpment Tabe-tenns equpment
Fshng rods and other fshng equp- Traps for throwng cay pgeons
ment
(3) L CTRIC, G S, ND OIL PPLI NC S
Tour commttee s b aso makes a substanta revson of the base of the ta
on eectrc, gas, and o appances. The foowng tems ta ed under present
aw are deeted from the base of ths ta under your commttee s b:
1. Cookng stoves and water heaters of the househod type
2. ectrc heatng pads and bankets
3. ectrc fans not of the househod or offce type
. ectrc baby botte warmers
. ectrc hand rons
6. ectrc ar space heaters, and
7. ectrc toasters of the househod type.
ectrc ar space heaters and eectrc fans not of the househod or offce type
are omtted from the base of the ta on eectrc, gas, and o appances because
the present ta Is mposed on ony some of these tems. Your commttee beeves
that to eave part of these tems n the ta base, whe others are ta -free, repre-
sents serous compettve dscrmnaton. In the case of eectrc fans not of the
househod type, for e ampe, bet-drven fans are not now ncuded In the ta
base. Moreover, t woud not be practca to ncude some of these fans
because they represent very arge and heavy ndustra equpment. owever,
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If bet-drven fans are to be e cuded from the base of ths ta , It aso appears
desrabe to remove the ta on drect motor-drven fans whch are n drect
competton wth certan of these bet-drven fans.
( ) OUS OLD-TYP R FRIG R TORS
Snce the ta on the househod type of refrgerators was frst mposed, a new
type of refrgeratng apparatus has come nto use namey, unts for the quck
freezng or frozen storage of foods. These quck-freeze unts are sod ether
separatey or wth ordnary househod refrgerators. Your commttee s b
e tends the ta on refrgerators to cover the househod type of quck-freeze unts
and apparatus. Your commttee sees no reason why an e cse ta shoud be
mposed on one type of househod refrgeratng equpment and not on another.
( ) TIR ND TU S
The present ta on tres s appcabe to a types of tres regardess of the
use for whch they are ntended. Consequenty t appes to the tres on toys,
awn mowers, baby bugges, etc. Snce the present ta s a unform cents per
pound, t represents ad vaorem rates n the case of ths type of tre of as much
ns 20 to 0 percent. Therefore, your commttee s b e empts sma tres of
these types.
The second amendment to the ta on tres and tubes provdes the same credt
In the case of tres used on automobe accessores as s now provded n the case
of tres used on new automobes and trucks. ccordngy, traer does
whch come equpped wth tres and tubes w be gven the beneft of ths
credtng devce.
(6) R UILT UTO P RTS ND CC SSORI S
The ta on automobe parts and accessores s revsed so as to e empt rebut
and recondtoned parts and accessores.
(T) R DIO R C I ING S TS
mnor revson has aso been made n the base of the ta on rado recevng
sets. communcaton or navgaton recever of the type used n commerca,
mtary, or marne nstaatons, s e empted from ths ta under the commt-
tee s b f sod to the Unted States for ts e cusve use. Ths e empton s
granted to remove admnstratve probems. No revenue s. of course, nvoved,
snce the ta n these cases today s utmatey pad by the Unted States
Government.
( ) FIR RMS
n amendment to your commttee s b e cudes from the 11 percent manu-
facturers ta on frearms those contanng an acton (breech mechansm or
recever) whch has prevousy heen used other than for testng purposes. Your
commttee s amendment s ntended to e empt from the appcaton of ths as
gunsmths who assembe guns argey from used parts.
(0) RTICL S SOLD T ROUG D L RS FOR IRCR FT IN FOR IGN TR D
Secton 3 1 of the Interna Revenue Code provdes an e empton from
manufacturers e cse ta es for artces sod for use as fue suppes, shps
stores, sea stores, or egtmate equpment on both shps and arcraft engaged n
foregn trade. owever, ths e empton may be avaed of for artces used on
arcraft ony n the case of drect saes by the manufacturer, snce the pro-
vsons aowng ta refunds after use or resae appy ony to artces used on
shps. The prncpe of the e empton for artces used on arcraft engaged n
foregn trade has aready been accepted n secton 3 1, and t does not appear
that refunds woud be any more dffcut to admnster wth respect to artces
used or resod for use on arcraft than wth respect to artces used or resod
for use on shps. Therefore, your commttee s b permts refunds of mann
facturers e cse ta es on artces used or resod for use on arcraft where a
drect sae by the manufacturer for such use woud have been e empt.
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(10) R NU FF CT
The revenue effect of the commttee s acton wth respect to the manufacturers
e cse ta es s shown n the foowng tabe:
Loss n e cse revenuo
Ta
In a fu year
o operaton
In fsca year
1961
Mhon of
doars
Mons o/
doars
39.0
2 .0
2 .
17.7
7.
.
Neggbe
9.0
0.0
GO. 0
30.0
1 .0
Neggbe
.0
Neggb o
6.0
3.6
39.0
19.
9
Neggbe
Matches, ordnary --
3.7
19 .
126.2
( ) COMMUNIC TION CIS T S
Tour commttee s b provdes for ta rate reductons n the case of the
ma|or communcaton e cse ta es. The rate reductons can be summarzed
as foows:
Ta
Rates under
present aw
Rates under
your com-
mttee s b
L Long dstance teephone or rado teephone to messages (charge more
than 2 cents)
2. Short to teephone messages (charge ess than 2 cents)
3. Loca teephone servce, resdenta - .
Percent
. Loca teephone servce, busness..
6. Leased wres, etc, -
6. Wre and equpment servce. ..
7. Teegraph, cabe, and rado dspatch, nternatona..
. Teegraph or rado dspatch, domestc
Percent
20
10
10
No change
20
No change
No change
10
The above tabuaton ndcates that the greatest ta reef s gven n the
case of domestc teegraph and rado servce. In ths case the rate s reduced
from 2 to 10 percent. Wth the present hgh ta rate, teegraph servce n
the Unted States actuay s beng operated at a defct. y substantay re-
ducng ths tar your commttee antcpates that t w be possbe to decrease
the prce now charged for teegraph messages and that as a resut the voume
of busness done w be ncreased and the proft poston of the ndustry m-
proved.
of the remanng reductons n the ta es on communcatons are of per-
centage ponts. Decreases of ths amount are made n resdenta and short to
teephone charges because your commttee beeves that teephone servce
today s a necessty to the average mercan. Fve percentage pont reduc-
tons are aso made n the ta es on eased wres and ong-dstance teephone
servce, prmary because the 2 percent rate whch now appes s among the
hghest mposed.
Tour commttee antcpates that there w be no dffcuty n determnng
whether oca teephone servce s resdenta or busness, snce the teephone
companes aready have to determne ths when chargng dfferent rates for
resdenta and busness servce.
Two revsons are made n the base of the ta on eased wres and wre
and equpment servces. speca e empton s provded n the case of the
ta on eased wres when such wres are used to furnsh educatona servces
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390
to students who are shut n ther homes or hosptas and cannot attend ther
reguar casses n schoo. n e empton s aso provded for pubc uttes
mantanng speca wres n the conduct of ther busness.
The revenue effect of the commttee s acton wth respect to the commun-
catons ta es s shown n the foowng tabe:
Loss n e c.
e revenue
Ta
In a fu year
of operaton
In fsca year
I M
Mon o/
doar,
Mons of
doUart
1. Long dstance teophone or rado teephone to messages (charge more than
7. Short to teephone messages (charge ess than 2 cents)
73.C
0.7
. Teegraph, cabe and rado dspatch, domestc and nternatona
7. Loca teephone servce, busness
.0
117.0
30.7
L
Tota
(F) TR NSPORT TION CIS T S
(1) R T C RG S
Under your commttee s b the ta on the transportaton of persons s reduced
from 1 percent of the amount charged to 10 percent. The ta on the trans-
portaton of property other than coa s reduced from 3 percent to M percent.
The ta on the transportaton of coa s reduced from cents to 2 cents per
short ton.
Tour commttee has reduced the ta on the transportaton of persons by
percentage ponts because at the present tme the 1 percent ta s one of the
reatvey hgher e cse ta rates and aso because the raroads and other forms
of transportaton have had dffcuty n mantanng ther voume of busness n
the past few years. It s antcpated that the reduced rate of ta w be refected
drecty n the prces pad for tckets by the persons usng such transportaton,
and that as a resut the use of transportaton factes w be ncreased.
The ta on the transportaton of property s a cost of dong busness to pract-
cay every producer shppng hs products to market. Moreover, t s a partcu-
ary dscrmnatory ta , snce arger ta es must be pad by those shppng greater
dstances. Thus, ths ta partcuary dscrmnates aganst producers n the
South and far West.
(2) C NG S IN T T S
Two revsons n the ta base have aso been made n the case of the ta on
the transportaton of persons. The frst of these reates to the ta on fshng
trps. mounts pad for transportaton n boats where the transportaton takes
pace for the soe purpose of fshng from the boat hnve been hed to be ta abe.
In the case of fshng-boat actvtes t s customary for the operators of such
boats to make a ump-sum charge for a fshng trp, ncudng not ony the charge
for transportaton, but aso charges for such servces as the use of fshng tacke,
a suppy of bat, food served on the boat, etc. The necessty of breakng down
ths ump-sum charge to determne the proporton of the tota whch represents
the ta abe charge for transportaton has been a dffcut probem both for the
fshng-boat operators and the ureau of Interna Revenue. Moreover, athough
fshng trps are techncay defned as transportaton, they are not generay con-
sdered so by aymen. s a resut the ta on fshng trps has bro.ght numerous
compants from sportsmen and has aso created troubesome coecton and com-
pance probems for the Government. Your commttee s b e empts from the
ta on the transportaton of persons amounts pad for transportaton by boat for
the purpose of fshng from such boat.
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391
The second revson In the base of the ta on the transportaton of persons
reates to transportaton to Puerto Rco and the rgn Isands. Under your
commttee s b transportaton to and from Puerto Rco and the rgn Isands
Is e empted from the appcaton of the transportaton-of-persons ta . Tour
commttee has taken ths acton to pace Puerto Rco and the rgn Isands n
as attractve a poston as any country n South merca In competng for tourst
trade from the Unted States.
(3) R NU FF CT
The revenue effect of the commttee s acton wth respect to the transportaton
e cse ta es s shown n the foowng tabe:
Ta
In a fu year
of operaton
In fsca year
19 1
Mons of
doar-
Mons of
doars
7
16
.0
111.2
Tota
2 0
100. 1
(O) OT R CIS T R DUCTIONS
cse ta reductons have aso been made n the case of pug and twst to-
bacco, snuff and cgars, and severa of the occupatona cense tu es. The rates
of these ta es under present aw and under your commttee b are as foows:
Ta
Ta rate under present
aw
Ta rate under com-
mttee b
1 cents per pound
oonts per pound.
Do.
do _
Dsted sprts used n the manufacture of certan non-
beverage products:
2. 0 to 20 per thou-
sand.
2 to 20 per thousand
wth changes the
ta casses.
(a) Occupatona ta n order o receve beneft of
drawback where wthdrawas arc .cs than 10
gaons per year.
(6) Net ta after drawback n the case of sprts used
n medcnes and medcna preparatons.
per year.
3 per proof gaon
2 per proo gaon.
No ta .
10 per machne per
year.
100 per machne per
year.
1 0 per machne per
owng aeys, bard and poo tabes operated wthout
charge by nonproft organzatons or governmenta
agences.
20 per aey or tabo
per year.
year.
No ta .
Certan ta es are aso made appcabe n the case of governmenta agences.
(1 TO CCO
In the case of pug and twst tobacco and snuff, your commttee has reduced
the ta rate from 1 cents per pound to cents per pound. In the case of smok-
ng and certan other tobaccos the ta remans at 1 cents per pound. Tour
commttee s b provdes for a reducton In ta n the case of pug and twst
tobacco and snuff snce these are used prmary by the ower-ncome groups
and, therefore, any ta upon them can be e pected to be hghy regressve.
The ta rate mposed on cgars under present aw s determned by the reta
prce at whch the cgars are ntended to be sod. bracket rate system s used
whch mposes the same ta per thousand cgars on cgars ntended to se at a
smar reta prce. ecause a bracket rate system s used, the ta on cgars
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392
Is not a constant percent of the reta prce. owever, on the average, the present
rate schedue appro mates a ta at 10 percent of the reta prce. Under your
commttee s b, the bracket rate system s revsed downward so that the average
rate of ta e pressed n terms of the reta prce appro mates or 6 percent.
The ta rate schedue In effect In 1939, the present rate schedue mposed by
the Revenue ct of 19 2, and the ta rate schedue under your commttee s b
are shown n the foowng tabuaton together wth ta coectons by each of
the present rate brackets for the fsca year 19 9:
To reta at
Rates per thoasand
Coectons
fsca year
19 9
More than
Not more than
1939 rates
Present rates
(mposed by
Revenue ct
0119 2)
Rates under
commttee
b
0
2 cents
2.00
2. 0
2.00
2.00
2. 0
2. 0
2. 0
3.90
3.60
.60
. 0
. 0
11.00
11.00
1 . 0
20.00
Thoutand
m
2 .- cents
3 cents
2.00
2.00
2.00
3.00
3.00
.00
6.00
.00
10. 0
10. 0
13. 0
13. 0
13. 0
3.00
3.00
.00
. OO
7.00
10.00
10.00
10.00
1 .00
1 .00
20.00
20.00
20.00
3M cents
cents
cents
6 cents
6,911
3.626
cents
6 cents
6 cents
cents
ceuts
ecnte
1 2 .92
2.3 2
2. S
cents
13 cents _
13 cents
1 cents . .
17 cents
17 cents
20 cents
23 cents
23 cents
30 cents
6, 31)
In addton to owerng the ta now In effect by appro matey one-thrd, the
revson of the bracket rates gves the cgar manufacturers greater fe bty
n shftng prces downward. Cgar saes have faen off rapdy n the ast few
years, and t s antcpated that the rate reducton provded for cgars In your
commttee s b w ncrease cgar saes reatve to other tobacco products or at
east ad the cgar ndustry n mantanng ts present reatve poston.
(2) DR W C ON DISTILL D SPIRITS
t the present tme the ta on dsted sprts s 9 a proof gaon. owever,
where the dsted sprts are used for medcnes, medcna preparatons, food
products, favors or favorng e tracts, whch are unft for beverage purposes,
a drawback of 6 s provded eavng a net ta of 3. Drawbacks are used In
these ta es rather than reducng the rate of ta , because a ower rate In these
cases mght resut n dsted sprts beng dverted to beverage purposes on
whch the hgher rate of ta shoud be pad. Usng these medcnes and medcna
preparatons as a source of revenue, however, appears to be n contradcton to
the pocy generay foowed n not mposng e cse ta es on medcnes. In part,
ths prncpe s recognzed under present aw by provdng for a drawback of a
but 3 of the ta per proof gaon. Your commttee s b ncreases the drawback
n the case of medcnes and medcna preparatons from the present G to 7
a proof gaon, eavng a net ta of 2 per proof gaon.
In order to be egbe for the drawbacks referred to above, an annua occupa-
ton ta must be pad by persons manufacturng or producng the medcnes,
medcna preparatons, food products, favors or favorng e tracts whch make
use of the dsted sprts. The purpose of these ta es s to ad the ureau of
Interna Revenue n checkng ths speca use of dsted sprts to prevent the
acoho from beng dverted to other purposes. These ta es are graduated accord-
ng to the number of proof gaons of dsted sprts wthdrawn as foows:
Wthdrawas not n e cess of 2 proof gaons, 2 ;
Wthdrawas not n e cess of 0 proof gaons, 0; and
Wthdrawas n e cess of 0 proof gaons, 100.
In practce the 2 cense has proved to be of such sze as to dscourage druggsts
and doctors who use on.y a few gaons of dsted sprts from obtanng censes
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393
In order to be egbe for the 6 per proof gaon drawback ( 7 under your com-
mttee s b). Under the b ths stuaton s corrected by addng another bracket
to the graduated-Ieense system provdng that n the case of persons wthdrawng
10 proof gaons or ess the ta sha be .
(3) COIN-OP R T D D IC S
Under present aw persons who have con-operated amusement devces on the
premses are requred to pay an occupatona ta of 10 a year for each such
machne. Ths s a fat-rate ta whch appes equay to the hghy proftabe
machnes and the ess proftabe ones. s a resut, ths ta bears heavy on
the 1-cent con-operated amusement devces snce a thousand customers a year
are requred merey to pay the 10 ta . Ths n some eases has been found to
serousy reduce or actuay emnate the proft margn of the operaton of 1-cent
amusement machnes. Therefore, your commttees b e empts these 1-cent
con-operated amusement devces from the 10 occupatona ta . One-cent gam-
ng devces are not affected by ths provson.
Under present aw the occupatona ta on gamng devces s 100 per year
per machne. Your commttee s b ncreases ths ta to 1 0.
( ) OWLIN LL YS, TC.
Operators of bowng aeys, bard and poorooms, under present aw. are
requred to pay an occupatona ta of 20 per year per bowng aey or bard
or poo tabe. ard and poo tabes n hosptas are e cepted from the ta
f the hosptas do not charge for ther use. Otherwse, the ta appes to a
aeys and tabes whch are not n prvate homes. Many groups, such as veterans
posts, and odges have these factes, partcuary bard and poo tabes, for
the use of ther members wthout charge, and where ths s the case there does
not appear to be any more occason for evyng a ta than where a person has a
bard or poo tabe n hs own home. Presumaby occupatona ta es are
ntended to be pad by ptrsons dervng ncome from the ta ed busness. Where
bowng aeys, bard and poo tabes are made avaabe wthout charge by
nonproft organzatons, or by agences of the Unted States Government, these
organzatons are not actuay engaged n the occupaton of operatng the tabes
as a trade or busness. Therefore, your commttee s b n such cases e empts
bowng aeys and bard and poo tabes from ta .
( ) FFI ING TO CCO ST MPS IN FOII IGN COUNTRI S
Provson s aso made n your commttee s b for the aff ng of nterna
revenue stamps n foregn countres to tobacco products manufactured n such
countres for mportaton nto the Unted States. For ths provson to be effec-
tve, the foregn country must provde recproca prveges to mercan manu-
facturers of these products. The aff ng of stamps n the case of cgarettes s
aready permtted under present aw. Your commttee s b smpy e tends ths
prvege to other types of tobacco products.
(6) PPLIC TION OF C RT IN T S WIT R SP CT TO GO RNM NT G NCI S
The attenton of your commttee has been caed to the fact that post e changes
unt ast ugust were not coectng the reta ta es and snce that tme have
been coectng these ta es n accordance wth the present aw as nterpreted
by the Treasury Department. Moreover, some queston has been rased as to
whether mtary e changes and other Government agences are now sub|ect
to the occupatona ta es. The bU provdes that the Unted States Government,
or any agency or nstrumentaty sha coect the reta ta wth respect to any
artces sod at reta whch are generay sub|ected to these ta es, uness saes
by such agences are specfcay e empted. smar provson n the b makes
the varous occupatona ta es appcabe n the case of these agences. Your
commttee beeves that t represents unfar competton to e empt governmenta
agences n competton wth prvate busness.
(7) R NU FF CT
The revenue effect of the commttee s acton wth respect to the ta reductons
descrbed here s shown n the foowng tabuaton, both wth respect to the oss
923 30 1 26
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39
whch t s estmated w be ncurred when the reductons become fuy effectve
and n the fsca year 19 1, when the reductons w be ony partay effectve:
Ta
In a fu year
of operaton
In fsca year
19 1
Mon of
doars
Mon of
doUart
nuf
.6
.2
1 .0
3.6
3.
12.0
Cgars (arge)
Occupatona ta requred n order to receve benefts of drawback from ds-
ted sprts used n the manufacture of certan nonbeverage products
Neggbe
2.3
Neggbe
.
3
Drawback of sprts used n medcnes and medcna preparatons
Penny-operated amusement devces .
- .0
Oamng devces
Occupatona ta es on bowng aeys, bard and poo tabes operated wth-
out charge by nonproft organzatons or governmenta agences ..
Neggbe
Neggbe
0
Tota
21. 0 | 17.
Neggbe
Tabe II. Reducton n e cse ta es under the commttee b
ates
Present aw-
Commttee acton
Loss n e cse ta
revenue (n
mons of
doars)
I
ye .r
Fsca
year
Retaers e cse ta es:
Lu usage:
Luggage, toet noses, etc
andbags, waets, key cases, etc.
Msceaneous case--, kts, bags,
etc.
ewery:
ewery n genera
atches retang for not more
than G and aarm cocks re-
tang for no; more than .
Other cocks retang for not
more than .
Certan handcraft kte f so d for
not more than 10 cents.
rtces sod at aucton at res-
dence n e cess of 100.
Fountan pens and mechanca
pencs, caps ornamented wth
precous metas, and ppes wth
stem or bow so ornamented.
dvertsng cock snus cost of
cock not more than ; 0 percent
of manufacturer s tota cost.
Furs:
Furs n genera
rtces sod at aucton at res-
dence n e cess of 100.
Cosmetcs:
Cosmetcs n genera
aby os, powders, otons, etc..
romatc cachous.
rtces used n barber and
beauty shops.
Tota, retaers e cse ta es. _
20 percent
20 percent
20 percent
20 percent..
10 percent..
20 percent ...
20 percent
empt
20 percent on tota
reta vaue.
20 percent
20 percent..
empt
20 percent
20 percent .
20 percent
20 percent
10 percent.
empt...
empt...
2.
10 percent 1
empt 1
empt
empt
10 percent....
10 percent on reta
vaue of cap, ppe
bow or stem.
empt
10 percent..
10 percent..
10 percent.
empt
empt....
empt....
10 .0
22.0
0. 0
v
See footnotes at end of tabe, p. 397.
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39
II. Reducton n e cse ta es under the commttee b Contnued
toss In e cse ta
revenue (n
mons of
doars) 1
Present aw
Commttee acton
Fu
year
Fsca
year
19 1
Ta on admssons and cabarets
d mssons:
CcrnT. ad mss.on .
Free admssons (e cept to horse
or dog races).
Reduced admssons (e cept to
borse or dog races).
ctvtes conducted by educa-
tona, regous, and chartabe
organzaton:--, agrcutura fars,
symphony and communty
concerts, muncpa swmmng
poos, etc., f earnngs do not
mure to beneft o any prvate
stockhoder or ndvdua.
Cabarets, roof gardens, etc.:
In genera
arooms where sae of re-
. reshments s ncdenta.
Tota, ta on admssons
and cabarets.
1 cent for each
cents or ma|or
fracton.
1 cent for each
cents or ma|or
fracton of vaue.
1 cent for each 6
cents or ma|or
fracton of vaue.
1 cent for each
cents or ma|or
fracton.
20 percent
20 percent
1 cent for each 10
cents or ma|or
fracton.
R cmpt
1 cent for each 10
cents or ma|or
fracton of actua.
amount pad.
empt .
192. C
1 percent.
empt
9.0
201.0
Tobacco:
Chewng tobacco:
Pue and twst.
other
Snuff
Cgars (arge) . ,
IS cent:; per pound.
1 cents per pound.
1 cents per pound.
12. 0 to 20 per thou-
sand.
cents nor pound..
No change
cents per pound .
2 to 20 per thou-
sand wth change
n ta casses.
Tota, tobacco.
Occupatona ta es:
Dsted sprts used n manufacture
of certan nonbeverarc products.
Occupatona ta n order to re-
ceve beneft of draw-bat k:
Wthdrawas of ess than 10
gaons per year.
Wthdrawas of more than 10
gaons per year.
Draw-back o sprts used n med-
cnes and medcna prepara-
tons.
musement and gamng devces:
musement devces.
Penny operated
Other_
Gamng devces.
owng aeys, bard and poo
tabes:
Operated wthout charge by non-
proft organzatons or govern-
menta agences.
Other
Tota occupatona ta es.
26 to 100 per year.
C per proof gaon..
10 per machne per
year.
10 per machne per
year.
100 per machne per
year.
20 per aey or tabe
per year.
20 per aey or tabe
per year.
per year
No change
7 per proof gaon..
empt
No change.
.2
1 .0
3.
12.0
1 0 per machne per
empt
No change -
N eg-
gbc
2,3
- .0
Neg-
gbe
19.0
Neg-
gbe
L9
-3.
-2.7 -1.6
Sec footnotes at end of tabc, p. 397.
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390
Tabe II. Reducton n e cse ta es under the commttee b Contnued
Rates
Present aw
Commttee acton
Loss In e cse t
revenue (In
mons of
doars)
Fu
year
Fsca
1931 1
Manufacturers e cse ta es:
Tre and nmT tubus:
Tres for toys, awnmowcrs, baby
bugges, etc.
Ta -pad tres or tubes sod on
certan parts or accessores.
Other tres
Other tubes
utomobe parts or accessores:
Rebut or recondtoned parts...
Other
Musca nstruments
ado recevnft sets, etc.:
Communcaton or navgaton
recevers sod to the U. S. Gov-
ernment.
Rado parts used n manufacture
of recevers sod to the U. .
Government.
other
Refrterators, etc.:
ousehod type refrgerators
uck freeze unts ---
r-condtoners
Sportng goods:
Chdren s toys and tems used
predomnanty n schoos.
Other
ectrc, gas. and o appances:
Cookng stoves and water heaters
of househod tvpe.
ectrc heatng pads and
bankets.
ectrc fans not of househod or
offce type.
ectrc baby botte warmers
ectrc hand ron
ectrc ar space heaters . .,
ectrc toasters
other
Photographc apparatus:
Cameras, apparatus and equp-
ment.
Fm
Cameras, etc.. fms aud pates,
busness type.
usness and store machnes
Frearms made by gunsmths usng
second-hand actons.
Matches, ordnary
Tota, manufacturers e cse ta es..
Ta on communcatons:
Teephone and teegraph, etc.:
Teephone or rado teephone to
messages:
Charge more than 2 cents..
Charge ess than 2 cents
Teegraph, cabe or rado ds-
patch:
Internatona
Domestc
Leased wres:
In genera ...
Certan servce furnshed to
shut-n students.
Two-way communcatons
used on servce trucks by
pubc uttes.
Wre and equpment servce.
Sec footnotes at end of tabe, p. 97.
S cents per pound...
No credtng devce.
cents per pound...
9 cents per pound...
percent
percent
percent
empt
Credtng devce
3 cents per pound.
09 cents per pound.
empt
3M percent .....
percent .
10 percent..
10 percent..
10 percent...
10 percent..,
No ta
10 percent .,
10 percent..
10 percent..
10 percent...
10 percent..
10 percent..
10 percent..
10 percent..
10 percent.,
t percent..
10 percent..
2 percent..
No change.
7 percent .
7 percent........
No change .
empt
No change.
empt
empt
empt
empt
empt....
empt
empt
No change.
39.0
2 .0
3.
1 gbe
9.0
60.0
2 .
17.7
2.
Ner-
1 percent
2 percent or 1 or-
cent.
10 percent
11 percent _.
2 cents per 1,000
10 percent.
19 percent
empt ...
percent
empt
1 cent per 1,000..
t
1 .0
C Neg-
gbe
.0
-
2 percent..
1 percent..
10 percent..
2 cent..
20 percent ..
10 percent......
No change .
10 percent..
2 percent..,
2 percent..
2 percent..
t...
pt.___
percent..
empt..
No change.
19 .
73.0
.
M
N-.:
Cbte
1.7
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397
Tabe II. Reducton n e cse ta es under the commttee b Contnued
Rates
Loss n e cse ta
revenue (n
mons of
doars)
Present aw
Commttee acton
Fu
year
Fsca
Ta on communcatons Con tnned
year
1 1
Teephone and teegraph, etc. Con.
Loca teephone servce:
1 percent
10 percent
.0
30.7
usness . ...............
No change..
Transportaton ta es:
Tota, ta on communca-
tons.
117.0
1.
Transportaton of persons:
Transportaton, seats, berths, etc.
Fshng boat trps
1 percent...
10 percent
| 7 .0
1G .0
1 percent
empt
.9
111. 2
Trave to and from the rgn
Isands and Puerto co.
Transportaton of property:
1 percent. ....
empt .
Coa.
cents per short ton
2 cents per short ton
W percent
Other
2 0.0
fO. 1
Grand tota _
1 010.0
6 0.0
These estmates take account of estmated Increases n consumpton resutng from reducton n rates
but tbey do not aow for possbe ncreases n ncome ta es.
ssumng that changes become effectve on sept. 1, 19 0, wth mnor e ceptons.
In genera, the e empton sha not appy to (1) coege athetc games, (2) pugstc matches, nr (3) car
nvas, rodeos, or crcuses n whch any professona performer or operator partcpates for compear on.
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39
Tabe III. stmated e cse-ta revenue under present aw and under the
commttee b
(Fu year bass; n mons of doars
I. Ta es whch nre reduced:
. Retaers e cse ta es:
Present
aw
Commttee
b
Reducton
n revenue
Furs
7 .0
200.0
0.0
9 .0
1 .
.0
2 .0
.0
M
10 .0
22.0
60.0
Tota, retaers e cse ta es
19.0
1R2.
236.
. Ta on admssons and cabarets.

3 1.0
3.0
1 9.0
3 .0
192.0
9.0
C. Tobacco:
2 .0
223.0
201.0
16.0
7.
.0
10.
3.3
30.0
.
.2
16.0
Tota, tobacco
67.
3. 23.7
D. Occupatona, etc., taos
10. C
13.3 -Z 7
. Manufacturers e cse ta es:
utomobe part or accessores
1 0.0
100.0
7.0
3.
0 .0
17.0
76.0
0.0
30.0
10.0
10.0
111.0
72.0
39.1
2 .0
Rado recevng sets, etc
3.
3. 1
9.0
11.0
1 .0
10.0
16.0
10.0
Necgbr
9.0
6.0
0.0
30.11
1 .0
Neggbe
.0
3.
Refrperators, etc
Sportng goods
ectrc, gas, and o appances
usness and store machnes
Matches
6.0
F. Ta on communcatons:
.-11.
3 .9
m
To teephone, teegraph, cabe, etc
730.0
2 L 0
2 7.0
206.0
710
.0
0. Transportaton ta es:
Tota, commun catons
0.0
G3.0
117.0
2 0.0
330.0
17 .0
16 .0
7 .0
1 .0
Tota, transportaton ta es
0. u
Ma
2 tt 0
II. Tae. whch arc not reduced, tota
Tota, ta es whch are reduced
2,031.
.90 .
1.621.
,90 .
,oa
7, . .0 6. 30.0
.oao
III. Sources of ddtona Revenue
( ) R ISION OF T CORPOR T R T STRUCTUR
(1) T R T R ISION
Your commttee b makes a substanta revson n the corporate rate
structure.
(a) stng aw.
For corporatons wth ta abe net ncomes of 0,000 and over, the e stng
aw provdes a 2 percent norma ta rate and a 1 percent surta rate, or a tota
rate of 3 percent. In order, however, to gve sma busness a ta advantage,
present aw provdes ower rates wth respect to ncomes of not over 2 ,000.
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399
For corporatons wth such Incomes, the norma ta , surta , and tota comhned
margna or bracket rates are as foows:
Income bracket
Norma
ta rate
Surta
rae
Tota
ta rate
Percent
Percent
Percrn
The fr t . |, OO_ _ _
s
17
10
c
2
The ne : vu )
6
0
23
2
The effectve rates on ncome In ths area of 2 ,000 and under range from 21
percent for corporatons wth ncomes of ,000 or oss to 23 percent for corpora-
tons wth ncomes of 2o,000. Snce the 3 percent rate appyng to corporatons
wth ta abe ncomes of 0,000 and over s appcabe to the entre Income n
such cases, t s necessary under present aw to brdge the Rap between 2 ,000
and 0,000 by appyng a 3 percent rate to ncome n ths area. Thrty-one
percentage ponts of ths 3 percent rate represent the norma ta and 22 per-
centage ponts represent the surta . Ths notch rate of 3 percent necessary
e ceeds the 3 percent rate appcabe to arger corporatons by 1 percentage
ponts, snce the average rate of 23 percent on a corporaton wth an ncome of
2 ,000 s 1 percentage ponts beow the 3 percent rate apped to arger
corporatons.
(6) Rates under the commttee h.
In eu of the present compcated system, whch provdes one set of rates for
corporatons wth ncomes of not more than 0,000, and another set of rates
for corporatons wth ncomes over 0,000, your commttee s b provdes for
the foowng corporate ta rate structure:
1. 2 ,000 surta e empton;
2. fat 21 percent norma ta rate; and
3. fat 20 percent surta rate.
Ths means that a corporaton wth an ncome of ess than 2 ,000 w pay a
fat 21 percent norma ta and no more. corporaton wth an ncome n e cess
of 2 ,000 w pay the foowng:
1. norma ta of 21 percent on ts entre ta abe ncome, pus
2. surta of 20 percent on that part of ts ncome n e cess of 2 ,000.
Tabes I and compare corporate ncome ta abtes and the effectve rates
under your commttee s b wth those under e stng aw. Tabe I shows the
Increases or decreases resutng from ths b.
The ta abty for ncomes of ,000 and under woud be the same as under
present aw. For ncomes between ,000 and appro matey 167,000, your
commttee s b decreases the ta abty, the ma mum decrease of 3, 00
beng reached at 0,000. For ncomes above appro matey 167,000, your
commttee s b ncreases the ta abty but the ncrease s never qute as
much as woud be produced by a smpe Increase of three percentage ponts n
the effectve rate. Thus, the tota top effectve norma ta and surta rate
never reaches 1 percent.
comparson of the combned norma ta and surta margna rates under
present aw and under your commttee s b s shown beow:
Margna rates
Surta net ncome
Present aw
Commttee
b
Percen
Percen
Not over .000 -
21
1
1
Over ,ch ) but not ovor r/ ) ___ _
23
2
S3
3
Over 2u, but not over no
Over 2.u0 . but not over 0,000
Ovor 0,000
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Tbe rate changes provded n your commttee s b w appy to ta abe years
begnnng after December 31, 10 9.
It s estmated that the corporate rate revsons made by your commttee s
b w ncrease net corporate ta coectons n a fu year of operaton by
33 mon. In the fsca year 19 1, It s estmated that there w be a net
ncrease n corporate ta coectons of 170 mon.
Tade I . Comparson of corporate ncome ta abty under present aw and
under your commttee s b
Net ncome (norma
ta and surta )
1.000..
2,0r .
3,000..
.000..
.000..
Sr.,oo..
7.000..
.000..
9,000..
10,000
1 ,001),
20,000
2 . )
30,000
tu|ooo
Combned norma ta and
surta
Present aw
210
120
630
0
1,0 0
1,2 0
1, 10
1,7 0
1,970
2,200
3,360
, 00
.7 0
. 00
1.0 0
Commttee
b
210
20
C30
M)
1,0 0
1,200
1, 70
1,0 0
1, 90
2,100
3,1 0
,200
,2 0
7,300
9,3 0
Net Income (norma
ta and surta )
0,000
,000
0.000
7 .000
100,000
M O.0O0..-.
106, 666-3
200.000
300.000....
00,000....
00.000...
7 0,000...
1.000.000..
,000.000..
10,000,000.
Present aw
Commttee
b
13,700
11, 00
10,3 0
13. 0
19,000
1 , 00
2 , 00
2 .7 0
3 .000
30.000
7,000
63.333M
6,300
63.333
76,000
77.000
11 .000
11 ,000
1 2.000
1 9.000
19D.000
200,000
2 ,000
302. 00
3U .( )
0 .000
1.900.000
2,0 ,000
3, 00,000
,09 .000
Tat.e . Comparson of effectve corporate ncome ta rates under present ate
and under your commttee s b
Net ncome (norma,
ta and surta )
surta
Present aw
Percent
21.00
21.00
21.00
21.00
21.00
21.33
21. 7
21.76
21. 9
22.00
22.33
22. 0
23.00
2 .00
31. 7
Commttee
bU
Percent
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
2 .33
2 .71
Net Income (norma
ta and surta )
0,000
7 .000 I
100,000
1 0,000
RM,(MS ..L
200,000
300,000
00,000
00.000
7 0.000
1,000.000 ...
,000.000
10,000,000.
surta
I -est u yw
Percent
3 .26
36.33
3 .00
3 .00
3 .00
3 .00
3 .00
3 .00
3 .00
3 .00
sv oo
3 .00
3 .00
3 .00
Commttee
b
Percent
31.00
3 .33
36.00
37.67
3 .00
3 . 0
39.33
39.7
0.00
0.33
a 60
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Tabe I. Comparson of ncrease or decrease n corporate ncome ta under
your commttee s b
Net -ncome (norma
ta and surta )
2 00
13 00.
1 ,000
1 ,000
6,000
7,000
,000
9 00
10 00
19 00
20,000
2 .000
surta
Doar n-
Percentage
crease or
Increase or
decrease ( )
decrease ( )
0
0
0
0
0
0
0
0
0
0
-t20
-1. 6
- 0
-2.
-10
-3.
- -
- .
-100
- .
-200
- .07
-300
-6.67
- 00
. TP
-1.100
-13.10
-1.700
1 . 3
Net ncome (norma
ta and surta )
7 .000
100 00
160.000
16f C6
20( 00
300.000
00 00..
00.000 ,-.
7 0,000
1.000.000
.000.(100
10,000 00
Doar In-
crease or
decrease -)
Percentage
Increase or
decrease (-)
- 2,300
-16.79
-2.SO0
-17. 7
-3. 00
-1 . 2
-2,7 0
-9.6
-2.000
-6.20
- 00
-.M
0
.00
1,000
,000
1.32
3. 1
7.000
.61
10,000
.26
17, 00
6.1
2 .000
6.6
1 .000
7.63
20 ,000
7.76
(2) LI MI N TION OF T NOTC I T R T SC DUL
The dssatsfacton wth the present corporate ta -rate structure s centered
n the ncome area between 2 ,000 and 0,000. The notch rate, or the 3
percent bracket rate apped under present aw to the ncome of sma corpora-
tons between 2 ,000 and 0,000, s ob|ected to prmary on the grounds that
corporatons whch normay have ncomes somewhat over 2 ,000 have tte
ncentve to ncrease ther earnngs, snce 3 cents out of each addtona doar
they earn, unt they reach the 0,000-ncome eve, s taken by the Federa
Government n ta es, eavng ony 7 cents out of each of these addtona doars
for the stockhoders. Corporatons wth ncomes over 0,000 have a much
greater ncentve to e pand ther earnngs, snce the Government takes ony
3 cents out of each addtona doar n ther case, eavng 62 cents to be
dvded among the stockhoders.
Ths 3 percent margna rate for corporatons wth ncomes between 2 ,000
and 0,000 tends to make corporatons n ths ncome area somewhat ess
carefu n ther e pendtures, but, more mportant, t dscourages the nvestment
of addtona funds n such corporatons. For e ampe, an ndvdua havng
100,000 to nvest woud fnd t more attractve to nvest n ether a sma cor-
poraton wth an ncome o ess than 2 ,000, or a arge corporaton customary
havng ncome n e cess of 0,000. ssumng the annua earnngs on ths
100,000 were 10,000. If the ndvdua were to nvest ths sum n a corporaton
wth an ncome of 1 ,000, the Government woud take n ta es 2, 00 from
the 10,000, or f he were to nvest t n a corporaton wth an ncome of 0,000,
the Government woud take 3, 00. owever, f these funds were nvested
n a corporaton wth an ncome of 2 ,000, the Government woud take ,3 I
out of ths 10,000 of addtona earnngs. It appears undesrabe from the
standpont of the economy as a whoe to pace these sma corporatons wth
ncome between 2 ,000 and 0,000 under such a handcap n competng wth
other corporatons for addtona nvestments.
The b emnates the notch rate by provdng a fat 2 ,000 surta e empton
whch woud be avaabe to a corporatons. Ths w provde ta advantages
to sma busnesses wthout ntroducng a system whch s ready adaptabe to a
drastc graduaton of rates.
The partcuar e empton pan n your commUtee s b provdes ony a snge
e empton whch t s beeved best e presses the dea of a fat ta rate modfed
by a concesson for sma busnesses. It s aso beeved that ths snge e emp-
ton pan has a number of advantages over a mutpe e empton system. Frst,
the snge-e empton system s much smper and coud be presented on the
ta form n a way whch woud make t easer for the ta payer to compute ts a .
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It shoud aso be ponted out that the snge-e empton system woud make t
possbe to consodate the norma ta and surta computaton. Whe ths
mght aso be possbe n the case of a mutpe-e empton pan or a graduated
rate pan, dffcut probems woud, n any case, be presented under such pans
n the handng of such tems as partay ta -e empt nterest and the speca
ta treatment accorded Western emsphere trade corporatons and dvdends
pad by pubc uttes on certan preferred stock.
( ) CONSOLID TING T T COMPUT TION ON T R TURN FORM
In nddton to the emnaton of the notch rate, your commttee s b provdes
for a dfferent method of computng the ta beneft to be gven Western em-
sphere trade corporatons and dvdends pad by pubc uttes on certan
preferred stock. sght change s aso made n the method of computng the
ta beneft to be gven partay ta -e empt nterest. t the present tme, par-
tay ta e empt nterest s e empted from the norma ta and certan dvdends
pad on the preferred stock of pubc uttes and the ncome of Western em-
sphere trade corporatons are e empted from the surta . s a resut of these
e emptons, t s not possbe-to change ether the norma ta rate or the surta
rate wthout changng the reatonshp between the ta burdens of ta payers
wth these speca e emptons and corporate ta payers generay.
Your commttee s b avods ths demma by substtutng for the surta
e empton, n the case of the Western emphere trade corporatons and certan
dvdends pad on preferred stock of pubc uttes, percentage e emptons
equa to 3 percent of the ncome recevng ths speca treatment. The effect
s to mantan for these speca types of ncome appro matey the present ta
beneft. owever, under your commttee s b, the surta s freed of speca
e emptons whch makes t possbe to rase or ower ths ta rate wthout
changng the beneft gven to these speca types of ncome.
It was deemed approprate to retan the present ta beneft for ta -e empt
nterest even though the norma ta rate under ths b s reduced from 2 to 21
percent, snce the b mantans the present ta beneft for Western emsphere
trade corporatons nnd pubc uttes payng certan types of dvdends. Ths
resut s accompshed by contnung the norma ta e empton for partay
ta -e empt nterest nnd by provdng a credt aganst surta net Income equa
to 1 percent of the partay ta -e empt nterest or 1 percent of the amount
by whch the corporate surta net ncome e ceeds 2 ,000, whchever s the esser.
The effect of ths proposa s to ncrease the 21 percent e empton gven par-
tay ta -e empt nterest under the norma ta by 3 percentage ponts n those
cases where the corporaton has ncome n e cess of 2 ,000 whch s equa
to the amount of ts partay ta -e empt ncome.
( ) CC L R TION OF T P YM NTS OF CORPOR TIONS
Under e stng aw corporate ta payers are gven the opton to eect to pay
ther entre ta on the 1 th day of the thrd month foowng the cose of the
year or to pay one-fourth of the ta on that date and the baance n e ua n-
staments on the 1 th day of the thrd, s th, and nnth months foowng the
frst nstament. For e ampe, a corporaton on the caendar-year bass may
pay one-fourth of the ta on the 1 th of March, une, September, and December.
Ths method of payment contrasts sharpy to that requred of most ndvduas
who pay the buk of ther ta durng the year n whch the ncome arses. The
contrast s most strkng In the case of a busness whch s operated as an nd-
vdua enterprse or a partnershp as compared wth a smar busness organzed
n the corporate form. It s dffcut to see why corporatons shoud be per-
mtted to spread the payment of ther ta es over the year foowng that In whch
the abty was ncurred whe partnershps and ndvdua propretorshps
are for the most part on a current payment bass.
Your commttee desres to reduce the tme durng whch the corporate ta
may be pad, but wshes to gve the busness communty ampe opportunty
to ad|ust tsef to -the change. Therefore, secton ( 03 of the b provdes for a
gradua transton coverng a perod of years, at the end of whch the nsta-
ment opton for corporatons w be reduced to two payments of 0 percent
of tho ta due on the 1 th day of the thrd month nnd the 1 th day of the s th
month foowng the cose of the ta abe year. The form n whch ths transton
s to he made s shown n tabe I1.
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Tabe II. cceerated payments of corporaton ncome ta es 1

Payments tte n
Frst
quarter
Second
quarter
Thrd
quarter
Fourth
quarter
Percent
30
3
0

0
Percent
30
3
0

0
Percent
20
1
10
0
Percen
20
1
10
6
0
Fourth ta abe year
1 The acceerated payments woud begn wth tambe years endng on or after Dec. 31, 19 0.
The change n the method of payment w be effectve wth respect to corpo-
rate ta abe years endng on or after December 31, 19 0.
For the caendar-year corporatons, whch make up about three-fourths of
the tota, your commttee s b requres n 19 1 the payment of 30 percent
of the ta on March 1 and une 1 and 20 percent on September 1 and
December 1 nstead of 2 percent on each of the quartery payment dates as
permtted under e stng aw. The payments on March 1 and nne 1 w
be ncreased to 3 percent of the ta due n 19 2, 0 percent n 19 3, percent
n 19 , and 0 percent n 19 , wth correspondng reductons n the percentage
of the ta payabe on September 1 and December 1 n each of these years.
The estmated ncrease n coectons resutng from acceerated payments
s shown n tabe III. It ap ears that n the fsca year 19 1 the addtona
coectons w be 730 mon. The ncreases n each of the years 19 2
through 19 are S00 mon. The tota addtona coectons durng the fu
6-year transton perod aggregate about bon.
These addtona coectons represent funds whch woud otherwse have been
receved n subsequent fsca years. Whe there w he no substanta add-
tona gans after 19 6 there w, f corporate ncome remans at present eves,
aso be no correspondng osses. The revenues whch have been coected n
the perod of transton nstead of durng the years mmedatey foowng w
be suppanted n those years by coectons whch woud have been made n
ater years under e stng aw.
Tabe III. stmated ncrease n corporate ncome a coectons resutng from
acceerated payments
In mons of douars
Fsca years
Increase n
coectons
Fsca years
Increase n
coectons
1961
730
19
00
00
0
962 -
00
00
19 3
Of course, a downturn n busness wth a consequent decne n corporate profts
woud produce a more rapd drop n coectons from the corporate ncome ta
f the atter s pad n two nstaments, as t w be n 19 and subsequent
years under your commttee s b, than f payment s spread over four quartery
payments as under e stng aw. owever, the ncrease n coectons durng
the subsequent perod of revva woud aso be more rapd.
Over the Ions run, eavng the busness cyce out of account, the addtona
coectons obtaned u-dor the b n the years 19 1 through 19 6 woud gen-
eray sneakng be offset by a correspondng reducton In ater years ony f
the acton now taken were reversed. It s true that where a ta payer goes out
of busness or ceases to have a ta abe net ncome the acceerated payments
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made durng the transton years woud be offset by reduced coectons :n
subsequent years. On the other hand there w be addtona gans n future
years as a resut of the acceeraton of the frst ta pad by new corporatons and
by corporatons whch move for the frst tme nto the ta payng cass. More-
over, an e panson of corporate earnngs durng future years w produce an
addtona gan because of the acceeraton of the ta based on the net ncrease
n ta abe ncome. If, therefore, hstorca trends contnue and corporate profts
ncrease n the future aong wth an e pandng economy, addtona gans from
acceeraton w accrue and the Government w not ose, e cept temporary
durng a perod of depresson, the addtona coectons receved durng the
years 19 1 through 19 0.
The addtona revenues obtaned n each of the transton years are the resut
of concent ratng In that year coectons based on the ta abtes of more than
1 year. though ths b speeds up the coecton of the corporate ncome ta ,
It does not Increase the ta abty of any corporaton.
vaabe nformaton ndcates that, taken ns a whoe, the corporatons of
ths country are unusuay qud and therefore n a poston to fnance the acce-
erated ta payments caed for under the commttee s b wth comparatvey tte
dffcuty. Tabe I shows the reaton between accrued Federa ncome ta
abtes and the cash pus Unted States Government securtes hed by a
corporatons other than banks and Insurance companes at the cose of each
quarter n the caendar years 19 and 19 9. On these dates the Federa ta
abty was never more than 30.6 percent of the sum of these very qud assets
and the percentage was decnng durng 19 9. t the cose of the fourth quarter
of that year, whch s the ast date for whch these statstcs are avaabe, the
accrued ta abtes were ess than one-fourth of the cash pus Government
securtes.
Tabe shows smar statstcs for manufacturng corporatons ony at the
cose of the fourth quarter of 19 9, cassfed accordng to the sze of the corpora-
ton. Ths tabe ndcates that among the smaer corporatons the ta abtes
were an even ower percentage of cash pus Government securtes than among
corporatons of greater sze. Snce about 36 percent of the ta abe corporatons
do not eecf the quartery payment opton but pay ther entre ta n fu on the
1 th day of the thrd month foowng the cose of ther ta abe year, and
roughy 90 percent of the corporaton ta s pad on the nstament bass, t s
evdent that the sma corporatons are the ones whch usuay do not eect to
pay n nstaments. Ths s consstent wth the statstcs shown n tabe
whch ndcate that on the average the smaer corporatons have comparatvey
arge accumuatons of very qud assets.
Tabes I and refect the average poston of mercan Industry. No doubt
there w be a number of cases n whch any acceeraton of the payment w
be dffcut because the cash poston of the corporaton Is very weak and ts
credt at the banks poor. owever, ths probem s greaty reduced by the
gradua transton to a two-payment system whch occurs under secton 603 of
yofr commttee s b, and for those cases where rea hardshp arses reef s
avaabe under secton 6(c) (1) of the Interna Revenue Code whch authorzes
the Commssoner of Interna Revenue to e tend the tme for payment for a
perod up to 6 nonfs. Ths power makes t possbe to aevate any rea
dffcutes rased by the acceerated payment pan..
Ths pan s not to be confused wth the pay-as-you-go system used under the
Indvdua ncome ta . Whe your commttee s b woud graduay reduce
the ag between the recept of the corporaton s ncome and the payment of ts
ta, a the payments woud contnue to be made n the year foowng the recept
of the ncome. ence, the genera argument that a system of current coecton
woud be napproprate for corporatons does not bear on the acceerated pay-
ment pan contaned n your commttee s b.
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Tabe I . Ta abtes, cosh, and . S. Government securtes of a corporatons
e cept banks and nsurance companes
ons of doars
ccrued
Federa
ncome
ta es
U.S.
Tota cash
and U. S.
Percent
Federa ta
to tota cash
and Gov-
ernment
securtes
Year
Cash
Govern-
ment
Govern-
ment
sccur.t.os
securtes
10.7
10.1
11.3
11.6
11.2
10.6
10.2
.7
a. 9
13.7
13.0
13.
13.9
1 .0
1 .
It. 6
1 .7
37.2
36.9
37.6
37.9
37.
39. 1
0.3
0.6
2 .
29.
30. 1
30.6
Source: Securtes and change Commsson.
2 . 2
2 .0
23.
2 .3
2 .7
2 .0
27 1
26.3
23.9
Tabe . Ta abtes, cash, and U. S. Government securtes of a manufacturng
corporatons, cassfed by sze of assets, fourth quarter, 19 9
MUbns of doars e cept as Indcated
ccrued
Federa
ncome
U. S.
Tota cash
and U. S.
Percent
Federa ta
to tota cash
and Gov-
ernment
securtes
sset casses n thousands o doars
Cash
Govern-
ment
Govern-
ment
U c -
securtes
securtes
7
27C
6 2
3 0
1
1,616
,09
9
39
17.1
2 .
2 .1
30. 0
30.
2 0 to 1.000
301
672
1,1 2
2,2
6, 6
10,606
1.000 to .000
S.000 to 10(1.000
100,000 and over -
Source: Federa Trade Commsson.
(C) R TURNS ND T T YM NTS OF TRUSTS, ST T S, ND NONR SID NT
LI NS
Tour commttee s b makes certan changes n the fng requrements and
the method of payment of the ncome ta n the case of estates, trusts, and
certan nonresdent aens. In order to grant fducares a tte more tme to
compete the work requred for the fng of ther ncome ta returns (Form 10 1),
whch w be ncreased somewhat under the wthhodng system, your commt-
tee s b moves the due date for the fng of returns by estates and trusts from
the oth day of the thrd month to the 1 th day of the fourth month foowng
the cose of the ta abe year. Thus, n the case of estates and trusts fng form
10 1 on the caendar-year bass, the due date w be pr 1 nstead of March 1 .
though e stng aw requres the fng of the wthhodng returns for non-
resdent aens on March 1 , t does not requre the payment of the ta by the
wthhodng agent unt une 1 . Under your commttee s b the payment of
the ta w be requred at the tme the return s due.
Under e stng aw fducares and certan nonresdent aens may eect to pay
the ta n four quartery nstaments. It has been brought to the attenton of
your commttee that there s no necessty for ths opton n the case of trusts,
and that n some cases the opton s an embarrassment to trustees who woud
ke to pay the ta abty at the tme of fng the return but hestate to do so
because they beeve ther responsbtes to the benefcares of the trust requre
the retenton of the funds unt the fna dates upon whch the ta payments
may be made under e stng aw, so as to ma mze the nterest earned on the
trust s assets. For these reasons your commttee s b emnates the nstament
opton n the case of trusts. The opton s aso emnated n the case of uon-
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06
resdent aens whose gross ncome s n e cess of 1 , 00 or who have a trade
or busness n the Unted States. owever, the opton s contnued n the case
of estates where the probem of rasng the cash to fnance the payment of ta es
s apt to be serous.
Whe these changes do not affect ta abtes, the emnaton of the nsta-
ment opton n the case of trusts and nonresdent aens w ncrease coectons
n the fsca year 19 1 by about 0,000,000. These are funds whch woud have
been coected n the fsca year 19 2 under e stng aw. There w be no cor-
respondng reducton n the coectons n 19 2 snce the funds coected on 19 0
abtes n the fsca year 19 1 w be repaced by funds that woud (under
e stng aw) have been receved n the fsca year 19 3.
(D) WIT OLDING ON DI ID NDS
Under e stng aw dvdend recpents are requred to report the tota
amount of ther dvdends from a sources as ncome on ther annua ncome
ta returns. The payng corporatons are not requred to wthhod any porton
of the ta due e cept n the case of nonresdent aens but are requred to fe
annua nformaton returns (Form 1099) wth the ureau of Interna Revenue
showng the amount of the dvdends pad to each sharehoder. owever, under
e stng reguatons ths return shows ony payments made to sharehoders to
whom the corporaton pad dvdends of 100 or more durng the caendar year.
Statstca studes ndcate that a substanta percentage of the dvdends pad
out by the corporatons of ths country s not decared as ta abe ncome. The
atest data from Statstcs of Income show that the net cash dvdends pad out
by corporatons n 19 7 were about 6. bon. The net cash dvdends reported
by ndvduas and fducares n that year were about .3 bon, eavng a
dfference of 1.1 bon, of whch ony about 300 mon can be accounted for
by dvdends pad to ta -e empt nsttutons and to ndvduas wth ncomes
beow the fng requrement. Wth the arge ncrease n dvdend payments
snce 19 7 t s probabe that the unreported dvdends may now amount to around
1 bon annuay. Whe to some e tent ths represents outrght evason, the
arger proporton s probaby due to the faure of ta payers to keep accurate
records of the occasona dvdend checks whch they receve. In most nstances
such errors of omsson woud not be dscosed by the nformaton returns fed
by the payor corporatons because of the 100 mtaton. The chances of ds-
cosure are reduced further by the faure to requre the sharehoder to temze
hs dvdends on hs annua ncome ta return.
Secton 601 of your commttee s b provdes that wth respect to dvdends
pad on or after anuary 1, 19 1, the payor w be requred to wthhod 10 per-
cent. 10 percent rate s used nstead of the 1 percent rate now apped to
wages and saares n order to smpfy the mpementaton of a new program.
Smpcty of admnstraton aso dctates the rue that f a payor s requred
to wthhod, t must do so on a the dvdends whch t pays out. ny other
approach woud compcate serousy the work of the wthhodng agents.
The procedures woud foow n some respects those used under the e stng
system of wthhodng on wages and saares. The dvdend recpent woud
ncude n hs ta abe ncome te fu amount of the dvdend before wthhodng
and receve a credt aganst the ta due equa to the amount wthhed by the
payor.
Whe the procedures foowed are smar to those used n wthhodng on
wages, there s a substantay smaer nterva n the case of dvdends between
the tme of wthhodng and the date on whch the ta s due. Ths s partcuary
true n the case of corporatons payng a or most of ther dvdends n the ast
quarter of the caendar year.
To assst the ta payer n makng out hs return, your commttee s b re-
qures the payor to nform the ta payer n wrtng, not ater than anuary 31
of the year foowng the one n whch the dvdend was pad, of the gross amount
of the dvdends pad to hm and the amount of the ta wthhed. The payor
corporaton may transmt ths nformaton n whatever fashon t deems de-
srabe, ether at the tme of the ndvdua dvdend payments or n a cumuatve
statement at a ater date. For e ampe, a notaton on or attached to the dv-
dend check woud suffce.
Tour commttee consdered a proposa to requre the reportng of ths nforma-
ton on a standardzed form whch coud be attached to the dvdend recpent s
return, smar to the Form W-2 now used n wthhodng on wages and saares.
owever, t opp ars that such a requrement woud mpose consderabe add-
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-107
tona e pense npon the wthhodng agents, and | our commttee s of the opnon
that at east durng the frst years when wthhodng on dvdends s operatve
the wthhodng agents shoud be aowed to perform ther tasks In the manner
whch s most convenent and east e pensve for them.
In order to mprove the reportng of dvdends, t Is understood that the u-
reau of Interna Revenue w amend ts present reguatons so as to requre
the temzaton of dvdends on the recpent s ncome ta return, and remove
the 100 mtaton on the report of dvdends pad now fed by the payor
corporatons. It Is understood that temzaton w be requred n the 10 0
returns fed In 19 1. ecause of the addtona work nvoved under the new
procedures, the ureau has been requested by your commttee to change the
due date of the return fed by the payor corporaton from February 1 to
February 2 of the year foowng the payment of the dvdend.
When stock s hed by an owner of record rather than tte actua owner, the
owner of record w transmt to the actua owner a statement of the gross
amount of dvdends receved and the ta wthhed. The form n whch ths
nformaton Is to be transmtted Is eft to the dscreton of the owner of record.
For nstance, a notaton on the monthy statement or credt sp furnshed
by a broker to hs customer w suffce.
Ta -e empt organzatons w be requred to fe a return as a means of
estabshng ther cam to a refund of the amount wthhed.
For the purpose of wthhodng, a dvdend s defned so as to ncude pay-
ments n knd, but not dvdends n the stock of, or n rghts to acqure the
stock of. the dstrbutng corporaton.
In order to meet a speca probem whch arses n the case of a short sae
where devery s made wth borrowed stock, your commttee s b defnes a
dvdend so as to ncude a payment made by a stockbroker to any person as a
substtute for a dvdend.
Under your commttee s b wthhodng s requred n the case of patronage
dvdends, rebates, and refunds by cooperatves. For ths purpose t s not
matera whether the dvdend s pad n cash, n the capta stock of the
payor, n revovng fund certfcates, retan certfcates, certfcates of ndebted-
ness, etters of advce as to the net amount retaned, or otherwse. If the
busness of the cooperatve s prncpay the marketng of the products of ts
members or other producers, or the purchasng of servces, suppes and equp-
ment used n the trade or busness of ts members or other persons, wth-
hodng w appy to the entre amount of the patronage dvdend even though
a porton s pad on the bass of purchases by the members actng as consumers
and s, therefore, not ta abe ncome. When a purchasng cooperatve deas
prncpay wth goods and servces whch do not enter nto ts patrons cost
of dong busness, wthhodng s not requred because most of the dvdends
pad are not ta abe ncome to the patrons.
In vew of the confuson whch now e sts wth respect to the ta abe
status of patronage dvdends, wthhodng s hghy desrabe. It makes t
cear that ta abe patronage dvdends ncude not ony those receved n
cash, but aso those whch are hed to be the equvaent of cash. For these
reasons wthhodng shoud resut n substantay more accurate reportng
than occurs under e stng aw.
Snce your commttee s b appes ony to true dvdends, t e empts from
wthhodng the so-caed dvdends pad by mutua savngs banks, cooperatve
banks, credt unons, and the dvdends pad by budng and oan assocatons
on ther wthdrawabe accounts. In these cases the dvdends bear a cose
resembance to the nterest pad by compettve bankng nsttutons to whch
the wthhodng system w not appy. owever, f a budng and oan assoca-
ton has permanent nonwthdrawabe stock outstandng, the dvdends pad
thereon woud be sub|ect to wthhodng. The dvdends pad by mutua n-
surance companes of a types, as we as those of corporatons owned by gov-
ernments, ther potca subdvsons or nternatona organzatons e empt from
the ncome ta , are not sub|ect to wthhodng, snce n these cases wthhod-
ng woud serve no usefu purpose. For smar reasons wthhodng s not
requred of R cooperatves.
Foregn corporatons w be requred to wthhod ony when e stng aw
requres them to wthhod on dvdends pad to nonresdent aens, that s,
when more than percent of the gross Income of the foregn corporaton was
derved from sources wthn the Unted States durng the 3 years precedng
the decaraton of the dvdend. Wthhodng w not be requred of other for-
egn corporatons. Some, such as Canadan corporatons, are aready requred
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to wthhod under the aws of the country of ncorporaton, and your commt-
tee beeves that n these cases the addton of wthhodng for the purposes of
the Unted States ta woud produce too drastc a resut. Moreover, for prac-
tca purposes wthhodng coud be enforced n those cases ony where the
foregn corporaton has a payng agent n the Unted States, and the addtona
e pense ncdent to wthhodng mght ead to the oss of ths busness by the
agents n ths country.
Wthhodng w not be requred n the case of a dvdend pad by one mem-
ber of an affated group to another corporaton n the group when consodated
returns are fed. In ths case wthhodng woud serve no usefu purpose,
snce the dvdends are emnated n computng consodated net ncome.
It s estmated that wthhodng on dvdends at a rate of 10 percent w
ncrease the yed of the ndvdua ncome ta by about 170 mon annuay,
of whch 20 mon s the resut of wthhodng on the patronage dvdends
of cooperatves. Ths addtona ncome represents n part the coecton of a
10 percent ta from those who woud otherwse successfuy evade the ta ,
and n part, addtona coectons from persons whose report of dvdends re-
ceved woud otherwse be naccurate because of a faure to understand ther
obgatons or to mantan adequate records. The 170 mon estmate s,
of course, net after the refund of the amounts wthhed on dvdends receved
by persons or Insttutons wth no ta abty In the year of payment.
Snce wthhodng w begn on anuary 1, 19 1, the estmated coectons n
the fsca year 19 1 w be substantay ess than n a fu year s operaton.
It s estmated that the 19 1 coectons w be about 70 mon more than
under e stng aw.
( ) DUC TION L, C RIT L , ND SIMIL R T MPT ORG NIZ TIONS
Tour commttee s b ncudes a seres of amendments desgned to correct
certan probems whch have arsen n connecton wth ta -e empt organzatons.
The provsons contaned n tte III of the b dea wth the unreated busness
ncome of certan ta -e empt nsttutons, the so-caed ease-back probem, the
probem of accumuated nvestment ncome, and certan restrctons on the e -
emptons en|oyed by prvatey controed trusts and foundatons and on the
deductons aowed to donors wth respect to ther gfts to such organzatons.
(1) UNR L T D USIN SS INCOM
Your commttee s b mposes the reguar corporate ncome ta on certan ta -
e empt organzatons whch are n the nature of corporatons and the ndvdua
ncome ta on ta -e empt trusts wth respect to so much of ther ncome as arses
from actve busness enterprses whch are unreated to the e empt purposes of
the organzatons. The ta appes to the unreated busness ncome of the abor,
agrcutura, and hortcutura organzatons e empt under secton 101(1) of
the Interna Revenue Code; the terary, scentfc, regons (other than
churches), educatona, and chartabe organzatons, ncudng hosptas and
foundatons, e empt under secton 101(0) ; and the busness and trade assoca-
tons e empt under secton 101(7). The ta does not appy to ncome of ths
type receved by a church. owever, the ta does appy to other e empt n-
sttutons under the auspces of the churches. It aso appes to the so-caed
nvestment subsdares now e empt under secton 101(1 ) f ther ncome s
payabe to secton 101 (1), (C), or (7) organzatons.
It Is mportant to note that many organzatons now e empted from ncome
ta under secton 101 of the Interna Revenue Code are not affected by these ta
proposas. For e ampe, none of the busness- or mutua-type organzatons are
affected. Ths ncudes: mutua savngs banks; budng nnd oan assocatons;
cooperatve banks and credt unons; cemetery companes; oca fe-nsurance
assocatons; mutua dtch or Irrgaton companes; mutua cooperatve teephone
companes or ke organzatons; mutua nsurance companes other han fe or
marne; farm cooperatves; corporatons whch are subsdares of farm co-
operatves: vountary fe, sck, or accdent beneft assocatons of Unted States
Government empoyees; oca teachers retrement fund assocatons: and vo-
untary empoyees fe, sckness, or accdent beneft assocatons. In addton
to these busness- or mutua-type organzatons, certan other organzatons aso
are not affected. These Incude: fraterna benefcary socetes; cvc eagues;
soca wefare organzatons; oca assocatons of empoyees organzed for char-
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tabe, educatona or recreatona purposes; soca cubs; Instrumentates of
the Unted States; and communa o- apostoc regous organzatons.
The probem at whch the ta on unreated busness ncome s drected here s
prmary that of unfar competton. The ta -free status of these secton 101
organzatons enabes them to use ther profts ta -free to e pand operatons,
whe ther compettors can e pand ony wth the profts remanng after ta es.
so, a number of e ampes have arsen where these organzatons have, n effect,
used ther ta e empton to buy an ordnary busness. That s, they have ac-
qured the busness wth no nvestment on ther own part and pad for t n nsta-
ments out of subsequent earnngs a procedure whch usuay coud not be fo-
owed f the busness were ta abe.
Your commttee s b does not deny the e empton where the organzatons
are carryng on unreated nctve busness enterprses, or requre that they ds-
pose of such busnesses, but merey mposes the same ta on ncome derved
therefrom as s borne by ther compettors.
Some of the wtnesses who appeared before your commttee took the poston
that ths unreated busness ncome shoud be ta ed ony If receved by a sub-
sdary organzaton. owever, It Is dffcut to see why a dfference In ta treat-
ment shoud be aowed merey because n one case the Income s earned drecty
by an educatona or chartabe organzaton, whe n the other t s earned by
a subsdary of such an organzaton. In both cases the ncome s derved from
the same type of actvtes and dsposed of n the same manner. Moreover, n
most cases the busness functons now carred on by subsdares coud be trans-
ferred to the parent f the ta were apped ony to the ncome of the subsdares.
Under your commttee s b the ta s Imposed on ncome derved from a trade
or busness reguary carred on by a ta -e empt organzaton f the busness
s not substantay reated to the performance of the functons upon whch the
organzaton s e empton s based. owever, the ta does not appy f substan-
tay a the work done n the trade or busness s performed wthout compen-
saton, or f, n the case of a 101(0) organzaton, the trade or busness s carred
on prmary for the convenence of the members, students, patents, offcers or
empoyees of the ta -e empt organzaton.
thetc actvtes of schoos are substantay reated to ther educatona
functons. For e ampe, a unversty woud not be ta abe on Income derved
from a basketba tournament sponsored by t, even where the teams were com-
posed of students of other schoos.
In the case of an educatona Insttuton, Income from dnng has, restaurants,
and dormtores operated for the convenence of the students, woud be consd-
ered reated ncome and, therefore, woud not be ta abe. Income from a un-
versty press woud be e empt In the ordnary case snce t woud be derved
from an actvty that s substantay reated to the purposes of the unversty.
Tour commttee s b specfcay e empts from ths ta ncome derved from
research for the Unted States or any of ts agences, snce most of ths work s
done on a cost bass. Research woud ncude not ony fundamenta research
but aso apped research such as testng and e permenta constructon and
producton.
In order to emnate the cases In whch the unreated busness Income s n-
cdenta, your commttee s b ncudes a specfc e empon of 1,000. Ths,
n addton to the requrement that such busnesses must be carred on reguary
to be ta abe, w dspose of most probems arsng n such cases. Moreover, m-
poston of the ta In cases where the Income s beow ths eve woud nvove
e cessve costs of coecton nnd payment.
In appyng the ta . your commttee s b provdes for the consodaton of n
of an organzaton s ncome from Its varous unreated trade or busness ac-
tvtes. To do otherwse woud deny to the organzatons the beneft now en|oyed
by ordnary corporatons of offsettng the osses on one venture aganst the gans
on another.
The ta apped to unreated busness ncome does not appy to dvdends, n-
terest, royates (ncudng, of course, overrdng royates), rents (other than
certan rents on property acqured wth borrowed funds), and gans from saes
of eased property. Tour commttee beeves that such passve Income shoud
not be ta ed where t s used for e empt purposes because nvestments producng
ncomes of these types have ong been recognzed as proper for educatona nnd
chartabe organzatons.
023 30 31 27
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(2) T I - C PRO L M
s mped by ts name, a ease-back Invoves the purchase of a property by a
ta -e empt organzaton, and the easng of the property usuay to the same
busness from whch the property was purchased. In the eary years of ts use
the devce was apped amost e cusvey to the purchase of reta store proper-
tes. Currenty t appears to be used aso for the purchase of other types of rea
property and f ed assets.
In many cases the e empt organzaton, n buyng the property, does not use
ts own funds to make the payment, but borrows the purchase prce and pays off
ths oan pus the nterest charges thereon, by appyng part or a of the renta
ncome receved for a perod of years to ths purpose. Thus, the e empt organza-
ton athough nvestng tte or nothng n the venture, obtans after a perod
of years an unencumbered tte to the property.
The purchase and ease-back arrangement apparenty s of recent orgn.
Nevertheess, t has aready become bg busness and a recent wrter has charac-
terzed It as the most noteworthy, fnanca devce of the present century. It
s reported that one rea-estate broker had competed ease-back saes snce the
war totang 0,000,000 and had authorzatons from appro matey 0 nsttu-
tons for the purchase of an addtona 100,000,000 worth of property under ths
type of arrangement.
nother recent report tes of a corporaton whch specazes n what are
caed one-contro packages. The corporaton buys a pant for the manufacturers
requrements. It aso guarantees to fnd an Insurance company, ta -e empt
organzaton, or prvate nvestor to buy the property provded the manufacturer
agrees to a ong-term ease. For one cent the corporaton had arranged these
deas for 1 offce and mantenance budngs vaued at . mon doars. ght
other deas of ths type were mentoned wth vaues rangng up to 7 ,000.
There are three prncpa ob|ectons to the ease-back arrangements where
borrowed funds are used. Frst, the ta -e empt organzaton Is not merey
tryng to fnd a means of nvestng ts own funds at an adequate rate of return
but s obvousy tradng on ts e empton, snce the ony contrbuton t makes to
the sae and ease s ts ta e empton. Therefore, t appears reasonabe to be-
eve that the ony reason why t receves the property at no e pense to Itsef s
the fact that t pays no Income ta on the rentas receved.
The second ob|ecton to the ease-back s that It s atogether concevabe that
f Its use Is not checked, e empt organzatons n the not-too-dstant future may
own the great buk of the commerca and ndustra rea estate n the country.
Ths, of course, woud ower drastcay the renta Income Incuded n the cor-
porate and Indvdua ncome ta bases. The fact that under present aw an
e empt nsttuton need not use any of ts own funds n acqurng property
through ease-backs borrowed funds may represent 100 percent of the purchase
prce Indcates that there s no mt to the property an e empt nsttuton may
acqure n ths manner. Such acqustons are not n any way mted by the
funds avaabe for Investment on the part of the e empt nsttuton. Ths
e pans why partcuar attenton shoud be gven to ease-backs whch nvove
the use of borrowed funds. Where an e empt organzaton uses ts own funds,
e panson of Its property hodngs through the ease-back devce must necessary
proceed at n much sower pace.
thrd reason for proposng the ta aton of ease-backs s the possbty whch
e sts n each case that the e empt organzaton has n effect sod part of ts
e empton. Ths can occur ether by the e empt organzaton payng a hgher
prce for the property or by chargng ower rentas than a ta abe busness coud
charge. Proof, of course, s dffcut to obtan because the purchase prce, or renta
charge whch a ta abe busness woud ngree to pay, s unknown.
In the case of ordnary Investments there s no reason why an e empt organza-
ton coud be e pected to make an offer whch woud be much, f any, better than
that whch woud be made by a ta abe busness. owever, In the case of the
ease-back arrangements the seers seem to take the poston that they w not
se at a uness they receve better terms than a ta abe busness can offer, and
the e empt organzaton, because of ts ta -free status, can afford to pay the
hgher prce and st make a proft on the transacton. Ths s especay key
to occur where the e empt organzaton s presented an arrangement whch does
not requre the commtment of any of Its own funds.
Your commttee s b woud resove ths aspect of the ease-back probem by
ta ng as unreated busness ncome, certan Income receved from the ease
of rea property and persona property eased In connecton wth t. The or-
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ganzatons covered by ths porton of your commttee s b are the snme ones
whch are sub|ected to ta on ther other unreated busness ncome.
Under your commttee s b the ta appes ony when the property owned by the
organzaton s eased for a perod of years or more, or when the perod of the
ease pus optons s years or more. The amount of rents ncuded n gross
ncome s restrcted to the same percentage of the rents whch the borrowed
funds used to fnance the purchase of the ncome-producng property bear to the
ad|usted bass of such property. Ts restrcts the ta to the ncome whch does
not resut from n smpe nvestment of the trust or organzaton s capta funds,
and emnates the possbty that the ta -e empt organzaton w use ts
e empton aone as a means of acqurng property
The ta woud appy both to cases where the vendor and the essee are the same
person and those where they are not. ence, the ta w apppy n cases whch
do not conform strcty wth the ease-back pan but whch rase the same probem
of unfar competton whch the ease-back Itsef produces n determnng the
porton of the vaue of the rented property whch s fnanced wth borrowed funds.
( ) CCUMUL T D IN STM NT INCOM
Tour commttee s studes have reveaed that In a number of cases chartabe,
etc., organzatons have obtaned the concessons granted under e stng aw
wtbout dstrbutng a substanta porton of ther current ncome for e empt
purposes. In some of these cases the tme when charty can e pect to beneft
appears e tremey remote. In the opnon of your commttee the ta -e empton
prveges wth respect to nvestment Income shoud be restrcted to that porton
of the ncome whch those organzatons demonstrate that they are usng to
fuf ther chartabe, etc., purposes by actua dstrbuton to charty as the
ncr.me s receved by them.
For ths reason your commttee s b sub|ects to ta , wth some mportant
e ceptons, that part of the nvestment Income of certan secton 101(6) organ-
zatons whch s not pad out on or before the 1 th day of the thrd month
foowng the cose of the ta abe year n whch the ncome s receved. The
foowng secton 101(6) organzatons are sub|ect to ta on ther accumuated
nvestment Income under your commttee s b: (1) trusts other than certan
speca trusts whch, by ther terms, are requred to dstrbute a ther ncome
and corpus wthn years after ther creaton; and (2) a other secton 101(6)
organzatons e cept (a) regous organzatons, (6) organzatons operated,
supervsed, controed, or prncpay supported by regous organzatons, (c)
schoos and coeges wth estabshed facutes and student bodes n attendance,
(d) and organzatons supported by ether the genera pubc or the Government.
Secton 101(1 ) organzatons are ta abe on ther accumuated nvestment
ncome ony f t s payabe to secton 101(6) organzatons ta abe on ther
accumuated nvestment ncome.
The ta appes to the porton of the undstrbuted Income of these organza-
tons and trusts whch conssts of nterest, dvdends, rents, royates, ncudng
overrdng royates, and ncome receved from trusts. It does not appy to the
unreated busness ncome whch s sub|ect to ta under other portons of your
commttee s b, nor does t appy to capta gans.
Tour commttee s aware that a ta of ths type woud work a hardshp n
cases where an e stng trust Instrument does not permt the current dstrbu-
ton of earnngs. ence, the ta s not apped to ncome from property trans-
ferred n trust pror to une 1, 19 0, sub|ect to such mandatory restrctons on
ts dstrbuton.
It Is recognzed aso that n some cases an Indvdua may wsh to make
provson for a specfc chartabe pro|ect n hs w but s not n possesson of
suffcent assets to fnance the entre cost. For these cases your commttee s
b permts the accumuaton ta -free of ncome from property set asde for a
chartabe, etc., purpose under the w of a decedent. owever, ths ta -free
accumuaton s mted to a perod of 2 years foowng the date of the decedent s
death.
thrd e cepton permts organzatons sub|ect to ta on ther accumuated
nvestment Income to set asde ncome wthout ta n speca trusts whch pro-
vde for e pendture of the funds so set asde and the ncome earned on these
funds wthn years after the trusts are created. Your commttee beeves such
an e cepton Is desrabe n order to permt an organzaton to commt ts ncome
over severa years for a specfc pro|ect whch cannot be fnanced out of 1 year s
Income or whch cannot be put nto operaton mmedatey.
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Fnay, your commttee recognzes that a chartabe, etc., organzaton may
wsh to accumuate reserves to enabe t to meet a pro|ected e pendture com-
mtment n years when ts current earnngs fa beow average. For ths reason
the organzatons and trusts sub|ect to the ta on accumuated nvestment n-
come are permtted to accumuate ta -free an amount equa to 1 year s Invest-
ment Income. The operaton of ths accumuaton credt may be ustrated
as foows:
The organzaton has nvestment ncome of 10,000 In 19 1, 1 ,000 n 19 2,
,000 n 19 3, and 10,000 n each of the years 19 through 19 7. It makes
e pendtures or gfts of 10,000 n 19 2, 30,000 n 19 3, and has no e pendtures
or gfts n 19 1, or 19 through 19 7. though It made no e pendtures n
19 1 t s not ta ed on the accumuaton of 10,000 n that year, because that
consttuted ony 1 year s Investment Income. t the end of 19 2 t has accumu-
ated ony 1 ,000, so that none of ts Investment ncome for that year s ta ed,
snce the accumuaton Is no greater than the 1 ,000 of Investment ncome for
that year. y the end of 19 3 t has e pended 0,000, 10,000 more than ts
aggregate nvestment ncome for 19 1, 19 2, and 19 3. It cannot carry ths
e cess of e pendture forward to permt an unta ed accumuaton n subsequent
years. It w be ta ed on ,000 n 19 , snce by the end of that year the
accumuaton aggregatng 20,000 n 19 and 19 e ceeds by ,000 the ma -
mum nvestment ncome, 1 ,000 n any of the precedng years. It w aso be
ta ed on the 10,000 Investment ncome, not e pended, receved n 19 6 and
19 7 because It has aready accumuated the ma mum amount aowed.
( ) F D R ORG NIZ TIONS
Secton 301(b) of your commttee s b provdes that no organzaton operated
prmary for the purpose of carryng on a trade or busness (other than the
renta of rea estate) for proft sha be e empted under secton 101 merey on
the grounds that a of Its profts are payabe to one or more organzatons
e empt from ta under ths secton. Ths amendment s not ntended to affect
the e emptons now provded for subsdares of farm cooperatves and nvest-
ment subsdares e empt under secton 101 (13) and (1 ) of the Interna
Revenue Code.
The effect of ths amendment s to prevent the e empton of a trade or busness
organzaton under secton 101 on the grounds that an organzaton actuay
descrbed n secton 101 receves the earnngs from the operatons of the trade
or busness organzaton. In any case t appears cear to your commttee that
such an organzaton Is not tsef carryng out an e empt purpose. Moreover,
t obvousy Is n drect competton wth other ta abe busnesses. Ths amend-
ment appes ony wth respect to ta abe years begnnng after December 31,
19 0. No mpcatons shoud be drawn from t as to the present ta status of
such organzatons.
(F) TRUSTS ND FOUND TIONS US D FOR T OID NC PURrOS S
Your commttee s study of the operatons of e empt chartabe, etc., trusts
and other organzatons has reveaed a number of cases where t appears that
donors of trusts and foundatons ether have derved, er at east have had the
opportunty to derve, substanta benefts from ther deangs wth trusts or
foundatons.
These benefts to the donors or trustees can arse from the sae of securtes
to, or the purchase of securtes from, the trust or foundaton. They may take
the form of borrowng funds from the e empt organzatons wth the payment
of abnormay ow nterest rates by the donor or the assumpton of abnorma
rsk by the e empt organzatons. They may take the form of the payment of
e cessve saares to the donor or a member of hs famy as an offca of the
trust or foundaton, or of renderng servces to the donor or a frm wth whch
he s assocated on a preferenta bass.
To check these abuses your commttee s b denes deductons to donors for
ncome, estate, and gft ta purposes of gfts made after une 30, 19 1, uness
the nstrument under whch the recpent organzaton s estabshed affrmatvey
provdes that (1) no part of the organzaton s assets may be oaned to substan
ta donors of the organzaton or any of ts offcers or trustees, or any member
of ther fames or to a corporaton controed by them; that (2) ony a reason-
abe compensaton for servces actuay rendered may be pad to such persons
by the organzaton; that (3) the servces of the organzaton may not be made
avaabe to such persons on a preferenta bass; that ( ) no substanta part
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of the assets of the organzaton may be used to purchase securtes or other
property from such persons; and that ( ) no substanta part of the property
of the organzaton may be sod to such persons. Ths provson woud appy,
n genera, ony to gfts made to organzatons whch are made sub|ect to ta
on ther accumuated nvestment Income under your commttee s b. Gfts
made to other e empt organzatons such as unverstes, regous organzatons,
communty chests and other pubc organzatons woud not be sub|ect to these
restrctons.
Your commttee s b aso denes Income ta e empton to a trust or founda-
ton where any of the above rues ore voated In the operaton of the organza-
ton. Ths provson Is appcabe wth respect to ta abe years begnnng after
December- 1, 19 0.
(O) C RIT L D DUCTIONS Y TRUSTS
Tour commttee has found that vrtuay the same probems e st wth respect
to the chartabe, etc., Income ta deducton taken by trusts under secton 102(a)
of the Code as e st wth respect to the chartabe, etc., organzatons whch rre
e empt from Income ta under secton 101(6) of the Code. Secton 102(a) per-
mts a trust whch s ta abe under Suppement of the Code to deduct any
amount of Its otherwse ta abe ncome whch, pursuant to the terms of the
w or deed creatng the trust, s pad or permanenty set asde for chartabe,
etc., purposes. Thus, a trust whch ether dstrbutes or accumuates ts Income
for chartabe purposes Is, for a practca purposes, e empt from ncome ta es.
Your commttee has found evdence that the unmted chartabe deducton
under secton 162(a) of the Code has been sub|ected to the same abuses whch
have occurred under the secton 101(6) ncome ta e empton. Trusts have
taken advantage of ths deducton to avod ta on ordnary busness actvtes,
to enter nto ease-back deas fnanced by borrowed funds, and to accumuate
ther Income Instead of actuay usng It for the purposes specfed n the secton
162(a) deducton. Your commttee has aso found evdence that trusts have
engaged n transactons wth ther creators or other donors and ther trustees
whch ndcate, at the very east, that the trust funds are beng used for the
beneft of prvate Indvduas as we as for the beneft of the utmate chartabe
benefcares.
In order to correct ths stuaton, your commttee s b provdes mtatons
on the present secton 162(a) deducton whch are smar to the mtatons the
b provdes wth respect to the secton 101(6) ncome ta e empton. The
secton 162(a) deducton s made nappcabe to trade or busness Income, whch
Is to be computed on the same bass as the unreated busness net ncome of
e empt organzatons. In the case of the trusts under secton 162, however, no
trade or busness may be consdered reated. s In the case of the e empt
organzatons, that porton of the renta Income from ong-term eases whch s
attrbutabe to the nvestment of borrowed funds s treated as busness ncome.
cept n the case of the mandatory accumuaton of Income from property
transferred n trust before une 1, 10 0, and the accumuaton wthn 2 years
after the decedent s death of ncome from property transferred n trust by w,
no deducton w be aowed under secton 162(a) wth respect to ordnary
Income whch s accumuated. The trustee Is gven the prvege of treatng
amounts dstrbuted wthn 2 mouths and 1 days after the cose of the year
as havng been dstrbuted durng the year. Capta gans whch are accumuated
may be deducted under the terms of secton 162 (a) as at present.
Where a trust Is operated n such a manner that (1) ts Income or corpus
s oaned to substanta donors, offcers, trustees, or members of ther fames
or corporatons controed by them; (2) unreasonabe compensaton Is pad to
such persons; ( ) servces are made avaabe to such persons on a preferenta
bass; ( ) substanta purchases of property are made from such persons; or
( ) a substanta part of the property of the trust s sod to such persons, the
deducton under secton 162(a) w be mted to 1 percent of the trust s
ncome.
( ) TRUSTS ND FOUND TIONS US D TO R T IN CONTROL IN F MILY
USIN SS
Frequenty fames ownng or controng arge busnesses set up prvate
trusts or foundatons to keep contro of the busness n the famy after death.
Ths s accompshed by eavng the busness ether at death or durng fe to
one of these famy trusts or foundatons. equests or gfts to such a trust or
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foundaton are at present aowabe deductons for estate, gft, and ncome tar
purposes. To prevent the avodance of Income, estate, and gft ta abty n
such cases, your commttee s b provdes that no chartabe deducton be aowed
to a contrbutor for ncome, estate, and gft ta purposes f both of the foowng
condtons are present:
(1) The contrbutor, or members of bs famy, have votng contro of the
organzaton to whch the contrbuton s made, and
(2) The contrbuton conssts of stock In a corporaton n whch the con-
trbutor together wth members of hs famy contro 60 percent or more of
the votng stock or 0 percent or more of the tota stock, countng the stock
hed by ta -e empt organzatons whch the famy contro.
It Is mportant to note that both of these condtons must be present before
the deducton woud be dened. deducton woud be granted wth respect to
a gft of stock n a famy busness gven to an organzaton whch the famy
does not contro; and a deducton woud be granted f stock n a famy busness
were sod and the proceeds gven to a chartabe organzaton whch the famy
dd contro.
The term votng contro of the organzaton that s, the chartabe organza-
ton Incudes those cases where the famy has the power to f vacances.
so, the proposa provdes that If any rght Is retaned n the property trans-
ferred, other than a rght n the ncome of the property, ths s to be consdered
the same as controng the organzaton. Ths was beeved necessary n order
to deny the deducton n those cases where stock s gven to an organzaton the
famy does not contro, but the famy retans the rght to vote the stock. Your
commttee beeves that dena of deductons n such cases Is smpy a recognton
of the fact that where such contro e sts no competed gft for whch a deducton
shoud be granted has been made.
(I) T ON LIF INSUR NC COMP NI S
Secton 01 of your commttee s b amends the formua used to determne the
ta abe net ncome of fe nsurance companes. The proposed formua s the
same as that contaned n ouse ont Resouton 371 whch was reported by
your commttee on anuary 2 , 1930 (see . Rept. No. 1 22 of the 1st Cong., 2d
sess.), and passed by the ouse on anuary 26. owever, under your commttee s
b ths formua s apped to the years 19 7 to 19 0, ncusve, whereas under
ouse ont Resouton 371 as t passed the ouse the formua was apped
to 19 7- 9.
The Senate verson of ouse ont Resouton 371 dffers n that the new for-
mua s apped ony to 19 9- 0. oth ouse and Senate reports on the resouton
nterpret the atter as a stopgap desgned to end the ta -free status of fe nsur-
ance companes whch was the Inadvertent resut of a formua adopted n the
Revenue ct of 19 2, and to aow further tme for the deveopment of a sats-
factory permanent souton to a dffcut and troubesome probem. In vew of
the short tme remanng n ths sesson of Congress, your commttee agrees
that the e tenson of the stopgap formua to 19 0 Is advsabe.
The rea pont at ssue between the ouse and Senate s the appcaton of
ths formua to the years 19 7 and 19 . Your commttee s strongy of the opn-
on that a ta shoud be coected for these years. The hstory of the dscussons
concernng the revson of the formua contaned In e stng aw, whch begns
on page of your commttee s report on ouse ont Resouton 371, ndcates
that the ndustry has been on notce snce the autumn of 19 7 that a ta mght
be coected for 19 7- . Moreover, the spokesmen for the companes whch do
the great buk of the busness have e pressed a preference for egsaton whch
woud cover a the years when no ta was assessed under e stng aw. The
formua contaned n the resouton and n secton 01 of ths b nvoves no
departure from the prncpes upon whch e stng aw s based and n the opnon
of your commttee the appcaton of the proposed formua to the years 19 7
and 19 w not fa on consttutona grounds. ence, your commttee has
ncuded n the present b stopgap egsaton appyng ths formua to the years
19 7 to 19 0, ncusve.
It s estmated that the tota addtona revenue to be derved under ths
provson of the b s 166 mon, of whch 70 mon Is the resut of appyng
the stopgap formua to the year 19 0.
( ) LOSS FROM S L OF USIN SS PROP RTY
Secton 117(|) of the Interna Revenue Code provdes that the aggregate net
gans from the sae of deprecabe assets and and hed for more than 6 months
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and used In the ta payer s busness sha be treated as ong-term capta gan,
but that the aggregate net oss from the sae of such property sha be treated
as ordnary oss. If a corporaton ses a factory for a proft In one year the gan
may be ta ed at the favorabe ong-term capta gan rates, but f the corporaton
ses another factory n the foowng year at a oss It Is aowed to treat the
atter as an ordnary oss and to offset ordnary Income aganst t. Ths speca
treatment was Introduced In 10 2 n order to stmuate the ae of busness
propertes so that they woud be more apt to come nto the hands of the persons
who coud use them effcenty for the war effort. Snce busness has now had
ampe opwrtunty to read|ust o peacetme actvtes, t s no onger necessary
to gve nconsstent treatment to gans and osses from the sae of busness
pro|ertes.
Under secton 209 (a) and (b) of your commttee s b osses from the sae of
busness property woud be treated as capta osses, whe gans from the sae
of busness property woud contnue to be treated as capta gans, regardess
of the perod for rahch the assets were hed, thus equatng the ta treatment of
trans and osses. It s estmated that emnaton of the ordnary oss treatment
on the sae of busness property w Increase the revenues by appro matey
73 mon a year.
Tour commttee s acton does not In any way affect the queston of the egbty
of vestock for the beneft of secton 117( ).
( ) INT R ST ON R FUNDS ND D FICI NCI S
Under e stng aw refunds pad by the Government as we as defcences pad
by the ta payer bear nterest at a rate of 6 percent. Snce ths rate s far out of
ne wth the prce whch the Government generay pays for the use of money,
your commttee beeves that the reducton n the rate pad on refund: to 3 per-
cent woud be equtabe. The ta payer recevng a refund woud st be obtan-
ng a rate of nterest on what amounts to a oan to the Government that s we n
e cess of the hghest rate pad on outstandng ong-term Unted States Govern-
ment securtes, and far more than the rate the Government pays on short-term
money.
Ths change s effectve November 1, 19 0.
It s antcpated that ths reducton In the nterest rate pad on refunds, whch
s made n secton 602 of your commttee s b, w save the Government about
mon a year.
(L) T INT R ST L M NT IN INST LLM NT P YM NTS OF LIF INSUR NC
benefcary under a fe Insurance pocy usuay may eect to receve a seres
o monthy or annua payments nstead of takng the face vaue of the pocy as
a ump sum. In some cases the Insured hmsef may make ths eecton. The
opton may provde for a specfc number of such payments, or that the payments
w contnue unt the benefcary s death. Under secton 22(b)(1) of the In-
terna Revenue Code
amounts receved under a fe Insurance contract pad by reason of the death of
the nsured whether n a snge sum or otherwse
are not Incuded In the ta abe Income of the benefcary. Ths provson has
een nterpreted as e emptng from Income ta the entre amount of the monthy
ot annua payments of fe Insurance pad n nstaments, even though such pay-
ments aggregate to more than the face vaue of the Insurance pocy payabe at
the death of the Insured.
In cacuatng the sze of such Instament payments, the fe Insurance company
w take nt account not ony the perod over whch the payments are to be made
but aso the Interest whch s earned after the date of death on the unpad pro-
ceeds of the pocy. The compete e empton of the nstament payment resuts
In the e empton of ths nterest from the ncome ta .
Such treatment s n sharp contrast wth that receved when the proceeds of
the pocy are pad n a ump sum and eft on depost wth the Insurance com-
pany. In ths case the nterest earned after the death of the nsured s ta abe
Income to the benefcary. Smary, when the proceeds of the pocy are taken n
a ump sum and nvested n Government securtes or kept on depost n a savngs-
bank account, the nterest earned subsequent to the death of the Insured Is, of
course, ta abe ncome. It foows, therefore, that an un|ustfabe dscrmna-
ton e sts under present aw n favor of a partcuar form of fe nsurance con-
tract.
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Secton 201 of your commttee s b provdes that where fe Insurance pro-
ceeds are pad In Instaments, the Interest eement n each Instament s to be
sub|ect to the ncome ta .
Where the nsurance proceeds are payabe n a f ed number of nstaments,
the amount that woud have been payabe n a ump sum Immedatey after the
death of the nsured w be dvded by the tota number of Instaments. The
resut w be the amount n each Instament whch represents payment of the
actua proceeds of the pocy, and the e cess over that amount w be ta abe
ncome. For e ampe, suppose the face vaue of a pocy s 10,000 and, under
an opton chosen by the nsured or eected by the benefcary, the nsurance s to
be pad n 10 annua payments of 1,1 0 each. The face vaue ( 10,000) dvded
by the number of nstaments (10) equas 1,000, whch represents the actua
nsurance proceeds pad out each year. Ths amount w not be ta ed as ncome,
but, snce each annua payment e ceeds ths amount by 1 0, the 1 0 w be
ta abe as the nterest eement n each Instament payment
Where the nstament payments are to contnue throughout the benefcary s
fe, the same computaton w be made, e cept that the number of annua n-
stament payments w be based on the benefcary s fe e pectancy, as deter-
mned by fe-e pectancy tabes. For e ampe, suppose the face vaue of the
pocy s 10,000, the annua payments are 600 each, and the benefcary bas a
fe e pectancy of 20 years. The face vaue ( 10,000) dvded by the number of
years of fe e pectancy (20) equas 00, whch represents the actua nsurance
proceeds pad out each year. The remander of each annua payment, 100, w
be ta abe as the nterest eement n each nstament pad under the contract.
Ths provson appes to amounts receved durng ta abe years begnnng
after December 31, 19 9, whether or not the nsured ded before, on, or after
such date, and regardess of when the opton s effectve. It shoud be born n
mnd that no nterest earned before the date of death w be sub|ect to ta .
It s estmated that ths secton of your commttee s b w ncrease ta co-
ectons by mon n a fu year of operaton.
(M) MORTIZ TION OF PR MIUM ON CON RTI L ONDS
Under secton 12 of the Interna Revenue Code the purchaser of a ta abe
bond who pays a prce n e cess of the amount recoverabe at maturty s per-
mtted a deducton whch w amortze the premum pad. If the bond s non-
caabe, the premum s wrtten off over the fe of the securty. If the bond s
caabe, the premum Is wrtten off over the perod between the date of purchase
and tbe earest ca date.
Secton 12 was ntended prmary to dea wth the case where the premum
was pad because the securt- bore a stated rate of nterest hgher than that
prevang n the current market for securtes of a ke rsk and a smar fe.
quty requred the aowance of a deducton aganst ordnary ncome n cases
of ths sort.
owever, a premum aso may arse because the securty purchased s con-
vertbe nto another type of securty. ere the premum pad may represent
nothng more or ess than a porton of the prce pad for the securty Into whch
the bond Is convertbe, and the aowance of a deducton for a premum of ths
type s no more |ustfabe than t woud be for the baance of the cost of the
nvestment. Nevertheess, snce no dstncton was made n the draftng of sec-
ton 12 of the Interna Revenue Code between premums based upon the pay-
ment of an unusuay hgh rate of nterest and premums based upon a converson
prvege, doubt arose concernng the avaabty of the amortzaton prvege
wth reference to premums of the atter type. Ths queston was resoved by
the Unted States Supreme Court In the ore and Shoong cases, decded on
une . 19 0. These cases nvoved the purchase of bonds at a substanta
premum whch was obvousy based prmary upon the prvege of converson
nto common stock. Snce tho securtes were caabe wthn the ta abe year,
the ta pnyers deducton of the dfference between the purchase prce and the
earest ca prce In the ta abe year when the bonds were purchased was sus-
taned by the Court. Ths resuts n a oophoe snce the effect Is to grant the
ta payer a deducton aganst ordnary Income equa to the amount of the premum
pad for the converson prvege, and the Government recoups ts oss on ths
account, f at a, ony to the e tent that the ad|ustment n the bass of the se-
curty obtaned as a resut of the converson eads to an addtona capta gans
ta at some ater date.
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Secton 21 of your commttee s b emnates ths oophoe by stpuatng
that the prvege of amortzng a bond premum aowed under secton 12 of
the Interna Revenue Code w not appy to the porton of the premum on a
convertbe bond whch s attrbutabe to the converson features of the bond.
The amendment appes to bonds purchased after une 1 , 19 0, the date upon
whch ths matter was brought to the attenton of your commttee. Wth respect
to bonds purchased on or before une 1 , 19 0, the amendment appes to that
part of the premum whch woud be amortzed n ta abe years begnnng
after that date. Thus, f a convertbe bond purchased on anuary 2, 19 0,
s caabe durng such year, the entre premum can be amortzed by a ta payer
on tbe caendar year bass. On the other hand, f the bond matured on anuary
2, 19 , wth no ca provson, one-ffth of the actua premum pad coud be
amortzed In 19 0, but ony one-ffth of that part of the premum not due to the
converson prvege coud be amortzed n each of the four subsequent years.
It s estmated that ths provson w Increase the revenue by 2 mon
annuay when n fu operaton.
(N) PR MIUMS ON T - MPT ONDS LD Y D L RS
Recent bond ssues by States and muncpates have had pecuar charac-
terstcs ; they ncude severa seres maturng wthn short perods but wth
e traordnary hgh nterest rates. c e ampe s to be found n a recent Issue
of bonds by a State, the aggregate obgaton beng for 0,000,000. Tbe frst
fve seres of those bonds, requrng payment by the State of 1,600,000 annuay
n 19 2 to 19 6, had an nterest rate of percent, athough they were ntended
to yed from 0.6 to 1.20 percent; whereas bonds maturng In 19 7 to 197 ,
ntended to yed from 120 to 2 percent, had an nterest rate of 1 percent.
Smary, a mdwestern cty recenty sod a group of sera bonds, those matur-
ng from 19 1 to 19 havng an nterest rate of 6 percent, whereas those matur-
ng from 19 to 1977 had an Interest rate of ony 2 percent.
person who acqures such a short-term, hgh-nterest bond, whether drecty
from the State or muncpaty or ndrecty from a deaer or another person,
must pay a very hgh premum. To acqure a bond whch woud pay Interest
of 60 per year and 1,000 at maturty years hence the purchaser woud be
requred to pay about 1,2 0.
In the absence of speca statutory provsons, a person who hed such a bond
for years woud receve 300 of nterest, whch woud be e cudabe from gross
Income and thus e empt from ta . ut snce he had pad 1,2 0 and receved
ony 1,000 at maturty he woud have a oss of 2 0, whch coud be deducted
from ordnary ncome, f the bond were hed for sae to customers, or deducted
from capta gans f the bond were hed by an nvestor. ctuay, of course,
such a oss s not a rea oss at a, snce the premum of 2 0 Is an offset
to the e traordnary hgh nterest ctuay, the yed on the bond over the
years s, roughy, 300 ess 2 0 or 0, whch Is the equvaent of 1 percent
per year on the par vaue; or, aowng for semannua recoupments of part
of the premum, there s a yed of about 1 percent per year on the actua nvest-
ment, whch s a norma yed on such short-term muncpa bonds.
To avod the nequtabe ta effects whch woud resut from the deducton
of such artfca osses, sectons 12 and 113(b)(1)( ) were added to the
Interna Revenue Code by the Revenue ct of 19 2. Wth respect to State
and muncpa bonds, In the case of nn nvestor, these provsons requre the
amortzaton of any premum pad. Thus, contnung the ustraton, the bass
of a bond acqured for 1,2 0, maturng n years, woud be reduced 0 per
year, so that f It were sod for 1,200 at the end of 1 year, or redeemed for
1,000 at the end of years, no capta oss woud resut. Snce the nterest
on such bonds s e empt from ta , amounts of annua amortzaton of premum
are not deductbe.
Under e stng aw, however, deaers n securtes, whether Indvduas, partner-
shps, or corporatons, are not requred to amortze such bond premums. Secton
12 (d) specfcay e cudes bonds whch consttute stock In trade of the ta -
payer or any such obgaton of a knd whch woud propery be Incuded In
the Inventory of the ta payer If on hand at the cose of the ta abe year, or
any such obgaton hed by the ta payer prmary for sae to customers n
the ordnary course of hs trade or busness. Thus, a deaer n securtes who
nventores hs securtes on a cost bass or who does not mantan Inventores
can deduct as a oss the dfference between the cost of such bonds and ther
seng prce or the amount receved at maturty. Deaers who nventory
ther securtes at market prces automatcay receve annua deductons of
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portons of the premums, snce an approprate amortzaton woud be refected
n the market prces shown n ther nventores, or n the seng prces f the
bonds were sod or matured durng the year. It appears that such artfca
osses, n substanta amounts, are avaed of by deaers n securtes generay,
and partcuary by members of underwrtng syndcates and the securty-deaer
affates of arge banks, who have transactons amountng to mons of doars
n State and muncpa bonds, to reduce ther ta abty on other ncome.
Secton 202 of your commttee s b s ntended to prevent the deducton of
such artfca osses, wthout unduy compcatng the accountng procedures
of deaers. Wth respect to State and muncpa bonds whch have been hed
more than 30 days and whch have a maturty or ca date not more than years
from the date of acquston by the deaer, the premum pad must be amortzed.
In the case of deaers who carry ther bonds at cost, ths amortzaton w re-
duce the bass so as to emnate an artfca oss n the year of the sae or other
dsposton of the bond, and n the case of deaers who carry ther bonds at market
prces the amount of the amortzaton for any year must be used to reduce the
cost of saes for that year.
Ths amendment w appy to ta abe years begnnng after December 31,19 9.
It s estmated that n the ong-run the revenues under ths changed procedure
w be about 20 mon hgher annuay than they woud be If e stng aw
were contnued.
(O) DI ID NDS-R C I D CR DIT FOR DISTRI UTIONS IN IND
Under secton 26(b) of the Interna Revenue Code a corporaton s aowed
to deduct from net ncome a dvdends-receved credt equa to percent of the
amount t receves from other domestc corporatons as dvdends. The purpose
of ths credt s to prevent ncome whch has been ta ed n the hands of the
corporaton earnng t from beng ta ed n fu agan n the hands of another
corporaton whch receves ths ncome n the form of a dvdend. owever,
a corporaton whch receves a dvdend n knd may be aowed a dvdends-
receved credt of percent of the far market vaue of the property receved,
even though the property receved as a dvdend n knd has apprecated In
vaue n the hands of the frst corporaton. It has been contended that no ncome
ta abty s ncurred f the stockhoder corporaton then ses the property,
because t has a bass n the hands of the stockhoder corporaton equa to ts
far market vaue at the tme of ts dstrbuton as a dvdend. The resut may
be a oophoe In the dvdends-receved-credt provson whch may aow a sub-
sdary corporaton and the corporaton whch hods ts stock to dspose of prop-
erty (by a dvdend n knd and subsequent sae) wth payment of an ncome ta
on ony 1 percent of Its vaue even though the proft reazed on the dsposton of
the property may greaty e ceed 1 percent of the property s market vaue at
that tme.
Secton 203 of your commttee s b coses ths oophoe by provdng that the
dvdends-receved credt sha not e ceed percent of the bass of the dstrbuted
property In the hands of the frst corporaton. If gan s recognzed to the frst
corporaton as a resut of the dstrbuton, the dvdends-receved credt woud
be aowed for percent of the bass of the property pus the gan recognzed
to the frst corporaton.
Ths amendment Is not Intended to affect any Interpretaton of e stng aw
wth respect to a dvdend n knd.
The provsons of ths secton w appy ony to dvdends receved after
December 31, 19 9.
It Is estmated that ths provson w Increase revenues by about 6 mon
a year.
(P) DI ID NDS OUT OF PR -1913 RNINGS
Dvdends pad out of corporate earnngs or profts accumuated before March
1, 1913, or apprecaton n the vaue of property accrued before March 1, 1913,
are specfcay e empt from ordnary ncome ta In the hands of the sharehoders
under secton 11 (b) of the Interna Revenue Code. The e empton appes re-
gardess of whether the sharehoder owned the stock before March 1, 1913, or
recentv acqured It. Ths e empton s not requred by the Consttuton, snce
the Supreme Court hed, n Lynch v. ornby (2 7 U. S. 339 (191 )), that the
net ncome of a ta abe person ncuded, under the 1913 ct
a dvdends decared and pad n the ordnary course of busness by a corpora-
ton to ts stockhoders after the takng effect of the ct (March 1,1913), whether
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from current earnngs, or from the accumuated surpus made up of past earnngs
or ncrease n vaue of corporate assets, notwthstandng t accrued to the cor-
poraton n whoe or n part pror to March 1,1013.
Whe secton 11 (b) e empts these dvdends from ordnary Income ta , t aso
provdes that these dvdends reduce the ad|usted bass of the stock In the hands
of the sharehoders. Lke the e empton tsef, ths treatment of dvdends out
of pre-1913 earnngs s Inconsstent wth the usua treatment of dvdends. s
a resut, stockhoders who se ther stock after recevng such dvdends are
key to forget that the bass of the stock to them, for purposes of gan or oss
on ts sae, has been reduced beow ts cost to them. Moreover, the ta treat-
ment of these dvdends n cases where they actuay e ceed the ad|usted bass
of the stock has been confusng and apparenty nconsstent. It was hed n
Iauvet v. Commssoner ( T. C. 10 (10 )), that a dvdend pad out of appre-
caton n vaue accrued pror to March 1, 1913, whe reducng the bass of
the sock to the sharehoder, dd not resut n ta abe Income to the sharehoder
even to the e tent that t actuay e ceeded the bass of the stock. Ths was true
whether the sharehoder purchased hs stock before or after March 1,1913. Sec-
ton 11 (d) provdes that certan types of corporate dstrbutons sha be ta ed
as gan from the sae or e change of capta assets to the e tent that they e ceed
the ad|usted bass of the stock. Dstrbutons out of apprecaton n vaue ac-
crued pror to March 1, 1913, are specfcay e cuded from the appcaton of
secton 11 (d), but dvdends pad out of pre-1913 earnngs or proms are not.
Presumaby, therefore, If dvdends pad out of earnngs or profts accumuated
pror to March 1, 1913, e ceed the bass of the stock, the stockhoders are sub|ect
to capta gans ta on the e cess. There does not appear to be any bass for
nconsstent ta treatment as between dstrbutons of pre-1913 earnngs and
dstrbutons out of apprecaton n vaue accrued pror to 1913 In ths stuaton.
The present e empton of dvdends pad out of pre-1913 earnngs and pre-1913
apprecaton n vaue of property s of tte vaue to stockhoders n most op-
eratng corporatons, because, f a corporaton has earnngs whch have been
accumuated snce March 1, 1913, every dvdend s deemed to have been pad
out of the post-1913 accumuaton of earnngs unt these earnngs have been
e hausted. It s ony after a earnngs accumuated snce March 1, 1913, have
been e hauste that a stockhoder may receve an e empt dvdend out of the
pre-1913 accumuaton of earnngs.
Secton 20 of your commttee s b provdes that dvdends pad out of earn-
ngs or profts accumuated before March 1, 1913, or pad out of apprecaton n
vaue accrued pror to March 1, 1913, be ta ed as ordnary dvdends. Ths pro-
duces consstency n the ta treatment of dvdends and removes the admnstra-
tve probem of drawng a ne between pre-March 1,1913, and post-March 1,1913,
earnngs and profts.
Ths amendment woud not affect the present ta treatment to the corporaton
of corporate property whch apprecated n vaue pror to March 1, 1913. s at
present, f such property s sod by the corporaton the ta abe gan to the corpo-
raton w be the e cess of the saes prce over the March 1, 1913, vaue of the
property as ad|usted for deprecaton, and so forth.
Tour commttee s amendment w appy to dstrbutons made by corporatons
after December 31. 19 9.
It s estmated that ths amendment w Increase the revenues by about 1
mon annuay.
( ) T -FR LI UID TION OF FOR IGN SU SIDI RI S
Foregn subsdares of domestc corporatons do not pay ncome ta to the
Unted States, and ther Income s ta ed to ther domestc parent corporatons
ony, when It s receved by the atter In the form of dvdends. owever, under
the present aw t s possbe for a domestc corporaton to aow the earnngs of
a foregn subsdary to accumuate n the foregn subsdary free of mercan
ncome ta and then qudate the foregn subsdary n a ta -free qudaton
under secton 112(b) (6) of the Interna Revenue Code, thus brngng the accu-
muated earnngs of the foregn subsdary back nto the domestc parent
corporaton wthout ta abty.
Secton 112(1) of the Code provdes that, In order for a foregn subsdary to be
consdered a party to a ta -free qudaton, t must be estabshed to the sats-
facton of the Commssoner that the qudaton s not n pursuance of a pan
havng as one of ts prncpa purposes the avodance of Federa Income ta es.
ut even where the qudaton s for egtmate busness reasons It s neverthe-
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e S true that the qudaton resuts In the domestc parent corporaton recevng
the accumuated earnngs of the subsdary wthout ther havng ever been
sub|ected to Unted States Income ta es.
ven If the qudaton or merger of a foregn subsdary corporaton does not
quafy as ta -free, the domestc parent corporaton s ta ed on ts gan ony nt
ong-term capta gan rates, ncudng that part of the gan whch Is attrbutabe
to earnngs of the foregn subsdary whch have been accumuated free of
Unted States ncome ta . Ths procedure may not aways be proftabe, how-
ever, snce a credt for foregn ncome ta es s not aowed aganst the capta
gan ta ,
Secton 206 of your commttee s b coses ths oophoe by requrng that, upon
the qudaton of a foregn corporaton whch s over 0 percent owned drecty
or Indrecty by ess than fve domestc corporatons, the domestc corporatons
w be ta ed at ordnary rates on ther ratabe share of the accumuated earnngs
of the foregn corporaton to the e tent of the gan by the domestc corporatons
on the qudaton. In the case of a consodaton or a merger n whch the
domestc corporatons reaze gan attrbutabe to the accumuated earnngs of the
foregn subsdary merged or consodated, the same prncpes w appy.
foregn ta credt w be aowed aganst ths ta to the same e tent that t s
aowed wth respect to an ordnary ta abe dvdend receved from a foregn
subsdary.
Tour commttee s amendment w appy to dstrbutons or transfers made
after December 31, 10 0, but t has no appcaton to dstrbutons or transfers
made pursuant to a pan whch the Commssoner has determned pror to the date
of enactment of the b to be a pan not havng as one of ts prncpa purposes
the avodance of Federa Income ta es.
(R) STOC R D MPTION SU SIDI RY CORPOR TIONS
Secton 11 (g) of the Interna Revenue Code provdes that where a corpora-
ton redeems ts stock n such a manner as to make the redempton essentay
equvaent to the dstrbuton of a ta abe dvdend, the amount dstrbuted n
redempton of the stock sha be treated ao a ta abe dvdend to the e tent that
It represents a dstrbuton of earnngs or profts. Such a provson was necessary
to prevent stockhoders from drawng off accumuated corporate profts through
the devce of seng part of ther stock to the corporaton.
The recent case of Commssoner v. Wanamaker (17 Fed. (2d) 10), however,
has reveaed a oophoe through whch ths resut can be accompshed wthout
comng wthn the words of secton 11 (g). Secton 11 (g) was hed n that case
to be appcabe ony where a corporaton cances or redeems ts own stock. It
was hed not to be appcabe when a subsdary corporaton purchased the stock
of ts parent corporaton from the sharehoders of the parent, even though the
effect was, n fact, dentca wth that whch woud have resuted f the parent
had tsef purchased the stock.
If the stockhoders of a corporaton whch owns a the stock of a subsdary
corporaton obtan cash from that subsdary, n effect they have receved a
dvdend to the same e tent as woud be the case f the cash had been pad by the
subsdary to the parent corporaton and had then been dstrbuted by the parent
to the stockhoders. nd where such stockhoders se part of ther stock n
the parent corporaton to the subsdary they nevertheess retan ownershp and
contro of both corporatons, snce the sod stock s one of the assets whch the
parent corporaton owns by vrtue of ts possesson of a the stock of the subsd-
ary. Therefore, secton 207 of your commttee s b amends secton 11 (g) of
the Interna Revenue Code, so as to cover ndrect redempton of shares n a
parent corporaton through purchases by ts subsdares. The amendment aso
e tends secton 11 (g) to cases n whch both the ssung corporaton and the
acqurng corporaton are controed drecty or ndrecty, by the same nterests.
Ths amendment w appy to ta abe years endng after December 31, 10 9,
but sha appy ony wth respect to amounts receved after such date.
Tour commttee s amendment w yed a sma amount of addtona revenue,
and prevent substanta oss through the utzaton of ths oophoe n future
years.
(S) C PIT L G INS TR TM NT OF INCOM FROM RTISTIC WOR S ND
IN NTIONS
When a person s In the professon of nventng, or wrtng books, or creatng
other artstc works, hs ncome from the sae of the products of hs work a
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21
ta ed as ordnary ncome. Ths s true whether he receves royates from the
use of hs products or ses them outrght, snce the products of hs work are
hed by hm prmary for sae to customers In the ordnary course of bs trade
or busness and are, therefore, not treated as capta assets.
If an amateur receves royates on hs Inventon or book or other artstc
work, they are treated as ordnary Income, but f he hods hs Inventon or book
or other artstc work for 6 months and then ses t outrght he can ava hmsef
of a oophoe whch treats such a sae as the sae of a capta asset, not hed
prmary for sae to customers n the ordnary course of the ta payer s trade or
busness. s a resut the ta payer receves ong-term capta gan treatment on
the product of hs persona effort.
There Is no queston under the ncome ta aw but that a person may be
treated as engagng In more than one trade or busness at the same tme, and
when a person wrtes a book or creates some other sort of artstc work or de-
vses an nventon wth the Idea of reazng Income on It he shoud be treated
as beng n the trade or busness of wrtng, creatng, or nventng, regardess
of whether the ncome from bs persona efforts s reazed through royates or
through outrght sae, and regardess of the fact that ths Is the frst tme he may
have engaged n such a trade or busness.
Secton 200(a) of your commttee s b provdes that when any person ses
an nventon or a book or other artstc work whch s the product of hs persona
effort hs ncome from the sae Is ta ed as ordnary Income. e woud, of course,
be abe to average hs Income from such work over 36 months, f hs actvtes
covered a perod of 36 months or more, to the e tent permtted by secton 107(b)
of the Interna Revenue Code.
It Is estmated that ths amendment w yed appro matey 1 mon an-
nuay n addtona revenue.
(T) S ORT S L S
t the present tme t s possbe for an Investor In stocks to reaze a capta
gan n ess than 6 months and obtan ong-term capta gan ta treatment on t
by makng a short sae whch w assure hs gan on hs orgna Investment, and
then defer cosng out the short sae unt he has hed hs orgna stock-nvestment
for more than 6 months. The operaton of the short-sae devce In the stock
market may be ustrated by the foowng e ampes:
ampe 1. On anuary 1 the ta payer buys 100 shares of stock at 10 per
share for a tota of 1,000. Fve months ater, on une 1, when the stock has
rsen to 16 per share, he ses short 100 shares at 16 per share for a tota of
1,600. On uy 2 (6 months after the orgna purchase) he devers the 100
shares he bought on anuary 1 to the ender of the stock used to effect the short
sae.
ctuay, the ta payer has a short-term gan of 600, reazed on une 1 when
he sod 100 borrowed shares for 1,600 n a short sae, but by deferrng devery
of the stock he aready owned unt he has hed t for 6 months the short-term
gan s converted Into a ong-term gan, so that 300 nstead of 600 s ncuded
n ta abe ncome.
ampe . On anuary 1 the ta payer buys 100 shares of stock at 10 per
share for a tota of 1,000. On une 1, he ses short 100 shares at 16 per share
for a tota of 1,600. If the prce of the stock thereafter rses to 1 per share,
on uy 2 he ses the 100 shares he bought on anuary 1 at 1 per share for a
tota of 1, 00. e then buys 100 shares at 1 per share for a tota of 1, 00
and devers them to cover the short sae he made In une.
s n e ampe 1, the true resut Is a short-term gan of 600, snce the ta payer
reazed a 000 pan when he made the short sae n une and the purchase of 100
shares for 1, 00 and the sae of 100 shares for 1, 00 on uy 2 merey cance
each other out owever, under e stng aw the four transactons are vewed
as: Frst, the purchase of 100 shares n anuary and ther sae In uy wth a
ong-term gan of 00; and, second, a short sae n une, cosed by purchase and
devery n uy wth a short-term oss of 200. Ths resuts n the ncuson
of 200 n ta abe ncome Instead of 600.
Much the same devce may be used by a ta payer to avod ta on hs profts
from specuaton In commodty futures. Ths devce s not used, however, by
busnessmen who dea n commodty futures to offset reguar busness deangs
n actua commodtes, snce they are not affected by the ong-term and short-term
capta gan provsons. Ther transactons In physca, spot gran, cotton,
etc., and ther offsettng hedges In commodty futures, whether or not actua
devery Is made on the hedgng contract, both gve rse to ordnary (rans or osses.
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ampe 3. ssume that a ta payer who Is not In the busness of seng
cotton:
1. On anuary 2, enters nto a futures contract agreeng to buy 100 baes
of cotton n October on the New York market for 1 ,000;
2. On pr , agrees to se 100 baes of cotton n October on the New
Oreans market for 17,000;
3. On uy 3, agrees to se 100 baes of cotton n October on the New York
market for 17, 00; and
. On uy 3, agrees to buy 100 baes of cotton n October on the New
Oreans market for 17, 00.
s actua gan s 2,000, and t was reazed on pr , ess than 6 months
after hs orgna purchase. ut by mantanng bs ong poston n the New
York market unt uy 3, and then offsettng t by a sae n that market, the
short-term gan s converted Into a ong-term gan. e can wat unt uy
wthout rsk snce he has aready, n pr, entered nto a futures contract for
the sae of 100 baes for 17,000 n the New Oreans market. Ths contract Is
aso cosed out on uy 3. The resut under present aw s a ong-term gan of
2, 00, ony haf, or 1,2 0, of whch s ta ed, and a short-term oss of 00, whch
s fuy deductbe. No rea gan or oss occurred after the pr agreement,
snce the oss n the short poston wns offset by the addtona gan after
pr n the ong poston.
Reguatons of the Department of grcuture prohbt a broker from carryng
for a customer smutaneous ong and short postons n the same commodty,
the same future perod, and the same market. ta payer may acheve sub-
stantay the same resut, however, by keepng the smutaneous ong and short
postons n two dfferent markets, as n e ampe 3, above.
Your commttee s b provdes that capta gans and osses w be deemed
ong-term gans and osses f the property sod or e changed has been hed more
than 3 months. Ths woud ncrease the possbty of utzng the short-sae
devce ns a method of ta avodance.
Secton 210 of your commttee s b provdes, n effect, that where a sae of
substantay dentca property s made, and thereafter smutaneous ong
and short postons are mantaned so as to gve an actua short-term trans-
acton the appearance of a ong-term transacton, gans and osses sha be
treated for ta purposes as short-term gans or osses. On the other hand, where
securtes have been hed for more than 3 months, and thereafter a short sae s
made, any oss on the short sae sha be treated as a ong-term oss, offsettng
the ong-term gan so that 0 percent of both w be taken nto account, and not
as a short-term oss 100 percent of whch woud be taken nto account.
Whether a short sae s of substantay dentca property w depend on
the crcumstances at the tme of the short sae. Securtes of one company
w not be regarded as substantay dentca wth securtes of another com-
pany, e cept that when ssued securtes of a successor corporaton may be
substantay dentca wth the securtes to be e changed for them n a reor-
ganzaton. It s specfcay provded that a commodty future requrng devery
n one caendar month w not be regarded as substantay Identca to a com-
modty future requrng devery In a dfferent caendar month.
The provsons of ths secton do not appy to stradde or arbtrage trans-
actons n commodty futures where ong and short contracts are e ecuted
on the same day and both are cosed out on the same day.
person who owns stock may buy a put whch entted hm to se hs
stock at any tme wthn, for e ampe, 30 days at a specfed prce. If the mar-
ket prce of the stock goes up, he w, of course, se at the market prce rather
than e ercse the put opton he has purchased. ut f the market prce goes
down he s assured of gettng the prce specfed n the put opton he has
bought. Therefore, a person who buys a put s assured that he w reaze the
apprecaton In vaue of hs stock |ust as though he had made a short sae.
For ths reason a short sae s defned as ncudng a put, or opton to se
at a f ed prce.
The provsons of ths secton woud appy to ta abe years begnnng after
the date of enactment of the ct
It s estmated that the new procedure woud resut In about 2 mon a
year n addtona revenue.
(U) COLL PSI L CO PO TIONS
The coapsbe corporaton s a devce whch has been used n an attempt
to convert ordnary ncome nto ong-term capta gan by use of a temporary
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23
corporaton. The devce has been used prncpay In the moton-pcture Indus-
try. egtmnte corporaton engaged n the busness of producng moton
pctures wond pay ordnary the corporate Income ta on Its net Income and
Its sharehoders woud pay ordnary ncome ta on ther dvdends from the
corporaton. Producers have tred to avod these resuts by organzng sepa-
rate corporatons for each moton pcture. Upon competon of the fm hut
pror to the reazaton by the corporaton of any ncome therefrom, the corpo-
raton Is qudated and the assets are dstrbuted. In such a case, the corpo-
raton pays no ta , camng that It has reazed no ncome. The producer
pays ta upon the dfference between hs cost and the far market vaue of the
assets so dstrbuted; but such gan Is reported as ong-term capta gan wth
a ma mum effectve rate of 2 percent fter qudaton, the far market vaue
of the reeased producton s ordnary amortzed aganst the ncome from the
fm as It Is receved. If the ncome from the fm does not e ceed such far
market vaue, there s no further ta .
In addton to the moton-pcture ndustry, t Is understood that the coapsbe-
corporaton devce has aso been used n the budng-constructon trade by con-
tractors who have corporatons construct budngs for sae and then qudate
the corporatons and se the budngs as Indvduas.
Under secton 211 of your commttee s b the gan reazed from the sae
or e change (Incudng qudaton) of stock n a coapsbe corporaton w
be treated as ordnary Income for ta purposes, In the case of a stockhoder
ownng 10 percent or more of the corporaton s stock, If the gan reazed
from the sae or e change of the stock durng the year s more than 70 percent
attrbutabe to property produced by the corporaton, and the gan s reazed
wthn 3 years foowng the competon of the manufacture, constructon, or
producton of the property.
Ths provson s appcabe ony to gans reazed after December 31, 19 9,
but no nference sha be drawn from the amendment wth respect to gans rea-
zed pror to 19 0.
It Is estmated that the cosng of the coapsbe corporaton oophoe w
produce appro matey 3 mon addtona revenue annuay.
( ) C PIT L G INS OF NONR SID NT LI NS
Under e stng aw capta gans of nonresdent aen Indvduas not engaged
n trade or busness n the Unted States are e empt from Income ta .
number of cases have been brought to the attenton of your commttee n whch
such nonresdent aens are escapng the capta gans ta , athough n fact they
are n ths country for consderabe perods and carry out transactons by whch
capta gans are reazed.
Secton 212 of your commttee s b deas wth ths oophoe by mposng a
ta on the net amount of capta gans derved from sources wthn the Unted
States by a nonresdent aen Indvdua not engaged n trade or busness n the
Unted States, but temporary present theren. If such nonresdent aen has
been wthn ths country for ess than 90 days durng the ta abe year, the ta
appes ony to such gans as were reazed durng hs presence n the Unted
States. If he was prestnt 90 days or more, the ta appes to a such gans
durng the entre ta abe year, whether or not he was present In the Unted
States at the tme the saes occurred.
Generay, the rate Imposed on such gans w be 30 percent, whch s the rate
apped under e stng aw to nonresdent aen ndvduas not engaged n trade
or busness n the Unted States on ther other ncome arsng from sources
wthn the Unted States. The 30 percent rate Is somewhat hgher than the
ma mum rate now apped to ong-term capta gans, but, of course, we beow
the rates frequenty appcabe to short-term capta gans. Where the ta -
payer s gross ncome from sources wthn the Unted States Is 1 , 00 or more,
the ta w be 30 percent or the amount cacuated under the reguar ncome
ta rates, whchever Is the arger.
Ths amendment, ke other sectons of yonr commttee s b, s mted by the
genera rue set out n secton 213 of the b, that
No amendment made by ths ct sha appy n any case where ts appcaton
woud be contrary to any treaty obgaton of the Unted States.
Ths amendment w appy to ta abe years begnnng after December 31,19 9.
It Is antcpated that ths amendment w ncrease the revenues by about
1 mon annuay.
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(W) UNIT D ST T S MPLOY S IN T POSS SSIONS
Secton 2 1 of the Interna Revenue Code e empts from ta the Income of
Indvdua ctzens and domestc corporatons from sources outsde the Unted
States If 0 percent or more of ther gross ncome Is derved from sources wthn
a possesson of the Unted States and 0 percent or more of ther gross Income
Is derved from the actve conduct of a trade or busness wthn a possesson
of the Unted States. For the purposes of secton 2 1, however, Unted States
possessons do not ncude the rgn Isands. Indvduas are entted to ths
e empton whether they engage In a trade or busness on ther own account or
as empoyees or as agents. The e empton has been nterpreted as appyng to
mtary and cvan personne empoyed by the Unted States.
Mtary and cvan personne of the Government who are ctzens of the
Unted States are not e empt from ncome ta when they are statoned n any
other part of the word, and ther e empton whe statoned In the possessons s
not n any way reated to the orgna purpose of secton 2 1, v-hch was to
encourage mercan busnesses n the possessons.
Secton 216 of your commttee s b emnates the speca treatment accorded
the mtary and cvan empoyees of the Unted States Government and ts
agences who are statoned In the possessons. Wages pad to them n ta abe
years begnnng after December 31, 19 9, for servces to the Unted States or ts
agences performed n such possessons w not be consdered Income from such
possessons, In determnng whether they are entted to the benefts of secton
2 1 of the Code, and w be sub|ect to ta as Income from sources wthn the
Unted States. Wthhodng on such wages w appy, effectve anuary 1, 19 1.
( ) ST T T D DUCTION FOR SUPPORT OF D P ND NTS
Secton 12(b) of the Code aows the gross estate of a decedent to be reduced
for estate ta purposes by amounts reasonaby requred and actuay e pended
for the support of the decedent s dependents durng settement of the estate to
the e tent that such e penses are aowed aganst the estate by State aw. Ths
deducton Is Inconsstent wth the concept of the estate ta as a ta on n prop-
ertes transferred at death. In practce It has dscrmnated n favor of estates
ocated n States whch authorze bera aowances for the support of depend-
ents, and It has probaby aso tended to deay the settement of estates.
Ths amendment w appy wth respect to estates of decedents dyng after
the date of enactment of ths b.
Secton 02 of your commttee s b repeas ths partcuar feature of the
estate ta aw. It Is estmated that ths acton w ncrease the revenues by
about 3 mon annuay.
I . Other d|ustments n the Ta Laws
( ) C RRY-O R OF USIN SS LOSS S
Secton 21 of your commttee s b amends the net operatng oss deducton
provded under secton 122 of the Interna Revenue Code. Under e stng aw
a busness oss In the ta abe year may be carred back aganst Income In the
two precedng years, and carred forward aganst the ncome of the two subse-
quent years. Your commttee s b substtutes for ths 2-year carry-back and
2-year cnrry-forward, a 1-year carry-back and a -year carry-forward.
One effect of ths change s to e tend the perod over whch busness ncome
can be averaged from to 7 years, thus reducng the ta dsadvantages whch
occur to busnesses wth fuctuatng Incomes. Such ncomes are assocated wth
unusua busness rsks and occur reatvey frequenty among sma atad new
busnesses. ence the e tenson of the averagng perod from to 7 years w
provde a rea stmuus to venture capta generay and to sma and new busness
n partcuar.
Your commttee s amendment paces greater emphass on the oss carry-
forward and ess on the oss carry-back than Is found In e stng aw. Ths
change aso provdes an addtona stmuus to busness Investment. pro-
vson under whch reef Is granted prmary when the busness s brought back
to a proftabe bass, provdes a greater ncentve to management and Investors
ake than a provson whch aows the osses of the present to be fnanced by
the refund of ta es pad n the past. The Increased emphass on the carry-
forward Is to the marked advantage of new busnesses, whch do not beneft n
any way from a carry-back, nnd estabshed busnesses whch are undergong a
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matera e panson. Moreover, the carry-forward seems to rase fewer admn -
tratve probems than a carry-back of equa ength.
though the advantages of the carry-forward are substanta, your commute
recommends the retenton of a 1-year carry-back In order to provde reef a
partcuar crcumstances where the carry-forward cannot be used or s
Inapproprate.
Under your commttee s b the 2-year carry-back and 2-year carry-forward
w contnue to appy to osses ncurred In ta abe years begnnng before
anuary 1, 19 0. Losses ncurred n ta abe years begnnng after December 31,
19 9, w be sub|ect to the new rue.
Snce ths amendment e tends the perod of averagng, some revenue oss s
Invoved. owever, no oss w be reazed for severa years and the tme of
appearance and the amount of the eventua revenue oss are very uncertan nnd
w depend upon future busness condtons.
( ) OLDING P RIOD IN T C S 07 C PIT L SS TS
Under e stng aw the more favorabe treatment accorded capta gans s
restrcted to gans on capta assets hed for more than 6 months. Secton
209(e) of your commttee s b reduces ths hodng perod from 6 months to 3.
ssentay the dstncton between ong- and short-term gans and osses s
ntended to confne the more favorabe ta treatment to the gans and osses
reazed by Investors and the hodng perod requrement s the test by whch
the nvestor s dstngushed from the specuator, whose ndvdua ventures
n the markets for capta assets tend to be of comparatvey short duraton.
In the opnon of your commttee the 6-month hodng perod requrement
used n e stng aw s onger than necessary, and there are very good reasons
for reducng the requrement to the mnmum consstent wth the fundamenta
pocy of the Congress on the ta aton of capta gans. ong hodng perod
has a dsturbng effect on prces n the markets for capta assets, whch s most
unfortunate. When prces rse, as has been the case n the securty markets
durng recent months, saes that woud otherwse have occurred do not take
pace because the owners of the assets desre to hod them unt they can quafy
the gan as ong-term and obtan the resutng ta benefts. The consequence
s that a check on the prce movement whch woud otherwse appear s mssng.
Your commttee s acton n reducng the hodng perod from 6 months to 3 w
reduce ths tendency, thus contrbutng to the stabzaton of the securty mar-
kets whch s hghy desrabe, snce t tends to encourage the fotaton of new
ssues and mprove the fow of venture capta so essenta to the contnued
progress of our economy.
In the opnon of your commttee the reducton In the hodng perod from 6
months to 3 w not mpar the effectveness of ths test as a devce for confnng
the more favorabe ta treatment to the nvestor s group.
The reducton n the hodng perod w be appcabe to ta abe years be-
gnnng after the date of enactment of ths b, and t w appy to saes or
e changes made after that date n the case of ta abe years begnnng on or
before that date.
(C) T TR TM NT OF PU RTO RIC N R SID NTS
Under the e stng Federa ndvdua ncome ta aw a dsparty e sts be-
tween the treatment accorded two dfferent casses of Unted States ctzens
who are resdents of Puerto Rco, those who are ctzens ony by reason of the
organc acts estabshng the government of Puerto Rco and those who are ct-
zens because they were born or naturazed n the Unted States. Puerto Rcan
resdents who are Unted States ctzens ony as a resut of the organc aw are
ta ed by the Unted States on any ncome derved from sources n the Unted
States n the same manner as nonresdent aens.
Ctzens of the Unted States who are resdents of Puerto Rco but derve ther
ctzenshp from the Puerto Rcan organc aw are aso dvded Into two groups
for ta purposes, dependng upon whether or not they are egbe for the speca
treatment provded for ncome from sources wthn the Unted States possessons
under secton 2 1 of the Interna Revenue Code. To be egbe for ths treat-
ment 0 percent of the ndvdua s gross ncome must be derved from Unted
States possessons and 0 percent of hs gross ncome must be derved from the
conduct of a trade or busness wthn a possesson of the Unted States ether
on hs own account or as an empoyee. These ndvduas are ta ed by the
923 30 1 2
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Unted States ony on Income from sources wthn the Unted States. They re-
ceve the reguar deductons to the e tent that they are aocabe to Income from
sources wthn the Unted States and are sub|ect to the reguar Indvdua
Income ta rates, but receve ony a snge persona e empton.
Those who do not quafy under secton 2 1 are ta ed by the Unted States on
ther Income from n sources, Incudng Puerto Rco, but receve a foregn ta
credt on ta es pad to Puerto Rco or to any foregn country. They receve the
ordnary deductons and e emptons.
For the purposes of Its own Indvdua Income ta , Puerto Rco does not ds-
tnqush between those of ts resdents whose Unted States ctzenshp depends
upon organc aw and those who were born or naturazed n the Unted States.
It ta es ther ncome from a sources, ncudng the Unted States, and aows
a ta credt for ta pad to the Unted States or to a foregn country.
In the opnon of your commttee the e stng Federa ncome ta treatment of
Unted States ctzens n Puerto Ron s confusng and the dscrmnaton aganst
those who derve ther ctzenshp from the organc aw s unfar. Moreover,
t Is most unfortunate to cassfy ctzens of the Unted States as nonresdent
aens for ta purposes. Under secton 217 of your commttee s b a Unted
States ctzens who are bona fde resdents of Puerto Rco durng the entre
ta abe year receve the same ta treatment. They are not ta ed under the
Federa Indvdua Income ta wth respect to any ncome derved from sources
wthn Puerto Rco. The ta s mted to Income derved from sources outsde
Puerto Rco, ncudng ncome from the Unted States tsef. The wthhodng
ta of 30 percent of gross ncome w no onger appy to resdents of Puerto
Rco who are ctzens of the Unted States ony by reason of organc aw nor are
they to be deprved of e emptons and the benefts of ncome spttng as under
e stng aw.
Puerto Rcan resdents are snged out In ths fashon because Puerto Rco s
In a unque poston. It s nether a foregn country nor an ntegra part of the
Unted States. Moreover, It dffers from a other possessons In that t has ts
own ncome ta aw whch takes the pace of the Federa Income ta aw. Fur
these reasons your commttee beeves t Is desrabe n the case of Puerto Rcan
resdents to appy the Unted States ta ony to Income derved from sources
outsde of Puerto Rco; for ncome from sources wthn Puerto Rco the Puerto
Rcan ncome ta akes the pace of the Unted Sates ncome ta .
Snce Puerto Rco aows a credt for ncome ta es pad to the Unted States,
the Puerto Rcan ta woud n effect appy ony to ncome derved from Puerto
Rco e cept when the Puerto Rcan ta s hgher than the Unted States ta .
In such a case Puerto Rco woud coect a ta equa to the dfference between
the Puerto Rcan rates and the Unted States rates appcabe to ncome derved
from sources outsde Puerto Rco.
There need be no fear that as a resut of your commttee s proposa anyone
w gan a ta beneft by spttng hs ncome In two and beng sub|ected to
ta on part of It by Puerto Rco and the other part by the Unted States. Wth
respect to Puerto Rcan resdents, Puerto Rco, snce t frst ncudes the Unted
States Income n ts ta base and then aows a credt for ncome ta es pad
to the Unted Staes, w coect a ta at reatvey hgh effectve rates on
the Income from Puerto Rcan sources, whe the Unted States, snce the
b aows an e cuson for ncome derved from Puerto Rcan sources, woud
coect a ta at reatvey ow effectve rates. ssumng the rate schedues were
the same In both the Unted States and Puerto Rco, the combned ta woud
be the same as woud be coected by ether ursdcton If the whoe Income
had been sub|ect to Its ta es none. In a smar fashon, If the ndvdua
Is a resdent of the Unted States, the Unted States woud coect the ta at
the reatvey hgh effectve rates and Puerto Rco at reatvey ow effectve
rates.
(D) CONT MPL TION OF D T
Secton 01 of your commttee s b changes the rue under the estate ta
deang wth the ta abty of transfers n contempaton of death. Under
e stng aw a such transfers are ncuded n the gross estate and there s
a rebuttabe presumpton that transfers made wthn 2 years pror to death
are made In contempaton of death.
Whe the Incuson In the gross estate of transfers n contempaton of death
has ong been regarded as necessary to prevent avodance of the estate ta ,
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the admnstraton of ths feature of the estate ta aw has aways proved
dffcut. Prncpay ths s due to the fact that contempaton of dent deas
wth the Intent of the transferor. Intent s e tremey dffcut to estabsh n
any case and becomes ncreasngy so wth the passage of tme. Undoubtedy
many gfts n contempaton of death have escaped the estate ta because of
the dffcuty whch the Government encounters n reconstructng the motves
of the deceased. On the other hand, compants have been receved that the
ureau of Interna Revenue has n some cases asserted that gfts made many
years before death were In contempaton of death wthout havng much bass
for the asserton. s a resut e ecutors of estates are confronted wth an un-
peasant choce between compromsng the asserted ta abty or engagng
n e pensve and dffcut tgaton. t the present tme ths probem hangs
over any person who makes a gft, even though he e pects to ve for many
years, uness he can prepare evdence demonstratng that the gft was made
prmary for nonta reasons.
Secton 01 of your commttee s b removes from the scope of the contem-
paton of death cause a transfers made more than 3 years pror to the date
of death. On the other hand, the burden of showng that the transfer was not
n contempaton of death w be borne by the estate n n cases where the
transfer was made wthn a perod of 3 years endng wth the date of death.
Ths w strengthen the poston of the Government n cases where the transfer
occurred between two and three years pror to the date of death.
The change w be effectve ony wth respect to the estates of decedents
dyng after the date of enactment of ths ct. It s estmated that ths pro-
vson w reduce the revenues by about mon a year when n fu operaton.
( ) DISTRI UTIONS IN ID OF D C D NTS ST T S
It has been brought to the attenton of your commttee that the probem of
fnancng the estate ta s acute n the case of estates consstng argey of
shares n a famy corporaton. The market for such shares s usuay very
mted, and t s frequenty dffcut, f not mpossbe, to dspose of a mnorty
nterest. If, therefore, the estate ta cannot be fnanced through the sae of
the other assets n the estate, the e ecutors w be forced to dspose of the
famy busness. In many cases the resut w be the absorpton of a famy
enterprse by arger compettors, thus tendng to accentuate the degree of
concentraton of ndustry n ths country.
Two potenta avenues of reef are avaabe under e stng nw and regua-
tons, but nether provdes a truy satsfactory remedy. Secton 22(a) of
th Interna Revenue Code permts the Commssoner of Interna Revenue to
e tend the tme for payment of the estate ta n cases of undue hardshp for
a perod not n e cess of 10 years. Snce ths e tenson s competey at the
dscreton of the Commssoner, e ecutors cannot fee secure n reyng upon
t as a means of sovng ther ta -payment probem. Moreover, an nterest rate
of percent s mposed when the payment of the ta s postponed under
secton 22(a). The earnngs of the busness whch are pad over to the
estate are, of course, sub|ect to the corporate and ndvdua ncome ta es. It
s ony the net return remanng after these ta es reduced by percent that
provdes the margn out of whch the ta may be accumuated durng the perod
of postponement. Ordnary ths margn w not be suffcenty arge to sove
the probem at ssue. Furthermore, under ths approach the Government s
recept of the ta s deayed.
The other possbe remedy e sts because of a reguaton whch sets up an
e cepton to the rue that the funds pad out through the redempton of the
outstandng securtes of a corporaton out of accumuated earnngs w be
ta abe as a dvdend to the recpent. The reguaton n queston (Reguatons
111, secton 29.11 -9) states that
a canceaton or redempton by a corporaton of a of the stock of a partcuar
sharehoder, so that the sharehoder ceases to be nterested n the affars of the
corporaton, does not effect a dstrbuton of a ta abe dvdend.
Whe ths reguaton provdes much needed reef n certan cases, t does not
consttute a satsfactory remedy for the probem at ssue here, snce n order
to quafy under the reguaton the estate must dspose of ts entre hodngs
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In the famy busness. In most cases ths w be tantamount to the wthdrawa
of the famy from the busness.
Your commttee Is of the opnon that remeda acton s desrabe n order
to prevent the enforced sae of the famy busnesses whch are so vta and
desrabe an eement n our system of free prvate enterprse. Therefore, secton
20 of your commttee s b amends secton 11 (g) of the Interna Revenue Code
so as, to remove from the category of a ta abe dvdend payments made nnder
certan carefuy restrcted crcumstances n the redempton by the ssung cor-
poraton of a porton of ts stock hed by a decedent s estate. To quafy for
such treatment the redempton must bo made wthn the perod of the statute
of mtatons for the assessment of the estate ta ; and the decedent s stock n
the corporaton carryng out the redempton must be more than 70 percent of
the decedent s net estate. The e cepton from the provsons of secton 11 (g)
w appy ony to so much of the proceeds of the stock as does not e ceed the
tota of the estate, nhertance, egacy, or successon ta es mposed because of
the decedent s death.
Ths statutory e tenson of the prncpe contaned n the e stng ncome ta
reguatons w provde an effectve method of fnancng the payment of the
ta when an estate conssts prmary of stock n a cosey hed busness, thus
emnatng, n most cases, the need for dsposng of the famy s nterest n the
busness. On the other hand the crcumstances under whch such reef s ava-
abe are narrowy denned and w restrct reef to stuatons n whch true
hardshp e sts.
The amendment made by ths secton of the b w be appcabe to ta abe
years endng on or after the date of enactment of the b, and t w appy ony
to amounts dstrbuted on or after that date.
The revenue oss resutng from ths secton of your commttee s b w be
sma.
(F) P RC NT G D PL TION
t your commttee s hearngs on ths b a number of wtnesses ponted oat
that the depeton provsons of e stng aw dscrmnate aganst the producers
of certan nonmetac mneras, Incudng coa. stng aw permts depeton
based on cost to a the mnng ndustres, but aows percentage depeton to
o, gas, sufur, meta mnes, and certan enumerated nonmetac mneras. If
ths produces a arger deducton. The rate aowed n the case of coa s
percent of gross ncome. The other enumerated nonmetac mneras other than
sufur receve 1 percent, whch s aso the rate aowed to meta mnes.
The testmony before your commttee reveaed that n a number of cases non-
metac mneras whch are not enumerated n e stng aw are compettve wth
the mneras recevng percentage depeton or have |ust as good a cam for such
treatment as the enumerated mneras. The testmony receved by your com-
mttee ndcated aso that the C percent rate aowed n the case of coa Is of
tte practca vaue, and that the coa-mnng Industry s pecuary n need of
more favorabe ta treatment because of the nroads on ts potenta markets
by aternatve sources of energy, partcuary o and gas.
Secton 20 of your commttee s b adds to the st of nonmetac mneras
whch may eect percentage depeton at a 1 percent rate, bora , fuer s earth,
refractory and re cay, quartzte, perte, datomaceous earth, metaurgca and
chemca grade mestone, and trno. stng aw aows the 1 percent rate to
thennrdte, but ony when t s obtaned from brnes, or m tures of brne. Ths
restrcton Is removed by your commttee s b.
The b Increases the percentage aowed In the case of coa from to 10
percent, and sets up a new group of mneras to whch percentage depeton
s avaabe at the rate of percent. Ths group conssts of sand, grave, grante,
marbe, stone, brck and te cay, shae, and she.
The rates used under the percentage depeton opton are, of course, apped
to the gross Income from the property. In order to restrct depeton to the
actua product of mnera e tracton, t s stpuated n your commttee s b
that the gross Income to whch the percentage depeton rate s to be apped
sha not ncude Income resutng from the transportaton of the product
beyond the property.
It s est-mated that these changes In the percentage depeton aowance w
reduce the revenues by about 3 mon a year when fuy effectve.
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29
D T IL D DISCUSSION OF T T C NIC L PRO ISIONS OF T
ILL
TITL I. CIS T S
Past I. Retaers cse Ta es
S CTION 101. R DUCTION OP T ON LDG G ND R MO L OF ND GS
ND C RT IN OT R IT MS FROM T
Ths secton amends secton 16 1 (a) of the Interna Revenue Code to reduce
the present rate of ta thereby Imposed on uggage, etc., from 20 to 10 percent
and to e empt from the ta purses, handbags, pocketbooks, waets, bfods, and
card, pass, and key cases now ta abe under secton 16 1(a)(2) and certan
cases, bags, and kts now ta abe under secton 16 1(a) (3), not Incudng toet
cases whch reman sub|ect to ta . rtces removed from the ta mposed by
ths secton, whch are wthn the scope of the present ta Imposed by secton
2 00 of the Code on |ewery as artces made of, or ornamented, mounted or
ftted wth, precous metas or Imtatons thereof, w contnue to be sub|ect
to ta , under secton 2 00.
S CTION 102. R T IL RS CIS T S ON W LRY ND FURS
Ths secton amends secton 16 0 of the Interna Revenue Code to reduce from
20 to 10 percent the present rate of ta mposed by sectons 2 00 and 2 01 of
the Code on |ewery and furs, and to e empt from ta watches whch se for
not more than 6 , now ta ed at the rate of 10 percent, and cocks whch se
for not more than , now ta ed at the rate of 10 percent If of the aarm type
and at 20 percent f not. so e empted are handcraft or hobby pro|ect kts
sod for not more than 10 cents each, now sub|ect to the 20 percent rate.
Subsecton (d) amends secton 2 00 of the Code to provde that the ta wth
respect to a fountan pen or mechanca penc sha appy ony to the cap f t
aone contans precous meta for ornamenta purposes and f t has a separate
prce at reta. It Is aso provded, In the case of a smoker s ppe, that f ony
the stem or the bow contans precous meta for ornamenta purposes, and f
such ornamented part has a separate prce at reta, the ta sha appy ony to
such ornamented part. In such cases the ta sha be computed wth reference
to such separate prces.
Subsecton (d) aso amends secton 2 00 of the Code to e empt from the ta
thereby mposed, any artce whch s a combnaton of a cock and an advertsng
sgn If the sum of the cost of the cock movement, hands, and numeras to the
manufacturer of such artce s not more than 30 percent of the entre cost of
such artce to such manufacturer.
Under e stng aw saes of |ewery or furs by auctoneers or other agents on
behaf of estates of decedents not engaged n the busness of seng ke artces,
and on behaf of. other persons (ncudng mnors, ncompetents, and other per-
sons represented by ega representatves) not engaged n such busness, are
not consdered saes at reta. Subsecton (e) makes such saes ta abe. Under
the amendment the auctoneer or other agent s consdered the person who makes
the ta abe sae, and must therefore make the return and pay the ta . mted
e empton s provded n the case of such an aucton hed at the home of the
owner of the |ewery or furs. rtces (otherwse ta abe by reason of the amend-
ment) may be sod ta -free n an amount of 100. Thus, for e ampe, f |ewery
were frst sod n the owner s home for 0 and a fur coat were ne t sod at
the same sae for 1 0, the sae of the |ewery woud be ta -free and the reman-
ng 60 of the 100 e empton woud be apped aganst the coat eavng t ta -
abe to the e tent of 90 of ts saes prce. Saes of nonta abe artces woud
not be consdered n appyng the 100 e empton. Ony one e empton s to be
aowed regardess of the perod of tme durng whch the aucton sae takes
pace. For the purposes of ths e empton, sae at the home of a decedent Is
consdered as at the home of the owner. The e empton has no appcaton n
the case of saes by an auctoneer or other agent on behaf of a decedent or per-
son who was engaged In the busness of seng the artces sod. Ths amend-
ment has no effect upon aucton saes of abandoned property by raroads, post-
offces, etc., where snch saes are conducted by empoyees thereof rather than by
auctoneers or other agents on ther behaf.
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S CTION 103. R T IL RS CIS T ON TOIL T PR P R TIONS
Ths secton amends secton 16 0 of the Interna Revenue Code to reduce the
present rate of ta mposed by secton 2 02(a) of the Code on toet artces
from 20 to 10 percent and amends secton 2 02(a) to e empt from the ta
thereby mposed aromatc cachous and toet artces ntended to be used or
apped ony n the care of babes. The determnaton of whether toet artces
are Intended to be used or apped ony n the care of babes w be made ony
by reference to the advertsng wth respect to, and the abeng contaned on.
the artce. If an artce s advertsed and abeed ns beng for use n the care
of babes and s not advertsed or abeed as usabe by persons other than babes
the artce s e empt from ta even though the partcuar purchaser buys It for
adut use. On the other hand, an artce whch s represented by advertsng
or abeng as ft for adut use n addton to use n the care of babes w not be
e empt from ta even though sod to a purchaser who ntends to use the artce
ony n the care of babes.
Under e stng aw toet artces sod to a beauty paror, barber shop, or
smar estabshment for use n the operaton thereof are ta abe when sod.
rtces sod to such estabshments for resae are not ta abe unt sod by
them. rtces procured by such estabshments ta -free for resae and actun y
used n operaton of the pace are ta abe when frst set apart for such use. Un-
der the amendment made by secton 103(d) to secton 2 02(b) of the Code toet
artces sod to such estabshments, for use In the operaton thereof, are e -
empted from ta . The resae of toet artces at reta by such estabshments
w contnue to be ta abe, as under present aw.
S CTION 10 . R T IL S L S r UNIT D ST T S OR Y ITS G NCI S OR
INSTRUM NT LITI S
In order to cear up any doubts reatve to the ta abty of artces sod at
reta wthn the Unted 3tates (ncudng aska and awa) by the Unted
States or any agency or nstrumentaty thereof, Incudng post e changes, shps
stores, etc., ths secton of the b adds secton 2 13 to the Interna Revenue
Code so as to e pressy provde that the ta es on artces sod at reta sha
appy to artces sod by the Unted States or any agency or nstrumentaty
thereof uness saes by such agency or nstrumentaty are specfcay e empted
therefrom by statute. Whe the amendment Is sub|ect to the genera effectve
date provsons set forth In secton 10 of the b, t Is beeve that the amend-
ment does not change e stng aw.
S CTION 10 . FF CTI D T OF P RT I
Ths secton provdes that the amendments of the Interna Revenue Code made
by part I of tte I of the b, reatng to retaers e cse ta es, sha appy ony
to artces sod on or after the frst day of the frst month whch begns more than
10 days after the date of the enactment of the ct. For such purpose an artce
Is consdered to be sod when possesson or the rght to possesson passes to the
purchaser. For e ampe. In the case of a ease or condtona saes contract
under whch rght to possesson of the artce passed to the essee or purchaser
pror to such frst day, e stng aw (ncudng e stng rates) w contnue to
appy wth respect to any renta or nstament payment made after such frst
day onpsuch ease or condtona sae, even though, n the case of such condtona
sae, tte to the artce does not pass to the purchaser unt after such frst day.
Part II. Ta on dmssons and Cabarets
S CTION 121. R DUCTION OF T ON DMISSIONS FROM 20 P RC NT TO 10
P RC NT
Ths secton and secton 122, by amendments of sectons 1C 0 and 1700(a)
of the Interna Revenue Code, reduce the present rate of ta mposed by secton
1700(a) of the Code on admssons from 1 cent for each cents or ma|or frac-
ton thereof to 1 cent for each 10 cents or ma|or fracton thereof. Thus, where
the admsson charge s 2 cents, the ta w be 2 cents Instead of cents as under
present aw. On an admsson charge of 26 cents the ta w be 3 cents.
S CTION 122. R MO L OF T ON FR DMISSIONS
Ths secton modfes the requrement under e stng secton 1700(a) (1) that
persons (e cept bona fde empoyees, muncpa offcers on offca busness, and
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chdren under 12 years of age), admtted free or at reduced rates, sha pay the
tame ta as persons payng the reguar admsson charge. Ths requrement s
retaned as to admssons to horse and dog races but otherwse there w be no
ta on free admssons and the ta on admssons at reduced rates w be meas-
ured by the amount actuay pad. osptazed veterans and hosptazed per-
sonne of the mtary, nava, and ar forces now entted to e empton when
admtted free w retan ths beneft wth respect to horse and dog races.
S CTION 123. MPTIONS F OM DMISSIONS T
Subsecton (a) of ths secton renstates the appcabty of secton 1701 of
the Interna Revenue Code whch e empted pror to October 1, 10 1, certan
admssons from the admssons ta .
Subsecton (b) amends secton 1701(a) of the Code so as to retan the e emp-
tons from the admssons ta whch e sted pror to October 1, 10 1, e cept n
the foowng respects:
(1) Under the amendment the admssons ta w appy to admssons to a
athetc games or e hbtons e cept those where the proceeds nure e cusvey
to the beneft of an eementary or secondary schoo. Under the pre-10 1 aw the
e empton from the admssons ta was dened ony wth respect to admssons
to an athetc game or e hbton the proceeds of whch nured whoy or party
to the beneft of a coege or unversty.
(2) The admssons ta w appy n the case of admssons to a wrestng
matches, prze fghts, or bo ng, sparrng, or- other pugstc matches or e hb-
tons, regardess of to whom the proceeds are payabe. Under the pre-10 1 aw
admssons to such e hbtons were n some eases e empt from ta .
(3) The e empton w not appy n the case of admssons to carnvas,
rodeos, or crcuses n whch any professona performer or operator partcpates
for compensaton. There was no correspondng provson n the pre-19 1 aw.
( ) The e empton wth respect to admssons a the proceeds of whch Inure
e cusvey to the beneft of socetes or organzatons conducted for the soe
purpose of Improvng any cty, town, vage, or other muncpaty s emnated
from the pre-10 1 e emptons. Many organzatons servng such functons are
specfcay aowed an e empton under other provsons retaned by the
amendment
( ) No e empton s granted under the amendment on the ground that n
the proceeds nure e cusvey to the beneft of persons n the mtary or nava
forces of the Unted States or to persons who have served n such forces and
are n need.
(6) Under pre-10 1 aw the e empton apped to admssons where the proceeds
nured e cusvey to the beneft of members of the poce or fre department of
any cty, town, vage, or other muncpaty or the dependents or hers of such
members. Under the amendment the proceeds must Inure e cusvey to the
beneft of a poce or fre department of any such ocaty or e cusvey to a fund
for the soe beneft of members of a poce or fre department or the dependents
or hers of such members.
(7) Opera companes not operated for the purpose of makng a proft are to
be consdered as educatona organzatons so that admssons a of the
proceeds of whch Inure e cusvey to the beneft of such companes w be
e empt from ta .
Subsecton (c) adds a new subsecton (d) to secton 1701 of the Code. Ths
new subsecton grants an e empton coverng admssons to factes for physca
recreaton, such as swmmng poos, bathng beaches, and skatng rnks (ncud-
ng e hbtons and tournaments conducted at such factes) operated by, and
wth the entre proceeds nurng to, States and potca subdvsons thereof,
such as countes and ctes, or the Unted States, and agences and nstrumen-
tates of the foregong. The new e empton does not encompass spectator
factes, such as zoos and aquarums.
Subsecton (d) of secton 123 of the b provdes for the abatement of any
penaty whch a State or potca subdvson may have ncurred for faure
to coect ta on admssons pror to anuary 1, 10 0, to swmmng poos or
bathng beaches operated by t. If any such penaty has been assessed and not
coected pror to the date of enactment of the ct, or s assessed on or after
such date, the assessment s to be abated. If such penaty Is coected by the
Unted States on or after the date of enactment of the act the amount so coected
s to be pad back as a penaty coected wthout authorty. Ta es coected from
patrons pror to he effectve date of the e empton must be pad to the Unted
States.
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S CTION 12 . FF CTI D T OF M NDM NTS R L TING TO DMISSIONS
Ths secton of the b provdes that the amendments made by the precedng
three sectons sha appy to amounts pad on or after the frst day of the fm
month whch begns more than 10 days after the date of the enactment of the
ct for admssons on or after such frst day.
S CTION 12 . T ON C R TS, ROOF G RD NS, TC.
present rate of ta Imposed by secton 1700(e) (1) of the Code on cabarets, roof
gardens, etc., from 20 to 1 percent.
Ths secton aso amends secton 1700(e) (1) of the Code to e empt from the
cabaret ta bona fde dance has, barooms, and other smar paces where the
6orvng or seng of ood,. refreshment, or merchandse s merey ncdenta to
the musc and dancng prveges furnshed uness the conduct of the pace s
such as to brng It wthn the norma concept of a roof garden, cabaret, or smar
pace. Ths determnaton w be made by reference to the over-a operaton
of the estabshment, Incudng such factors as the reatve ncome from the
severa actvtes over a perod of tme, the reatve porton of space devoted to
the varous actvtes, the type of refreshments served or sod, the scope and char-
acter of the entertanment furnshed, and the hours of operatons.
The purpose of ths amendment s to make It cear that the prncpes set forth
n the case of Geer . rmngham, coector of nterna revenue, Unted States
Dstrct Court, Northern Dstrct of Iowa, decded anuary 10, 19 0, are con-
trong n the determnaton of whether the estabshment nvoved s operatng
as a cabaret or as a dance ha, and to avod the broad constructon paced upon
the statute n the case of vaon musement Corporaton v. Unted States (16
Fed. (2d) 0 3), whch requres that dance has and smar estabshments be
ta ed as cabarets, even though the servng or seng of food, refreshments, or
merchandse s merey Incdenta.
The amendments made by ths secton become effectve at 10 a. m., on the frst
day of the frst month whch begns more than 10 days after the date of the
Pabt III
S CTION 1 1. R DUCTION OF T ON SNUFF ND ON PLUG ND TWIST
TO CCO
Subsecton (a) of ths secton amends secton 2000(a)(1) of the Interna
Revenue Code to -reduce the present rate of ta Imposed on snuff from 1 to
cents per pound.
Subsecton (b) amends secton 2000(a) (2) of the Code to reduce the present
rate of ta mposed on pug and twst tobacco from 1 to cents per pound.
S CTION 1 2. R T OF T ON CIG RS
Ths secton amends secton 2000(c) (1) of the Interna Revenue Code to set
up a new schedue for the ta aton of cgars weghng more than 3 pounds per
thousand. The present and proposed cassfcatons and rates are as foows:
P SF.NT
Ta rate
per U
Made to se at reta (cents):
Not more than 2. 2. 0
More than 2. and not more
than 3.00
More than and not more
than 6 .00
More than 0 and not more
than 7.00
More than and not more
than 1 10.00
than 20 1 .00
More than 20 20. 00
P 0PO D
Ta rat
Mad to se at reta (cents) :
Not more than 3. 2.00
More than 3. and nut more
than 0 2. 0
than . . 0
More than . and not more
than 13 . 0
than 17 . 0
than 23 11.00
than SO 1 . 0
More than 30 20.00
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S CTION 13 . LLOWING ST MPS TO TT C D IN FOR IGN COUNTRI S
TO C RT IN TO CCO PRODUCTS
Ths secton of the b amends sectons 2103(c) and 2112(c) of the Code so
as to permt mporters of tobacco, snuff, and cgars manufactured n foregn
countres to have Unted States revenue stamps attached to such products n
foregn countres, n the same manner and on the same bass as s now provded
n secton 2112(c) of the Code wth respect to cgarettes. The prvege w
appy ony In the case of tobacco, snuff, and cgars mported from foregn
countres whch grant recproca treatment to mercan e porters.
The amendment becomes effectve on the frst day of the frst month whch
begns more than 10 days after the date of the enactment of the ct.
S CTION 13 . FF CTI D T OF P RT III
Ths secton fes the effectve date of the new ta rates on snuff, pug and
twst tobacco, and cgars. The new rates appy to removas for consumpton
or sae made on or after the frst day of the frst month whch begns more than
20 days after the date of enactment of the ct.
Paet I . Occupatona Ta es
S CTION 1 1. DISTILL D SPIRITS US D IN T M NUF CTUR OF C RT IN
NON R PRODUCTS
Ths secton amends secton 32 0(1) (2) of the Interna Revenue Code to f
at a ower amount the rate of the speca (occupatona) ta requred to be pad
by certan persons to render them egbe for drawback of ta pad on sma
quanttes of dsted sprts wthdrawn and used n manufacturng or producng
medcnes, medcna preparatons, food products, favors, or favorng e tracts,
whch are unft for beverage purposes. Under e stng aw the owest rate s
2 per annum appcabe where the quantty wthdrawn does not e ceed 2
proof gaons. Under the amendment the rate s reduced to where the quan-
tty wthdrawn does not e ceed 10 proof gaons. Where the wthdrawas are n
e cess of 10 proof gaons the e stng speca ta rates w contnue.
Subsecton (b) of ths secton amends secton 32 0(1) ( ) of the Code to
ncrease to 7 the drawback of 6 per proof gaon aowed by secton 309(b)
of the Revenue ct of 19 3 on dsted sprts used n manufacturng or pro-
ducng medcnes or medcna preparatons. The drawback rate where dsted
sprts are used n manufacturng or producng food products, favors, and
favorng e tracts w contnue to be 6 per proof gaon.
Subsecton (c) of ths secton provdes that the amendment made by sub-
secton (a) sha be appcabe wth respect to a perods after une 30, 19 0,
and the amendment made by subsecton (b) sha be appcabe wth respect
to dsted sprts used after une 30, 19 0.
S CTION 1 2. T ON COIN-OP R T D MUS M NT ND G MING D IC S
Subsecton (a) amends secton 3267(a) (2) and (3) of the Interna Revenue
Code to Increase the present rate of the speca (occupatona) ta thereby
mposed wth respect to con-operated gamng devces from 100 to 1 0 per year.
Subsecton (b) amends secton 3207(b) of the Code to e empt 1-cent con-
operated amusement devces from the speca (occupatona) ta of 10 per year
now mposed by secton 3267(a) (1 of the Code. One-cent con-operated vendng
machnes whch dspense or entte a person to receve no prze other than
merchandse of a reta vaue of cents or ess w contnue to be sub|ect to the
10 ta , and a other gamng devces w contnue to be sub|ect to the ta
mposed by secton 3267(a) (2) and (3) of the Interna Revenue Code.
Subsecton (c) provdes that the amendments made by ths secton sha take
effect on the frst day of the frst month whch begns more than 10 days after
the date of enactment of ths ct, but no refund or credt sha be made or aowed
by reason of the amendment made by subsecton (b) wth respect to any ta
pad pror to such frst day.
S CTION 1 3. OWLING LL YS ND ILLI RD ND POOL T L S OF
MPT ORG NIZ TION
Ths secton amends secton 320 (a) of the Interna Revenue Code to e empt
from the speca (occupatona) ta wth respect to the operaton of each bowng
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aey or bard or poo tabe for the use of whch no cbarge s made and whch
s operated by an agency or nstrumentaty of the Unted States or by a nonproft
organzaton and ocated on the premses thereof. The amendment woud be
appcabe to any perod begnnng after une 30,19 1.
S CTION 1 . F D R L G NCI S O INSTRUM NT LITI S
In order to cear up doubts reatve to the appcaton to agences and nstru-
mentates of the Unted States, such as post e changes, shps stores, etc., of
the speca (occupatona) ta es mposed by chapter 27 of the Interna Revenue
Code, ths secton adds to the Interna Revenue Code a new secton, desgnated
32 3, whch e pressy makes such ta es appy to such agences and nstrumenta-
tes whch are not specfcay e empted therefrom by statute.
. P T . M NUF CTUR RS CIS T S
S CTION 161. M NDM NTS R L TING TO T ON TIR S ND INN R TU S
Subsecton (a) of ths secton amends secton 3 00(a) of the Interna Revenue
Code to reduce the present rate of ta thereby mposed on tres from to 3
cents per pound, and frcm 9 to 6 cents per pound n the case of nner tubes.
Subsecton (b) of ths secton amends secton 3 00(a) of the Code to e empt
from the ta thereby mposed on tres those of a-rubber constructon wthout
fabrc or meta renforcement, whether hoow center or sod, If they are not
more than 1 nches n dameter and not more than 1 nches n cross secton,
and those of e truded trng wth nterna wre fastenng agent. In genera,
ths w e empt such tres as those on chdren s toys, baby bugges, and awn
mowers.
Subsecton (c) of ths secton amends secton 3 03(e) of the Co e whch now
grants a credt aganst the ta Imposed by secton 3 03 (a) or (b) on truck or
automobe chasss, bodes, etc., wth respect to the ta pad on tres, tubes, and
automobe rados sod on or In connecton wth, or wth the sne of, a chasss,
body, or motorcyce ta abe under secton 3 03 (a) or (b). The amendment
grants a ke credt wth respect to ta pad on tres, tubes, and automobe rados
sod on or n connecton wth, or wth the sae of, an artce ta abe under secton
3 03(c) whch appes to parts or accessores of artces ta abe under secton
3 03 (a) or (b).
S CTION 1 2. T ON P RTS OR CC SSORI S FOR UTOMO IL S, TC.
Subsecton (a) of ths secton amends secton 3 03(c) of the Interna Revenue
Code to reduce the present rate of ta thereby mposed on automotve parts and
accessores from to 3 percent.
Subsecton (b) aso amends secton 3 03(c) of the Code to e empt recond-
toned and rebut parts and accessores from the ta thereby mposed on
automotve parts and accessores.
S CTION 1 3. R DUCTION OF T ON MUSIC L INSTRUM NTS FROM 10
P RC NT TO P RC NT
Ths secton amends secton 3 0 of the Interna Revenue Code to reduce from
10 to percent the present rate of ta thereby mposed on musca nstruments.
The rate of ta on rado recevng sets, phonographs, and phonograph records
remans at 10 percent.
S CTION 1 . N IG TION R C I RS SOLD TO T UNIT D ST T S
Ths secton deas wth communcaton or navgaton recevers of the type
used n commerca, mtary, or marne nstaatons hereafter n ths paragraph
referred to as navgaton recevers. Subsecton (a) amends secton 3 0 (a) of
the Interna Revenue Code to e empt from the ta thereby Imposed on rado
recevng sets, etc., the sae of navgaton recevers to the Unted States for ts
e cusve use. Subsecton (b) amends secton 3 0 (b) of the Code to e empt
from the ta thereby mposed on component parts of rado recevng sets, etc.,
the sae of any artce for use by the vendee as matera n the manufacture or
producton of navgaton recevers to be sod by hm to the Unted States for ts
e cusve use. Subsecton (c) amends secton 3 3(a) (1) of the Code to aow
a manufacturer or producer of navgaton recevers a credt or refund of ta
pad on artces ta abe under secton 3 0 (b) purchased for use by hm In the
manufacture or producton of navgaton recevers f such navgaton recevers
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have been sod by hm to the Unted States for Its e cusve use. Subsecton (d)
amends secton 3 3(a)(3)( ) of the Code to aow a credt or refund to a
manufacturer, producer, or mporter of navgaton recevers In the amount of
ta pad by hm wth respect to the sae thereof If he has In hs possesson
such evdence as reguatons may requre that such navgaton recevers have
been resod to the Unted States for ts e cusve use. Subsecton (e) amends
secton 3 (b) of the Code to e empt from the ta thereby Imposed on the use
of ta abe artces by the manufacturer, producer, or mporter thereof, artces
ta abe under secton 3 0 (b) used n the manufacture or producton of navga-
ton recevers sod to the Unted States for Its e cusve use.
S CTION 1 3. R DUCTION OP T OF R FRIG R TORS ND IMPOSITION OF
T ON UIC -FR Z UNITS
present rate of ta thereby mposed on househod-type refrgerators and certan
artces sutabe for use as parts of or wth such refrgerators from 10 to 7
percent, and to mpose a new ta at the rate of 7 percent on househod-type
unte for quck-freezng or frozen storage of foods and combnatons of such
househod type refrgerators and unts, and on artces sutabe for use as parts
of or wth such unts. Under e stng aw no ta s mposed on the sae of
certan artces sutabe for use as parts of or wth the househod-type refrgera-
tors used by the vendee n the manufacture or producton of, or as component
parte of, such refrgerators. Under the amendment no ta w appy n the
case of saes of certan artces sutabe for use as parte of or wth the house-
hod-type refrgerators or unts for quck-freezng or frozen storage to a manu-
facturer or producer of compete refrgerators, refrgeratng or coong apparatus,
or quck-freeze unts, whether or not of the househod type. If any such artces
are resod by such vendee otherwse than on or In connecton wth, or wth the
sae of, compete refrgerators, refrgeratng or coong apparatus, or quck-
freeze unts, manufactured or produced by hm, then he sha be consdered the
manufacturer or producer of such artces so resod. Sef-contaned ar-cond-
tonng unte contnue to be ta ed at the rate of 10 percent.
S CTION 1 6. R P L OF T ON C RT IN SPORTING GOODS
Ths secton amends secton 3 06(a)(1) of the Interna Revenue Code to
e cude from the ta on sportng goods the foowng-named tems:
asebas and other baseba equpment
asketbas
o ng goves and other bo ng equpment
Crcket bas and bats
Fencng equpment
Footbas and other footba equpment
Gymnasum equpment and apparatus
ockey equpment
Indoor basebas and other Indoor-baseba equpment
Lacrosse equpment
Mass bas
Push bas
Skates
Snow toboggans and seds
Soccer bas
Softbas and other Softba equpment
Track hurdes
autng equpment
oey bas and other voey-ba equpment
Water-poo equpment
Wrestng head harness
S CTION 1 7. R MO L OF C RT IN IT MS FROM T T ON L CTRIC, G S,
ND OIL PPLI NC S
Ths secton amends secton 3 06(a) (3) of the Interna Revenue Code to
e cude a number of Items from the present ta thereby Imposed on eectrc,
gas, and o appances. The amendment w e cude the foowng:
ectrc drect-motor-drven fans and ar crcuators not of the househod
or offce type.
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ectrc, gas, or o water heaters of the househod type.
ectrc nt rons.
ectrc ar heaters.
ectrc heatng pads and bankets.
Cookng stoves or ranges of the househod type.
ny artce desgned prmary for use as a baby botte warmer.
ectrc toasters of the househod type.
S CTION 1 . R DUCTION OF T ON P OTOGR P IC PP R TUS ND
R MO L OF C RT IN IT MS FROM SUC T
Ths secton amends secton 3 06(a)( ) of the Interna Revenue Code to
reduce the present rate of ta thereby mposed on cameras and camera enses
from 2 to 10 percent and on une posed photographc fm from 1 to 10 percent.
Ths secton aso w e cude the foowng tems from the e stng ta :
Photographc apparatus and equpment; une posed photographc fm not In
ros; -ray cameras; st-camera enses havng a foca ength of more than
120 mmeters; moton-pcture camera enses havng a foca ength of more than
30 mmeters; fm more than 1 0 feet n ength; and fm more than 2 feet In
ength and more than 30 mmeters In wdth.
owever, If any peson acqures fm not sub|ect to ta and ses t In, or n
connecton wth a sae thereof reduces t to, such form and dmensons that
t woud be ta abe f sod by a manufacturer, producer, or Importer, then such
person sha be consdered the manufacturer of the fm so sod by hm. -ray
fm, and cameras weghng more than pounds e cusve of ens and accessores,
contnue to be ta -e empt.
S CTION 169. R DUCTION OF T ON USIN SS ND STOR M C IN S
Ths secton amends secton 3 06(a)(0) of the Interna Revenue Code to
reduce the present rate of ta thereby mposed on busness and store machnes
from 10 to percent
S CTION 100. R MO L OF T ON C RT IN FIR RMS
Ths secton amends secton 3 07 of the Interna Revenue Code so as to e -
cude from the ta thereby mposed on frearms any frearm whch contans an
acton that has been prevousy used n the frng of a frearm for other than
testng purposes.
S CTION 101. R DUCTION OF T ON M TC S
Ths secton amends secton 3 09(a) of the Interna Revenue Code to reduce
the present rate of ta thereby Imposed on matches from 2 to 1 cent per thou-
sand. Fancy wooden matches and wooden matches havng a staned, dyed, or
coored stck or stem contnue sub|ect to ta at the rate of cents per thousand.
S CTION 102. RTICL S SOLD FOR US OF IRCR FT NG G D IN FOR IGN
TR D
Ths secton amends secton 3 3(a) (3) ( ) (II) of the Interna Revenue Code
to remove an nconsstency wth secton 3 1 In the matter of ta -free procure-
ment of suppes for certan arcraft Secton 3 1 permts ta -free saes of
artces for use as suppes, equpment, etc., of certan vesses, and for ths
purpose certan arcraft are gven a mted cassfcaton as vesses. Secton
3 13(a) (3) ( ) () now provdes for credt or refund of ta pad on artces used
or resod for use as suppes, equpment, etc., of such vesses, but contans no
provson correspondng to that of secton 31 1 e tendng a ke beneft wth
respect to arcraft The matter Is covered by amendng secton 3 3(a)(3)
( ) () to make It cover artces used, or resod for use, for any of the purposes,
but sub|ect to the condtons, provded n secton 3 1.
S CTION 10 . FF CTI D T OF P RT
Ths secton provdes that the amendments reatng to the manufacturers
e cse ta es (other than the amendments made by sectons 1 (c) and (e) and
162 of the b) sha appy ony to artces sod on or after the frst day of the
frst month whch begns more than 10 days after the date of the enactment of
the ct. For such purpose an artce s consdered to be sod when possesson
or rght to possesson passes to the purchaser. s ponted out n the dscusson
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of secton 10 (reatng to retaers e cse ta es) ths means, for e ampe, In the
case of a ease or condtona saes contract under whch rght to the possesson
of the artce passes to the essee or purchaser pror to such frst day, that e st-
ng aw (ncudng e stng rates) w contnue to appy wth respect to renta
or nstament payments made after such frst day on such ease or condtona
sae, even though (n the case of condtona sae) tte to the artce does not
pass to the purchaser unt after such frst day.
Past I. Ta ok Communcatons
S CTION 16 . T OF T ON T L P ON , T L GR P , TC., S R IC S
Ths secton amends In severa respects secton 3 6 of the Interna Revenue
Code whch ta es amounts pad for teegraph, teephone, and smar servces.
Subsecton 16 (a) amends secton 3 6 (a) to change the ta cassfcatons and
rates. The rate of ta on teephone or rado teephone to messages or conver-
satons for whch the charge s more than 2 cents s reduced from 2 percent,
the rate under secton 16 0 of the Code, to 20 percent Where the charge s ess
than 2 cents the rate s reduced from 1 to 10 percent. The 10 percent rate
appes whether the message or conversaton s reated to busness or otherwse.
In the case of domestc teegraph, cabe, or rado dspatches or messages the
rate s reduced from 2 percent, the rate under secton 16 0 of the Code, to 10
percent. Internatona teegraph, cabe, or rado dspatches or messages con-
tnue to be ta ed at the present 10 percent rate.
s under e stng aw, In computng the ta to be pad by Insertng cons n
con-operated teephones, a fracton of cents ess than 2 cents s dsregarded.
fracton of cents amountng to 2 cents or more s treated as cents.
The rate of ta on eased wre, teetypewrter, or takng crcut speca serv-
ces s reduced from 2 percent, the rate estabshed by secton 16 0 of the Code,
to 20 percent. Other wre and equpment servce, such as stock quotaton and
nformaton servce, and burgar or fre aarm servce, contnues to be ta ed at
the rate of percent.
The rate on oca resdence teephone e change servce and oca teephone
e change servce at attended pubc teephones s reduced from 1 percent, the
rate estabshed by secton 16 0 of the Code, to 10 percent. The ta on oca
busness teephone e change servce and any other teephone servce In respect
of whch a ta s not otherwse payabe under secton 3 6 (a) w contnue at
the present rate of 1 percent. mounts pad In connecton wth a termnaton
of servce are not to be consdered as amounts pad for teephone servce. s
under e stng aw, oca teephone e change servce pad for by nsertng cons
n con-operated teephones avaabe to the pubc w not be sub|ect to ta ,
e cept that where such servce Is furnshed for a guaranteed amount any amounts
pad under the guarantee and any other f ed perodc charges w contnue to
be sub|ect to ta at the rate of 1 percent.
Secton 3 6 (b) of the Code now e empts from ta amounts pad for eased
wre, etc., servces (otherwse ta abe under secton 3 6 (a) (2) where such
servces are utzed by common carrers, teephone and teegraph companes,
and rado broadcastng statons and networks, n the conduct of ther busnesses.
Subsecton (b) amends ths provson to e tend the same e empton to pubc
uttes. Subsecton (c) adds to secton 3 6 of the Code a new subsecton
e emptng from the ta mposed by secton 3 6 (a) (2) on eased wre, etc.,
servces utzed n furtherance of the educaton of Incapactated homebound,
shut-n, or hosptazed students or pups where such servce nvoves channes
and equpment for communcaton from or to a cassroom, schoo, or coege.
Subsecton (d) amends secton 16 0 of the Code to rescnd the mposton thereby
of teegraph and teephone ta rates whch are superseded by the rates set
forth In secton 16 (a) of the b.
S CTION 169. FF CTI D T OF P RT I
Ths secton f es the tme when the amendments made by secton 16 sha
take effect n reaton to the rate reducton date whch s the frst day of the
frst month whch begns more than 10 days after the date of enactment of the
ct. In genera the amendments appy wth respect to amounts pad on or
after the rate reducton date for servces rendered on or after such date. The
amendments do not appy wth respect to amounts pad pursuant to bs ren-
dered pror to the rate reducton date. The amendments appy wth respect to
amounts pad pursuant to bs rendered on or after the rate reducton date for
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servces for whch no prevous b was rendered, e cept wth respect to sock
servces as were rendered more than 2 months before such date. Servces ren-
dered more than 2 months before such date are governed by the provsons of
sectons 16 0 and 3 6 of the Interna Revenue Code n effect at the tme such
servces were rendered.
Secton 16 of the Interna Revenue Code (reatng to the war-ta rates
mposed by secton 16 0 of the Code on teephone, teegraph, rado, and cabe
factes) Is repeaed snce t w be obsoete upon enactment of the b.
Part II. Transportaton Ta es
S CTION 171. TR NSPORT TION OF P RSON.
Subsecton (a) of ths secton amends secton 16 0 of the Interna Revenue
Code to reduce the present rate of ta mposed by secton 3 60 (a) and (c) of
the Code on the transportaton of persons from 1 to 10 percent.
Subsecton (b) amends secton 3 69(b) of the Code to add to the e emptons
from te ta on the transportaton of persons thereby granted, an addtona
e empton coverng amounts pad for transportaton by boat for the purpose of
fshng from such boat
Subsecton (c) amends secton 3 69(a) of the Code to e empt from the ta
thereby mposed on the transportaton of persons, transportaton any part of
whch s to or from Puerto Rco or the rgn Isands, e cept wth respect to any
part of such transportaton whch s from any port or staton wthn the Unted
States, Canada, or Me co to any other port or staton wthn the Unted States,
Canada, or Me co.
The foowng e ampes ustrate the appcaton of ths e empton:
and purchase tckets n New York for transportaton aboard a vesse
bound from New York to San Francsco va the Panama Cana wth a stop
at Puerto Rco. s tcket enttes hm to transportaton to San uan,
Puerto Rco; and s tcket s for San Francsco, Caf. The amount pad by
Is not sub|ect to ta snce t s for transportaton to Puerto Rco. The
amount pad by D s not sub|ect to ta even though the voyage begns at a
port wthn the Unted States and ends at another port wthn the Unted
States, snce part of the transportaton was to Puerto Rco. C purchases a
tcket n New York for transportaton by ar from New York to San uan,
Puerto Rco, va Mam, Fa. C s ta abe wth respect to that part of the
transportaton whch s between New York and Mam.
S CTION 172. R DUCTION OF T ON TR NSPORT TION OF PROP RTY
Subsecton (a) of ths secton amends secton 3 7 (a of the Interna Revenue
Code to reduce the present rate of ta thereby mposed on the transportaton of
property other than coa from 3 to 1 percent of the amount pad for the
transportaton.
Subsecton (b) amends secton 3 7 (a) of the Code to reduce t e present rate
of ta thereby mposed on the transportaton of coa from to 2 cents per short
ton.
S CTION 173. FF CTI D T OF P RT II
Ths secton f es the effectve date of part II reatng to the ta es on the
transportaton of persons and property. The amendments made by ths part
appy to amounts pad on or after the frst day of the frst month whch begns
more than 10 days after the date of enactment of the ct for transportato
orgnatng on or after such frst day.
TITL II. INCOM T S
S CTION 201. MOUNTS R C I D UND R LIF -INSUR NC CONTR CTS
Subsecton (a) of ths secton of the b amends secton 22(b) (1) of the Code
reatng to e cuson of fe nsurance from gross ncome. Under e stng aw a
e empton s provded by secton 22(b) (1) for amounts receved under a fe-
nsurance contract pad by reason of the death of the Insured. udca de-
csons have construed ths provson as e emptng from ta the amount receved
by the benefcary of a fe-nsurance contract under an agreement requrng the
proceeds to be pad n Instaments rather than In a ump sum, whether by d-
recton of the Insured, or eecton by the benefcary under an opton In tb
pocy (Commssoner v. Wndow, 113 Fed. 2d) 1 (19 0) ; Commssoner v.
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Perce, 1 6 Fed. (2d) 3 (19 )). s a resut of ths constructon a benefcary
may receve ta -free not ony the amp sum that woud have been payabe at the
death of the nsured but In addton such e cess amounts as may be added by
the nsurer to such prncpa sum (when t Is pad n nstaments) by reason of
the runnng of tme.
The amendments made by subsecton (a) of ths secton woud sub|ect to
ncome ta the eement of such nstament payments whch Is n the nature of
nterest. Thus It Is provded that the amount that woud have been payabe at
the death of the Insured (f payment at a ater date had not been provded for)
sha be prorated, under reguatons prescrbed by the Commssoner wth the
approva of the Secretary, over the perod wth respect to whch such payments
are to be made, and the e cess of the amount receved n the ta abe year over
the amount determned by eucI proraton sha be Incuded n gross ncome.
The contempated operaton of the amendment may be ustrated as foows:
If the proceeds are payabe In nstaments for a f ed number of years, the
amount that woud have been payabe by the nsurance company Immedatey
upon the death of the nsured (f payment at a ater date had not been provded
for) s to be dvded by the tota number of nstaments payabe over the
f ed number of years for whch payment Is to be made, and the quotent repre-
sents the porton of each nstament to be e cuded from gross ncome. The
amount of each Instament In e cess of such e cuded porton s to be ncuded
n gross Income. For e ampe, f, at the nsured s death, 1,000 woud have
been payabe n a snge nstament, but 10 equa annua payments are made
n eu thereof, the porton of the nstament receved durng any ta abe year
to be e cuded from gross ncome Is 100 ( 1,000 dvded by 10). ny amount
receved as an nstament In e cess of 100 Is to be ncuded In gross Income.
If the proceeds are payabe n Instaments durng the fe of the benefcary
the amount of each Instament that Is to be Incuded n gross ncome w be
determned as above, e cept that the number of years to be used n the specfed
computaton w be determned by the fe e pectancy of the benefcary, as
cacuated by the tabe of mortaty used by the partcuar nsurance company
n determnng the amount of the annuty. The e cuson s aowed wth re-
spect to each nstament so ong as he ves. Thus, If n the e ampe above, the
benefcary had a fe e pectancy of 10 years and was to be pad equa annua
payments for fe, the porton of the nstament receved durng any ta abe
year to be e cuded from gross Income s 100 ( 1,000 dvded by 10) whether
the benefcary ves for ess or more than 10 years.
If the proceeds are payabe In nstaments for a f ed number of years and
for contnued fe, the amount of each nstament that s to be ncuded n
gross ncome w be determned ether as provded n the frst e ampe f the
f ed number of years for whch payment s to be made e ceeds the fe e -
pectancy of the benefcary, as cacuated by the tabe of mortaty used by the
partcuar nsurance company In determnng the amount of the annuty; or.
as provded n the second e ampe If such fe e pectancy e ceeds the specfed
f ed perod. In ether event the e cuson appes to every nstament receved
by the benefcary.
If the mode of settement contans refund features, the yeary e cuson w
be computed, under reguatons prescrbed by the Commssoner wth the ap-
prova of the Secretary, after e cudng the actuara vaue of such features.
If the mode of settement has been n effect pror to the frst ta abe year
of the ta payer begnnng after December 31, 19 9, the amount receved whch
woud have been e cuded annuay from gross Income had the commttee amend-
ment been appcabe from the death of the Insured sha be the amount to he
e cuded annuay n ta abe years sub|ect to ths amendment.
The amendment made by subsecton (a) Is appcabe wth respect to amounts
receved under a fe nsurance contract durng ta abe years begnnng after
December 31,19 9, whether or not the nsured ded before, on or after that date.
provson Is Incuded n subsecton (b) of ths secton to make It cear that
the amendment Is not ntended to affect amounts receved under poces payabe
under the War Rsk Insurance ct as amended, the Word War Fnance ct of
192 as amended, or the Natona Servce Lfe Insurance ct of 19 0, as amended,
to the e tent-that such amounts are presenty e empt from ta aton.
S CT ION 202. TR TM NT OP OND PR MIUM IN C S OF D L RS IN
T - MPT S CURITI S
Secton 202(a) of the b amends secton 22 of the Interna Revenue Code
by addng a new subsecton (o) to requre deaers n securtes to make an ad-
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|ustment for bond premum on certan ta -e empt bonds. The ad|ustment Is
requred ony n the case of short-term muncpa bonds, whch are defned
as obgatons Issued by a government or potca subdvson thereof on whch
the nterest s e cudabe from gross ncome, e cept such obgatons whch are
sod or otherwse dsposed of by the ta payer wthn 30 days after the date
of acquston by hm, or the earest maturty or ca date of whch s a date
more than years from the date on whch t was acqured by hm. Under
ths defnton f a deaer n securtes purchases or otherwse acqures a ta -
e empt bond ssued by a State or cty and ses the bond to a customer wthn
30 days after the date of ts acquston the ad|ustment provded for by the
amendment made by ths secton of the b w not appy. Smary, f for
e ampe, the ta -e empt muncpa bond acqured by the deaer on anuary 1,
10 0, matures anuary 2,10 , or f such bond cannot be caed before such date,
the amendment made by ths secton w not appy.
The ad|ustment requred, n the case of a deaer n securtes who computes
hs gross ncome from such trade or busness by the use of nventores and vaues
such nventores on any bass other than cost, s the reducton of cost of secur-
tes sod durng such year by the amount equa to the amortzabe bond premum
whch woud be dsaowed as a deducton f the deaer were an ordnary Investor
hodng such bond. The term cost of securtes sod s specfcay defned
as the amount ascertaned by subtractng the nventory vaue of the cosng
Inventory of a ta abe year from the sum of the nventory vaue of the openng
nventory for such year and the cost of securtes and other property purchased
durng such year whch woud propery be ncuded n the nventory of the
ta payer f on hand at the cose of the ta abe year.
If a deaer n securtes computes hs gross ncome wthout the use of nven-
tores or f hs nventores are voued at cost he Is requred to make an ad|ustment
smar to that whch he woud make were he an ordnary Investor. Thus, such
a deaer who ses or otherwse dsposes of a short-term muncpa bond durng
the year s requred to reduce the bass of the bond by the amount of the ad|ust-
ment whch woud be requred under secton 113(b) (1) ( ) were he an ordnary
nvestor.
Subsecton (b) of ths secton amends secton 113(b) (1) by addng new sub-
paragraph (I) thereto, and secton 12 by addng new subsecton (e). for the
purpose of provdng a reference In these reated sectons to the new provsons
contaned n secton 22(o).
The amendments made by ths secton of the b w be appcabe to ta abe
years begnnng after December 31, 10 0.
S CTION 20 . DI ID NDS-R C I D CR DIT
Ths secton of the b restrcts the aowance of the dvdends-receved
credt n the case of dvdends n knd. The dvdends-receved credt w be
mted to an amount not greater than percent of the ad|usted bass of
the property receved as a dvdend n the bands of the dstrbutng corporaton
at the tme of dstrbuton. For ths purpose, the ad|usted bnss s to be
ncreased n the amount of gan or decreased n the amount of oss. If any,
recognzed to the dstrbutng corporaton as a resut of the dstrbuton. The
dvdends-receved credts n no event w be aowed n an amount greater than
0 percent of the far market vaue of the property receved as a dvdend.
Ths amendment s to appy to ta abe years endng after December 31, 10 0,
but s appcabe ony wth respect to dvdends receved after such date.
CTION 20 . P RC NT G D PL TION
Ths secton of the b grants a percentage-depeton aowance at the rate of
percent, n the case of deposts of sand, grave, grante, marbe, stone, brck
cay, te cay, shae, cam she, and oyster she. Percentage-depeton aow-
ance s aso provded n the case of deposts of trpo, bora , fuer s earth,
refractory and fre cay, quartzte, perte, datomacoous earth, metaurgca-
grade mestone, and chemca-grade mestone, at the rate of 1 percent The
percent rate of percentage depeton now aowed for coa has been ncreased
to 10 percent. The aowances are of the stated percentages of the gross Income
from the property but not In e cess of 0 percent of the net ncome of the
ta payer (computed wthout aowance for depeton) from the property.
Subsecton (b) of ths secton makes a technca amendment to parafrraph
(2) of secton 11 (b) of the Code n order to emnate the necessty of stng
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by name those mnes for whch depcton based on dscovery vaue s dened by
reason of the aowance of percentage depeton.
Yonr commttee has made technca amendments to secton 11 (b)( )( )
whch do not ater Its substance. change has aso been made n the paren-
thetca cause statng the source from whch thenardte s derved. Under the
present wordng of the secton, percentage depeton s aowed for thenardte
produced from brnes or m tures of brne. To remove any ambguty your
commttee has changed the wordng of ths secton so that thenardte, Incudng
thenardte from brnes or m tures of brne, s permtted the percentage de-
peton aowance.
Secton 11 (b) ( ) ( ) of the Code (reatng to the defnton of gross ncome
from the property) s amended so as to provde, n effect, that, n computng
gross ncome from the mnera property, the gross ncome sha not be aug-
mented by vaue added as the resut of transportaton of the crude mnera
product from the property. The amendment s merey decaratory of e stng
aw.
S CTION 20 . CORPOR T RNINGS ND PROFITS CCUMUL T D PRIOR TO
M RC 1913
Ths secton amends secton 11 of the Interna Revenue Code to emnate
the e empton under whch dstrbutons by a corporaton to ts share-
hoders out of earnngs and profts accumuated before March 1, 1913, or
consstng of ncrease n vaue of property accrued before March 1, 1913, are
not sub|ect to ta as dvdends when receved by the sharehoders. Under
the amendments, dstrbutons made by a corporaton after December 31, 19 9,
out of ts earnngs or profts w consttute dvdends wthout regard to whether
the earnngs and profts were accumuated before March 1, 1913, or conssted
of gan from apprecaton In vaue accrued before March 1, 1913.
The basc amendments made by secton 20 are the amendments made by
subsectons (c) and (d) to secton 11 (a) and (b) of the Code. Secton
11 (a) of the Code at present provdes n substance that a dvdend means a
dstrbuton made by a corporaton to ts sharehoders (1) out of Its earnngs
or profts accumuated after February 2 , 1913, or (2) out of ts earnngs or
profts of the ta abe year. Secton 11 (b) provdes wth respect to earnngs
or profts accumuated, or ncrease n vaue of property accrued, before March
1, 1913, that such earnngs or profts may be dstrbuted e empt from ta after
the earnngs and profts accumuated subsequent to February 2 , 1913, have
been dstrbuted but that the ta -free dstrbutons sha be apped aganst and
reduce the ad|usted bass of the stock n the hands of the sharehoder. Sub-
secton (c) of ths secton of the b amends secton 11 (a) by e pandng the
defnton of a dvdend to ncude any dstrbuton out of accumuated earnngs
or profts and not merey a dstrbuton out of earnngs or profts accumuated
after February 2 , 1913. Subsecton (d) of ths secton of the b amends
secton 11 (b) by emnaton of the provson permttng the ta -free dstrbu-
ton of the earnngs or profts accumuated, or ncrease n vaue of property
accrued, before March 1, 1913, wth the resut that such a dstrbuton s made
sub|ect to the genera provsons of secton 11 (a).
Subsectons (a), (b), and (h) of ths secton of the b make conformng
amendments to secton 27(g) (reatng to treatment for purposes of dvdends-
pad credt of dstrbutons n qudaton chargeabe to earnngs and profts),
112(c) (2) (reatng to gan from e changes not soey n knd where a dstrbu-
ton has the effect of a ta abe dvdend), and 371(e) (2) (reatng to e changes
not soey n knd made pursuant to orders of the Securtes and change
Commsson) n that, as n the case of the amendment made by subsecton (c)
to secton 11 (a), they substtute n each secton for the reference made to
earnngs and profts accumuated after February 2 , 1913, as made In that
secton, a reference to accumuated earnngs or profts. Subsecton (e) of
ths secton of the b makes a conformng amendment to secton 11 (d) (re-
atng to other dstrbutons from capta) smar to that made by subsecton
(d) to secton 11 (b) n that t strkes the reference made n that secton to
ncrease n vaue of property accrued before March 1,1913.
Paragraph (1) of subsecton (f) of ths secton of the b amends secton
11 (1), to the e tent that that secton reates to the effect on earnngs and
profts of gan or oss from the sae or other dsposton of property, so as to
emnate the frst cause (2) of that secton whch provdes the method of com-
putng the effect of any such sae or dsposton on earnn|rs and profts for a
923 30 01 2
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perod begnnng after February 2 , 1913. Snce, under the amendments made
to secton 11 (a) and (b), the ta abty of dstrbutons made after December
31, 19 9, s to be determned by reference to the earnngs and profts of the
corporaton wthout regard to whether or not they were accumuated before or
after March 1, 1913, or consst of Increase In vaue of property accrued pror
to that date, cause (2) serves no further usefu purpose Insofar as such
dstrbutons are concerned. It s to be noted that the frst cause (1) of that
secton prescrbes the method for computng earnngs and profts wthout regard
to the date March 1, 1913, wth respect to saes or other dspostons of property
and that that cause has been effectve as of the date of enactment of every
revenue ct That cause, therefore, w contnue to be effectve and, under
the amendments made by ths secton, w become appcabe wth respect to
dstrbutons made after December 31, 19 9.
The amendment made by subsecton (f) (1) of ths secton w have no effect
n determnng the gan or oss ta abe to the corporaton arsng from the sae
or other dsposton of property by It but w ony appy to the effect of such
sae on the earnngs or profts of that corporaton.
Subsecton (g) of ths secton of the b repeas secton 11 (m) of the Code
whch provdes a method for computng that porton of earnngs and profts
whch conssts of ncrease n vaue of property accrued before March 1, 1913.
s n the case of the amendment made by subsecton (f) (1), there s no need
for the rue prescrbed by ths secton wth respect to dstrbutons made by a
corporaton after December 31, 19 9, snce under the amendment made by sub-
secton (c) to secton 11 (a) dstrbutons out of such Increase n vaue are
treated the same as dstrbutons out of other earnngs and profts.
The amendments made by a of the above subsectons, that s, by a the
subsectons e cept subsecton (f)(2), are appcabe to ta abe years endng
after December 31, 19 9, but ony wth respect to dstrbutons made by a cor-
poraton after such date.
Subsecton (f) (2) of ths secton of the b amends that part of secton 11 (1)
of the Code whch deas wth the effect on earnngs and profts of the recept
by a corporaton of a ta -free dstrbuton from another corporaton. Secton
11 (1) provdes that a dstrbuton receved by a corporaton from a second
corporaton whch (under the aw appcabe to the year n whch the dstrbuton
was made) was not a ta abe dvdend to the sharehoders of the second cor-
poraton sha not ncrease the earnngs and profts of the frst corporaton If the
dstrbuton was apped In reducton of the bass of the stock n respect of whch
the dstrbuton was made. Ths provson e cuded from earnngs and profts
of a recpent corporaton a dstrbuton out of pre-1913 earnngs or profts snce
such a dstrbuton dd not consttute a dvdend under secton 11 (a) and was
apped n reducton of bass under secton 11 (b). The effect of the provson,
n con|uncton wth the amendments made by ths secton to secton 11 (a)
and (b) of the Code, woud be that f Corporaton dstrbutes ts own pre-1913
earnngs or profts to ts sharehoders n 19 0 or thereafter, such a dstrbuton
w consttute a dvdend, whe f Corporaton receved n 19 0 from Cor-
poraton a dstrbuton out of Corporaton s pre-1913 earnngs and proft
such dstrbuton woud not be ncuded n the computaton of the earnngs an
profts of Corporaton and, accordngy, woud not consttute a dvdend when
pad n 19 0 or thereafter by that corporaton to ts sharehoders. In order
to correct ths nconsstency, subsecton (f) (2) adds a sentence to secton 11 (11
provdng In substance that, n determnng the earnngs and profts of a cor-
poraton for purposes of dstrbutons made by t after December 31, 19 9. n
dstrbuton receved by that corporaton pror to anuary 1, 19 0, from another
corporaton out of the earnngs and profts of the dstrbutng corporaton sha
be treated as though (under the aw appcabe to the year n whch the dstrbu-
ton was made) the dstrbuton had Increased the earnngs and profts of the
recpent corporaton and had not been apped In reducton of the bass of the
stock n respect of whch the dstrbuton was made. The earnngs and profts
of the dstrbutng corporaton for purposes of ths subsecton are determned
wthout regard to whether or not they accrued pror to March 1, 1913, or cousst
of ncrease n vaue of property accrued pror to that date, and those earnngs
and profts n turn are determned under the subsecton to the e tent that the
subsecton w be appcabe to that corporaton.
The amendment made by subsecton (f) (2) can affect the computaton of
earnngs and profts arsng from the sae or other dsposton by a corporaton
of property as determned under that part of secton 11 (1) whch reates to
that queston. Secton 110(1) now provdes, and w contnue to provde even
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after Its amendment y subsecton (f)(1), that gan or oss reazed on such
a sae or other dsposton Increases or decreases earnngs and profts to the
e tent to whch such gan or oss (determned wthout regard to March 1, 1013,
vaue) s recognzed In computng net ncome of the corporaton. It further
provdes, however, that, where the ad|ustment to bass for purpose of determn-
ng gan or oss from the sae dffers from the ad|ustment proper for purposes
of computng Increase or decrease n earnngs and profts resutng from the sae,
the atter ad|ustment sha be used for earnngs and profts purposes. Under
present aw, a recept by a corporaton of a dstrbuton out of pre-1913 earnngs
or profts s apped n reducton of bass both for purposes of gan or oss and
for purposes of determnng earnngs and profts. owever, under the amend-
ment made by subsecton (f) (2), such a recept ncreases earnngs and profts
of the recpent corporaton and therefore Is not apped n reducton of bnss
for purposes of determnng earnngs and profts. ccordngy, the ncrease or
decrease In earnngs and profts on a subsequent sae of the stock Is determned
by consderng as the ad|usted bass such bass wthout reducton by the amount
of the pre-1913 earnngs and profts. To the e tent that the earnngs and profts
of the corporaton woud have been reduced by dstrbutons pror to anuary
1, 10 0, had the pre-1913 earnngs prevousy receved resuted In an ncrease
n earnngs and profts, the reconstructon of earnngs and profts requred by
subsecton (f) (2) for purposes of post-19 9 dstrbutons sha be reduced
accordngy.
ampe. Corporaton C owns stock n Corporaton D, havng an unad|usted
bass of 100,000. In 1930, Corporaton C receved a dstrbuton of 26,000 from
Corporaton D whch was pad out of Corporaton D s earnngs and profts accu-
muated before March 1, 1913, and reduced the bass of the stock, for pur-
poses of gan or oss, to 7 ,000. If the stock s sod n 19 6 for 100,000, there
w be gan of 2 ,000 for ncome ta purposes. owever, snce, for the purposes
of computng earnngs and profts, the dstrbuton In 1936 s consdered, under
the amendment, as havng ncreased earnngs and profts and as not havng
been apped n reducton of bass, the ad|usted bass n 19 6, for purposes of
earnngs and profts, w be 100,000, and no Increase n earnngs and profts
w resut from the sae. The same resut woud foow If the sae had been
made n 19 6 for purposes of determnng earnngs and profts wth respect to
dstrbutons made by the corporaton after December 31, 19 9.
For purposes of determnng whether a dstrbuton made by a corporaton
after December 31, 19 9, Is a ta abe dvdend, the amendment made by sub-
secton (f) (2) sha appy wth respect to dstrbutons made by a corporaton
to another corporaton on or before December 31, 19 9. The amendment made
by subsecton (f) (2) has no effect on the ta abtes of the recpent cor-
poraton wth respect to dstrbutons receved by t on or before that date.
S CTION 200. DISTRI UTIONS IN LI UID TION OF FOR IGN SU SIDI RY
Ths secton adds a new paragraph (2) to secton 11 (c) of the Code (reatng
to dstrbutons n qudaton of a corporaton) to provde speca rues for
ta ng dstrbutons n qudaton of a foregn corporaton more than 0 percent
of the vaue of the outstandng stock of whch s owned, drecty or Indrecty, by
ess than fve domestc corporatons. The rues provded In secton 11 (c)(2)
are aso appcabe to dstrbutons or transfers of assets by any corporaton n
connecton wth a merger or consodaton Invovng the transfer of the assets of
a foregn corporaton, as to whch the 0 percent stock-ownershp test s met, to a
domestc corporaton. Thus the rues are appcabe not ony to qudatons, the
entre gan from whch Is recognzed under secton 112(a), but aso to qudatons
the gan from whch s n whoe or In part, under e stng aw, not recognzed
under secton 112(b)(3), c, and (g)(1)( ) (athough there descrbed as e -
changes), and secton 112(b) (6) (ncudng a cases descrbed n the ast sentence
thereof). The rues are appcabe unformy to any dstrbuton, qudaton, or
transfer, consttutng a dstrbuton, qudaton, or transfer, wthn the meanng
of the provsons of chapter 1 of the Code, whether or not consttutng a dstrbu-
ton, qudaton, or transfer, under the corporate aw.
In any case to whch secton 11 (c)(2) appes there sha be ta ed as a
dvdend to each domestc corporaton ownng stock or securtes In such foregn
corporaton so much of the gan resutng from the dstrbuton as s not n e cess
of such domestc corporaton s ratabe share of the accumuated earnngs and
profts derved from sources wthout the Unted States. Thus, f corporaton P,
a foregn corporaton a of the outstandng stock of whch s owned by corpora-
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ton , a domestc corporaton dstrbutes ts assets to corporaton n compete
qudaton, the gan to the domestc corporaton from such dstrbuton Is recog-
nzed and s ta ed as a dvdend to the e tent that t does not e ceed the corpora-
ton s ratabe share of the earnngs and profts of corporaton F from foregn
sources. Smary, f corporaton F transfers ts assets to a newy formed do-
mestc corporaton D and stock n corporaton D s transferred to corporaton
ether through the medum of corporaton F or drecty, the gan accrung to cor-
poraton from such dstrbuton or transfer w be recognzed and ta ed as a
dvdend to the e tent that t does not e ceed that corporaton s share of the earn-
ngs and profts of corporaton F from foregn sources. If, however, nstead of a
qudaton of corporaton F drecty to corporaton , there Is a merger of
corporaton F Into corporaton C, a domestc corporaton the stock of whch s
aso whoy owned by corporaton and the assets of corporaton F become the
assets of the resutng corporaton C, the gan reazed by corporaton sha be
ta abe under secton 11 (c) (2) as though corporaton F had frst dstrbuted
Its assets n qudaton to corporaton and corporaton had then transferred
the assets to corporaton C.
The determnaton of a domestc corporaton s ratabe share of the accumuated
earnngs and profts of a foregn corporaton derved from sources wthout the
Unted States sha, for purposes of secton 11 (c)(2), be made n a manner
consstent wth the provsons of secton 119, reatng to ncome from sources
wthn the Unted States, and secton 131(f), reatng to credt for foregn ta es
pad by a foregn subsdary of a domestc corporaton. Such determnaton s
to be made as of the cose of the ta abe year of the foregn corporaton n
whch the dstrbuton or transfer s made but wthout dmnuton by reason of
dstrbutons made durng such year or any prevous ta abe year f made In
pursuance of a pan of qudaton, merger, or consodaton n connecton wth
whch such dstrbuton or transfer s made but by ncudng n the computaton
thereof a amounts accrued to the cose of the ta abe year. Secton 11 (c) (2).
however, s not appcabe wth respect to that part of any dstrbuton whch
s otherwse treated as a ta abe dvdend under chapter 1 of the Code.
The amendment addng secton 11 (c)(2) requres no change In the bass
provsons of secton 113.
The amendment made by ths; secton s appcabe to ta abe years endng
after December 31,19 9, but sha appy ony wth respect to transfers made after
such date. The amendment s aso nappcabe wth respect to a dstrbuton or
transfer made after December 31, 19 9, If, pror to the date of enactment of
ths ct, the Commssoner has determned under secton 112(I) that the trans-
acton was not In pursuance of a pan havng as one of Its prncpa purposes
the avodance of Federa Income ta es.
S CTION 207. TR TM NT OF C RT IN R D MPTIONS OF STOC S DI ID NDS
Ths secton amends secton 11 (g) of the Code, whch provdes for the treat-
ment as ta abe dvdends of amounts dstrbuted by a corporaton n canceaton
or redempton of ts stock f the canceaton or redempton and the reated
dstrbuton are effected at such tme and n such manner as to be essentay
equvaent to the dstrbuton of a ta abe dvdend.
In Trustees of ohn Wanamaker v. Commssoner (11 T. C. 36 , affrmed 17S
Fed. (2d) 10 (C. . 3d, 19 9)), the court hed that the anguage of secton 11 (g)
was so mted as to appy on| to the redempton by a corporaton of ts own
stock and as not to appy to the purchase by a whoy owned subsdary of stock of
the parent company from the stockhoders of the parent, even though, If the
parent corporaton had drecty redeemed Its stock, the redempton woud have
effected a dstrbuton of ts earnngs and profts essentay equvaent to the
dstrbuton of a ta abe dvdend.
The amendments made by ths secton of the b woud add a new paragraph
(2) to secton 11 (g) of the Code to requre the appcaton of the prncpes of
secton 11 (g) to cases where the acquston of stock s made by a corporaton
controed by the ssung corporaton, or controed by the same Interests as
contro the ssung corporaton.
The amendments reate to two types of cases. Where stock of a parent cor-
poraton s acqured by a subsdary, the amount pad for the stock Is treated,
for the purposes of secton 11 (g) (1), as though such amount had been dstrb-
uted by the subsdary to the parent and had then been apped by the parent n
redempton of ts stock. If the amount pad for the stock woud, under those
crcumstances, be treated as essentay equvaent to the dstrbuton of a ta abe
dvdend by the parent under the prncpes of secton 11 (g)(1), the amount
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when pad by the subsdary to a sharehoder of the parent sha, to the same
e tent, consttute a dvdend In the bands of such sharehoder.
The second type of case covered by the amendments Invoves the purchase by
one corporaton of the stock of another where both corporatons are controed
by the same nterests. Under the amendments, the amount pad consttutes a
ta abe dvdend from the ssung corporaton to the e tent that It woud, under
the genera prncpes of secton 11 (g) (1), have consttuted such a dvdend If
the amount had been dstrbuted by the Issung corporaton In redempton of Its
stock an the stock had thereafter been sod by the Issung corporaton to the
acqurng corporaton.
For purposes of both types of cases referred to above, contro Is defned to mean
the ownershp of stock possessng at east 0 percent of the tota combned votng
power of a casses of stock entted to vote or at east 0 percent of the tota
vaue of shares of a casses of stock of the corporaton.
In vew of the amendments made by secton 20 of the b for the purpose of
makng dstrbutons out of earnngs and profts accumuated before March 1,
1013, ta abe, the present secton 11 (g), whch Is restated as secton 11 (g) (1),
s aso amended by makng t refer to accumuated earnngs or profts rather
than to earnngs or profts accumuated after February 2 , 1913.
The amendments made by secton 207 are appcabe to ta abe years endng
after December 31, 19 9, but sha appy ony wth respect to amounts receved
by sharehoders after such date.
S CTION 20 . R D MPTION OF STOC TO P T D T T S
Ths secton adds a new paragraph (3) to secton 11 (g) of the Code (reatng
to redempton of stock by a corporaton) to e cept from the appcaton of such
subsecton certan redemptons of stock.
Secton 11 (g) provdes In substance that an amount dstrbuted n canceaton
or redempton of stork sha be treated as a ta abe dvdend If the canceaton
or redempton s effected at such tme and n such manner as to make the
dstrbuton essentay equvaent to the dstrbuton of a ta abe dvdend.
Under secton 11 (g) (3), as added by ths secton of the b, secton 11 (g) s
made nappcabe to amounts dstrbuted wth respect to stock the vaue of
whch Is ncuded n determnng the vaue of the gross estate of a decedent under
secton 11, to the e tent that the dstrbutons do not e ceed the estate, n-
hertance, egacy, and successon ta es (ncudng any Interest coected as a
part of such ta es) Imposed because of the decedent s death. The e cepton
made by secton 11 (g) (3), however, appes ony to dstrbutons In respect of
stock of a corporaton f the vaue of the stock of such corporaton comprses more
than 70 percent of the vaue of the net estate of the decedent, and ony to ds-
trbutons made after the death of the decedent and wthn the perod of mta-
tons for assessment of estate ta provded n secton 7 (a).
The provsons of secton 11 (g) (3) are appcabe to ta abe years endng on
or after the date of enactment of ths ct, but sha appy ony to amounts ds-
trbuted on or after such date.
Ths secton revses the treatment of capta gans and osses as foows:
(1) Gans or osses from saes or e changes of property used In the ta payer s
trade or busness, of a character whch Is sub|ect to the aowance for depreca-
ton provded n secton 23(1), and rea property used In hs trade or busness
(other than property of a knd whch woud propery be Incudbe n the nven-
tory of the ta payer If on hand at the cose of the ta abe year or property hed
by hm prmary for sae to customers n the ordnary course of hs trade or
busness) and tmber wth respect to whch secton 117(k) (1) or (2) s app-
cabe, are to be consdered as gans or osses from saes or e changes of capta
assets.
(2) The defnton of the term capta assets has been amended so as specf-
cay to e cude patents; copyrghts; Inventons; desgns; terary, musca, or
artstc compostons; and smar property n the hands of ether the person
whose persona efforts created such property or a person dervng a bass for
the property, for the purpose of determnng gan, from the person who created t.
(3) The abandonment of a capta asset or of certan deprecabe property and
rea property used n the trade or busness w he consdered as a sao or
e change of such asset or property.
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( ) The hodng perod, used for determnng whether a capta gan or oss
Is ong-term or short-term, has been changed from the present perod of 6 months
to 3 months.
Secton 117(|) of the Code now provdes Inconsstent treatment of gans am
osses upon the sae or e change of rea or deprecabe property used n the
ta payer s trade or busness (other than property of a knd whch woud propery
be ncudbe In the nventory of the ta payer If on hand at the cose of the
ta abe year or property hed by hm prmary for sae to customers n the
ordnary course of hs trade or busness) and hed by hm for more than
months. Where the gans from such saes e ceed the osses, the net gan s now
treated as ong-term capta gan. owever, where the osses from such saes
e ceed the gans, the amount of the net oss s aowed n fu as a deducton from
ordnary ncome. Subsecton (b) of ths secton amends secton 117( ) so as to
provde that both gans and osses from saes or e changes of such property sha
be consdered as gans or osses from saes or e changes of capta assets. The
commttee amendment aso removes the requrement that the property must have
been hed for more than 6 months n order to quafy under secton 117(|). The
commttee amendment to secton 117( )(1) of the Code retans the reference
now contaned theren to secton 117(k). Thus, gans or osses arsng from the
cuttng of tmber wth respect to whch an eecton has been made under secton
117(k) (1), and from tmber whch has been dsposed of, as provded n secton
117(k) (2), sha be consdered as gans or osses from the saes of capta assets.
references to gans or osses from compusory or nvountary converson of
property have been emnated from secton 117( ). s a resut, the treatment
of gans or osses upon the destructon, n whoe or n part, theft or sezure,
or requston or condemnaton of property used n the trade or busness w be
as provded for n sectons 22(a), 23(e), 112(f), and other appcabe provsons
of the Code. For e ampe, gans or osses arsng from the destructon or demo-
ton of property and subsequent compensaton for ts oss by nsurance proceeds
w be ordnary gans or osses (see everng v. Wam Faccus Oak Leather
Co., 313 U. S. 2 7), and gans and osses arsng from condemnaton proceedngs
w be capta gans or osses (sec awaan Oas Products, Ltd. v. Commssoner,
126 Fed (2d) ; Commssoner v. esebach, 127 Fed. (2d) 3 9).
Subsecton (d) of ths secton of the b amends secton 117 by addng a new
subsecton (1) thereto to provde that the abandonment of capta assets, or of
property sub|ect to secton 117( ), sha be consdered as a sae or e change
thereof. Thus whether there s a sae or an abandonment, gans or osses w
be treated as capta gans or osses. The treatment of an abandonment as a sae
or e change does not e tend to tmber wth respect to whch secton 117(k) (1)
or (2) s appcabe.
The defnton of the term capta assets has been further amended to e cude
certan property created by the persona efforts or e ertons of the ta payer.
Under the commttee amendment a person who devses an Inventon or who wrtes
a book or creates some other sort of artstc work w be ta ed at ordnary n-
come rates, rather than at capta gan rates, upon gan from the sae of the
work regardess of whether It s hs frst producton n the fed or not.
Subparagraph (C) of secton 117(a) (1) of the Code as provded for by ths
secton of the b sts specfcay patents, copyrghts, Inventons, desgns, and
terary, musca, or artstc compostons as property Intended to be e cuded
from the capta asset category. The amendment w aso e cude from such
category any property smar to that specfcay named; for e ampe, a formua
or a rado program whch has been created by the persona efforts of the ta payer.
The Interest of a soe propretor n such a busness enterprse as a photographc
studo s not smar property even though the vaue of the busness may be
argey attrbutabe to the persona efforts of the soe propretor.
Where property has been created by more than one person, as for e ampe,
where three Indvduas coaborate In wrtng a book or deveopng an nven-
ton, the nterest of each ta payer n the property w be e cmed from the
capta-asset category and any gan derved from a sae of such nterest w be
ta ed at ordnary Totes.
The provsons of subparagraph (C) appy not ony to Inventons and smar
property In the hands of the ta payer whose persona efforts created the prop-
erty but aso to such property hed by a person n whose hands the bass of the
property s determned (for the purpose of determnng gan on a sae or e -
change) In whoe or n part by reference to the bass of such property n the
hands of the person whose persona efforts created the property. Thus a sae
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of such property by one who receved t by gft from the creator of the property
woud be ta ed as ordnary ncome.
The amendments made by ths secton to secton 117 of the Code do not cover
the stuaton In whch the ta payer contrbutes an nventon or smar property
created through hs persona efforts to a newy formed corporaton n e change
for ts stack and then ses the stock snce such stuaton s deat wth n secton
211 of the b.
In cases where the nventon, wrtng or other product requred 36 months or
more to produce and 0 percent or more of the Income therefrom s umped nto
1 year the provsons of secton 107(b) of the Code w aow the averagng
of the Income from such work over a perod of 36 months. Under present aw
there s e cuded from the benefts of secton 107(b) that part of the gross n-
come from an artstc work or nventon whch s ta abe as a gan from the sae
or e change of a capta asset hed for more than 0 months. In vew of the com-
mttee amendment e paned above whch e cudes such property from the defn-
ton of a capta asset, a technca amendment of secton 107(b) s made by
subsecton (f) of ths secton of the b to remove the e cepton. In determnng,
for the purposes of secton 107(b), the ta whch woud be attrbutabe to the
gan on the sae of an artstc work or nventon f t had been receved rataby
n a ta abe year before the enactment of ths b, such gan w contnue to be
treated as ordnary gan. In the case of the sae, pror to the effectve date of
the amendment, of an artstc work or nventon by a creator who has eected the
nstament bass under secton , the ta treatment of nstament payments
receved after such effectve date w be governed by the rue of Sne v. Com-
mssoner (07 Fed. (2d) 01).
Subsecton (c) of ths secton of the b amends secton 117(k) (reatng to
gan or oss upon the cuttng of tmber), and subsecton (e) amends sectons
117 (a) and (b) (reatng to capta gans and osses) ; 12(g) (2) (reatng to
the ta n case of capta gans) ; 23(k) ( ) (reatng to nonbusness debts) ;
16 (b) (reatng to ta abty of benefcary of an empoyee s trust) ; 169(c)
(reatng to ncome of partcpants n a common trust fund) ; 1 2 (reatng tn ta
of partners) and 302(b) (6) (reatng to treatment of capta gan dvdends
from reguated nvestment companes) to conform such sectons to the commt-
tee proposa to shorten the hodng perod used for determnng whether a gan
or oss upon the sae or e change of a capta asset Is short-term or ong-term.
The amendments accompsh ths purpose by strkng out s months or 6
months n such sectons and nsertng n eu thereof 3 months.
The amendments made by ths secton of the b w generay be appcabe
wth respect to ta abe years begnnng after the date of enactment thereof.
owever, n the case of saes or e changes of capta assets made after the date
of enactment of ths b the 3-month hodng perod provded for by the amend-
ments made by subsecton (e) to sectons 117 (a) and (b), 169(c), and 1 2,
rather than the 6-month hodng perod provded under present aw, w govern
even though such saes or e changes occur wthn a ta abe year begnnng on or
before the date of the enactment of ths b.
S CTION 210. S ORT S L S OF C PIT L SS TS
Ths secton amends secton 117 of the Code (reatng to capta gans and
osses) by addng a new subsecton (desgnated (m)) to provde specfc rues
ns to the ta consequences of certan short saes of property. These rues appy
ony to short saes of stocks or other securtes, to transactons n stocks or
securtes on a when ssued bass, and to transactons n commodty futures.
Moreover, the rues appy ony where the deangs are n such property whch Is
a capta asset, as defned n secton 117(a), n the hands of the ta payer.
edgng operatons by operators of gran eevators, mers, producers of coth,
and so forth, whch gve rse to ordnary gan or oss rather than to capta gan
or oss, are not sub|ect to the rues.
The frst two rues, set forth In secton 117(m)(), are appcabe wherever
property substantay dentca to that sod short has been hed by the ta payer
on the date of the short sae for not more than 3 months or s acqured by hm
after the short sae and on or before the date of the cosng thereof. In such a
case:
Rue (1) : ny gan upon the cosng of the short sae sha, under the pro-
vsons of secton 117(m) (1) ( ), be consdered as a short-term capta gan.
Ths rue appes wthout regard to when the property actuay used to cose the
short sae was acqured.
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Rue (2) : The hodng perod of such substantay Identca property sha,
under the provsons of secton 117(m) (1) ( ) and notwthstandng the pro-
vsons of secton 117(h), be consdered to begn on the date of the cosng of
the short sae, or on the date of a sae, gft, or other dsposton of such property,
whchever date occurs frst If severa quanttes of property substantay
Identca to that sod short were acqured at dfferent tmes not more than 3
months pror to the short sae and pror to the cosng thereof, ths rue sha
appy to such property n the order of the dates of Its acquston.
The thrd rue, set forth n secton 117 (m) (2), s appcabe wherever property
substantay dentca to that sod short has been hed by the ta payer on the
date of the short sae for more than 3 months. In such a case:
Rue (3) : ny oss upon the cosng of the short sae sha, not wthstandng
the provsons of secton 117(g)(2), be consdered as a ong-term capta oss.
Ths rue, ke rue (1), appes wthout regard to when the property actuay
used to cose the short sae was acqured.
Rues (1) and (3) do not appy to so much of the property sod short as e -
ceeds n quantty the substantay dentca property descrbed n sectons
117(m)() and 117(m)(2), respectvey; nor does rue (2) appy to so much
of the substantay Identca property descrbed n secton 117(m) (1) as e ceeds
n quantty the property sod short
The foowng e ampes ustrate the appcaton of ths secton to short
saes of stock:
ampe (1): ta payer buys 100 shares of stock at 10 per share on
February 1, ses short 100 shares at 16 per share on pr 1, and coses the
short sae on May 2 by deverng the 100 shares bought on February 1 to the
ender of the stock used to effect the short sae. Snce 100 shares of stock
had been hed by the ta payer on the date of the short sae for not more than 3
months, the gan of 600 upon the transacton s, by appcaton of rue (1),
short-term capta gan.
ampe (2): ta payer buys 100 shares of stock at 10 per share on
February 1, ses short 100 shares at 16 per share on pr 1, coses the short
sae on May 1 wth 100 shares of stock purchased on that date at 1 per
share, and ses the 100 shares of stock (purchased on February 1) at 1 per
share on May 2. The 200 oss upon the cosng of the short sae s, as under
present aw, short-term capta oss. y appcaton of rue (2), the hodng
perod of the stock bought on February 1 s consdered to begn on May 1 (the
date of the cosng of the short sae); the 00 gan upon the sae of such stock
s, therefore, short-term capta gan.
ampe (3): The ta payer buys 100 shares of stock at 10 per share
on February 1, ses short 100 shares at 16 per share on une 1, ses the 100
shares of stock (purchased on February 1) at 1 per share on uy 1, and
coses the short sae on uy 1 wth 100 shares of stock purchased on that date
at 1 per share. The 00 gan upon the sae of the stock bought on Feb-
ruary 1 s, of course, ong-term capta gan. Snce the ta payer had hed 100
shares of stock on the date of the short sae for more than 3 months, the
200 oss upon the cosng of the short sae s, by appcaton of rue (3), ong-
term capta oss.
ampe ( ): The ta payer ses short 100 shares of stock at 16 per
share on February 1. e bays 2 0 shares of the same stock on March 1 at
10 per share and hods the atter stock unt une 2 (more than 3 months)
when 100 shares are devered to cose the short sae made on February
Snce substantay dentca property was acqured by the ta payer after the
short sae and before t was cosed, the 600 gan s short-term capta gan.
The hodng perod of the remanng 1 0 shares s not affected by secton 117(m),
snce to that e tent the substantay dentca property e ceeds the quantty
of the property sod short.
In the case of transactons In stocks or other securtes on a when Issued
bass, the entry nto a contract to se such stocks or securtes when ssued
sha be consdered as a short sae and the performance of such contract or
the assgnment thereof for vaue sha be consdered as a cosng of such short
sae. For the purpose of rues (1) and (2), but not for the purpose of rue
(3), the acquston of a put or other opton to se property at a f ed prce
sha be consdered as a short sae, and the e ercse or e praton (by reason
of faure to e ercse) of such opton sha be consdered as a cosng of such
short sae.
In the appcaton of the three rues, the term ta payer sha be read as
ta payer or hs spouse. s a resut, f the spouse of the ta payer hods
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property substantay Identca to that sod short by the ta payer, the three
rue sha appy to the same e tent as If such substantay Identca property
were hed by the ta payer. owever, the three rues do not so appy where
the ta payer and hs spouse are egay separated under a decree of dvorce
or of separate mantenance.
The three rues are aso appcabe to transactons n commodty futures.
s apped to smutaneous ong and short transactons In the same commod-
ty, for devery In the same future perod and n the same market, ths secton
s consstent n purpose wth Mmeograph 62 3, ssued by the ureau of Inter-
na evenue n March , 19 .
In the case of commodty futures transactons, however, the three rues do
not appy to what are commony known as arbtrage or stradde transac-
tons ; that s, to a ong poston n one market and a short poston n another
market, requrng devery n the same month of the same or substantay den-
tca commodtes, entered Into on the same day and subsequenty cosed on
the same day. owever, where the quantty of the commodty nvoved In one
market e ceeds the quantty of the commodty Invoved n the other, the rues
appy to such e cess.
No genera defnton of substantay Identca property s gven n ths sec-
ton, snce t s beeved that the term must be apped n accordance wth the
actua crcumstances of each transacton. s apped to securtes, ths term
has for many years been n secton 11 of the Code, and varous rungs and
decsons have been made whch w, n genera, be equay appcabe to the
provsons of ths proposed amendment. It s not beeved that the term sub-
stantay dentca shoud be apped to securtes of dfferent corporatons
(e cept n speca stuatons as, for e ampe, the securtes of predecessor and
successor corporatons In a reorganzaton), nor, n genera, to preferred stock
or bonds as compared wth common stocks. owever, In speca stuatons,
such as where preferred stock or bonds are convertbe Into common stock of
the same corporaton, the reatve vaues and prce changes may be so smar
as to make them substantay Identca to the common stock. Dfferent com-
modtes, such as corn and wheat, whch are not generay through custom of
the trade used as hedges for each other, woud not be substantay Identca.
Secton 117(m) (3) ( ) (11) e pressy provdes that dfferent futures for e -
ampe, May wheat and uy wheat sha not be consdered as substantay den-
tca. Contracts on dfferent markets may, dependng upon the crcumstances,
be so smar as to be regarded as substantay dentca; n each such case,
the hstorca smarty n prce movements n the two markets s a prmary
factor to be consdered.
The amendments made by ths secton are appcabe ony wth respect to ta -
abe years begnnng after the date of enactment of the b. ven wth respect
to such ta abe years, however, the amendments do not appy where the short
sae was made on or before the date of enactment of the b.
S CTION 211. TR TM NT OF G INS TO S R OLD RS OF COLL PSI L
CORPOR TIONS
Ths secton of the b odds a new subsecton (n), reatng to coapsbe cor-
poratons, to secton 117 of the Code. The coapsbe corporaton s a devce
whereby one or more ndvduas attempt to convert the profts from ther partc-
paton n a pro|ect from ncome ta abe at ordnary rates to ong-term capta
gan ta abe ony at a rate of 2 percent.
The term coapsbe corporaton s specfcay defned by paragraph (2)
of the subsecton to mean a corporaton formed or avaed of prncpay for the
manufacture, constructon, or producton of property, or for the hodng of stock
n a corporaton so formed or avaed of, wth a vew to () the sae or e change
of stock by ts sharehoders (whether In qudaton or otherwse), or a ds-
trbuton by the corporaton to ts sharehoders, pror to the reazaton by the
corporaton manufacturng, constructng, or producng the property of a substan-
ta part of the net ncome to be derved from such property and () the reaza-
ton by such sharehoders of gan attrbutabe to such property. The paragraph
further states when a corporaton sha be deemed to have manufactured, con-
structed, or produced property.
It w be noted that the term coapsbe corporaton s so defned as to n-
cude corporatons endng themseves to the attempted ta -savng practce out-
ned above, whether they are the corporatons commencng and competng the
pro|ect or corporatons mare use of as hodng companes havng no other busness
than to separate the sharehoders from the corporaton undertakng the ;ro|ect
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The corporaton, furthermore, has been so defned as to descrbe corporatons
dfferent n knd from those whch ordnary qudate foowng norma busness
operatons. Ths ob|ectve has been specfcay strengthened by the statement
made n subparagraph (1) above, to the effect that the sae or e change or the
dstrbuton be made pror to the reazaton by the corporaton of a substanta
part of the net ncome to be derved from the property. On the other hand, n
many cases an ordnary corporaton may dstrbute property In knd n the course
of ts qudaton, or the stock In such a corporaton may be sod pror to the
reazaton by the corporaton of the net ncome to be derved from some of ts
property, but such a corporaton coud not be consdered to have been formed
or avaed of prncpay for the manufacture, constructon, or producton of
that property aone.
Whe the prmary use made of coapsbe corporatons n the past has usuay
nvoved ther qudaton n the manner ndcated above, t s apparent that the
sharehoders formng or avang themseves of such a corporaton coud rase
the same ta questons as woud be rased by a qudaton by seng ther stock
to outsde nterests at the tme and under the crcumstances when the corpora-
ton mght otherwse be qudated. In ke manner, the corporaton mght ds-
trbute the property n queston wthout qudatng and, under secton 11 (d),
the vaue of the property dstrbuted, to the e tent that t was not a dvdend,
woud frst be apped aganst the ad|usted bass of the stock to the sharehoders
and the e cess, f any, woud be ta abe n the same manner a a gan from the
sae or e change of property. Paragraph (1) of the subsecton, n prescrbng
the treatment to be gven the gan from the sae or e change of stock of a co-
apsbe corporaton, s deemed to refer to ths e cess vaue n the case of a ds-
trbuton made by the corporaton other than n qudaton. Snch a dstrbuton
s specfcay referred to n connecton wth the defnton of the term co-
apsbe corporaton n paragraph (2) of the subsecton and both paragraph (1)
and paragraph (2) of the subsecton refer to the sae or e change of the stock
other than n qudaton.
Subparagraph ( ) of paragraph (2) of the subsecton states that a corporaton
sha be deemed to have manufactured, constructed or produced property f t
engaged n the manufacture, constructon or producton of such property to any
e tent or If It hods property havng a substtuted bass under secton 113 of the
Code determned by reference to the cost of property manufactured, constructed
or produced by the corporaton or by another. Under ths statement the corpora-
ton need not have orgnated the manufacture, constructon or producton; nether
need the manufacture, constructon or producton be competed by t It w
nonetheess be deemed to have manufactured, constructed or produced property
In that ts sharehoders may reaze gan wth respect to the addtona vaue
added to the property by the manufacture, constructon or producton to the
e tent that t was carred out. Lkewse, for e ampe, a corporaton whch man-
ufactured a move and e changed ts move wth another corporaton for a move
manufactured by that corporaton n an e change whch woud not be ta abe for
ta purposes woud be consdered as havng manufactured, constructed or pro-
duced the move thus receved on the e change. Ths atter type of provson
s desgned to cover an obvous devce whch mght be utzed by a coapsbe
corporaton n an attempt to crcumvent the provson whch ths commttee has
added to the b.
Paragraph (3) of the subsecton sets forth three mtatons on the appcaton
of the subsecton. Frst, the subsecton sha not appy uness the sharehoder
seng or e changng hs stock has at some tme subsequent to the commence-
ment of the manufacture, constructon, or producton of the property by the cor-
poraton owned more than 10 percent n vaue of the outstandng stock of the
corporaton. In determnng the ownershp of stock of the corporaton by that
sharehoder, the stock ownershp rues set forth In secton 603(a) of the Code to
the e tent that they are pertnent are made appcabe wth the addtona prov-
son that the famy of an ndvdua sha ncude, n addton to the persons
mentoned n that secton, the spouses of that ndvdua s brothers and ssters
(whether by the whoe or haf bood) and the spouses of that Indvdua s nea
descendants. Second, the subsecton sha not appy to the gan recognzed by a
sharehoder from the sae or e change of hs stock uness more than 70 percent
of such gan s attrbutabe to the property so manufactured, constructed, or
produced. Thrd, the subsecton sha not appy to gan reazed after the e pra-
ton of 3 years foowng the competon of such manufacture, constructon, or
producton.
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It to the purpose of the frst mtaton to nsure that the provson w ony be
appcabe to a sharehoder who by vrtue of hs stock ownershp can be pre-
sumed to be an nterested party to the pro|ect whether at the tme of ts or-
ganzaton or at some ntermedate date. The stock ownershp rues are made
necessary In order to prevent any one sharehoder s dsgusng hs nterest by
the pacement of the stock of the corporaton among the dfferent members of
Ms famy. oth the second and thrd mtatons reate to the gan reazed
from the sae or e change of the stock, the second mtaton beng desgned to
nsure that the appcaton of the subsecton w be mted to those corporatons
where the reatonshp between the gan reazed and the property manufactured,
constructed, or produced Is substanta. The thrd mtaton Imposes an arb-
trary tme mt beyond whch gan reazed w not be sub|ect to the subsecton on
the theory that a corporaton w not be a coapsbe corporaton as defned n
genera terms In paragraph (2) If the sharehoders do not reaze ther gan
unt after 3 years foowng the competon of the manufacture, constructon, or
producton.
Paragraph (1) of the subsecton refers to gan from the sae or e change of a
capta asset hed for more than 3 months. Under secton 117 of the Code, pror
to Its amendment by ths b, ran from the sae or e change of a capta asset
hed for more than 6 months s defned as ong-term capta gan. Under secton
209(e) of ths b, ths perod woud be changed to 3 months and paragraph (1)
has been amended to accord wth ths change. It to specfcay provded n
subsecton (b) of ths secton, however, that n the case of gan reazed on or
before the date of the enactment of ths ct the words capta asset hed for
more than 3 months sha be read as capta asset hed for more than 6 months.
The success of attempts under e stng aw to make use of a coapsbe cor-
poraton and to take advantage of the qudaton of that corporaton wthn the
meanng of secton 11 (c) has never been tested n the courts, and t s not cear
that the ndvduas makng use of the devce w succeed n ther ob|ectves.
Tour commttee beeves, however, that the proposed amendment deang specf-
cay wth the sub|ect of coapsbe corporatons Is desrabe In order to nsure
that the use of the devce In the future w resut In no ta advantage. Thus,
under paragraph (1) of the subsecton as added to the Code, the gan from the
sae or e change of stock of a coapsbe corporaton w be treated as gan from
the sae or e change of property whch to not a capta asset. Ths treatment
Is to be effectve, however, ony to the e tent that the use of the devce s nter-
preted as gvng rse to gan whch gan Is consdered (but for the provsons
of the subsecton) as ong-term capta gan.
The amendment made by the secton Is appcabe to ta abe years endng
after December 31, 19 9, but ony wth respect to gan reazed after that date.
It Is specfcay provded In the secton that the determnaton of the ta treat-
ment of gans reazed pror to anuary 1, 19 0, sha be made as If ths secton
had not been enacted and wthout nferences drawn from the fact that the amend-
ment made by the secton s not made appcabe to such gans and wthout n-
ferences drawn from the mtatons contaned n the subsecton as added to
the Code.
CTION 212. C PIT L G INS OF NONR SID NT LI N INDI IDU LS
Secton 211 (a) (1) of the Code Imposes a ta of 30 percent on the f ed or deter-
mnabe annua or perodca gans, profts, and ncome receved from sources
wthn the Unted States by nonresdent aen Indvduas not engaged n trade
or busness wthn the Unted States. The substance of ths provson frst
appeared n secton 211(a) of the Revenue ct of 1936 whch changed the method
of ta n|r such ndvduas, wth the resut that they no onger were ta abe on
capta gans derved from sources wthn the Unted States. Under the present
statute ony those aens who are resdent n, or are engaged n trade or busness
wthn, the Unted States are ta abe on such capta gans.
Secton 211(a)(1)( ), as amended by ths secton of the b, broadens the
ta abe ncome base of nonresdent aens who hare been present n the Unted
States at some tme durng the ta abe year but have not engaged In trade or
busness theren. Under the amendment such nonresdent aens w be sub-
|ect to a ta of 30 percent on the net amount of capta gans n addton to the
present ta of 30 percent on f ed or determnabe annua or perodca Income.
The effect of the amendment s, for purposes of ta ng capta gans, to dvde
nonresdent aen Indvduas not engaged n trade or busness wthn the Unted
States nto three dstnct categores:
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(1) Those who have not been present In the Unted States at any tme
durng the ta abe year;
(2) Those who have been present theren for a perod or perods aggre-
gatng ess than 90 days durng the ta abe year; and
(3) Those who have been present theren for a perod or perods aggregat-
ng 90 days or more durng the ta abe year.
nonresdent aen comng wthn category (1) Is not affected by ths secton
of the b, Insofar as hs capta gans derved n, or hs capta osses aocabe
to, the Unted States are concerned. Gans derved n the Unted States on
saes or e changes of capta assets effected by such an ndvdua durng the
ta abe year are not sub|ect to ta In the Unted States. Losses aocabe to
sources wthn the Unted States from such saes or e changes are dsaowed as
deductons. nonresdent aen comng wthn category (2) above s ta abe
on the e cess of hs capta gans over hs capta osses, determned as ndcated
beow, derved from sources wthn the Unted States from saes or e changes of
capta assets effected durng hs presence wthn the Unted States. Gans or
osses on such transactons effected durng the ta abe year at tmes other than
durng such presence n the Unted States are not to be taken nto consderaton
n the computaton of the net amount of capta gans sub|ect to ta . non-
resdent aen comng wthn category (3) above s ta abe on the e cess of bs
capta gans over hs capta osses, determned as ndcated beow, derved
from sources wthn the Unted States from saes or e changes of capta assets
effected at any tme durng the ta abe year, even though he Is not present n the
Unted States at the tme such saes or e changes are effected. In computng the
tota perod of presence In the Unted States for a ta abe year a separate
perods durng the ta abe year are to be aggregated. Mere physca presence n
the Unted States at any tme durng the ta abe year s the test for determnng
whether to appy the provsons of ths amendment.
For the purposes of the computaton under proposed secton 211(a)(1)( ),
gans and osses are to be taken nto account ony to the e tent that they woud
be recognzed and taken nto account, f the ta payer had been engaged n trade
or busness wthn the Unted Sates. owever, n determnng the amount of
gan or oss to be used In such computaton, no regard w be gven to the per-
centage provsons under secton 117(b) of the Code or to the provson for the
capta oss carry-over under secton 117(e) of the Code.
Secton 211(a) (1) ( ) merey Imposes a ta upon the e cess of capta gans
over capta osses. The e cess, If any, of sueh osses over such gans (whether
or not e ceedng 1,000) s of no sgnfcance for the purposes of secton
211(a)(1)( ).
Under secton 211(a) (2) of the Code the ta of 30 percent Imposed by secton
211(a) (1) Is made nappcabe, when the aggregate of the amount of f ed or
determnabe Income sub|ect to ta under paragraph (1) e ceeds 1 , 00. When
such amount receved by the ta payer e ceeds 10, 00, he becomes sub|ect under
secton 211(c) of the Code to the reguar norma and surta rates Imposed by
secton 11 and secton 12. The b rewrtes e stng secton 211(a) (2) to ncor-
porate In the present rue, rues for takng nto cognzance the net amount of
capta gans n the determnaton of the amount of 1 , 00.
When the aggregate amount determned n accordance wth secton 211(a) (1)
of the Code, as amended by the b, e ceeds 1 , 00, the ta payer becomes sub-
|ect, under the amendment of secton 211(c), to both the norma ta and surta
mposed by sectons 11 and 12, or n the aternatve to the ta Imposed by secton
117(c), on the tota of hs f ed or determnabe Income and hs capta gans.
In the rues proposed to be added to secton 211(c) n the case of capta gans
and osses, the provsons of secton 117 of the Code w be fuy appcabe,
e cept for the capta oss carry-over provson under secton 117(e), wth respect
to such capta gans and osses as are recognzed for purposes of the computaton.
owever, n effect, the present mtaton of secton 211(c) s retaned so that
n no case sha the ta be ess than 30 percent of the tota amount of f ed or
determnabe ncome sub|ect to ta under secton 211(a)(1)( ) pus the net
amount of capta gans determned (wthout regard to secton 117 (b) and ( )
of the Code) under proposed secton 211(a) (1) ( ).
The amendments made by secton 212 of the b w not appy to any case
where ther appcaton woud be contrary to any treaty obgaton of the Unted
States. Ths rue s contaned n secton 213 of the b.
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S CTION 213. TR T O LIG TIONS
Ths secton provdes that no amendment made by the b sha appy In any
ease where Its appcaton woud be contrary to any treaty obgaton of the
Unted States.
S CTION 21 . N T OP R TING LOSS D DUCTIONS
Subsecton (a) of ths secton amends secton 122(b) of the Interna Revenue
Code to provde that the net operatng oss for any ta abe year begnnng after
13ecember 31, 19 9, may be carred back to the precedng ta abe year ony;
such net operatrg oss (to the e tent t s not nbsorbed as a carry back) aso
may be carred forward t the fve succeedng ta abe years.
The amendment made by subsecton (a) of ths secton Is appcabe to a
ta abe years begnnng after December 31, 19 7, but the resut of the provsons
of secton 122 as amended s to mpose the new carry-back and carry-over prov-
sons ony wth respect to net operatng osses sustaned n ta abe years begn-
nng after December 31, 19 9. Net operatng osses sustaned n ta abe years
begnnng before anuary 1, 19 0, w contnue, as under e stng aw, to be
carred back for 2 years and carred over for 2 years. Thus, a net operatng
oss for 19 9 (In the case of a ta payer on the caendar year bass) coud st
be carred back to 19 7 and 19 S and over to 19 0 and 19 1; whereas, a net oper-
atng oss for 19 0 coud be carred back ony to 19 9, but t coud be carred
over to 19 1 to 19 , Incusve.
Subsecton (b) of ths secton amends secton 20(b) of the Code to provde
that n computng the ad|usted net ncome of the corporaton for purposes of
the mtaton on the dvdends-receved credt such ad|usted net ncome sha
be computed wthout regard to the net operatng oss deducton aowabe for
such year, f any, under secton 23(s) of the Code n computng net ncome.
The dvdends-receved credt s refected n the ad|ustments under secton 122(c)
n computng the net operatng oss deducton for such year, and an ad|ustment
for such deducton n computng the dvdends-receved credt under secton 20(b)
may, n certan cases, resut n a dena of benefts to whch the ta payer s
entted. Ths amendment wth respect to the computaton of the dvdends-
receved credt s appcabe ony to ta abe years begnnng after December 31,
19 9.
S CTION 21 . MORTIZ TION OF OND PR MIUM ON CON RTI L ONDS
Secton 21 of the b amends secton 12 (b)(1) of the Code to requre the
e cuson from the amount of bond premum on a convertbe bond of any amount
attrbutabe to the converson features of the bond. The term convertbe bond
ncudes bonds ssued wth detachabe stock-purchase warrants.
Cacuaton of the vaue of the converson features of a partcuar bond may
be accompshed smpy by ascertanng the yed on wnch bonds of smar char-
acter (not havng converson features) are seng on the open market and
ad|ustng the prce of the bond n queston to ths yed. Ths ad|ustment may be
made wth the ad of standard bond tabes. Suppose, for e ampe, It s desred
to apprase the bonds of the YZ Company. ssume that these bonds have
years to run to maturty and have a coupon rate of nterest of percent. study
of smar bonds on whch quotatons are avaabe shows that they se at an
average yed of .7 . In order to reduce these bonds to a prce whch w gve
an equvaent yed. It Is necessary ony to turn to a standard bond tabe for
percent bonds wth a -year maturty, and read across from .7 . The corre-
spondng prce, 90.7 Is the desred vaue. Subtractng ths vaue from the amount
pad for the bond w dscose the amount attrbutabe to the converson features
of the bond.
In seectng quotatons for comparatve purposes bonds of the same cassf-
caton and grade as the convertbe ssue shoud be chosen.
The amendment made by ths secton w be appcabe to ta abe years
begnnng after une 1 , 19 0. The amendment w aso appy In the case of
a ta abe year begnnng on or before une 1 , 19 0, wth respect to convertbe
bonds acqured after such date. For e ampe, the amortzabe bond premum on
a convertbe bond acqured on uy 1, 19 0, by a ta payer reportng on the bass
of the caendar year 19 0, must be ad|usted to e cude the amount attrbutabe
to the converson features of the bond. If such ta payer acqured such bond
on une 1 , 19 0, however, no ad|ustment w be requred under the commttee
amendment unt the ta abe year 19 1.
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S CTION 216. MPLOY S OF UNIT D ST T S WOR ING IN POSS SSIONS OP
T UNIT D ST T S
Secton 216 of the b amends secton 2 1 of the Code by the addton of
secton 261 ( ). Under the new secton, amounts pad for servces performed by
a ctzen of the Unted States as an empoyee of the Unted States or any agency
thereof w, for the purposes of secton 2 1, be deemed to be derved from sources
wthn the Unted States. The resut of the amendment s that saares or com-
pensaton pad by the Unted States or any agency thereof to an empoyee who
s a ctzen of the Unted States for servces performed wthn a possesson
thereof w not be consdered as ncome from such possesson n determnng
whether the empoyee s entted to the benefts of secton 2 1 of the Code, and
w b sub|ect to ta as ncome from sources wthn the Unted States. Ths
amendment s appcabe ony to ta abe years begnnng after December 31,19 9.
S CTION 217. R SID NTS OF PU RTO RICO
Secton 217 of the b makes provson for the e tenson of the Federa Income
ta aws to Puerto Rco to the e tent of sub|ectng ndvdua ctzens of Puerto
Rco who are aso Unted States ctzens to the Federa ta on ther word-wde
ncome, as n the case of other ctzens, and to the e tent of sub|ectng to the
same treatment aen ndvduas who are bona fde resdents of Puerto Rco
durng the entre ta abe year. Such aens resdent n Puerto Rco woud be
sub|ect to ta as n the case of aens resdent n the Unted States. ny n-
dvdua ctzen of the Unted States, or any aen ndvdua, who s a bona fde
resdent of Puerto Rco durng the entre ta abe year w, however, be permtted
to e cude from gross Income any Income derved from sources wthn Puerto
Rco, e cept amounts receved for servces performed as an empoyee of the
Unted States or any agency thereof. Deductons aocabe to such e cuded
ncome w not be aowed for purposes of the Federa ta .
In the case of an ndvdua ctzen of the Unted States who gves up hs
Puerto Rcan resdence after havng been a bona fde resdent of Puerto Rco
for a perod of at east 2 years before the date of such change n resdence, any
ncome derved from Puerto Rcan sources whch Is attrbutabe to the perod
of resdence pror to the change may aso be e cuded from gross Income, e cept
amounts receved for servces performed as an empoyee of the Unted States
or any agency thereof. Deductons aocabe to such e cuded ncome w not
be aowed. Smar treatment s not e tended to ndvdua aens who change
ther resdence from Puerto Rco.
The above changes n ta aton are accompshed by the amendment of sec-
ton 2 1 of the Code to make such secton nappcabe to Puerto Rco In the
case of ctzens of the Unted States, by the amendment of secton 2 2(a) to
make such secton Inappcabe to ctzens of Puerto Rco, and by the addton
of new sectons 116(1) and 220 to the Code. Secton 116(1) provdes for the
e cuson from gross ncome of ncome from sources wthn Puerto Rco In the
case of ndvduas who are bona fde resdents of Puerto Rco durng the entre
ta abe year. Secton 220 provdes that suppement of the Code (reatng
to nonresdent aen Indvduas) sha have no appcaton to aen Indvduas
who are bona fde resdents of Puerto Rco durng the entre ta abe year and
that such ndvduas sha be sub|ect, as In the case of ctzens and resdent
aens, to the ta es mposed by sectons 11 and 12 of the Code.
Wthhodng of ta at source under secton 1 3 (a) and (b) of the Code on
f ed or determnabe annua or perodca Income w be contnued In accord-
ance wth present provsons of the Code n the case of aen ndvduas who
are resdents of Puerto Rco, even though such Indvduas are bona fde resdents
of Puerto Rco durng the entre ta abe year. Such treatment s obtaned by
amendments to sectons 1 3(a) (1) and 1 3(b) of the Code. Credt for, or
refund of, such wthhed ta w be aowed In the case of those aen resdents
of Puerto Rco who become sub|ect to ta under sectons 11 and 12 of the Code
n accordance wth proposed secton 220. .
Secton 217(f) of the b makes provson for the amendment of sectons
1621(a)(6) and 1621(a)( ) of the Code reatng to defnton of wages wth
respect to the coecton of Income ta at source on wages. Pursuant to proposed
secton 1621(a)(6)( ) wthhodng of ncome ta w be requred on wages
pad for servces performed by an ndvdua aen resdent of Puerto Rco as an
empoyee of the Unted States or any agency thereof.
Secton 1621(a)( )( ), as amended by the b, wn no onger appy to
Puerto Rco. In ts appcaton to any other possesson of the Unted States,
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ths secton requres wthhodng of ncome ta on wages pad for servces re-
formed by a ctzen of the Unted States In such possesson as an empoyee of
the Unted States or any agency thereof. Pursuant to secton 1621(a)( )(C)
wthhodng of ta w not be requred on wages pad for servces performed by a
ctzen of the Unted States wthn Puerto Rco, If It s reasonabe to beeve
that durng the entre caendar year the empoyee w be a bona fde resdent
of that possesson, uness the empoyer Is the Unted States or any agency thereof.
Secton 217(g) amends secton (a) of the Code to requre aen ndvduas
who are resdents of Puerto Rco durng the entre ta abe year to make a
decaraton of estmated ta for the ta abe year In accordance wth the present
requrements of the Code. Gross Income n such cases w not, of course, n-
cude the Puerto Rcan source Income e cuded by vrtue of secton 116(1) (1)
of the Code. Ctzens of Puerto Rco who are not otherwse ctzens of the
Unted States, w, of course, be requred to make the decaraton prescrbed
by secton (a) of the Code.
Secton 217(h) of the b provdes for the amendment of sectons 131(a) (2)
and 131(a) (3) of the Code whch reate to the credts aganst ta . Under the
amendment to secton 131(a)(2) aen ndvduas who are resdents of Puerto
Rco durng the entre ta abe year w be aowed a credt for ta es pad or
accrued durng the ta abe year to any possesson of the Unted States wth
respect to ncome from sources n such possesson sub|ect to the Federa Income
ta . Pursuant to the amendment to secton 131(a) (3) such an aen ndvdua
w aso be aowed a credt for ta es pad or accrued durng the ta abe year to
any foregn country wth respect to Income from sources n such country sub|ect
to the Federa ncome ta , f the foregn country of whch such aen resdent
s a ctzen or sub|ect, n mposng Its ncome ta es, aows a smar credt to
ctzens of the Unted States resdng theren. No credt w, of course, be
aowed aganst the Federa ncome ta for ta es pad or accrued to Puerto Rco
wth respect to ncome derved from Puerto Rcan sources but e cuded from gross
ncome for purposes of the Federa ncome ta . Smary, no credt w be
aowed for ncome ta es pad to Puerto Rco on ncome derved from sources n
a foregn country, even though such ncome may have been sub|ect to ta n (1)
the Unted Ptates, (2) the foregn country, and (3) Puerto Rco.
S CTION 21 . INCR S IN R T OF CORPOR TION INCOM T S
Secton 21 amends the Income ta to Impose, n genera, a 21 percent norma
ta on the norma ta net Income of corporatons and a 20 percent surta on
corporaton surta net ncome. The frst 2 ,000 of corporaton surta net
ncome, however, w not be sub|ect to the surta . The genera pan for ta ng
corporate ncome w be appcabe to a corporatons (e cept a corporaton
sub|ect to the ta mposed by secton 231(a), reatng to ta on foregn corpora-
tons not engaged n trade or busness In the Unted States) wthout regard to
the amount of the corporaton s ncome. There w consequenty no onger be
any so-caed notch provson. Secton 1 , reatng to ta on speca casses of
corporatons, s repeaed.
Subsecton (a) of secton 21 amends secton 13(a) (2), reatng to the defn-
ton of norma ta net ncome, to provde the foowng addtona credts: In
the case of a pubc utty, the credt provded In secton 26(h) for dvdends pad
on preferred stock, and n the case of a Western emsphere corporaton, the
credt provded n secton 26(1) (whch credt s dscussed beow). Ths sub-
secton aso amends secton 13(b) by changng the present rates theren to a
snge rate of 21 percent of the norma ta net ncome, and repeas secton 1 ,
whch secton now mposes varous aternatve rates of ta on norma ta net
ncome of speca casses of corporatons. Under ths amendment, the norma
ta net ncome of every corporaton (e cept a corporaton sub|ect to the ta
mposed by secton 231(a), Suppement G, or Suppement ) w be sub|ect under
secton 13(b) to one rate of ta , that s, 21 percent
Subsecton (b) amends secton 1 , reatng to surta on corporatons. Under
secton 1 (a), as amended, credts n addton to those provded under e stng
aw are aowed n computng corporaton surta net Income. These addtona
credts, dscussed beow, are, n the case of a Western emsphere trade corpora-
ton, the credt provded n secton 26(1), and n the case of a corporaton recev-
ng nterest on partay ta -e empt obgatons, the credt provded n secton
26( ). s under e stng aw, dvdends receved on the preferred stock of a
pubc utty are dsregarded n computng the dvdends-receved credt aowed
n comparng corporaton surta net ncome. The credt for dvdends pad on
preferred stock of a pubc utty a modfed n secton 26(h), as amended, whch
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amendment s dscussed beow. Secton 1 (b), as amended, mposes a surta of
20 ereent on the amount by whch the corporaton surta net ncome e ceeds
2 ,000. Ths ta s appcabe to every corporaton e cept a corporaton sub|ect
to a ta mposed by secton 231(a), Suppement G, or Suppement .
Subsecton (c) amends secton 26(h)(1) to provde that the credt under
that secton s an amount equa to the esser of: (1) 3 percent of the amount
of dvdends pad durng the ta abe year on the preferred stock of the pubc-
utty company; or (2) 3 percent of the e cess of the ad|usted net ncome of
the pubc-utty company over ts dvdends-receved credt provded n secton
26(b). Ths credt s appcabe n computng both the norma ta net Income
and the corporaton surta net Income.
Subsecton (d) amends secton 26 by addng at the end thereof new subsecton
(1) whch provdes a credt (appcabe to Western emsphere trade corpora-
tons) equa to 3 percent of the norma ta net ncome of the Western emsphere
trade corporatons, such norma ta net ncome beng computed wthout regard
to the credt provded n such subsecton (). Ths credt s appcabe n com-
putng both the norma ta net ncome and the corporaton surta net ncome.
Subsecton (e) further amends secton 26 by addng after subsecton (),
dscussed above, new subsecton ( ) whch provdes a credt of the esser of:
(1) 1 percent of the credt provded n secton 26(a) (reatng to nterest on
partay ta -e empt obgatons) ; or (2) 1 percent of the amount by whch the
corporaton surta net ncome, computed wthout regard to the credt provded
n subsecton ( ), e ceeds 2 ,000. Ths credt s appcabe n computng cor-
poraton surta net ncome.
Subsecton (f) amends secton 207(a) (1) (reatng to norma ta and surta
on mutua nsurance companes, other than fe or marne) and secton 207(a) (3)
(reatng to the norma ta and surta on nternsurers or recproca under-
wrters) to refect the norma ta of 21 percent and the surta of 20 percent of
the e cess of surta net ncome over 2 ,000. Thus, under secton 207(a) (1) ( ),
the surta on the company s surta net ncome Is computed as provded n secton
1 (b) ; that s, t s computed at the rate of 20 percent on the amount by whch
such surta net ncome e ceeds 2 ,000.
Subsecton (g) amends secton 362(b) (3) and ( ) (reatng to norma ta and
surta on reguated nvestment companes) to refect the new rates provded
by ths secton.
Subsecton (h) makes the necessary technca amendments to other provsons
of the Interna Revenue Code. Ths subsecton amends secton 201(a)(1) (re-
atng to ta on fe-nsurance companes) to refect the new rates. Secton
20 (a)(1) (reatng to ta on nsurance companes other than fe or mutua)
s amended so that the ta es on such companes w be computed as provded n
secton 13(b), that s, at the rate of 21 percent of Its norma ta net ncome, and
as provded n secton 1 (b), that s, at the rate of 20 percent on the amount
by whch ts corporaton surta net ncome e ceeds 2 ,000. Secton 20 (a)(2)
(reatng to defnton of norma ta net ncome and corporaton surta net ncome
of nsurance companes other than fe or mutua) Is amended so that such com-
panes, n computng ther corporaton surta net Income, w be entted to the
surta credt for partay ta -e empt nterest provded n secton 26( ).
Ths secton aso amends secton 231(b), reatng to foregn corporatons en-
gaged n trade or busness n the Unted States. Such corporatons w be sub-
|ect to the norma ta mposed by secton 13(b) and the surta Imposed by
secton 1 (b).
S CTION 210. FF CTI D T OF TITL II
The changes made wth respect to Income ta es by tte II of the b are ap-
pcabe, e cept as otherwse e pressy provded, wth respect to ta abe years
TITL III. TR TM NT OF INCOM OF, ND GIFTS ND U STS
TO, C RT IN T - MPT ORG NIZ TIONS
, Tte III of the b changes the present ta treatment of the ncome of certan
ta -e empt organzatons and the deductons for gfts and bequests to such or-
ganzatons. Ths tte s dvded nto three parts, (I) Ta aton of usness and
Other Income of Certan Ta - empt Organzatons, (II) Chartabe. tc.:
Deductons of Trusts Not empt From Ta aton and (IU) Dsaowance of
Deductons for Certan Gfts and equests.
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Pabt I. Ta aton of usness amd Otheb Income of Certan Ta - empt
Organzatons
S CTION 301. INCOM OF DUC TION L, C RIT L , ND C RT IN OT R
MPT ORG NIZ TIONS
Subsecton (a) of secton 301 of the b adds to the Interna Revenue Code
certan provsons Imposng a ta on the unreated busness net ncome of edu-
catona, chartabe, etc., organzatons and on the accumuated Investment n-
come of certan e empt organzatons. s the e stng Suppement U of the
Code s now obsoete, the new provsons are nserted In eu of the present pro-
vsons of Suppement U, and are numbered as sectons 21 through 20 of the
Interna Revenue Code. Ths suppement Is entted Ta aton of usness and
Other Income of Certan Ta - empt Organzatons. For convenence of refer-
ence, the ta w be referred to In ths report as the Suppement U ta .
Subsecton (a) of secton 21 mposes a ta upon the Suppement U net Income
(as denned In subsecton (c)) of certan organzatons ow e empt from Federa
ncome ta by reason of secton 101 (1), (6), (7), and (1 ) of the Interna
Revenue Code. Ths ta Is effectve for ta abe years begnnng after December
31. 19 0.
Rates.
Subsecton (a) of secton 21 aso prescrbes the rates of the Suppement U
ta . Under paragraph (1) thereof, organzatons, whch f not e empt woud
be ta ed as corporatons, are sub|ected to a norma ta of 21 percent on ther
Suppement U net ncome and a surta of 20 percent on the amount of such
ncome In e cess of 2 ,000 (the corporate ncome ta rates provded n the
b). Under paragraph (2) thereof, trusts, whch f not e empt woud be
snb|ect to the provsons of Suppement of the Interna Revenue Code, are
ta ed at the ndvdua rates prescrbed n sectons 11 and 12(b) of the Code.
Organzatons sub|ect to ta .
Subsecton (b) of secton 21 defnes the organzatons whoso ncome s sub-
|ect to the Suppement U ta . Paragraph (1) thereof provdes that the foow-
ng organzatons, wth the e ceptons noted beow, are sub|ect to the ta at
corporate rates:
Labor, agrcutura, and hortcutura organzatons, e empt under secton
101(1) of the Code; chartabe, scentfc, terary, educatona, regous or-
ganzatons (other than churches), and organzatons for the preventon of
cruety to chdren or anmas, e empt under secton 101(6) of the Code; bus-
ness eagues, chambers of commerce, rea-estate boards, or boards of trade,
e empt under secton 101(7) of the Code; corporatons descrbed n secton
101(1 ), organzed for the e cusve purpose of hodng tte to property, co-
ectng ncome therefrom, and turnng over the entre amount thereof, ess
e penses, to any of the above-sted e empt organzatons whch themseves are
snb|ect to the Supement U ta , or to churches.
Te churches are e empt from the Suppement U ta , regous organza-
tons are sub|ect to such ta even though organzed under church auspces.
Ths Is aso true of organzatons wth chartabe, educatona, etc., purposes
whch are organzed under church auspces. Lkewse, a secton 101(1 ) cor-
poraton hodng property for a church woud be, as ndcated above, sub|ect
to the Suppement U ta .
Subsecton (b)(2) of secton 21 brngs wthn the scope of the Suppement
U ta any trust whch woud be sub|ect to the provsons of Suppement of the
Code f t were not e empt from ta aton by reason of secton 101(6) of the
Code.
Defnton of Suppement net ncome.
The ncome sub|ect to the Supement U ta Is the Suppement U net Income,
whch s defned n subsecton (c) of secton 21 as (1) the unreated busness
net ncome (as defned In secton 22) n e cess of 1,000, pus (2) In the case
of certan organzatons (descrbed In secton 2 (a)), the amount by whch
the accumuated nvestment ncome (defned n secton 2 (b)) e ceeds the
credt provded by secton 2 .
023 30
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Subsecton (d) of secton 21 provdes that the Suppement U net ncome of
a foregn organzaton sub|ect to the Suppement U ta s the amount of such
Income derved from Unted States sources determned n accordance wth the
rues of secton 119 and sectons 212, 213(a), 231 (c) and (d), and 232(a) of
the Code.
S CTION 22. UNR L T D USIN SS N T INCOM
Ths secton descrbes the unreated busness net ncome whch s sub|ect
to Suppement U ta . Unreated busness net Income s defned n subsecton
(a) of secton 22 as the gross ncome derved by any organzaton (to whch
Suppement U appes) from any unreated trade or busness reguary carred
on by It, ess the deductons aowed by secton 23 of the Code whch are drecty
connected wth the carryng on of such trade or busness, sub|ect to certan
e ceptons, addtons, and mtatons. In the case of an organzaton whch
reguary carres on two or more unreated busnesses, ts unreated busness
net ncome s Its gross Income (as descrbed beow) from a such unreated
busnesses, ess the deductons aowed wth respect to a such unreated
busnesses.
Defnton of unreated trade or busness.
s used In ths secton, the term trade or busness has the same meanng
as t has esewhere n the Code, as, for e ampe, n secton 23(a)(1). The
defnton of unreated busness net ncome n secton 22, however, ncudes
ony ncome from unreated trades or busnesses whch are reguary carred
on. Thus, n determnng whether the ncome of an e empt organzaton from
a trade or busness s sub|ect to the Suppement U ta , It s frst necessary
to determne whether t s ncome from a trade or busness whch s reguary
carred on, or s Income from a sporadc actvty. If a chartabe organzaton,
e empt under secton 101(6) of the Code, gves an occasona dance to wh ch
the pubc Is admtted for a charge, hrng an orchestra and entertaners for
the purpose, ths woud not be a trade or busness reguary carred on wthn
the meanng of secton 22. kewse, an organzaton whch operates n sandwch
stand durng the week of an annua county far s not reguary carryng on
a trade or busness. On the other hand, f an organzaton operates a pubc
parkng ot 1 day each week, the organzaton woud be reguary carryng on
a trade or busness. Smary, f an organzaton owned a race track, ths
woud not be consdered an occasona actvty even though the track waa
operated ony a few weeks every year, snce It s usua to carry on such a trade
or busness ony durng a partcuar season.
If a trade or busness s reguary carred on, It Is st not sub|ect to the
Suppement U ta uness suc busness s unreated wthn the meanng of
secton 22(b). That secton defnes the term unreated trade or busness
to mean, n the case of an organzaton sub|ect to the Suppement U ta , any
trade or busness the conduct of whch s not substantay reated (asde from
the need of such organzaton for ncome or funds or the use t makes of the
profts derved) to the e ercse or performance by such organzaton of Its
chartabe, educatona, or other purpose or functon consttutng the bass
for Its e empton under secton 101 of the Code.
For e ampe, a wheat farm operated by an e empt agrcutura coege as
part of ts educatona program woud be consdered a reated busness. Of
course, Income of an educatona organzaton from charges for admssons
to footba games woud not be deemed to be ncome from an unreated busness,
snce ts athetotc actvtes are substantay reated to ts educatona pro-
gram. owever, the manufacture and sae of automobe tres by a coege
woud ordnary be consdered an unreated busness. trade or busness
whch Is otherwse unreated woud not become reated merey because some
Incdenta use Is made of the busness factes to further the e empt purpose.
For e ampe, the tre busness noted above woud not become substantay re-
ated even though some students as part of ther educatona program performed
some mnor cerca or bookkeepng functons. Nevertheess, an organzaton,
e empt under secton 101(6) of the Code and engaged In the rehabtaton of
handcapped persons woud not be sub|ected to the Suppement U ta on any
ncome t derves from the sae of artces made by such persons snce such
busness woud be a necessary part of ts rehabtaton program.
owever, the term unreated trade or busness does not ncude any trade
or busness
(1) n whch substantay a the work n carryng on such trade or busness
Is performed for the organzaton wthout compensaton; or
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(2) carred on by an organzaton e empt under secton 101(6) of the Code
prmary for the convenence of Its members, students, patents, offcers, or
empoyees.
n e ampe of the operaton of the frst of the mtatons mentoned above
woud be an e empt orphanage runnng a second-hand cothng store and seng
to the genera pubc. If substantay a the work In carryng on such trade
or busness s performed for the organzaton by vounteers wthout compen-
saton, the profts of the busness woud not be sub|ect to the Suppement U ta .
n e ampe of the second mtaton woud be a aundry operated by a coege
for the purpose of aunderng dormtory nens and the cothng of students.
owever, a aundry operated by a coege apart from ts campus prmary for
the purpose of makng a proft from aunderng the cothng of the genera
pubc woud be unreated and not wthn the scope of ths mtaton.
ceptons, addton , and mtatons.
(a) dvdends, Interest, annutes, and royates (Incudng overrdng
royates), and the deductons drecty connected therewth, are e cuded from
the concept of unreated busness net ncome. Ths e cepton appes not ony
to nvestment ncome but aso to such tems as busness nterest on overdue open
accounts recevabe.
(b) In genera, rents from rea property (Incudng personaty eased there-
wth ) and the deductons drecty connected therewth are aso e cuded. ow-
ever, certan rent receved from a Suppement U ease, as defned n secton 23,
s ncuded as an tem of gross ncome derved from an unreated trade or
busness. The term rents from rea property does not Incude ncome from
the operaton of a hote but does ncude rents derved from a ease of the hote
tsef. Smary, ncome derved from the operaton of a parkng ot s not
consdered rents from rea property. Income receved from a busness of
rentng persona property s e cuded from unreated busness ncome ony
If the persona property s eased wth rea property.
gans or osses from the sae, e change, or other dsposton of rea
property, or of persona property eased wth the rea property, are e cuded
from unreated busness ncome. Ths e cudes the gan or oss resutng from
the dsposton ether of rea property (other than rea property hed for sae
to customers n the ordnary course of a trade or busness) or of any persona
property eased wth such rea property whether or not a capta asset. The
term other dsposton ncudes an nvountary converson, such as theft or
destructon, of the property.
(c) The net operatng oss deducton provded n secton 23(s) of the Code
s aowed as a deducton aganst gross ncome n computng the unreated
busness net ncome. The net operatng oss carry-back or carry-over s de-
termned under secton 122 of the Code wthout, however, takng nto account
any ncome or deducton whch s e cuded under Suppement T n computng
the unreated busness net ncome. For e ampe, a oss attrbutabe to an
unreated trade or busness woud not be dmnshed for purposes of determnng
the net operatng oss carry-back or carry-over by reason of the recept of
substanta dvdend Income. For the purposes of ths provson, the terms
precedng ta abe year and precedng ta abe years as used n secton 122
of the Code do not ncude any ta abe year for whch the organzaton was not
sub|ect to the provsons of Suppement U.
(d) ncome derved from research done for the Unted States or any of
ts agences, and a deductons drecty connected wth such Income are e cuded.
Income receved from research work done by a unversty for the tomc nergy
Commsson woud, for e ampe, not be ncuded n unreated busness ncome.
(e) The so-caed chartabe-contrbuton deducton aowed by sectons 23(o)
and 23 (q) of the Code s to be aowed aganst gross ncome n computng the
unreated busness net ncome n the case of any trust descrbed n secton
21(b) (2) and n the case of any other organzaton descrbed n secton 21(b)
(1), respectvey, whether or not the contrbuton s drecty connected wth the
carryng on of the trade or busness. The deducton for contrbutons s
mted to 1 percent or percent, as the case may be, of the unreated busness
net ncome computed wthout beneft of the chartabe-contrbuton deducton
Itsef, accordng to whether the organzaton s Suppement T net Income Is ta abe
t Indvdua or corporate rates. In computng such deducton for a trust
ta ed at ndvdua rates, there are to be taken nto account not ony vountary
gfts or contrbutons made by the trust to or for the use of donees, but aso
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dstrbutons made pursuant-to the trust Instrument to quafed benefcares
descrbed In secton 23(o) of the Code.
The contrbuton, whether made by a trust or other e empt organzaton, most
be pad to another organzaton to be aowabe. For e ampe, a secton 101 (6)
ncorporated educatona nsttuton operatng an unreated busness woud be
aowed a deducton up to percent of ts unreated busness net ncome for
amounts of ncome from any source pad over to the Red Cross but woud not
be aowed any deducton for amounts of busness ncome whch are used to
defray ts own e penses n admnsterng ts own educatona program.
In the event an organzaton to whch Suppement U appes s a member of a
partnershp whch s reguary engaged In a trade or busness whch s unreated
to the functons and purposes of the organzaton, the organzaton woud In-
cude, In computng ts unreated busness net ncome, so much of ts share
(whether or not dstrbuted) of the partnershp gross ncome as s derved from
that unreated busness and ts share of the deductons attrbutabe thereto,
and make the necessary ad|ustments for the e ceptons and mtatons whch
have been dscussed above. For e ampe, If an e empt educatona nsttuton Is
a sent partner In a partnershp whch runs a barre factory and such Insttu-
ton aso hods stock In a pottery manufacturng corporaton, t woud ncnda
In ts unreated busness ncome ts share of the barre factory Income, but not
Its proportonate share of any dvdends receved by the partnershp from the
pottery corporaton. If the ta abe year of the organzaton s dfferent from
that of the partnershp, the amounts to be so ncuded or deducted n computng
the unreated busness net ncome are to be based upon the Income and deduc-
tons of the partnershp for any ta abe year of the partnershp endng wthn
or wth the ta abe year of the organzaton.
S CTION 2S. SUPPL M NT U L S
Your commttee proposes to ta as unreated busness net Income the ncome
whch a Suppement U organzaton receves from the ong-term ease of ts rea
property (ncudng persona property eased wth the rea property) n the snnae
proporton that unpad ndebtedness respectng the property at the cose of
the essor s ta abe years bears to the ad|usted bass of the property.
The b deas ony wth ta consequences to he mposed on the essor organza-
ton, and, of course, no mpcaton s to be drawn from ths mted treatment of
the probem as to the ta consequences of such arrangements under e stng aw
to the vendors and essees of the property. That Is a separate probem, not deat
wth here, and the appcaton of e stng aw to the vendors and essees s not
chruged by the b.
Secton 23 defnes the type of ease sub|ect to the Suppement TT ta , and sets
forth the rues respectng the ascertanment of the part of such rents whch
s to be sub|ect to the ta .
D FINITION Or SUPPL M NT U L S
The term Suppement T ease Is defned In secton 23(a) as any ease for
a term of years or more of rea property owned by an organzaton (or by a
partnershp of whch t s a member), but ony If at the cose of the essor s
ta abe year there Is a Suppement T ease ndebtedness, as defned n secton
23(b), wth respect to such property.
In computng the term of the ease, the perod for whch a ease may be renewed
or e tended by reason of an opton contaned theren s consdered as part of the
term. For e ampe, a 3-year ease wth an opton for renewa for another such
perod woud be consdered a ease for a term of 6 years. nother e ampe
woud be a 1-year ease wth opton of renewa for another such term, where the
partes at the end of each year renew the arrangement Under ths set of facts,
durng the fourth year the ease woud fa wthn the -year rue, snce the ease
woud have nvoved years and there woud reman an opton for the ffth year.
Therefore, the renta recepts for the fourth year w fa wthn the scope of
the Suppement U ta to the e tent that the borrowed funds rue of secton
23(b) Is appcabe.
If the property s acqured sub|ect to a ease, the term of such ease Is con-
sdered to begn on the date of such acquston. For e ampe, If an e empt
organzaton purchases, In whoe or n part wth borrowed funds, rea property
sub|ect to a 10-year ease whch has 3 years eft to run and such ease contans
no rght of renewa cr e tenson, the ease w be treated as a 3-year ease, and
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hence w not meet the defnton of Suppement TT ease In proposed secton
23(a). owever, If ths ease contans an opton to renew for a perod of 2
years or more, It s a Suppement U ease.
D FINITION OF SUPPL M NT L S IND T DN SS
The term Suppement U ease Indebtedness s defned n secton 23(b) to
mean, wth respect to any rea property eased for a term of years or more, the
unpad amount of the ndebtedness Incurred by the essor In acqurng and mprov-
ng the property (ncudng ndebtedness ncurred as the pro mate resut
thereof). Where ony a porton of the rea property s sub|ect to a Suppement U
ease aocaton of the ndebtedness appcabe to the whoe property must, be
made to the premses covered by the ease.
Where rea property Is acqured sub|ect to a mortgage or smar en, whether
the acquston be by gft, devse or purchase, the amount of the Indebtedness
secured by such mortgage or en Is consdered Suppement U ease ndebteness,
even though the essor does not assume or agree to pay the ndebtedness. For
e ampe, a unversty pays 100,000 for rea estate vaued at 300,000 but sub|ect
to a 200,000 mortgage. For the purposes of the Suppement U ta ths purchase
woud be treated as f 200,000 of borrowed funds had been used to buy the
property.
It w be noted that the rues respectng Suppement U eases cover cases, where
the eased property tsef s not mortgaged. They are ntended, for e ampe, to
reach cases such as the foowng: scentfc organzaton mortgages ts abora-
tory to rase funds to remode another budng, otherwse free of ndebtedness, n
order to ease such budng for a ong term to a grocery store chan. Ths woud
be an e ampe of a Suppement U ease ndebtedness wthn the meanng of the
secton. Lkewse, f a unversty pedges some of ts nvestment securtes wth a
bank for a oan whch Is useC to purchase a budng that t eased for a ong
term, the ease woud be a Suppement U ease. If the budng Itsef were ater
mortgaged to rase funds to reease the pedged securtes, the ease woud con-
tnue to be a Suppement U ease. Moreover, f property, nether acqured nor
Improved wth borrowed funds, Is ater mortgaged to obtan funds for some pur-
pose not connected wth the property, the borrowng woud render a ong-term
ease of the property a Suppement U ease f under the partcuar facts of the case
t coud be sat that the borrowng was the pro mate resut of havng acqured
the property.
The b covers arrangements worked out by the use of a subsdary corporaton
of the type e empt under secton 101(1 ) of the Code. For e ampe, assume a
parent organzaton borrows funds to purchase reaty and sets up a separate
secton 101(1 ) corporaton as a subsdary to hod the property. Such subsd-
ary corporaton eases the property for a perod of years or more, coects the
rents and pays over a of the ncome, ess e penses, to the parent whch uses the
rents to amortze the Indebtedness. The ease by the secton 101(1 ) subsdary
corporaton woud be a Suppement U ease, and the renta ncome woud be sub-
|ect to the ta , whether the subsdary tsef assumes the ndebtedness or not.
For the purposes of secton 23, provson s made n subsecton (c) thereof
that the term rea property and the term premses Incude persona property
of the essor eased by It to a essee of ts rea estate f the ease of such persona
property s made under, or n connecton wth, the ease of such rea estate.
TR TM NT OF SUPPL M NT U L S NTS ND D DUCTIONS
Under secton 23(d) (1) a formua Is set out for computng the amount of the
renta ncome wth respect to a Suppement U ease whch s to be ncuded n the
computaton of unreated busness net ncome under secton 22(a). The amount
of rent to be Incuded s the same percentage (but not n e cess of 100 percent) of
the tota rents derved durng the ta aba year under each such ease as ( ) the
Suppement U ease ndebtedness, at the cose of the ta abe year, wth respect to
th premses covered by such ease, s of ( ) the ad|usted bass, at the cose of the
ta abe year, of such premses.
ssume, for e ampe, that an educatona nsttuton purchased property for
00,000, and eased t for a perod of 20 years and the ad|usted bass of such
property at the cose of the frst ta abe year was aso 00,000. If the fu
00,000 purchase prce actuay came from the schoo s own funds, the renta
ncome from ths eased property woud not be treated ns unreated busness
ncome. owever, f the Insttuton borrowed ether rart or a of the 310 000, at
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62
east a porton of the renta Income -woud be unreated busness Income. If It had
borrowed 200,000 to acqure the property, snce ths Is two-ffths of the ad|usted
bass, two-ffths of the renta Income receved from the eased property woud
enter Into the computaton of unreated busness net Income under secton
22(a) (3). If, n a subsequent year, the Indebtedness were reduced to 100,000,
assumng the ad|usted bass were st 00,000, one-ffth of the renta Income
woud be Incuded as an tem of gross ncome In computng the unreated busness
net Income.
Smary, If an educatona Insttuton whch owned a budng ste worth
20,000 borrowed 0,000 to erect a budng thereon and then eased the entre
property for a perod of years or more, fve-sevenths of the renta ncome from
the property (assumng the ad|usted bass to be 70,000) woud be Incuded In
computng unreated busness net ncome at the end of the frst year.
Where ony a porton of the property, wth respect to whch an Indebtedness
e sts, s sub|ect to a Suppement T ease, proper aocaton to the porton of the
premses covered by such ease must be made of the ndebtedness reated to the
property. For e ampe, assume that an e empt organzaton owns a four-story
budng havng an ad|usted bass of 100,000, that t spends 100,000 of borrowed
funds n mprovng the whoe budng, and that the frst foor s then rented
under a -year ease at a renta of ,000 a year. The econd, thrd, and fourth
foors are ether eased out on a yeary bass or are used by the organzaton
Itsef as offce space. ssume aso, for smpcty of e ampe, that the bass
ad|usted to the end of the ta abe year s 200,000. aocabe equay to each of
the four stores. Under ths set of facts, ony one-fourth of the property woud
be covered by the Suppement U ease. The formua for computng the per-
centage of rents to be taken Into account n the above e ampe coud be repre-
sented as foows:
The amount of the Suppement U ease ncome
( ocabe part of Suppement U ease Indebtedness)
( d|usted bass of Suppement U eased premses) Rent-
The numerator In the above e ampe 100,000.
The denomnator 200,000.
Therefore, appyng the formua to the e ampe, the percentage of Suppement U
ease ncome woud be one-haf of ,000, or 2,000, whch amount under secton
23 (d)(1) .s an Item of gross ncome derved from an unreated trade or busness.
The above e ampes do not take nto consderaton ad|ustments to the bass due
to deprecaton of the premses covered by the Suppement U ease. The bass of
the premses woud, of course, be changed each year by ad|ustments for depreca-
ton, capta addtons, etc. It s therefore cear that n years n whch the ndebt-
edness appcabe to the eased premses s not reduced, reducton of the bass by
deprecaton ad|ustments mght resut In a hgher percentage of rents beng
ncuded In the computaton of the unreated busness net ncome than n the
Iromed ntey pror year.
P RC NT G OF n DUCTIONS T N INTO CCOUNT
Secton 23(d) (2) and (3) respectvey set forth the percentage of the sum
of the deductons whch Is to be taken Into account wth respect to each Suppe-
ment U ease and the deductons that are aowabe In computng the sum of
deductons. The percentage rue respectng the deductons s comparabe to
that e paned above respectng the rents from Suppement C eases. The sum
of the deductons s the sum of the foowng deductons aowabe under secton
23 of the Code:
( ) Ta es and other e penses pad or accrued durng the ta abe year
upon or wth respect to the property sub|ect to the Suppement U ease.
( ) Interest pad or accrued durng the ta abe year on the Suppement U
ease Indebtedness.
(O) reasonabe aowance for e hauston, wear and tear (Incudng
a reasonabe aowance for obsoescence) of the property sub|ect to such
ease.
Where ony a porton of the rea property s sub|ect to the Suppement T ease,
there s taken Into account ony those amounts of the above-sted deductons
whch are propery aocabe to the premses covered by such ease.
The percentage of the sum of the deductons aowed wth respect to the Sup-
pement U rents s taken nto account n computng the unreated busness net
Income umer proposed secton 22fa). Under proposed secton 22(a). add-
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163
tonn deductons, nnmey, for net operatng osses, and chartabe contrbutons,
are then apped. Concevaby, the net operatng oss and the chartabe con-
trbuton deductons aowed under proposed secton 22(a) coud offset gross
ncome from a Suppement U ease. On the other hand, a oss wth respect to
a Suppement U ease mght Itsef produce a net operatng oss under the prov-
sons of secton 22(a) reatng to determnaton of unreated busness net
ncome.
S CTION 3 . CCUMUL T D IN STM NT INCOM
ORG NIZ TIONS FF CT D
Secton 2 as added by ths b provdes that certan trusts and other organ-
zatons whch are prvatey supported sha, sub|ect to certan mtatons, be
ta ed on ther accumuated nvestment ncome. Subsecton (a) of secton 2
descrbes the organzatons to whch secton 2 s to appy. Paragraph (1)
thereof sts those organzatons ta abe as corporatons to whch ths secton
s to appy. Incuded s any organzaton descrbed In secton 101 Id) of the
Code e cept
(1) a regous organzaton (ncudng churches);
(2) an educatona organsaton whch normay mantans a reguar fac-
uty and currcuum and normay has a reguary organzed body of pups
or students n attendance at a pace where ts educatona actvtes are
reguary carred on;
(3) an organzaton supported, In whoe or n part, by funds contrbuted
by the Unted States or any State or potca subdvson thereof, or pr-
mary supported by contrbutons of the genera pubc; or
( ) an organzaton operated, supervsed, controed, or prncpay sup-
ported by a regous organzaton (other than a trust) e empt from ta aton
under secton 101 (6).
Subsecton (a)(1) aso provdes that the rues of secton 2 are to appy
to any corporaton descrbed In secton 101(1 ) whose ncome s payabe to an
organzaton whch Itsef Is sub|ect to the provsons of ths secton.
Subsecton (a) (2) sts those secton 101(6) trusts ta abe at ndvdua rates
to whch secton 2 s to appy. Incuded are a trusts sub|ect to the Suppe-
ment U ta and descrbed n secton 21(b)(2), e cept a trust created by an
organzaton whch tsef Is sub|ect to the provsons of secton 2 provded
such trust meets certan specfed requrements. The requrements whch such
a trust must meet n order to be e empt from the ta are as foows: The trust
nstrument must specfcay provde that wthn not more than years from the
date on whch the trust s ereated a of the corpus and Income of the trust
must ether be used by the trust for some specfcay named pro|ect, wthn the
purvew of secton 101(6), whether or not such pro|ect Is for the beneft of
the organzaton creatng the trust, or be pad over by the trust to a benefcary
(other than the organzaton creatng the trust) for use by the benefcary for
a specfc pro|ect descrbed n the trust nstrument and wthn the purvew
of secton 101(6) ; the trust must be rrevocabe and be sub|ect to no powers
of ateraton, modfcaton, or amendment; and none of the trustees of such
trust may be offcers, drectors, trustees, or empoyees of the organzaton
whch created the trust,
CCUMUL T D IN STM NT INCOM
Subsecton (b) of secton 2 defnes accumuated nvestment ncome as the
amount by whch the gross nvestment ncome (as defned n subsecton (c))
e ceeds the deductons aowed under subsecton (d).
GROSS IN STM NT INCOM
Subsecton (c) of secton 2 defnes the term gross nvestment ncome.
Paragraph (1) ncudes wthn the term gross nvestment ncome the gross
amount of ncome (to the e tent Incudbe n gross ncome under secton 22 of the
Code) receved durng the ta abe year from the foowng sources:
( ) nterest (other than partay ta -e empt Interest descrbed n secton
2 (a) of the Code);
( ) dvdends:
(C) royates (ncudng overrdng royates) ;
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(D) rents from rea or persona property other than that percentage of Sup-
pement U ease rentas ncuded under secton 22 In the computaton of
unreated busness et ncome;
( ) ncome receved from a trust e empt from ta aton under secton 101(C).
Incsme receved from a trust sub|ect to the provsons of Suppement s aso
ncuded but ony f and to the e tent that the trust was aowed at any tme
a deducton under secton 162 n respect of such ncome.
Paragraph (1) of secton 2 (c) further provdes that n computng the gross
nvestment ncome of a trust descrbed n secton 21(b)(2), ncome s to be
e cuded to the e tent provded n paragraph (2) of secton 2 (c).
M ND TO Y ISTING TRUSTS S OF UN 1, 19 0
Paragraph (2) ( ) of secton 2 (c) provdes that n computng the gross
Investment ncome under paragraph (1) of a trust sub|ect to the Suppement
U ta on Investment ncome, there s to be e cuded from gross nvestment ncome
nterest, dvdends, royates and rents, to the e tent that such Income s at-
trbutabe to property transferred to such trust pror to une 1,19 0, and f such
Income s requred to be accumuated pursuant to the mandatory terms of the
trust Instrument, but ony f no person after that date had power to ater, amend
or modfy the terms requrng accumuaton.
It Is necessary to provde for such e stng Irrevocabe trusts whch make
mandatory an accumuaton of ncome, snce the creators of those trusts reed on
the provsons of e stng aw. It w be noted that ths e cepton appes ony
to trusts e stng as of une 1,19 0, and then ony to ncome whch s attrbutabe
to property transferred to such trusts pror to that date. so, ths e cepton
covers trusts created by deed as we as those created by w. The phrase
attrbutabe to property transferred to such trust pror to une 1, 19 0, s not
mted In scope to specfc tems of property. For e ampe, where a trustee after
une 1, 19 0, shfts an nvestment n Unted States Government bonds to cor-
porate bonds, the corporate bonds fa wthn the quoted phrase.
SP CI L RUL WIT R SP CT TO T ST M NT RY TRUSTS
Paragraph (2) ( ) of secton 2 (c) provdes that n computng the gross n-
vestment ncome under paragraph (1) of a trust sub|ect to the ta on accumua-
tons, there s to be e cuded nterest, dvdends, royates, and rents attrbutabe
to property of the decedent transferred (whether on or before or after une
1, f).r)0) under hs w to a trust created by such w, f such ncome Is receved
durng a ta abe year begnnng wthn 2 years after the date of the death of
the decedent Thus, ths paragraph provdes a 2 -year perod of unta ed accumu-
aton In the case of testamentary trusts. Under ths e cepton respectng testa-
mentary trusts, the accumuaton need not be mandatory. The e cepton, how-
ever, whe t appes ony to ncome receved by the trust durng a ta abe year of
the trust begnnng wthn 2 years after the date of the death of the settor,
appes to such ncome attrbutabe to property transferred by w before, on.
or after une 1, 19 0. (If the property was transferred pror to une 1, 19 0,
and the accumuaton s mandatory, the e cepton of paragraph (2) ( ) woud
be appcabe.) The phrase attrbutabe to property transferred to such trust
pror to une 1, 19 0, appes where the decedent ded before une 1, 19. 0. even
though, owng to deay n admnstraton, the trust s not In actua operaton
unt some tme after une 1, 19 0. For e ampe. If a settor ded on May 2 .
19D0. devsng certan property n trust for the beneft of a named chartabe
organzaton requrng that the trust must wthout dscreton accumuate a
the Income for 0 years before turnng It over to the chartabe henefca y. there
woud be no ta on the accumuaton durng the 0-year perod even though the
trustees dd not n fact acqure custody of the property unt anuary 1, 19 1.
If a trust were created under a w of the decedent who ded on une 1, 1930,
and the accumuaton were dscretonary, Income woud be accumuated ta -free
unt une 1, 19 .
n DUCTIONS LLOW L IN D T RMINING CCUMUL T D IN STM NT INCOM
Subsecton (d) of secton 2 sets forth rues wth respect to the deductons
aowabe In determnng the accumuated Investment ncome. There are to be
aowed as deductons from the gross Investment ncome a e penses pad dur-
ng the ta abe year, a gfts or contrbutons payment of whch s made durng
the tn nbe year, a e pendtures made (urng the ta abe year whch are
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propery chargeabe to capta account, and amounts aowabe for the ta nbe
year as deprecaton and depeton under sectons 23(1) and 23(m) of the Code.
Such deductons Incude payments to the speca -year trusts descrbed n
secton 2 (a) as beng e empt from the accumuatons ta .
These deductons are, however, sub|ect to certan e ceptons whch are set
forth n paragraphs (1) through (7) of secton 2 (d). No deducton s to be
aowed for
(1) any amounts aowabe as a deducton to the organsaton n com-
putng for any ta abe yenr ts unreated busness net Income as defned
n proposed secton 22(a) ; for e ampe, a foundaton has ncome from
nvestment sources and from an unreated busness. No part of the e -
penses of the unreated busness, even f they e ceed the Income from such
busness, woud be aowed as a deducton from the gross Investment Income
n determnng the accumuated Investment Income sub|ect to the Suppe-
ment U ta ;
(2) the payment of any ta es descrbed n subparagraph ( ), (C), (D)
of secton 23(c) (1) of the Code; that s, no deducton s aowed for payment
of Federa ncome ta es, for payment of estate, Inhertance, egacy, suc-
cesson, or gft ta es, or for Income ta es pad to foregn countres or pos-
sessons of the Unted States for whch credt aganst the Suppement U
ta may be taken, pursuant to secton 26, under secton 131 of the Code;
(3) capta e pendtures made chefy for, or wth respect to property
hed chefy for, the producton of ncome or proft: for e ampe, an orphanage
to whch ths proposed secton appes coud deduct the amount e pended
to bud a new dormtory, but not amounts e pended to buy stocks or bonds
for the producton of ncome;
( ) deprecaton on property hed chefy for purposes other than the
producton of ncome or proft (ths provson s desgned to prevent a
doube deducton for property purchased and then ater deprecated) ;
( ) deductons offsettng ncome from a reated trade or busness; that
Is, deductons attrbutabe to a trade or busness, whch Is not an unreated
trade or busness under Suppement , must frst be used to offset any ncome
arsng from such trade or busness, because such ncome s not ncuded In
gross nvestment ncome In computng the Suppement U ta ; but the e cess
of such deductons woud be aowed as a deducton aganst the gross n-
vestment Income;
(6) deductons for e pendtures by a donee organzaton of gfts or con-
trbutons whch were earmarked by the donor to be e pended by the donee
organzaton for a specfc pro|ect or purpose uness the amount of such
gft or contrbuton was Incudbe by the donee organzaton In ts gross
nvestment ncome under subsecton (c) (1) ( ) of secton 2 ;
(7) deductons by a donor organzaton for gfts or contrbutons to
another organzaton aso sub|ect to the ta on accumuated nvestment
Income uness the donor organzaton earmarks such gft or contrbuton
to be e pended by the donee organzaton for a specfc pro|ect or purpose,
or uness such gft Is Incudbe n the gross nvestment ncome of the
donee organzaton under subsecton (c) (1) ( ) of proposed secton 2 .
The above-descrbed paragraphs (6) and (7) of secton 2 (d) set forth the
condtons under whch an organzaton to whch ths secton appes may take
a deducton ether for the e pendture of amounts receved as gfts or contrbu-
tons or for gfts or contrbutons made by t to another organzaton to whch
ths secton appes. dstrbuton by a trust (whether of corpus or ncome)
to ts benefcares Is to be consdered as a gft or contrbuton by the trust to ts
benefcares wthn the meanng of subsecton (d). Other gfts or contrbutons
whch are earmarked by the donor to be e pended for a specfc purpose are not
ncudbe n the gross nvestment ncome of the donee organzaton and such
donee organzaton s not permtted a deducton for the earmarked e pendtures
because the amount of the gft has not entered Into the computaton of ts gross
Investment ncome and because t has not had the free use of such gft or contrbu-
ton.
In the foowng e ampes the term organzaton, uness otherwse ndcated,
means an organzaton to whch ths secton appes and the term earmarked
means a gft or contrbuton earmarked to be e pended for a specfc pro|ect desg-
nated by the donor.
(a) If an organzaton other than a trust makes an earmarked gft or contrbu-
ton to another organzaton, the amount of the gft s deductbe, notwthstand-
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66
ng paragraph (7), by the donor, but the e pendture of the earmarked funds by
the donee does not gve a deducton to the donee.
(b) If the gft or contrbuton n e ampe (a) were not earmarked, paragraph
(7) woud deny a deducton by the donor, but It may be deductbe (when e -
pended) by the donee organzaton under the genera provsons of subsecton
(d) of secton 2 .
(c) Where a trust makes an earmarked gft or contrbuton out of Its ncome
to an organzaton, whether or not the donee organzaton s a named benefcary
of the trust, the gft s deductbe by the donor trust, notwthstandng paragraph
(7) (snce such paragraph does not dsaow such a gft f It s earmarked or f
It s ncudbe In the gross nvestment ncome of the donee organzaton under
secton 2 (c) (1) ( )). If the amount Is ncudbe In the donee s gross nvest-
ment ncome, the donee may take a deducton under paragraph (6) upon the e -
pendture of the gft even though t was earmarked.
(d) If the gft or contrbuton n e ampe (c) were not earmarked, the resuts
woud be the same, that Is, the donor woud take a deducton, If the tem woud
be ncuded n the donee s Income under subsecton 2 (c) (1) ( ), and the donee
woud aso take a deducton upon the e pendture of the gft snce It woud
not be dsaowed by paragraph t6).
(e) If a trust makes a gft soey out of Its corpus, the resuts woud be the
same as n e ampes (a) or (b) obove, dependng on whether or not the gfts
were earmarked.
(f) If an organzaton, ncudng a trust, makes a gft, whether or not ear-
marked, to a unversty descrbed n secton 2 (a) (1) ( ), the amount of the
gft s deductbe by the donor as the donee s not an organzaton to whch ths
proposed secton appes.
Where an organzaton hods property chefy for purposes other than the pro-
ducton of ncome or proft, no deducton Is to be aowed for amounts e pended In
payment of the purchase prce of such property to the e tent that the amounts
so pad were borrowed by the organzaton under a oan secured by a mortgage
or smar en on the property. owever, any amount pad n reducton of the
prncpa amount of such oan woud be deductbe at that tme as an e pendture
propery chargeabe to capta account.
Secton 2 (e) provdes that, at the eecton of the ta payer, any amount pad
out after the cose of the ta abe year and on or before the 1 th day of the thrd
month foowng, sha for the purposes of the deducton rues of secton 2 d ,
be consdered as pad on the ast day of the ta abe year. For e ampe, assume
that the ta payer made three gfts of ,000 each after the ast day of a ta abe
year and on or before the 1 th day of the thrd month foowng such ast day
but had pad out no other deductbe amounts. e coud eect to deduct ,000,
,000, or 12,000, as havng been pad on the ast day of the ta abe year. e
coud not, by reason of such gfts, deduct 6,000 or any other amount not equa
to one cf the gfts or to the sum of two or a three of the gfts. The amount
that he does Incude as havng been pad on the ast day of the ta abe year
cannot be Incuded as deductons for the ta abe year In whch the gfts were
actuay made.
S CTION 2S. CCUMUL TION CR DIT
T secton sets- out the method of computng the accumuaton credt to be
aowed under secton 21(c)(2) aganst the accumuated nvestment Income
of an organzaton sub|ect to the provsons of secton 2 n determnng
ts Suppement U ta . The purpose of the credt s to aow organzatons
havng defnte yeary e pendture commtments an opportunty to create a reserve
for contngences and e pendture commtments whch may arse In a year of
ow earnngs. In genera, ths credt aows the organzaton to accumuate
unta ed an amount equa to the hghest annua gross Investment Income reazed
durng the ta year In queston or durng one of the precedng fve ta abe years.
Ths amount represents the tota up to whch accumuatons may be made un-
ta ed and may change from year to year as the gross nvestment ncome and
deductbe e pendtures fuctuate. In each ta abe year t Is necessary to ascer-
tan how much, If any, may be added unta ed to the tota amount of accumuatons
carred forward from the prevous year.
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67
MOUNT Or CR DIT
The accumuaton credt Is defned n subsecton (a) of secton 2 as the
amount whch, pursuant to subsecton (b) (1) or (2), s added at the cose
of the ta abe year to the accumuaton fgure.
CCUMUL TION FIOUR
Secton 2 (b) provdes rues for ascertanment of the accumuaton fgure.
It provdes that at the begnnng of the frst ta abe year for whch an organza-
ton has accumuated Investment Income the accumuaton fgure of such organ-
saton s zero. Paragraph (1) provdes that there s to be added to the accumua-
ton fgure at the cose of such frst ta abe year, an amount equa to the accumu-
ated nvestment Income for such year. In other words, for the frst ta abe
year for whch the organzaton has accumuated nvestment Income the credt
offsets the whee amount of such Income.
Paragraph (2) provdes that at the cose of each subsequent ta abe year for
whch such organzaton has accumuated Investment Income, there s added
to the accumuaton fgure carred over to such year from the prevous year
an amount (not greater than the accumuated Investment ncome for such year)
whch, when added to such fgure, s not n e cess of the hgher of the gross
nvestment ncome for such year or the hghest amount of the gross nvestment
ncome for any one of the fve precedng ta abe years, whchever s greater.
The accumuated nvestment ncome e ceedng ths credt s sub|ect to the Sup-
pement U ta . The term precedng ta abe years as used n paragraph (2)
does not ncude any ta abe year for whch the organzaton was not sub|ect
to the provsons of secton 2 .
Paragraph (3) of secton 2 (b) provdes that at the cose of any ta abe
year for whch the deductons aowed the organzaton under secton 2 (d)
e ceed ts gross nvestment ncome for such year, there s to be subtracted from
the accumuaton fgure carred over to such year so much of such e cess as
does not reduce such accumuaton fgure beow zero. Therefore, n any year
n whch there s an e cess of deductons over gross nvestment Income the
correspondng reducton In the accumuaton fgure n effect ncreases the amount
of accumuaton credt thereafter avaabe.
MPL
The actua computaton of the accumuaton credt may best be e paned by
a detaed e ampe. ssume an organzaton s sub|ect to the provsons of
secton 2 and derves ncome soey from nvestments. Ths organzaton
wshes to know the amount of nvestment ncome t can accumuate yeary ta -
free. In the year 19 1, t has gross nvestment Income of 100,000 and aowabe
deductons therefrom of 0,000, whch eaves t an accumuated nvestment
ncome of 0,000. Snce the credt aowed n the frst ta abe year n whch
an organzaton has accumuated nvestment ncome s the entre amount of
such ncome for such year, ths 0,000 woud be added to ths organzaton s
accumuaton fgure and no ta woud be pad on the amount thus accumuated.
In 19 2, ths organzaton agan has 100,000 of gross nvestment ncome, but
no aowabe deductons and, consequenty, ts accumuated nvestment ncome
s 100,000. Snce ths s the organzaton s second ta abe year, the accumua-
ton fgure carred forward to such year contans the amount added thereto at
the end of the pror ta abe year. The accumuaton credt for 19 2 s that
amount whch when added to the 0,000 accumuaton fgure carred over from
19 1 woud not be greater than the 100,000 gross nvestment ncome for ether
the year 19 1 or 19 2. The amount of credt s therefore 0,000, whch s
credted aganst the accumuated nvestment ncome of 100,000, eavng an
e cess of such ncome n the amount of 0,000 sub|ect to the Suppement U ta .
In 19 3, the gross nvestment ncome s 1 0,000, the aowabe deductons are
300,000, eavng no accumuated nvestment ncome for the year to be ta ed.
The amount of the e cess of deductons over gross Investment ncome In 19 3
s 1 0,000. So much of ths e cess Is subtracted from the accumuaton fgure
as w not reduce that fgure to ess than zero. The accumuaton fgure at the
end of 19 2 was 100,000 whch fgure carred over to 19 3 Is smaer than the
1 0,000 e cess deductons aowed n 19 3; therefore, the accumuaton fgure
woud be reduced to zero at the end of 19 3.
In 19 , the gross nvestment Income Is 1 0,000 and deductons are 7 ,000,
gvng an accumuated Investment ncome of 7 ,000. Snce the accumuaton
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fgure Is zero, an amount up to the 1 0,000 gross Investment Income coud be
accumuated, but the accumuated Investment Income s ony 7 ,000; therefore,
the atter amount Is added to the accumuaton fgure, rasng such fgure at
the end of 19 to 7 ,000. s the credt n 10 s equa to the accumuated
Investment Income, there s no e cess of such Income over the credt In 19 to
ta .
In the year 19 , the gross nvestment ncome s 200,000. There are no deduc-
tons ; so the accumuated Investment Income s aso 200,000. Snce the credt
Is that part of the accumuated nvestment ncome, 200,000, whch when added
to the accumuaton fgure of 7 ,000 does not e ceed the gross Investment ncome
of 200,000, the amount of accumuaton credt for 19 s 12 ,000, whch amount
rases the accumuaton fgure at the end of the year to 200,000. The amount
of accumuated Investment ncome sub|ect to ta s the accumuated nvestment
ncome of 200,000 ess the credt of 12 ,000. The amount of such Income whch
Is sub|ect to the Suppement U ta for 19 s, therefore, 7 ,000.
In the year 19 , the gross Investment ncome Is 1 0,000 and the deductons
are aso 1 0,000, whch eaves no accumuated Investment Income sub|ect to
ta . s there Is no credt needed for the year 19 0, no amount of credt s
added to the accumuaton fgure of 200,000, whch fgure s carred over to 19 7.
In 19 7, the gross nvestment ncome Is 1 0,000 and the deductons are 100,000.
whch eaves accumuated nvestment ncome n the amount of 0,000. The
hghest annua gross Investment Income for the year 19 7 and the precedng
-year perod Is the 200,000 reazed n 19 . The amount of credt for the
year 19 7 Is that part of the accumuated nvestment Income of 0,000 whch,
when added to the accumuaton fgure of 200,000, does not e ceed the gross
Investment Income fgure of 200,000. Obvousy, such amount s zero. s no
amount may be added to the accumuaton fgure at the cose of 19 7, the
accumuaton credt for that year s zero, and the entre accumuated nvestment
Income for 19 7 In the amount of 0,000 Is sub|ect to ta . The accumuaton
fgure at the end of 19 7, remans at 200,000 as so much of the accumuated
Investment ncome as Is ta ed does not enter nto the computaton of the
accumuaton fgure for future years.
The fgures used In the above e ampe are summarzed beow n tabe form.
Tabe
Fgures In thousands of doars
Gross In
vestment
(1)
100
100
1 0
I.7)
200
IN)
ISO
owabe
deductons
CO
0
300
7
0
160
100
ccumu-
ated In-
vestment
ncome
(3-1-3)
so
100
0
7
200
o
60
ccumu-
aton
credt
(amount
added to
ton fgure)
(0
M
0
7
12
0
0
Subtrac-
tons from
accumua-
ton fgure
1 0
ccumu-
aton
fgure
60
100
0
7
200
200
0
0
7
0
S CTION 26. T S OF FO IGN COT NT 1 S ND POSS SSIONS OF T UNIT D ST T S
Secton 20 s a technca provson to provde necessary rues for the app-
caton of the foregn ta credt (under secton 131 of the Code) n the case
of any domestc organzaton dong busness In a foregn country or possesson
of the Unted States and whch s sub|ect to the Suppement D ta . The sec-
ton provdes that the amount of ncome, war-profts, and e cess-profts ta es
mposed by foregn countres or possessons of the Unted States Is to be aowed
as a credt aganst the Suppement U ta to the e tent provded In secton 131 of
the Code. The secton further provdes that the term norma-ta net Income
and the term net Income as used n secton 131 of the Code Is to be read a
Suppement U net Income n the case of organzatons comng wthn the
scope of the Suppement U ta .
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S CTION 301(b). F D R ORG NIZ TIONS
Subsecton (b) of secton 01 of the b adds a paragraph at the end of secton
101 of the Code to provde that an organzaton operated for the prmary purpose
of carryng on a trade or busness for proft s not to be e empt under any para-
graph of secton 101 of the Code on the ground that a of ts proft. are payabe
to one or more organzatons e empt from ta aton under that secton. It s aso
provded that for the purposes of ths paragraph the term trade or busness
does not ncude the renta by an organzaton of ts rea property (ncudng
persona property eased therewth).
The determnaton of the ta treatment of such feeder organzatons for
ta abe years begnnng pror to anuary 1, 10S1, s to be made as f ths sub-
secton of the b had not been enacted and wthout nference drawn from
the fact that the amendment made by ths subsecton of .the b s not e pressy
made appcabe to such ta abe years. In the area covered by ths amendment
there has been tgaton as to the appcaton of such a rue under e stng
aw (cf. Roche s each. Inc. v. Commssoner (C. C. . 2, 193 ), 96 Fed. (2d)
776: Unversa O Products Co. v. Campbe (C. . 7, 19 0), 1 1 Fed. (2d) 1;
Wngham v. ome O M (C. . , 19 0), 1 1 Fed. (2d) 9; C. F. Mueer
Co., 1 T. C. No. 111 (May 2 , 19 0)). The amendment Is ntended to show
ceary what, from ts effectve date, the rue s to be, wthout dsturbng the
determnaton n present tgaton of the rue of e stng aw.
It s not Intended that ths paragraph have any effect on cooperatves formed
by other cooperatves under secton 101(12) of the Code, on secton 101(13) of
the Code (deang wth certan other corporatons organzed by assocatons
e empt under secton 101 (12) of the Code, or by members of such assocatons) or
on secton 101(1 ) of the Code (deang wth certan corporatons organzed
to hod property and pay the net ncome therefrom to an organzaton e empt
under secton 101 of the Code).
The paragraph appes to organzatons operated for the prmary purpose of
carryng on a trade or busness for proft, as for e ampe, a feeder corporaton
whose busness s the manufacture of automobes for the utmate prot of an
educatona nsttuton.
S CTION 301(c). R UIR M NT FOR CONTINU D MPTION UND
S CTION 101(6)
Subsecton (c) of secton 301 of the b amends secton 101(6) of the Interna
Revenue Code to provde that certan organzatons are not to be consdered to
be operated e cusvey for the e empt purposes descrbed n secton 101(6) of
the Code uness they are operated n accordance wth certan specfed stand-
ards. Organzatons to whch the standards are not specfcay apped are:
( ) regous organzaton (other than a trust) ; ( ) an educatona organ-
zaton whch normay mantans a reguar facuty and currcuum and nor-
may has a reguary organzed body of pups or students n attendance at the
pace where ts educatona actvtes are reguary carred on; (C) an or-
ganzaton supported, n whoe or n part, by funds contrbuted by the Unted
States or any State or potca subdvson thereof, or prmary supported
by contrbutons of the genera pubc or operated, supervsed, controed, or prn-
cpay supported by a regous organzaton (other than a trust) whch s tsef
e empt under secton 101 (6) of the Code.
The standards of operaton specfed for any other organzaton under secton
101(6) of the Code ore that
() no part of ts ncome or corpus s oaned to;
() no compensaton other than a reasonabe aowance for saares or
other compensaton for persona servces actuay rendered s pad by t to;
() no part of ts servces s made avaabe on a preferenta bass to;
(v) no substanta purchase of securtes or any other property s made
by It from;
(v) no substanta part of Its securtes or other property s sod to;
a substanta contrbutor to such organzaton, or any offcer, drector, or trustee
of such organzaton, or any member of the famy (defned to ncude ony
brothers and ssters whether by whoe or haf bood, spouse, ancestors, and nea
descendants) of such person or a corporaton controed by such person. s
used here the term contro of a corporaton means drect or ndrect owner-
shp of 0 percent or more of the votng stock or of the vaue of a the shares
of the corporaton.
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The above amendment to secton 101(6) of the Code Is ntended to deny ta -
e empt status under that secton to organzatons whch are manpuated to UM
prvate advantage of any substanta donors of such organzatons. The fact
that the above specfc standards are made appcabe to certan secton 101( )
organzatons does not Impy that smar crtera may not be used n deter-
mnng whether other secton 101(6) organzatons are operated e cusvey for
e empt purposes.
S CTION 301(d). T C NIC L M NDM NTS
Subsecton (d) of secton 301 of the b contans a number of technca amend-
ments. Paragraph (1) thereof amends secton 101 of the Interna Revenue Code
to provde that the organzatons descrbed theren are e empt e cept to the
e tent provded n Suppement U, and that notwthstandng the fact that such
organzatons are sub|ect to ta under Suppement U, they are st to be
consdered as e empt from ncome ta es for the purpose of any aw whch refers
to organzatons e empt from Income ta es.
Paragraphs (2) and (3) amend secton 117(c) of the Code to provde for the
appcaton to an organzaton sub|ect to the Suppement U ta the aternatve
ta rates set out n that secton n any ta abe year n whch the net ong-term
capta gan of such organzaton e ceeds ts net short-term capta oss. Ths
provson can appy ony n the case of an organzaton carryng on an unreated
trade or busness and whch has a proft, treated as a capta gan, from the sae
of property used In the unreated trade or busness. It has no appcaton to
capta gans derved from saes of stocks, bonds, and the ke, snce such capta
gans w not be ncuded n computng Suppement U net Income.
Paragraph ( ) amends secton 1 3 of the Code (reatng to wthhodng ta
at source on payments to nonresdent aens, etc.) by addng at the end of that
secton a new subsecton to be desgnated subsecton (h) and entted Wth-
hodng on Certan Foregn Ta - empt Organzatons. Ths subsecton s
desgned to appy to foregn organzatons whch have ncome from Unted States
sources sub|ect to the Suppement U ta , the ncome ta wthhodng provsons
of secton 1 3 of the Code (nonresdent aens), and secton 1 of the Code
(foregn corporatons). The wthhodng provsons of sectons 1 3 and 1
of the Code w be apped to the ncome of such foregn organzaton whch s
ncudbe n computng ts gross Investment ncome under secton 2 (c) and
to the rents Incudbe under secton 22 In computng Its unreated busness
net ncome, but ony to the e tent and sub|ect to such condtons as may be
provded n reguatons prescrbed by the Commssoner of Interna Revenue
wth the approva of the Secretary of the Treasury.
Paragraphs ( ) and (6) respectvey amend Suppement of the Code (dea-
ng wth the ta aton of nonresdent aen ndvduas) and Suppement I of the
Code (deang wth the ta aton of foregn corporatons) to provde a cross
reference to the specn provsons reatng to foregn educatona, chartabe, and
certan other e empt organzatons sub|ect to Suppement T and Incuded In
secton 21(d).
Secton 302 of the b provdes thnt the amendments made by part I of tte
III of the b (the Suppement U ta rues so far dscussed) are to be appcabe
ony wth respect to ta abe years begnnng after December 31, 10 0.
Part II. Chartabe, tc., Deductons of Trusts Not empt From Ta attof
S CTION 321. C RIT L , TC., D DUCTIONS OF TRUSTS
Subsecton (a) of secton 321 of the b amends secton 102 of Suppement
of the Interna Revenue Code to brng the treatment of the broad chartabe, etc.,
deductons aowed trusts ta abe under Suppement In ne generay wth
the treatment provded for trusts and other organzatons e empt under secton
101(0) of the Code.
Paragraph (1) of subsecton (g) of secton 162 denes a deducton under
secton 102(a) of the Code wth respect to Income of a ta abe year begnnng
after December 31, 10 0, whch s accumuated, uness such ncome Is In one of
the foowng categores:
(1) Income attrbutabe to property transferred to such trust pror to une 1,
10 0, f the accumuaton thereof Is mandatory under the terms of the w or deed
creatng the trust, and no person at any tme after une 1, 19 0, had power te
ater, amend, or modfy the terms requrng accumuaton or to revoke the trust;
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(2) Income attrbutabe to property of a decedent transferred (whether on,
before, or after une 1, 10 0) under hs w to a trust created by hs w. Ths
e cepton woud appy ony to Income accumuated (whether or not n the
dscreton of the fducary) durng a ta abe year of the trust begnnng wthn
26 years after the date of the death of the decedent;
(3) Income derved from the sae, e change, or other dsposton of capta
assets.
ceptons (1) and (2) above are smar to the e ceptons provded under
secton 2 (c)(2) ( ) and ( ) n computng the gross nvestment ncome of a
secton 101(C) trust. Snce these e ceptons were dscussed n connecton wth
proposed secton 2 , they w not be agan dscussed here.
Paragraph (2) of subsecton (g) of secton 162 provdes that no amount other-
wse aowabe under subsecton (a) of secton 162 of the Code as a deducton
s to be aowed as a deducton wth respect to ncome of the ta abe year
(whether or not accumuated) whch s aocabe to the Suppement U busness
ncome of such trust for the ta abe year. Provson s made that the Suppe-
ment U busness naome of a Suppement trust s to be computed as If such
trust were e empt under secton 101(6) of the Code. Secton 22(b) provdes
that n the case of a Suppement trust computng ts net ta abe ncome under
Suppement U, the term unreated trade or busness ncudes any trade or
busness reguary carred on by such trust, or by a partnershp of whch t s
a member. The Suppement D busness ncome of such trust woud n effect be
ts net ncome derved from any reguary-carred-on busness actvty (ncudng
the percentage of rents taken Into account under a Suppement U ease).
Paragraph (3) of subsecton (g) of secton 162 provdes that at the eecton of
the fducary, any amount of ncome of the trust for ts ta abe year pad out or.
used after the cose of the ta abe year and wthn 2 months after the cose
of the ta abe year may be consdered as pad or used on the ast day of such
ta abe year for the purposes of ths subsecton and secton 162(a) of the Code.
MPL
The appcaton of paragraphs (1) and (2) of secton 162(g) can be ustrated
by the foowng e ampe:
trust, created In 19 0 by an Inter vvos transfer of property, provded that
the trustee pay one-haf of the ncome of the trust to a chd of the grantor and
that the other haf of the Income be pad over to a chartabe organzaton, or,
n the dscreton of the trustee, accumuated for the beneft of the chartabe
organzaton. The trust ncome for the ta abe year 10 1 s 0,000, consstng of
10,000 ta -e empt nterest from muncpa bonds, 10,000 of dvdends from
corporate stock, and 30,000 net proft from the operaton of a honess conducted
by the trustee. The trust Income for the year avaabe for the chartabe bene-
fcary s 2 ,000, but ony 10,000 s pad over n 19 1 to the charty and the
baance ( 1 ,000) s accumuated for ater dstrbuton to t. Of the 10,000
pad to the chartabe organzaton, 7,100 Is dsaowed as a deducton upon
appcaton of secton 162 (a) and (g).
Two thousand doars of the dstrbuton s dsaowed as beng aocabe to the
ta -e empt nterest of the trust
/ 10,000 ta -e empt Interest em/w
0,000 trust ncome WWW/
Such dsaowance resuts under the e stng aw wthout appcaton of secton
162(g).
Fve thousand one hundred doars of the ten thousanc doars dstrbuton Is
dsaowed under secton 162(g) as a deducton as beng aocabe to the Suppe-
ment U busness ncome of the trust. The fgure of ,100 Is obtaned by the
foowng formua:
2 , 00/ Suppement U busness Income v 1f
0,000 ncome of the trust 10 000-
The numerator of 2 , 00 s the fgure obtaned by computng the unreated bus-
ness Income of the trust under the rues of secton 22(a). In makng such com-
putaton, the dstrbuton of 10,000 Is taken nto account under paragraph
(6) ( ) of secton 22(a), but snce the 10,000 dstrbuted e ceeds 1 percent
of the unreated busness ncome ( 30,000) computed wthout the dstrbuton of
10,000, the deducton under secton 22(a)(6)( ) Is mted to , 00. eavng
the trust wth a Suppement U busness ncome of 2 , 00.
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Wth 7,100 beng dsaowed, the trust Is aowed a deducton of ony 2 90
by reason of the dstrbuton of 10,000. The 2,000 s made up of 2 000 ao-
cabe to the 10,000 dvdends receved by the tcust
pus 900 not aocabe under secton 162(g) to the ncome receved from tba
busness
No deducton s aowed to the trust for the 1 ,000 set asde for future ds-
trbutons to the charty. though the property of the trust was transferred n
trust pror to une 1, 19 0, the accumuaton of the 1 ,000 was not mandatory
under the terms of the trust.
If the trust bad been created by a w of a decedent dyng In 19 0 the provson
of secton 102(g) (1) ( ) woud aow some deducton wth respect to the 1 ,000
accumuated, snce the ncome woud be accumuated durng a ta abe year of
the trust begnnng wthn 2 years after the date of the death of the decedent.
In such case, 3,000 of the 1 ,000 woud be aowed as a deducton aocabe to the
10,000 dvdends receved by the trust( ; ,0 1 ,000 and 1,3 0 woud
be aowed as a deducton not aocabe under secton 162(g) to that busness
Paragraph ( ) of subsecton (g) mts the amount otherwse deductbe
under secton 102(a) of the Code to 1 percent of the net ncome of the trust
(computed wthout the beneft of secton 1 2(a)) uness the trust s so operated
that certan prohbted benefts or advantages may not nure to a certan defned
cass of persons. These persons are: any substanta contrbutor, offcer, or trustee
of such trust, any member of the famy (defned to ncude brothers and ssters
of the whoe or haf bood, spouse, ancestors and nea descendants) of any such
person, or any corporaton controed by any such person, whch contro may be
e ercsed through the ownershp, drecty or ndrecty, of ether 0 percent or
more of the votng stock or 0 percent of the tota vaue of a stock of the
corporaton.
The types of advantages or benefts whch may nure to such persons durng
the operaton of the trust and whch woud prevent the aowance under secton
102(a) of the Code of a deducton n e cess of 1 percent of the net ncome of the
trust are:
( ) oan from ncome or corpus of the trust;
( ) Compensaton, other than a reasonabe saary or compensaton for serv-
ces actuay rendered;
(C) Preferenta servces:
(D) substanta purchase of securtes or property from the trust; or
( ) substanta sae of securtes or property to the trust.
Paragraph (1) of secton 321(b) of the b provdes that the deductons unde
secton 102(a) of the Code are to be sub|ect to the provsons of subsecton (g).
Paragraph (2) of secton 32 b) amends secton 101 of the Code to add at th
end thereof a new subsecton to be desgnated (d) and entted Trusts empt
Under Secton 101(6). Ths subsecton provdes that suppement Is not tc
appy n the case of any trust whch s e empt (e cept as provded n Suppement
U) from ta aton by reason of secton 101(6) of the Code.
Secton 322 of the b provdes that the amendments made by part II of Ot
III of the b are to be appcabe ony wth respect to ta abe year begnnng
after December 31,19 0.
S CTION 321(b). T C NIC L M NDM NTS
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Part III. Dsaowance of Deducton of Certan Gfts and f.quf.sts
CTION 31. DIS LLOW NC OF C RT IN C RIT L . TC.. D DUCTIONS
Subsecton (a) of secton 331 of the b amends chapter 3S of the Interna
Revenue Code, addng a new secton to be numbered secton 3 10, entted Ds-
aowance of Certan Chartabe, tc., Deductons.
Subsecton (a) of proposed secton 3S10 provdes that no gft or bequest for
regous, chartabe, scentfc, terary, or educatona purposes, ncudng the
encouragement of art and the preventon of cruety to chdren or anmas, other-
wse aowabe as a chartabe, etc., deducton under the approprate ncome-,
estate-, and gft-ta -deducton provsons of the Interna Revenue Code s to be
aowed as a deducton uness such gft or bequest s a deductbe gft or bequest
wthn the meanng of subsectons (b) and (c) of secton 3S10.
The term gft or bequest s defned for the purposes of secton 3 10 to mean
any gft, contrbuton, bequest, devse, egacy, or transfer made n trust or. f
not made n trust, made to an organzaton other than
(1) fraterna socety, order, or assocaton;
(2) regous organzaton;
(3) n educatona organzaton whch normay mantans a reguar fac-
uty and currcuum and normay has a reguary organzed body of pups
and students n attendance at the pace where ts educatona actvtes are
reguary carred on;
( ) n organzaton whch s supported, n whoe or n part, by funds
contrbuted by the Unted States or any State or potca subdvson thereof,
or s prmary supported by contrbutons of the genera pubc; or
( ) n organzaton operated, supervsed, controed, or prncpay sup-
ported by a regous organzaton (other than a trust) e empt from ta a-
ton under secton 101(C) of the Code.
POW RS ND OP R TION OF TRUSTS OR OT R ORG NIZ TIONS
Subsecton (b) of secton 3 10 states that no gft or bequest specfed n sub-
secton (a) sha be consdered a deductbe gft or bequest for purposes of
subsecton (a) uness
(1) The nstrument under whch the trust or other organzaton referred
to n subsecton (a) s admnstered provdes that:
( ) No part of ts ncome or corpus may be oaned to;
( ) No compensaton, other than a reasonabe aowance for saares
or other compensaton for persona servces actuay rendered, may be
pad by t to;
(C) No part of Its servces may be made avaabe on a preferenta
bass to;
(D) No substanta purchase of securtes or any other property may
be made by t from; and
( ) No substanta part of ts securtes or other property may be
sod to;
a substanta contrbutor to such trust or other organzaton or any cncer,
drector or trustee of such trust or other organzaton; or any member of
the famy (defned to ncude ony brothers and ssters whether by whoe
or haf bood, spouse, ancestors, and nea descendants) of any such person ;
or a corporaton controed by such person, the term contro meanng here
drect or ndrect ownershp of 0 percent or more of the votng stock or
of the vaue of a shares; and
(2) Such nstrument provdes that no part of the ncome or corpus of
such trust or other organzaton may be pad to any trust or organzaton
to whch a gft or bequest woud not be a deductbe gft or bequest under
ths subsecton.
Ths atter provson s ntended to prevent a donor from avodng the effect
of subsecton (b) by contrbutng through an organzaton whch meets the re-
qurements of subsecton (a) to another organzaton whch fas to meet these
requrements.
GIFTS OF STOC
Subsecton (c) of secton 3 10 provdes that no gft or bequest specfed n
subsecton (a) and consstng of stock n a corporaton sha be consdered a
deductbe gft or bequest for purposes of subsecton (a) f:
923 30 31 SI
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(1) ther the contrbutor or hs famy or the contrbutor together wth
hs famy contro the organzaton to whch the contrbuton s made, ether
by comprsng the ma|orty of the offcers, drectors, or trustees of such trust
or other organzaton, or by havng the power to f vacances In a ma|orty
of such offces, or by retanng any rght wth respect to the votng stock
or the dsposton of such stock; and
(2) Such stock s stock n a corporaton In whch the contrbutor, or the
members of hs famy, as defned above, or such contrbutor together wth
such famy members own 0 percent or more ether of the votng stock or
of the vaue of the outstandng stock of such corporaton. Where a trust
or other organzaton owns, or hods n trust, any stock and where manage-
ment s controed ether by the contrbutor or hs famy or by the con-
trbutor together wth hs famy, such stock Is consdered to be owned by
such contrbutor or such famy members. Stock owned or hed In trust by
any trust or organzaton s aso consdered to be so owned where the con-
trbutor or hs famy have any rghts wth respect to the votng or dspos-
ton of such stock.
oth of the above condtons must be present before the chartabe deducton
woud be dened the donor under subsecton (c) of secton 3 10. deducton
woud be granted for stock n a famy busness gven to an e empt organza-
ton whch the famy dd not contro, and a deducton woud be granted f stock
n a famy busness were sod and the proceeds gven to a chartabe organsaton
whch the famy dd contro.
Cause (C) of secton 3 10(c)(1) and the smar provson of secton
3 10(c) (2) are causes ntended to prevent the contrbutor reservng to hmsef
or the members of hs famy contro over corporate stock after such stock has
been contrbuted to a trust or other organzaton. These causes woud not
prevent, however, the contrbutor or members of hs famy from beng mnorty
trustees or mnorty members of the board of drectors or board of trustees of
the trust or other organzaton to whch such stock has been contrbuted.
T C NIC L M NDM NTS
Subsecton (b) of secton 331 of the b amends sectons 23(o ) (2), 23(q) (2),
12(d), 61(a) (3), 100 (a) (2) ( ), and 100 (b) of the Interna Revenue Code to
provde a cross-reference to secton 3 10 for dsaowance of certan chartabe,
etc., deductons otherwse aowabe.
FF CTI D T OF P ST m
Secton 332 of the b provdes that the amendments made by part III of
tte III of the b are to appy wth respect to the gfts or bequests, descrbed
n secton 3 10, made on or after uy 1,19 1.
Tte I . Income Ta es of Lfe Insurance Companes
Ths tte of the b revses the present statutory formua, on the bass of
whch the ncome ta of fe Insurance companes s determned, n a manner
smar to that provded for by ouse ont Resouton 371, whch passed the
ouse of Representatves on anuary 26, 19 0. Under the ont resouton the
revsed formua woud appy to the ta abe years 19 7, 19 , and 19 9. The
commttee amendment e tends the appcaton of the corrected formua to the
year 19 0. The operaton and effect of the amendments made by secton 01,
and by secton 02, whch provdes for the fng of returns by fe nsurance
companes for ta abe years begnnng n 19 7, 19 , and 19 9, are e paned n
deta n Report No. 1 22, ghty-frst Congress, second sesson, accompanyng
ouse ont Resouton 371, as foows (the frst secton of the |ont resouton s
the same as secton 01 of the b, and secton 2 of the |ont resouton s the same
as secton 02 of the b) :
Part III Detaed Dscusson of the Technca Pbovsons of the ont
Resouton
frst secton
Under e stng aw, Income ta es (norma and surta ) are Imposed on fe-
Insurance companes at the rates provded for corporatons generay. The ta es
are mposed, however, ony wth respect to ad|usted norma-ta net ncome (as
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defned n secton 202 of the Interna Revenue Code) and ad|usted corporaton
surta net ncome (as denned n secton 203). In the determnaton of the ad-
|usted norma-ta net ncome and the ad|usted corporaton surta net Income of
a fe-surance company, the company s aowed a credt whch s, n both cases,
caed the reserve and other pocy abty credt. These credts are arrved
at by mutpyng the norma-ta ncome of the company for the ta abe year, or
ts corporaton surta net Income, as the case may be, by a fgure whch s
determned and procamed for each ta abe year by the Secretary of the Treas-
ury. stng aw (secton 202(b) of the Code) provdes that the fgure so
determned and procamed sha be based on such data, for the precedng ta abe
year, wth respect to fe-nsurance companes as the Secretary consders repre-
sentatve, and that the fgure sha be computed n accordance wth a formua
based upon the rato whch the aggregate of three specfed types of Items for such
companes bears to the aggregate of the net ncomes (computed wth certan
ad|ustments) of suoh companes.
Subsecton (a) of the trst secton of the |ont resouton, as reported, amends
the second sentence of secton 202(b) of the Interna Revenue Code. though
ths amendment eaves unchanged the formua to be used n arrvng at the
Income ta es payabe by fe-nsurance companes for ta abe years other than
ta abe years begnnng n 10 7, 19 , and 19 0, t does make two changes n
such formua for ta abe years begnnng n 19 7, 19 , and 19 9. oth changes
resut n a smaer numerator, n the computaton of the rato referred to n the
precedng paragraph, than s obtaned under e stng aw. Nether change affects
the amount of the denomnator of such rato. Under e stng aw, one of the
three tems whch make up the numerator of the rato Is the product of (1) the
mean of the ad|usted reserves at the begnnng and end of the ta abe year and
() the reserve earnngs rate (defned n secton 201(c) ( ) of the Code). The
frst change made by the amendment s to provde that n computng such product
there sha be used, n eu of the reserve earnngs rate, the average rate of nterest
assumed n computng fe-nsurance reserves. Such average rate sha be deter-
mned n the manner provded n the second sentence of secton 201(c)( ) of
the Code.
The second change provdes that f the Secretary of the Treasury, n computng
the rato, fnds that the net effect of ncudng the data wth respect to any fe-
nsurance company s to Increase the numerator more than such data ncreases
the denomnator, he sha mt the net change n the numerator resutng from
the ncuson of such data to the net change n the denomnator resutng there-
from.
The foowng w ustrate the appcaton of the second change made by the
amendment The Secretary of the Treasury, havng seected the data of fe
nsurance company as representatve, fnds that the net ncome (ad|usted as
requred by secton 202(b)) of company for the ta abe year 19 6 was 100,000.
Ths 100,000 w be used by the Secretary n makng up the denomnator of the
rato whch w determne the fgure to be used for the ta abe year 19 7. The
Secretary further fnds from the data of company for the year 19 6 that the
sum of ( ) 2 percent of ts reserves for deferred dvdends, ( ) Interest pad by
It, and (C) the product of ( ) the mean of ts ad|usted reserves at the begnnng
and end of the ta abe year 19 6, and () the average rate of nterest assumed n
19 6 by company n computng Its fe nsurance reserves, was 10 ,000. Were
t not for the second change made by the amendment, the Secretary woud add
10 ,000 to the numerator of the rato, thereby ncreasng the numerator ,000
more than the ncuson of the data of such company ncreased the denomnator
of the rato. Under the amendment, ony 100,000 woud be added to the numer-
ator of the rato.
In the case of a few fe Insurance companes the Secretary of the Treasury
may fnd that the net efTect of Incudng data wth respect to such companes s a
subtracton from the denomnator of the rato. In the treatment of the data of
such a company, the effect of the second change made by the amendment woud
b to requre the Secretary, n eu of makng an addton to the numerator of the
rato, to subtract from the numerator an amount equa to the amount subtracted
from the denomnator by reason of the ncuson of such data.
Subsecton (b) of the frst secton of the |ont resouton amends secton
203(b) of the Code to make It cear that the fgure to be used n computng the
reserve and other pocy abty credt under secton 203(b) (for the purposes of
the surta ) for any ta abe year begnnng n 19 7, 19 , or 19 9 s the same
sure whch the Secretary of the Treasury sha determne and prof au frr sucb
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year under sec on 202(b) of the Code as amended by subsecton (a) of the frst
secton of the |ont resouton.
Subsecton (c) of the frst secton of the |ont resouton provdes that the
amendments made by the |ont resouton sha be appcabe to ta abe years
begnnng after December 1, 19 6. owever, as noted above, the amendments
do not effect a change n the formua to be used In computng the ncome ta es of
fe nsurance companes for ta abe years begnnng after 19 9. snce the egs-
aton s proposed merey as a stopgap measure pendng the deveopment and
enactment of a satsfactory ong-range bass for the ta aton of fe nsurance
companes. Subsecton (c) aso provdes that the Secretary of the Treasury
sha, wthn 60 days after the date of the enactment of the ont resouton, deter-
mne and procam the fgures to be used by fe-nsurance companes n comput-
ng ther reserve and other pocy abty credts for ta abe years begnnng n
19 7, 19 , and 19 9.
S CTION 2
Secton 2 of the ont resouton, ns reported, provdes for the fng of returns
and the payment of ta es by fe nsurance companes wth respect to ta abe
years begnnng n 19 7, 19 , and 19 9.
Under these provsons, every fe-nsurance company sub|ect to the ta es m-
posed by secton 201 of the Code s requred to fe a return for 19 7, for 19 ,
and for 19 9, even though under e stng aw t may have fed a return for any
or a of such years. The return requred under these provsons for any such
year may not be fed before the Secretary has procamed (after the enactment of
the |ont resouton) the fgure to be used n computng the reserve and other
pocy nbty credts for such year and must be fed on or before the ffteenth
day of the thrd month foowng the cose of the month n whch the ont resou-
ton s enacted. ny such return sha consttute the return for the ta abe year
for n purposes of the Code, must meet the requrements of secton 2(a), and
sha be fed as requred by secton 3(b)(2) and other reevant provsons of
the Code. Thus, such a return sha consttute the return for the purposes of
Suppement L, reatng to the assessment and coecton of defcences; Suppe-
ment M, reatng to nterest and addtons to the ta ; and Suppement O, reatng
to overpayments. No return wth respect to the ta es mposed by secton 201
of the Code for a ta abe year begnnng n 19 7, 19 , or 19 9, whch Is fed by
a fe-nsurance company on or before the date of the Secretary s procamaton
requred under secton 1(c) of the |ont resouton, sha be consdered for any of
such purposes, or for any other purpose, of the Code as the return for such year.
The provsons of secton 6(a) of the Code (reatng to the tme of payment)
w not be appcabe to the payment of ta es for such three ta abe years. In-
stead, such ta es sha be due and payabe on the 1 th day of the thrd month
foowng the cose of the month In whch the |ont resouton s enacted. The
provsons of secton 6(b) of the Code (reatng to Instament payments) are,
however, not affected, and a fe nsurance company may, at ts eecton, pay the
ta es due for any such year n four equa nstaments n accordance wth the
provsons of that secton.
Secton 2 of the ont resouton further provdes that a payments made wth
respect to the ta es for 9 7, 19 , or 19 9 mposed by secton 201 of the Code
tnder the aw In effect pror to the enactment of the |ont resouton, to the e -
tent that they have not been credted or refunded, sha be deemed to be payments
made at the tme of the fng of the return requred by the |ont resouton on
account of the ta es for such year. (Ta es for 19 7 and 19 were pad by some
fe nsurance companes dong heath and accdent busness.) The amount
whch w be so credted w ncude, n addton to the ta Itsef, any amounts
pad as nterest, penaty, or addtons to the tar.
For e ampe, assume that under e stng aw a fe nsurance company wrtng
heath and accdent nsurance pad, for ts ta abe year 19 7, 16,000 In ta es, an
addtona amount of 6 asserted as a defcency by the Commssoner of In-
terna Revenue, 101 as nterest thereon, and a neggence penaty of 2; for ts
ta abe year 19 , 6,000 n ta es; and no ta for ts ta abe year 19 9. Under
secton 2 of the |ont resouton the foowng amounts woud be deemed to be
payments made, on account of such ta es, at the tme of the fng of the returns
provded for by the ont resouton : ( ) on account of the ta es for the ta abe
year 19 7, 16,9 9; ( ) on account of the ta es for the ta abe year 19 , 6,000;
and (C) on account of the tn es for the ta abe year 19 9, none. Such payments
woud be so treated, of course, ony to the e tent that they had not prevousy been
credted or refunded.
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In treatng such ta es as pad at the tme of the fng of the return requred by
secton 2 of the ont resouton, such payment (n the event the return s fed
before the due date prescrbed by secton 2) w be sub|ect to the provsons of
secton 322(b) ( ) of the Code whch provdes speca rues appcabe for certan
purposes where a ta payment s made at the tme of fng a return whch Is fed
before ts due date.
Speca treatment wth respect to ta abty for 19 7 and 10 s provded
by secton 03 of the b for certan nsurance companes whch were n recever-
shp or whch operated other fe nsurance companes n recevershp durng such
years. The appcabty of ths secton s mted to cases where an nsovent
fe nsurance company was paced n recevershp and ts busness was operated
for the beneft of ts cyhoders by another fe nsurance company as a separate
fund under a management contract approved by the court havng |ursdcton
of the recevershp, and where, pror to November 1, 19 9, the management con-
tract was termnated pursuant to ts terms, fna accountng was made to the
pocyhoders of the nsovent company, and the proper State supervsory offcas
approved such accountng. In such cases funds accumuated under the manage-
ment contract w have been dstrbuted and an accountng made therefor wth
approva of a court and there s no way by whch the operatng company can
charge the fund for the ta or n any other way recoup t.
The procedure provded for such companes s as foows: The operatng com-
pany w be requred to fe a separate return for tsef and a separate return for
the nsovent company for any ta abe year begnnng n 19 7 or 19 . The return
fed for the operatng company must e cude a ncome, deductons, and credts
aocabe to the nsovent company and the return fed on behaf of the nsovent
company must be based ony upon the ncome, deductons, and credts of suh
company. The ta es of the operatng company for such yenr w be determned
n the same manner as the ta es for other fe nsurance companes for that year,
that s, under secton 201 of the Code wth the amendments made by secton
01 of ths b.
The ta es of the nsovent company w be determned In a ke manner, but
under ths secton of the b they are mted n amount so that they cannot e ceed
the hgher of ( ) an amount whch the fna accountng approved by the State
supervsory offcas refects as charged to the company as ts porton of the ta es
Imposed for such year under secton 201 or ( ) the amount of ta es Imposed for
such year by secton 201, computed on the ass of the separate return for the
nsovent company, wthout regard to the amendments made by secton 01 of
ths b. For purposes of ( ), amounts charged to the company sha ncude
amounts charged through the estabshment of a reserve account.
Where an operatng company fed for the year 19 7 or 19 a snge return
n whch ts ncome, deductons, and credts were combned wth those of the
nsovent company, payments made wth respect to such return are deemed,
for purposes of the ast sentence of secton 02 of the b, to have been made
by the nsovent company to the e tent charged to that company n the fna
accountng, and the baance of such payment s to be treated as made by the
operatng company.
Secton 03 does not affect the appcaton of sectons 01 and 02 to any
ta abe year other than 19 7 or 19 .
TITL ST T T
S CTION 01. TR NSF RS IN CONT MPL TION OF D T
Ths secton of the b amends secton 11 of the Code, reatng to the gross
estate, by addng a new subsecton, desgnated (1), to change n two respects
the rues wth respect to transfers n contempaton of death.
Frst, the new subsecton (1) provdes that (e cept n the case of a bona
fde sae for an adequate and fu consderaton n money or money s worth)
the transfer of an nterest n property, the renqushment of a power descrbed
n secton 11(d), or the e ercse or reease of a power of appontment, as
defned n secton 11(f), effected by a decedent wthn 3 years pror to hs
death sha, uness shown to the contrary, be deemed to have been made n
contempaton of death. Ths 3-year rebuttabe presumpton repaces the smar
2-year presumpton heretofore provded by the ast sentence of secton 11(c) (1)
( ) and paragraph ( ) of secton 11(d).
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Second, the new subsecton (1) provdes that no such transfer, renqush-
ment, e ercse, or reease made more than 3 years pror to the decedent s death
sha be deemed or hed to have been made In contempaton of death.
The amendments made by ths secton are appcabe ony wth respect to
estates of decedents dyng after the date of enactment of the b.
S CTION 02. R P L OF D DUCTION FOR SUPrORT OF D P ND NTS
Ths secton amends secton 12(b) of the Code (reatng to deductons from
gross estate of a decedent) to emnate, effectve wth respect to estates of dece-
dents dyng after the date of enactment of the b, the deducton for amounts e -
panded for the support, durng the settement of the estate, of dependents of
the decedent.
Under e stng aw amounts e pended n accordance wth the oca aw
for support of the survvng spouse of the decedent are. by reason of ther
deductbty under secton 12(b), not aowabe as a marta deducton under
secton 12(c) of the Code. owever, as a resut of the amendment made by ths
secton, such amounts heretofore deductbe under secton 12(h) w be aow-
abe as a marta deducton sub|ect to the condtons and mtatons of .-o-ton
12(e).
TITL I. MISC LL N OUS M NDM NTS
S CTION 001. COLL CTION OF INCOM T T SOURC ON DI ID NDS
Secton 601(a) adds to the Interna Revenue Code a new chapter, desgnated
chapter , consstng of sectons 1310 to 1317, ncusve. Chapter provdes
a system for coecton of ncome ta at the source on dvdends as nnd whe
pad. The amount so coected w be aowed as a credt aganst the ta
mposed by chapter 1 for the ta abe year n whch such dvdends are n-
cudbe n gross ncome.
The term dvdend as used n chapter s defned n secton 1310. -
cept for a dvdend n the stock or n rghts to acqure the stock of the ds-
trbutng corporaton, t ncudes a dvdend as defned n secton 11 (a): a
payment made by a stockbroker to any person as a substtute for such a dvdend
whch s not pad n the stock or n rghts to acqure the stock of the dstrbutng
corporaton; and a patronage dvdend, rebate, or refund pad, regardess of
form or manner In whch made, by an assocaton operated on a cooperatve
bass prncpay for the marketng of products of members or other producers,
for the purchasng of suppes and equpment used n the trade or busness of
members or other persons, for the furnshng of servces ncdent to the trade
or busness of members or other persons, or for any combnaton of such
actvtes.
Thus, any dstrbuton by a corporaton whch Is a dvdend under secton
11 (a), uness t s made In the stock or n the rghts to acqure the stock of the
dstrbutng corporaton, whether n cash or n knd (ncudng a dstrbuton
In the stock of any corporaton other than the dstrbutng corporaton), Is a
dvdend for purposes of chapter . ny nyment made by a stockbroker to
any person, reatv.e to a short sae, as a substtute for such a dvdend s a
dvdend for purposes of chapter . Lkewse, a patronage dvdend, rebate,
or refund pad, n cash, n the capta stock of the assocaton, In revovng
fund certfcates, n retan certfcates, n certfcates of Indebtedness, n etters
of advce as to the net amount retaned, or In any other manner, and regardess
of form, by an assocaton operated prncpay for the marketng of products of
members of the assocaton or of other producers, for the purchasng of suppes
and equpment used n the trade or busness of such members or of other
persons, for the furnshng of servces Incdent to the trade or busness of such
members or of other persons, or for any combnaton of such actvtes. Is a
dvdend for the purposes of chapter . For e ampe, a rebate pad n cash
by cooperatve M, whch s prncpay operated for the purchasng of tractors
used by the members of such cooperatve n ther trade or busness of farmng.
Is a dvdend for the purposes of chapter .
Subsecton (a) of secton 1311 provdes that every person makng payment
of a dvdend sha deduct and wthhod upon such dvdend a ta equa to 10
percent of the amount of such dvdend. Ths subsecton aso provdes that
any person requred to deduct and wthhod a ta under secton 1 3 or 1 (re-
atng to wthhodng n the case of nonresdent aen ndvduas and foregn
corporatons) on the pavment of a dvdend sha not be requred to deduct and
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wthhod a tn under ths secton upon such payment. The purpose of the
atter provson s to prevent doube wthhodng on the same payment.
Subsecton (b) of secton 1311 provdes for wthhodng n the case when; the
wthhodng agent s unabe to determne what porton of a dstrbuton s a
dvdend. In such case, the wthhodng agent sha compute the ta , requred
to be deducted, wthhed, nnd pad, on the entre amount of the dstrbuton.
Subsecton (c) of secton 1311 provdes for wthhodng n the case where the
wthhodng agent s unabe to determne the owner of the securty n respect
of whch a dvdend s payabe. In such case, even though actua payment of
the dvdend s not effected, the wthhodng agent s requred to deduct, wth-
hod, and ay, under reguatons prescrbed by the Commssoner wth the
approva of the Secretary, a ta equa to 10 percent of such dvdend.
Subsecton (d) of secton 1311 provdes that f the wthhodng agent, n voa-
ton of the provsons of chapter , fas to deduct and wthhod the ta tnder
such chapter, and thereafter the ta aganst whch such ta may be credted
s pad, the ta requred to be deducted and wthhed under chapter sha
not be coected from the wthhodng agent. I nder the provsons of ths
subsecton, however, the wthhodng agent s not reeved from abty for
any penates or addtons to the ta otherwse appcabe n respect of such
faure to deduct and wthhod.
Subsecton (e) of secton 1311 provdes that the tn deducted nnd wthhed
under chapter sha not be aowed as a deducton n computng net ncome
for the purpose of any ta on ncome mposed by act of Congress. Thus, nether
the corporaton payng the dvdend nor the recpent of the dvdend s aowed
to deduct from gross ncome the ta wthhed.
Subsecton f) of secton 1311 reates to refunds and credts of the ta de-
ducted and wthhed under chapter . Paragraph (1) of ths subsecton pro-
vdes that refund or credt to the wthhodng agent sha be made ony to the
e tent that the amount of the overpayment was not deducted and wthhed under
ths chapter by such agent. Thus, any amount deducted and wthhed under ths
chapter sha not be refunded or credted to the wthhodng agent. Paragraph
(2) of ths subsecton refers to secton 3 for credt generay of the ta deducted
and wthhed under ths chapter, and to secton 322(a) for refund or credt
of such tn n case of e cessve wthhodng.
Subsecton (g) of sect|n 1311 provdes that chapter . requrng deducton
and wthhodng upon dvdends pad, sha not appy to a dvdend pad by the
foowng organzatons: (1) mutnn savngs bank e empt from ta aton
under secton 101(2) ; (2) a budng and oan assocaton, e empt from ta a-
ton under secton 101( ), f the dvdend s pad upon wthdrawabe accounts;
(3) a cooperatve bank e empt from ta aton under 101( ) ; ( ) n Federa sav-
ngs nnd oan assocaton e empt from ta aton under secton 101(1 ) ; ( ) a
mutua nsurance company or assocaton: (6) an assocaton operated on a co-
operatve bass prncpay for rura eectrfcaton; (7) a credt unon wthout
capta stock organzed and operated for mutua purposes and wthout proft;
( ) a corporaton a of the stock of whch s owned by one or more ( ) govern-
ments, ( ) potca subdvsons thereof, (C) nternatona organzatons, or
(D) whoy owned nstrumentates or agences of any of the foregong f such
nstrumentates or agences are e empt from ta under chapter 1; (9) a
foregn corporaton, uness svch corporaton s requred to wthhod on dv-
dends under secton 1 3(b) ; (10) a corporaton payng the dvdend to another
corporaton wth whch the payor corporaton fed a consodated ncome ta
return for the precedng ta abe year pursuant to the provsons of secton 1 1
of the Code. For the purposes of ths subsecton, accounts n budng and oan
assocatons are wthdrawabe accounts when such accounts are n nature
akn to savngs deposts In banks. Preferred, guaranty, or smar shares n a
budng and oan assocaton are not wthdrawabe accounts ; and dvdends
pad on such shares w be sub|ect to wthhodng under secton 1311. The de-
termnaton whether a foregn corporaton s requred to wthhod under secton
1 3(b) s made on the bass of the provsons of that secton wthout regard to
whether any payments are n fact made to nonresdent aen ndvduas. Thus,
f a foregn corporaton woud be requred to wthhod under secton 1 3(b) f
any of ts sharehoders were nonresdent aens, t s not e empt under secton
1311(g) ( ), whether or not any of ts sharehoders are nonresdent aens.
Secton 1312 provdes that every person requred under chapter to deduct
and wthhod any ta sha make a return of and pay such ta at such tme and
n such manner as the Commssoner, wth the approva of the Secretary, may
by reguatons prescrbe. It s understood that the Commssoner w prescrbe
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such reguatons provdng for the return and payment of such ta wthn 30
days after the date of the dvdend.
Secton 1313 provdes that the wthhodng agent sha bt abe for the pay-
ment of the ta requred under chapter to be deducted and wthhed, and
that such agent sha not be rbe to any person for the amount deducted, wth-
hed, and pad under chapter to the ureau of Interna Revenue.
Subsecton (a) of secton 131 provdes that every person requred under
chapter to deduct and wthhod a ta upon a dvdend sha furnsh to the
payee of the dvdend nformaton n wrtng showng the amount of such dv-
dend (wthout regard to the wthhodng under such chapter) and the amount
deducted and wthhed as ta under ths chapter n respect to such dvdend.
Where such person s requred under such chapter to deduct and wthhod a
ta upon more than one dvdend pad to a payee durng the same caendar year,
such person may furnsh such nformaton wth respect to two or more dvdends
on the same statement. Whe the nformaton In wrtng may take any form
the payor may choose, t must be furnshed to the payee not ater than anuary
31 of the year succeedng the caendar year n whch the dvdend Is pad. If
a payee to whom such nformaton s furnshed s not the recpent of the dvdend
(the person requred to ncude n gross ncome such dvdend), such payee
sha furnsh to such recpent nformaton n wrtng, n such form as such payee
may choose, showng the amount of such dvdend and the amount deducted
and wthhed as ta under chapter n respect of such dvdend.
Subsecton (b) of secton 131 provdes that the Commssoner, under such
reguatons as he may prescrbe wth the approva of the Secretary, may grant
to any wthhodng agent a reasonabe e tenson of tme wth res ect to the
nformaton requred under subsecton (a) to be furnshed. Such an e tenson
may not be n e cess of 30 days.
Secton 131 provdes for penates n case of wfu faure to furnsh the
nformaton requred to be furnshed n secton 131 . Subsecton (a) provdes
that any person, requred under secton 131 to furnsh nformaton n wrtng
who wfuy furnshes fase or frauduent nformaton, or who wfuy fas
to furnsh the nformaton requred under such secton n the manner or at the
tme requred, shn for each such offense, upon convcton thereof, be fned not
more than 1,000, or mprsoned for not more than 1 year or both. Subsecton
(b) provdes for a cto penaty of not more than 0, n addton to the crmna
penaty provded by subsecton (a), for each offense by any person requred
under secton 131 to furnsh nformaton n wrtng who wfuy fas to fur-
nsh such nformaton n the manner or at the tme requred, or who wfuy
furnshes fase or frauduent nformaton. These penates correspond to those
provded n secton 1626 of the Code for wfu faure to furnsh a statement
or for a fase or frauduent statement wth respect to the ta wthhed at source
on wages.
Secton 1316 provdes that a provsons of aw, ncudng penates, appcabe
wth respect to any ta mposed by secton 2700, and the provsons of secton
3661, sha nsofar as appcabe and not nconsstent wth the provsons of
chapter , be appcabe wth respect to the ta under such chapter.
Secton 1317 provdes for the credt aowabe for the ta deducted and wth-
hed upon dvdends pad to reguated nvestment companes or persona hodng
companes. Subsecton (a) provdes that, where such an nvestment or hodng
company s the recpent of a dvdend and s aso a wthhodng agent, the
amount deducted and wthhed as ta under chapter , wth respect to a dv-
dend pad to such company, sha be aowed as a credt aganst the abty of
such company under chapter for amounts deducted and wthhed by t under
such chapter. Ths subsecton further provdes that such credt sha be aowed
wth respect to such wthhodng agent s abty arsng durng the ta abe
year, determned under chapter 1, durng whch the dvdends are receved.
For e ampe, assume the foowng: reguated Investment company R receves
a 10,000 dvdend from corporaton ; deducted and wthhed 1,000 as ta
under chapter , so that R receved a net payment of 9,000: R decares durng
the same ta abe year a dvde.d of 10,000 on whch t s requred to deduct
and wthhod 1,000. R actuay pays ts stockhoders 9,000 and, under ths
subsecton s aowed to credt aganst Its wthhodng abty the 1,000 pre-
vousy deducted and wthhed by . Subsecton (b) or secton 1317 provdes
that the provsons of secton 1317 appy ony to wthho dng agents whch are
reguated nvestment comnanes as defned n secton 361 or persona hodng
companes as defned n secton 01.
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Subsecton (b) of secton 601 of the b amends secton 2 (d) ( ) so as to
provde for tbe ta under chapter n the case of consent dvdends. Ths
subsecton aso provdes for the credt aowabe for such ta wth respect to
consent dvdends.
Subsecton (c) of secton 601 of the b amends secton 3 by revsng the
heedng thereof, by addng a beadng before the frst pnrngraph, and by addng
at the end thereof a new subsecton (b). Secton 3 (b) provdes that the
amount deducted and wthhed as ta under chapter sha be aowed as
a credt (after proper ad|ustment for the amount, f any, aowed as a credt
under secton 1317) aganst the ta Imposed by chapter 1 upon the recpent
of tbe ncome. Secton 3 (b) provdes that such credt sha be aowed for
the ta abe year In whch the dvdend Is receved. If the recpent of the
dvdend s a partnershp or a common trust fund, then the credt sha not
be aowed to such recpent, but the members of the partnershp, or the par-
tcpants n the common trust fund, as the case may be, sha be aowed ther
proportonate share of such credt. If the recpent of the dvdend s an estnte
or trust, and If any benefcary Is requred |nder ths chapter to ncude a porton
of such dvdend n computng hs net ncome, the credt wth respect to such
porton of tbe dvdend sha not be aowed to the estate or trust hut sha be
aowed to such benefcary.
The recpent of the dvdend s the person who s requred to ncude n hs
gross Income for the ta abe year the amount of the dvdend from whch the
ta has been deducted and wthhed. In the case of stock hed n the name of a
nomnee or agent, the recpent of the dvdend s the actua owner of such
dvdend and not the nomnee or agent. Under e stng requrements of the
Treasury Department, the actua owner of the dvdend s now dscosed to
the Commssoner on Form 10 7, and t s contempated that ths procedure
w be contnued.
In the case of a reguated Investment company or persona hodng company,
the credt aowabe under secton 3 Is that porton of tbe ta actuay deducted
and wthhed under chapter whch was not camed or aowed as a credt
under secton 1317.
Subsecton (d) of secton 601 of the b amends the frst sentence of secton
1 3(c) to provde that every person requred to deduct and wthhod any ta
under secton 1 3 sha make return of and pay any such ta to the coector
desgnated n secton 3(b) on or before March 1 of the foowng year. The
effect of ths amendment s to requre payment on the fng date of the return,
tnder e stng aw, even though the return must be fed on or before March
1 , payment s not requred unt une 1 .
Subsecton (e) of secton 601 of the b amends secton 1 3 by addng at
the end thereof new subsecton (h) whch provdes for takng nto account the
amount deducted and wthhed as ta under secton 1311 In determnng the
ta requred to be deducted and wthhed under secton 1 3(b) on the same
ncome. Subsecton (h) of secton 1 3 provdes that where any person s re-
qured to deduct and wthhod a ta under secton 1 3(b) on an amount on
whch there has been deducted and wthhed a ta under secton 1311. such
person sha deduct and wthhod ony the e cess of the amount whch woud
be requred to be deducted and wthhed under secton 1 3(b) but for the ap-
pcaton of secton 1311, over the amount prevousy deducted and wthhed
under secton 1311. For e ampe, assume the foowng: , a Unted States
ctzen, s the record hoder of shares n the corporaton; n fact s the un-
dscosed agent of , a nonresdent aen. The corporaton dstrbutes to a
dvdend of 10,000, payng hm 9,000 and deductng and wthhodng 1,000
under chapter . In turn. s requred under secton 1 3(b) to deduct and
wthhod a ta of 30 percent of the dvdend whch beongs to . Under secton
1 3(h), the amount must deduct and wthhod s 2,000, that s, the e cess
of 30 percent of the payment of 10,000 he woud receve but for the amount
deducted and wthhed under chapter , or 3,000, over the amount actuay
deducted and wthhed under chapter on such dvdend, or 1,000. If n any
case the ta requred to be deducted and wthhed under secton 1 3(b) shoud
be 10 percent or ess, and If 10 percent of the dvdend was actuay deducted
and wthhed at the source under chapter , then secton 1 3(h) woud resut
n no addtona wthhodng on the same dvdend by under secton 1 3(b).
Subsecton (f) of secton 601 of the b amends secton 1 to nsert pro-
vsons correspondng to secton 1 3(h), dscussed above.
Subsecton (g) of secton 601 of the b amends secton 1 (a) so as to
authorze the Commssoner to requre that the amount deducted and wthhed
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as ta under secton 1311 wth respect to each sharehoder sha be shown on
the nformaton returns requred of corporatons wth respect to dvdend pay-
ments, n addton to other nformaton that may be requred on such returns.
In vew of the wthhodng under chapter , It Is contempated that Treasury
reguatons w be amended to requre corporatons to furnsh nformaton re-
turns as to a dvdends pad, and not merey as to dvdends In e cess of a
certan amount.
Subsecton (h) of secton 601 of the b amends secton 322(a) (2) to provde
that f the ta es wthhed at the source on dvdends and on wages e ceed the
ncome ta aganst whch the ta es so wthhed may be credted under secton
3 , the amount of the e cess of such credt sha be consdered an overpayment.
Ths amendment merey e tends the provsons of e stng aw wth respect to
ta es wthhed at source on wages so that ta es wthhed at source on dvdends
are aso covered.
Secton 322(e) of e stng aw reates to the date ta es deducted and wthhed
at the source on wages are deemed pad by the recpent of the wages. Subsec-
ton (I) of secton 601 of the b amends secton 322(e) to provde that, for the
purposes of secton 322 .reatng to refunds and credts), any ta actuay
deducted and wthhod at the source sha, n respect of the recpent of the
Income, be deemed to have been pad by hm not earer than the ast day
prescrbed by aw for the fng of the return for hs ta abe year wth respect
to whch such ta s aowabe as a credt under secton 32 or 3 . For the
purposes of secton 322(e), the ast day prescrbed by aw for the fng of the
return s determned wthout regard to any e tenson granted for the fng of
the return for the ta abe year. Smary, n the case of nonresdent aen
ndvduas entted to the credt provded by secton 32, the date prescrbed by
aw for fng ther returns s determned wthout regard to any e empton
granted by the Commssoner from the fng requrement.
Subsecton (|) of secton 601 of the b abends secton 3771(f), a cross-
reference, to conform to the change made In secton 322(e).
Subsecton (k) of secton 601 of the b amends secton 3797(a) (16) by
e tendng the defnton of the term wthhodng agent to cover the person
requred to deduct and wthhod any ta under the provsons of secton 1311:
under e stng aw, such defnton covers ony the person requred to deduct
and wthhod any ta under the provsons of secton 1 3 or 1 .
Subsecton (1) of secton 601 of the b amends secton 3(a)(1) to provde
that n the case of the return fed by the fducary of an estate or trust return
shn he made on or |efore the 1 th day of pr foowng the cose of the
caendar year. In the case of such returns beng fed on the bass of a fsca
year, the return sha be made on or before the 1 th day of the fourth month
foowng the cose of the fsca year. Other returns fed on the bass of ether
the caendar or the fsca year w contnue to be made on or before the 1 th day
of the thrd month foowng the cose of the respectve ta abe year. The effect
of ths amendment Is to e tend for one month the date for fng the return of
a fducary of an estate or trust.
Subsecton (1) of secton 601 of the b aso amends secton 6(a) to e tend
for 1 month the date for payment of the ta mposed upon an estate or trust.
Ths amendment makes the date of payment correspond to the date for fng
the return, dscussed above.
Subsecton (m) of secton 601 of the b provdes thnt the amendments made
by ths secton sha take effect on anuary 1, 19 1. e cept that the amendments
made by subsecton (1), dscussed above, shn be appcabe wth respect to
ta abe years endng after the date of the enactment of ths ct.
S CTION 02. R DUCTION OF R T OF INT R ST ON O RP YM NTS
Subsectons (a) and (b) of ths secton amend, respectvey, secton 3771(a)
of the Code, reatng to the rate of nterest on overpayments of any Interna
revenue ta , and secton 3 3(c) of the Code, reatng to the rate of Interest on
overpayments of manufacturers e cse ta es, so as to reduce the rate of nterest
on such overpayments. s so amended, sectons 3771(a) and 3 3(c) provde
for the aowance of nterest on overpayments for any perod after October 31,
19 0. at the rate of 3 percent per annum and for any perod pror to November
1,19 0, at the present rate of 6 percent per annum.
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Subsecton (c) smary amends secton 2 11(a) of tte 2 of the Unted
States Code, as amended, so as to provde that wth respect to any |udgment of
any court rendered for any overpayment n respect of any nterna revenue ta
for any perod after October 31, 19 0, the nterest sha be aowed at the rate
of 3 percent per annum and for any perod pror to November 1, 19 0, at the
present rate of 6 percent per annum.
S CTION 03. P YM NT OF INCOM T Y INST LLM NT P YM NTS
Secton 603 of the b amends secton 6(b) of the Interna Revenue Code
wth respect to payment of Income ta es n nstaments. Under present aw
a corporaton may pay ts ta n four equa quartery nstaments. Under
secton 6(b) as amended, corporate Income ta es w be requred to be pad
as foows: In the case of a ta abe year endng on or after December 31, 19 0
(and endng before December 1, 19 1), a corporaton w be requred to pay
30 percent of ts ta on ts frst quartery nstament date, 30 percent on ts
second quartery Instament date, 20 percent on ts thrd quartery nstament
date, and 20 percent on ts fourth quartery nstament date; for ts ta abe
year endng on or after December 31, 19 1 (and endng before December 31,
19 2), It w be requred to pay 3 percent of ts ta on eac of the frst two
nstament dates and 1 percent on each of the ast two nstament dates; for
Its ta abe year endng on or after December 31, 19r 2 (and endng before
December 31, 19 3), t w be requred to pay 0 percent of ts ta on each of he
frst two Instament dates and 10 percent of the ta on each of the ast two
nstament dates; for ts ta abe year endng on or after December 31, 19 3
(and endng before December 31, 19 ), t w be requred to pay percent of
ts ta on each of the frst two Instament dates and percent on each of the
ast two nstament dates. For a ta abe years endng on or after December
31, 19 , a corporaton w be requred to pay ts ta n two nstaments, the
frst nstament of 0 percent of ts ta beng due on the 1 th day of the thrd
month foowng the cose of ts ta abe year, and the remanng 0 percent of
ts ta beng due on the 1 th day of the s th month foowng the cose of ts
ta abe year.
Secton 603 of the b further amends secton 6(b) so that the nstament
prvege, formery provded for n the case of estates, trusts, and certan
nonresdent aens, s provded for ony n the case of estates. Under ths
amendment trusts and certan nonresdent aens heretofore afforded the prv-
ege of eectng to pay the ta n four equa nstaments w be requred to
pay the tota amount of the ta on the date prescrbed for such payment.
If the fu amount of ta due on any nstament date s not pad on such date,
the entre unpad amount of the ta , as under e stng aw, becomes due and
payabe. In the case of ta payabe n four nstaments, the dates prescrbed
for the payment of each Instament are determned n the same manner as under
e stng aw. Thus, n the case of an estate requred (under the amendment
made by secton 601(1) of the b) to pay the ta on the 1 th day of the fourth
month after the cose of ts ta abe year, the nstament dates are determned
by reference to that day.
The amendments made by ths secton are appcabe to a ta abe years endng
on or after December 31, 19 0.
19 0-2 -13 93
R NU CT OF 19 0
Senate Report No. 237 , ghty-frst Congress. Second Sesson. Caendar No. 23 01
ugust 22 (egsatve day, uy 20), 19 0
Mr. George, from the Commttee on Fnance, submtted the foowng report
to accompany . R. S920 :
The Commttee on Fnance, to whch was referred the b ( . R. 920) to re-
duce e cse ta es, and for other purposes, havng consdered the same, reports
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favoraby thereon wth amendments and recommends that the b, as amended,
do pass.
I. Genera Statement
Mtary acton In orea couped wth substanta Increases n defense and
reated e pendtures has made necessary to convert the e cse ta reducton
b: passed by the ouse In une of ths year nto a b to rase revenues. The
b as amended by your commttee w ncrease ta abtes by . bon
doars a year when fuy effectve, and w Increase coectons n the fsca year
19 1 by about 3 bon doars. It s not antcpated that these Increases w be
of suffcent sze to offset the new defense and reated e pendtures. owever,
ths b accompshes a that can be done qucky.
Your commttee deemed t unwse to deay the b by attemptng to Incude
other methods of rasng revenue, such as an e cess profts ta , whch woud re-
qure severa weeks of hearngs and detaed study and anayss by the commttee
and ts staff. To make the change n wthhodng rates on ndvduas effectve
on October 1 t s necessary that the b become aw as soon as possbe n order
that the wthhodng forms may be revsed and prnted n tme. It s aso advs-
abe that the ta on corporatons be adopted as prompty as possbe snce t
affects the year 19 0. The commttee has nstructed the staff to study the e cess
profts ta and other revenue-rasng measures, so that they may be consdered
by your commttee eary ne t year, and has announced that any e cess profts
ta enacted at that tme w be appcabe to the ncome of the entre caendar
year 19 1.
Your commttee s b ncudes many of the oophoe-cosng measures, the
mnor e cse Increases contaned n the ouse b, and e tends the 10 percent
ta on rado recevers to teevson sets. The ouse pan to acceerate corporate
ncome ta payments s retaned. owever, the buk of the addtona revenue
provded under the b w come from the mposton of hgher corporate and
Indvdua Income ta rates. The top corporate ncome ta rate s rased from
3 to percent. The percentage reductons n the wartme ndvdua ncome
ta es, made by the Revenue cts of 19 and 19 , are emnated, ncreasng
the eft rtve startng rate from 16.6 to 20 percent, and the top rate from about
2 to 91 percent. The fu ncrease n both corporate and ndvdua rates w
be effectve In 19 1 and subsequent years. Th. corporate Income ta ncrease
appes to appro matey one-haf, and the ndvdua ncome ta ncrease to
about one-quarter of the ncome for the caendar year 19 0. These changes n
the corporate and ndvdua Income ta rates nvove few technca probems
and there s genera agreement that these rates must be rased n vew of the
new e pendtures requred by the crss n nternatona affars.
II. Revenue ffect of the
Tabe 1 compares the effect of the Fnance Comrfttee b and the ouse b
on coectons n the fsca year 19 1 and on ta abtes n a fu year of opera-
ton. It s estmated that your commttee s b w ncrease ta abtes n a
fu year of operaton by . bon, whe the ouse b woud have vrtuay
no effect on over-a ta abtes. In terms of coectons t s estmated that
n the fsca year 19 1 your commttee s b w ncrease revenues by sghty ess
than . bon as compared to sghty more than 600 mon under the ouse
b. stmated coectons for the fsca year 19 1 n the case of both the use
b and your commttee s b take nto account the acceeraton of ta payments
for corporaton and the emnaton of the nstament payment prvege for
trusts and nonresdent aens. No account s taken of these two provsons n
the case of the coumns reatng to abtes under ether the ouse b or your
commttee s b, snce these provsons do not affect the tota ta whch w
eventuny be pad by any corporaton, trust, or nonresdent aen. Nevertheess,
these two provsons w ncrease coectons n the fsca years 19 1 through
19 6 by S .9 bon.
To make comparsons possbe between the provsons of the ouse b and
your commttee s b the estmates for both bs are based on current eves of
Income and profts. If the upward trend n busness contnues, ths w, of course,
resut n an understatement of the Increase In ta coectons and abtes. The
estmates for the ouse b shown n tabe 1 dffer from those shown n the report
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of the Commttee on Ways and Means snce the nternatona stuaton has had
an mportant effect upon eves of ncome and profts.
In terms of the effect of the two bs on ta abtes, there are three ma|or
varatons. Frst, the ouse b provdes for a net e cse ta reducton of )10
mon, whe your commttee s b ncreases e cse ta abtes by mon.
Second, your commttee s b ncreases ta abtes under the ndvdua ncome
ta by 2,7 mon, whe the ouse b made no changes n ths ta . Thrd,
your commttee s b ncreases corporaton ncome ta rates by 1, 00 mon,
whe the ouse b woud have ncreased these abtes by ony 0 mon.
On the other hand, your commttee s b does not contan n of the ouse oop-
hoe-cosng and ta -ad|ustment provsons whch woud rase revenue. In
terms of revenue the two most mportant such tems, whch are ncuded n the
ouse b but not n your commttee s b, reate to wthhodng on dvdends
and ower nterest rates on ta refunds.
Tabe 1. Comparson of the estmated effect of the Fnance Commttee s b
and the ouse b on ta abtes n a fu year of operaton and on coec-
tons n the fsca year 19 1
( ) or decrease ( ); n mons ot do ars
ffect on abtes n a
u year o. operaton
F.tTect on coectons n
-be fsca year t
Fnance
Commt-
tee s b
Fnance
Commt-
-ee s b.
ouse b
ouse bb
-1. SO0
0
- 0
0
320
00
1.62
177
7 0
- . -a
00
100

6
m
19
-1
166

-3;
:o
0

0
90
0
7
-670

1W)
-910
M-30
, SO 1 61 1 967 1 620
cceerated payments
Indvdua .ncorac ta rate
Chartabe trust , amy foundatons, edccnt.ona
nsttutons, etc
Msceaneous oophoes, etc
Pcrcentaee depeton , .
Lfe-nsurant- companes.....__......_ .
Interest rate on refunds
cceerated payment of .nrome ta es of trusts and
nonresdent aens
Wthhodng a on dvdends
cse ta es fne
Tota no
1 These estmates arc based on current eve - o ncome and profts and hence dffer .rom the estmates
contaned n the report of the Commttee on Ways and Means.
Net amounts after aow np for reduced ndvdua ncome ta es because of ower dvdends.
1 ssumng the chanpes become effectve on Oct. 1, fc 0.
; the changes become effectve on Sept. 1, I960.
Staff of the ont Commttee on Interna Revenue Ta aton.
In terms of the effect on coectons n the fsca year 19 1, the revenue effects
of the ouse b and your commttee s b are much coser than s true n the
case of ta abtes. In the fsca year 19 1 coectons under your commttee s
b w e ceed those whch the ouse b woud provde by appro matey 2.3
bon. gan the e cse ta reductons provded by the ouse b, the ndvd-
ua ncome ta rate ncreases provded n your commttee s b, and the arger
corporate rate ncreases provded by your commttee s b account for the dffer-
ence. The coectons from the acceeraton of corporate ta payments are some-
what greater under your commttee s b than under the ouse b because of
the hgher ta rates your commttee s b makes effectve.
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6
III. The Rates Undee the Indvdua Income Ta
Tour commttee adopted the suggeston of the admnstraton n respect to
the ndvdua ncome ta . Ths suggeston was to emnate entrey for 10 1
and subsequent years the percentage reductons made n the Revenue ct ot
19 and n the Revenue ct of 19 . These reductons are as foows:
17 percent of the frst 00 of tentatve ta ;
12 percent of that part of the ta n e cess of 00 and not In e cess of
100.000:
9.7 percent on the ta n e cess of 100,000.
For the year 19 0, the ta n effect Is ncreased for the quarter startng October
1, 19 0. Thus, the wthhodng rate s rased, effectve October 1, 19 0, from
1 percent to 1 percent. owever, to appy the ncreased rates to ony that
part of the ncome arsng after October 1, 19 0. woud be unfar n the case of
those ta payers who derve the greater part of ther ncome n the atter part
of the year. Therefore, the procedure actuay foowed n the b for 19 0
was to cut the percentage reductons under e stng aw by appro matey 2
percent. s a resut, after a ta payer has determned hs tentatve ta for
caendar year 19 0, he w, under the b, make the foowng percentage
reductons In such ta nstead of the reductons provded for under e stng aw:
13 percent of the frst 00 of tentatve ta ;
9 percent of that part of the tentatve ta between 00 and 100,000;
7.3 percent of that part of the tentatve ta n e cess of 100,000.
In the case of ndvduas on a fsca year bass, ncome for years endng pror
to October 1,10 0. w be sub|ect to the rates mposed under e stng aw. When
the fsca year begns pror to October 1, 19 0, and ends subsequent to that
date, the year w be dvded nto two parts for the purposes of the ta . To
the e tent that the ta abe year precedes October 1, 19 0, the ndvdua w
be ta ed at the rates mposed under e stng aw. To the e tent that the year
foows September 30, 19 0, the Indvdua w be ta ed at the rates mposed
for 19 1 and subsequent years. Indvduas wth fsca years begnnng after
September 30,19 0, w be sub|ect to the rates Imposed for 19 1.
Whe the ouse b dd not change the rates mposed on ndvdua ncomes,
your commttee has added to the b provsons whch w ncrease abtes
by about 2.7 bon doars In a fu year s operaton at current ncome eves.
Tota abtes w Increase from 1 . bon to 1 .6 bon doars, or about
17 percent. Under the b the fu Increase w appy to ncomes receved or
accrued n 19 1 and subsequent years. ppro matey one-fourth of the n-
crease w appy to 19 0 Incomes In the case of Indvduas on a caendar year
bass.
Tabe 2 compares the combned norma ta and surta margna rates mposed
under the Revenue ct of 19 (the wartme peak) and those mposed under the
19 and 19 cts (takng the percentage reductons nto account) wth the
rates whch w appy n 19 1 and subsequent years under your commttee s
b. The rates under the b w be 3 percentage ponts ower In each bracket
than those mposed under the 19 ct. The dfference represents a 3 percentage
pont reducton n the rate schedue made n the Revenue ct of 19 , whch s
not removed by ths b.
Ths b does not affect the Increases In persona e emptons and dependency
credts made n the Revenue cts of 19 and 19 . The Revenue ct of 19
aowed the 00 per capta e emptons for both norma and surta purposes.
The Revenue ct of 19 ncreased these e emptons from 00 to 600 per capta,
nsttuted an addtona e empton of ke amount for ta payers and ther spouses
If they are 6 years of age or over, and substtuted a 600 e empton for bnd
ta payers for the 00 deducton aowed under the prevous aw.
The b aso does not dsturb the system of spttng the Income of marred
coupes adopted n the Revenue ct of 19 .
In order to keep coectons on a current bass the wthhodng rate w b6
Increased from 1 to 1 percent wth respect to a wages and saares pad ou
or after October 1, 19 0. Ths s the fu 20 percent ncrease n the wthhodng
rate requred under ths b.
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7
The remova of the postwar percentage reductons In the tentatve ta a the
most desrabe method of meetng the Presdent s request for an mmedate
ncrease n revenue from the ndvdua ncome ta . The change s smpe and
easy understood. The addtona ta es whch w resut w be dstrbuted
n the same fashon as the decreases resutng from the postwar percentage
reductons. Thus, the acton taken at ths tme s no more than a parta return
to the wartme ta burdens. Moreover, the emnaton of the percentage re-
ductons w smpfy the cacuatons made on the ndvdua s ncome ta
return.
Tabe 2. Indvdua ncome ta rate schedue. the Fnance Commttee ratet
or 19 1 and ub equcnt yean compared utth thoe used under the Revenue
cts of /. ; ,. 9 , and 19k
19 ct
19 ; ct
19 ct
(present
taw)
0 to 2,000
) to ,000
) to 0,000
o-
tto
) to
) to ,000
) to 0,000
oooo to teo.ooo
0,000 to 70,000
0,000 to 0.000
W0,000 to 90,000
90,000 to 100,000
100,000 to 136,719.10
|,79.o to a|,ooo
) to 200,000...
--a rate mtaton.
PtTcrn
19.00
20.90
2 .70
32.30
36.10
0.
.6
7. 0
6tt 36
63.20
66.06
r.s. do
61.7
6 .
6a 0
71.26
7 .10
76.9
79. 0
2.6
.
6.60
6.
Percen
16.60
19.36
22.
26. 0
29.92
33.
37.
1.36
.00
6.6
9.2
1.92
6 . 6
67.20
60.72
63.36
66.00
6a 6
71.2
73.92
76, 6
7a 32
SO. 322
1.2260
2.1276
77.00
1 fter reducton from tentatve ta .
Tabe 3 shows by net ncome casses the dstrbuton of ncome, ta abe returns
and ta abtes under e stng aw and under your commttee s b when
the proposed change n rates s fuy effectve. The tabe ndcates that the b
w make ony a mnor change n the apportonment of the tota burden between
the group of ndvduas whose ncomes are ess than ,000 and the group whose
ncomes are ,000 or more.
Tabe compares the ta burdens under e stng aw, the burdens whch w
e st under the b In 1960, and the burdens under the b n 19 1 and subse-
quent years n the case of a snge ndvdua wth no dependents. Tabes and
6 contan smar comparsons for a marred coupe wth no dependents and a
marred coupe wth two dependents. These tabes ndcate that, when e pressed
as a percentage of the ta due under present aw, the ncrease under the b
s comparatvey arge n the case of ta payers wth smaer ncomes. ow-
ever, when the ncrease s e pressed as a percentage of the spendabe ncome
remanng after ta under present aw, the change n the ower ncome brackets
s comparatvey sma and the Increase In the upper ncome brackets s com-
paratvey arge.
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Tabe 7 shows the effectve rates of ta aton under e stng aw, under your
commttee s b In 10 0 and under the b n 19 1 and subsequent years for a
snge person wth no dependents. Tabes and 9 show smar data for a
marred coupe wth no dependents and a marred coupe wth two dependents.
These tabes show that the ncrease n the effectve rate s substantay arger n
the case of arge ncomes than It s n the case of sma ncomes.
Tabe 3. stmated net ncome, ta abe returns, and ta abty under present
aw and under the Fnance Commttee b when the change n rate t fuy
effectve
IMoney amounts In thousands
Ta abty
Increase In
ta under
Income casses after deductons
but before e emptons
Not ncome
Number of
ta abe
returns
Present aw
Fnance
Commttee s
b1
Commttee s
bO
2,11 ,21
12,06 , 00
31. 7 7,70
2 . 1 3,71
20. 693, 211
2, 06,199
7,9 6,162
12, 2 .019
6, 9 7,196
.600.93
111,971
13 ,900
1,109. 0
2,9 0,11
2. 00,
2, 16.11
22,929
1 ,613
99. SIT
00. 01
01.96
fcrrrr :
920.79
2, 0,29
2,000,
2.01 ,16
3toS
Tota under
91.317. 37
3 . 6 , 09
7, 7. 6 2
9,001,396
1. 13.71
to 10
17,3 ,9 3
12,620, 69
, 9 1 ., 129
2,117, 66
1.91 ,090
301,0 6
232, 22
21 ,3 1
2,637,7 7
7.663
13 ,6 9
31,063
1 , 77
922
06
1
2,1 6.261
2,3 2,662
1, 96, 22
6,063
966, 3
177, 723
1 0,926
139. 0
2, ,362
2,7 3, 29
1,701,6 6
963, 1 0
1,079.12
19 . 2 1
16 ,27
1 1. 12
02,111
360.632
20 .76
107,117
112, 1
17, 1
26 to 0
0 to 100
gs
00 to 1.000
Tota over
39, 773, 196
3,66 ,011 ,326. 70
9, 7. 73 1.231.003
Grand tota
131,090,633 I 3 ,136, 20 1 , 1 ,162
1 ,6 . 69 I 2,7 .717
P RC NT G DISTRI UTION
1.62
9.6
22.23
1 . 3
1 .71
6.31
20.9
32.
1 .22
1Z06
0.71
. 2
1 . 3
12.66
12.7
0.73
6.9
16.
119
13.02
M
2 to 3 ....
6. 7
1 .21
1 . 9
1 .6
3 to
to 6
Tota under _
69.66
90.3
7.3
. 0
.1
13.26
9.63
3. 0
1.62
1. 6
.23
.1
.16
6.92
2.22
.36
.0
.0
13.63
1 .07
9. 7
. 1
6.11
1.12
.96
.
13.79
1 .7
9.17
.19
6. 1
1.0
. 9
. 2
1 .6
IS. 1
7. 6
3.90
.10
.6
. 3
. 3
00 to 1.000
Tota over 6
30.3
9.62
2 66
1.60
.
IUO.00
100.00
100.00
100.00
-
Incudes norma ta , surta , and aternatve ta on net ong-term capta gan .
When the rate changes are fuy eUectve.
Less than 0.00 percent.
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9
Tabe . Comparson of ndvdua ncome ta abty under present ave and
under the Fnance Commttee b for the caendar years 19 0 and 19 1
SINGL P R90N NO D P ND NTS
mount o ta under-
Increase under F-
nance Commt-
tee b
1960 ncrease as
a percentage
of
1961 ncrease as
a percentage
of

Net ncome before
e empton
Fnance Commttee
b
Ta
under
present
aw
Net In-
come
f 1 t-r
Ta
Net n-
come
after
ta
under
present
aw
Present
aw
1
1960
19 1
ta
under
present
under
present
aw
19 0 19 1
Percent
Percent
aw
Percent
Percent
33
66
1 9
3
0
2
7
1
.
.
.
.
.6
.0
3.7
3.6
3.6
3.6
3.
3.
3.
2.9
3.9
0.2
.3
.
.6
.7
.
.9
1.0
L3
1.S
1.
3.0
.9
9.
13.0
20.
20.
20.6
20.6
19.2
16.
1 .1
1 .7
1 .2
1 .0
13.9
13.7
13.7
11.6
13.0
0.9
1.
2.3
3.7
3.0
3.2
3.6
.0
6.0
6.1
7.3
11.9
19.
3 .
3.6
70
167
2
2
3
1,60
2,201
,032
6,301
, 9
23,997
60,770
396.221
00,000
0
1 0
2 0

9
1,7 0
2, 36
,
6,9 2
9,796
26,3
66,79
29,27
70.000
3
7
11
19
t3 m . . . .
232
09
11
1, 6
2, 12
3. 9
6,0 9
.600
23,201
,762
3 ,000
770,000
31

79
133
23
312
6
63
1,196
3,1 7
0.16
,27
100,000
,000
32
7
77
137
212
29
,000
10,000
1 ,000
30,000
2 .000
0,000
7 ;
100,000
2,00
11.221
30.000
I M DM
Tow,r|ro;::: .
Takng nto account ma mum effectve rate mtaton of 77 percent.
9 Takng nto account ma mum effectve rate mtaton of 0 percent.
Source: StafI of the ont Commttee on Interna Revenue Ta aton.
Tabu: . Comparson of ndvdua ncome face abty under present ac and
under the Fnance Commttee b rates for the caendar years 19 0 and 19 1
M RRI D P RSON NO D P ND NTS
mount of ta under
Increase under F-
nance Commt-
tee b
19 0 ncrease as
a percentage
of
19 1 ncrease as
a percentage
of

Net ncome before
e empton
Fnance Commttee
b
Ta
under
present
aw
Net n-
oome
after
ta
under
present
aw
Ta
Net n-
come
after
ta
under
present
aw
Present
aw
I960
19 1
under
present
aw
1960
19 1
Percent
Percent
Percent
Percent
1.200
66
2
139
313
661
1,2 7
1,6 6
2,93
, 02
6,0 7
17,797
7,99
37 ,6 7
792, 2
2
377
.3
.6
.7
.7
.
.9
2073
20.
20.
20.
17.
16.
1 .2
1 .7
1 .
13.9
13.7
12.2
11.
67
1.6
2.3
3.0
3.1
3.2
3.
.0
.
7.3
11.9
31.3
3 .6
1, 00
60
160
360
760
L 16
1,
3,260
, 72
6,72
19,692
2,776
03,
6 ,6
10
.
.
.
.
.2
.0
3.7
3.6
3.6
3.
3.
3.1
2,9
2,000
133
299
631
1,206
1,621
2, 29
,2 7
, 77
17,201
6, 03
3 9,662
770,000
6
1
30
60
6
106
16
210
96
1,691
10,99
22, 2
27
61
129
210
267
31
62
7
2,391
6,373
3, 6
,6
3,000
,000
,000
10,000
1 .1100
20,000
1.0
2 ,000
1.1
60.000
1.
3.0
7.
9.
100,000.
00,000
1,000,000
1 Takng nto account ma mum effectve rate mtaton of 77 percent.
923 30 1 32
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90
Tabe 6. Comparson of ndvdua ncome ta abty under present ac and
under the Fnance Commttee b for the caendar years 19 0 and 19 1
M RRI D P RSON 2 D P ND NTS
Net ncomc before
e empton
mount of ta under-
Present
aw
Fnance Commttee
b
19 0
Increase under F-
nance Commt-
tee b
1 00
10 1
1960 ncrease as
a percentage
of
Ta
under
present
aw
Net In-
come
after
ta
under
present
aw
19611:
a pc
Ta
under
present
aw
f ,UO0
1U,000
1 ,000
20,nuo
2 ,ooo ,
60.000
100.000
00,000
Per cen
Pcrcen1
Pa cm
100
32
97
1,361
2, 12
3,
6, 76
16, 7
,6 3
3 ,677
709,31
10
62
1,016
1, 17
2,607
,030
6,672
17,1 2
7,20
369,
791, 30
120
620
1,162
1,602
2, 900
, 6
6,26
1 ,
61,912
66
02,
67,

90
3

9. ,
1 2
106
67
1, 66
10,06
22,116
20

17
231
3
676
702
306
6,269
3,779
,1 2
.
IS
.
.1
3.
3.6
3.6
II
a.

2,9
0.2
.6
,1
1.0
1.7
2.9
7.
0.6
17.0
16.
1 .
1 .
13.9
13.7
12.2
11.6
Tabe 7. Comparson of ndvdua ncome taw effectve rates under present ac
and under the Fnance Commttee b for the caendar years 19 0 and 19 1
SINGL P RSON NO D P ND NTS
Net Income before e empton
600...
1,11 1,0111 ..
ffectve rates
Present
aw
.2
6.6
10.0
11.6
13. 6
16.2
19.3
21. 2
26.0
30.
3 .
6.
.
77.0
77.0
Fnance Commttee b
.
7.0
10.
12.2
1 .3
16.9
2a 0
22.0
26.9
31.6
3 .6
.0
00.6
79.2
0.0
Perunt
6. 6
.0
12.0
. n
16.3
1 .9
22.3
2 .
20.7
3 .7
30.2
62.
66.
.0
7.0
Percentage pont In-
crease, r nance
mttee h over
ent aw
Percent
. .-
0.2
.6
.6
.7
.
.0
1.1
1.2
L6
2,0
2.2
3.0
19 1
P;r;tn:
0.0
1.
1.0
2.
2.6
Z7
LI
3.1
1.7
.1
.
6.
.0
.9
Tnkn nto account ma mum effectve rate mtaton of 0 percent.
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91
Tabe . Companon of ndvdua ncome ta effectve rates under present ate
and under the Fnance Commttee h for the caendar years 19 0 and 19 1
M RRI D P RSON NO D P ND NTS
ffectve rates
Percentage pont n-
crnsc. Fnance Com
mttec b over pres-
ent aw
Net ncome before e empton
Fnance Commttee b
Present
aw
19 0
1 1
1 0
1 1
Percent
Percent
Percent
Percent
Percent
1,200
1. 00
3.3
3.
.0
0.2
0.7
2,000
6.6
7.0
.0
.3
1.
10.0
10.
12.0
.6
2.0
.000
1Z6
13.2
1 .2
.6
2.6
.000
1 . 1
IS. 7
17.7
.6
2.6
10.000
s.:
16.
1 .
.6
2.7
16,000
1 .9
IS. 6
21.7
.7
2.
21. :
22.0
2 .
.
3.1
2T.S
2 .3
26.
.
3.
3 .
3 .6
3 .2
LI
.S
6.
.0
2.
LI
6.
00,000
71.
7 .1
0.7
2.2
.
1,000,000 .
77.0
7 .2
.
2.2
.9
Tabe 9. Comparson of ndvdua ncome ta effectve rates under present au
and under the Fnance Commttee b for the caendar years 19 0 and 19 1
M RRI D P RSON 2 D P ND NTS
ffectve rates
Percentage pont n-
crease. Fnance Cotu-
rottte b over pres-
ent aw
Net ncou.e before e empton
Fnance Commttee b
Present
aw
19 0
19 1
I960
1 1
Percent
Percent
Percent
Percent
Percent
2. 00
M.00O
1.3
3.
.0
0.2
0.7
( .000
.6
9.0
10.
.
1.
S ,0OO.._
12. 2
12.7
1 .
.
.2
10.000
13.6
1 .2
1 .9
.6
2.3
S1 .000
16.7
17.
19.3
.6
7.6
20,001
19.
20.2
22.3
.7
2.
2 ,000
ILI
22.7
2 .1
.
3.2
0.000
33.2
3 .3
37.
LI
.6
100,000
.6
7.2
1.9
1.6
6.3
1 00, 00
71.7
73.9
0.
2.2
.
1,000 000
76.9
79.1
.7
2.2
.
I . The Rates Undeb the Cobpobate Income Ta
Your commttee s b ncreases the corporate Income ta abtes whch
woud resut from the ouse b. The fu change w be effectve n 19 1 and
subsequent years. ppro matey one-haf of the corporate ncrease w appy
for the caendar year 19 0. When fuy effectve at current eves of corporate
profts, the proposed changes n the corporate rates w ncrease the corporate
ncome ta abtes by 1.6 bon annuay. Ths s an ncrease of about 1
percent In the amount of the ta due and about percentage ponts n the
average rate of ta mposed. Takng Into account the reducton n the ta abe
ncome of Indvduas that w accompany the ower eve of dvdend payments
resutng from the ncrease n the corporate rate, the net ncrease n ta
abtes when the changes In the corporate rates made n ths b are fuy
effectve w be 1. bon annuay.
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92
The rate changes under your commttee s b are desgned not ony to Increase
the revenue, but aso to emnate the 3 percent notch rate apped under e stng
aw to Incomes between 2 ,000 and 0,000.
( ) ISTING L W
Under e stng aw corporatons wth ta abe Incomes of 0,000 and over
pay a fat 2 percent norma ta and a fat 1 percent surta , a tota rate of 3
percent. To gve smaer busness a ta advantage, the effectve rate of ta aton
s reduced for corporatons wth ncomes beow 2 ,000. Ths s accompshed
by the appcaton to such corporatons of the foowng margna or bracket
rates:
Inoome bracket
Norma
ta rate
Surta
rate
Tota ta
rate
Percent
1
17
10
Percent
Percent
The ne t .000 -
6
6
6
a
a
a
s a resut the effectve or average rate of ta rses from 21 percent for cor-
poratons wth ncomes of ,000 or ess to 23 percent for corporatons wth an
ncome of 2 ,000. Snce the 3 percent rate appyng to corporatons wth ta -
abe ncomes of 0,000 and over s appcabe to the entre ncome, t s necessary
to brdge the gap between 2 ,000 and 0,000 by appyng a 3 percent rate to
the ncome n ths area. Thrty-one percentage ponts of ths 3 percent rate
represent the norma ta and 22 percentage ponts represent the surta . Ths
notch rate of 3 percent necessary e ceeds the 3 percent rate appcabe to
arger corporatons by 1 percentage ponts, snce the average rate of 23 percent
on a corporaton wth an ncome of 2 ,000 s 1 percentage ponts beow the 3
percent rate apped to arger corporatons.
The 3 percent bracket rate s ob|ectonabe prmary because of Its effect on
the ncentve to ncrease earnngs for corporatons whch normay have ncomes
somewhat over 2 ,000. Under the notch rate 3 cents out of each addtona
doar whch these corporatons earn, unt they reach the 0,000 ncome eve,
s taken by the Federa Government n ta es, eavng ony 7 cents out of each of
these addtona doars for the stockhoders. Corporatons wth ncomes over
0,000 have a much greater ncentve to e pand ther earnngs, snce the Gov-
ernment takes ony 3 cents out of each addtona doar n ther case, eavng 62
cents for the stockhoders.
( ) T OUS ILL
To emnate the 3 percent notch rate and to ncrease coectons the ouse
b emnates the compcated system of rates used under e stng aw and sub-
sttutes :
1. 2 ,000 surta e empton,
2. fat 21 percent norma ta rate, and
3. fat 20 percent surta rate.
Thus, a corporaton wth an ncome of 2 ,000 or ess woud pay a fat 21 percent
norma ta and no more. corporaton wth an ncome n e cess of 2 ,000
woud pay a norma ta of 21 percent on ts entre ta abe ncome, and a surta of
20 percent on that part of ts ncome n e cess of 2 ,000.
The substtuton of a surta e empton of 2 ,000, avaabe to a corporatons,
for the present 3 percent notch rate preserves the ta advantages en|oyed by
sma busness wthout ntroducng a system whch s ready adaptabe to a
drastc graduaton In rates. To ntroduce a system of steepy graduated rates t
woud be necessary to add addtona e emptons, and at the same tme to ncrease
very substantay the fat ta rate appyng to a corporatons, a souton whch
Is key to appear unpaatabe to sma, as we as arge, corporate ta payers.
snge e empton of the type n the b best e presses the dea of a fat ta rate
modfed by a concesson for sma busness. It s much smper than a system
G
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b
3
2
9
6
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1
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#
p
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93
of mutpe e emptons nnd can be presented on the return form In a way whch
makes t easer for the ta payer to compute the ta . snge e empton of
ths type aso makes It possbe to consodate the norma ta and surta compu-
tatons on the return form. Whe ths mght aso he possbe n the case of a
mutpe-e empton pan or a graduated-rate pan, dffcut probems woud be
presented under these pans In the handng of such tems as partay ta -
e empt nterest and the speca ta treatment accorded Western emsphere
trade corporatons and dvdends pad by pubc uttes on certan preferred
stock.
The changes made In the ouse b woud appy to a ta abe years begnnng
The provsons of the ouse b descr ed above woud Increase the net cor-
porate ncome ta abtes by 0,000,000 a year when fuy effectve.
(C) T FIN NC COMMITT ILL
Your commttee adopted the suggeston of the admnstraton for ncreasng
the corporate Income ta for 19 1 and subsequent years. Ths proposa ncor-
porated the pan of the ouse b for emnatng the 3 percent notch rate hut
used corporate rates n e cess of those n the ouse b. s a resut the top cor-
porate rate w be percent as compared wth 3 percent under e stng aw.
Ths s shown by the foowng tabe:
Margna rates
Surta net ncome
Present
aw
ouse
b
Fnance
Commt-
tee b
Not over 6,000
Percent
21
Percent Percen:
Over ,000 but not over 20,000
23
2
3
3
2,
2
11
Over 20,000 but not over 2 .nno
Over 2. .000 but not over 0,000

Over 0,000
Under your commttee s b corporatons w pay a 2 percent norma ta on
a of ther ta abe ncome and a 20 percent surta on ther ncome n e cess of
2 ,000. Under the ouse b they woud pay a 21 percent norma ta on ther
entre ta abe ncome and the same 20 percent surta on ther ncome n e cess
of 2 ,000.
Tour commttee dd not deem t advsabe to make such an ncrease n cor-
porate rates, effectve for 19 0, snce the year 19 0 s amost three-fourths over.
Your commttee seected uy 1, 1 0, as the dvdng ne n determnng when
the ncreased rates woud be effectve.
For the caendar year 19 0, the norma ta w be 23 percent and the surta
on ncomes n e cess of the 2 ,000 surta e empton w be 19 percent, makng
a tota top rate of 2 percent for the caendar year 1 | 0 as compared wth a
top rate of percent for 10 1 and subsequent years.
Corporatons wth ta abe years endng pror to uy 1, 19 0, w be ta ed
at the rates mposed under e stng aw. Years begnnng pror to uy 1,
19 0, and endng after that date w be dvded nto two parts. The proporton
of the corporaton s ta abe ncome whch reates to the perod precedng uy
1, 19 0. w be ta ed at the rates used under e stng aw. To the e tent that
the corporaton s ta abe year foows uy 1, 19 0, ts Income w be ta ed
at the rates mposed for 19 1 and subsequent years. Fsca years begnnng
after uy 1,19 0, w be sub|ect to the rates mposed for 19 1.
Tabe 10 shows the combned norma ta and surta effectve rates under
your commttee s b for 19 1 and subsequent years, as we as those under the
ouse b and e stng aw. The ouse b dd not change the rate mposed
on corporatons wth ncomes up to ,000. For corporatons wth ncomes
between ,000 and appro matey 167,000 the effectve rate under the ouse
b s ess than under e stng aw, argey because n these cases the benefts
from the emnaton of the notch outwegh the ncrease n the margna rate
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9
Imposed on ncome In e cess of 0,000. Snce the reverse s true of corpora-
tons whose ncomes e ceed 107,000, the effectve rate for such corporatons s
ncreased under the ouse h. The ma mum ncrease In the effectve rate s
sghty ess than 3 percentage ponts and the ma mum effectve rate s |ust
under 1 percent
Tare 10. Comparson of effectve corporate ncome ta rates under present far.
under the ouse b, and, under the Fnance Commttee s b n 19 1 and
subsequent years
Net ncome (nnrtnn and
surta )
Present aw
ouse b
6,ooo ZZZZZZZ
30.000
31. .
noowZZZZZZZZZ
70.000
171, 2 .67 pus.
7 ,000
100.000
1 0,000
W.W.S
300.000
300.000
00,000
00,000
7 0.000
1,000.000
.000,000
10.000.000
ectve
rates
Per cm
21. 00
21.00
21.00
21.33
.1 7
21. 7
21. 9
:2.00
22.33
22. 0
23.00
2 . 00
20.00
31. 7
3 . 2
3 .33
3 .00
3 .00
. 00
3 . re
. 00
3 .00
3 .00
3 .00
3 .00
3 .00
3 .00
3v. 00
3 .00
3 . 00
3 .00
3 .00
ffectve
rates
Percent
21.00
21.(10
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
21.00
2 . 33
2 .00
26. 71
2 . 0
29. 9
31.00
32.67
33. S
3 . 00
3 .33
36.00
37.67
3 ,00
3 . 0
39.33
39. 76
0.00
0.33
0. 0
0.90
0.9
Percen tope
pont n-
crease or
decrease
( ) over
present aw
o
0
0
0
-0.33
-. 9
_.no
-1.33
-1. 0
-zoo
3.07
.00
_ . ...
- .7
-6.
-7.00
.33
- . 1
.00
-3. 67
2.00
-.33
0
. 0
1.33
1. 7
2.00
Z33
2. 0
Z90
2.9
ffectve
Percentage pont In-
crease or decrease ( )
over
ouse b
Percen
2 .00
2 .00
2 .00
2 .00
2 .00
2 .00
2 .00
2 .00 I
2 .00 I
2 .00
2 .00
2 .00
2 .00
2 .33
29.00
30.71
32.60
3. M
3 .00
30.07
7. SC.
3 .00
3 .33
0.00
1.67
2.00
2. 0
3. 33
3.7
.00
.33
. 0
.90
. 1
.0
.0
.0
.0
.0
.0
.0
.0
.0
.
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.00
.00
.00
.00
.00
3.67
3. 3
.2
3.11
3.00
Z67
2. 0
2.00
.33
0
1.7
-2.
-100
-1.33
-.1
0
.33
2.
U7
.00
.30
. 3
S.7S
6.00
. S3
6. 0
6.90
6. OS
Tabe 10 brnes out ceary the fact that your commttee s h ncreases the
effectve rates mposed under the ouse b by percentage ponts for corpora-
tons In a ncome casses.
Corporatons wth Incomes of . ,000 or ess w be ta ed percentage ponts
more under your commttee s b than under e stng aw. The net ncrease
over e stng aw w be ess than ponts n the case of corporatons wth
ncomes between ,000 and 31,2 0, the net ncrease n ths area decnng as
the corporate Income grows arger. For ncomes between ,000 and 2 ,000
ths s due to the fact that a fat 2 percent ta rate on the frst 2 ,000 of ncome
s substtuted for rates whch under present aw ncrease from 21 percent to 2
percent n ths ncome area. For ncomes be ween 2 ,000 and 31,2 0 the fact
Ihat the rates do not ncrease by percentage ponts s due to the emnaton of
the notch. t 31,2 0 the effectve rates under your commttee s b and e stng
aw are dentca. The benefts from the emnaton of the notch are suffcent
to produce a smaer effectve rate under your commttee s b than under e stng
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9
aw for corporatons wth Incomes between 31,2 0 and 71, 29. at whch pont
the rates under the b and under e stng aw are agan equa. For corporatons
wth ncomes n e cess of 71, 29 the effect of emnatng the notch s out-
weghed by the Increase n the rate of ncome In e cess of 0,000, and In these
cases the effectve rate under your commttee s b s hgher than under e stng
aw. The ncrease grows wth the sze of the ncome and reaches a ma mum
of |ust under 7 percentage ponts. Thus, the ma mum effectve rate under
your commttee s b Is appro matey percent.
Tabe 11. Comparson of corporate ncome-tarn abty under present aw, under
the ouse t, and under the Fnance Commttee s b n 19 1 and subsequent
years
Combned norm
a ta and so
rta
Net ncome
mount at ta
Doar nc
rease or
Percente ncrease
decrease
(-) over
w
or dec
rease (-)
(norma ta and
surta )
pre 6nt U
over pr
esent av
ouse bf
Commttee s
Fnance
ouse
b
Fnance
ouse
Fnance
Present .aw
Commt-

Commt-
b
tee s b
D
tee s b
1.000
210.00
210.00
260.00
0
0
0
19.06
(2,000
20.00
20.00
00.00
0
0
0
19.0
630.00
630.00
7 a 00
0
120
0
19.0
1 .000
0.00
0.00
1,000.00
0
160
0
19.0
.000
1,0 0.00
1,0 0.00
1,2 0.00
0
200
0
19.06
6.000
1,2 0. 00
1,260.00
1, 00.00
- 20.00
220
1.
17.19
7,000.. .. ..
1, 10.00
1, 70.00
1, 7 0.00
- 0.00
2 0
-2.6
1 . 9
000
1,7 0.00
1,6 0.00
2.000.00
-60.00
260
-3.
1 .9
10.000
1,970.00
1, . 00
2,2 0.00
- a oo
2 0
- .06
1 .21
to.tm Y.Y. - . - .
2.200.00
2, 100.00
2, 00.00
-100.00
300
- .
13.6
16,000
3,3 0.00
3,1 0.00
3,7 0.00
200.00
00
- .97
11.9
30,000
. 00.00
,200.00
,000.00
:wm n
00
-6.67
11.11
26,000
,7 0.00
,2 0.00
6,2 0.00
00. 00
00
- .70
.70
30,000
, 00.00
7,300.00
, 00.00
-1,100.00
100
-13.10
1.19
31,2.
,062. 0
7, 12. 0
9,062. 0
-1,2 0.00
0
-13.79
0
11,0 0.00
,3 0.00
10, 7 0. 00
1,700.00
-300
-1 .3
-9 71
0,000
13, 700.00
11, 00.00
13,000.00
2.300. 00
-700
-16.79
- .11
,000
16,3 0. 00
13, 0.00
1 ,2 0.00
2,900.00
-1.100
-17.7
-6.73
60,000
I , 000.00
1 ,600.00
17, SOU. 00
-3, 00. 00
-1, 00
-1 . 2
-7. 9
71, 2 .S7-pus.___
27. 1 2. 6
2 ,2 .71
27,1 2. 6
-2, 7.1
0
-10. 3
0
7 .000
26. M . 00
2 ,7 0.00
2 ,7 0.00
2,7 0.00
2 0
-9.6
.
100,000
3 .000.00
36,000.00
0,000.00
2,000.00
2,000
- .26
.26
1 0,000
7. 000.00
6, 00.00
62, 00.00
- 00.00
, 00
-.
9.6
166,6602
63. 33.1
63,3331
70,000.00
0
6,6662
0
10. 3
200,000
76.000. 00
77,000.00
,000.00
1,000.00
9,000
1.32
11.
300,000
11 , 000.00
11 ,000. 00
130,000.00
,000.00
16,000
3.61
1 .0
00.000
1 2.00
1 ,000.00
17 ,000. 00
7,000.00
23.000
.61
1 .13
600.000
100.000. 00
200,000.00
220,000.00
10, OOO. 00
30.000
.26
1 .79
7 0.000 ...
2S. -, )U. 00
302, 00.00
332. 00.00
17, 00.00
7, 00
9.1
16.67
1.000.000
3 0. 0(0. 00
06.000.00
,000.00
2 ,000.00
6 ,000
6.
17.11
.ooo.noo
1. dO . ). 00
2,0 ,000. 00
2,2 ,000.00
1 ,000.00
3 ,000
7.63
1 .16
10,000,000
3, soo, ooo. oo
,09 ,000.00
, 9 ,000.00
29 ,000.00
96 ,000
7.76
1 .29
Tabe 11 compares the tn burdens under your commttee s b In 19 1 and
subsequent years wth those under the ouse b and under e stng aw.
The effectve rates and ta burdens whch w be mposed for the caendar
year 10 0, the year of transton under your commttee s b, are shown n tabe
12. The rates under your commttee s b w be 2 percentage ponts hgher
than under e stng aw for corporatons wth ncomes up to ,000. The n-
crease w be ess than 2 percentage ponts for corporatons wth ncomes be-
tween ,000 and 2 ,000. corporaton whose ncome s precsey 2 ,000
w be sub|ect to the same rate under the b as under e stng aw. When
the corporaton s ncome fas between 2 ,000 and 11 ,7 0, the ta rate under
the w be smaer than under e stng aw due to the emnaton of the
notch. t an ncome of 11 ,7 0 the rates under the b and under e stng
aw agan w be dentca. Corporatons wth arger ncomes are sub|ect to
a heaver rate under the b than under e stng aw, the dfference ncreasng
wth the sze of the ncome. The ma mum ncrease w be |ust under
percentage ponts.
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96
Tabe 12. Comparson of effectve corporate ncome ta rates and ta abty
for 19 0, under the Fnance Commttee s b and under present ate
Net ncome (norma
and surta )
1,000
2,000
3.000
,000
.000
6,000
7,000
,000
9.000
10,000
16,000
20,000
2 ,000
30,000
3 .000
0.000
,000
0,000
7 .000
100,000
11 ,7 0
1 0,000
200.000
300,000
00.000
00.000
7 0.000
1.000.UOO.
|,0O0,COO...
10,000,000..
ffectve rates
Combned norma and
Present
Fnance
Commt-
PercentaRo
pont n-
Present
aw
Fnance
Commt-
Increase or de-
crease (-)
tee s b
ere so or de-
crease (-)
tee s b
mount
Percent
Percent
Percent
Percent
21.00
23.00
2.00
210
230
20
9. f -
21.00
23.00
2.00
20
60
0
9.62
21.00
23.00
2.00
630
690
60
9. 2
21.00
23.00
2.00
0
920
0
9. 2
21.00
23.00
2.00
1,0 0
1,1 0
100
9.62
21.33
23.00
1.67
1,2 0
1,3 0
100
7. 1
21. 7
23.00
1. 3
1, 10
1,610
100
6.62
21.7
23.00
1.2
1,7 0
1, 0
100
.7
21. 9
23.00
1.11
1,970
2,070
100
.0
22.00
23.00
1.00
2,200
2,300
100
.
22.33
23.00
.67
3,3 0
3, 60
100
2.99
22. 0
23.00
. 0
, 00
,600
6,760
100
2.22
23.00
23.00
0
6,760
0
0
2 .00
26.17
-1. 3
, 00
7, 60
- 0
-6.
31. 7
2 . 3
-3.1
11,0 0
9,9 0
12,0 0
1,100
-9.9S
3 .2
30.13
- .12
13,700
-1,660
12.0
36.33
31.
. 9
16,3 0
1 ,1 0
-2,200
13. 6
3 .00
32. 0
. 0
19,000
16,260
-2,760
1 . 7
3 .00
3 .67
2.33
2 , 00
26,7 0
-1.7 0
-6.1
3 .00
37.2
-.76
3 ,000
37,260
-760
-1.97
3 .00
3 .00
0
,12
6,12
0
0
3 .00
3 . 3
. 3
67,000
,260
1,2 0
2.W
3 .00
39.63
1.63
7 ,000
79,2 0
3,2 0
.2
3 .00
a 2
2. 2
11 ,000
121,2 0
7,2 0
6,36
3 .00
0. 1
2. 1
1 2,000
163,2 0
11,2 0
7. 0
3 .00
1.0
3.06
190,000
20 ,2 0
1 ,2 0
.0
3 .00
1.37
3.37
2 ,000
310,260
2 .2 0
.
3 .00
1. 3
3. 3
3 0,000
1 ,260
2,09 ,260
36,2 0
9.2
3 .00
1.91
3.91
1,900,000
3, 00,000
19 ,260
10 2
3 .00
1.9
3.9
,196,2 0
396,260
10. 0
(D) C NG S M D FOR T PD POS OF CONSOLID TING T T
COMPUT TION ON T R TURN FORM
In addton to the emnaton of te notch rate, both the ouse b and
your commttee s b provde a dfferent method of computng the ta beneft
to be gven Western emsphere trade corporatons and dvdends pad by pubc
uttes on certan preferred stock. The ouse b aso contaned a provson
preservng the present ta beneft for partay ta -e empt nterest Tour
commttee s b retans ths feature for the caendar year 19 0 when the norma
ta w aso be beow the present norma ta rate. For 19 1 and subsequent
years ths ad|ustment s unnecessary because the norma ta rate for those years
w be 2 percent, whe the e stng norma ta rate s ony 2 percent. Tour
commttee s b aso makes a change n the method of computng the dvdends-
receved credt where dvdends are receved on certan preferred stock of pubc
uttes. These changes make t possbe to combne the norma ta and surta
nto a snge ta computaton on the corporate rate form.
. cceeraton of Ta Payments or Cobpobatows
Under e stng aw corporate ta payers are gven the opton to eect to pay
ther entre ta on the 1 th day of the thrd month foowng the cose of
the ta abe year or to pay one-fourth of the ta on that date and the baance
n equa nstaments on the 1 th day of the thrd, s th, and nnth months foow-
ng the frst nstament. For e ampe, a corporaton on the caendar-year bass
may pay one-fourth of the ta for 19 0 on the 1 th of March, une, September,
and December, 19 1. Ths method of payment contrasts sharpy wth that
requred of most ndvduas who pay the buk of ther ta durng the year
n whch the ncome arses. The contrast s most strkng n the case of a
busness whch Is operated as an ndvdua enterprse or a partnershp as
compared wth a smar busness organzed n the corporate form.
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97
Yonr commttee desres to reduce the tme durng whch the corporate ta
may be pad, but wshes to gve the busness communty ampe opportunty to
ad|ust tsef to the change. Therefore, secton 20 of your commttee s b
provdes for a gradua transton coverng a perod of years, at the end
of whch the nstament opton for corporatons w be reduced to two pay-
ments of 0 percent of the ta due on the 1 th day of the thrd month and the
baance on the 1 th day of the s th month foowng the cose of the ta abe
year. The form In whch ths transton s to be made Is shown n tabe 13.
Tabe 13. rcrrrntcd payment of corporaton ncome ta es
Percent of payments due In
Frst quarter
Second quar-
Thrd quar-
Fourth quar-
(percent)
ter (percent)
ter (percent)
ter (percent)
SO
30
20
S
3
1
1
0
0
10
10

Ffth Unabe year nd subsequent years

0

0
0
The acceerated pnymt nts woud orpn wth ta abe years endng on or after Dec. 31, 19 0.
The frst chance n the method of payment w be effectve wth respect to cor-
porate ta abe years endng on or after December 31, 19 0.
For the caendar-year corporatons, whch make up about three-fourths of the
tota, your commttee s b requres the payment of 30 percent of the 19 0 ta
on March 1 and une 1 , 19 1, and 20 percent on September 1 and December 1 ,
Instead of 2 percent on each of the quartery payment dates as permtted under
e stng aw. The payments on March 1 and une 1 w be ncreased to 3
percent of the ta due In 19 2, 0 percent n 19 3, percent n 19 , and 0 per-
cent In 10 , wth correspondng reductons n the percentage of the ta payabe
on September 1 and December 1 n each of these years.
The estmated ncrease n coectons resutng from acceerated payments s
shown n tabe 1 . In the fsca year 19 1 t s estmated that the addtona
coectons w be about s( ; mon. The addtona recepts n the fsca year
19 6, the ast year n whch coectons are affected, w be about 90 mon.
The ncrease n each of the years 19 2 through 19 w be about 1 bon.
The tota addtona coectons durng the fu t-year transton perod aggregate
about . bon.
Tabe 1 . stmated ncrease n corporate ncome tarn coectons resutng from
acceerated payments
In mons of doars
Fsca years
Inerea.s n
coectons
Fsca years
ncrca c ,n
coectons
1 61
fon
19
970
970
90
1962
1,0 0
970
11)
yro
Source: Staff of th ont Comm.ee on Interna Revenue Ta aton.
though these addtona coectons represent funds whch woud otherwse
have been receved n subsequent fsca years, there w be no correspondng re-
ductons n recepts n subsequent years f corporate profts reman at current
eves. The revenues coected n the perod of transton nstead of n the years
mmedatey foowng w be suppanted n those years by coectons whch
woud have been made n ater years under e stng aw.
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9
Of course, a down-turn n busness wth a consequent decne n corporate profts
woud produce a more rapd drop n coectons from the corporate ncome ta f
the atter Is pad n two Instaments, as t w be n 10 and subsequent years
under your commttee s b, than If payment s spread over four quartery pay-
ments as under e stng aw. owever, the Increase In coectons durng the sub-
sequent perod of revva woud aso be more rapd.
Over the ong run, eavng the busness cyce out of account, the addtona co-
ectons obtaned under the b n the years 19 1 through 19 6 woud, generay
speakng, be offset by a correspondng reducton n ater years ony f the acton
now taken were reversed. It s true that where a ta payer goes out of busness
or ceases to have a ta abe net ncome the acceerated payments made durng the
transton years w be offset by reduced coectons n subsequent years. On the
other hand, there w be addtona gans n future years as a resut of the acce-
eraton of the frst ta pad by new corporatons and by corporatons whch move
for the frst tme Into the ta payng cass. Moreover, an e panson of corporate
earnngs (urng future years w produce an addtona gan because of the acce-
eraton of the ta based on the net ncrease n ta abe ncome. If, therefore, hs-
torca trends contnue and corporate profts Increase n the future aong wth an
e pandng economy, addtona gans from acceeraton w accrue and the Gov-
ernment w not ose, e cept temporary durng a perod of depresson, the add-
tona coectons receved durng the years 19 1 through 19 6.
The addtona revenues obtaned In each of the transton years are the resut
of concentratng n each of these fsca years, coectons based on the ta abtes
of more than 1 year. though ths b speeds up the coecton of the corporate
Income ta , t does not ncrease the ta abty of any corporaton.
vaabe nformaton ndcates that, taken as a whoe, the corporatons of
ths country are unusuay qud and, therefore, n a poston to fnance the
acceerated ta payments caed for under the commttee s b wth comparatvey
tte dffcuty. Tabe 1 shows the reaton between accrued Federa ncome ta
abtes and the cash pus Unted States Government securtes hed by a
corporatons other than banks and nsurance companes at the cose of each
quarter n the caendar years 19 and 19 9 and the frst quarter of 19 0. On these
dates the aggregate accrued Federa ncome ta abty was never more than
30.6 percent of the sum of these very qud assets. t the cose of the frst
quarter of 19 0 the accrued ta abtes were ess than one-fourth of the cash
pus Government securtes.
Tabe 16 shows smar statstcs for manufacturng corporatons ony at the
cose of the frst quarter of 19 0, cassfed accordng to the sze of the corporaton.
Ths tabe ndcates that among the smaer corporatons the accrued Federa
Income ta abtes were an even ower percentage of cash pus Government
securtes than among corporatons of greater sze. Snce abont 36 percent of
the ta abe corporatons do not eect the quartery payment opton but pay ther
entre ta n fu on the 1 th day of the thrd month foowng the cose of ther
ta abe year, and roughy 90 percent of the corporaton ta s pad on the nsta-
ment bass, t s evdent that the sma corporatons are the ones whch usuay
do not eect to pay n nstaments. Ths s consstent wth the statstcs shown
n tabe 16 whch ndcate that on the average the smaer corporatons have
reatvey arge accumuatons of very qud assets.
Tabes 1 and 16 refect the average poston of mercan Industry. No douht
there w be a number of cases n whch any acceeraton of the payment w
be dffcut because the cash poston of the corporaton s weak and ts credt at
the banks poor. owever, ths probem s greaty reduced by the gradua trans-
ton to a two-payment system whch occurs under secton 20 of your commttee s
b. For those cases where rea hardshp arses reef w be avaabe under
secton 6(c)(1) of the Interna Revenue Code whch authorzes the Comms-
soner of Interna Revenue to e tend the tme for payment for a perod up ;o
6 months. Ths power makes t possbe to aevate any rea dffcutes rased
by the acceerated payment pan.
Ths pan s not to be confused wth the pay-as-you-go system used under the
Indvdua ncome ta . Whe your commttee s b woud graduay reduce the
ag between the recept of the corporaton s ncome and the payment of Its ta , a
the payments woud contnue to be made n the year foowng the recept of the
Income. ence, the genera argument that a system of current coecton wond
be napproprate for corporatons does not bear on the acceerated payment pan
contaned n your commttee s b.
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9
Tabe 1 . Ta abtes, cash, and . . Government securtes o nTI
corporatons e cept banks and nsurance companes
I oar amounts n bons
ccrued
Federa
ncome
turn
D. . Gov-
em men t
securtes
Tota cash
and U. .
Government
securtes
Percent
Federa ta
to tota cash
Cub
and
Government
securtes
19 :
10.7
23.6
13.7
37.2
2 .
10.9
23.0
13.0
36.9
29.6
11.2
2 .2
13.
37.6
30.1
11.6
2 .0
at
37.
30.6
1M9:
11.2
10.6
23.
1 .0
37.
29.9
2 .3
1 .
39.1
27.1
10.2
2 .7
1 .6
S2
26.3
.7
2 .9
16.7
23.9
10 0 Frst quarter
.7
23.7
16.7
0.
2 .0
Source: Securtes and change Commsson.
Tabe 1C. Ta abtes, cash, and . . Government securtes of a manu-
facturng corporatons, cassfed by sze of assets, frst quarter, 19 0
; Doar amounts n mons
Percent
Federa ta
to tota cash
sset casses n thousands
of doars
ccrued
Federa
ncome
ta es
Cash
U. . Gov-
ernment
securtes
Tota cash
and U. .
Government
securtes
ant.
Government
60
2 0
63
1.9
3.262
312
766
1, 76
3,9 6
,76
6
370
1.03
2.213
6. 1
11.0
16.22
23.77
2 .69
30. 16
29.
260 to 1.000
269
737
2, 9
6.2 6
1.000 to .000
,000 to 100,000
I. Returns and Ta Payments of Tbt|bts and Nonresdent ens
Under e stng aw fducares may eect to pay the ncome ta n four quartery
nstaments. It has been brought to the attenton of your commttee that there
Is no necessty for ths opton n the case of trusts, and that n some cases the
opton s an embarrassment to trustees who woud ke to pay the ta at the
tme of tng the return but hestate to do so because they beeve ther respon-
sbtes to the benefcares of the trust requre the retenton of the funds unt
the fna dates upon whch the ta payments may be made so as to ma mze th
nterest earned on the trust s assets. For these reasons, secton 20 of your
commttee s b emnates the nstament opton n the case of trusts. The
opton s contnued n the case of estates, where the probem of rasng cash to
fnance the payment of ta es s apt to be serous.
stng aw requres the fng of the wthhodng returns for nonresdent
aens on March 1 but does not requre the payment of the ta by the wth-
hodng agent unt une 1 . Secton 221 of your commttee s b conforms the
date upon whch the wthhodng agent must pay the ta wth the date upon
whch he tes the wthhodng return.
stng aw aso gves nonresdent aens whose gross ncome s n e cess of
1 , 00 or who have a trade or busness n the Unted States the opton to pay
ther ta n nstaments. Secton 20 of your commttee s b emnates ths
nstament opton.
These amendments are effectve w respect to ta abe years endng on or
afer December 31. 19 0.
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We these changes do not affect ta abtes, the emnaton of the nsta-
ment opton n the case of trusts and certan nonresdent aens w ncrease
coectons n the fsca year 19 1 by about 90,000,000. These are funds whch
woud have been coected n the fsca year 19 2 under e stng aw. There w
be no correspondng reducton n coectons n 19 2 snce the funds coected on
19 0 abtes n the fsca year 19 1 w be repaced by funds that woud
(under e stng aw) have been receved n the fsca year 19 3.
II. cse Ta Changes
The ouse b provdes for a gross e cse ta reducton of 1,010 mon,
or a net oss of revenue of 910 mon after the effects on ncome ta coectons
are taken Into account. Your commttee has nmended the b to remove the
e cse ta changes resutng n ths oss of revenue. The ouse report ponts
out that corporate and ndvdua ncome ta es have been decreased substan-
tay snce the cessaton of hosttes wth Germany and apan, whe e cse
ta es have remaned substantay at ther wartme eves. Your commttee
agrees that pror to the begnnng of the mtary acton n orea ths consttuted
a good reason for reducng e cse ta es. owever, the necessary requests of
the Presdent for substanta ncreases n defense and reated e pendtures snce
the begnnng of the orean confct make e cse ta reductons mpossbe at
ths tme. Rather t s necessary to consder the emnaton of most of the
ndvdua and corporate ncome ta reductons whch the ouse report ndcates
are the prmary |ustfcaton for e cse reductons.
The ouse b makes a number of sautary ad|ustments n the bases of varous
e cse ta es n addton to the rate reductons. owever, n the short run at
east these ad|ustments w resut n the oss of some e cse ta revenue. For
that reason t s approprate to postpone the consderaton of these ad|ustments
unt ne t year when t w be possbe to devote more tme to the detas of
the e cse ta structure.
Your commttee s b retans those ad|ustments n e cse ta es In the ouse
b whch resut n revenue Increases. These
(1) e tend the reta ta es on furs and |ewery to cover aucton saes, wth
an e empton of 100 for auctons n prvate homes;
(2) e tend the manufacturers ta on househod-type refrgerators to cover
unts for the quck freezng or frozen storage of foods;
(3) ncrease the annua occupatona cense ta on con-operated gamng
devces from 100 to 1 0; and
( ) mpose the 20 percent reta e cse ta es and the varous occupatona
e cse ta es n the case of the Unted States Government or any of
ts agences or nstrumentates uness an e empton s specfcay
provded.
Your commttee has aso amended the ouse b to e tend the 10 percent
manufacturers e cse ta on rado recevng sets to cover teevson sets, and
to cose a oophoe whch has deveoped n the case of the ta es on the trans-
portaton of persons and property.
Instead of the net e cse ta reducton of 910 mon provded by the ouse
b, t s estmated that the b as amended by your commttee w resut n an
ncrease n e cse ta revenues of mon n a fu year of operaton.
Generay, the e cse ta amendments ncuded n your commttee s b w
be effectve on or after the frst day of the frst month whch begns more than
10 days after the date of enactment of the b.
( ) UCTION S L S
Tnder e stng aw the ta on |ewery and furs appes to the aucton of such
tems ony when the aucton takes pace n, or s conducted for, a reta estabsh-
ment. Otherwse artces sod at an aucton do not quafy as artces sod at
reta. s a resut many auctons are hed, especay In the case of |ewery,
where ta -free saes are made to Indvduas ntendng to use or wear the
|ewery or furs themseves. Ths consttutes unfar competton wth the ord-
nary |eweer or fur retaer who must charge the 20 percent ta , and represents
a partcuary severe hardshp to retaers ocated near organzatons carryng
on aucton saes on a arge scae. The queston of new or od furs or |ewery
Is not nvoved, snce an auctoneer may se ether new or od furs or |ewery
free of ta , whe a ta s mposed on ether type of sae n the case of the retaer.
. R. 920 as passed by the ouse corrects ths nequty by treatng as reta
saes furs or ewery sod at aucton, wth an e empton of 100 where such Items
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are auctoned In a prvate borne. Your commttee has accepted ths provson of
the ouse b. Under the ouse b the rate of ta n the case of furs and
ewery woud be reduced to 10 percent but under secton 001 of your commttee s
b the present 20 percent rates are retaned. It s estmated that ths w resut
n a sma annua ncrease n e cse ta revenues.
( ) UIC FR Z UNITS
Snce the ta on the househod type of refrgerators was frst mposed, a new
type of househod refrgeratng apparatus has come nto use; namey, unts for
the quck freezng or frozen storage of foods. These quck-freeze unts are sod
ether separatey or wth ordnary househod refrgerators. Your commttee sees
no reason why an e cse ta shoud be mposed on one type of househod refrg-
eratng equpment and not on another. The ouse b e tends the manufac-
turers ta on refrgerators to cover househod-type quck-freeze unts and appa-
ratus. Your commttee concurs n ths provson. Under the ouse b the rate
of ta woud have been 7 percent. Under secton 606 of your commttee s b
the 10 percent rate now appyng to refrgerators s retaned and aso apped to
the quck-freeze unts. It s estmated that the e tenson of the ta on refrg-
erators to cover quck-freeze unts and apparatus w ncrease e cse ta
revenues by mon n a fu year of operaton.
(C) COIN OP R T D G MING D IC S
Under present aw the occupatona ta on con-operated gamng devces s
100 per year per machne. The ouse b ncreases ths ta to 1 0. The n-
crease n ths ta at the present tme appears partcuary approprate n vew
of the fact that the Senate has recenty passed a b (S. 33f 7) bannng nterstate
shpments of gamng devces. Your commttee s b (secton 603) accepts the
ouse provson. It s estmated that n a fu year of operaton the ncrease
n ths ta w rase e cse ta coectons by mon.
(D) PPLIC TION OF C RT IN CIS T S WIT R SP CT TO
GO RNM NT G NCI S
Unt ugust 1, 19 9, post e changes were not coectng reta e cse ta es,
but snce that tme those wthn the Unted States have been coectng these
ta es n accordance wt the Treasury Department nterpretaton of present aw
as requrng them to do so. Moreover, some queston has been rased as to
whether mtary e changes and other Government agences are now sub|ect to
the occupatona ta es, and n any case some Government agences are not now
payng these ta es. To e empt from these ta es Government agences n compet-
ton wth prvate busness represents unfar competton. The ouse b removes
the possbty of ths dscrmnaton by provdng that the Unted States Govern-
ment or any of ts agences or nstrumentates n the Unted States sha coect
the reta e cse ta es wth respect to any artces sod at reta whch are
generay sub|ected to these ta es uness saes by such agences are specfcay
e empted. smar provson n the ouse b makes the varous occupatona
ta es appcabe n the case of these Government agences. Sectons 002 and
60 of your commttee s b concur n these two provsons of the ouse b.
It s estmated that there w be a sma ncrease n revenues as a resut of
coectng occupatona ta es from a governmenta agences. No ncrease s
antcpated as a resut of requrng Government agences to coect the reta
ta es snce, as ndcated above, these ta es aready are beng coected.
( ) T L ISION S TS ND PP R TUS
The ta on rado recevng sets was frst adopted n the Revenue ct of 1932.
t that tme there was no ndcaton that a cosey assocated type of home
entertanment, namey, teevson, woud come nto wdespread use. ad ths
possbty been apprecated the ta on rado recevng sets mght we have been
drafted n such a fashon as to ncude teevson sets. In any case t appears
undesrabe to ta one of these forms of home entertanment and not the other.
Moreover, teevson aready s offerng serous competton to moton-pcture
theaters and other types of entertanment sub|ect to the ta on genera adms-
sons. Your commttee beeves that It represents unfar competton to evy a
ta on one and not the other of these cosey compettve forms of entertanment.
s a resut of the defense effort t aso appears probabe that for some tme
to come mtatons on producton, rather than on demand, w he the factors
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determnng the number of teevson sets sod. In vew of ths t appears m-
probabe that the mposton of a moderate manufacturers e cse ta on tee-
vson sets w have any matera effect on the number of sets purchased. Thus,
t s not antcpated that the Imposton of a manufacturers ta on teevson
sets w affect the sze of the teevson audence or nfuence the number of
teevson statons whch may be estabshed n the ne t few years.
In vew of the above consderatons secton 60 of your commttee s b amends
the ouse b to e tend the present 10 percent manufacturers ta on rado
recevng sets and apparatus to teevson sets and apparatus. On the bass of
a fu year of operaton t s estmated that ths acton w ncrease revenues
by 2 mon.
(F) TR NSPORT TION OF P RSONS ND PROP RTY W R MOUNTS R
P ID OUTSID OF T UNIT D ST T S
The attenton of your commttee has been caed to the fact that an ncreasng
number of persons have been seekng to avod the 1 percent ta on the trans-
portaton of persons and the 3 percent ta on the transportaton of property by
usng varous devces to pay the transportaton charges outsde of the Unted
States. Ths practce has been ncreasng rapdy snce the repea of the Cana-
dan ta on the transportaton of persons n March of 19 9. Many beeved
that payments outsde the Unted States for transportaton wthn the Unted
States were ta -free because the sectons evyng these ta es (secton 3 9 (a)
and (c) and secton 3 7 (a)) refer to amounts pad wthn the Unted States.
owever, the Commssoner of Interna Revenue on September 2, 19 0. ssued
a reease defnng payment wthn ths country n case of the ta on transpor-
taton of persons as ncudng cases where:
persons ma or teegraph or send cash, checks, money orders, or other
funds to tcket offces, trave agents, etc., n other countres (such as Canada or
Me co) for such tckets, or f persons arrange wth trave or transportaton
offces n ths country for the furnshng of such tckets from a foregn address.
In a reease on uy 19 0. the Commssoner stated that n the case of the ta
on the transportaton of property
there s no doubt that Congress ntended to Incude a domestc shpments where
a the transactons n connecton wth shpments of goos normay take pace
wthn the Unted States.
Whe there has been consderabe dspute as to the correctness of these In-
terpretatons of the aw by the Commssoner t s your commttee s vew that
these rungs are on accurate nterpretaton of e stng aw. Moreover, the
reease reatng to the transportaton of persons ceary does not cover the case
where a person hmsef pays the transportaton charge outsde of the Unted
States nor does the reease reatng to the transportaton of property necessary
mpose the ta n a cases where the transportaton s wthn the Unted States.
To carfy the appcaton of these ta es secton 007 of your commttee s b
adds provsons to the sectons of the Interna Revenue Code mposng the ta es
on transportaton of persons and property (sectons 3 69 and 3 7 ) ndcatng
that where the transportaton both begns and ends n the Unted States, the
ta es appy even though payment s made outsde the Unted State . Whe the
resutng ncrease over present coectons under these ta es w be sma, your
commttee s acton forestas the possbty of a substanta revenue oss n
te future.
III. ducatona, Chartabe, and Certan Other Ta - empt Organzatons.
Foundatons, and Trusts
Tour commttee s b (sectons 301 to 3 1) ncudes a seres of provsons
whch, under specfed condtons, resut n the mposton of ta es n the case
of educatona, chartabe, and certan other ta -e empt organzatons, founda-
tons, and trusts; the dena of chartabe deductons under secton 162 to non-
e empt trusts; and the dena of deductons for ncome, estate, and gft ta
purposes to donors to these organzatons. These provsons can be summarzed
as foows:
(1) organzatons e empt under secton 101 (1), and (7), certan organza-
tons e empt under secton 101(1 ), a organzatons e empt under secton
101 (0) e cept churches or assocatons of churches, and a trusts recevng
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chartabe deductons under secton 162(a), are sub|ect to Income ta or dened
chartabe deductons wth respect to Income derved
(o) from operaton of a busness enterprse whch s unreated to the
purpose for whch such organzaton receved an e empton, or
(6) from rentas from property eased to others on a ong-term bass Where
the property was purchased wth borrowed funds;
(2) The fng of annua nformaton showng such tems as Income, dsburse-
ments for chartabe, etc., purposes, and accumuatons w be requred n the
case of foundatons, trusts, and certan other educatona and chartabe organ-
zatons e empt under secton 101(0) and trusts camng deductons under sec-
ton 162(a), and ths nformaton w be made avaabe to the pubc;
(3) Feeder organzatons, or organzatons whose prmary actvtes are
concerned wth the operaton of a busness and turnng the ncome earned over
to organzatons e empt under secton 101 are dened e empton under secton
101 (however, mtatons are mposed on the dena of e empton n pror years) ;
and
( ) If as a resut of engagng In certan specfed types of transactons wth
donors, funds are dverted from the chartabe or educatona purpose of foun-
datons, trusts, or smar organzatons
(a) the organzatons ose ther e emptons (or.n the case of none empt
trusts they are dened unmted chartabe, etc., deductons under
secton 162(a)) prospectvey ony, e cept that e empton may be
dened retroactvey where the prohbted transacton was entered
Into wth the purpose of dvertng funds Invovng a substanta propor-
ton of the assets or ncome of the organzaton and
(b) deductons for contrbutons to organzatons whch have ost ther e -
empton, or ther rght to unmted chartabe deductons, under (a)
are dened, but ony after the organzaton has ost ts e empton,
or deducton, e cept that deductons to donors may be dened retro-
actvey where the donors themseves were Invoved In a prohbted
transacton entered Into wth the purpose of dvertng funds, and such
dverson nvoved a substanta porton of the assets or ncome of
the organzaton.
The provsons pertanng to unreated busness Income and easebacks (pont
1 above) and those deang wth feeder organzatons (pont 3 above) are
substantay the same as In the ouse b e cept for the mtatons Imposed
on the dena of e emptons n pror years. The provson that nformaton,
reatng to accumuatons and other tems, whch w be made avaabe to the
pubc, be requred of certan organzatons (pont 2 above) Is substtuted for
a ouse measure provdng a tn on the accumuaton of nvestment ncom (n
e cess of stated aowances) of foundatons, trusts, and certan other educatona
and chartabe organzatons. The provson reatng to the dena of e empton
and deductons where certan types of transactons are made wth donors (pont
) represents a modfcaton of provsons n the ouse b. Under the ouse
b f the foundatons, trusts, and smar organzatons engage n certan spec-
fed types of transactons wth donors, offcers, or trustees, the organzatons
woud ose ther e empton (or n the case of trusts comng under secton 162,
they woud ose ther unmted chartabe, etc., deducton).
The ouse b aso woud requre these foundatons, trusts and smar organ-
zatons to stpuate n the nstruments under whch they are admnstered that
they w not engage n the specfed transactons wth donors, offcers, or trustees
f contrbutons to such organzatons are to be deductbe to ther donors. so
under the ouse b deductons for chartabe contrbutons woud be dened
where the contrbutons consst of stock n a corporaton controed by the donor
and hs famy and are gven to an organzaton or trust whch the donor and
hs famy contro. These provsons are omtted entrey n your commttee s
bU.
( ) UNR L T D USIN SS INCOM
The use b mposes the reguar corporate ncome ta on certan ta -e empt
organzatons whch are n the nature of corporatons, and the ndvdua ncome
ta on ta -e empt trusts, wth respect to so much of ther ncome as arses from
actve busness enterprses whch are unreated to the e empt purposes of the
organzatons. Trusts camng the chartabe, etc., deducton under secton
162(a) of the Code aso are dened ths deducton wth respect to ther busness
ncome. The ta n the case of e empt organzatons appes to the unreated
busness Income of the abor, agrcutura, and hortcutura organzatons e empt
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under secton 101(1) of the Code; the terary, scentfc, regons (other than
churches), educatona, and chartabe organzatons, ncudng hosptas and
foundatons, e empt under secton 101 (6) ; and the busness and trade assoca-
tons e empt under secton 101(7). The ta does not appy to Income of ths
type receved by a church even though the church s hed In the name of a bshop
or other church offca. owever, the ta does appy to other e empt nsttu-
tons under the auspces of the churches.
The ta on unreated busness ncome under your commttee s b s mposed
n the same manner and appes to the same organsatons as under the ouse
b e cept that t s made cear that assocatons or conventons of churches aso
are e cuded from the ta . It was ponted out to your commttee that In the
case of some denomnaons each oca church s autonomous and that as a resut
the centra assocaton or conventon mght not be e empted from ta n these
cases under the ouse b.
The ta on unreated busness ncome, under both the ouse b and your
commttee s b, aso appes to the so-caed Investment subsdares now e empt
under secton 101(1 ) f ther Income s payabe to secton 101 (1), (6), or (7)
organzatons. owever, snce these organzatons are presenty mted to hod-
ng tte to property, coectng ncome from t and turnng the proceeds over to
other e empt organzatons, the ony trade or busness n whch they can engage
s the renta of property. Consequenty the ta on unreated busness ncome
can ony appy to ther renta ncome from the type of eases descrbed under (2)
beow.
It s Important to note that many organzatons now e empt from ncome
ta under secton 101 of the Interna Revenue Code are not affected by these
ta measures. For e ampe, none of the busness- or mutua-type organzatons
are affected. These ncude mutua savngs banks; budng and oan assoca-
tons; cooperatve banks and credt unons; cemetery companes; oca fe
nsurance assocatons; mutua dtch or rrgaton companes; mutua cooperatve
teephone companes or ke organsatons; mutua Insurance companes other
than fe or marne; farm cooperatves; corporatons whch are subsdares of
farm cooperatves; vountary fe, sck, or accdent beneft assocatons of Unted
States Government empoyees; oca teachers retrement fund assocatons; and
vountary empoyees fe, sckness, or accdent beneft assocatons. In addton
to these busness- or mutua-type organzatons, certan other organzatons aso
are not affected. These Incude fraterna benefcary socetes; cvc eagues;
soca wefare organzatons; oca assocatons of empoyees organzed for
chartabe, educatona or recreatona purposes; soca cubs; nstrumentates
of the Unted States; and communa or apostoc regous organzatons.
Your commttee s b aso adds a new provson deang wth unreated busness
ncome of secton 101 (6), (1), or (7) organzatons n years begnnng pror to
anuary 1, 19 1. Ths provdes that wth respect to these pror years no such
organzatons sha be dened e empton on the grounds that they are carryng
on trades or busnesses for proft f the ncome from these sources woud not be
ta abe under the provsons of your commttee s b deang wth unreated
busness ncome, or f such organzaton woud not be dened e empton under the
amendment made to secton 101 by ths b reatng to feeder organzatons.
Ths provson w gve assurance to such organzatons that ther e empton
w not be dened wth respect to these past years merey because ther prmary
ncome s renta Income (other than ease-back Income).
(1) INCOM FROM UNR L T D TR P OR USIN SS OT R T N T R NT L
OF PROP RTY
The probem at whch the ta on unreated busness Income s drected s
prmary that of unfar competton. The ta -free status of secton 101 or-
ganzatons enabes them to use ther profts ta -free to e pand operatons, whe
ther compettors can e pand ony wth the profts remanng after ta es. so,
a number of e ampes have arsen where these organzatons have, n effect, used
ther ta e emptons to buy an ordnary busness. That s, they have acqured
the busness wth tte or no nvestment on ther own part and pad for t n
nstaments out of subsequent earnngs a procedure whch usuay coud not
be foowed f the busness were ta abe.
In nether the ouse b nor your commttee s b does ths provson deny
the e empton where the organzatons are carryng on unreated actve busness
enterprses, nor requre that they dspose of such busnesses. oth provsons
merey mpose the same ta on ncome derved from an unreated trade or busness
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as s borne by ther compettors. In fact It s not Intended that the ta mposed
on unreated busness Income w have any effect on the ta -e empt status of
any organzaton. n organzaton whch s e empt pror to the enactment
of ths b, f contnung the same actvtes, woud st be e empt after ths b
becomes aw. In a smar manner any reasons for denyng e empton pror
to enactment of ths b woud contnue to ustfy dena of e empton after the
b s passage.
Some of the wtnesses who ap eared efore your commttee took the poston
that ths unreated busness ncome shoud be ta ed ony f receved by n sub-
sdary organzaton. owever, t Is dffcut to see why a dfference n ta treat-
ment shoud be aowed merey because n one case the ncome s earned drecty
by an educatona or chartabe organzaton, whe In the other t Is earned
by a subsdary of such an organzaton. In both cases the ncome s derved
from the same type of actvtes and dsposed of n the same manner. Moreover,
n most cases the busness functons now carred on by subsdares coud be
transferred to the parent If the ta were apped ony to the ncome of the
subsdares.
Under the ouse b and your commttee s b the ta s Imposed on ncome
derved from a trade or busness reguary carred on by a ta -e empt or-
ganzaton f the busness Is not substantay reated to the performance of
the functons upon whch the organzaton s e empton s based. owever, the
ta does not appy If substantay a the work done n the trade or busness s
performed wthout com|ensaton, or f, n the case of a secton 101(6) organ-
zaton, the trade or busness s carred on prmnry for the convenence of the
members, students, patents, offcers, or empoyees of the ta -e mpt organzaton.
thetc actvtes of schoos are substantay reated to ther educatona
functons. For e ampe, a unversty woud not be ta nbe on ncome derved
from a basketba tournament sponsored by t, even where the teams were
composed of students of other schoos.
In the case of an educatona nsttuton, ncome from dnng has, restaurnnts,
and dormtores operated for the convenence of the students woud be consdered
reated Income and, therefore, woud not be ta abe. Income from a unversty
press woud be e empt n the ordnary case snce t woud be derved from an
actvty that s substantay reated to the pun oses of the unversty.
n amendment made by your commttee aso e cepts from ta ncome derved
from the sae of merchandse by ta -e empt organzatons when the merchandse
s acqured by gft. Ths s ntended to e cude thrft shops run by ta -e empt
organzatons where those desrng to beneft the e empt organzaton contrbute
od cothes, books, etc., to be sod wth the proceeds gong to the e empt
organzaton.
The ouse b specfcay e empts from ta ncome derved from research
for the Unted States or any of ts agences, snce most of ths work s dune
on a cost bass. Your commttee s b e empts ncome derved from work
performed under a contract for State and oca governments, as we as the
Unted States Government. The word work s used nstead of research
because t was ponted out to the commttee that Government contracts gven
to unverstes frequenty provde for deveopment and nstructon as we as
research. Work done for State and oca governments, as we as work done
for the Federa Government, Is e cuded snce t Is not beeved that such
work s ordnary undertaken on a proft-makng bass.
speca e empton s provded under your commttee s b n the case of
coeges, unverstes, and hosptas for ncome receved from research done
for anyone. Ths s not ntended to mpy, however, that funds receved for
research by other nsttutons necessary represent unreated busness ncome.
For e ampe, a grant by a corporaton to a foundaton to fnance scentfc re-
search woud be a gft rather than trade or busness ncome (ether reated
or unreated) f the resuts of the research were to be made freey avaabe to
the pubc. owever, a grant by a corporaton to be used for research by
a foundaton wth the resuts of the research to be gven ony to the grantor
woud ceary not be a gft and woud consttute unreated busness ncome.
In order to emnate the cases n whch the unreated busness ncome s
ncdenta, both the ouse b and your commttee s b ncude a specfc
e empton of 1,000. Ths, n addton to the requrement that such busnesses
must be carred on reguary to be ta abe, w dspose of most of the nusance
cases. Moreover, mposton of the ta n cases where the ncome s beow
1,000 woud nvove e cessve costs of coecton and payment
923 30 1 33
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06
In appyng the ta , the ouse b and your commttee s b provde for
the consodaton of a of an organzaton s ncome from ts varous unreated
trade or busness actvtes. To do otherwse woud deny to the organzatons
the beneft now en|oyed by ordnary corporatons of offsettng the osses on one
venture aganst the gans on another.
The ta on unreated busness ncome does not appy to dvdends, nterest,
royates, and rents (other than certan rents on property acqured wth bor-
rowed funds). The ouse report ndcated that for ths purpose the term
royates woud, of course, ncude overrdng royates. Your commttee has
amended the b to ncude overrdng royates specfcay n the term royates
and to make t cear that royates may be measured by producton or by gross
or net ncome from the property.
The ouse b aso provded that the ta on unreated busness ncome dd
not appy to gans or osses from the sae of rea property. Your commttee s
b broadens ths somewhat to e cude gans or osses from the sae of any
property (ncudng standng tmber) other than stock n trade, property hed
for sae to customers, or tmber cut by the organzaton.
Dvdends, nterest, royates, most rents, capta gans nnd osses, and smar
tems are e cuded from the base of the ta on unreated ncome because your
commttee beeves that they are passve n character and are not key to
resut n serous competton for ta abe busnesses havng smar ncome.
Moreover, nvestment-producng ncomes of these tvpes have ong been recognzed
as a proper source of revenue for educatona and chartabe organzatons and
trusts.
(2) ease-back ncome
s mped by ts name, a ease-back nvoves the purchase of a property by
a ta -e empt organzaton, and the easng of the property, usuay to the am
busness from whch the property was purchased. In the eary years of Its
use the devce was apped amost e cusvey to the purchase of reta store
propertes. Currenty t aso s beng used for the purchase of other types of
rea property.
In many cases the e empt organzaton, n buyng the property, does not us.
ts own funds to make the payment, but borrows the purchase prce and pay
off the oan pus the nterest charges thereon by appyng part or a of the
renta ncome receved for a perod of years to ths purpose. Thus, the e empt
organzaton, athough nvestng tte or nothng n the venture, obtans after
a perod of years an unencumbered tte to the property.
The purchase and ease-back arrangement apparenty s of recent orgn
Nevertheess, t has aready become bg busness and a recent wrter has
characterzed t as the most noteworthy fnanca devce of the present century.
It was reported that one rea-estate broker had competed ease-back saes
snce the war totang 0,000,000 nnd had authorzatons from appro matey 0
Insttutons for the purchase of an addtona 100,000,000 worth of proptrty
under ths type of arrangement.
There are three prncpa ob|ectons to the ease-back arrangements where
borrowed funds are used. Frst, the ta -e empt organzaton s not merey
tryng to fnd a means of nvestng ts own funds at an adequate rate of return
but s obvousy tradng on Its e empton, snce the ony contrbuton t makes
to the sae and ease s ts ta e empton. Therefore, t appears reasonabe to
beeve that the ony reason why t receves the property at no e pense to tsef
Is the fact that t pays no ncome ta on the rentas receved.
The second ob|ecton to the ease-back s that t s atogether concevabe that
f ts use s not checked, e empt organzatons n the not too dstant future
may owu the great buk of the commerca and ndustra rea estate n the
country. Ths, of course, woud ower drastcay the renta ncome ncuded
In the corporate and ndvdua ncome ta bases. The fact that under present
aw an e empt nsttuton need not use any of ts own funds n acqurng
property through ease-backs borrowed funds may represent 100 percent of the
purchase prce Indcates that there s no mt to the property an e empt
nsttuton may acqure n ths manner. Such acqustons are not n any way
mted by the funds avaabe for nvestment on the part of the e empt nsttu-
ton. Ths e pans why partcuar attenton shoud be gven to ease-backs
whch nvove the use of borrowed funds. Where an e empt organzaton uaea
ts own funds, e panson of ts property hodngs through the ease-back devce
must necessary proceed at a much sower pace.
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07
thrd reason for proposng the ta aton of ease-backs Is the possbty
whch e sts n each case that the e empt organzaton has n effect sod part
of ts e empton. Ths can occur ether by the e empt organzaton payng a
hgher prce for the property or by chargng ower rentas than a ta abe busness
coud charge. Proof, of course, s dffcut to obtan because the purchase prce,
or renta charge whch a ta abe busness woud agree to pay, s unknown.
In the case of ordnary nvestments there s no reason why an e empt organ-
zaton coud be e pected to make an offer whch woud be much, f any, better
than that whch woud be made by a ta abe busness. owever, In the case
of the ease-back arrangements the seers seem to take the poston that they
w not se at a uness they receve better terms than a ta abe busness can
offer, and the e empt organzaton, because of ts ta -free status, can afford to
pay the hgher prce and st make a proft on the transacton. Ths s especay
key to occur where the e empt organzaton s presented an arrangement whch
does not requre the commtment of any oZ ts own funds.
The ouse b and your commttee s b woud resove ths aspect of the ease-
back probem by ta ng, as unreated busness ncome, certan ncome receved
from the ease of rea property and persona property eased n connecton wth
t The organzatons covered by ths porton of the b are the same ones whch
are sub|ected to ta on ther other unreated busness Income.
Under the ouse b the ta appes ony when the property owned by the
organzaton s eased for a perod of years or more, or when the perod of the
ease pus optons s 6 years or more. Your commttee s b makes ony a sght
modfcaton In ths. The easea to whch It woud appy are eases of more than
years, snce It was brought to the attenton of the commttee that many short-
term eases are for as many as years. Under both bs the amount of rents
Incuded n gross ncome s restrcted to the same proporton of the rents as the
borrowed funds used to fnance the purchase or mprovement of the ncome-pro-
ducng property bear to the ad|usted bass of such property. Ths restrcts the
ta to the ncome whch does not resut from a smpe nvestment of the trust or
organzaton s capta funds, and emnates the possbty that the ta -e empt
organzaton w use Its e empton aone as a means of acqurng property.
The ta appes not ony to cases where the vendor and the essee are the same
person but aso to those where they are not. ence, the ta w appy n cases
whch do not conform strcty wth the ease-back pan but whch rase the same
probem of unfar competton whch the ease-back tsef produces.
In addton to the amendment aready mentoned, your commttee s b makes
four substantve changes n the ouse ease-back provson. of these dea
wth mertorous e cusons from the appcaton of ths ta . The frst e cudes
from the ta on ease-backs reated eases even though the essee s a ta abe
organzaton. Reated s defned n a smar fashon as n the case of a re-
ated trade or busness and s, for e ampe, ntended to e cude from the app-
caton of ths ta eases by ta -e empt hosptas of part of the hosptas to doc-
tors assocatons to use as cncs. It s beeved that eases of ths type are
entered nto prmary to further the purpose of the e empt organzaton rather
than to gan speca benefts from ta e empton.
The second of these e cusons reates to property whch was acqured by gft,
bequest, or devse before uy 1,19 0, and at the tme of acquston was aready
sub|ect to both a mortgage and a ease. Ths e cuson aso appes to nvest-
ment subsdares e empt under secton 101(1 ) where one-thrd of the stock n
the subsdary was acqured by gft and a of the stock was acqured pror to
uy 1, 19 0. In the case of such subsdares ndebtedness Incurred pror to
uy 1, 19 0, or ndebtedness ncurred after such date n mprovng property as
requred by a ease entered nto before uy 1, 19 0, does not come under the
ease-back ta . Ths second e cuson s desgned to omt from the ta base
property whch has aready been acqured by gft, snce t appears unkey that
there was any ntent to avod ta es n these cases.
The thrd e cuson mts the appcaton of the ease-back ta where ony a
part of the property s rented out under ong-term eases. In these cases the
ta s mposed ony f ether of two condtons s present:
(1) the rents derved from ong-term eases represent 0 percent or more of
the tota renta payments receved, or the space occuped by such
easehoders represents 0 percent or more of the rented area, or
(2) the renta payments derved from any snge ong-term ease-hoder
represent 10 percent or more o the tota rents or the space occuped
by any snge ong-term easehoder represents 10 percent or more of
the area rented out
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Thus, no ta woud be mposed where a substanta part of the property s
rented out on a short-term bass, and where the ong-term eases whch do
e st are spread out among reatvey numerous easehoders. It s not beeved
that such arrangements represent an attempt to trade on ta e empton.
The fourth e cuson provded by your commttee s b reates to cases
where an e empt organzaton has borrowed funds to bud a budng prmary
desgned for ts own use, but has e tra space whch t desres to rent out under
ong-term eases. Your commttee s b e cudes such eases from the appca-
ton of the ease-back ta . In such cases ta advantages ceary are not the
prncpa reason for acqurng the budng.
( ) PU LICIZING INST D OF T ING CCUMUL T D IN STM NT INCOM
The ouse b woud sub|ect to ta , wth specfed e ceptons, that part of the
nvestment ncome of certan secton 101(6) organzatons whch s not pad out
on or before the 1 th day of the thrd month foowng the cose of the ta abe
year n whch the ncome s receved. The foowng secton 101 (6) organzatons
woud be sub|ect to ta on ther accumuated nvestment ncome under the ouse
b: (1) a trusts other than certan speca trusts whch, by ther terms, are re-
qured to dstrbute a ther ncome and corpus wthn years after ther crea-
ton: and (2) a other secton 101(6) organzatons e cept (a) regous or-
ganzatons, (6) organzatons operated, supervsed, controed or prncpay
supported by regous organzatons, (c) schoos and coeges wth estabshed
facutes and student bodes n attendance, (d) and organzatons supported by
ether the genera pubc or the Government. Secton 101(1 ) organzatons
woud be ta abe on ther accumuated nvestment ncome ony f payabe to
secton 101(G) organzatons ta abe on ther accumuated nvestment ncome.
The nuse b woud aso, wth certan e ceptons, deny trusts the chartabe
etc., deducton under secton 162(a) f they do not dstrbute the ncome reserved
for chartabe, etc., purposes wthn 2 months after the end of ther ta abe
years. The ta (or dena of a deducton In the case of trusts comng under
secton 162) under the ouse b woud appy to the porton of the undstrbuted
ncome of these organzatons and trusts whch conssts of nterest, dvdends,
rents, royntes (ncudng overrdng royates) and ncome receved from trusts.
It woud not appy to the unreated busness ncome whch s sub|ect to ta
under other portons of the ouse b and your commttee s b, nor woud t
appy to capta gans.
The ta under the ouse h woud not appy to ncome from property trans-
ferred n trust, sub|ect to mandatory restrctons on ts dstrbuton, pror to
une 1, 19 0. The ouse b aso permtted the accumuaton, ta -free, of Income
from property set asde n trust for a chartabe, etc., purpose under the w of a
decedent. owever, ths ta -free accumuaton woud be mted to a perod of
2 years foowng the date of the decedent s death. thrd e cepton under the
ouse b woud permt organzatons sub|ect to ta on ther accumuated nvest-
ment ncome to set asde ncome wthout ta n speca trusts whkh provde for
e pendture of the funds so set asde and the ncome earned on these fund
wthn years after the trusts are created. Fnay, the ouse b provded
that organzatons and trusts sub|ect to the ta on accumuated nvestment In-
come coud accumuate ta -free an amount equa to 1 year s nvestment Income.
Your commttee has re|ected ths accumuatons ta and substtuted for t
the requrement that Informaton dscosng the e tent of accumuatons must
be made avaabe to the pubc. Your commttee does not queston the contenton
that some organzatons are abusng ther ta -e empt prvege by undesrabe
accumuatons of ncome. owever, wtnesses before, and statements presented
to, your commttee brought out qute ceary that the measure passed by the
ouse was too nfe be and as a resut woud serousy n|ure many worth-
whe educatona and chartabe pro|ects. To menton some probems under the
ouse provson:
(1) foundaton coud not use any of Its Income to endow another or-
ganzaton uness the atter was of a type not sub|ect to the accumuatons
ta .
(2) foundaton coud not set asde funds whch. If subsequenty matched
by another organzaton, woud be spent for some specfc purpose.
(3) Foundatons may fnd that as the resut of a crss, such as a war, they
nro unabe to spend ther funds for a perod of tme for the purposes for
whch they were organzed.
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( ) Funds Irrevocaby sot asde In a -year trust fund as provded by the
ouse b may not be needed at the end of the -year perod for the spet-ttc
pro|ect for whch they were set asde, and
( ) One year s earnngs the accumuatons permtted by the ouse h,
may not be suffcent to even out varatons n the earnngs or needs for funds
of a foundaton.
It s beeved that pubshng nformaton about the accumuatons of these
foundatons and trusts w serve two purposes. Frst, fu pubc Informaton
w encourage dstrbutons. Second, t w revea the e tent of the accumua-
tons probem.
The organzatons requred to fe ths nformaton, whch s to be made ava-
abe to the pubc, ncude a organzatons e empt under secton 101(6) now
requred to fe nformatona returns (Form 900) under secton (f) of the
Code, and aso trusts camng chartabe, etc., deductons under secton 162(a)
of the Code. Ths Incudes a of the organzatons whch under the ouse b
woud be sub|ected to the accumuatons ta .
The nformaton to be requred In the case of a secton 101(6) organzaton s:
1. Its gross Income for the year,
2. ts e penses attrbutabe to such ncome,
3. ts dsbursements out of current Income for ts educatona, chartabe, etc
purpose,
. Its accumuaton of ncome wthn the year,
. ts pror accumuatons of Income.
6. ts dsbursements out of prncpa, and
7. a baance sheet.
Trusts camng chartabe, etc., deductons under secton 162(a) w be re-
qured to submt smar nformaton.
(C) F D R ORG NIZ TIONS
The ouse b provdes that no organzaton operated prmary for the
purpose of carryng on a trade or busness (other than the renta of rea estate)
for proft sha be e empt under secton 101 merey on the grounds that a of
ts profts are payabe to one or more organzatons e empt from ta under ths
secton. Your commttee has accepted ths provson of the ouse b. Ths
amendment -s not ntended to affect the e emptons now provded for farm
cooperatves, subsdares of these cooperatves or nvestment subsdares e empt
under secton 101 (12), (13), and (1 ).
The effect of ths amendment s to prevent the e empton of a trade or busness
organzaton under secton 101 on the grounds that an organzaton actuay
descrbed n secton 101 receves the earnngs from the operatons of the trade
or busness organzaton. In any case t appears cear to your commttee that
such an organzaton s not Itsef carryng out an e empt purpose. Moreover,
t obvousy s n drect competton wth other ta abe busnesses. Ths amend-
ment appes ony wth respect to ta abe years begnnng after December 31,19 0.
Your commttee aso amended the b to provde that e empton sha not
be dened to one of these organzatons wth respect to years pror to anuary
19 1 f such organzaton ws granted e empton n a etter from the ureau
of Interna Revenue, uness subsequenty the e empton was revoked or nqures
were made by the ureau of Interna Revenue reatve to the e empt status |f
the organzaton. Tn any case the e empton may not be dened for perods
pror to such revocaton or nqury. Your commttee s b aso added a provson
that no organzaton whose e empton under secton 101 has not been granted,
questoned or dened pror to the passage of ths b sha be dened e empton
for any perod pror to anuary 1,10 7. on the ground that t s carryng on a trade
or busness for proft. Moreover, the fng of an nformaton return (Form 900)
sha be deemed to be the fng of a return for the purpose of determnng the
3-year perod of mtatons on the assessment of defcences. Organzatons not
requred to fe Form 990 aso are treated for ths purpose as f they had done so.
(D) MODIFIC TION OF OUS ILL PRO ISIONS R L TING TO TR NS CTIONS
PRO I IT D IN T C S OF TRUSTS ND MPT FOUND TIONS
The ouse report Indcates that the Commttee on Ways and Means In studyng
the operatons of educatona and chartabe foundatons and trusts has found
that n a number of cases donors of trusts and foundatons ether have derved,
or at east have had the opportunty to derve, substanta benefts from ther
deangs wth the trusts or foundatons.
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10
It Is ponted out n the ouse report that these benefts to the donors or
trustees can arse n a number of dfferent ways. They may take the form o
seng securtes to, or purchasng securtes from, the trust or foundaton under
condtons whch beneft the donor. They may arse from the borrowng c.f
funds from the e empt organzatons wth the payment of abnormay ow nterest
rates by the donor or the assumpton of abnorma rsk by the e empt organzatons.
They may take the form of the payment of e cessve saares to the donor or a
member of hs famy as an offca of the trust or foundaton, or of renderng
servces on a preferenta bass to the donor or a frm wth whch he s assocate .
To check these abuses the ouse b denes deductons to donors for ncome,
estate, and gft ta purposes of gfts made after une 30, 19 1, uness the nstru-
ment under whch the recpent organzaton s estabshed affrmatvey provdes
that
(1) no part of the organzaton s assets may be oaned to substanta donors
of the organzaton or any of ts offcers or trustees, or any member
of ther fames or to a corporaton controed by them.
(2) ony a reasonabe compensaton for servces actuay rendered may ho
pad to such persons by the organzaton,
(3) the servces of the organzaton may not be made avaabe to such
persons on a preferenta bass,
( ) no substanta part of the assets of the organzaton may bo used to
purchase securtes or other property from such persons; and
( ) no substanta part of the property of the organzaton may be sod to
such persons.
Ths provson woud appy, In genera, ony to gfts made to organzatons
whch, under the ouse b, are made sub|ect to ta on ther accumuated
nvestment ncome. Gfts made to other e empt organzatons such as unver-
stes, regous organzatons, communty chests, and other pubc organzatons
woud not be sub|ect to these restrctons.
The ouse b aso woud deny ncome ta e empton to a trust or founda-
ton (and wth respect to trusts comng under secton 162 woud deny the un-
mted chartabe, etc., deducton, where any of the above rues are voated n
the operaton of the organzaton. These provsons woud be appcabe wth
respect to ta abe years begnnng after December 31,10 0.
our commttee s n sympathy wth the goas sought by the above prov-
sons of the ouse b but beeves they woud be unduy harsh n ther app-
caton. No ob|ecton s seen to engagng n transactons wth donors f these
transactons are carred out at arm s ength. Moreover, many foundatons and
trusts woud fnd t ether mpossbe or very dffcut to stpuate n ther nstru-
ments that they w not ensrase In the specfed transactons even though th v
never have done so and never e pect to do so. Nevertheess, donors to snch
organzatons coud not deduct ther contrbutons under the ncome, estate, or
gft ta es. so an organzaton mght unntentonay voate one of the
requrements, such as payng what mght be hed to be an unreasonabe saary,
and then, when ts return was e amned severa years ater, fnd that t woud
ose ts e empton for the past severa years.
s a resut your commttee has recast the ouse provsons to remove ther
harshness. Prohbted transactons have been redefned as ncudng ony trans-
actons n whch an organzaton
(1) ends any part of ts ncome or corpus wthout adequate securty or at
an unreasonabe rate of nterest to donors, members of ther fames,
or a corporaton whch they contro.
(2) pays any compensaton to such persons other than a reasonabe aow-
ance for persona servces actuay rendered,
(3) makes any part of ts servces avaabe to such persons on preferenta
bass,
( ) makes any substanta purchase of securtes or other property from
such persons wthout adequate consderaton,
( ) ses any substanta part of ts securtes or other property to such
persons wthout adequate consderaton, or
(6) engages n any other transacton whch resuts In a substanta dver-
son of Its ncome or corpus to such persons.
It Is mportant to note In the ahove stng of prohbted transactons that under
your commttee s b the prohbted transactons are restrcted to transactons
n whch a donor (ncudng a testator) or a member of hs famy s key to
gan some speca beneft from the transacton. Moreover, these prohbted
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transactons do not appy to transactons between the e empt organzaton and
ts trustees, drectors, or offcers.
empton (or the unmted chartabe deducton under secton 162), a
dened under your commttee s b In the case of an organzaton or trust par-
tcpatng n a prohbted transacton ony wth respect to years subsequent to
the year n whch t receves notfcaton of a voaton e cept where the pro-
hbted transacton was entered Into wth the purpose of dvertng funds nvov-
ng a substanta proporton of the assets or ncome of the organzaton. In
ths atter case e empton may be dened retroactvey. Provson aso Is made
for one of these organzatons or trusts whch has engaged n a prohbted
transacton to regan ts e empt status (or the unmted chartabe, etc.,
deducton under secton 162) by presentng nformaton to the Commssoner of
Interna Revenue whch satsfes hm that t s unkey to agan partcpate n
one of these transactons.
For deducton of contrbutons to donors, your commttee s b ony requres
that the organzaton or trust be e empt at the tme the contrbuton Is made
(stpuaton n nstruments s not requred), uness the donors (or ther fam-
es) personay are nvoved n one of these transactons for the purpose of
dvertng funds from the organzaton and such transacton nvoves a substan-
ta part of the assets or ncome of the organzaton.
Under your commttee s b the provsons dscussed here ony affect trusts
camng chartabe deductons under secton 162(a) and organzatons e empt
under secton 101(6) other than
(1) Regous organzatons,
(2) The contrbuton conssts of stock n a corporaton In whch the con-
(3) Organzatons whch receve a substanta porton of ther support
from a government or drecty or ndrecty from the genera pubc (e cud-
ng n such computaton ncome receved by the organzaton n carryng on
ts e empt functon),
( ) Organzatons whch are operated or prncpay supported by re-
gous organzatons, and
( ) Organzatons provdng medca or hospta care or medca educa-
ton or medca research.
The organzatons e cuded from the appcaton of these provsons are n
genera what mght be caed pubc organzatons and because of ths
characterstc are not beeved key to become nvoved In any of these
prohbted transactons.
( ) LIMIN TION OF ODS PRO ISION PR NTING T US OF TROSTS
ND FOUND TIONS TO R T IN CONTROL OF F MILY USIN SS
The ouse b provded that no chartabe deducton woud be aowed to a
contrbutor for ncome, estate, and gft ta purposes f both of the foowng
condtons were present:
(1) Th contrbutor, or members of hs famy, have votng contro of the
organzaton to whch the contrbuton s made, and
(2) The contrbuton conssts of stock n a corporaton n whch the con-
trbutor together wth members of hs famy contro 0 percent or more of
the votng stock or 0 percent or more of th tota stock, countng the stock
hed by ta -e empt organzatons whch the famy contro.
The ouse report ponted out that under the b both of these condtons must
be present before the deducton woud be dened. deducton woud be granted
wth respect to a gft of stock n a famy busness gven to an organzaton whch
the famy does not contro: and a deducton woud be granted f stock n a
famy busness were sod nnd the proceeds gven to a chartabe organzaton
whch the famy dd contro.
In the ouse b the term votng contro of the organzaton that Is, the
chartabe organzaton ncuded those cases where the famy has the power to
f vacances. so, the proposa provded that f any rght s retaned n the
property transferred, other than a rght n the ncome of the property, ths s to
be consdered the same as controng the organzaton.
Tour commttee has re|ected ths provson entrey.
Th ouse report e pressed the vew that dena of deductons n such cases
woud smpy be a recognton of the fact that where such contro e sts no
competed gft for whch a deducton shoud be granted has been made. In the
opnon of your commttee ths overooks the fact that the donor or hs famy
must use the property set asde In the foundaton or trust for chartabe, etc.,
purposes rather than for persona purposes.
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The vew was aso e pressed In the ouse report that as a resut of aowng
these deductons there was avodance of ncome, estate, and gft-ta deductons.
Outweghng ths n the vew of your commttee s the fact that f these deductons
ar| not aowed st arger funds woud be ost to prvate charty.
I . Ta on Lfe Insurance Co panes
Tte I of your commttee s b amends the formua used to determne the
ta abe net ncome of fe nsurance companes. Ths acton s ntended to
termnate the ta e empt status of the fe Insurance companes whch resuts
from the operaton of the formua contaned r. e stng aw. and to permt the
study necessary to deveop a permanent souton to the probem of the adequate
ta aton of such companes. The proposed formua s the same as that contaned
In the ouse b and n ouse ont Resouton 37 whch was retred by your
commttee on pr 10, 10 0. (See S. ept. No. 1 3 of the Sst Cong., 2d sess.
Under your commttee s b ths formua Is apped to the years 10 9 and 19 0.
Under the ouse b t s apped aso to 10 7 and 19 .
Your commttee does not beeve t advsabe to appy the formua retroactvey
to the years 19 7 and 10 . The returns for those years were fed seme tme
ago; the books cf the companes have been cosed : and n some cases no reserves
vere estabshed to cover the Federa ta abty. Testmony before your com-
mttee n ts hearngs on ouse ont Resouton 371 dscosed that some com-
panes had made commtments n those years reynr on the fact that no Federa
ncome ta was payabe und:T e stng aw. ence, the payment of a ta now
woud mpose a hardshp upon the pocyhoders
The commttee beeves that the ;onsttutona:ty of a ta mposed at ths tme
on 10 7 and 10 ncomes s at east debatabe. It s evdent that some companes
w contest the vadty of such a ta and others may be forced to do so through
acton of ther pocyhoders.
ven f your commttee were of the opnon that a ta eved now on 10 7 and
19 ncomes woud be uphed by the Supreme Court, t woud st oppose retro-
actve ta aton e tendng over such a ong perod of tme. The mposton of a
ta on 10 7 and 10 S ncomes at ths ate date woud be nconsstent wth funda-
menta p bc pocy whch requres that a ta payer s obgaton to bs Govern-
ment be ma3e defnte and certan at the tme the ta s due.
Ic attemptng to ustfy the 10 7 am 19 ta es the ouse report stresses the
hstory of the premnary negotaton- between the Treasury D partment and
the representatves of the two assocatons of fe-nsurnnce companes, whch
have been n process ever snce the autumn of 19 7. owever, your commttee
does not regan. the e stence of these negotatons as puttng the nsurance com-
panes on notce that the Congress mnrht adopt retroactve egsaton e tendng
as far back as 19 7 and 10 . In fact some of the wtnesses before your commttee
testfed that they had no notce that such retroactve egsaton was contem-
pated, even by the Treasury Department, unt ugust 19 9.
On the other hand, the fe-nsurance ccmpan s have been on notce that a
revson of the formua was beng consdered by the Congress for the year 1919.
a east snce October 10, 19 9, the date ouse ont Resouton 371 was ntro-
duced. Ths date s over 2 months befor. the end of the caendar year 19 9
and r months before the due date for fng 19 9 returns.
It s estmated that the tota addtona revenue to be derved from your
commttee s b w e appro matey 122,000,000. Of ths amount 2,000,000
w be derved from the |var 19 0 and 0,000,000 from the year 19 0.
. Other Rkvenue-Incbeasno Changes n the Income Ta es
( ) M SUR S INCLUD D IN T FIN NC COMMITT ILL
(1) P MIUMS ON T - MPT ONDS F.I ) by deaers
Recent bond ssues by some States and muncpates have had pecuar
characterstcs; they ncude severa seres maturng wthn short perods but
wth e traordnary hgh nterest rates. n e ampe s to be found n a
recent ssue of bonds by a State, the aggregate obgaton beng for 0,000,000.
The frst fve seres of those bonds, requrng payment by the State of 1,600,000
annuay n 19 2 to 10 0, had an nterest rate of percent, athough they
were Intended to yed from 0.0 to 1.20 percent; whereas bonds maturng n
19 7 to 197 , Intended to yed from 1.20 to 2 percent, had an Interest rate of
1 percent. Smary, a mdwestern cty recenty sod a group of sera bonds.
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those maturng from 10 1 to 19 havng an nterest rate of 6 percent, whereas
those maturng from 10 to 1977 had an nterest rate of ony 2 percent.
person who acqures such a short-term, hgh-nterest bond, whether drecty
from the State or muncpaty or Indrecty from a deaer or another person,
must pay a very hgh premum. To acqure a bond whch woud pay nterest of
60 per year and 1,000 at maturty years hence the purchaser woud be requred
to pay about 1,2 0.
In the absence of speca statutory provsons, a person who hed such a bond
for years woud receve 300 of Interest, whch woud t e cudabe from gross
ncome and thus e empt from ta . ut snce he had pad 1,2 0 and receved
ony 1,000 at maturty he woud have a oss of 2 0, whch coud be deducted
from ordnary Income, If the bond were hed for sae to customers, or deducted
from capta gans f the bond were hed by an nvestor. Of course, such a
oss s not a rea oss at a, snce the premum of 2 0 s an offset to the e -
traordnary hgh nterest. ctuay, the yed on the bond over the years s,
roughy, 300 ess 2 0 or 0, whch s the equvaent of 1 percent per year on
the par vaue; or, aowng for semannua recoupments of part of the premum,
there s a yed of about 1 percent per year on the actua nvestment, whch s a
norma yed on such short-term muncpa bonds.
To avod the nequtabe ta effects whch woud resut from the deducton
of such artfca osses, sectons 12 and 113(b) (1) ) were added to the
Interna Itevenue Code by the Revenue ct of 19 2. Wth respect to State and
muncpa bonds, n the case of an nvestor, these provsons requre the amortza-
ton of any premum pad. Thus, contnung the ustraton, the bass of a bond
acqured for 1,2 0, maturng n years, woud be reduced 0 per year, so
that f t were sod for 1,200 at the end of 1 year, or redeemed for 1,000 at
the end of years, no capta oss woud resut. Snce the nterest on such
bonds s e empt from ta , amounts of annua amortzaton of premum are
not deductbe.
Under e stng aw, however, deaers n securtes, whether ndvduas, partner-
shps, or corporatons, are not requred to amortze such bond premums. Sec-
ton 12 (d) specfcay e cudes bonds whch consttute stock n trade of the
ta payer or any such obgaton of a knd whch woud propery be ncuded n
the nventory of the ta payer f on hand at the cose of the ta abe year, or
any such obgaton h r by the ta payer prmary for sae to customers n the
ordnary course of hs trade or busness. Thus, a deaer n securtes who n-
ventores hs securtes on a cost bass or who does not mantan nventores
can deduct as a oss the dfference between the cost of such bonds and ther
seng prce or the amount receved at maturty. Deaers who nventory ther
securtes at market prces automatcay receve annua deductons of portons
of the premums, snce an approprate amortzaton s refected n the market
prces shown n ther nventores, or n the seng prces f the bonds are sod
or mature durng the year. It appears that such artfca osses, n substanta
amounts, are avaed of by deaers n securtes generay, and partcuary by
members of underwrtng syndcates and the securty-deaer affates of arge
banks, who have transactons amountng to mons of doars n State and
muncpa bonds, to reduce ther ta abty on other ncome.
Secton 203 of your commttee s b s ntended to prevent the deducton of
such artfca osses, wthout unduy compcatng the accountng procedures of
deaers. Wth respect to State and muncpa bonds whch have been hed more
than 30 days and whch have a maturty or ca date not more than years from
the date of acquston by the deaer, the premum pad must be amortzed. In
the case of deaers who carry ther bonds at cost, ths amortzaton w reduce
the bass so as to emnate an artfca oss n the year of the sae or other
dsposton of the bond, and n the case of deaers who carry ther bonds at
market prces the amount of the amortzaton for any year must be used to
reduce the cost of saes for that year.
In the ouse h ths provson was effectve for ta abe years begnnng after
December 31, 19 9. Wtnesses who appeared at your commttee s hearngs
ponted out that the use of ths effectve date woud requre e tensve and
costy ree amnaton of transactons whch occurred before notce was gven of
a change n the aw by the enactment of the ouse b. Therefore, your com-
mttee has amended the b so as to requre the amortzaton of the premum on
a securtes purchased on or after uy 1, 19 0, but n the case of securtes
hed on une 30, 19 0. such amortzaton w be requred ony wth respect to
ta abe years begnnng after that date.
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It s estmated that n the ong run the revenues under ths changed procedure
w be about 20 mon hgher annuay than they woud be f e stng aw
were contnued.
(2) DI ID NDS-R C I D CR DIT FO DISTRI UTIONS IN IND
Under secton 26(b) of the Code, a corporaton s aowed to deduct from net
Income a dvdends-receved credt equa to percent of the amount t receves
from other domestc corporatons as dvdends. The purpose of ths credt Is to
prevent ncome whch has been ta ed n the hands of the corporaton earnng t
from beng ta ed n fu agan n the hands of another corporaton whch receves
ths ncome n the form of a dvdend. owever, a corporaton whch receves a
dvdend n knd may be aowed a dvdends-receved credt of percent of the
far market vaue of the property receved, even though the property receved as
a dvdend n knd has apprecated n vaue n the hands of the frst corporaton.
It has been contended that no ncome ta abty s ncurred f the stockhoder
corporaton then ses the property, because t hns a bass n the hands of the
stockhoder corporaton equa to ts far market vaue at the tme of ts dstr-
buton as a dvdend. The resut may be a oophoe n the dvdends-receved-
credt provson whch may aow a subsdary corporaton and the corporaton
whch hods ts stock to dspose of property (by n dvdend n knd and subsequent
sae) wth payment of an Income ta on ony 1 percent of ts vaue even tbor- h
the proft reazed on the dsposton of the property may greaty e ceed 1 percent
of the property s market vaue at that tme.
Secton 122(a) of your commttee s b deas wth ths probem by provdng
that the dvdends-receved credt sha not e ceed percent of the ad|usted
bass of the dstrbuted property n the hands of the dstrbutng corporaton. If
gan s recognzed to the atter corporaton as a resut of the dstrbuton, the
dvdends-receved credt woud be aowed for percent of the ad|usted bass of
the property pus the gan recognzed to the dstrbutng corporaton.
Ths amendment s not ntended to affect any Interpretaton of e stng aw
wth respect to a dvdend n knd.
Ths mtaton on the dvdends-receved credt w appy ony to dvdends
receved after the date of enactment of ths b. Under the ouse b, the
change woud be appcabe to dvdends receved after D ember 31, 10 9.
It s estmated that ths provson w ncrease revenues by about 0 mon
a year.
(3) STOC RFD fPTION Y SU SIDI RY CORPOR TIONS
Secton 11 (g) of the Code provdes that where a corporaton redeems ts
stock n such a manner as to make the redempton essentay equvaent to the
dstrbuton of a ta abe dvdend, the amount dstrbuted n redempton of the
stock sha be treated as a ta abe dvdend to the e tent that t represents a
dstrbuton of earnngs or profts. Such a provson was necessary to prevent
stockhoders from drawng off accumuated corporate profts through the devce
of seng part of ther stock to the corporaton.
The recent case of Commssoner v. Wanamaker (17 Fed. (2d) 10), however,
has reveaed a oophoe through whch ths resut can be accompshed wthout
comng wthn the scope of secton 11 (g). Secton 11 (g) was hed n that case
to be appcabe ony where a corporaton cances or redeems ts own stock. It
was hed not to be appcabe when a subsdary corporaton purchased the stock
of ts parent corporaton from the sharehoders of the parent, even thouah the
effect was, n fact, practcay dentca wth that whch woud have resuted f
the parent had Itsef purchased the stock.
If the stockhoders of a corporaton whch owns a the stock of a subsdary
corporaton obtan cash from that subsdary, n effect they have receved a dv-
dend to the same e tent as woud be the case f the cash had been pad by the
subsdary to the parent corporaton and had then been dstrbuted by the parent
to the stockhoders. nd where such stockhoders se part of ther stock n
the parent corporaton to the subsdary they nevertheess retan ownershp and
contro of both corporatons, snce the sod stock s one of the assets whch the
parent corporaton owns by vrtue of ts possesson of a the stock of the subsd-
ary. Therefore, secton 209 of your commttee s b amends secton 11 (g) of
the Code, so as to cover ndrect redempton of shares In a parent corporaton
through purchases by ts subsdares.
The ouse WU aso e tended the appcaton of secton 11 (g) to cases n whch
both the ssung corporaton and the acqurng corporaton are controed drecty
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or Indrecty by the same Interests. Tour commttee emnated ths provson
because In ths case t s not cear that the effect s the same as a redempton of
stock by the ssung corporaton.
Ths amendment w appy ony to amounts receved after the date of enact-
ment. Under the ouse b the change Is apped to amounts receved after
December 31, 10 0.
Tour commttee s amendment w yed a sma amount of addtona revenue,
and prevent substanta oss through the utzaton of ths oophoe n future
years.
( ) C PIT L G INS TR TM NT OF INCOM FROM OO S ND OT R RTISTIC WOR S
When a person s n the professon of wrtng books, or creatng other artstc
works, hs ncome from the sae of the products of s work s ta ed as ordnary
ncome. Ths s true whether e receves royates from the use of hs products
or ses them outrght, snce the products of hs work are hed by hm prmary
for sae to customers n the ordnary course of hs rade or busness and are,
therefore, not treated as capta assets.
If an amateur receves royates on hs botk or other artstc work, they are
treated as ordnary ncome, but f he hods hs book or other artstc work for 6
months (3 months under ths b) and then ses t outrght he can ava hmsef
of a oophoe whch treats such a sae as the sae of a capta asset, not hed
prmary for sae to customers n the ordnary course of the ta payer s trade or
busness. s n resut the ta payer receves ong-term capta gan treatment on
the product of hs persona effort.
Secton 211 (a) and (b) of your commttee s b provdes that when any per-
son ses a book or other artstc work whch s the product of hs persona ffort
hs ncome from the sae s ta ed as ordnary ncome. e woud, of course, be
abe to average hs ncome from such work f hs actvtes covered a perod of
36 months or more, to the e tent permtted by secton 107(b) of the Code. To
avod a oophoe a gan receved by a person who acqured the book or other ar-
tstc work as a gft from the creator s aso ta ed on ordnary ncome.
Yonr commttee s amendment s appcabe to ta abe years begnnng after the
date of enactment.
It s estmated that ths amendment may yed neary 1 mon annuay n
addtona revenue.
The ouse b aso woud have treated as ordnary ncome gans from the sae
of an nventon or patent by the occasona nventor. Your commttee beeves
that the desrabty of fosterng the work of such nventors outweghs the sma
amount of addtona revenue whch mght be obtaned under the ouse b, and
therefore the words nventon, patent, and desgn have been emnated
from ths secton of the b.
(6) S ORT S L S OF C PIT L SS ST
t the present tm_- t s possbe for an Investor n stocks to reaze a capta
gan n ess than 6 months and obtan ong-term capta gan ta treatment
on t by makng a short sae, whch w assure hs gan on hs orgna nvest-
ment, and then defer cosng out the short sae unt he has hed hs orgna
stock nvestment for more than 6 months. smar resut may be obtaned
where the nta transacton s a short sae.
Much the same devce may be used by a ta payer to avod ta on hs profts
from specuaton n commodty futures. Reguatons of the Department of
grcuture prohbt a broker from carryng for a customer smutaneous ong
and short postons n the same commodty, the same future perod, and the
same market. ta payer may acheve substantay the same resut, however,
by keepng the smutaneous ons and short postons n two dfferent markets.
Your commttee s b esewhere (secton 211(c)) provdes that capta gans
and osses w be deemed ong-term gans and osses f the property sod or
e changed has been hed more than 3 months. Ths woud ncrease the pos-
sbty of utzng the short-sae devce as a method of ta avodance.
Secton 212 of your commttee s b provdes, n effect, that where a sae
of substantay dentca property s made, and thereafter smutaneous ong
and short postons are mantaned so as to gve an actua short-term trans-
acton the appearance of a ong-term transacton, gans and osses sha be
treated for ta purposes as short-term gan;; or osses. On the other hand, where
securtes have been hed for more than 3 months, and thereafter a short sae
s made, any oss on the short sae sha be treated as a ong-term oss, offsettng
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the ong-term gan so thnt 0 percent of both w be taken Into account, and
not as a short-term oss 100 percent of whch woud be taken Into account.
These rues as appy where the ta payer buys and hs spouse ses substantay
Identca property, or vce versa.
Whether a short sae Is of substantay dentca property w depend on
the crcumstances at the tme of the short sae. Securtes of one company w
rot be regarded as substantay dentca wth securtes of another company,
e cept that when ssued securtes of a successor corporaton may be substan-
tay dentca wth the securtes to be e changed for them n a reorganzaton.
It s specfcay provded that a commodty future requrng devery In one
caendar month w not be regarded as substantay Identca to a commodty
future requrng devery In a dfferent caendar month.
The provsons of ths secton do not appy to stradde or arbtrage trans-
actons u commodty futures where ong and short contracts are e ecuted
on the same day and both are cosed out on the same dny.
person who owns stock may buy a put whch enttes hm to se hs stock
at any tme wthn, for e ampe, 30 days at a specfed prce. If the market
prce of the stock goer up he w, of course, se at the mnrket prce rather than
e ercse the put opton he has mrchased. ut f the market prce goes down
he s assured of gettng the prce specfed n the put opton he has |ought.
Therefore, a person who buys a put s assured that he w reaze the ap-
precaton n vaue of hs stock |ust as though he had made a short sae. For
ths reason a short sae s defned as ncudng a put, or opton to se at a
f ed prce.
The provsons of ths secton woud appy to ta nbe years begnnng after
the date of enactment of the ct, but not to short saes made before such ate.
It s estmated that the new procedure w resut n about 2 mon a year
n addtona revenue.
(6) COLL PSI L CORPOR TIONS
The coapsbe corporaton s a devce whch has been used n an attempt to
convert ordnary ncome nto ong-term capta gan by use of a temporary cor-
poraton. The devce has been used prncpay n the moton-pcture ndustry.
egtmate corporaton engaged n the busness of producng moton pctures
woud ordnary pay the corporate ncome ta on ts net Income and ts share-
hoders woud pay ordnary ncome ta on ther dvdends from the corpora-
ton. Producers have tred to avod these resuts by organzng separate cor-
poratons for each moton pcture. Upon competon of the fm but pror to
the reazaton by the corporaton of any ncome therefrom, the corporaton
s qudated and the assets are dstrbuted. In such a case, the corporaton pays
no ta , camng thnt t has reazed no ncome. The producer pays ta upon
the dfference between hs cost and the far mnrket vaue of the assets so ds-
trbuted: but such gan s reported as ong-term capta gan wth a ma mum
effectve rate of 2 percent. fter qudaton, the far market vaue of the
reeased producton s ordnary amortzed aganst the ncome from the fm
as t s receved. If the ncome from the fm does not e ceed such far market
vaue, there s no further ta .
In addton to the moton-pcture ndustry, It s understood that the coapsbe-
corporaton devce has aso been used n the budng-constructon trade by
contractors who have corporatons construct budngs for sae and then qudure
the corporatons and se the budngs as ndvduas.
Under secton 213 of your commttee s b the gan reazed from the sae
or e change (ncudng qudaton) of stock n a coapsbe corporaton w
be treated as ordnary ncome for ta purposes, n the case of a stockhoder
ownng 10 percent or more of the corporaton s stock, f the gan reazed from
the sae or e change of the stock durng the year s more than 70 percent at-
trbutabe to property produced by the corporaton, and the gan s reazed
wthn 3 years foowng the competon of the manufacture, constructon, or
producton of the property.
Ths provson s appcabe ony to gans reazed after December 31, 1
but no nference sha be drawn from the amendment wth respect to gans
reazed pror to 19 0.
It s estmated that the cosng of the coapsbe-corporaton oophoe n
r.uuce appro matey 3 mon addtona revenue annuay.
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(T) C PIT L G INS OF NONR SID NT LI NS
Under e stng aw capta Rans of nonresdent aen ndvduas not engaged
In trade or busness In the Unted States are e empt from ncome ta . number
of cases have been brought to the attenton of your commttee n whch such
nonresdent aens are escapng the capta-gans tu , athough n fact they are
n ths country for consderabe perods and carry out transactons n ths coun-
try by whch capta gans are reazed.
Secton 21 of your commttee s b deas wth ths oophoe by mposng a
ta on the net amount of capta gans derved from sources wthn the Unted
States by a nonresdent aen Indvdua not engaged n trade or busness n the
Unted States, but temporary present theren. If such nonresdent aen has
been wthn ths country for ess than O days durng the ta abe year, the ta
appes ony to such gans as were reazed durng hs presence n the Unted
States. If he has been present 00 days or more, the ta appes to a such gans
reazed on transactons carred out wthn the Unted States personay or
through an agent durng the entre ta abe year, whether or not he was present
n the Unted States at the tme the saes or e changes occurred.
Generay, the rate mposed on such gans w be 30 percent, whch s the rate
apped under e stng aw to nonresdent aen ndvduas not engaged n trade
or busness n the Unted States on ther other ncome arsng from sources
wthn the Unted States. The 30 percent rate Is somewhat hgher than the
ma mum rate now apped to ong-term capta gans, but, of course, we
beow the rates frequenty appcabe to short-term capta gans. Where the
ta payer s gross Income from sources wthn the Unted States s 1 , 00 or
more, the ta w be 30 percent or the amount cacuated under the reguar
ncome ta rates, whchever s the arger.
Ths amendment, ke other sectons of your commttee s b, Is mted by the
genera rue set out n secton 213 of the b, that
No amendment made by ths ct sha appy n any case where ts appcaton
woud be contrary to any treaty obgaton of the Unted States.
Ths amendment w appy ony wth respect to gans reazed after December
31. 19 0.
It s antcpated that ths amendment w ncrease the revenues by about
1 mon annuay.
( ) MORTIZ TION OF PR MIUM ON CON TI I. ONDS
Under secton 12 of the Code the purchaser of a ta abe bond who pays a prce
n e cess of the amount recoverabe at maturty s permtted a deducton whch
w amortze the premum pad. If the bond s noncanbe, the premum s
wrtten off over the fe of the securty. If the bond s caabe, the premum s
wrtten off over the perod between the date of purchase and the earest ca
date.
Secton 12 was ntended prmary to dea wth the case where the premum
was pad because the securty bore a stated rate of nterest hgher than that
prevang n the current market for securtes of a ke rsk and a smar fe.
quty requred the aowance of a deducton aganst ordnary ncome n cases
of ths sort.
owever, a premum aso may arse because the securty purchased s con-
vertbe nto another type of securty. ere the premum pad may represent
nothng more or ess than a porton of the prce pad for the securty nto
whch the bond s convertbe, and the aowance of n deducton for a premum
of ths type s no more |ustfabe than t woud be for the baance of the cost
of the nvestment. Nevertheess, snce no dstncton was made n the draftng
of secton 12 of the Code between premums based upon the payment of an
unusuay hgh rate of nterest and premums based upon a converson prvege,
doubt arose concernng the avaabty of the amortzaton prvege wth refer-
ence to premums of the atter type. Ths queston was resoved by the Unted
States Supreme Court n the ore and Shoong cases, decded on une , 10 0.
These cases nvoved the purchase of bonds at a substanta premum whch
was obvousy based prmary upon the prvege of converson nto common
stock. Snce the securtes were caabe wthn the ta abe year, the ta payer s
deducton of the dfference between the purchase prce and the ca prce n the
ta abe year when the bonds were purchased was sustaned by the court. Ths
resuts n a oophoe snce the effect s to grant the ta payer a deducton aganst
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ordnary Income equa to the amount of the premum pad for the converson
prvege, and the Government recoups ts oss on ths account, f at a, ony
to the e tent that the ad|ustment n the bass of the securty obtaned as a resut
of the converson eads to an addtona capta gans ta at some ater date.
Secton 219 of your commttee s b emnates ths oophoe by stpuatng
that the prvege of amortzng a bond premum aowed under secton 12 of the
Code w not appy to that porton of the premum on a convertbe bond whch
s attrbutabe to the converson features of the bond.
Wth respect to securtes acqured on or before une 1 . 19 0, the amendment
appes to ta abe years begnnng after that date. For nstance, f a convertbe
bond purchased on anuary 2, 19 0. matures on anuary 2, 19 , wth no pro-
vson for earer ca, one-ffth of the actua premum pad coud be amortzed
n 19 0 by a ta payer on the caendar year bass, but ony that part of the
premum not due to the converson prvege coud be amortzed over the four
subsequent years. owever, wth respect to bonds acqured after une 1 , 19 0.
ony that part of the premum not attrbutabe to the converson prvege may
be amortzed n 19 0 or subsequenty.
It s estmated that ths provson w ncrease the revenue by 2 mon
annuay when n fu operaton.
(9) UNIT D ST T S MPLOY S IN T POSS SSIONS ND T C N L ZON
Secton 2 1 of the Code e empts from ta the Income of ndvdua ctzens
and domestc corporatons from sources outsde the Unted States f 0 per-
cent or more of ther gross Income s derved from sources wthn a possesson
of the Unted States and 0 percent or more of ther gross ncome s derved
from the actve conduct of a trade or busness wthn a possesson of the Unted
States. For the purposes of secton 2 1, the Cana Zone receves the same treat-
ment as a possesson, but the rgn Isands are not so treated. Indvduas are
entted to ths e empton whether they engage n a trade or busness on ther
own account or as empoyees or as agents. The e empton has been nterpreted
as appyng to mtary and cvan personne empoyed by the Unted States.
Mtary and cvan personne of the Government who are ctzens of the
Unted States are not e empt from ncome ta when they are statoned n any
other part of the word, and ther e empton whe statoned n the possessons
s not n any way reated to the orgna purpose of secton 2 1, whch was to
encourage mercan busnesses n the possessons.
Secton 223 of your commttee s b emnates the speca treatment accorded
the mtary and cvan empoyees of the Unted States Government and ts
agences who are statoned n the possessons. Wages pad to them n ta abe
years begnnng after December 31, 19 0, for servces to the Unted States or
ts agences performed n such possessons w not be consdered ncome from
wthn such possessons, n determnng whether they are entted to the benefts
of secton 2 1 of the Code, and w be sub|ect to ta as ncome from sources
wthn the Unted States. Wthhodng on such wages w appy, effectve
anuary 1, 19 1.
The provson In the ouse b apped to ta abe years begnnng after De-
cember 31, 19 9. Snce no current payments of ta have been made and snce
t s key that most of the Indvduas n queston have carred on ther affars
for more than haf of 19 0 wthout reservng funds wth whch to nay ths ta .
the mposton of a ta on 19 0 ncomes woud probaby resut n consderabe
hardshp. ence, your commttee has made the change effectve for ta abe
years begnnng after December 31. 19 0.
It s estmated that ths provson w ncrease the revenues by 31,000,000
annuay when fuy effectve.
(10) T TR TM NT OF PU RTO RIC N R SID NTS
Under the e stng Federa ndvdua Income ta aw a dsparty e sts be-
tween the treatment accorded two dfferent groups of Unted States ctzens
who are resdents of Puerto Rco, those who are ctzens ony by reason of the
organc acts estabshng the government of Puerto Rco and those who are
ctzens because they were born or naturazed n the Unted States. Puerto
Rcan resdents who are Unted States ctzens ony as a resut of the organc
aw are ta ed by the Unted States on any Income derved from sources In the
Unted States In the same manner as nonresdent aens.
Ctzens of the Unted States who are resdents of Puerto Rco but derve ther
ctzenshp from the Puerto cnn organc aw are aso dvded nto two groups
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for ta pot-pones, dependng upon whether or not they are egbe for the
speca treatment provded for ncome from sources wthn the Unted States
possessons under secton 2 1 of the Code. To be egbe for ths treatment
0 percent of the ndvdua s gross ncome must be derved from Unted Stntes
possessons and 0 percent of hs gross ncome must be derved from the conduct
of a trade or busness wthn a possesson of the Unted States ether on hs
own account or as an empoyee. These ndvduas are ta ed by the Unted
States ony on Income from sources wthn the Unted States. They receve
the reguar deductons to the e tent that they are aocabe to ncome from
sources wthn the Unted States and are sub|ect to the reguar ndvdua n-
come ta rates, but receve ony a snge persona e empton.
Those who do not quafy under secton 2. 1 are tn ed by the Unted States
on ther Income from n sources, ncudng Puerto co, but receve n foregn
ta credt on ta es pad to Puerto co or to any foregn country. They receve
the ordnary deductons and e emptons.
For the purposes of ts own ndvdua ncome ta , Puerto Rco does not ds-
tngush between those of ts resdents whose Unted States ctzenshp depends
upon organc aw and those who were born or naturazed n the Unted States.
It ta es ther ncome from a sources, ncudng the Unted States, and aows
a ta credt for ta pad to the Unted States or to a foregn country.
In the opnon of your commttee the e stng Federa ncome ta treatment
of Unted States ctzens n Puerto Rco s confusng and the dscrmnaton
aganst those who derve ther ctzenshp from the organc aw s unfar. More-
over, It s most unfortunate to cassfy ctzens of the Unted States as non-
resdent aens for ta purposes. Under secton 22 of your commttee s b a
Unted States ctzens who are bona fde resdents of Puerto Rco durng the
entre ta abe year receve the same ta treatment wth respect to ta abe
years begnnng after December 31, 19.10. They are not ta ed under the Fed-
era ndvdua ncome ta wth respect to any ncome derved from sources
wthn Puerto Rco. The ta s mted to ncome derved from sources out-
sde Puerto Rco, ncudng ncome from the Unted Stntes tsef. The wth-
hodng ta of 30 percent of gross ncome w no onger appy to resdents of
Puerto Rco who are ctzens of the Unted States ony by reason of organc
aw nor are they to be deprved of e emptons and the benefts of ncome spttng
as under e stng aw.
Puerto Rcan resdents are snged out In ths fashon because Puerto Rco s
n a unque poston. It s nether a foregn country nor an ntegra part of
the Unted States. Moreover, t dffers from a other possessons n that t
as ts own Income ta aw whch takes the pace of the Federa ncome ta
aw. For these reasons your commttee beeves t s desrabe n the case of
Puerto Rcan resdents to appy the Unted States ta ony to ncome derved
from sources outsde of Puerto Rco; for ncome from sources wthn Puerto
Rco the Puerto Rcan ncome ta takes the pace of the Unted States ncome
ta .
Snce Puerto Rco aows a credt for ncome ta es pad to the Unted States,
the Puerto Rcan ta woud n effect appy ony to ncome derved from Puerto
Rco e cept when the Puerto Rcan ta s hgher than the Unted States ta . In
such a case Puerto Rco woud coect a ta equa to the dfference between the
Puerto Rcan rates and the Unted States rates appcabe to ncome derved
from sources outsde Puerto Rco.
There need be no fear that as a resut of your commttee s proposa anyone
w gan a ta beneft by spttng hs ncome n two and beng sub|ected to ta
on part of t by Puerto Rco and the other part by the Unted States. Wth re-
spect to Puerto Rcan resdents, Puerto Rco, snce t frst ncudes the Unted
States ncome n ts ta base and then aows a credt for ncome ta es pad to the
Unted States, w coect a ta at reatvey hgh effectve rates on the ncome
from Puerto Rcan sources, whe the Unted States, snce the b aows an e -
cuson for ncome derved from Puerto Rcan sources, woud coect a ta at
reatvey ow effectve rates. ssumng the rate schedues were the same n both
the Unted States and Puerto Rco, the combned ta woud e the same as woud
be coected by ether ursdcton f the whoe ncome had been sub|ect to ts
fa es aone. In a smar fashon, f the ndvdua s a resdent of the Unted
States, Unted States woud coect the ta at the reatvey hgh effectve rates
nd Puerto Rco at reatvey ow effectve rates.
It has been estmated that ths provson w ncrease the revenues by 2, 00,000
uuuay when fuy effectve.
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20
Your commttee has amended ths porton of the ouse b so ns to make pro-
vson for the coecton of ta-es due the Unted States from resdents of Puerto
Rco. Ths atter amendment s made effectve on the date of enactment
( ) M SUR S INCLUD D IN T OUS ILL W IC R NOT CONT IN D
IN T FIN NC COMMITT ILL
(1) T INT ST L M NT IN INST LLM NT P YM NTS OF LIF INSUR NC
benefcary under a fe-nsurance pocy usuay may eect to receve a seres
of monthy or annua payments nstead of takng the face vaue of the pocy as
a ump sum, or such nstament payments may have been arranged for by the
nsured. The contract may provde for a specfc number of such payments, or
that the payments w contnue unt the benefcary s death. Under secton
22(b) (1) of the Code
amounts receved under a fe nsurance contract pad by reason of the death of
the nsured whether In a snge sum or otherwse
are not ncuded n the ta abe ncome of the benefcary.
Secton 201 of the ouse b provded that where the proceeds were pad n
nstaments, the nterest eement n each nstament was to be sub|ect to the
ncome ta . Your commttee beeves that t woud be unwse to ta such nsta-
ment payments snce t s desrabe that wdows and other benefcares of fe-
nsurance poces be encouraged to receve the proceeds n nstaments over a
perod of years rather than as a ump sum whch may be ost or dsspated.
12) DI ID NDS P ID OUT OF P -1913 NIN0
The ouse b contaned a provson (secton 20 ) for the ta aton as ordnary
ncome to the stockhoder of dvdends pad out of corporate earnngs and profts
accumuated pror to March 1,1913, or out of apprecaton n the vaue of property
whch occurred before that date. Snce 191C the varous revenue aws have con-
taned provsons whch specfcay e cude such payments from the defnton
of ta abe dvdends, the payments beng regarded as essentay equvaent to
a return of capta and used to reduce the bass of the stock. Durng the nter-
venng 3 years a great many stockhoders have receved dvdends out of pre-1913
earnngs or apprecaton whch have not been regarded as ordnary ncome. The
number of corporatons whch woud henceforth pay such dvdends s reatvey
sma and the number of stockhoders who mght receve such dvdends s mted.
Therefore, t seems napproprate at ths ate date to change the ta treatment
of such dvdends. ence, ths provson of the ouse b has been emnated.
(3) T -FR LI UID TION OF FOR IGN SU SIDI RI S
The ouse b contans a provson (secton 206) revsng the ta treatment of
the qudaton of foregn subsdares of domestc corporatons. Tnder e stng
aw such qudaton may resut n a capta gan, or may not be ta abe f the
qudaton compes wth the requrements for a ta -free reorganzaton. The
ouse b woud ta as ordnary ncome so much of the gnn reazed n quda-
ton as s not n e cess of the proportonate amount of the foregn corporaton
accumuated earnngs and profts, provded over 0 percent of th stock n the
foregn corporaton s owned drecty or ndrecty by ess than fve domestc
corporatons.
Ths provson has not been Incuded n your commttee s b. Your commttee
beeves the provson In the ouse b s unduy harsh snce t ta es dstrbu-
tons In qudaton as ordnary ncome and rases other troubesome probems.
( ) LOSS FROM S L OF USIN SS PROP RTY
Secton 117( ) of the Interna Revenue Code provdes that the aggregate net
gans from the sae of deprecabe assets and and, hed for more than 6 months
and used n the ta payer s busness, sha be treated as ong-term capta gan,
but thnt the aggregate net oss from the sae of such property sha be treated as
ordnary oss. Ths treatment was ntroduced n 19 2 n order to stmuate the
sae of busness propertes so that they woud be more apt to come nto the hands
of the persons who coud use them effcenty for the war effort.
Under the ouse b (secton 209) osses from the sae of property used n
the trade .r busness woud be treated as capta osses, whe gans from the sae
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21
of such property woud contnue to be treated as capta gans, regardess of the
perod for whch the assets were hed, thus equatng the ta treatment of gans
and osses. Your commttee receved abundant testmony ndcatng that such
treatment of osses arsng from the sae or abandonment of property used n
the ta payer s busness woud resut n great nequty, because n many cases
ta payers woud have no offsettng capta gan. It s evdent, for e ampe, that
a raroad whch abandons a branch ne or some other part of ts property that
can no onger be operated effcenty w have a very arge oss but w amost
never, ether n that or n subsequent years, have suffcent capta gans to absorb
the fu amount of the oss ncurred. Smary, o companes frequenty abandon
eases on property where no o was found but rarey have offsettng capta pans.
Smar stuatons w occur In other ndustres. For these reasons your com-
mttee deemed the acton taken n the ouse b to be unwse and made no
amendment of secton 117( ) other than the reducton of tr hodng perod from
6 to 3 months, and an amendment recognzng the change n the treatment of the
sae of books and artstc works.
The changes made by ths h n the present secton 117(|) w not affect the
status of vestock under e stng aw.
(6) WIT OLDING O DI ID NDS
The ouse b ncuded a provson (secton 601) requrng corporatons to
wthhod a ta at 10 percent on a dvdends pad to ther stockhoders. t your
commttee s hearngs a great dea of ob|ecton was rased to ths feature of the
ouse b. It was ponted out that the proposa nvoves the coecton of a ta
from ndvduas who have no ta abty because ther ncome s ess than
ther e emptons and deductons, and from organzatons wth a ta -e empt
status. ddtona e pense Is mposed upon the wthhodng agents.
t the present tme corporatons are requred to report to the ureau of In-
terna Revenue dvdends pad to each stockhoder n e cess of 100 per year.
The knowedge, on the part of the stockhoder who receves a smaer amount,
that the corporaton w not report the dvdends pad to hm tends to encourage
careessness on hs part, f not deberate evason. stng aw gves the Com-
mssoner of Interna Revenue power to requre corporatons to report the pay-
ment of dvdends n any amount to a stockhoders. It Is understood by your
commttee that the Commssoner proposes to revse the e stng reguatons so
as to requre compete reportng.
t the present tme the dvdend recpent s not requred to Itemze hs dv-
dends n hs ncome ta return. Ths aso tends to reduce the accuracy of
the reportng of ncome. It s understood that the Commssoner w amend the
ncome ta return form so that the temzaton of dvdends w be requred n
the 19 0 ta returns fed n 19 1.
These two admnstratve changes w provde the ureau of Interna Renvue
wth more adequate nformaton for use n the dscovery of evason of the ncome
ta on dvdends. In the opnon of your commttee these admnstratve changes
w hep to correct the probem at whch the proposa for wthhodng on dv-
dends was amed.
The provson In the ouse b e tended wthhodng to the patronage dv-
dends or refunds of certan cooperatves. The testmony before your com-
mttee reveaed that .n a arge number of cases such wthhodng woud not
ustfy the e pense and troube mposed on the wthhodng agent and the ta -
payer. For e ampe t was stated that n one cooperatve n 19 , 7. percent of
the patronage dvdends were for ess than and n a second case G3 percent
were for ess than 2. 0. The undesrabty of wthhodng n such cases was
an addtona reason for your commttee s re|ecton of the pan contaned n the
ouse b.
(6) INT R ST ON R FUNDS ND D FICI NCI S
Under e stng aw overpayments refunded by the Government bear nterest
at the rate of 6 percent, the same rate as s pad by the ta payer on defcences.
Under the ouse b (secton 602) the nterest pad by the Government on over-
payments woud be reduced to 3 percent. Tour commttee s of the opnon that
the resutng dfference between the Interest rate pad and that receved by the
Government Is dscrmnatory. Therefore, the ouse provson has not been
ncuded n your commttee s b.
923 30 1 3
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I. Otheh d|ustments n the Ta Law
( ) M SUR S CONT IN D IN T OUS ILL
(1) P RC NT G D PL TION
Secton 20 of the ouse b woud amend secton 11 (b) of the Code deang
wth percentage depeton. The percentage aowed coa woud be ncreased from
to 10; a number of Items woud be added to the st of nonmetac mneras
recevng the 1 percent rate; and a new group of nonmetac mneras woud
receve percentage depeton at the rate of percent. The ouse b aso n-
cudes an nmendment ntended to redefne the gross ncome upon whch the per-
centage depeton rate s apped.
Secton 20 of your commttee s b emnates the ncrease In the rate on coa
and the aowance of percentage depeton for the addtona nonmetnc mn-
eras enumerated n the ouse b. n estmated revenue oss of 13 ,000,000
annuay s Invoved, whch s dffcut to reconce wth the need for revenue at
the present tme. Moreover, your commttee Is not convnced that a of the
tems to whch percentage depeton woud be e tended have a vad cam to such
treatment. In those cases where a vad cam for some addtona depeton
aowance e sts, t s not evdent that the percentage rates used n the ouse
b are necessary the approprate ones. Thus, t appears desrabe to postpone
acton on these proposas unt your commttee can carry out a more carefu
anayss of the probems nvoved.
Under the ouse b the gross ncome from the property upon whch per-
centage depeton s apped does not ncude any amount whch refects trans-
portaton beyond the property. Whe ths rue may be equtabe when the
frst processng occurs on the property, t dscrmnates aganst the case where
the frst processng must be done esewhere. ccordngy your commttee has
amended ths provson so as to make t conform wth what your commttee
beeves s the ntent of e stng aw. The Code secton here Invoved was added
n the 19 3 Revenue ct so that the aw woud ceary have the same meanng
as that ntended by the depeton provsons n the 1932 ct and contemporary
Treasury reguatons nterpretatve thereof. Those reguatons specfed that
the gross ncome computat .on for depeton purposes was to be before transporta-
ton from the pace where the ast of the processes sted beow was apped.
Terran, water suppy, or other factors, sometmes permt the appcaton of
ordnary treatment processes drecty on the mnng property. t other tmes
the pants to appy such processes to obtan the commercay marketabe mnera
products are normay ocated some dstance from the mouth or openng of the
mne, but are at the nearest practcabe pont at whch such processes can be
effcenty performed. The transportaton to these pants and the ordnary
treatment processes apped are neded as a part of mnng n determnng gross
ncome for percentage depeton purposes.
Ths rue, ntended to be apped a accordance wth norma standards, ceary
woud not e tend to transportaton to dstant ponts far beyond the ocatons
where mne operators woud normay ocate such pants. ut the rue woud
be appcabe when the ocaton of the pant or m s at a pont not substantay
more dstant from the pont of e tracton than s reasonaby necessary for effcent
and economca operaton.
In order to remedy another probem ponted out to your commttee at ts hear-
ngs, the b defnes ordnary treatment processes n the case of bentonte to
ncude crushng, dryng, puverzng or granuatng, and oadng for shpment
The amendments made by ths secton of your commttee s b w be appcabe
to ta abe years begnnng after December 31,19 9.
(2) DISTRI UTIONS IN ID OF D C D NTS ST T S
It as been brought to the attenton of your commttee that the probem of
fnancng the estate ta s acute n the case of estate consstng argey of shares
n a famy corporaton. The market for such shares Is usuay very mted,
and t s frequenty dffcut, f not Impossbe, to dspose of a mnorty nterest
If, therefore, the estate ta cannot be fnanced through the sae of the other assets
n the estate, the e ecutors w be forced to dspose of the famy busness. In
many cases the resut w be the absorpton of a famy enterprse by arger
compettors, thus tendng to accentuate the degree of concentraton of ndustry
n ts country.
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Two potenta avenues of reef are avaabe under e stng aw and refuta-
tons, but nether provdes a truy satsfactory remedy. Secton 22(a) of the
Code permts the Commssoner of Interna Revenue to e tend the tme for pay-
ment of the estate ta n cases of undue hardshp for n perod not n e cess of 10
years. Snce ths e tenson s competey t the dscreton of the Commssoner,
e ecutors cannot fee secure n reyng upon t as a menus of sovng ther ta -
payment prob.em. Moreover, an nterest rate of percent s Imposed when the
payment of the ta s postponed under secton 22(a). The earnngs of the bus-
ness whch are pad over to the estate are, of course, sub|ect to the corporate
and ndvdua ncome ta es. It s ony the net return reduced by percent
remanng after these ta es that provdes the marrn out of whch the ta may
be accumuated durng the perod of postponement. Ordnary ths margn w
not be suffcenty arge to sove the probem at ssue. Furthermore, under ths
approach the Government s recept of the ta s deayed.
The other possbe remedy e sts because of a reguaton whch sets up an
e cepton to the rue that the funds pad out through the redempton of the out-
standng securtes of a corporaton out of accumuated earnngs w b ta abe
as a dvdend to the recpent. The reguaton n queston (Reguatons 111,
secton 29.11 -9) states that
a canceaton or redempton by a corporaton of a of the stock of a partcuar
sharehoder, so that the sharehoder ceases to be nterested n the affars of the
corporaton, does not effect a dstrbuton of a ta abe dvdend.
Whe ths reguaton provdes much-needed reef n certan cases, t does not
consttute a satsfactory remedy for the probem at ssue here, snce n order to
quafy under the reguaton the estate must dspose of ts entre hodngs n the
famy busness. In most cases ths w be tantamount to the wthdrawa of the
famy from the busness.
Your commttee s of the opnon that remeda acton s desrabe n order to
prevent the enforced sae of the famy busnesses whch are so vta and desrabe
an eement n our system of free prvate enterprse. Therefore, secton 210 of
your commttee s b amends secton 11 (g) of the Code so as to remove from the
category of a ta abe dvdend payments made under certan restrcted crcum-
stances n the redempton by the ssung corporaton of a porton of ts stock hed
by a decedent s estate. To quafy for such treatment the redempton must be
made wthn the perod of the statute of mtatons for the assessment of the
estate ta es due. The e empton from the provsons of secton 11 (g) w appy
ony to so much of the proceeds of the stock as does not e ceed the tota of the
estate, nhertance, egacy, or successon ta es (ncudng nterest) mposed
because of the decedent s death.
The ouse b restrcted the e empton to cases where the vaue of the stock
In the famy corporaton ncuded n the ta abe estate was more than 70 percent
of the vaue of the net estate. Your commttee beeves ths 70 percent mtaton
Is unduy restrctve. Therefore ths provson was emnated.
Ths amendment w be appcabe ony to amounts dstrbuted on or after
the date f enactment of the b.
The revenue oss resutng from ths secton of your commttee s b w
be sma.
(3) OLDING P RIOD FO C PIT L SS TS
Under e stng aw the more favorabe treatment accorded capta gans Is
restrcted to gans on capta assets hed for more than 6 months. Secton
211(c) of your commttee s b reduces the perod for determnng ong-term gans
and osses from 0 months to 3. ssentay the dstncton between ong- and
short-term gans and osses s ntended to confne the more favorabe ta treat-
ment to the gans and osses reazed by nvestors. The hodng perod requre-
ment Is the test by whch the nvestor s dstngushed from the specuator,
whose ndvdua ventures n the markets for capta assets tend to be of com-
paratvey short duraton.
In the opnon of your commttee the 6-month hodng perod requrement used
In e stng aw Is onger than necessary, and there are good reasons for reducng
the requrement to the mnmum consstent wth the fundamenta pocy of the
Congress on the ta aton of capta gans. ong hodng perod has a dsturbng
effect on prces n the markets for capta assets, whch Is most unfortunate.
When prces rse, as has been the case In the securty markets durng the ast
year and notaby n the commodty markets durng recent weeks, saes that
woud otherwse have occurred do not take pace because the owners of thn assets
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desre to hod them unt they cnn quafy the gan as ong-term and obtan the
resutng ta benefts. The consequence s that a check on the prce movement
whch woud otherwse appear Is mssng.
In the opnon of your commttee the reducton n the hodng perod from
6 months to 3 w not Impar Its effectveness as a devce for confnng the
more favorabe ta treatment to the nvestor group.
The reducton n the hodng perod w be appcabe to saes and e changes
made after the date of enactment of ths bL
( ) C RRY-O R OF USIN SS LOSS S
Secton 217 of your commttee s b amends the net operatng oss deducton
provded under secton 122 of the Code. Under e stng aw a busness oss n
the ta abe year may be carred back aganst Income n the two precedng years,
and carred forward aganst the ncome of the two subsequent years. Your com-
mttee s b substtutes for ths 2-year carry-back and 2-year carry-forward, a
1-year carry-back and a -year carry-forward.
One effect of ths change s to e tend the perod over whch busness ncome can
be averaged from to 7 years, thus reducng the ta dsadvantages whch occur
to busnesses wth fuctuatng ncomes. Such ncomes are assocated wth un-
usua busness rsks and occur reatvey frequenty among sma and new bus-
nesses. ence the e tenson of the averagng perod from to 7 years w
provde a rea stmuus to venture capta generay and to sma and new busness
n partcuar.
Your commttee s amendment paces greater emphass on the oss carry-forward
and ess on the oss carry-back than Is found n e stng aw. Ths change aso
provdes a stmuus to busness Investment. provson under whch reef s
granted prmary when the busness s brought back to a proftabe bass provdes
a greater ncentve to management and nvestors ake than a provson whch
aows the osses of the present to b fnanced by the refund of ta es pad n the
past. The ncreased emphass on the carry-forward Is to the marked advantage
of new busnesses, whch do not beneft n any way from a carry-back, and estab-
shed busnesses whch are undergong a matera e panson. Moreover, the
carry-forward rases fewer admnstratve probems than a carry-back of equa
ength.
though the advantages of the carry-forward are substanta, your commttee
recommends the retenton of a 1-year carry-back n order to provde reef n
partcuar crcumstances vhere the carry-forward cannot be used or s
Inapproprate.
Under your commttee s b the 2-year carry-back and 2-year carry-forward
w contnue to appy to osses ncurred n ta abe years begnnng before anu-
ary 1, 10 0. Losses ncurred n ta abe years begnnng after December 31, 19 9,
w be sub|ect to the new rue.
Snce ths amendment e tends the perod of averagng, some revenue oss s
nvoved. owever, no oss w be reazed for severa years. The tme of
appearance and the amount of the eventua revenue oss are very uncertan and
w depend upon future busness condtons.
( ) coWtkmpaton of death
Secton 01 of your commttee s b changes the rue under the estate ta
deang wth the ta abty of transfers n contempaton of death. Under
e stng aw a such transfers are ncuded n the gross estate and there s a
rebuttabe presumpton that transfers made wthn 2 years pror to death are
made n contempaton of death.
Whe te ncuson n the gross estate of transfers n contempaton of death
has ong been regarded as necessary to prevent avodance of the estate ta . the
admnstraton of ths feature of the estate ta aw has aways proved dffcut.
Prncpay ths s due to the fact that contempaton of death deas wth the
ntent of the transferor. Intent s e tremey dffcut to estabsh n any case
and becomes ncreasngy so wth the passage of tme. Undoubtedy many gfts
n contempaton of death have escaped the estate ta because of the dffcuty
whch the Government encounters n reconstructng the motves of the deceased.
On the other hand, compants have been receved that the ureau of Interna
Revenue has n some cases asserted that gfts made many years before death
were n contempaton of death wthout havng much bass for the asserton.
s a resut e ecutors of estates are confronted wth an unpeasant choce between
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compromsng the asserted ta abty or engagng n e pensve and dffcut
tgaton. t the present tme ths probem nnngs over any person who ma Ives
a gft, even though he e pects to ve for many years, uness he can prepare
evdence demonstratng that the gft was made prmary for nonta reasons.
Secton 01 of your commttee s b removes from the scope of the contempa-
ton of death cause a transfers made more than 3 years pror to the date of
death. On the other hand, the burden of showng that the transfer was not n
contempaton of death w be borne by the estate n a cases where the transfer
was made wthn a verod of 3 years endng wth the date of death. Ths w
strengthen the poston of the Government n cases where the transfer occurred
between 2 and 3 years pror to the date of death.
The change w be effectve ony wth respect to the estates of decedents dyng
after the date of enactment of ths b. It s estmated that ths provson w
reduce the revenues by about ,000,000 a year when n fu operaton.
1 1 T T T D DUCTION FO SUPPORT OF D P ND NTS
Secton 12(b) of the Code aows the gross estate of a decedent to be reduced
for estate ta purposes by amounts reasonaby requred and actuay e pended
for the support of the decedent s dependents durng settement of the estate to
the e tent that such e penses are aowed by State aw. Ths deducton s
nconsstent wth the concept of the estate ta as a ta on a propertes trans-
ferred at death. In practce It has dscrmnated n favor of estates ocated In
States whch authorze era aowances for the support of dependents, and
t has probaby aso tended to deay the settement of estates.
Secton 02 of your commttee s b repeas ths partcuar feature of the
estate ta aw. Ths amendment w appy wth respect to estates of decedents
dyng after the date of enactment of ths b.
It s estmated that ths acton w ncrease the revenues by about 3,000,000
annuay.
( ) M SUR S DD D Y T FIN NC COMMITT
(1) CLUSION FO M M F OF T RM D FORC S
Secton 202 of your commttee s b e cudes from ta abe ncome the compen-
saton of members of the rmed Forces of the Unted States n combat zones
such as orea. The e cuson covers a the pay of ensted men and warrant
offcers and the frst 200 pef month pad to commssoned offcers.
The proporton of the annua pay of an ensted man or a warrant offcer whch
Is e cuded w be determned by dvdng the number of months durng any
part of whch he served n n stone of combat by the tota number of months
durng whch he was an ensted man or warrant offcer n the rmed Forces
durng hs ta abe year. In the case of a commssoned offcer the e cuson for
a ta abe year s 200 tmes the number of months n any part of whch he served
as an offcer n n combat area.
The Presdent s authorzed to desgnate as a combat zone any area n whch
he fnds that the rmed Forces of the Unted States are engaged n combat.
Such desgnaton may be made appcabe to any part of the perod from une
2 , 10 0, to December 31, 11) 2. and the e cuson provded by ths amendment
sha appy wth respect to compensaton for servces performed n such areas
durng such perod.
Ths b aso provdes that there sha be no wthhodng on the pay of mem-
bers of the rmed Forces for any month durng any part of whch they were n a
combat ztne.
The prncpe of ncome ta reef for members of the armed servces on actve
duty durng a tme of emergency s we estabshed. Durng Word War II an
e cuson of a type smar to that provded under ths b was n effect. ow-
ever, the Word War II provson was aowed for a members of the rmed
Forces no matter where they served, whe the e cuson under ths b Is ava-
abe ony to those servng n the desgnated zones of combat.
The Word War II e cuson for commssoned offcers was a ma mum of
1, 00 annuay as compared wth a ma mum of 2, 00 under ths b. It s
beeved that ths ncrease s advsabe to acheve a greater degree of equaty n
treatment as between ensted men and offcers.
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(2) MORTIZ TION OF M RG NCY F CILITI S
Secton 21 of your commttee s b provdes for the amortzaton over a
perod of 60 months of factes certfed as essenta because of the present
emergency. The amortzaton deducton s n eu of deprecaton. It may be
eected by a ta payer whose facty has been certfed to have an emergency
character and ths eecton may be revoked on notce by the ta payer. The pro-
vson s smar to secton 12 of the Code whch authorzed the amortzaton
of emergency factes durng Word War II.
The provson n your commttee s b dffers from secton 12 n the foowng
respects:
The b provdes that the certfyng authorty Is to be desgnated by the
Presdent n an ecutve order, whereas n Word War II ths task was assgned
to the rmy and Navy Departments actng under reguatons ssued by the
Presdent. Durng the war the certfyng authorty was deegated to the Wnr
Producton oard. The provson n the b w permt greater fe bty In
admnstraton.
Tt p b provdes that a porton of the facty may be desgnated as essenta.
There was no smar provson under the Word War II egsaton but
certfcates mtng amortzaton to a percentage of the tota cost of a facty
were ssued n the cosng months of the war.
Your commttee s b, ke the Word War II provson, stpuates that the
emergency perod n whch factes may be certfed w end wth a procama-
ton by the Presdent that the ssuance of such certfcatons s no onger requred
n the nterests of natona defense. The Word War II egsaton aso provded
that n the event the perod of emergency was termnated pror to the concuson
of the 00-month amortzaton perod on a gven facty, the ta payer coud
recompute hs amortzaton over the perod endng wth the date of the Pres-
denta procamaton. No smar provson s contaned n your commttee s
b.
Ths secton of the b s appcabe wth respect to factes competed after
December 31, 19 9.
(3) MPLOY STOC 0PTT0N
Tour commttee s b (secton 220) estabshes a new set of rues for the ta
treatment of certan empoyee stock optons. Such optons are frequenty used
as ncentve devces by corporatons who wsh to attract new management, to
convert ther offcers nto partners by gvng them a stake n the busness,
to retan the servces of e ecutves who mght otherwse eave, or to gve ther
empoyees generay a more drect nterest n the success of the corporaton.
t the present tme the ta aton of these optons s governed by reguatons
whch mpede the use of the empoyee stock opton for ncentve purposes.
Moreover, your commttee beeves these reguatons go beyond the decson of
the Supreme Court n Commssoner v. Smth, 32 U. S. 177 (19 ). The re-
sutng uncertanty as to whether these reguatons are n accordance wth the
aw s an addtona reason for egsatve acton at the present tme.
The rue apped under e stng reguatons s that an empoyee e ercsng an
opton to purchase stock from hs empoyer corporaton receves ta abe ncome
at the tme the opton Is e ercsed to the e tent of the dfference between
the market vaue of the stock at the tme of e ercse and the opton (or purchase)
prce. The dfference Is ta ed as ordnary ncome, rather than as a capta
gan, on the theory that t represents addtona compensaton to the empoyee
Snce the empoyee does not reaze cash ncome at the tme the opton s e er-
csed, the Imposton of a ta at that tme often works a rea hardshp. n
Immedate sae of n porton of the stock acqured under the opton may be
necessary In order to fnance the payment of the ta . Ths, of course, reduces
the effectveness of the opton as an ncentve devce.
Under your commttee s b no ta w be Imposed at the tme of e ercse
of a restrcted stock opton or at the tme the opton s granted and the gan
reazed by the sae of the stock acqured through the e ercse of the opton
w be ta ed as a ong-term capta gan. Such treatment Is mted to the
restrcted stock opton for the purpose of e cudng cases where the opton
Is not a true Incentve devce. Optons whch do not quafy as restrcted
stock optons w contnue to be ta ed as under e stng aw.
Ordnary when an opton s used as an ncentve devce, the opton prce
appro mates the far market vaue of the stock at the tme the opton t
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granted. owever, many stocks are not sted on e changes and therefore the
far market vaue Is dcut to determne. ence, yoar commttee s b requres
that to quafy as a restrcted stock opton the opton prce at the tme of
ssuance must bo percent or more of the far market vaue of the stock.
restrcted stock opton s entted to the treatment provded by the b
ony If t s e ercsed whe the grantee s an empoyee, or wthn a perod
of 3 months foowng the termnaton of hs empoyment. The benefts of ths
provson e tend to cases where the empoyee of a parent corporaton receves
an opton to purchase stock In a subsdary and where the empoyee of a sub-
sdary receves an opton to acqure stock n a parent corporaton.
The stock acqured under a restrcted stock opton must not be sod ess
than 2 years subsequent to the date on whch the opton s granted, and the
stock purchased under the opton must be hed for a perod of not ess than
6 months. Thus, under the b the empoyee w receve speca treatment
ony If he remans n the empoyment of the company for a substanta perod
after the tme when he acqures the opton and actuay nvests n the stock of
the company for a consderabe perod.
Restrcted stock optons cannot be transferabe e cept by w or by operaton
of the aws of ntestate successon.
The status of a restrcted stock opton w Ik dened f the recpent of
the opton owns drecty or ndrecty more than 10 percent of the combned
votng power of a casses of stock of the empoyer corporaton or of the
parent corporaton at the tme the opton s granted. Ths rue s ntended to
prevent the use of stock optons by empoyers who seek merey to convert the
earnngs of a corporaton from ordnary ncome Into a capta gan.
Snce the optons whch quafy for speca treatment are regarded as n-
centve devces rather than compensaton, no deducton s aowed the corpora-
ton under secton 23(a) wth respect to a transfer of stock pursuant to a
restrcted stock opton.
The rues governng restrcted stock optons appy to optons granted,
modfed, e tended, or renewed after December 31, 10 6, and e ercsed after
19 9.
( F MILY P RTN RS IPS
Secton 222 of |our commttee s b Is Intended to harmonze the rues
governng nterests n the so-caed famy partnershp wth those generay
appcabe to other forms of property or busness. Two prncpes governng
attrbuton of ncome have ong been accepted as basc: (1) ncome from prop-
erty s attrbutabe to the owner of the property; (2) ncome from persona
servces s attrbutabe to the person renderng the servces. There s no reason
for appyng dfferent prncpes to partnershp ncome. If an ndvdua makes
a bona fde gft of rea estate, or of a share of corporate stock, the rent or
dvdend ncome s ta abe to the donee. though there s no bass under
e stng statutes for any dfferent treatment of partnershp nterests, recent
|udca and admnstratve acton n ths fed has gnored the prncpe that
Income from property s to be ta ed to the owner of the property.
Many court decsons snce the decson of the Supreme Court n Commssoner
v. Cubertson (337 U. S. 733) have hed nvad for ta purposes famy partner-
shps whch arose by vrtue of a gft of a partnershp nterest from one member
of a famy to another, where the donee performed no vta servces for the
partnershp. Some of these cases apparenty proceed upon the theory that a
partnershp cannot be vad for ta purposes uness the ntrafamy gft of
capta s motvated by a desre to beneft the partnershp busness. Others seem
to assume that a gft of a partnershp nterest s not compete because the donor
contempates the contnued partcpaton n the busness of the donated capta.
owever, the consstency wth whch the Ta Court, snce the Cubertson dec-
son, has hed nvad famy partnershps based upon donatons of capta, and
the many reasons advanced n the opnons for such decsons woud seem to
ndcate that, athough the opnons often refer to ntenton, busness purpose,
reaty, and contro, they have n practca effect estabshed a rue of aw
to the effect that an Intrafamy gft of a partnershp nterest, where the donee
performs no substanta servces, cannot be the bass of a vad partnershp for
ta purposes. We are Informed that the settement of many cases In the fed
s beng hed up by the reance of the fed offces of the ureau of Interna
Revenue upon some such theory. Whether or not the opnon of the Supreme
Court n Commssoner v. Tower (327 U. S. 2 0) and the opnon of the Snnreme
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Court n Commssoner v. Cubcrtson (337 U. S. 733) whch attempted to e pan
the Tower decson, afford any |ustfcaton for the confuson Is not matera
the confuson e sts.
Your commttee s amendment makes t cear that, however the owner of a
partnershp nterest may have acqured such nterest, the ncome Is ta abe to
the owner, If he s the rea owner. If the ownershp s rea, t does not matter
what motvated the transfer to hm or whether the busness benefted from the
entrance of the new partner. The queston of the ta abty of the ncome of
such nterest depends, as n the case of any other donated property, on whether
the donee s the rea owner of the nterest. The amendment s ntended to make
t cear that there s nothng pecuar n the ta aw as apped to partnershps
but, on the contrary, that they are governed by the ordnary rues whch gen-
eray determne the person to whom ncome s to be ta ed.
The amendment eaves the Commssoner and the courts free to nqure n any
case whether the donee or purchaser actuay owns the nterest n the partner-
shp whch the transferor purports to have gven or sod hm. Cases w arse
where the gft or sae s a mere sham. Other cases w arse where the trans-
feror retans so many of the Incdents of ownershp that he w contnue to be
recognzed as a substanta owner of the Interest whch he purports to have gven
away, as was hed by the Supreme Court n an anaogous trust stuaton nvoved
n the case of everng v. Cfford (309 U. S. 3 1). The same standards appy
n determnng the bona fdes of aeged famy partnershps as n determnng
the bona fdes of other transactons between famy members. Transactons
between persons n a cose famy group, whether or not nvovng partnershp
nterests, afford much opportunty for decepton and shoud be sub|ect to cose
scrutny. the facts and crcumstances at the tme of the purported gft and
durng the perods precedng and foowng t may be taken nto consderaton
n determnng the bona fdes or ack of bona fdes of a purported gft or sae
Not every restrcton upon the compete and unfettered contro by the donee
of the property donated w be ndcatve of sham n the transacton. Contrac-
tua restrctons may be of the character ncdent to the norma reatonshps
among partners. Substanta powers may be retaned by the transferor as a
managng partner or n any other fducary capacty whch, when consdered n
the ght of a the crcumstances, w not ndcate any ack of true ownershp n
the transferee. In weghng the effect of a retenton of any power upon the
bona fdes of a purported gft or sae, a power e ercsabe for the beneft of
others must be dstngushed from a power vested n the transferor for hs own
beneft.
Your commttee s amendment requres that a true partnershp reaton e st
In that each partner must be a rea owner of an nterest n the enterprse, |ust as
an aeged donee of any other property must actuay own t f the ncome s to
be ta abe to hm rather than to the donor. In the case of a transfer of an
nterest n a partnershp, as of any other property, It s not requred that there
be any partcuar motve for the transfer. There need be no purpose that the
transfer beneft the busness. It s a basc premse that a bona fde gft s not
normay motvated by any busness purpose; therefore, the fact that any part-
ner s capta nterest In a partnershp was acqured from a reatve n a purey
donatve and nonbusness transacton s not to be consdered as an adverse
factor In determnng whether he actuay owns an nterest n the enterprse.
If he does own such an nterest n the busness, t Is mmatera from whom be
acqured t or what motvated the transferor n transferrng It to hm.
Snce egsaton s now necessary to make cear the fundamenta prncpe
that, where there s a rea transfer of ownershp, a gft of a famy partnershp
Interest s to be respected for ta purposes wthout regard to the motves whch
actuated the transfer, t s consdered approprate at the same tme to provde
specfc safeguards whether or not such safeguards may be nherent In the
genera rue aganst the use of the partnershp devce to accompsh the defec-
ton of ncome from the rea owner. Your commttee s b therefore Incudes
specfc provsons to prevent the defecton of persona servce Income and to
prevent the aocaton of other ncome n dsproporton to capta nterests.
Your commttee s b requres that the terms of the partnershp agreement are
to be dsregarded where the aocaton under the agreement does not substantay
refect the proportonate vaue of the servces or capta of the famy members,
In ths connecton the new secton 191 added to the Code by your commttee s
b whe specfcay provdng that nonpartcpaton In the management or
conduct of the partnershp busness sha not dsquafy a person as a partner,
provdes that ths nonpartcpaton sha be taken nt# account n determnng
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the proportonate vaue of the servces and capta of each partner. Where
reaocaton s necessary, a reasonabe proportonate aowance for ther servces
s to t e made In determnng the ncome of those partners who rendered servces.
Reaocaton of Income other tmn ncome from persona servces may not be
predcated upon the fact that the capta of one famy member was acqured
by sft from another.
The amendments made by ths secton are appcabe for ta abe years begn-
nng after December 31, 103 .
( ) R COGNITION Or G INS IN T LI UID TIONS OF DOM STIC CORPOR TIONS
Secton 206 of your commttee s b restores for a specfc nterva the prov-
sons of secton 112(b) (7) of the Cone. The amendment permts the stockhoders
of domestc corporatons to eect to dstrbute the assets of the corporaton n
compete qudaton on the foowng terms. In genera, n the case of stock
hed by n vduas, ony that porton of the dstrbuton to the sharehoders whch
represents accumuated earnngs s to be ta ed as ordnary ncome. So much of
the remander as conssts of money, or of stock or securtes acqured by the cor-
poraton after a basc date ( ugust 1 , 11) 0) s to be treated as a capta gan.
In the case of stock hed by cor ratons (oher than corporatons hodng 0
percent or more of the votng power), the corporate sharehoder s ta abe on ts
ratabe share of the accumuated earnngs or on that porton of the assets acqured
by t whch conssts of money, or stock or securtes acqured by the dstrbutng
corporaton after the basc date, whchever s greater.
Under the present form of secton 112b) (7 a smar eecton was avaabe
when the pan of qudaton was adopted after the date of enactment of the
Revenue ct of 19 3 and put Into effect durng the caendar year 19 . Under
your commttee s b ths eecton s restored for pans of qudaton adopted
after December 3 , 19 u, and effected durng any one caendar month n 19 1. To
arod converson of the assets of the corporaton nto stock or securtes whch
coud be dstrbuted ta -free n antcpaton of egsatve rcton restorng secton
112(b)(7). the basc date referred to above, s made ugust 1 , 11( 0, the date
when ths egsaton was appoved by your commttee.
Ths eecton w factate the qudaton of certan domestc corporatons,
especay domestc persona hodng compane . Your commttee recognzes the
undesrabe character of domestc persona hodng companes and wshes to
e pedte ther qudaton.
(6) CIRCUL TION P NDITUR S OF N W P P R . M C, 7.INF.S, ND OT R P RIODIC LS
Under the b, pubshers of newspapers, magaznes, or other perodcas are
aowed to deduct as ordnary e penses e pendtures to mantan, estabsh, or
ncrease crcuaton, e cept e pendtures fcr the purchase of and or deprecabe
property or for the acquston of crcuaton through the purchase of other
perodcas. Ths foows, n genera, the practce of e stng aw athough n
some nstances e pendtures to ncrease and estabsh crcuaton have been
requred to be captazed. The b removes any uncertanty by permttng a
such e pendtures to be taken as deductons. owever, pubshers may be
aowed to captaze nstead of deductng the porton of such e pendtures as,
under reguatons prescrbed by the Secretary, s deemed to be chargeabe to
capta account.
Ths amendment s effectve wth respect to ta abe years begnnng after
December 31, 19 .
(7) CORPOR T R ORG NIZ TIONS T ING T FORM OF SPIN-OFFS
Secton 207 of the b, reatng to corporate reorganzatons known as spn-
offs, s added by your commttee. spn-off occurs when some part of the
assets of an e stng corporaton are transferred to a new corporaton and the
stock In the atter s dstrbuted to the sharehoders of the e stng corporaton.
spn-off aso occurs when the stock of an e stng corporaton , a controed
subsdary of corporaton . s transferred to a new corporaton C and the stock
of the new corporaton C s dstrbuted to the stockhoders of corporaton wth-
out surrender of ther stock. On the other hand, a spt-up occurs when a snge
e stng corporaton s repaced by two or more new corporatons, the stock n
the new corporatens beng dstrbuted to the sharehoders of the e stng corpo-
raton whch s competey qudated.
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Under e stng aw a corporate reorganzaton takng the form of a spt-up
may be, and usuay s, ta -free. Tour commttee s b provdes the same treat-
ment for spn-offs. Ths s done because your commttee beeves that corporate
reorganzatons whch accompsh substantay the same effect shoud be gven
the same ta treatment. Moreover, your commttee consders t economcay
unsound to mpede reorganzatons whch break busness up nto smaer unts.
owever, your commttee s b provdes for the nonrecognton of gans or
osses n the case of spn-offs ony where both the corporaton whch s spnn-
off and the e stng corporaton are ntended to contnue carryng on bnsness
after the reorganzaton, and where the reorganzaton does not represent a devce
for the dstrbuton of earnngs and profts of the e stng corporaton. Moreover,
the nonrecognton of gan does not appy f preferred stock Is receved n respect
to the spun-off assets.
It s not antcpated that the nonrecognton of gan or oss In the case of
spn-offs w resut n an mportant oss of revenue, snce It s aready possbe
for corporatons to accompsh much the same effect wthout recognton of gan
or oss f the reorganzaton takes the form of what s frequenty the more
cumbersome type of reorganzaton, namey, a spt-up.
Ths amendment w appy ony to dstrbutons of stock made after the date
of enactment of ths b.
( ) P RSON L OLDING COMP NY INCOM
If a cosey hed corporaton receves most of Its ncome from such sources as
dvdends, nterest, certan rents, and royates, ndcatng that the company s
beng used as an ncorporated pocketbook, t s desgnated for ta purposes as a
persona hodng company. Generay, such a company, n addton to payng
the reguar corporate ncome ta es, s sub|ected to an addtona penaty ta at
the rate of 7 percent or percent on ts undstrbuted ncome.
Incuded In persona hodng company ncome are amounts receved for the
nse of the corporaton s property where 2 percent or more of the stock n the
corporaton s hed by the ndvdua rentng the corporate property. The atten-
ton of your commttee has been caed to e ampes where, through a set of
fortutous crcumstances, corporatons have become cosey hed and aso have
rented most of ther assets for use n the operaton of busnesses to the ndvduas
hodng the stock of the companes. Thus, unwttngy the corporatons have
become persona hodng companes and sub|ect to the penaty ta .
Whe your commttee recognzes that such arrangements coud resut n ta
avodance, and, therefore, does not permt such practces n the future, t beeves
that reef for past years shoud be gven where such arrangements have been
unwttngy entered nto wth no thought of ta avodance. Thus, your com-
mttee s b n secton 226 mts the appcaton of secton 02(f) of the Code
(defnng persona hodng company Income) to emnate, for ta abe years
endng after 19 and before 10 0, rents for the use of a corporaton s property
by persons hodng 2 percent or more of the stock of the company where the
property s used by such persons n the operaton of a bona fde com-
merca, Industra, or mnng enterprse .
It s antcpated that the revenue oss from ths proposa w be nomna.
(9) R GUL T D IN STM NT COMP NI S
Under e stng aw a corporaton whose prmary source of ncome s from
dvdends, nterest, and the sae of securtes and whose securty hodngs are
wdey dstrbuted may, f certan specfed condtons are met, be treated for
ta purposes as a reguated nvestment company. Such nvestment com-
panes are gven speca ta treatment under suppement of the Code on the
theory that they merey represent a means for a arge number of sma nvestors
to poo ther rsks and secure good nvestment counse. Where such a company
dstrbutes nt east 90 percent of ts net ncome for the ta abe year. It s n
genera ta ed at the corporate ta rates on ony ts undstrbuted ncome.
Sometmes these companes e perence consderabe dffcuty n determnng
what consttutes 90 percent of ther net Income before the end of ther ta abe
year, because of the recept at, or very near, the end of the year of a substanta
proporton of ther dvdend ncome. owever, f ther net ncome s not deter-
mned wth suffcent accuracy so that they can dstrbute 00 percent of t by the
cose of the yonr. they ose the favorabe ta treatment provded In suppement .
To overcome ths dffcuty your commttee has added secton 22 to the b,
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whch permts such companes to eect to count as dstrbutons durng th
ta abe year certan dvdends decared after the cose of the year but before
fng the return for such year.
(10 T NSION Or TIM IN T C S OF DISC RG OF C RT IN IND T DN SS
Secton 201 of your commttee s b e tends for an addtona year the appca-
ton of secton 22(b) (0) and (10) of the Code whch permts raroads and
other corporatons to e cude from ncome amounts attrbutabe to the dscharge
of certan ndebtedness. Therefore, the b e tends ths prvege to December
31, 19 1.
(II) C PIT L G IN ND LOSS TR TM NT FOR SSIGNM NTS OF C RT IN
OIL, O S, ND MIN R L RIG TS
Under e stng aw, as nterpreted by the ureau of Interna evenue, f a
person ses the rght to obtan a stated amount of producton from an o, gas,
or mnera property, whe retanng a conuung nterest n such property,
the amount receved s treated as ordnary ncome. Your commttee beeves
that payments of ths type based on physca voume of producton are more n
the nature of capta gans than ordnary ncome. It s your commttee s vew,
for e ampe, that when the owner of an o we agrees to se a specfed number
of barres of o out of future producton he Is n reaty seng a part of hs
nterest n the o property rather than reazng ordnary ncome as woud be
true f he were to se the o at or after the tme he takes t out of the ground.
s a resut, your commttee s b has added a new subsecton (n) to secton
117 of the Code, provdng that where a person owns an economc nterest n o,
gas, or mneras and ses the rght to take o, gas, or mneras produced from
such property unt a specfed quantty has been obtaned, the proceeds he
receves from such assgnment sha be treated as proceeds from the sae or
e change of a capta asset. It s mportant to note that ths provson does
not appy to assgnments of nterests n producton measured n money and
that t does not appy to assgnments pedged for the deveopment of the
pro|erty.
Ths provson s effectve as of the date of enactment of the b.
(12) R RSION RY INT R STS IN T C S OF LIF INSUR NC
Under e stng aw, n genera, the proceeds of a fe-nsurance pocy on the
fe of the decedent payabe to a benefcary other than the e ecutor are n-
cudbe n hs gross estate to the e tent that he has pad the premums on the
pocy, or entrey ncuded f he possessed any ncdents of ownershp (other
than a reversonary nterest) n the pocy. Under the provsons of the Itevenue
ct of 10 2. premums pad by the nsured on or before anuary 10, 19 1, are
not to be consdered n determnng the e tent to whch the proceeds of a pocy
are ncudbe n the nsured s gross estate f the nsured dd not possess at
any tme after anuary 10, 19 1, an ncdent of ownershp n the pocy.
Incdent of ownershp for purposes of determnng whether proceeds of the
pocy are ncudbe by reason of premums pad on or before anuary 10, 19 1,
ncudes a reversonary nterest. Consequenty, athough the decedent may have
transferred a pocy pror to anuary 11, 19 1. he woud nevertheess have been
consdered as retanng an ncdent of ownershp f, upon the death of the
desgnated benefcary pror to hs own death, the rght to name another bene-
fcary or otherwse en|oy the vaue of the pocy woud revert to hm by vrtue
ether of e press provsons of the pocy or by operaton of aw.
In . It. 26 . whch was enacted as Pubc Law 37 n 19 9, the Congress
deat wth possbtes of reverter n genera. It was provded that property
transferred pror to death shoud not be ncuded n the gross estate of a decedent
by reason of the retenton of a reversonary nterest f the vaue of such nterest
mmedatey before hs death was not more than percent of the vaue of the
property nterest to whch t reated, or f the property woud revert to the de-
cedent ony by operaton of aw and not by e press terms of the nstrument of
transfer.
Ths egsaton dd not appy, however, to such an ncdent of ownershp
n a fe-nsurance pocy whch resuted from the retenton by an ndvdua
after anuary 10, 19 1. of a reversonary nterest n a pocy on whch he had
pad premums pror to that date.
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Tour commttee has, therefore, ncuded n ths b a provson, secton 03,
amendng secton 0 (c) of the Revenue ct of 19 2 so that a decedent sha
not be consdered as retanng an ncdent of ownershp by reason of retanng
a reversonary nterest f the vaue of such reversonary nterest between anuary
10, 19 1, and hs death does not e ceed percent of the vaue of the pocy, or
f such reversonary nterest arose soey by operaton of aw. The effect of
ths secton s to treat possbtes of reverter wth respect to certan nsurance
poces on a comparabe bass wth the treatment accorded possbtes of re-
verter generay under the estate ta aw.
The provson appes to the estates of a decedents dyng after October 21,
19 2, the date of enactment of the Revenue ct of 19 2. Provson s made for
refunds wthout nterest.
D T IL D DISCUSSION OF T T C NIC L PRO ISIONS OF T ILL
TITL I INCR S IN INCOM T R T S
Pabt I. Indvdua Income Ta es
S CTION 101. INCR S IN NORM L T ND SURT ON INDI IDU LS
Ths secton, for whch there s no correspondng secton n the b as passed
by the ouse, amends sectons 11 and 12 of the Interna Revenue Code, reatng
to the rates of the norma ta and surta on ndvduas. The amendments made
by ths secton of the b (together wth the amendments made by sectons 102
and 131 of the b) resut n an ncrease n ta for a ta abe years endng
after September 30, 19 0. The b provdes no ncrease n the rates of ta
appcabe to ndvduas n the case of a ta abe year endng on or before Sep-
tember 30. 19 0, e cept n an unusua case descrbed n secton 103 of the b
(deang wth a |ont return of husband and wfe coverng two dfferent ta abe
years, one of whch coses pror to October 1, 19 0, by reason of the death of one
spouse).
Under the amendments to sectons 11 and 12, the norma ta and surta n
case of ta abe years begnnng after September 30, 19 0, w be computed at
the same rates whch appy under present aw n computng the tentatve norma
ta and tentatve surta , but the ta es so determned w not, as under e stng
aw, be reduced under the provsons of secton 12(c) of the Code, amended by
secton 101(b) (3) of the b. It Is provded, however (under secton 12(f) of
the Code as amended by secton 101(b) ( ) of the b) that the combned norma
ta and surta for a ta abe year begnnng after September 30, 19 0, sha
n no event e ceed 7 percent of the net ncome for the ta abe year.
In the case of the caendar year 19 0 (ta abe year begnnng on anuary 1,
19 0, and endng op December 31, 19 0) the amendments provde for computng
a tentatve norma ta and a tentatve surta for such year n the same manner
as that provded under e stng aw, but the amendment to secton 12(c) of the
Code provdes for a reducton of the aggregate of such tentatve ta es by an
amount whch s ess than the reducton provded under e stng aw. It s
further provded (under secton 12(c) (1) of the Code as amended by the b)
that the combned norma ta and surta for the caendar year 19 0 sha n
no event e ceed 0 percent of the net ncome of the ta abe year.
In the case of a ta abe yenr endng n 19 0 but before October 1, 19 0, the
amendments provde for computaton of the norma ta and surta n the same
manner as that provded under e stng aw. Thus In the case of a ta abe
year begnnng October 1. 10 9, and endng September 30, 19 0, or n the case
of a ta abe year whch began anuary 1, 19 0, and ended pror to October 1.
10 0, by reason of the death of the ta payer, no ncrease n ta s provded
under the amendments.
If the ta abe year begns before October 1, 19 0, nnd ends after September SO.
19 0 (other than a ta abe year whch s the caendar year 19 0) the ta m-
posed by sectons 11 and 12 for such year w be computed under the provsons
of secton 10 (e) of the Code, as e paned n the dscusson of secton 131 ot
the b.
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S CTION 102. INDI IDU LS WITII D UST D GROSS INCOM OF L SS T N
S,000
Secton 102, for whch there Is no correspondng provson n the b as passed
by the ouse, amends secton 00, reatng to optona ta on ndvduas wth
ad|usted gross ncome of ess than ,000, to provde new tabes to refect the
ncreased ncome ta raes on ndvduas provded n ths b.
S CTION 103 COMPUT TION OF T IN C S OF C RT IN OINT R TURNS
Secton 103, for whch there s no correspondng provson n the b ns passed
by the ouse, provdes that f a |ont return of a husband and wfe s fed under
the provsons of secton 1 (b) (3) of the Interna Revenue Code n a case where
the husband and th- wfe have dfferent ta abe years because of the death of
ether sM|ue, and the ta abe year of the survvng spouse covered by such |ont
return begns before October 1, 19 0. and ends after September 30, 19 0, the
amendments made by part I of tte I of the b, reatng to ndvdua ncome
ta rates, sha be appcabe n respect of such |ont return as f the ta abe
years of both spouses covered by the ont return ended on the date of the cosng
of the survvng spouse s ta abe year.
Under secton 1 tb) (3) of the Code, f the ta abe years of husband and wfe
begn on the same day but end on dfferent ta abe days because of the death
of ether spouse or both, the ont return may nevertheess be made wth respect
to both ta abe years. Thus, f one spouse des durng 19 0 and the survvng
spouse eects to fe a |ont return under secton 1(b) (3) of the Code coverng
hs caendar year 19 0 and the ta abe year of the decedent spouse, secton 103
of the b provdes that the ta- wth respect to the ont return w be computed
at the rates appcabe under the b to a return for the caendar year 19 0. In
such a case, t woud be mmatera whether the ta abe year of the decedent
spouse ended before or after October 1.19 0. If the .a abe year of the survvng
spouse begnnng before October 1, 19 0, and endng after September 30, 19 0. s
not a caendar year, the ta n the case of the fng of a ont return by the
survvng spouse woud be computed under the provsons of secton 10 (e) of
the Code (as amended by secton 131 of the b), and the computatons requred
theren wth respect to caendar months n the ta abe year woud be made by
reference to the caendar months of the survvng spouse s ta abe year.
S CTION 10 . FF CTI D T OF P RT I
The amendments made by part I of the b are appcabe wth respect to
ta abe years endng after December 31, 19 9, e cept that the amendment made
by secton 101(b)( ) of the b to secton 12(f) of the Code appes ony to
ta abe years begnnng after September 30, 19 0.
Part II. Corporaton Income Ta es
S CTION 121. INCR S IN R T OF CORPOR TION INCOM T S
Ths secton, whch corresponds to secton 21 of the b as passed by the
ouse, amends the corporate ta provsons to mpose, n genera, a ta ncrease
wth respect to corporatons havng as a ta abe year the caendar year 19 0,
and mposes a further ncrease wth respect to ta abe years begnnng after
une 30, 19 0. There s no ncrease n rates for ta abe years endng on or before
une 30. 19 0. Speca provson s made for ta abe years of corporatons begn-
nng pror to uy 1, 19 0 (other than the caendar year 19 0) and endng after
that date, so as to apporton the ta ncrease provded n ths b to such ta abe
years.
The secton adopts for the caendar year 19 0 and ta abe years begnnng
after une 30, 19 0, the method of ta ng corporatons provded n the b as
passed by the ouse. ccordngy, norma ta net ncome and corporaton
surta net ncome are defned substantay In the manner provded by the
ouse b. The norma ta rate s made appcabe to the entre norma ta
net ncome of a corporatons; the surta rate appes to the corporaton surta
net ncome n e cess of 2 ,000. Under ths pan, the so-caed notch provsons
are emnated. It Is not ntended, however, that the e empton of the frst
2 ,000 of a corporaton s surta net ncome from the surta sha be abused by
the spttng up, drecty or ndrecty, of a busness enterprse nto two or more
corporatons or the formng of two or more corporatons to carry on an nte-
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grated busness enterprse. It Is beeved that sectons and 129 w prevent
ths form of ta avodance.
Subsecton (a) of secton 121 amends secton 13, reatng to the norma ta
on corporatons, wth respect to ta abe years endng after December 31, 19 9.
In secton 13(a) (2) ( ), appcabe to the caendar year 19 0 and ta abe years
begnnng after une 30, 19 0, norma ta net ncome s defned as n secton 21
of the b as passed by the ouse. Credts appcabe aganst norma ta net
ncome are provded n the case of dvdends pad on the preferred stock of a
pubc utty and n the case of a Western emsphere trade corporaton. (These
credts are dscussed beow.) For ta abe years begnnng before uy 1, 19 0
(other than the caendar year 19 0), secton 13(a)(2)( ) retans the present
defnton of norma ta net ncome.
Secton 13(b), as amended, reatng to the mposton of the norma ta ,
provdes the norma ta rates appcabe n the case of ta abe years endng
after December 31, 19 9. For ta nbe years begnnng after une 30, 19 0, a
norma ta of 2 percent s mposed on a corporatons; for the caendar year
19 0, the norma ta s 23 percent. Wth respect to ta abe years (other than
the caendar year 19 0) begnnng before uy 1, 19 0, secton 13(b) retans the
norma ta provsons of present aw appcabe to corporatons wth ncomes
over 2 ,000, but n the case of a ta abe year (other than the caendar year
19 0) begnnng before uy 1, 19 0, and endng after une 30, 19 0, the ta s
computed under secton 10 (f) of the Code, added by secton 131 of the b.
Subsecton (b) of secton 121 amends secton 1 (a), reatng to the norma
ta on certan casses of corporatons, to restrct the appcaton of the secton to
ta abe years begnnng before uy 1, 19 0 (other than the caendar year 19 0).
For the caendar year 19 0 and for a ta abe years begnnng after une 30,
19 0, secton 1 of the Code w have no appcaton.
Subsecton (c) of secton 121 amend secton 1 , reatng to the surta on
corporatons, wth respect to the denton of corporaton surta ncome and
the surta rate mposed. In the case of ta abe years begnnng after une 30.
19 0, corporaton surta net ncome s defned as the net ncome mnus the sum
of the foowng credts (dscussed beow) : (1) the credt for dvdends receved
provded n secton 26(b) of the Code, (2) n the case of a pubc utty, the
credt for dvdends pad on preferred stock provded n secton 26(h) of the
Code, and (3) n the case of Western emsphere trade corporatons, the credt
provded n secton 26(1) of the Code. In the case of the caendar year 19 0. the
credt provded n secton 26(|) of the Code s aowed n addton to the above
three credts. In the case of ta abe years begnnng before uy 1, 19 0 (other
than the caendar year 19 0), the defnton under present aw of corporaton
surta net ncome s retaned.
Secton 1 (b), as nmended, mposes ncreased surta rates for ta abe years
begnnng after une 30, 19 0, and for the caendar year 19 0. For those years
begnnng after une 30,19 0, the surta upon the corporaton surta net ncome
s 20 percent of surta net ncome n e cess of 2 ,000. For the caendar year
19 0. the surta rate s 19 percent on corporaton surta net ncome n e cess of
2 ,000. The surta rates of the present aw are retaned as to ta abe years
begnnng before uy 1, 19 0 (other than the caendar year 19 0), but n the
case of a ta abe year (other than the caendar year 19 0) begnnng before uy
1, 19 0, and endng after une 30,19 0, the ta s computed under secton 10 (f)
of the Code, added by secton 131 of the b.
The effect of the amendments to sectons 13, 1 , and 1 s to change the corpo-
rate ta rates and the corporate ta base for the caendar year 19 0 and a
ta nbe years begnnng after une 30, 19 0. The present system of graduated
rates beow 2 ,000 of ncome, notch rates between 2 ,000 and 0,000 of Income,
and unform rates for ncomes n e cess of 0,000 are repaced by a snge rate
nppcate to the entre norma ta net ncome and a surta rate appcabe to
corporaton surta net ncome In e cess of 2 ,000. In computng the ta for
both the caendar year 19 0 and years begnnng after une 30, 19 0. the new
credts are taken nto account n determnng norma ta net ncome and corpora-
ton surta net ncome.
For ta nbe years begnnng pror to uy 1, 19 0 (other than the caendar
yenr 19 0). the norma ta and surta rates of e stng aw w be appcabe,
sub|ect to the provsons of secton 10 (f). In the case of a ta abe year whch
begns and ends pror to uy 1, 19 0, the e stng ta rates and method of de-
termnng ta w appy. Thus there w be no ncrease In ta for a fsca year
begnnng on uy 1, 19 9, and endng on une 30, 19 0, or for a short ta abe
year begnnng on anuary 1,19 0, and endng on May 31, 19 0.
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Subsecton (d) of secton 121 amends secton 207(a)(1) (reatng to norma
tu and surta on mutua nsurance companes other than fe or marne) and
secton 207(a)(3) (reatng to the norma ta and surta on nternsurers or
recproca underwrters) to refect the norma ta rates and surta rates app-
cabe to corporatons for ta abe years begnnng after une 30, 19 0, and for
the caendar year 19 0.
Subsecton (e) of secton 121 amends secton 302(b) (3) nnd ( ) (reatng to
norma ta and surta on reguated nvestment companes) to refect the new
rates provded by Ibs secton.
Subsecton (f) of secton 121, for whch there s no correspondng provson
In the b as passed by the ouse, amends secton 1 1(c) (reatng to computaton
and payment of ta on consodated retans) to provde that n the case of an
affated group of corporatons Incudng one or more Western emsphere trade
corporatons fng a consodated return the 2 percent addtona ta sha be
apped on the amount by whch the consodated corporaton surta net ncome
of the affated group e ceeds the porton of the consodated corporaton surta
net ncome attrbutabe to the Western emsphere trade corporatons. If tb
consodated corporaton surta net ncome of the Western emsphere trade
corporatons Is ess than zero, the 2 percent addtona ta sha be apped aganst
the consodated corporaton surta net ncome of the entre aff ated group,
cudng the Western emsphere trade corporatons.
Subsecton (g) of secton 121 makes the necessary technca amendments to
other provsons of the Interna tevenue Code. Ths subsecton amends secton
322(c) (reatng to the amount of net operatng oss deducton) to provde that,
n determnng the net operatng oss deducton, the norma ta net Income of
corporatons sha be computed wthout regard to the credt provded n secton
20(h) for dvdends pad on the preferred stock of a pubc utty or the credt
provded n secton 20() for Western emsphere trade corporatons. Ths sub-
secton aso amends secton 201(a)(1) (reatng to ta on fe-nsurance com-
panes) to refect the new rates. Secton 20 (a) (1) (reatng to ta on nsurance
companes other than fe or mutua) s amended so that the ta es on such
companes w be computed as provded In sectons 13(b) and 1 (b). Secton
20 (a) (2) (reatng to defnton of norma ta net ncome and corporaton surta
net ncome of nsurance companes other than fe or mutua) s amended so
th;t such companes, n computng ther corporaton surta net ncome for the
caendar year 19 0, w be entted to the surta credt for partay ta e empt
nterest provded n secton 20(|). Ths subsecton aso amends secton 231(b),
reatng to foregn corporatons engaged n trade or busness n the Unted States.
For the caendar year 19 0 and for ta abe years begnnng after une 30, 19 0,
such corporatons w be sub|ect to the norma ta mposed by secton 13(b) and
the surta mposed by secton 1 (b).
S CTION 122. CR DITS OF CORPOR TIONS
Subsecton (a) of secton 122, whch corresponds to sectons 203 and 21 (b)
of the b as passed by the ouse, amends secton 26(b), reatng to the dvdends-
receved credt. Secton 26(b), as amended, w provde that the dvdends-
receved credt sha be the sum of: (1) percent of a dvdends receved
from a domestc corporaton sub|ect to the ncome ta , other than dvdends
receved (n ta abe years descrbed In cause (2) of ths sentence) on the
preferred stock of a pubc utty: pus (2) In the case of any ta abe year
begnnng after une 30. 19 0. 9 percent of the amount receved as dvdends
on the preferred stock of a pubc utty whch s sub|ect to the ncome ta , but
not to e ceed 9 percent of the stockhoder s ad|usted net ncome computed
wthout regard to the net operatng oss deducton provded n secton 23(s).
For the caendar year 19 0 the amount provded n (2), above, w be 7 per-
cent of the amount receved as dvdends on the preferred stock of a pubc utty
whch Is sub|ect to the ncome ta . but not to e ceed 7 percent of the stock-
hoder s ad|usted net ncome computed wthout regard to the net operatng oss
deducton. In no event s the tota credt aowed by secton 26(b) to e -
ceed percent of the stockhoder s ad|usted net ncome computed wthout
regard to the net operatng oss deducton. Under the b as passed by the
ouse, the amendment provdng that ad|usted net ncome, for purposes of
servng as a mtaton on the dvdends-receved credt, sha be computed wth-
out regard to the net operatng oss deducton, was to b appcabe wth respect
to ta abe years begnnng ater December 31. 19 9. Under your commttee s
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b, the amendment w be appcabe wth respect to ta abe years endng
Secton 203 of the b, as passed by the ouse, restrcted the aowance of
the dvdends-receved credt n the case of dvdends n knd. Wth the e -
cepton of a change In the effectve date, your commttee s b contans the same
provson. The dvdends-receved credt w be mted to an amount not greater
than percent of the ad|usted bass of the property receved as a dvdend n the
hands of the dstrbutng corporaton at the tme of the dstrbuton. For ths
purpose, the ad|usted bass s to be ncreased In the amount of gan or decreased
n the amount of oss, f any, recognzed to the dstrbutng corporaton as a
resut of the dstrbuton. The dvdends-receved credt n no event w be
aowed n an amount greater than percent of the far market vaue of the
property receved as a dvdend. Under the b as passed by the ouse the
amendment was to be appcabe to ta abe years endng after December 31,
19 9, but ony wth respect to dvdends receved after such date. Your com-
mttee has changed the effectve date so that the amendment w appy ony to
dvdends receved after the date of the enactment of ths ct.
Subsecton (b) of secton 122, whch corresponds to secton 21 (c) of the
b as passed by the ouse, amends secton 26(h) (1) to provde that, for the
caendar year 19 0, the credt under that secton s an amount equa to 33 per-
cent of the esser of (1) the amount of dvdends pad on the preferred stock
of the pubc-utty company, or (2) the e cess of the ad|usted net ncome of the
pubc-utty company over ts dvdends-receved credt provded n secton 26(b)
for such ta abe year. For ta abe years begnnng after une 30, 19 0, the
credt s equa to 31 percent of the esser of such amounts. Ths credt Is ap-
pcabe In computng both the norma ta net ncome and the corporaton
surta net ncome.
Subsecton (c) of secton 122, whch corresponds to secton 21 (d) of the
b as passed by the ouse, amends secton 26 by addng at the end thereof
new subsecton () whch provdes a credt (appcabe to Western emsphere
trade corporatons) equa, for ta abe years begnnng after une 30, 19 0, to
31 percent of the norma ta net ncome of the Western emsphere trade cor-
poraton, such norma ta net ncome beng computed wthout regard to the credt
provded In such subsecton (). For the caendar year 19 0, the credt Is equa
to 33 percent of such amount. Ths credt Is appcabe n computng both the
norma ta net ncome and the corporaton surta net.
Subsecton (d) of secton 122 corresponds to secton 21 (e) of the b as
passed by the ouse, whch aowed a surta credt for partay ta -e empt
nterest wth respect to ta abe years begnnng after December 31, 19 9. Tour
commttee has provded a smar credt under secton 26(|) appcabe, how-
ever, ony to the caendar year 19 0 and reduced In amount. The credt
aowed s the esser of (1) .3 percent of the credt provded n secton 26(a)
(reatng to nterest on partay ta -e empt obgatons) ; or (2) .3 percent
of the amount by whch corporaton surta net ncome, computed wthout regard
to the credt provded n subsecton (|), e ceeds 2 ,000. Ths credt s appcabe
ony n computng corporaton surta net ncome.
cept as otherwse e pressy provded, the amendments made by part IT of
the b are appcabe wth respect to ta abe years endng after December
31, 19 9.
Part III. Fsca Year Ta payers
S CTION 131. FISC L Y R T P Y RS
Secton 131, for whch there s no correspondng provson In the b as
passed by the ouse, amends secton 10S, reatng to fsca year ta payers.
The present subsecton (e) of secton 10 s reettered as subsecton (g) and
two new subsectons, (e) an (f), are added.
The new subsecton (e) deas wth the ndvdua ncome ta n the case of
ta abe years (other than the caendar year 19 0) whch begn before October
1, 19 0, and end after September 30, 19 0. In the case of any such ta abe year
the Indvdua Income ta mposed by sectons 11 and 12 or 00, whchever
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s appcabe, w be determned by computng two tentatve ta es and ten
addng together certan portons of such tentatve ta es. The ta w be the
sum of:
(1) that porton of a tentatve ta , computed wthout regard to the
provsons of secton 10 (e), whch the number of caendar months n the
the ta abe year pror to October 1, 10 0, bears to the tota number of
caendar months In snc ta abe year, pus
(2) that porton of a tentatve ta , computed by appyng the provsons
of sectons 11(a), 12(b)(1). 12(d). nnd 12(f), or tabe I of secton )
(whch are appcabe to ta abe years begnnm; after September 30. 10 0),
as f such provsons were appcabe to such ta abe year, whch the number
of caendar months n such ta abe year after September 30, 11)30, bears to
the tota number of caendar months n such ta abe year.
For the purposes of secton 10 (e), a caendar month sha be dsregarded f ess
than 1 days of such month fa wthn the ta abe year; f more than 1 days of
the month fa wthn the ta abe year, such mouth sha be consdered a fu
caendar month.
The new subsecton (f) deas wth the corporate ncome ta n the case of ta -
abe years (other than the cnendnr year 19 0) whch begn pror to uy 1,
10 0, and end after une 30, 10 0. In the case of any such ta abe year the
corporate ncome ta Imposed by sectons 13, 1 , and 1 w be determned by
computng two tentatve ta es and then addng together certan portons of such
tentatve ta es. The ta w be the sum of:
(1) that porton of a tentatve ta , computed wthout regard to the
provsons of secton 10 (f), whch the number of days n the ta abe year
pror to uy 1, 10 0, bears to the tota number of days n such ta abe
year, pus
(2) that porton of a tentatve ta , computed by appyng the provsons
of sectons 13(b)(1), 1 (b)(1), 26(b)(2)( ), 26(h)(1)( ), and 26 )
(1) (whch are appcabe to ta abe years begnnng after une 30, 10 0)
as f such provsons were appcabe to such ta abe year, whch the number
of days n such ta abe year after une 30, 10 0, bears to the tota number
of days n such ta abe year.
In computng the ta under secton 10 (e) or (f), the net ncome of the ta -
payer for the ta abe year s not recomputed n determnng the tentatve ta
under ether cause (1) or (2) of secton 10 (e) or (f).
Part I . Increase n Wthhodng of Ta at Source o Wages
S CTION 1 1. P RC NT G M T OD OF WIT OLDING
Secton 1 1, for whch there s no correspondng provson n the b as passed
by the ouse, amends secton 1622(a) by changng the percentage rate of wth-
hodng from 1 percent to 1 percent.
S CTION 1 2. W G R C T WIT OLDING
Secton 1 2, for whch there s no correspondng provson n the b as passed
by the ouse, amends secton 1622(c) (1), reatng to wage bracket wthhodng,
to provde new tabes to refect the ncreased ta rates.
S CTION 1 3. FF CTI D T OF P RT I
The amendments made by ths part are appcabe ony to wages pad on or
after October 1, 10 0. It s mmatera whether the wages were earned before
or after October 1, 10 0. If they are pad on or after October 1, 10 0, the new
wthhodng rates w appy.
TITL II. MISC LL N OUS INCOM T M NDM NTS
S CTION 201. T NSION OF TIM IN T C S OF DISC RG OF
IND T DN SS
Ths secton, for whch there s no correspondng secton n the ouse b,
e tends for 1 year the appcaton of secton 22(b) (0) nnd (10) of the Interna
Revenue Code, whch permts a corporaton to e cude from ncome certan
amounts attrbutabe to dscharge of ndebtedness.
023 30 1 3
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S CTION 202. INCOM T MPTIONS FOR M M RS OF T RM D FORC S
S R ING IN COM T R S
Ths secton, for whch there Is no correspondng provson In the ouse b,
amends secton 22(b) (13) of the Interna Revenue Code to grant an addtona
aowance for members of the rmed Forces servng n combat zones.
Ths addtona aowance s In the form of an e cuson of certan amounts
from gross ncome. The determnaton of such amount depends, ntay, upon
the cassfcaton of such member as a commssoned offcer or as an ensted
person. Unke the provsons of secton 22(b) (13) n effect durng Word War
II, a commssoned warrant offcer s to be treated as an ensted person. Non-
commssoned warrant offcers w contnue to be treated as ensted personne.
nsted personne w be entted to e cude from gross ncome, n the case
of compensaton receved after une 2 , 19 0, and pror to anuary 1. 19 2, for
actve servce n the rmed Forces of the Unted States, that amount of such
compensaton receved durng the ta abe year whch bears the same rato to the
tota of such compensaton receved durng such ta abe year as the number of
caendar months durng any part of whch the member performed such servce
n a combat zone durng such ta abe year bears to the tota number of caendar
months durng any part of whch he performed such servce at any pace durng
such ta abe year.
Commssoned offcers w be entted to e cude from gross ncome, n the
case of compensaton receved after une 2 , 19 0. and pror to anuary 1. 19 2.
for actve servce n the rmed Forces of the Unted States, that amount of such
compensaton whch s equa to 200 tmes the number of caendar months durng
any part of whch he performed such servce n a combat zone durng the ta abe
year.
The determnatons as to whch specfc areas are combat zones are to be made
by the Presdent of the Unted States by ecutve order on the bass of whether
the rmed Forces of the Unted States are engaged n combat theren snce
une 2 , 19 0. Servce s to be consdered as performed n such zones ony f
t s performed on or after the date desgnated by the Presdent by ecutve
order as the date of the commencement of combatant actvtes n such zone
and on or before the date desgnated by the Presdent by ecutve order as
the date of the termnaton of combatant actvtes n such zone.
Subsecton (b) of ths secton amends secton 1621(a) of the Code to e cude
from the defnton of wages remuneraton pad for actve servce as a member
of the rmed Forces of the Unted States n a month durng any part of whch
such member served n a combat zone as defned n secton 22(b) (13).
Subsecton (b) s effectve wth respect to wages pad on or after the frst day
of the second caendar month whch begns after the date of enactment of ths ct
Subsecton (c) of ths secton provdes for the furnshng of certan addtona
Informaton on the wrtten statement requred to be furnshed to empoyees n
the case of members of the rmed Forces entted to the benefts of secton
22(b) (13).
S CTION 203. TR TM NT OF OND PR MIUM IN C S OF D L RS IN
T - MIT S CURITI S
Ths secton Is the same as secton 202 of the ouse b, e cept that your
commttee nsert sub|ecton (c) to change the effectve date of the amendments
made by the secton.
Subsecton (a) of ths secton amends secton 22 of the Interna evenne Code
by addng a new subsecton (o) to requre deaers n securtes to make an ad-
|ustment for bond premum on certan ta -e empt bonds. The ad|ustment s
requred ony n the case of short-term muncpa bonds, whch are defned
as obgatons ssued by a government or potca subdvson thereof on whch
the nterest Is e cudbe from gross ncome, e cept such obgatons whch are
sod or otherwse dsposed of by the ta payer wthn 30 days after the date
of acquston by hm, or the earest maturty or ca date of whch Is a date
more than years from the date on whch t was acqured by hm. Under
ths defnton f a deaer n securtes purchases or otherwse acqures a tav-
e empt bon ssued by a State or cty and ses the bond to a customer wthn
30 days after the date of ts acquston the ad|ustment provded for by the
amendment made by ths secton of the b w not appy. Smary, f for
e ampe, the ta -e empt muncpa bond acqured by the deaer on anuary 1.
19 1, matures anuary 2. 10 ft, and If such bond cannot- be caed before snfh
date, the amendment made by ths secton w not appy.
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The ad|ustment requred, In the case of a deaer In securtes who computes
hs gross Income from such trade or busness by the use of Inventores and
vaues such Inventores on any bass other than cost, Is the reducton of cost
o securtes sod durng such year by the amount equa to the amortzabe bond
premum whch woud be dsaowed as a deducton f the deaer were an or-
dnary nvestor hodng such bond. The term cost of securtes sod s specf-
cay defned as the amount ascertaned by subtractng the Inventory vaue
ct the cosng nventory of a ta abe year from the sum of the Inventory vaue
of the openng nventory for such year and the cost of securtes and other prop-
erty purchased durng such year whch woud propery be ncuded n the n-
ventory of the ta payer If on hand at the cose of the ta abe year.
If a deaer In securtes computes hs gross Income wthout the use of Inven-
tcres or f hs nventores are vaued at cost he s requred to mnke nn ad|ust-
ment smar to that whch he woud make were he an ordnary nvestor. Thus,
such n deaer who ses or otherwse dsposes of a short-term muncpa bond
durng the year s requred to reduce the bass of the bond by the amount of
the ad|ustment whch woud be requred under secton 113(b)(1)( ) were he
an ordn. ry nvestor.
Subsecton (b) of ths secton amends secton 113(b) (1) by addng new sub-
paragraph (I) thereto, and secton 12 by addng new subsecton (e), for the
purpose of provdng a reference n these reated sectons to the new provsons
contaned n secton 22(o).
Subsecton (c) of ths secton, added by your commttee, changes the effectve
date of the amendments made by the secton, makng such amendments ap-
pcabe to ta abe years endng after une 30, 19 0, nstead of to ta abe years
begnnng after December 31, 19 9. owever, subsecton (c) provdes that,
n the case of a ta abe year begnnng before and endng nfter une 30, 19 0,
the amendments sha be appcabe ony wth respect to obgatons acqured
fter such date.
S CTION 20 . CIRCUL TION P NS S OF N WSP P RS, M G ZIN S, ND
P RIODIC LS
Ths secton of the b, whch was added by your commttee, amends secton
23 of the Code (reatng to deductons from gross ncome) by addng at the
end thereof a new subsecton (bb) to provde for the deducton from gross n-
come (notwthstandng the provsons of secton 2 (a), reatng to tems not
deductbe from gross ncome) of a e pendtures to estabsh, mantan, or
ncrease the crcuaton of a newspaper, magazne, or other perodca, other
than e pendtures for the purchase of and or deprecabe property or for the
acquston of crcuaton through the purchase of newspapers, magaznes, or
other perodcas. s an e cepton to ths rue, the b provdes that the de-
ducton sha not be aowed wth respect to any porton of such crcuaton
e pendtures whch s, under reguatons prescrbed by the Secretary, chargeabe
to capta account, f the ta payer eects, n accordance wth such reguatons,
to treat sued porton as so chargeabe. If the ta payer so eects, the eecton
must be for the tota amount of such porton of the crcuaton e pendtures
whch s chargeabe to capta account, and sha be bndng for a subsequent
ta abe years. Wth respect to the bndng effect of such an eecton, t s pro-
vded, however, that the Secretary may, u cn appcaton by the ta payer, per-
mt a revocaton of such eecton sub|ect to such condtons as the Secretary
deems necessary.
The b aso provdes for a technca amendment of secton 113(b)(1)( )
of the Code (reatng to rues for determnng ad|usted bass of property) to
conform such provson to the new secton 23(bb) of the Code descrbed above.
The amendments, made by ths secton are retroactve, beng made appcabe
wth respect to ta abe years begnnng after December 31,19 .
S CTION 203. P YM NT OF INCOM T T INST LLM NT P YM NTS
Ths secton s dentca wth secton 603 of the b passed by the ouse.
Ths secton of the b amends secton 6(b) of the Interna Revenue Code
wth respect to payment of ncome ta es n nstaments. Under present aw
a corporaton may pay ts ta n four equa quartery nstaments. Under
secton 6(b), as amended, corporate ncome ta es w be requred to be pad
as foows: In the ease of a ta abe year endng on or after December 31, 19 0
(and endng before December 31, 19 1), a corporaton w be requred to pay
30 percent of ts ta on ts frst quartery nstament date, 30 percent on ts
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second quartery Instament date, 20 percent on ts thrd quartery Instament
date, and 20 percent on ts fourth quartery nstament date; for ts ta abe
year endng on or after December 31, 10 1 (and endng before December 31,
19 2), t w be requred to pay 3 percent of ts ta on each of the frst two
nstament dates and 1 percent on each of the ast two nstament dates; for
ts ta abe year endng on or after December 1, 19 2 (and endng before De-
cember 31, 19 3), t w be requred to pay 0 percent of ts ta on each of the
frst two nstament daes and 10 percent of the ta on each of the ast two
nstament dates; for ts ta abe year endng on or after December 31, 19
(and endng before December 31, 19 ), t w be requred to pay percent
of ts ta on each of the frst two nstament dates and percent on each of
the ast two Instament dates. For a ta abe years endng on or after De-
comber 31, 19 , a corporaton w be requred to pay Its ta n two nstaments,
the frst Instament of 0 percent of ts ta beng due on the 13th day of the
thrd month foowng the cose of ts ta nbe year, and the remanng 0 per-
cent of ts ta beng due on the 1 th day of the s th month foowng the cose
of ts ta abe year.
Ths secton further amends secton 6(b) so that the nstament prvege,
formery provded for n the case of estates, trusts, and certan nonresdent
aens, s provded for ony n the case of estates. Under ths amendment trusts
and certan nonresdent aens heretofore afforded the prvege of eectng to
pay the ta In four equa nstaments w be requred to pay the tota amount
of the ta on the date prescrbed for such payment.
If the fu amount of ta due on any nstament date s not pad on such
date, the entre unpad amount of the ta , ns under e stng aw. becomes due
and payabe. In the case of ta payabe n four nstaments, the dates pre-
scrbed for the payment of each nstament are determned n the same manner
as under e stng aw.
The amendments made by ths secton are appcabe to a ta abe years
endng on or after December 31, 19 0.
SUCTION 200. L CTION S TO R COGNITION OF G IN IN C RT IN CORPOR T
LI UID TIONS
Ths secton, for whch thera s no correspondng provson n the ouse b,
amends secton 112(b)(7) of the Interna Revenue Code (reatng to eecton
as to recognton of gan n certan corporate qudatons), whch secton s
appcabe under e stng nw ony n cases n whch the qudaton was pur-,
suant to a pan adopted after the date of enactment of the Revenue ct of 19 3,
and the transfer of n the property under the qudaton occurred wthn one
caendar month In 19 . The amendment made by ths secton makes secton
112(b)(7) appcabe to cases n whch the qudaton s pursuant to a pan
adopted after December 31, 19 0. and the transfer of a the property nnder
the qudaton occurs wthn one caendar month n 1931. The effect of the
secton s, n genera, to postpone the recognton of that porton of a quafed
eectng sharehoder s gan on the qudaton whch woud otherwse be rec-
ognzed and whch s attrbutabe to apprecaton n the vaue of certan cor-
porate asset , unreazed by the corporaton at the tme such assets are dstrbuted
n compete qudaton.
In order to adapt the baance of secton 112(b) (7) as It now appears n the
Code to qudatons occurrng n 19 1, the date ugust 1 . 19 0, s substtuted
for the date December 10. 19 3, n subparagraphs ( ), ( ), and (F) of the
secton (reatng to the determnaton of e cuded corporatons and reatn|
to the recognton of gan from the recept of money or of stock or securtes
acqured by the qudatng corporaton after such date).
Ths secton aso makes a technca amendment to secton 113(a) (1 ) of the
Interna Revenue Code, n order to make that secton equay appcabe to
property acqured by an eectng sharehoder n a qudaton n 19 (covered
by secton 112(b) (7) pror to ts amendment by ths ct) and to property ac-
qured by an eectng sharehoder In a qudaton n 19 1 (covered by secton
112(b) (7) as amended by ths ct).
The amendments mnde by ths secton are appcabe to ta abe years endng
S CTION 207. C RT IN DISTRI UTIONS OF STOC ON R ORG NIZ TION
Ths secton, for whch there s no correspondng provson n the ouse b,
amends secton 112(b) of the Interna Revenue Code by addng at the end
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thereof a new paragraph (11) provdng that If there Is dstrbuted, n pursu-
ance of a pan oZ reorganzaton, to a sharehoder of a corporaton whch s
a party to the reorganzaton, stock (other than preferred stock) n another
corporaton whch s a part| to the reorganzaton, wthout the surrender by
such sharehoder of stock, no gan to the dstrbutee from the recept of such
stock s to be recognzed uness t appears that ( ) any corporaton whch s
a party to such reorganzaton wns not ntended to contnue the actve conduct
of a trade or busness after such reorganzaton, or ( ) the corporaton whose
stock s dstrbuted wns used prncpay ns a devce for the dstrbuton of
earnngs and profts to the sharehoders of any corporaton a party to the
reorganzaton.
The secton s appcabe ony to the- onrecognton of gan, snce a dstrbuton
of stock n pursuance of a pan of reorganzaton nnd wthout the surrender by
the sharehoder of any of hs stock n the transferor corporaton coud not gve
rse to a oss.
Subsecton (b) of ths secton nmewds secton 113(a) by addng a new para-
grap1. (23). Ths paragraph provdes that f property conssts of stock ds-
trbuted after the date of the enactment of the Revenue ct of 19 0 to a ta payer
n connecton wth a transacton descrbed n ths secton, or conssts of stock n
respect of whch such dstrbuton was made, then the bass of the new stock and
of the od stock, respectvey, sha n the sharehoder s hands be determned by
aocatng between the od s ock and the new stock the ad|usted bass of the od
stock ; such aocaton to be made under reguatons prescrbed by the Secretary.
Subsecton (c) of ths secton provdes that the amendments made are app-
cabe to ta abe years endng after the date of the enactment of ths ct but ony
wth respect to dstrbutons of stock made after such date.
S CTION 20 . P RC NT G D PL TION
The b as reported by your commttee strkes out secton 20 (whch reated
to aowances for depeton) of the ouse b and nserts n eu thereof ths sec-
ton whch amends secton 11 (b) ( ) ( ) of the Interna Revenue Code (reatng
to the defnton of gross ncome from the property).
Subsecton (a) provdes, n effect, that n computng gross ncome from the
property, there sha be ncuded vaue added as the resut of transportaton of
ores or mneras (whether or not by common carrer) from the pont of e trac-
ton from the ground to the pant or m n whch the ordnary treatment processes
are apped thereto.
Subsecton (b) adds a new subdvson (v) to secton 11 (b)( )( ), provd-
ng that n the case of bentonte, the term ordnary treatment processes ncudes
crushng, dryng, puverzng or granuatng, and oadng for shpment.
Subsecton (c) provdes that the amendments sha be appcabe wth respect
to ta abe years begnnng after December 31, 19 9.
S CTION 209. TR TM NT OF C RT IN R D MPTIONS OF STOC S DI ID NDS
Ths secton corresponds to secton 207 of the ouse b, e cept that your com-
mttee amendment does not appy to cases where corporatons are merey con-
troed by the same nterests. Your commttee has aso changed the effectve
date of the secton and made certan technca changes.
Ths secton amends secton 11 (g) of the Code, whch provdes for the treat-
ment as ta abe dvdends of amounts dstrbuted by a corporaton n cancea-
ton or redempton of ts stock f the canceaton or redempton and the reated
dstrbuton are effected nt such tme nnd n such manner as to be essentay
equvaent to the dstrbuton of a ta abe dvdend.
In Trustees of ohn Wannmakcr v. Commssoner (11 T. C. 3G , affrmed 17
Fed. (2d) 10 (C. . 3d, 19 9)), the court hed that the anguage of secton 11 (g)
was so mted as to appy ony to the redempton by a corporaton of ts own
stock and as not to appy to the purchase by a whoy owned subsdary of stock
of the parent company from the stockhoders of the parent, even though, f the
parent corporaton had drecty redeemed ts stock, the redempton woud have
effected a dstrbuton of ts earnngs and profts essentay equvaent to the
dstrbuton of a ta abe dvdend.
The amendment made by ths secton of the b woud add a new paragraph (2)
to secton 11 (g) of the Code to requre the appcaton of the prncpes of sec-
ton 11 (g) n the case where the acquston of stock s made by a corporaton
controed by the Issung corporaton.
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Under the amendment, where stock of a parent corporaton Is acqured by a
subsdary, the amount pad for the stock s treated, for the purposes of secton
11 (g) (1), as though such amount had been dstrbuted by the subsdary to the
parent and had then been apped by the parent n redempton of Its stock. If
the amount pad for the stock woud, under those crcumstances, be treated as
essentay equvaent to the dstrbuton of a ta abe dvdend by the parent
under the prncpes of secton 11 (g)(1), the amount when pad by the sub-
sdary to a sharehoder of the parent sha, to the same e tent, consttute a
dvdend n the hands of such sharehoder.
For purposes of determnng whether one corporaton s so controed by another
as to be ts subsdary, contro s defned to mean the ownershp of stock possess-
ng nt east 0 percent of the tota combned votng power of a casses of stock
entted to vote or at east 0 percent of the tota vaue of shares of a casses of
stock of the corporaton.
Your commttee as retaned the provson In secton 11 (g) of the Code whch
provdes that, n order to be ta abe as a dvdend, the amount so dstrbuted n
redempton of the stock must represent a dstrbuton of earnngs or profts
accumuated after February 2 , 1013, nasmuch as secton 20 of the ouse b,
whch woud ta dstrbutons of amounts accumuated pror to that date, has
been omtted.
The ouse b provded that the amendments woud be appcabe to ta abe
years endng after December 31, 1 M ), but ony to amounts receved after anch
date. Your commttee has changed the effectve date so that the amendment w
nppy to ta abe years endng after the date of the enactment of ths ct but ony
wth respect to amounts receved after such date.
S CTION 210. R D MPTION OF STOC TO P Y D T T S
Ths secton s the same as secton 20 of the b as passed by the ouse e cept
that your commttee has emnated the provso thnt the vaue of the stock n the
corporaton must comprse more than 70 percent of the vaue of the net estate and
has made a technca amendment.
Ths secton adds a new paragraph (3) to secton 11 (g) of the Code (reatng
to redempton of stock by a corporaton) to e cept from the appcaton of shco
subsecton certan redemptons of stock.
Secton 11 (g) provdes n substance that an amount dstrbuted n cancea-
ton or redempton of stock sha be treated as a ta abe dvdend f the cancea-
ton or redempton s effected at such tme and n such manner as to make dstr-
buton essentay equvaent to the dstrbuton of a ta abe dvdend.
Under secton 1.1 (g)(3), as added by ths secton of the b, secton 11 (g)
s made Inappcabe to amounts dstrbuted wth respect to stock the vaue of
whch s Incuded n determnng the vaue of the gross estate of a decedent under
secton 11, to the e tent thnt the dstrbutons do not e ceed the estate, nhert-
ance, egacy, and successon ta es (ncudng any nterest coected as a part of
such ta es) Imposed because of the decedent s death. The e cepton made by
secton 11 (g) (3), however, appes ony to dstrbutons made after the deah
of the decedent and wthn the 3-yenr perod of mtatons for assessment of
estate ta provded n secton cS7 (a), determned as provded under secton S7
f appcabe. ny other e tensons of the perod of mtatons for assessment
of estate a w not operate as an e tenson of the tme wthn whch such
dstrbutons must be made.
The e cepton made by secton 11 (g) (3) s appcabe If the redeemed stock
s ncudbe n the decedent s gross estate whether or not the stock s owned
by the decedent at the tme of hs death and whether or not the redempton s
from the estate of the decedent. For e ampe, the e cepton s appcabe to the
redempton of stock ncudbe n the decedent s gross estate whch the decedent
had transferred n contempaton of death. The e cepton s aso appcabe to
the redempton of stock ncudbe In the decedent s estnte f such stock was
dstrbuted by the estate pror to the redempton. The e cepton, however, s not
appcabe to the redempton of stock from a purchaser for vaue thereof even
though such stock was ncudbe n a decedent s gross estate.
The provsons of secton 11 (g) (3) are appcabe to ta abe years endng on
or after the date of enactment of ths ct, but shu appy ony to auonms
dstrbuted on or after such date.
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Ths secton corresponds to secton 200 of the ouse MIL Yonr commttee,
however, has made severa Important changes.
S LTS OF USIN SS F OP TT
Yonr commttee has emnated the amendments proposed to be made to the
Interna Ievenue Code by secton 200 (b) and (d) of the ouse b, whch
woud have changed the ta treatment of saes and e changes of certan busness
property and abandonments of such property or capta assets.
C0PY I IIT , LIT R RY, MUSIC L OS RTISTIC COMPOSITIONS, ND SIMIL R PROP RTY
Secton 200(a) of the ouse b woud amend secton 117(a) (1) of the Code
by revsng the defnton of capta assets so as specfcay to e cude there-
from patents, copyrghts, nventons, desgns, terary, musca or artstc com-
postons, and smar property, n the hands of ether (1) the person whose
persona efforts crented such property or (2) a person dervng a bass for the
property, for the purpose of determnng gan, from the person who created t.
Your commttee has mted the scope of ths amendment (redesgnated as secton
211(a) of the b) to copyrghts, terary, musca or artstc compostons, and
smar property, and has emnated the proposed change n the treatment of
such property as nventons, patents, and desgns. Under the commttee amend-
ment, a person who wrtes a book or creates some other sort of artstc work
w be ta ed at ordnary ncome rates, rather than at capta-gan rates, upon
gan from the sae of the work regardess of whether t s hs frst producton
n the fed or not. The amendment made by secton 211(a) w aso e cude
from the capta asset category any property smar to that specfcay named;
for e ampe, a rado program whch has been created by the persona efforts
of the ta payer. Your commttee has found t necessary to make a carfyng
amendment (contaned n secton 211(b) of the b) to secton 117(|) of the
Code to prevent the creator of such property from obtanng capta gans treat-
ment by reason of the use of the property for a tme n hs trade or busness.
The nterest of a soe propretor n such a busness enterprse as a photographc
studo s not smar property even though the vaue of the busness may be
argey attrbutabe to the persona efforts of the soe propretor.
Where property has been created by more than one person, as for e ampe,
where three ndvduas coaborate n wrtng a book, the nterest of each ta -
payer n the property w be e cuded from the capta-asset category and any
gan derved from a sae of such nterest w be ta ed at ordnary rates.
The provsons of subparagraph (C) appy not ony to copyrghts and smar
property n the hands of the ta payer whose persona efforts created the prop-
erty but aso to such property hed by a person n whose hands the bass of the
property s determned (for the purpose of determnng gan on a sae or e -
change) n whoe or n part by reference to the bass of such property n the
hands of the person whose persona efforts created the property. Thus a sae
of such property by one who receved t by gft from the creator of the property
woud be ta ed as ordnary ncome.
The amendments made by ths secton to secton 117 of the Code do not cover
the stuaton n whch the ta payer contrbutes a copyrght or smar property
created through hs persona efforts to a newy formed corporaton n e change
for ts stock and then ses the stock snce such stuaton s deat wth n secton
213 of the b.
In cases where the wrtng or other product requred 3C months or more
to produce and 0 percent or more of the ncome therefrom s umped nto 1
year the provsons of secton 107(b) of the Code w aow the averagng of
the ncome from such work over a perod of not more than 36 months. Under
present aw there s e cuded from the benefts of secton 107(b) that part of
the gross ncome from an artstc work or nventon whch s ta abe as a gan
from the sae or e change of a capta asset hed for more than 6 months. The
e cuson of both artstc works and nventons from the defnton of a capta
asset, as proposed by secton 209(a) of the ouse b, woud have made the
e cepton under secton 107(b) unnecessary; hence, secton 209(f) of the ouse
b woud have made a technca amendment to secton 107(b) emnatng such
e cepton. Snce nventons w contnue to receve capta-gans treatment
under your commttee s b to the same e tent as under present aw, your
commttee has deeted the proposed technca amendment to secton 107(b).
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In determnng, for the purposes of secton 107(b), the ta whch woud be
attrbutabe to the gan on the sae of an artstc work f t had been receved
rataby n a ta abe year before the enactment of ths b, such gan w be
treated as ordnary gan. In the case of the sae, pror to the effectve date of
the amendment, of an artstc work by a creator who has eected the nstament
bass under secton , the ta treatment of nstament payments receved after
such effectve date w be governed by the rue of Sne v. Commttoner (97
Fed. (2d) 91).
Te amendments made by subsectons (a) and (b) of secton 211 w be
appcabe ony wth respect to ta abe years begnnng after the date of the
enactment of the b.
OLDING P RIOD FOR C rT t SS TS
Subsecton (c) of secton 211, whch corresponds to secton 209 (c) and (e)
of the ouse b, provdes that the hodng perod used for determnng whether
a capta gan or oss s ong-term or sbort term sha be 3 months nstead of
6 months as under present aw. To accompsh ths purpose, subsecton (c)
strkes out s months or 6 months and nserts n eu thereof 3 months-
n secton 117 (a), (b), (|), and (k) of the Code. Smar amendments are
made to sectons 12(g)(2) (reatng to the ta n case of capta gans);
23(k)( ) (reatng to nonbusness debts.); 107(b) (reatng to compensaton
for servces rendered for a perod of 3(1 months or more) ; 10 (b) (reatng to
ta abty of bene cary of an empoyee s trust) ; 169(c) (reatng to ncome
of partcpants n a common trust fund; 1 2 (reatng to ta of partners), av
362(b)(6) (reatng to treatment of capta gan dvdends from reguated
nvestment companes) to conform such sectons to the proposed 3-month
hodng perod.
The amendments made by subsecton c) w appy wth respect to saes or
e changes made after the date of the enactment of the b.
S CTION 212. SnO T S L S OF C PIT L SS TS
Ths secton s the same as secton 210 of the b as passed by the ouse e cept
that the desgnaton of the subsecton to be added to the Interna Revenue Code
s (1) Instead of ( u).
Ths secton amends secton 117 of the Code (reatng to capta gans and
osses) by addng a new subsecton (desgnated (1), to provde specfc rues as
to the ta consequences of certan short saes of property. These rues appy
ony to short saes of stocks or other securtes, to transactons u stocks or se-
curtes on a when ssued bass, and to transactons n commodty futures.
Moreover, the rues appy ony where the deangs are n such property whch s
a capta asset, as defned n secton 117(a), n the hands of the ta payer.
edgng operatons by operators of gran eevators, mers, producers of coth,
and so forth, whch gve rse to ordnary gan or oss rather than to capta gan
or oss, are not sub|ect to the rues.
The frst two rues, set forth n secton 117(1) (1), are appcabe wherever
property substantay dentca to that sod short has been hed by the ta payer
on the date of the short sae for not more than 3 months or s acqured by hm
after the short sae and on or before the date of the cosng thereof. In sucL
a case:
ue (1) : ny gan upon the cosng of the short sae sha, under the pro-
vsons of secton 117(1) (1) ( ), be consdered as a short-terra capta gan. Ths
rue appes wthout regard to when the property actuay used to cose the
short sae was acqured.
Rue (2) : The hodng perod of such substantay dentca property sha,
under the provsons of secton 117(1) (1) ( ) and notwthstandng the provsons
of secton 117(h), be consdered to begn on the date of the cosng of the shun
sae, or on the date of a sae, gft, or other dsposton of such property, whch-
ever date occurs frst. If severa quanttes of property substantay Identca
to that sod short wore acqured at dfferent tmes not more than 3 months pror
to the short sae and pror to the cosng thereof, ths rue sha appy to such
property n the order of the dates of ts acquston.
The thrd rue, set forth In secton 117(1) (2), s appcabe wherever property
substantay dentca to that sod short has been hed by the ta payer on the
date of the short sae for more than 3 months. In such a case:
Rue (3) : ny oss upon the cosng of the short sae sha, notwthstandng
the provsons of secton 117(g)(2), be consdered as a ong-term capta oss.
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Ths rue, ke rue (1), appes wthout regard to when the property actuay
used to cose the short sae was acqured.
ues (1) and (3) do not appy to so much of the property sod short as e ceeds
n quantty the substantay dentca property descrbed n sectons 117(1) (1)
and 117(1) (2), respectvey; nor does rue (2) appy to so much of the sub-
stantay dentca property descrbed n secton 117(1) (1) as e ceeds In quantty
the pro orty sod short.
The foowng e ampes ustrate the appcaton of ths secton to short saes
of stock:
ampe (1) : ta payer buys 00 shares of stock at 10 per share on
February 1, ses short 100 shares nt 10 per share on pr 1, and coses the
short sae on May 2 by deverng the 100 shares nought on February 1 to the
ender of the stock used to effect the short sae. Snce 100 shares of stock
had been hed by the ta payer on the date of the short sne for not more than 3
months, the gan of 000 upon the transacton s, by appcaton of rue (1), short-
term capta gan.
ampe (2) : ta payer buys 100 shares of stock at 10 per share on
February 1, ses short 100 shares at 10 per share on pr 1, coses the short
sae on May 1 wth 100 shares of stock purchased on that (ate at 1 per share,
and ses the 100 shares of stock (purchased on February 1) at 1 per share on
May 2. The 200 oss upon the cosng of the short sae s, as under present aw,
short-term capta oss. Ity appcaton of rue (2), the hodng perod of the
stock bought on February 1 s consdered to begn on May 1 (the date of the
cosng of the short sae) ; the S0O gan upon the sae of such stock s, therefore
short-term capta gan.
ampe (3) : The ta payer buys 100 shares of stock at 10 per share on
February 1, ses short 100 shares nt 16 per share on une 1, ses the 100 shares
of stock (purchased on February 1) nt 1 per share on uy 1, and coses the
short sae on uy 1 wth 100 shares of stock purchased on that date at 1 per
share. The 00 gan upon the sae of the stock bought on February 1 s, of
course, ong-term capta gan. Snce the ta payer had hed 100 shares of
stock on the date of the short sae for more than 3 months, the 200 oss upon the
cosng of the short sae s, by appcaton of rue (3), ong-term capta oss.
ampe ( ) : The ta payer ses short 100 shares of stock nt 1C per share
on February 1. e buys 2 0 shares of the same stock on March 1 at 10 per
share and hods the atter stock unt une 2 (more thnn 3 months) when 100
shares nrc devered to cose the short sne nnde on February 1. Snce sub-
stantay dentca pro erty was acqured by the ta payer after the short sae
and before t was cosed, the 000 gan s short-tr-rm capta gnn. The hodng
perod of the remanng 0 snros s not affected by secton 117(1). snce to that
e tent the substantay dentca property e ceeds the quantty of the property
sod short.
In the case of transactons n stocks or other securtes on a when ssued
bass, the entry nto a contract to se such stocks or securtes when ssued
sha e consdered as a short sne nnd the performnnce of such contract or the
assgnment thereof for vaue sha be consdered ns a cosng of such short sae.
For the purpose of rues (1) nnd (2), but not for the purpose of rue (3), the
acquston of a put or other opton to se property nt n f ed prce sha he
consdered as a short sae, and the e ercse or e praton (by reason of faure
to e ercse) of such opton sha be consdered as a cosng of such short sae.
In the appcaton of the three rues, the term ta payer sha be rend as
ta payer or hs spouse. s a resut, f the spouse of the ta payer hods prop-
erty substantay dentca to that sod short by the ta payer, the three rues
sha appy to the same e tent ns f such substantay Identca property were
hed by the ta payer. owever, the three rues do not so appy where the ta -
payer and hs spouse are egay separated under a decree of dvorce or of
separate mantenance.
The three rues are aso appcabe to transactons n commodty futures. s
npped to smutaneous ong nnd short transactons n the same commodty, for
devery n the same future perod nnd n the same market ths secton s con-
sstent n purpose wth Mmeograph 62 3, ssued by the ureau of Interna
Revenue on March . 10 .
In the case of commodty futures trnnsactons, however, the three rues do
not nppy to what are commony known as arbtrage or stradde transactons;
that s, to a ong poston n one market and a short poston n another market,
requrng devery n the same month of the same or substantay dentca
commodtes, entered nto on the same day and subsequenty cosed on the same
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day. owever, where the quantty of the commodty Invoved n one market
e ceeds the quantty of the commodty Invoved n the other, the rues appy
to such e cess.
No genera defnton of substantay dentca property Is gven n ths secton,
snce t s beeved that the term must be apped n accordance wth the actua
crcumstances of each transacton. s apped to securtes, ths term has for
many years been In secton 11 of the Code, and varous rungs and decsons
hnve been made whch w, n genera, be equay appcabe to the provsons
of ths proposed amendment. It s not beeved that the term substantay
dentca shoud be apped to securtes of dfferent corporatons (e cept n
speca stuatons as, for e ampe, the securtes of predecessor and successor
corporatons n a reorganzaton), nor, n genera, to preferred stock or bonds as
compared wth common stocks. owever, n speca stuatons, such as where
preferred stock or bonds are convertbe nto common stock of the same corpora-
ton, the reatve vaues and prce changes may be so smar as to make them
substantay dentca to the common stock. Dfferent commodtes, such as corn
nnd wheat, whch are not generay through custom of the trade used as hedges
for each other, woud not be substantay dentca. Secton 117(1) (3) ( ) ()
e pressy provdes that dfferent futures for e ampe. May wheat and uy
wheat sha not be consdered as substantay dentca. Contracts on dfferent
markets may, dependng upon the crcumstances, be so smar as to be regarded
as substantay dentca; n each such case, the hstorca smarty n prce
movements n the two markets s a prmary factor to be consdered.
ta abe years begnnng after the date of enactment of the b. ven wth
respect to such ta abe years, however, the amendments do not appy where the
short sae was made on or before the date of enactment of the b.
S CTION 213. TR TM NT OF G INS TO S R OLD RS OF COLL PSI L
CORPOR TIONS
Ths secton corresponds to secton 211 of the b as passed by the ouse
Your commttee, however, has made technca amendments and changed the desg-
naton of the subsecton to be added to the Interna Revenue Code from (n)
to (ra).
Your commttee has aso restrcted the mtatons on the appcaton of the
new subsecton so as to make sub|ect to the provsons thereof gan reazed by
a sharehoder upon hs stock n a coapsbe corporaton f such sharehoder
owned stock at any tme after the commencement of the manufacture, construc-
ton, or producton of the property whch was consdered as owned at such tme
by another sharehoder who then owned, or was consdered as ownng, more than
10 percent In vaue of the outstandng stock of the corporaton.
Ths secton of the b adds a new subsecton (m), reatng to coapsbe cor-
poratons, to secton 117 of the Code. The coapsbe corporaton Is a devce
Whereby one or more ndvduas attempt to convert the profts from ther par-
tcpaton In a pro|ect from ncome ta abe at ordnary rates to ong-term capta
gan ta abe ony at a rate of 2 percent.
Under paragraph (1) of the subsecton as added to the Code, gan from the
sae or e change of stock of a coapsbe corporaton w be treated as gan
from the sae or e change of property whch s not a capta asset. Ths treat-
ment s to be effectve, however, ony to the e tent that the use of the devre s
Interpreted as gvng rse to gan whch gan s consdered (but for the provsons
of the subsecton) as ong-term capta gan.
The term coapsbe corporaton Is specfcay defned by paragraph (2) of
the subsecton to mean a corporaton formed or avaed of prncpay for the
manufacture, constructon, or producton of property, or for the hodng of
stock In a corporaton so formed or avaed of, wth a vew to () the sae or
e change of stock by ts sharehoders (whether n qudaton or otherwse), or
a dstrbuton by the corporaton to ts sharehoders, pror to the reazaton by
the corporaton manufacturng, constructng, or producng the property of a
substanta part of the net ncome to be derved from such property and (11) the
reazaton by such sharehoders of gan attrbutabe to such property. The
paragraph further states when a corporaton sha be deemed to have manu-
factured, constructed, or produced property.
It w be noted that the term coapsbe corporaton s so defned as to ncude
corporatons endng themseves to the attempted ta -savng practce ontned
above, whether they are the cor|toratons commencng and competng the pro|ect
or corporatons made use of as hodng companes havng no other busness than
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to separate te sharehoders from the corporaton undertakng the pro|ect. The
corporaton, furthermore, has been so denned as to descrbe corporatons dfferent
n knd from those whch ordnary qudate foowng norma busness opera-
tons. Ths ob|ectve has been specfcay strengthened by the statement made
In subparagraph (1) above, to the effect that the sae or e change or the ds-
trbuton be made pror to the reazaton by the corporaton of a substanta part
of the net ncome to be derved from the property. though n many cases an
ordnary corporaton may dstrbute property n knd n the course of ts quda-
ton, or the stock n such a corporaton may be sod pror to the reazaton by the
corporaton of the net Income to be derved from some of Its property, such a
corporaton coud not be consdered to have been formed or avaed of prncpay
for the manufacture, constructon, or producton of that property aone.
Whe the prmary use made of coapsbe corporatons n the past has usuay
nvoved ther qudaton n the manner ndcated above, t s apparent that the
sharehoders formng or avang themseves of such a corporaton coud rase
the same ta questons as woud be rased by a qudaton by seng ther stock
to outsde nterests at the tme and under the crcumstances when the corpora-
ton mght otherwse be qudated. In ke manner, the corporaton mght
dstrbute the property n queston wthout qudatng and, under secton 11 (d),
the vaue of the property dstrbuted, to the e tent that t was not a dvdend,
woud frst be apped aganst the ad|usted bass of the stock to the sharehoders
and the e cess, f any, woud be ta abe n the same manner as a gan from the
sae or e change of property. Paragraph (1) of the subsecton, In prescrbng
the treatment to be gven the gnn from the sae or e change of stock of a
coapsbe corporaton, s deemed to refer to ths e cess vaue n the case of a
dstrbuton made by the corporaton other than n qudaton. Such a dstrbu-
tcn s specfcay referred to n connecton wth the defnton of the term co-
apsbe corporaton n paragraph (2) of the subsecton. ISoth paragraph (1)
and paragraph (2) of the subsecton refer to a sae or e change of the stock other
than n qudaton.
Subparagraph ( ) of paragraph (2) of the subsecton states that a corpora-
ton sha be deemed, for purposes of the above defnton, to have manufactured,
constructed, or produced property f t engaged n the manufacture, constructon
or producton of such property to any e tent or f t hods property havng a
substtuted bass under secton 113 of the Code determned by reference to the
cost of property manufactured, constructed, or produced by the corporaton or by
another. Under ths statement the corporaton need not have orgnated the
manufacture, constructon, or producton; nether need the manufacture, con-
structon, or producton )e competed by t. It w nonetheess be deemed to
have manufactured, constructed, or produced property n that ts sharehoders
may reaze gan wth respect to the addtona vaue added to the property by
the manufacture, constructon, or producton to the e tent that t was carred
out. Lkewse, for e ampe, a corporaton whch manufactured a moton pc-
ture and e changed t wth another corporaton for a moton pcture manu-
factured by that corporaton n an e change whch woud not be ta abe woud
be consdered for ta purposes as havng manufactured, constructed, or produced
the moton pcture thus receved on the e change. Ths atter type of provson
s desgned to cover an obvous devce whch mght be utzed by a coapsbe
corporaton n an attempt to crcumvent the new provson.
Paragraph (3 of the subsecton sets forth three mtatons on the appca-
ton of the subsecton. Frst, the subsecton sha not appy uness the share-
hoder seng or e changng hs stock has at some tme subsequent to the
commencement of the manufacture, constructon, or producton of the property
by the corporaton owned, or been consdered as ownng, more than 10 percent
n vaue of the outstandng stock of the corporaton, or owned stock whch was
consdered as owned at such tme by another sharehoder who then owned, or
was consdered as ownng, more than 10 percent n vaue of the outstandng stock
of the corporaton. In determnng the ownershp of stock of the corporaton
by a sharehoder, the stock ownershp rues set forth n secton 03(a) of the
Code to the e tent that they are pertnent are made appcabe wth the add-
tona provson that the famy of an ndvdua sha ncude, n addton to
the persons mentoned n that secton, the spouses of that ndvdua s brothers
and ssters (whether by the whoe or haf bood) and the spouses of that In-
dvdua s nea descendants. Second, the subsecton sha not appy to the gan
recognzed by a sharehoder from the sae or e change of hs stock uness more
than 70 percent of such gan s attrbutabe to the property so manufactured,
constructed, or produced. Thrd, the subsecton sha not appy to gan reazed
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after the e praton of 3 years foowng the competon of the manufacture,
constructon, or producton of the property.
It s the purpose of the frst mtaton to nsure that the provson w ony
be appcabe to a sharehoder who by vrtue of hs stock ownershp can be
presumed to be an Interested party to the pro|ect whether at the tme of ts
organzaton or at some ntermedate date. The stock ownershp rues are nnde
necessary n order to prevent any one sharehoder s dsgusng hs Interest by
the pacement of the stock of the corporaton among the dfferent members of
hs famy. oth the second and thrd mtatons reate to the gan reazed
from the sae or e change of the stock, the second mtaton beng desgned to
nsure that the appcaton of the subsecton w be mted to those corpora-
tons where the reatonshp between the gan reazed and the property manu-
factured, constructed, or produced s substanta. The thrd mtaton mposes
an arbtrary tme mt beyond whch gan reazed w not be sub|ect to the
subsecton on the theory that a corporaton w not be a coapsbe corporaton
as defned n genera terms n paragraph (2) f the sharehoders do not reaze
ther gan unt after 3 years foowng the competon of the manufacture, con-
structon, or producton.
Paragraph (1) of the subsecton refers to gan from the sae or e change of a
capta asset hed for more than 3 months. Under secton 117 of the Code, pror
to ts amendment by ths b, gan from the sae or change of n capta asset
hed for more than 6 months s defned as ong-term capta gan. Under secton
211(c) of ths b, ths perod woud be changed to 3 months and paragraph 111
has been desgned to accord wth ths change. It s specfcay provded n
subsecton (b) of ths secton, however, that n the case of gan reazed on or
before the date of the enactment of ths ct the words capta asset hed for
more than 3 months sha be rend as capta asset hed for more than 6 months,
The success of attempts under e stng aw to make use of a coapsbe corpora-
ton and to take advantage of the qudaton of that corporaton wthn the
moanng of secton 11 (c) has never been tested n the courts, and t s not cear
that the ndvduas makng use of the devce w succeed n ther ob|ectves.
Your commttee beeves, however, that the proposed amendment deang specf-
cay wth the sub|ect of coapsbe corporatons s desrabe n order to nsure
that the use of the devce n the future w resut n no ta advantage.
The amendment made by the secton Is appcabe to ta abe years endng
after December 31, 19 9, but ony wth respect to gan reazed after that date.
It s specfcay provded In the secton that the determnaton of the ta treat-
ment of gans reazed pror to anuary 1, 19 0, sha be made as If ths secton
had not been enacted and wthout nferences drawn from the fact that the
nmendment made by the secton s not made appcabe to such gans and wthout
nferences drawn from the mtatons contaned n the subsecton as added to
the Code.
S CTION 211. SSIGNM NT OF C RT IN OIL, G S. ND MIN R L RIG TS
Ths secton, for whch there s no correspondng provson n the ouse b,
amends secton 117 of the Interna Revenue Code by addng a new subsecton n)
at the end thereof. Ths new subsecton provdes that the amounts receved
for the assgnment by an assgnor out of economc nterests hed by hm of rghts
whch entte the assgnee to o, gas, or mneras produced, or the proceeds
derved from an agreed share of producton f, as, and when produced, unt a
f ed or determnabe amount of o, gas, or mnera has been receved, sha be
treated as amounts receved from the sae or e change of capta assets.
Ths amendment s ntended to appy to the consderaton receved for assgn-
ments of rghts such as n-o payment rghts, whether ong or short-ved. It
may be noted that the amendment does not appy to cases where the perod of
the assgnment s to e pre upon the recept of an ascertanabe sum of money.
In order to prevent any queston arsng, your commttee has provded that
ths subsecton sha not be appcabe to an assgnment by an operator If such
operator s pedged to use the amounts receved for such assgnment n the
deveopment of the property.
The amendment made by ths secton w appy wth respect to ta abe years
b |0nung after December 31, 19 0.
S CTION 21 . C PIT L G INS OF NONR SID NT LI N INDI IDU LS
Ths secton s dentca wt secton 212 of the b as passed by the ouse.
Secton 211(a) (1) of the Code mposes a ta of 30 percent on the f ed or de-
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termnabe annua or perodca gans, profts, and Income receved from sources
wthn the Unted States by nonresdent aen ndvduas not engaged n trade
or busness wthn the Unted States. The substance of ths provson frst ap-
peared n secton 211(a) of the Itevenue ct of 1936 whch changed the method
of ta ng such ndvduas, wth the resut that they no onger were ta abe on
capta pans derved from sources wthn the Unted States. Under the present
statute ony those aens who are resdent n, or are engaged n trade or busness
wthn, the Unted States are ta abe on such capta gans.
Secton 211(a)(1)( ), as amended by ths secton of the b, broadens the
ta abe ncome base of nonresdent aens who have been present n the Unted
States at some tme durng the ta abe year but have not engaged In trade or
busness theren. Under the amendment such nonresdent aens w be sub|ect
to a ta of 30 percent on the net amount of capta gans n addton to the
present ta of 30 percent on f ed or determnabe annua or perodca ncome.
Te effect of the amendment s, for purposes of ta ng capta gans, to dvde
nonresdent aen ndvduas not engaged n trade or busness wthn the Unted
States nto three dstnct categores:
(1) Those wo have not been present n the Unted States at any tme
durng the ta abe year;
(2) Those w .o have been present theren for a perod or perods aggre-
gatng ess than 90 days durng the ta abe year ; and
(3) Those who have been present theren for a perod or perods ag-
gregatng O days or more durng the ta abe year.
nonresdent nen comng wthn category (1) above s not affected by ths
secton of the b, nsofar as hs capta gans derved n, or hs capta osses
aocabe to, the Unted States are concerned. Gans derved n the Unted
States on saes or e changes of capta assets effected by such an ndvdua
durng the ta abe year are not sub|ect to ta n the Unted States. Losses
aocabe to sources wthn the Unted States from such saes or e changes
are dsaowed as deductons. nonresdent aen comng wthn category (2)
above s ta abe on the e cess of hs capta gans over hs capta osses,
determned as ndcated beow, derved from sources wthn the Unted States
from saes or e changes of capta assets effected durng hs presence wthn
the Unted States. Gans or osses on such transactons effected durng the
ta abe year at tmes other than durng such presence n the Unted States are
not to be taken nto consderaton n the computaton of the net amount of
capta gans sub|ect to ta . nonresdent aen conng wthn category (3)
above s ta abe on the e cess of hs capta gans over hs capta osses,
determned as ndcated beow, derved from sources wthn the Unted States
from saes or e changes of capta assets effected at any tme durng the
ta abe year, even though he s not present n the Unted States at the tme
such saes or e c.mges are effected. In computng the tota perod of presence
n the Unted States for a ta abe year a separate perods durng the ta abe
year are to be aggregated. Mere physca presence n the Unted States at
any tme durng the ta abe year Is the test for determnng whether to appy
the provsons of ths amendment.
For the purposes of the computaton under proposed secton 211(a)(1)( ),
gans and osses are to be taken nto account ony to the e tent that they woud
be recognzed and taken nto account, f the ta payer had been engaged n trade
or busness wthn the Unted States. owever, n determnng the amount of
gan or oss to be used n such computaton, no regard w be gven to the percent-
age provsons under secton 117(b) of the Code or to the provson for the capta
oss carry-over under secton 117(e) of the Code.
Secton 211 u) (1) ( ) merey mposes a ta upon the e cess of capta gans
over capta osses. The e cess, f any, of such osses over such gans (whether
or not e ceedng 1,000) s of no sgnfcance for the purposes of secton
211(a)(1)( ).
Under secton 211(a) (2) of the Code the ta of 30 percent mposed by secton
211(a) (1) s made nappcabe, wh n the aggregate of the amount of f ed or
determnabe ncome sub|ect co ta under paragraph (1) e ceeds 1 , 00. When
such amount receved by the ta payer e ceeds 1 , 00, he becomes sub|ect under
secton 211(c) of the Code to the reguar norma and surta rates mposed by
stcton 11 and secton 12. The b rewrtes e stng secton 211(a) (2) to ncor-
porate n the present rue, rues for takng nto cognzance the net amount of
capta gans n the determnaton ot the amount of 1 , 00.
When the aggregate amount determned n accordance wth secton 211(a) (1)
of the Code, as amended by the b, e ceeds 1 , 00, the ta payer becomes sub-
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eot, tnder the amendment of secton 211(c), to both the norma ta and surta
mposed by sectons 11 and 12. or In the aternatve to the ta Imposed by secton
117(c), on the tota of hs f ed or determnabe Income and hs capta gans. In
the mps proposed to be added to secton 211(c) n the case of capta gans and
osses, the provsons of secton 117 of the Code w be fuy appcabe, e cept
for the capta oss carry-over provson under secton 117(e), wth respect to
such capta gans and osses as are recognzed for purposes of the computaton.
owever, n effect, the present mtaton of secton 211(c) Is retaned so that n
no case sha the ta be ess than 30 percent of the tota amount of f ed or deter-
mnabe Income sub|ect to ta under secton 211(a) (1) ( ) pus the net amount
of capta gans determned (wthout regard to secton 117 (b) and (e) of the
Code) under proposed secton 211(a) (1) ( ).
The amendments made by sector 21 of the b w not appy n any case
where ther appcaton woud e contrary to any treaty obgaton of the Unted
States. Ths rue Is contaned In secton 210 of the b.
S CTION 21 . TR T O LIG TIONS
Ths secton s dentca wth secton 213 of the b as passed by the I use. It
provdes that no amendment made by the b sha appy n any cas where ts
appcaton woud be contrary to any treaty obgaton of the Unted States.
S CTION 217. N T OP R TING LOSS D DUCTIONS
Ths secton Is dentca wth secton 21 (a) of the b passed by the ouse.
Subsecton (a) of ths secton amends secton 122(b) of the Interna Revenue
Code to provde that the net operatng oss for any ta abe year begnnng after
December 31, 10 9, may be carred back to the precedng ta abe year ony; such
net operntng oss (to the e tent t s not absorbed as a carry-back) aso may be
carred forward to the fve succeedng ta abe years.
The amendment made by subsecton (a) of ths secton Is appcabe to a ta -
abe years begnnng after December 31, 13 7, but the resut of the provsons
of secton 122 as amended Is to Impose the new carry-back and carry-over prov-
sons ony wth respect to net operatng osses sustaned In ta abe years begn-
nng after December 31, 19 9. Net operatng osses sustaned n ta abe years
begnnng before anuary 1, 19 0, w contnue, as under e stng aw, to be
carred hack for 2 years and carred over for 2 years. Thus, a net o| eratng
oss for 19 9 (n the case of a ta payer on the caendar year bass) coud st be
carred back to 19 7 and 19 and over to 19 0 and 19 1; whereas, a net operatng
oss for 10 0 coud be carred back ony to 19 9, but t coud be carred over to
19 1 to 19 , ncusve.
S CTION 21 . MORTIZ TION OF M RG NCY F CILITI S
Ths secton of the b, for whch there s no correspondng provson In the
Iouse b has the same basc ob|ectves as secton 12 of the Code (reatng to
the amortzaton of emergency factes durng Word War II) but s dfferent
therefrom n severa mportant respects, and t Is not Intended In any way to affect
the aw, or ts admnstraton, under that secton.
Ths secton of the b adds to the Code a new secton 12 whch provdes that
every person may, at hs eecton, take a deducton from gross Income for the
amortzaton of any emergency facty as defned In subsecton (d) of secton
12 . Such factes are factes, and, budngs, machnery, and equpment,
or any part thereof, the constructon, reconstructon, erecton, .r nstaaton of
whch was competed after December 31,19 0, or the acquston of wh h orcurred
after December 31,10 9, and wth respect to whch a certfcate of necessty pur-
suant to the provsons of subsecton (e) of secton 12 has been made.
The amortzaton of the ad|usted bass of any such facty Is to be spread over
a perod of 00 months, the deducton to be n eu of the present deducton for
e hauston, wear and tear, and obsoescence provded for In secton 23(1) of the
Code. The 00-month perod shn begn as to any emergency facty, at the eec-
ton of the ta payer, wth the month foowng the month n whch the facty
was competed or acqured, or wth the succeedng ta abe year.
Subsecton (b) of secton 12 provdes that an eecton to take the amortza-
ton deducton sha be made In the manner provded n reguatons prescrbed by
the Secretary of the Treasury. so, under subsecton (b), the manner of rank-
ng the eecton as to when the 00-month perod for such amortzaton sha begn
s to be controed by reguatons prescrbed by the Secretary.
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Subsecton (c) of fecton 12 provdes that If, after havng eected to take
the amortzaton deducton, the ta payer desres to termnate such deducton
and take the deprecaton deducton provded by secton 23(1) of the Code wth
respect to the remander of the ad|usted bass of the facty, he sha be per-
mtted to do so upon wrtten notce fed wth the Secretary pror to the month
whch the ta payer specfes n such notce as the month of dscontnuance; and
the ta payer sha, n such event, not be entted to any further amortzaton
deducton wth res ect to such emergency facty.
Subsecton (d) of secton 12 defnes the term emergency facty. It aso
df fnes the term emergency perod as meanng the perod begnnng on anu-
ary 1, 19 0, and endng on the date on whch the Presdent procams that the
utzaton of a substanta porton of the emergency factes certfed under
subsecton (e) as necessary s no onger requred n the Interest of natona
defense. Subsecton (d) aso provdes that no amortzaton deducton sha be
aowed as to any emergency facty for any ta abe year uness a certf ate
In respect thereof under such subsecton sha have been made pror to the fng
of the ta payer s return for such ta abe year. In the case of an emergency
facty competed or acqured after December 31, 19 9, and before the date of
enactment of the Revenue ct of 19 0, no amortzaton deducton sha be aowed
therefor n respect of any ta abe year uness a certfcate In respect thereof sha
have been made pror to the e praton of 12 months after the date of enactment
of ths b.
Subsecton e) of secton 12 provdes that the ad|usted bass of an emergency
facty sha be determned by Incudng ony so much of the amount of the ad-
|usted bass of the facty (computed wthout regard to secton 12 ) as Is
propery attrbutabe to such constructon, reconstructon, erecton, nstaaton,
or acquston after December 31, 19 9, ns a certfyng authorty (to be desg-
nated by the Presdent by ecutve order) has certfed as necessary n the
nterest of natona defense durng the emergency perod (as defned In sub-
secton (d) of secton 12 ), and ony such porton of such amount as the certfy-
ng authorty has certfed as attrbutabe to defense purposes. Such certfca-
ton sha be made under reguatons prescrbed by the desgnated certfyng
authorty wth the approva of the Presdent. It s further provded that an ap-
pcaton for a certfcate of necessty must be fed at such tme and n such
manner as the certfyng authorty may, under such reguatons, prescrbe.
owever, such a certfcate of necessty sha have no effect uness an appcaton
therefor s fed before the e praton of 6 months after the begnnng of such
constructon, reconstructon, erecton, or nstaaton or the date of such ac-
quston, or before the e praton of 0 months after the date of enactment of
ths b, whchever s the ater. Subsecton (e) further provdes, n connecton
wth the determnaton of the ad|usted bass of an emergency facty, that after
the competon or acquston of a facty whch has been certfed under such
subsecton, any e pendture (attrbutabe to such facty and to the perod after
the competon or acquston) whch does not represent constructon, reconstruc-
ton, erecton, nstaaton, or acquston Incuded n such certfcate, but wth
respect to whch a separate certfcate of necessty s made, sha not be apped
n ad|ustment of the bass of such facty, but a separate bass sha be com-
puted therefor as If t were a new and separate emergency facty.
Subsecton (f) of secton 12 provdes that f the ad|usted bass of an emer-
gency facty (computed wthout regard to secton 12 ) s n e cess of the ad-
|usted bass computed under subsecton (e), the deprecaton deducton provded
by secton 23(1) of the Code sha, despte the provsons of subsecton (a) of sec-
ton 12 , be aowed wth respect to such facty as f ts ad|usted bass for the
purposes of such deprecaton deducton were an amount equa to the amount of
such e cess.
Subsecton (g) of secton 12 provdes for the computaton of the amortza-
ton deducton where compensaton for the unamortzed cost of an emergency
facty s receved by the ta payer under a contract wth the Unted States. If
an amount s propery ncudbe n the ta payer s gross ncome on account of
a payment wth respect to an emergency facty and such payment s certfed
(under reguatons prescrbed by the Presdent) by the desgnated authorty as
compensaton to the ta payer for the unamortzed cost of the facty, then the
amortzaton deducton for the month n whch such amount s ncudbe, n
gross ncome sha (n eu of the amortzaton deducton for such month com-
puted under subsecton (a) of secton 12 ) be equa to the amount so ncudbe,
but not In e cess of the ad|usted bass of the facty as of the end of such month
(computed wthout regard to any amortzaton deducton for such month). In
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order for ths provson to be appcabe, the payment to the ta payer must be
made because (1) a contract wth tho Unted States Invovng the use of the
facty has been termnated, or (2) the ta payer had reasonabe ground for
antcpatng future contracts wth the Unted States nvovng the use of the
facty. If the ta payer s not entted to any amortzaton deducton wth
respect to such facty, the deprecaton deducton aowabe under secton 23(1)
of the Code, on account of the month In whch such compensaton s ncudbe
n gross ncome, sha be ncreased by the amount of such compensaton, but such
deducton, on account of such month, sha not be n e cess of the ad|usted bass
of the facty as of the end of such month (computed wth regard to any
deducton aowabe, on account of such month, under secton 23(1) or secton
12 (g) (2) of the Code).
Subsecton (h) of secton 12 provdes that where property s hed by one
person for fe wth remander to another person, the amortzaton deducton
sha be aowabe to the fe tenant as f he were the absoute owner of the
property.
Ths secton of the b aso makes a technca amendment of secton 23(t) of
the Code so as to ncude theren a reference to the new secton 12 of the Code.
The amendments by ths secton of the b are made appcabe wth respect
to ta abe years endng after December 31, 19 9.
S CTION 219. MORTIZ TION OF OND PR MIUM ON CON RTI L ONDS
Ths secton s dentca wth secton 21 of the b passed by the ouse. It
amends secton 12 (b) (1) of the Code to requre the e cuson from the amount
of bond premum on a convertbe bond of any amount attrbutabe to the con-
verson features of the bond. The term convertbe bond ncudes bonds Is-
sued wth detachabe stock-purchase warrants.
Cacuaton of the vaue of the converson features of a partcuar bond may be
accompshed smpy by ascertanng the yed on whch bonds of smar character
(not havng converson features) are seng on the oon market and ad|ustng
the prce of the bond n queston to ths yed. Ths ad|ustment may be made
wth the ad of standard bond tabes. Suppose, for e ampe, t s desred to
apprase the bonds of the YZ Company. ssume that those bonds have years
to run to maturty and have a coupon rate of nterest of percent. study
of smar bonds on whch quotatons are avaabe shows that they se at an
average yed of .7 . In order to reduce these bonds to a prce whch w gve
an equvaent yed, t s necessary ony to turn to a standard bond tabe for
percent bonds wth a -year maturty, and read across from .7 . The correspond-
ng prce, 90.7 s the desred vaue. Subtractng ths vaue from the amount
pad for the bond w dscose the amount attrbutabe to the converson features
of the bond.
In seectng quotatons for comparatve purposes bonds of the same cassfca-
ton and grade as (he convertbe ssue shoud be chosen.
The amendment made by ths secton w be appcabe to ta abe years begn-
nng nfter une 1 ,19 0. The amendment w aso appy n the case of a ta abe
year begnnng on or before une 1 , 19 0, wth respect to convertbe bonds
acqured after such date. For e ampe, the amortzabe bond premum on a con-
vertbe bond acqured on uy 1, 19 0, by a ta payer reportng on the bass of
the caendar year 19 0, must be ad|usted to e cude the amount attrbutabe to
the converson features of the bond. If such ta payer acqured such bond on
une 1 , 19 0, however, no ad|ustment w be requred under the commttee
amendment unt the ta abe year 19 1.
S CTION 220. STOC OPTIONS
Ths .secton adds a new secton 130 to the Code to provde rues for the ta
treatment of ncome resutng from the grantng or e ercse by an ndvdua of a
specay defned type of opton ( restrcted stock opton ) to purchase stock of
an empoyer corporaton or a parent or subsdary of such empoyer corporaton.
The secton contans no rues appcabe to transactons respectng stock optons
whch are not restrcted stock optons as defned n the secton.
The restrcted stock optons, wth respect to whch the rues of secton 130
are to be appcabe, are defned In secton 130 (c) to mean an opton granted
after 19 6 by a corporaton to an ndvdua for any reason connected wth the
empoyment of such ndvdua by the corporaton or by a parent or subsdary of
such corporaton, but ony f
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(1) at the tme the opton s granted the opton prce s at east per-
cent of the far market vaue at such tme of the sock sub|ect to the opton;
(2) the opton by Us terms s not transferabe otherwse than by w or t he
nws of descent and dstrbuton, aud s e ercsabe durng hs fetme ony
by the empoyee;
(3) the empoyee at the tme the opton s granted, does not own stock
possessng more than 10 percent of the tota combned votng power of a
casses of stock of the empoyer corporaton or of ts parent or subsdary
corporaton.
Secton 130 (a) provdes that f stock s transferred to an empoyee pursuant
to hs e ercse after 1)1 0 of a restrcted stock opton, and no dsposton of such
nock s made by the empoyee wthn 2 years from the date of the grantng of
the opton nor wthn 6 months after Ihe transfer of such stock to hm
(1) no Income sha resut at the tme of the transfer of such stock to the
empoyee upon hs e ercse of the opton;
(2) no deducton under secton 23(a) s aowabe at any tme to the em-
poyer corporaton or Its parent or subsdary corporaton wth respect to the
stock so transferred : and
(3) no amount other than the opton prce sha be consdered as receved
by ether of such corporatons for the stock so transferred.
In the appcaton of subsecton (a) of secton 130 f. wthn the perod
prescrbed, the empoyee dsposes of stock acqured under the opton, the rues of
the subsecton respectng Income of the empoyee, respectng deducton aowabe
tc the empoyer or other corporaton, and respectng amount receved for the
stock do not, of course, appy. Transactons respectng the opton and such stock
revert to ther status under e stng aw. The opton tsef does not, as to stock
wth respect to whch the opton s st e ercsabe, ose ts character as a re-
strcted stock opton. Smary f the stock dsposed of Is ony part of the
stock acqured under the opton, the speca treatment accorded by secton 130
s not ost wth respect to stock not dsposed of.
Secton 130 (a) contans a rue that the provsons of secton 130 do not
appy n any case where the hoder of the opton does not e ercse t wthn 3
months after eavng the empoyment of the empoyer corporaton, a parent or
subsdary. Ths rue docs not, of course, mean that the empoyee may not shft
empoyment from, for e ampe, the orgna empoyer corporaton to a parent or
subsdary corporaton. Under ths rue an e ercse of an opton after such 3-
month perod carres wth t none of the speca treatment of secton 130 . Where
an ndvdua has e ercsed an opton wth respect to part of the stock covered by
te opton pror to eavng such empoyment, then eaves such empoyment, he
cannot on an e ercse of the baance of the opton more than 3 months after
eavng such empoyment, secure the benefts of secton 1.30 as to the ater
e ercse of the opton athough he may retan such benefts wth respect to the
earer e ercse of the opton.
The perod of tme durng whch the empoyee must hod the stock to secure
the benefts of the secton may be ustrated by the foowng e ampe (the
e ampe aso ustrates the rues respectng parent and subsdary corporatons) :
In the case of corporatons , . and C. C s a subsdary of and s a sub-
sdary of . s empoyed by corporaton and (for reasons connected wth
hs empoyment) receves from corporaton a restrcted stock opton fas defned
n secton 130 (c)) to acqure stock of C corporaton. The opton s granted
anuary 1, 19 1, and covers the purchase of 1.000 shares of C stock for . 0
per share ( , 00), such stock on anuary 1, 19 1. havng a far market vaue
of 10 per share ( 10,000). On uy 1, 19 12. when C corporaton stock has a
far market vaue of 12 per share ( 12,000). . whe st empoyed by . e er-
cses the opton and acqures 1.000 shares of C stock for , 00. On February 1,
19 3 (2 years and 1 month from the date the opton was granted, and 7 months
from the date the stock was acqured) dsposes of the stock. Under such
condtons, Is entted (as far as the perod requrements are concerned) to
the benefts of secton 130 .
If In the e ampe gven, had e ercsed the opton and acqured the stock
on anuary 1, 19 3 (2 years after the opton was granted), and dsposed of the
stock on une 1, 19 2 ( months Inter), the transacton woud not have met
the 6-month hodng perod requrement appcabe to the stock, and woud
not be entted to the benefts of secton 130 .
Secton 130 aso contans defntons consdered necessary to the rues of the
secton respectng restrcted stock optons, ncudng defntons of parent and
subsdary corporatons, and rues for the treatment of modfcatons, e tensons,
923 30 CI 36
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and renewasof optons to purchase stock. In genera, a modfcaton, e tenson,
or renewa s to be consdered the grantng of a new opton. Under these rues
a restrcted stock opton may, as a resut of modfcaton, cease to be a restrcted
stock opton, or an opton may by modfcaton become a restrcted stock opton.
S CTION 221. P YM NT OF T WIT LD T SOURC FROM NONR SID NT
LI NS
Ths secton Is bascay the same as secton 601(d) of the b passed by the
ouse. Though the ouse amendments provdng for the coecton of ncome
ta at source on dvdends have been deeted by your commttee, the amendment
provded by ths secton has been retaned wth a mnor change. y vrtue thereof
secton 1 3(c) of the Code s amended wth respect to the payment of the ncome
ta wthhed at source under secton 1 3. Under e stng aw the wthhodng
agent s requred to make return of the tn on or before March 1 of each year
and to pay the ta on or before une 1 . The amendment proposed by your
commttee w requre the wthhodng agent to make return and payment
of the ta on or before March 1 of each year to the coector desgnated n
secton 3(b) of the Code. The effect of the amendment s to advance the pay-
ment date by requrng payment of the ta on the fng date of the return. The
changes thus made w aso appy to the return and payment of the ta wthhed
under secton 1 of the Code.
S CTION 222. F MILY P RTN RS IPS
Ts secton, for whch there s no correspondng provson n the ouse b,
amends secton 3797(a)(2) of, and adds a new secton 191 to, the Interna
Revenue Code to revse the ta treatment of famy partnershps as e paned
In I( ) ( ) of the genera dscusson secton of ths report.
S CTION 22 . MPLOY S OF T UNIT D ST T S WOR ING IN POSS SSIONS
OF T UNIT D ST T S OR IN T C N L ZON
Ths secton s the same as secton 21G of the ouse b, e cept that a change
has been ncorporated to make the amendment appcabe wth respect to ta abe
years begnnng after December 31, 19 0. Secton 223 amends secton 2 1 of the
Code by the addton of secton 2 1 ( . Under secton 2 1, as amended, amounts
pad for servces performed by a ctzen of the Unted States as an empoyee of
the Unted States or any agency thereof w, for the purposes of such secton, be
deemed to be derved from sources wthn the Unted States. The resut of the
amendment Is that saares or compensaton pad by the Unted States or any
agency thereof to an empoyee who s a ctzen of the Unted States for servces
performed wthn a possesson thereof w not be consdered as ncome from
such possesson, n determnng whether the empoyee s entted to the benefts
of secton 2 1 of the Code, and w be sub|ect to ta as Income from sources
wthn the Unted States.
It Is to be noted, however, that ony for the purposes of secton 2 1 of the
Code sha such amounts be deemed to be derved from sources wthn the Unted
States. The proposed amendment does not dsturb other source rues such as
those set forth In secton 119 of the Code, reatng to the determnaton of
Income from sources wthn and wthout the Unted States, so that those rues
w be appcabe for the purpose of determnng the credt for ta es of foregn
countres and of possessons of the Unted States.
S CTION 22 . R SID NTS OF PU RTO RICO
Ths secton corresponds to secton 217 of the h passed by the ouse. The
provsons of the ouse b have been retaned, but two new subsectons have
been added by your commttee. The frst of these, subsecton (), provdes for
the amendment of the Interna Revenue Code secton reatng to the coecton
of ta es In the rgn Isands and Puerto Rco; the second, subsecton (|),
provdes for the amendment of the sectons of the Code and of the Soca Securty
ct whch reate to the defnton of net earnngs from sef-empoyment.
Secton 22 of the b makes provson for the e tenson of the Federa ncome
ta aws to Puerto Rco to the e tent of sub|ectng ndvdua ctzens of Puerto
Rco who are aso Unted States ctzens to the Federa ta on ther word-wde
ncome, as n the case of other Unted States ctzens, and to the e tent of sub-
|ectng to the same treatment aen ndvduas who are bona fde resdents of
Puerto Rco durng the entre ta abe year. Such aens resdent n Puerto
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Rco woud be sub|ect to ta as n the ense of aens resdent In the Unted
States. ny Indvdua ctzen of the Unted States, or any aen Indvdua,
wo Is a bona fde resdent of Puerto Rco durng the entre ta abe year w,
however,, be permtted to e cude from gross Income any ncome derved from
sources wthn Puerto Rco, e cept amounts receved for servces performed as
an empoyee of the Unted States or nny agency thereof. Deductons nocabe
to such e cuded Income w not be aowed for purposes of the Federa ta .
In the case of an Indvdua ctzen of the Unted States who gves up hs
Puerto tcan resdence after havng been a bona fde resdent of Puerto Rco for
a perod of at east 2 years before the date of such chnnge In resdence, any
ncome derved from Pnerto Rcnn sources whch s attrbutabe to the perod
of resdence pror to the chance may aso be e cuded from gross Income, e cept
amounts receved for servces performed as an empoyee of the Unted States
or any agency thereof. I (eductons aocabe to such e cuded ncome w not
be aowed. Smar treatment s not e tended to ndvdua aens who change
ther resdence from Puerto Rco.
The above changes In the ta aton of the ncome of ndvduas ;re accompshed
by the amendment of secton 2 1 of the Code to make such secton Inappcabe
to Puerto Rco n the case of ctzens of the Unted States, by the amendment of
secton 2 2(a) to make such secton nappcabe to ctzens of Puerto Rco and
by the addton of new sectons 116(1) and 220 to the Code. Secton 116(1),
as added by secton 22 (c) of the b, provdes for the e cuson from gross
Income of ncome from sources wthn Puerto Rco n the case of Indvduas
who are I ona fde resdents of Puerto Rco durng the entre ta abe year.
Secton 220, as added by secton 22 (d) of the h, provdes that suppement
of the Code (reatng to nonresdent aen ndvduas) sha have no appcaton
to aen ndvduas who are bona fde resdents of Puerto Rco durng the entre
ta abe year and that such ndvduas sha be sub|ect, as n the case of ctzens
and aen resdents of the Unted States, to the ta es Imposed by sectons 11
and 12 of the Code.
Wthhodng of ta at source under secton 1 3 (a) and (b) of the Code
on f:;ed or determnabe annua or perodca ncome w be contnued n ac-
cordance wth present provsons of the Code n the case of aen ndvduas who
are resdents of Puerto Rco, even though such ndvduas are bona fde res-
dents of Puerto Rco durng the entre ta abe year. Such treatment s ob-
taned by amendments, as provded by secton 22 (e) of the b, to sectons
1 3(a) (1) and 1 3(b) of the Code. Credt for, or refund of, snc wthhed ta
w be aowed n the case of those aen resdents of Puerto Rco who become
sub|ect to tu under sectons 11 and 12 of the Code n accordance wth proposed
secton 220.
Secton 2 2 f) of the b makes provson for the amendment of sectons
1621(a)(6) and 1621(a)( ) of the Code reatng to defnton of wages wth
respect to the coecton of ncome ta at source on wages. Pursuant to pro-
posed secton 1621 a) (0) (13), wthhodng of ncome ta w be requred on
wages pad for servces performed by an ndvdua aen resdent of Puerto
Rco as an empoyee of the Unted States or nny agency thereof.
Secton 1021(a) ( ) ( ), as amended by the b, w no onger appy to Puerto
Rco. In Its appcaton to any other possesson of the Unted States, ths secton
requres wthhodng of ncome ta on wages pad for servces performed by a
ctzen of the Unted States n such possesson as an empoyee of the Unted
States or any agency thereof. The atter change s a coroary to the amendment
provded by secton 223 of the b. Pursuant to secton 1621(a) ( ) (C) wthhod-
ng of ta w not be requred on wages pad for servces performed by a ctzen
of the Unted States wthn Puerto Rco, f t s reasonabe to beeve that durng
the entre caendar year the empoyee w be a bona fde resdent of that
possesson, uness the empoyer Is the Unted States or any agency thereof.
Secton 22 (g) of the b amends secton (a) of the Code to requre aen
Indvduas who are resdents of Puerto Rco durng the entre ta abe year to
make a decaraton of estmated ta for the ta abe year n accordance wth
the present requrements of the Code. Gross Income n such cases w not, of
course, ncude the Puerto Rcan source ncome e cuded by vrtue of secton
116(1) (1) of the Code. Ctzens of Puerto Rco who are aso ctzens of the
Unted States, w, of course, be requred to make the decaraton prescrbed
by secton (a) of the Code.
Secton 22 (h) of the b provdes for the amendment of sectons 131(a) (2)
and 131(a) (3) of the Code whch reate to the credts aganst ta . Under the
amendment to secton 131(a)(2) aen ndvduas who are bona fde resdents
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of Puerto Rco durng the entre ta abe year w be aowed a credt for ta es
pad or accrued durng the ta abe year to any possesson of the Unted States
wth respect to ncome from sources n such possesson sub|ect to the Federa
ncome ta . Pursuant to the amendment to secton 131(a)(3) such an aen
ndvdua w aso be aowed a credt for ta es pad or accrued durng the
ta abe year to any foregn country wth respect to ncome from sources n
such country sub|ect to the Federa ncome ta , f the foregn country of whch
such aen resdent s a ctzen or sub|ect, n mposng ts ncome ta es, aows
a smar credt to ctzens of the Unted States resdng theren. No credt w,
of co -rse, be aowed aganst the Federa ncome ta for ta es pad or accrued
to Puerto Rco wth respect to ncome derved from Puerto Rcan sources but e -
cuded from gross ncome for purposes of the Federa ncome ta . Smary,
no credt w be aowed for ncome ta es pad or accrued to Puerto Rco on
ncome derved from sources n a foregn country, even though such ncome may
have been sub|ect to ta n (1 the Unted Sates, (2) the foregn country, and
(3) Puerto Rco.
Snce secton 22 of the b broadens the appcaton of the ncome ta aws
to ndvduas n Puerto Rco, proposed secton 3 11(a) provdes that, notwth-
standng any other provson of aw (such as Puerto Rcan organc aw) respect-
ng ta aton n Puerto Rco, a ta es mposed by chapter 1 of the Code (ncudng
those mposed by the Sef- mpoymeut Contrbutons ct), by the Federa
Insurance Contrbutons ct, and by subchapter D of chapter 9 (coecton of
ncome ta at source on wages), sha be coected under the drecton of the
Secretary and sha be pad nto the Treasury of the Unted States as nterna
revenue coectons. In addton, ths proposed subsecton provdes that a pro-
vsons of the aws of the Unted States (ncudng the provsons reatng to The
To Court of the Unted States) appcabe to the admnstraton, coecton,
and enforcement of any ta mposed upon the Incomes of ndvduas, estate ,
and trusts by chapter 1 (ncudng the ta Imposed by the Sef- mpoyment Con-
trbutons ct), nnd of any ta mposed by the Federa Insurance Contrbutons
ct or by subchapter D of chapter 9 (coecton of ncome ta nt source on wages),
sha, n respect to such ta , e tend to and be appcabe n Puerto Rco n the
same manner and to the same e tent as f Puerto Rco were a State, and as f
the term Unted States when used n a geographca sense ncuded Puerto Rco.
Secton 22 (|) of the b, added by your commttee to the ouse b, provdes
for the amendment of secton 1(a)(7) of the Interna Revenue Code and of
secton 211(a)(7) of the Soca Securty ct, each of whch contans speca
rues for the computaton of net earnngs from sef-empoyment n the case
of Puerto Rco.
Proposed secton 1(a)(7)( ) provdes n effect that, wth respect to
any ta abe year begnnng before the effectve date specfed n secton 3 10
of te Code (. e., the date on whch the provsons of tte II of the Soca
Securty ct are e tended to Puerto Rco), the Puerto Rcan source ncome of
n Unted States ctzen w be taken nto account n determnng whether such
ctzen of the Unted States meets the requrements of secton 2 1 of the Code,
and thus n determnng whether or not gross ncome means ony Unted States
source ncome for purposes of the sef-empoyment ta . In other words, ths
proposed amendment preserves for purposes of the sef-empoyment ta the rue,
shoud the effectve date specfed n secton . 10 e no earer than anuary 1.
19 2, whch woud have e sted n the absence of the amendments proposed by
secton 22 of the b.
Proposed secton 1(a) (7) (R) provdes n effect that, wth respect to any
ta abe year begnnng on or after the effectve date specfed n secton 3 10
of the Code, any resdent of Puerto Rco, whether or not a bona fde resdent
thereof durng the entre ta abe year, and whether or not an aen, n cthsen
of the Unted States, or a ctzen of Puerto Rco, sha compute hs net earnngs
from sef-empoyment n the same manner as woud a ctzen of the Unted
States resdng n the Unted States. For purposes of the sef-empoyment ta ,
the gross ncome of such a resdent of Puerto Rco w Incude ncome from
Puerto Rcan sources.
The amendment proposed by secton 22 (|) (2) of the b to secton 211 (a) (7)
of the Soca Securty ct conforms such secton 211(a) (7) to proposed secton
S(a) (7) of the Interna Revenue Code.
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S CTION 226. OUL T D IN STM NT COMP NI S
Ts secton, for whch there n no correspondng provson n the ouse b,
amends secton 302(b) of the Interna Revenue Code to add a new paragraph,
desgnated ( ), thereto.
Under e stng aw a reguated Investment company, In computng ts Suppe-
ment . not ncome and Suppement surta net ncome, s entted to a credt
fur dvdends pad (other than capta gan dvdends). It Is entted, aso,
to reduce the e cess of ts net ong-term capta gan over ts net short-term
capta oss by the amount of capta gan dvdends pad to sharehoders.
In order to obtan the benets of these provsons, however, a reguated n-
vestment company must dstrbute ts ncome and cupta gans to stockhoders
n the ta abe year whch such ncome and gans are receved. In respect
of Income or gans receved by such a company near the end of ts ta abe year,
It may be dffcut to meet ths requrement. The new paragraph ( ) accord-
ngy provdes that, for the purposes of subsecton (b) of secton 3( 2, any
dvdend or porton thereof whch s decared by a company after the cose
of ts ta abe year and pror to the tme for the fng of ts return for such
ta abe year (ncudng the perod of any e tenson of tme granted for fng
such return) sha, to the e tent the company so eects n such return, be treated
as havng been pad durng such ta abe year provded that the dstrbuton
of such dvdend (the entre dvdend decared, and not merey the porton
covered by eecton) s actuay made to the sharehoder wthn the 12-month
perod foowng such ta abe year and not ater than the date of the frst
reguar dvdend payment made after such decaraton.
Ths paragraph enabes n company to treat certan dvdends ns havng been
pad n a ta nbe year precedng that of ther actua payment for the purpose
of computng the Suppement net ncome, the Suppement surta net ncome
and the e cess of net ong-term capta gan over net short-term capta oss
pus capta gan dvdends pad, as we as for the purpose of determnng
whether such company dstrbuted 90 percent of ts net ncome (other than
net capta gans) durng the ta abe year as ta abe dvdends (other than
capta gan dvdends). Ths paragraph, however, does not affect the ta a-
bty of the sharehoder wth respect to such dvdend recepts; the dvdend
w contnue to be ta abe to a sharehoder n the year n whch receved by
hm.
The amendment s effectve wth respect to ta abe years endng after the
date of enactment of ths ct.
S CTION 220. P RSON L OLDING COMP NY INCOM
Secton 02(f) of the Interna Revenue Code provdes n genera that amounts
receved as compensaton for the rght to use property of a corporaton 2
percent or more of the vaue of the outstandng stock of whch s owned,
drecty or ndrecty, by or for an ndvdua entted to the use of the property
are persona hodng company ncome.
Ths secton provdes that secton 02(f) of the Code sha not appy wth
respect to rents receved durng ta abe years endng after December 31, 19-1 ,
and pror to anuary 1, 19 0, f such rents were receved for the use by the
essee n the operaton of a bona tde commerca, ndustra, or mnng enterprse,
of property of the ta payer.
TITL III. TR TM NT OF INCOM OF, ND GIFTS ND U STS
TO, C RT IN T - MPT ORG NIZ TIONS
Ths tte corresponds to tte III of the ouse b. Numerous changes and
technca amendments have been made by your commttee and w be noted
n the dscusson of the varous provsons under ths tte.
Tte III of the b changes the present ta treatment of the ncome of
certan ta -e empt organzatons and trusts: and the deductons for gfts
and bequests to such organzatons nnd trusts. Ths tte s dvded nto four
parts, (I) Ta aton of usness Income of Certan Ta - empt Organzatons,
(II) Chartabe, tc., Deductons of Trusts Not empt From Ta aton, (III)
Loss of empton Under Secton 101(6) and Dsaowance of Certan Gfts
and equests, and (I ) Informaton To e Made vaabe to the Pubc.
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Pabt I. Ta aton of usness Income or Cebtan Ta - empt Organzatons
S CTION 301. INCOM OF DUC TION L, C RIT L , ND C RT IN OT R
MPT ORG NIZ TIONS
Subsecton (a) of secton 301 of the b adds to the Interna Revenue Code
certan provsons mposng a ta on the unreated busness net ncome of educa-
tona, chartabe, etc., organzatons. s the e stng Suppement U of the Code
s now obsoete, the new provsons are nserted n eu of the present provsons
of Suppement U, and are numbered as sectons 21 through 2 of the Interna
Revenue Code. Ths suppement s entted Ta aton of usness Income of
Certan Secton 101 Organzatons. For convenence of reference, the ta w
be referred to n ths report as the Suppement U ta .
Subsecton (a) of secton 21 mposes a ta upon the Suppement U net ncome
(as defned n subsecton (c)) of certan organzatons now e empt from Federa
ncome ta by reason of secton 101 (1), (6), (7),or (1 ) of the Interna Revenue
Code. Ths ta s effectve for ta abe years begnnng after December 31, 19 0.
Rates.
Subsecton (a) of secton 21 aso prescrbes the rates of the Suppement U
ta . Under paragraph (1) thereof, organzatons, whch f not e empt woud
be ta ed as corporatons, are sub|ected to a norma ta of 2 percent on ther
Suppement U net ncome and a surta of 20 percent on the amount of such
ncome n e cess of 2 ,000 (the corporate Income ta rates provded In the b).
Under paragraph (2) thereof, trusts, whch f not e empt woud be sub|ect to
the provsons of Suppement of the Interna Revenue Code, are ta ed at the
Indvdua rates prescrbed n sectons 11 and 12(b) of the Code.
Organzatons sub|ect to taw.
Subsecton (b) of secton 21 defnes the organzatons whose ncome s sub|ect
to the Suppement U ta . Paragraph (1) thereof provdes that the foowng
organzatons, wth the e ceptons noted beow, are sub|ect to the ta at corporate
rates:
Labor, agrcutura, and hortcutura organzatons, e empt under secton
101(1) of the Code; chartabe, scentfc, terary, educatona, regous organ-
zatons (other than a church, or a conventon or assocaton of churches), and
organzatons for the preventon of cruety to chdren or anmas, e empt under
secton 101(6) of the Code; busness eagues, chambers of commerce, rea-estate
boards, or boards of trade, e empt under secton 101(7) of the Code; corporatons
descrbed n secton 101(1 ), organzed for the e cusve purpose of hodng tte
to property, coectng ncome therefrom, and turnng over the entre amount
thereof, ess e penses to any of the above-sted e empt organzatons whch
themseves are sub|ect to the Suppement U ta , or to a church or a conventon
or assocaton of churches.
Whe churches, and assocatons or conventons of churches, such as the
Southern aptst Conventon, are e empt from the Suppement U ta , regous
organzatons are sub|ect to such ta even though organzed under church aus-
pces. Ths s aso true of organzatons wth chartabe, educatona, etc.. pur-
poses whch are organzed under church auspces. Lkewse, a secton 101(1 )
corporaton hodng property for a church, or a conventon or assocaton of
churches, woud be, as ndcated above, sub|ect to the Suppement U ta .
Subsecton (b) (2) of secton 21 brngs wthn the scope of the Suppement
ta any trust whch woud be sub|ect to the provsons of Suppement of the
Code f t were not e empt from ta aton by reason of secton 101(6) of the Code.
Defnton of Suppement U net ncome.
The ncome sub|ect to the Suppement U ta s the Suppement U net ncome,
whch Is defned n subsecton (c) of secton 21 as the unreated busness net
Income (as defned n secton 22) n e cess of 1,000.
Foregn organzatons.
Subsecton (d) of secton 21 provdes that the Suppement U net ncome of a
foregn organzaton sub|ect to the Suppement U ta s the amount of such
ncome derved from Unted Stntes sources determned n accordance wth the
rues of secton 110 and sectons 212, 213(a), 231 (c) and (d), and 232(a) of
the Code.
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S CTION 22. UNR L T D USIN SS N T INCOM
Ths secton descrbes the unrented busness net Income whch s sub|ect to
Suppement U ta . I nreuted busness net ncome s defned In subsecton (n)
of secton 22 as the gross Income derved by nny organzaton (to whch Suppe-
ment U appes) from any unreated trade or busness reguary carred on by t,
ess the deductons aowed by secton 23 of the Code whch are drecty connected
wth the carryng on of such trade or busness, sub|ect to certan e ceptons,
addtons, and mtatons. In the case of an organzaton whch reguary carres
on two or more unreated busnesses, ts unreated busness net ncome s ts
gross Income (as descrbed beow) from a such unreated busnesses, ess the
deductons aowed wth respect to a such unreated busnesses.
Defnton of unreated trade or usness.
s used n ths secton, the term trade or busness has the same meanng as
t has esewhere n the Code, as, for e ampe, n secton 23(a) (1). The defnton
of unreated busness net Income n secton 22, however, ncudes ony ncome
from unreated trades or busnesses whch are reguary carred on. Thus, In
determnng whether the Imome of an e empt organzaton from a trade or
busness s sub|ect to the Suppement U ta , t s frst necessary to determne
whether t s ncome from a trade or busness whch s reguary enrred on, or s
ncome from a s|oradc actvty. If a chartabe organzaton, e empt under
secton 101(6) of the Code, gves an occasona dance to whch the pubc s
admtted for a charge, hrng an orchestra and entertaners for the purpose, ths
woud not be a trade or busness reguary carred on wthn the meanng of
secton 22. Lkewse, an organzaton whch operates a sandwch stand durng
the week of an annua county far s not reguary carryng on a trade or busness.
On the other hand, f an organzaton operates a pubc parkng ot one day each
week, the organzaton woud be reguary carryng on a trade or busness.
Smary, f an organzaton owned a race track, ths woud not be consdered
an occasona actvty even though the track was operated ony a few weeks
every year, snce t s usua to carry on such a trade or busness ony durng a
partcuar season.
If a trade or busness s reguary carred on, t s st not sub|ect to the Sup-
pement U ta uness such busness s unreated wthn the meanng of secton
22(b). That secton defnes the term unrented trade or busness to mean, n
the case of an organzaton sub|ect to the Suppement U ta , any trade or
busness the conduct of whch s not substantay reated (asde from the need
of such organzaton for ncome or funds or the use t makes of the profts derved)
to the e ercse or performance by such organzaton of ts chnrtabe, educatona,
or other purpose or functon consttutng the bass for ts e empton under secton
101 of the Code.
For e ampe, a wheat farm operated by an e empt agrcutura coege as part
of ts educatona program woud be consdered a reated busness. Of course,
ncome of an educatona organzaton from charges for admssons to footba
games woud not be deemed to be ncome from an unreated busness, snce ts
athetc actvtes are substantay reated to ts educatona program. Smary,
In the case of a nonproft hospta, where some patents are charty patents and
some pay ther own way, the ncome from patents n ether category s consd-
ered reated ncome and, therefore, not ta abe. owever, the manufacture and
sae of automobe tres by a coege woud ordnary be consdered an unreated
busness. trade or busness whch s otherwse unreated woud not become
reated merey because some ncdenta use s made of the busness factes to
further the e empt purpose. For e ampe, the tre busness noted above
woud not become substantay reated even though some students as part of
ther educatona program performed some mnor cerca or bookkeepng func-
tons. Nevertheess, on organzaton e empt under secton 101(6) of the Code
and engaged n the rehabtaton of handenpped persons woud not be sub|ected
to the Suppement U ta on any ncome t derves from the sae of artces made by
such persons snce such busness woud be a necessary part of ts rehabtaton
program.
owever, the term unreated trade or busness does not ncude any trade or
busness
(1) In whch substantay a the work n carryng on such trade or
busness s performed for the organzaton wthout compensaton; or
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(2) carred on by an organzaton e empt under secton 101(0) of the
Code prmary for the convenence of ts members, students, patents, offcers,
or empoyees; or
(3) whch conssts of seng merchandse, substantay a of whch
has been receved by the organzaton as gfts or contrbutons. Ths para-
graph has been added to secton 22(b) as passed by the ouse n order to
remove actvtes commony known as thrft shops from the appcaton of the
ta .
n e ampe of the operaton of the frst of the mtatons mentoned above
woud be an e empt orphanage runnng a second-hand cothng store and sene
to the genera pubc. If substantay a the work n carryng on such trade
or busness s performed for the organzaton by vounteers wthout compensaton, .
the profts of the busness woud not be sub|ect to the Suppement U ta .
n e ampe of the second mtaton woud be a aundry operated by a coege
for the purpose of aunderng dormtory nens and the cothng of students.
owever, n aundry operated by a coege apart from ts campus prmary for
the purpose of makng a proft from aunderng the cothng of the genera pubc
woud be unreated and not wthn the scope of ths mtaton.
ceptons, addtons, and mtatons.
(a) dvdends, nterest, annutes, and royates, and the deductons drecty
connected therewth, are e cuded from the concept of unreated busness net
ncome. Ths e cepton appes not ony to nvestment ncome, but aso to such
tems as busness nterest on overdue open accounts recevabe. Your commttee
has added a provson to make t cear that the term royates, as used n-
ths secton, ncudes overrdng royates and that royaty payments may be
measured by producton or by gross or net ncome from the property. owever,
where an organzaton owns a workng nterest n a mnera property, and s
not reeved of ts share of the deveopment costs by the terms of any agreement
wth an operator, ncome receved from such an nterest woud not be e cuded.
(b) In genera, rents from rea property (Incudng personaty eased there-
wth) and the deductons drecty connected therewth are aso e cuded. ow-
ever, certan rent receved from a Suppement U ease, as defned n secton 23,
s ncuded as an tem of gross ncome derved from an unreated trade or
busness. The term rents from rea property does not ncude Income from the
operaton of a hote but does ncude rents derved from a ease of the hote
tsef. Smary, ncome derved from the operaton of a parkng ot s not
consdered rents from rea property. Income receved from a busness of
rentng persona property s e cuded under secton 22(a)(3) ony f the
persona property s eased wth rea property.
(c) Your commttee has e tended the e cuson from ta provded n the
ouse b for gans and osses on rea property to gans or osses from the sae,
e change, or other dsposton of property other than stock n trade of the organ-
zaton or other property of a knd whch woud propery be ncuded n the
nventory of the organzaton f on hand at the cose of the ta abe year, or
property hed by the organzaton prmary for sae to customers n the ordnary
course of an unreated trade or busness reguary carred on by the oganzaton.
Ths e cuson does not appy wth respect to the cuttng of tmber whch s
consdered, upon the appcaton of secton 117(k) (1), as a sae or e change of
such tmber. The term other dsposton ncudes an nvountary converson,
such as theft or destructon of the property.
(d) The net operatng-oss deducton provded n secton 23(s) of the Code Is
aowed as a deducton aganst gross ncome n computng the unreated busness
net Income. The net operatng oss carry-back or carry-over s determned under
secton 122 of the Code wthout, however, takng nto account any ncome or
deducton whch s e cuded unoer Suppement U n computng the unreated
busness net ncome. For e ampe, a oss attrbutabe to an unreated trade or
busness woud not be dmnshed for purposes of determnng the net operatng
oss carry-back or carry-over by reason of the recept of substanta dvdend
ncome. For the purposes of ths provson, the terms precedng ta abe year
and precedng ta abe years as used n secton 122 of the Code do not ncude
any ta abe year for whch the organzaton was not sub|ect to the provsons
of Suppement U.
(e) Your commttee has e tended the e cuson provded n the ouse b for
Income receved for research done for the Unted States, or Its agences, to
e cude a ncome derved from work performed under a contract wth the
Unted States or any of Its agences or nstrumentates, or wth any State or
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po tcn subdvson thereof, nnd a deductons drecty connected wth such
Income are aso to be e cuded.
Your commttee baa aso added a new paragraph desgnated ( ) to secton
22(a) whch e cudes Income, and deductons drecty connected therewth,
derved from research performed for any person by a coege, unversty, or a
hospta.
(f) The o-cned ohnrtnbe-contrbuton deducton aowed by sectons 23(o)
and 23(q) of the Code a to be aowed aganst gross ncome In computng the
unreated busness net ucome In the case of any trust descrbed n secton
21(b)(2) and n the case of any other organzaton descrbed n secton
21(b)(1), respectvey, whether or not the contrbuton s drecty connected
wth the carryng on of the trade or busness. The deducton for contrbutons
s mted to 1 percent or percent, as the case - ay be, of the unreated busness
net ncome computed wthout beneft of the chartabe-contrbuton deducton
tsef, accordng to whether the organzaton s Suppement II net Income s
ta abe at ndvdua or corporate rates. In computng such deducton for a
trust ta ed at Indvdua rates, there are to be taken nto account not ony voun-
tary gfts or contrbutons made by the trust to or for the use of donees, but aso
dstrbutons made pursuant to the trust Instrument to quafed benefcares
descrbed In secton 23(o) of the Code.
The contrbuton, whether made by a trust or other e empt organzaton, must
be pad to another organzaton to be aowabe. For e ampe, a secton 101(0)
Incorporated educatona nsttuton operatng an unreated busness woud be
aowed a deducton up to percent of Its unreated busness net ncome for
amounts of ncome from any source pad over to the ted Cross but woud not
be aowed any deducton for amounts whch are used to defray ts own e penses
In admnsterng ts own educatona program.
In the event an organzaton to whch Suppement U appes Is a member of a
partnershp whch s reguary engaged In a trade or busness whch Is unreated
to the functons and purposes of the organ znto., the organzaton woud Incude
In computng ts unreated busness net Income, so much of ts share (whether
or not dstrbuted) of the partnershp gross ncome as s derved from that
unreated busness and Its share of the deductons attrbutabe thereto, and make
the necessary ad|ustments for the e ceptons, addtons, and mtatons whch
have been dscussed above. For e ampe, f an e empt educatona nsttuton s
a sent partner n a partnershp whch runs a barre factory and such partner-
shp aso hods stock n a pottery manufacturng corporaton, the e empt organ-
zaton woud Incude n ts unreated busness ncome ts share of the barre
factory ncome, but not ts proportonate share of .ny dvdends receved by the
partnershp from the pottery corporaton. If the ta abe year of the organzaton
s dfferent from that of the partnershp, the amounts to be so ncuded or
deducted n computng the unrented busness net ncome are to be based upon the
Income and deductons of the partnershp for any ta abe year of the partnershp
endng wthn or wth the ta abe year of the organzaton.
S CTION 23. SUPPL M NT T L S
Tour commttee s b ta es as unreated busness net Income the ncome whch
a Suppement U organzaton receves from the ong-term ease of ts rea property
(ncudng persona property eased wth the rea property) n the same propor-
ton that unpad ndebtedness respectng the property at the cose of the essor s
ta abe year bears to the ad|usted bass of the property.
The b deas ony wth ta consequences to be mposed on the essor organ-
zaton, and, of course, no mpcaton s to be drawn from ths mted treatment
of the probem as to the ta consequences of such arrangements under e stng
aw to the vendors and essees of the property. That s a separate probem, not
deat wth here, and the appcaton of e stng aw to the vendors and essees s
not changed by the b.
Secton 23 defnes the type of ease sub|ect to the Suppement ta , and
sets forth the rues respectng the ascertanment of the part of such rents whch
s to be sub|ect to the ta .
n F rrnoN op suppement u ease
Tour commttee has changed the defnton of the term Suppement T ease
as defned n secton 23(a), as t appeared n th ouse b, so that t ncudes,
sub|ect to e ceptons hereafter dscussed, any ease for a term of more than
years of rea property by an organzaton (or by a partnershp of whch t s a
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member), but ony f at the cose of the essor s ta abe year there Is a Suppe-
ment U ease ndebtedness, as defned n secton 23(b), wth respect to such
property.
In computng the term of the ease, the perod for whch a ease may be renewed
or e tended by reason of an opton contaned theren s consdered as part of the
term. For e ampe, a 3-year ease wth an opton for renewa for another such
perod woud be consdered a ease for a term of 6 years. nother e ampe woud
be a 1-year ease wth opton of renewa for another such term, where the partes
at the end of each year renew the arrangement Under ths set of facts, durng
the ffth year, the ease woud fa wthn the -year rue, snce the ease woud
have Invoved years and there woud reman an opton for the s th year.
Therefore, the renta recepts for the ffth year woud fa wthn the scope of the
Suppement U ta to the e tent that the borrowed funds rue of secton 23(b)
s appcabe.
If the property s acqured sub|ect to a ease, the term of such ease s consd-
ered to begn on the date of such acquston. For e ampe, f an e empt organ-
zaton purchases, n whoe or n part wth borrowed funds, rea property sub|ect
to a 10-year ease whch has 3 years eft to run, and such ease contans no rcht of
renewa or e tenson, the ea e w be treated as a 3-year ease and hence, w not
meet the defnton of a Suppement U ease n secton 23(a). owever, f ths
ease contans an opton to renew for a perod of 3 years or more, t s a Suppe-
ment U ease.
Your commttee has amended secton 23 (a) as t appeared n the ouse b to
provde that no ease sha be consdered a Suppement U ease f such ease s
entered nto prmary for purposes whch are substantay reated (asde from
the need of such organzaton for ncome or funds, or the use t makes of the rents
derved) to the e ercse or performance by such organzaton of ts chartabe,
educatona, or other purpose or functon consttutng the bass for ts e empton
under secton 101. For e ampe, where a hospta eases a cnc to an assocaton
of doctors, the rents derved under such ease woud be e cuded from the
ta mposed by ths secton f the ense was made for purposes substantay
reated to the carryng on of hospta functons.
Tour commttee has aso emnated from the defnton of a Suppement
ease, as t appeared n the ouse b, a ease of premses n a budng prmary
desgned for occupancy by the organzaton.
Your commttee has amended secton 23(a) as It appeared n the ouse b
to provde that f a ease for more than years to a tenant Is for ony a porton
of the rea property, and space n the rea property Is rented durng the ta abe
year under a ease for ess than years to any other tenant of the organzaton,
the eases of the rea property for more than years are to be consdered as
Suppement U eases durng the ta abe year ony under one or more of the
foowng condtons: (1) the rents derved from the rea property durng the
ta abe year under such eases represent 0 percent or more of the tota rents
derved durng the ta abe year from the rea property; or the area of the
premses occuped under such eases represents, at any tme durng the ta abe
year, 0 percent or more of the tota area of the rea property rented at such
tme; or (2) the rent derved from the rea property durng the ta abe year
from any tenant under such a ease, or from a group of tenants (under such
eases) who are ether members of an affated group (as defned n secton 1 1
of the Code) or are partners, represents more than 10 percent of the tota rents
derved durng the ta abe year from such property; or the area of the premses
occuped by any one such tenant, or by any such group of tenants, represents
at any tme durng the ta abe year more than 10 percent of the tota area of the
rea property rented nt such tme.
For e ampe, In 19 1 an educatona organzaton begns the erecton of an
11-story apartment budng usng funds borrowed for that purpose and mme-
datey eases for a 10-year term the frst foor to a rea estate deveopment
company to subet for stores and shops. s fast as the new apartments arc
competed, they are rented out on an annua bass. t the end of 10 6, a
e cept the tenth and eeventh foors are rented. Those two foors are competed
durng 19 7 and rented out. ssume that for 19 1 and each subsequent ta nbc
vear through 19 6 and for the ta abe year 1960, the renta for the frst foor
represents more than 10 percent of the tota rents derved durng the ta abe
vear from the budng. Under ths set of facts the 10-year ease woud be
consdered to be a Suppement U ease for a e cept the ta abe years 19 S,
19 9, and 1901.
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D FINITION OF SUPPL M NT D L IND T DN SS
Tour commttee has amended secton. 23(b) to cnrfy the term Suppement
U ease ndebtedness as t appeared n the ouse b. s now defned the
term means, wth respect to any rea property eased for a term of more than
fve years, the unpad amount of
(1) the ndebtedness ncurred by the essor n acqurng or Improvng
such property;
(2) the ndebtedness ncurred pror to the acquston or mprovement
of 6uch property If such Indebtedness woud not have been ncurred but
for such acquston or Improvement; and
(3) the Indebtedness ncurred subsequent to the acquston or Improve-
ment of such property f such Indebtedness woud not have been ncurred
but for such acquston or mprovement md the ncurrence of the ndebted-
ness was reasonaby foreseeube ut the tme of such acquston or mprove-
ment.
ccordngy, the raes respectng Suppement U eases cover cases where the
eased property Itsef s not mortgaged. They are ntended, for e ampe, to reach
cases such as the foowng: unversty pedges some of ts nvestment secur-
tes wth a bank for a oan whch s used to purchase a budng that s eased
for a ong terra. Ths woud be an e ampe of a Suppement U ease ndebtedness
ncurred pror to the acquston of the property. If the budng tsef were
ater mortgaged to rase unds to reease the pedged securtes, the ease woud
contnue to be a Suppement II ease. Lkewse, If a scentfc organzaton
mortgages Its aboratory to repace workng capta used n remodeng another
budng, otherwse free of ndebtedness and eased for a ong term to a grocery
store chan, the ease woud be a Suppement U ease nasmuch as the ndebted-
ness, ncurred subsequent to the mprovement of such property, woud not have
been Incurred but for such Improvement and the ncurrence of the ndebtedness
was reasonaby foreseeabe at the tme of such mprovement, snce the organza-
ton knew t must have workng capta to contnue current operatons.
Where ony a porton of the rea property s sub|ect to a Suppement U ease,
aocaton of the ndebtedness appcabe to the whoe property must be made
to the premses covered by the ease.
Where rea property s acqured sub|ect to a mortgage or smar en, whether
the acquston be by gft, devse, or purchase, the amount of the ndebtedness
secured by such mortgage or en s consdered Suppement ease Indebtedness
even though the essor does not assume or agree to pay the Indebtedness. For
e ampe, a unversty pays 100,000 for rea estate vaued at 300,000 and
sub|ect to a 200,000 mortgage. For the purposes of the Suppement U ta .
ths purchase woud be treated ns f 200,000 of borrowed funds had been used
to buy the property. owever, your commttee has added to secton 23(b)
severa e ceptons to ths rue not found n the ouse t. The 3rst provdes
that where rea property was acqured by gft, bequest, or devse, pror to uy
1, 1930, sub|ect to a mortgage or other smar en, the nmount of such mortgage
or other smar en sha not be consdered as an ndebtedness of the essor
ncurred n acqurng such property. The second provdes that where rea
property was acqured by gft, bequest, or devse pror to uy 1, 19 0, sub|ect
to a ease requrng mprovements n such property upon the happenng of stated
contngences. Indebtedness ncurred n mprovng such property n accordance
wth the terms of such ease sha not be consdered as ndebtedness for the
purposes of ths subsecton. The thrd provdes that In the case of a corporaton
descrbed In secton 101(1 ), a of the stock of whch was acqured pror to
uy 1, 19. ), by an organzaton descrbed n paragraph (1), (6), or (7) of
secton 101 (and more than one-thrd of such stock was acqured by such
organzaton by gft or bequest), any ndebtedness ncurred by such corporaton
pror to uy 1, )r 0, and any ndebtedness ncurred by such corporaton on
or after such date In mprovng rea property In accordance wth the terms
of a ease entered nto pror to such date, w not be consdered as an ndebted-
ness for the purposes of ths subsecton.
The b covers arrangements worked out by the use of a subsdary corporaton
of the type e empt under secton 101(1 ) of the Code. For e ampe, assume a
parent organzaton borrows funds to purchase reaty and sets up a separate
secton 101(1 ) corporaton as a subsdary to hod the property. Such sub-
sdary corporaton eases the property for a perod of 6 years or more, coects
the rents and pays over a of the ncome, ess e penses, to the parent whch
uses e rents to amortze the Indebtedness. The ease by the secton 101(1 )
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subsdary corporaton woud be a Suppement U ease, and the renta Income
woud be sub|ect to the ta , whether the subsdary Itsef assumes the ndebted-
ness or not. Snce the e stng provsons of secton 101(1 ) aready prevent
subsdary corporatons e empt UDder that secton from engagng n any actve
busuess enterprse, t may be noted that the ony type of unreated ncome hed
by such subsdary corporatons on whch an ncome ta woud be mposed s
Income from a Suppement U ease.
For the purposes of secton 23, provson Is made In subsecton (c) thereof
that the term rea property and the term premses Incude persona property
of the essor eased by t to a essee of Its rea estate f the ease of such persona
property s made under, or n connecton wth, the ease of such rea estate.
TR TM NT OF SUPPL M NT U L S NTS ND D DUCTIONS
Under secton 23(d) (1) a formua Is set out for computng the amount of
the renta Income wth respect to a Suppement ease whch s to be ncuded
n the computaton of unreated busness net ncome under secton 22(a). The
amount of rent to be ncuded s the same percentage (but not n e cess of 100
percent) of the tota rent derved durng the ta abe year under each such ease
as ( ) the Suppement U ease ndebtedness, at the cose of the ta abe year,
wth respect to the premses covered by such ease, s of ( ) the ad|usted
bass, at the cose of the ta abe year, of such premses.
ssume, for e ampe, that an educatona nsttuton purchased property for
00,000, and eased t for a perod of 20 years and the ad|usted bass of such
property at the cose of the frst ta abe year was aso 000,000. If the fu
00,000 purchase prce actuay came from the schoo s own funds, the renta
ncome from ths eased property woud not be treated as unreated busness
Income. owever, f the nsttuton borrowed ether part or a of the 00,000,
at east a porton of the renta ncome woud be unreated busness ncome. If
t had borrowed 200,000 to acqure the property, snce ths s two-ffths of the
ad|usted bass, two-ffths of the renta ncome receved from the eased property
woud enter Into the computaton of unreated busness net ncome under secton
22(a) ( ). If, n a subsequent year, the ndebtedness were reduced to S100.000,
assumng the ad|usted bass were st 00,000, one-ffth of the renta ncome
woud be ncuded as an tem of gross ncome n computng the unreated busuess
net ncome.
Smary, f an educatona nsttuton whch owned a budng ste worth
20,000 borrowed 0,000 to erect a budng thereon and then eased the entre
property for a perod of 6 years or more, fve-sevenths of the renta ncome
from the property (assumng the ad|usted bass to be 70,000) woud be ncuded
n computng unreated busness net ncome nt the end of the frst year.
Where ony a porton of the property, wth respect to whch an ndebtedness
e sts, s sub|ect to a Suppement U ease, proper aocaton to the porton of
the premses covered by such ease must be made of the ndebtedness reated
to the property. For e ampe, assume that nn e empt organzaton owns a four-
story budng havng nn ad|usted bass of 100,000, that t spends 100,000 of
borrowed funds n mprovng the whoe budng, and that the frst foor s then
rented under n 6-year ease at a renta of ,000 a year. The second, thrd,
nnd fourth foors are eased out on a yeary bass. ssume aso, for smpcty
of e ampe, that the bass ad|usted to the end of the tn nbe year s 200,000,
nocnbe equay to each of the four stores. Under ths set of facts, ony one-
fourth of the property woud be covered by the Suppement U ease. The formua
for computng the percentage of rents to be taken nto account n the above
e ampe coud be represented as foows:
The amount of the Suppement U ease Income
( ocabe part of Suppement U ease ndebtedness)
( d|usted bass of Suppement U eased premses)
The numerator n the above e ampe 100,000.
The denomnator 1/1 200,000.
Therefore, appyng the formua to the e ampe, the percentage of Suppement
U ease ncome woud be one-haf of ,000, or 2,000, whch amount under
secton 2.3(d) (1) s an tem of gross ncome derved from an unreated trade
or busness.
The above e ampes do not take nto consderaton ad|ustments to the bnss
due to deprecaton of the premses covered by the Suppement U ease. The
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bass of the premses woud, of course, be changed each year by ad|ustments
for deprecaton, capta addtons, etc. It s therefore cear that n years In
whch the mcbtedne.su appcabe to the eased premses s not reduced, reduc-
ton of the bass by deprecaton ad|ustments mght resut n a hgher percentage
of rents beng Incuded n the computaton of the unreated busness net ncome
than n the mmedatey pror year.
Ph C NT O OF D DUCTIONS T N INTO CCOUNT
Secton 23(d) (2) and (3) respectvey set forth the percentage of the sum
of the deductons whch s to be taken nto account wth res Ct to each Suppe-
ment U ease and the deductons that are aowabe n computng the sum of
deductons. The percentage rue respectng the deductons s comparabe to
that e paned above respectng the rents from Suppement U eases. The sum
of the deductons s the sum of the foowng deductons aowabe under secton
23 of the Code:
( ) Ta es and other e penses pad or aecrncd durng the ta abe year
upon or wth respect to the rea property sub|ect to the Suppement U ease.
( ) Interest pad or accrued durng the ta abe year on the Suppement
D ease Indebtedness.
(C) reasonabe aowance for e hauston, wear and tear (ncudng a
reasonabe aowance for obsoescence) of the rea property sub|ect to
such ease.
Where ony a porton of the rea property s sub|ect to the Suppement T ease,
there Is taken nto account ony those amounts of the above-sted deductons
whch are propery aocabe to the premses covered by such ease.
The percentage of the sum of the deductons aowed wth respect to the Sup-
pement U rents s taken Into account n computng the unreated busness net
ncome under proposed secton 22(a). Under secton 22(a), addtona deduc-
tons, namey, for net operatng osses, and chartabe contrbutons, are then
apped. Concevaby, the net operatng oss and the chartabe contrbuton
deductons aowed under secton 22(a) coud oTset gross ncome from a Sup-
pement U ease. On the other hand, a oss wth respect to a Suppement U ease
mght tsef produce a net operatng oss under the provsons of secton 22(a)
reatng to determnaton of unreated busness net ncome.
CCUMUL T D IN STM NT INCOM
Tour commttee has emnated those provsons of the ouse b whch woud
have added sectons 21(c) (2), 2 , and 2 to the Interna Revenue Code, whch
woud have sub|ected to the Supement U ta certan accumuated nvestment
ncome of trusts and certan other organzatons e empt under secton 101(0) of
the Code.
S CTION 2 . T TS OF FOR IGN COUNTRI S ND POSS SSIONS OF T UNIT D ST T S
Secton 2 , whch corresponds to secton 20 as t appeared n the ouse b,
Is a technca provson to provde necessary rues for the appcaton of the
foregn-ta credt (under secton 131 of the Code) In the case of any domestc
organzaton dong busness n a foregn country or possesson of the Unted
States and whch s sub|ect to the Suppement U ta . The secton provdes that
the amount of ncome, war-profts, and e cess-profts ta es Imposed by foregn
countres or possessons of the Unted States s to be aowed as a credt aganst
the Suppement U ta to the e tent provded n secton 131 of the Code. The
secton further provdes that the term norma-ta net ncome and the term
net Income as used n secton 131 of the Code s to be read as Suppement U
net ncome In the case of organzatons comng wthn the scope of the Suppe-
ment U ta .
S CTION 301(b). F D R ORG NIZ TIONS
Subsecton (b) of secton 301 of the b adds a paragraph at the end of secton
101 of the Code to provde that an organzaton (whch term ncudes a trust)
operated for the prmary purpose of carryng on a trade or busness for proft
s not to be e empt under any paragraph of secton 101 of the Code on the ground
that a of ts profts are payabe to one or more organzatons e empt from
ta aton under that secton. It Is aso provded that for the purposes of ths
paragraph the term trade or busness does not ncude the renta by an organ-
zaton of ts rea property (ncudng persona property eased therewth).
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The determnaton of the ta treatment of such feeder organzatons for ta -
abe years begnnng pror to anuary 1, 19 1, s to be made as f ths subsecton
of the b had not been enacted and wthout nference drawn from the fact that
the amendment made by ths subsecton of the b s not e pressy made app-
cabe to such ta abe years. In the area covered by ths amendment there has
been tgaton as to the appcaton of such a rue under e stng aw (cf.
Rochc g ench, Inc. v. Commssoner (C. C. . 2, 193 ), 96 Fed. (2d) 776: Un-
versa O Products Co. v. Campbe (C. . 7, 19 0), 1 1 Fed. (2d) 1; WUmf
ham v. ome O M (C. . ,19 0), 1 1 Fed. (2d) 9; C. F. Mueer Co.. 1 T. C.
No. 1111 May 2 , 19 0)). The amendment s Intended to show ceary what,
from Its effectve date, the rue s to be, wthout dsturbng the determnaton n
present tgaton of the rue of e stng aw.
It s not ntended that ths paragraph have any effect on cooperatves formed
by other cooperatves under secton 101(12) of the Code, on secton 101(13) of
the Code (deang wth certan other corporatons organzed by assocatons e -
empt under secton 101(12) of the Code, or by members of such assocatons),
or on secton 101(1 ) of the Code (deang wth certan corporatons organzed
to hod property and pay the net ncome therefrom to an organzaton e empt
under secton 101 of the Code).
The paragraph appes to organzatons operated for the prmary purpose of
carryng on a trade or busness for proft, as for e ampe, a feeder corporaton
whose busness s the manufacture of automobes for the utmate proft of an
educatona nsttuton.
Ths amendment to secton 101 w automatcay be appcabe for the pur-
poses of those provsons of the Federa Insurance Contrbutons ct and the
Federa Unempoyment Ta ct whch refer to secton 101 or a partcuar para-
graph thereof.
S CTION 301(c). T C NIC L M NDM NTS
Subsecton (c) of secton 301 of the b, correspondng to subsecton (d) of
secton 301 of the ouse b, contans a number of technca amendments. Para-
graph (1) thereof amends secton 101 of the Interna Revenue Code to provde
that the organzatons descrbed theren are e empt e cept to the e tent provded
n Suppement U. and that notwthstandng the fact that such organzatons are
sub|ect to ta under Suppement U, they are st to be consdered as e empt from
ncome ta es for the purpose of any aw whch refers to organzatons e empt
from ncome ta es.
Paragraphs (2) and (3) amend secton 117(c) of the Code to provde for the
appcaton to an organzaton sub|ect to the Suppement U ta the aternatve ta
rates set out n that secton In any ta abe year n whch the net ong-term capta
gan of such organzaton e ceeds ts net short-term capta-oss. Ths provson
can appy ony n the case of an organzaton carryng on an unreated trade or
busness and whch has a proft, treated as a capta gan, from the sae of prop-
erty such as tmber hed by the organzaton prmary for sae to customers n
the ordnary course of an unreated trade cr busness reguary carred on by
the organzaton. It has no appcaton to capta gans derved from saes of
stocks, bonds, and the ke, snce such capta gans w not be ncuded n com-
putng Suppement U net ncome.
Paragraph ( ) amends secton 1 3 of the Code (reatng to wthhodng ta
at source on payments to nonresdent aens, etc.) by addng at the end of that
secton a new subsecton to be desgnated subsecton (h) and entted Wth-
hodng on Certan Foregn Ta - empt Organzatons. Ths subsecton Is
desgned to appy to foregn organzatons whch have ncome from Unted States
sources sub|ect to the Suppement U ta , the ncome ta wthhodng provsons
of secton 1 3 of the Code (nonresdent aens), and secton 1 of the Code
(foregn corporatons). The wthhodng provsons of sectons 1 3 and 1 of
te Code w be apped to rents ncudbe under secton 22 n computng the
unreated busness net ncome of foregn organzatons, but ony to the e tent and
sub|ect to such condtons as may be provded n reguatons.
Paragraphs ( ) and (C) respectvey amend Suppement of the Code (dea-
ng wth ta aton of nonresdent nen ndvduas) and Suppement I of the
Code (deang wth the ta aton of foregn corporatons) to provde a cross
reference to the speca provsons reatng to foregn educatona, chartabe,
and certan other e empt organzatons sub|ect to Suppement U and ncuded
n secton 21(d).
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S CTION 302. MPTION OF C RT IN ORG NIZ TIONS FOR P ST Y RS
Secton 302 of the b, for whch there Is no correspondng provson n the
ouse b, deas wth possbe ta abty for years begnnng pror to 1 31 of
certan organzatons whch for such years were consdered e empt from ncome
ta under secton 101 of the Interna Revenue Code; the deductbty of con-
trbutons tft those of such organzatons as were consdered e empt under secton
101(6) s aso deat wth.
In vew of the character of tgaton whch has deveoped wth respect to
certan organzatons camng the benefts of secton 101(6), your commttee
consdered t advsabe to prescrbe certan rues respectng w|sshe asserton of
ta abty for post years aganst certan organzatons whch mght be affected
bv the utmate outcome of pendng tgaton (cf. Roche s Icach. Inc. v. Cnmms-
soner (C. C. . 2,193 ), 96 Fed. (2d) 776; Unversa O Products Co. v. Campbe
(C. . 7, 19 0), 1 1 Fed. (2d) 1; Wngham v. orne O (C. . . 11) 0),
1S1 Fed. (2d) 9; C. F. Mueer Co., 1 T. C. No. 111 (May 2 ,10 0)). It wU be
noted that the provsons n secton 302 of the b dea ony wth the ta -e empt
status of organzatons for ta abe years begnnng pror to anuary 1, 19 1. and
have no appcaton to ta abe years begnnng after December 31, 19 0, for any
organzaton. so, secton 302 appes ony where a dena of e empton mght
be made on the ground that the organzaton was carryng on n trade or busness
for proft, and nothng theren mts the dena of e empton for faure to meet
other requrements of secton 101.
TR D OR USIN SS NOT UNR L T D
Secton 302(a), as added by your commttee, provdes that for aDy ta abe year
begnnng pror to anuary 1, 19 1, no organzaton sha be dened e mpton
under paragraph (1), (6), or (7) of secton 101 of the Interna Revenue Code on
the ground that t s carryng on trade or busness for proft f the ncome from
such trade or busness woud not be ta abe as unreated busness ncome under
the provsons of Suppement U, as amended by ths b, or f such trade or
busness woud not be ncuded wthn the meanng of the term trade or busness
as used n secton 101 of the Code, as amended by the b. Ths s to assure that
no more strct rue w be apped for such years than w be apped n the
future under the b.
TR D OR USIN SS INCOM ND MPTION PR IOUSLY GR NT D
Secton 302(b), as added by your commttee, provdes that for any ta abe year
begnnng pror to anuary 1, 19 1, no organzaton whch has been advted by
the ureau of Interna Revenue n a etter to such organzaton that such organ-
zaton was e empt from ta aton under secton 101 of the Code sha be dened
e empton from ncome ta under such secton on the ground that t s carryng
on a trade or busness for proft, uness, pror to such date the ureau of Interna
Revenue has, n a etter to such organzaton, nforned such organzaton that
ts e empton under such secton was wthdrawn or requested further nforu-aton
from such organzaton reatve to ts e empt status. In no event sha e emp-
ton be so dened for any such ta abe year pror to the ta abe year n whch
such etter requestng nformaton was maed to such organzaton, or, f no
etter so requestng nformaton was maed, pror to the ta abe year n whch
such etter, nformng the organzaton that ts e empton was wthdrawn, was
maed.
MPTION :TOT PR IOUSLY GR NT D, U STION D O D NI D
Secton 302(c), as added by your commttee, provdes that on organzaton
whose e empton under secton 101 of the Code has not been approved, questoned,
or dened by the ureau of Interna Revenue pror to the date of enactment of
ths ct n a etter to such organzaton sha not be dened e empton for any
perod pror to anuary 1. 19 7, on the ground that t s carryng on a trade or
busness for proft. In the case of such an organzaton, the fng of an nforma-
ton return requred by secton (f) of the Code (reatng to returns by ta -
e empt organzatons) for any ta abe year begnnng pror to anuary 1, 19 1,
sha be deemed to be the fng of a return for the pr|mses of secton 27 of the
Code (reatng to perod of mtaton upon assessment and coecton) wth re-
spect to ta abe years begnnng pror to anuary 1, 19 1. In the case of such an
organzaton whch was, by the provsons of secton (f) of the Code, specfcay
not requred to fe such nformaton return, a return sha be deemed to have been
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f ed, for the purposes of the precedng sentence, at the tme when such return
shoud have been fed had t been requred for ta abe years begnnng pror to
anuary 1, 19 1.
D NI L OF D DUCTIONS
Secton 302(d), as added by your commttee, provdes that a gft or bequest for
regous, chartabe, etc., purposes to an organzaton carryng on a trade or
busness for proft, otherwse aowabe as a deducton under the approprate
ncome, estate, or gft ta provsons may not be dened under such deducton
provsons for any ta abe year begnnng pror to anuary 1, 10 1, f a dena
of e empton to the recpent organzaton for the tme n whch such contrbuton
was made s prevented by the provsons of subsecton (a), (b), or (c) of ths
secton.
Secton 303 of th3 b provdes that the amendments made by part I of tte
III of the b (the Suppement U ta rues so far dscussed) are to be appcabe
ony wth respect to ta abe years begnnng after December 31, 19 0.
Part II. Chartabe, tc., Deductons of Trusts Not empt From Ta aton
S CTION 321. C I1 L , TC., D DUCTIONS OF TRUSTS
Secton 321 of your commttee s b corresponds to secton 321 of the ouse
b, whch secton has been rewrtten by your commttee to emnate those prov-
sons of the ouse b whch wouIO have dened a deducton under secton 162(a)
of the Code wth respect to ncome of any ta abe year begnnng after December
31, 19 0, whch was accumuated, and aso the prvege of eecton whch woud
have been granted trustees by the ouse b to deduct under secton 102(a)
dstrbutons made after the cose of the ta abe year.
Subsecton (a) of secton 321 of your commttee s b adds to secton 162 of
Suppement of the Interna Revenue Code a new subsecton desgnated (g),
desgned to brng the treatment of the chartabe, etc., deductons aowed trusts
ta abe under Suppement n ne generay wth the treament provded trusts,
and other organzatons e empt under secton 101(0) of the Code. Paragraph
(1) of secton 102(g) provdes that n computng the deducton aowabe under
subsecton (a) of secton 162 of the Code to a trust for any ta abe year begnnng
after December 31, 19 0, no amount otherwse aowabe under subsecton (a) of
secton 102 as a deducton sha be aowed as a deducton wth respect to ncome
of the ta abe year whch s aocabe to ts Suppement U busness ncome for
such year. s used here, the term Suppement U busness ncome means an
amount equa to the amount whch, f such trust were e empt under secton 101 (6)
of the Code from ta aton, woud be computed as ts unreated busness net n-
come under secton 22 (reatng to ncome derved from certan busness actv-
tes and from certan eases).
Secton 22(b) provdes that n the case of a Suppement trust computng ts
net ta abe ncome under Suppement U, the term unreated trade or busness
ncudes any trade or busness reguary carred on by such a trust, or by a
partnershp of whch t s a member. The Suppement T busness ncome of such
a trust woud n effect be ts net ncome derved from any reguary carred on
busness actvty (ncudng the percentage of rents taken nto account under a
Suppement U ease),
OP R TION OF TRUSTS
Paragrnph (2) of secton 102(g) contans provsons desgned to mt the
amount otherwse deductbe by a trust under secton 162(a) of the Interna
Revenue Code where the trust s so operated that certan defned casses of per-
sons receve speca beneft. so, provson s made denyng chartabe, etc.,
deductons to donors for gfts or bequests made n trust for chartabe, etc., pur-
poses where (he recpent trust has engaged n a transacton whch dverts ether
ncome or corpus from the chartabe, etc., purposes for whch t had been set
asde to the speca beneft of a donor or creator of such trust. There are smar
provsons, appcabe to organzatons e empt under secton 101(0) of the Code,
n part III of tte III of your commttee s b, more detaed anayss of
these provsons w be found n that part of your commttee s report whch ds-
cusses part III of tte III of the b.
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LIMIT TION ON C RIT M. , TC., D DUCTIONS
Subparagraph ( ) of paragraph (2) of secton 102(g), whch s smar to para-
graph ( ) of secton 102(g) as t appeared In the ouse b, mts the amount
otherwse deductbe under secton 102(a) of the Code to 1 percent of ts net
Income n the case of a trust whch has engaged n any prohbted transacton as
denned n subparagraph ( ) of paragraph (2) of secton 102(g).
PRO IIIIT D TR NS CTIONS
Subparagraph (I ) of paragraph (2) of secton 102(g) sts the types of trans-
actons whch are deemed prohbted for purposes of ths paragraph. Incuded
are oans, purchases, payments, saes, and certan other acts, whch resut n
dverson of trust ncome or corpus (whch has been permanenty set asde or
Is to be used e cusvey for chartabe or other purposes descrbed n secton
102(a) of the Code), drecty or ndrecty, to the creator of such trust, or any
|erson who has made a substanta contrbuton to such trust.
The st of specfc categores of transactons whch are prohbted s smar
tc that contaned n the comparabe ouse provson e cept that your commttee
has mted the categores to transactons whch are not at arm s ength. For
e ampe, the ouse b woud have prohbted any transacton whereby any
part of the ncome or corpus of such trust was oaned to a certan defned cass
cf persons. Under your commttee s b the ony endng whch s consdered a
prohbted act s the endng of ncome or corpus whch has been permanenty set
asde or s to e used for chartabe, etc., purposes, and then ony where such
ncome or corpus s ent wthout the recept of adequate securty and a reasonabe
rate of nterest, snce ony ths type of oan s not at arm s ength. Your com-
mttee has added to the st of prohbted transactons as t appeared n the
ouse b a genera category comprsng any transacton whch resuts n a
substanta dverson of such ncome or corpus to the speca cass of persons.
T L Y RS FF CT D
Subparagraph (C) of paragraph (2) of secton 102(g) provdes that the
mtaton on deducton prveges under secton 162(a) of the Code because of
engagng n a prohbted act as defned above appes for ta abe years subsequent
to the ta abe year In whch the trust s notfed that t has engaged n a prohb-
ted transacton. owever, such deducton prvege may be so mted wth
respect to any ta abe year f such trust entered nto such prohbted transacton
wth the purpose of vertng such corpus or ncome from ts chartabe, etc., pur-
pose and such transacton nvoved a substanta part of such ncome or corpus.
Subparagraph (D) of paragraph (2) of secton 102(g) provdes rues for the
recovery of the aowance of the unmted chartabe deducton prvege accorded
trusts under secton 162(a) of the Code. In any ta abe year subsequent to the
ta abe year n whch notce of the mtaton of deducton by reason of secton
162(g)(2) has been receved, the trust may, under reguatons, f e cam for
restoraton of ts prvege of unmted deducton under secton 162(a). Ths
cam s to be granted f the Secretary s satsfed that such trust w not
knowngy agan engage n a prohbted transacton. The perod of renewed un-
mted deducton under secton 162(n) of the Code begns wth the ta abe year
subsequent to the ta abe year n whch such cam was fed.
DIS LLOW NC OF C RT IN C RIT L , TC., D DUCTIONS
Subparagraph ( ) of paragraph (2) of secton 162(g) provdes that no gft
or bequest (defned n subsecton (f) to ncude any gft, contrbuton, bequest,
devse, egacy, or transfer) for regous, chartabe, etc., purposes otherwse
aowabe as a chartabe, etc., deducton under, the approprate ncome, estate,
and gft ta provsons of the Interna Revenue Code, s to be aowed f made n
trust, and, such trust at the tme the gft or bequest s made as been dsaowed
the unmted deducton prvege under secton 102(a) by operaton of the
provsons of ths paragraph.
owever, where the deducton prvege of the trust has been mted by reason
of ts havng engaged n a prohbted transacton wth the purpose of dvertng
corpus or ncome from ts chartabe, etc., purpose and such transacton n-
voved a substanta part of such ncome or corpus, the deductons of the donor
are to be dsaowed for gfts or bequests made pror to or durng the ta abe
year of the trust durng whch the prohbted transacton occurred, f the donor
D23S30 1 37
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or (f an ndvdua) any member of hs famy (defned to ncude ony brothers
and ssters whether by whoe or haf-bood, spouse, ancestors, and nea de-
scendants) was a party to such prohbted transacton.
S CTION 321(b). T C NIC L M NDM NTS
Subsecton (b) of secton 321 of the b s the same as paragraph (1) of sec-
ton 32 b) of the ouse b. It provdes that the deductons under secton
102(a) of the Code are to be sub|ect to the provsons of subsecton (g).
Your commttee s b omts the technca amendment provded n paragraph
(2) of secton 321(b) of the ouse b, whch amendment provded that suppe-
ment was not to appy In the case of any trust whch s e empt (e cept as
provded n suppement U) from ta aton by reason of secton 101(6) of the Code.
If present aw acheves such a resut, the provson of the ouse b s unneces-
sary; f present aw does not acheve such resut, your commttee does not desre
to change the aw at ths tme.
Secton 322 of the b provdes that the amendments made by part II of tte
III of the b are to be appcabe ony wth respect to ta abe years begnnng
after December 31, 19 0, e cept that subparagraph ( ) of paragraph (2) of
secton 102(g), added by secton 321(a) of the b, sha appy ony wth respect
to gfts or bequests made on or after anuary 1.10 1.
Pabt III. Loss of empton Under Secton 101(6) and Dsaowance or
Certan Gfts and equests
Part III of tte III of your commttee s b s a combnaton of secton 301(c)
and part III of tte III of the ouse b.
Secton 301(c) of the ouse b set up specfc standards under whch an
organzaton e empt under secton 101(6) must operate n order to retan ts
e empt status. Part I of tte III of the ouse b provded that these stand-
ards of operaton must be set forth In the nstrument under whch the trust or
other organzaton was operated n order for contrbutons to such organzaton
to be deductbe. The prncpa change made by your commttee s that the dena
of chartabe deductons s made contngent upon whether the recpent organza-
ton has engaged n some prohbted net for whch It s dened ta e empt status,
am the provsons of the ouse b whch requred the charter of the recpent
organzaton to prevent t from engagng n such prohbted acts have been
strcken from the b by your commttee.
S CTION 31. MPTION OF C RT IN ORG NIZ TIONS fND R S CTION 101
ND D DUCTI ILITY OF CONTRI UTIONS M D TO SUC ORG NIZ TIONS
Secton 331 of your commttee s b amends chapter 3 of the Interna Revenue
Code, addng a new secton to be numbered secton 3 13, entted Requrements
for empton of Certan Organzatons Under Secton 101(G) and for De-
ductbty of Contrbutons Made to Such Organzatons.
organzatons to whch secton appes
Subsecton (a) of secton 3 13 sts the organzatons to whch that secton
appes. It appes to any organzaton descrbed n secton 101(6) wth cerUn
e ceptons. In genera, those e cepted are regous organzatons (other than
trusts) and organzatons operated, supervsed, controed, or prncpay sup-
ported by such regous organzatons, certan educatona organzatons, certan
medca organzatons, and certan organzatons supported by the genera pubc
or the Government. These e cepted categores of organzatons are n genera
the same as those e cepted In the comparabe secton of the ouse b e cept
that the category of pubcy supported organzatons has been broadened to make
cear that an organzaton whch normay receves a substanta part of ts
support (e cusve of Income receved n e ercse or performance of ts e empt
functon) ndrecty from the genera pubc through such organzatons as the
Communty Chest s e cepted from the provsons of ths secton. so, your
commttee has added an e press e cepton for an organzaton, the prncpa
purposes or functons of whch are the provdng of medca or hospta care or
medca educaton or medca research.
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PRO I IT D TR NS CTIONS
Subsecton (b) of secton .1 13 sts the types of transactons whch are deemed
prohbted for the purposes of ths secton. Incuded are oans, purchnses, pay-
ments, saes, and certan other acts, whch resut n the dverson of ncome or
corpus of the organzaton, drecty or ndrecty, to any person who has made a
substanta contrbuton to such organzaton. The st of s ecfc categores of
transactons whch are prohbted s smar to that contaned n the comparabe
ouse provson e cept that your commttee has mted the categores to trans-
actons whch are not at arm s ength. For e ampe, the ouse b woud have
prohbted any transacton whereby any part of the Income or corpus of such an
organzaton was oaned to a certan denned cass of persons. Under your com-
mttee s b the ony endng whch s prohbted s the endng of ncome or
corpus wthout the recept of adequate securty and a reasonabe rate of Interest,
snce ony ths type of oan Is not at nrm s ength. Your commttee has a 1dod to
the st of prohbted transact Ions as It appeared In the ouse b a genera
category comprsed of any transacton whch resuts In a substanta dverson
of ncome or corpus to a certan defned cass of persons.
D NI L or MPTION TO ORG NIZ TIONS NG GING IN PRO I IT D TR NS CTIONS
Subsecton (c) of secton 3S13 provdes that any organzaton descrbed In
secton 101(C) of the Interna Revenue Code (e cept an organzaton e cepted
by subsecton (a) of secton 3 13) whch has engaged n nny prohbted trans-
acton (as descrbed n subsecton (b) of secton 3 13) sha not be e empt from
ta aton under secton 101(C) for any ta abe year subsequent to the ta abe
year n whch t s notfed by the proper admnstratve authorty that t has
encaged In such prohbted transacton. owever, e empton may be dened
wth respect to any ta abe year f such organzaton entered nto such pro-
hbted transacton wth the purpose of dvertng ncome or corpus from ts
e empt purpose and such transacton nvoved a substanta part of the ncome
or corpus of such organzaton.
For e ampe, creates a foundaton In 19 3 ostensby for educaton pur-
poses. , as trustee, accumuates the Income unt 1900 when he uses ths
accumuated ncome to send s chdren to coege, the rea purpose of the
foundaton from ts ncepton. Such foundaton may ose ts e empton for n
years snce ts ncepton, that s, for ta abe years 10 through 1900 and future
ta abe years.
The above nmendment Is ntended to deny ta -e empt status under secton
101(0) to organzatons whch are manpuated to the prvate advantage of
any substanta donors of such organzatons. The fact that the above specfc
standards are made appcabe to certan secton 101(0) organzatons does not
mpy that smar crtera may not Ik used n determnne; vheth r other secton
101(C) organzatons are operated e cusvey for e empt purposes.
FUTI ST TUS OF ORG NIZ TION D NI D MPTION
Subsecton (d) of secton 3S13 provdes rues for the recovery of ta -e empt
status by an organzaton dened e empton under secton 101(G) of the Code
by reason of the provsons of secton 3 13. Such an organzaton may fe
cam for e empton, under reguatons, n any ta abe year foowng the ta -
abe year n whch notce of dena of e empton was receved. Ths cam for
e empton s to be granted f the Secretary s satsfed that such organzaton
w not knowngy agan engage n a prohbted transacton. The perod of
new e empton begns wth the ta abe year subsequent to the year n whch
such cam s fed.
For e ampe, a foundaton engages In a prohbted act n ts ta abe year 19C0
wthout tne purpose of dvertng ncome or corpus from ts e empt purpose. It
Is notfed n ts ta abe year 1901 that t has engaged n such transacton. It
therefore oses ts ta e empton for ts ta abe year 1902. owever, t fes
cam for e empton n ts ta abe year 19G2, and the Secretary acts favoraby
on ths cam. Under ths set of crcumstances, such organzaton w be
e empt for ts ta abe year 1903 and for subsequent ta abe years.
DIS LLOW NC OF C RT IN C RIT L , TC., D DUCTIONS
Subsecton (e) of secton 3313 provdes that no gft or bequest (defned n
subsecton (f) to ncude any gft, contrbuton, bequest, devse, egacy, or
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transfer) for regous, chartabe, etc., purposes otherwse aowabe as a
chartabe, etc., deducton under the approprate Income, estate, and gft ta
deducton provsons of the Interna evenue Code, Is to be aowed f made
to an organzaton whch at the tme the gft or bequest s made Is not e empt
under secton 101(6) of the Code by reason of the provsons of secton 3S13.
owever, where the recpent organzaton s not e empt because It has
engaged n a prohbted transacton wth the purpose of dvertng Income or
corpus from ts e empt purpose and such transacton nvoved a substanta part
of ts ncome or corpus, the deductons of the donor are to be dsaowed for
gfts or bequests made pror to or durng the ta abe year of the organzaton
durng whch the prohbted transacton occurred, If the donor or (f an nd-
vdua) any member of hs famy (defned to ncude ony brothers and ssters
whether by whoe or haf bood, spouse, ancestors, and nea descendants) was
a party to such prohbted transacton.
For e ampe, corporaton n 19 creates a foundaton purportedy for
chartabe purposes and takes a chartabe deducton therefor, reportng on a
caendar-year bass. In 10 corporaton makes a subsequent gft to ths
foundaton and takes a Chartabe deducton; kewse, n 19 6 and 19 7 corpo-
raton makes smar contrbutons and takes smar deductons. ssume
that n year 19 the foundaton had purposey dverted a arge part of ts
corpus to the beneft of corporaton and had receved notce to that effect n
19 6. Under ths set of facts, both corporaton and corporaton woud ose
a chartabe deducton for the year 19 7. Moreover, the chartabe deductons
that corporaton took for the years 19 , 19 , and 19 6 mght aso be ds-
aowed snce corporaton was a party to ths prohbted transacton.
S CTION 332. T C NIC L M NDM NTS
Secton 332 of the b amends sectons 23(o) (2), 23(q) (2), 162(a), 0 (a) (2),
12(d), 61(a)(3), 100 (a) (2) ( ), and 100 (b) of the Interna evenue Code
to provde a cross reference to sectons 3 13 and 162(g)(2) for dsaowance of
certan chartabe, etc., deductons otherwse aowabe, nnd amends secton
101(6) of the Code for cross reference to secton 3 13 for oss of e empton
under certan crcumstances.
S CTION 333. FF CTI D T S OF P RT III
Secton 333 of the b provdes that the amendments made by subsectons (c)
and (d) of secton 3S13, added by secton 331 of ths b, sha appy wth respect
to ta abe years begnnng after December 31, 19 0, and that subsecton (e)
of secton 3S13 sha appy wth respect to gfts or bequests made on or after
anuary 1, 19 1.
Past I . Informaton To e Madk vaabe to the Pubc
S CTION 3 1. INFORM TION WIT R SP CT TO C RT IN C RIT L . TC.,
MPTIONS ND D DUCTIONS
Secton 311 of your commttee s b amends Suppement D of chapter 1 of the
Interna evenue Code to add a new secton desgnated secton 1 3, entted
Informaton Requred From Certan Ta - empt Organzatons and Certan
Trusts. There s no comparabe provson n the ouse b.
Ths new secton requres that any organzaton e empt under secton 101(6)
of the Code and sub|ect to the requrements of secton (f) of the Code furnsh
the foowng nformaton annuay at such tme and In such manner as the
reguatons may prescrbe:
(1) ts gross ncome for the year,
(2) ts e penses attrbutabe to such ncome and ncurred wthn the year,
(3) ts dsbursements out of ncome wthn the year for the purposes for
whch t s e empt,
( ) Its accumuaton of ncome wthn the year,
( ) ts aggregate accumuatons of Income at the begnnng of the year,
(C) ts dsbursements out of prncpa n the current and pror years for
the purwses for whch It Is e empt, and
(7) a baance sheet showng ts assets, abtes and net worth as of the
begnnng of such year.
Trusts camng chartabe, etc., deductons under secton 162(a) of the Code
sha he requred to fe the foowng nformaton annuay at such tme and n
such manner as the reguatons may prescrbe:
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(1) the amount of the chartabe deducton taken under secton 102(a) wthn
such year (showng separatey the amount of such deducton whch
was pad out and whch was permanenty set asde for chartabe, etc.,
purposes durng such year),
(2) the amount pad out wthn such year whch represents amounts for
whch chartabe, etc., deductons have been taken n pror years,
(3) the amount or whch chartabe, etc., deductons have been taken n pror
years but whch has not been pad out at the begnnng of the year,
( ) the amount pad out of prncpa In the current and pror years for
chartabe, etc., purposes,
( ) the tota ncome of the trust wthn such year and the e penses at-
trbutabe thereto, and
(6) a baance sheet showng the assets, abtes, and net worth of the
trust as of the begnnng of such year.
It s eft to admnstratve dscreton as to whether ths new nformatan s to
be returned on a separate form prescrbed for ths purpose or on an Informaton
return form now n use, revsed to nc.de the new nformaton. The degree of
deta and partcuarty whch may be caed for n reportng the requred nfor-
maton w be determned by reguatons. The names and addresses and other
Informaton requred of these trusts and other organzatons are to be made
avaabe to te genera pubc, n such manner as the Secretary may prescrbe.
ny trust or other organzaton whch s requred to furnsh ths nformaton and
wfuy fas to do so s sub|ect to the penates provded n secton 1 (a) of
the Code. The amendments made by ths secton are effectve for ta abe years
TITL I . INCOM T S OF LIF INSUR NC COMP NI S
FOR 10 9 ND 19 0
Ths tte of the b revses the present statutory formua used In determnng
the ncome ta of fe nsurance companes. The revson s smar to that pro-
vded for by ouse ont Resouton 371. Under that resouton, as passed by
the ouse on anuary 26, 19 0, the revsed formua woud appy to the ta abe
years 19 7, 19 . and 19 9. Tte I of ths b as passed by the ouse adopted
the provsons of that resouton and e tended tne appcaton of the revsed for-
mua to the year 111 0. Under ouse ont Resouton 371 as amended and
passed by the Senate, on pr 13, 19 0, the revsed formua woud appy ony
to the ta abe years 19 9 and 19 0.
S CTION 01. CORR CTION OF FORMUL T S T) IN COMPUTING INCOM T S
OF LIF INSUR NC COMP NI S FOR 19 9 ND 19 0
Ths secton, as reported by your commttee, woud adopt the provsons of
ouse ont Resouton 371 as passed by the Senate. The operaton and effect
of the amendments made by ths secton are e paned n deta n Senate Report
No. 1 3 , ghty-frst Congress, second sesson, accompanyng ouse ont Reso-
uton 371, whch reads, n part, as foows:
Part II. Detaed Dscusson of the Technca Provsons of
the ont Resouton
Under e stng aw, ncome ta es (norma and surta ) are mposed on fe-
nsurance companes at the ra.es provded for co-poratons generay. The ta es
re mposed, however, ony wth respect to ad|usted norma ta net nccme (as
(Ued n secton 202 of the Interna Revenue Code) and ad|usted corporaton
sur. net ncome (as defned n secton 203). In the determnaton of the ad-
|usted norma-ta net ncome and the ad|usted corporaton surta net ncome of
a fe-nsurance company, the company s aowed a credt whch s. n both cases,
caed the reserve and other pocy abty credt. These credts are arrved
at by mutpyng the norma-ta ncome of the company for the ta abe year,
or ts corporaton surta net ncome, as the casa may be, by a fgure .,hch s
determned and procamed for each ta abe year by the Secretary of the
Treasury. stng aw (secton 202(b) of the Code) provdes that the fgure
so determned and procamed sha be based on such data, or the precedng
ta abe year, wth respect to fe-nsurance companes as the Secretary con-
sders representatve, and that the fgure sha be computed :n accordance wth
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a formua based upon the rato weh the aggregate of three specfed types
of tems for such companes bears to the aggregate of the net ncomes (com-
puted wth certan ad|ustment. ) of such companes.
Subsecton (a) of the frst secton of the ont resouton, as reported, amends
the second sentence of secton 22(b) of the Interna Revenue Code. though
ths amendment eaves unchanged the formua to be used n arrvng at the
Income ta es payabe by fe-nsurance companes for ta abe years other than
ta abe years begnnng n 10-19 and 19 0, t docs make two changes n such
formua for ta abe years begnnng n 19 9 and 19 0. oth changes resut
n a smaer numerator, n the computaton of the rato referred to n the pre-
cedng paragraph, than s obtaned under e stng aw. Nether cbange affects
the amount of the denomnator of such rato. Under e stng aw, one of the
three tems whch make up the numerator of the rato s the product of ()
the means of the ad|usted reserves at the begnnng and end of the ta abe year
and () the reserve earnngs rate (defned n secton 201(c)( ) of the Code).
The frst change made by the amendment s to provde that n computng such
product there sha be used, n eu of the reserve earnngs rate, the average
rate of nterest assumed n computng fe-nsurance reserves. Such average
rate sha be determned n the manner provded n the second sentence of secton
201(c) ( ) of the Code.
The second change provdes that f the S -cretary of the Treasury, In com-
putng the rato, fnds that the net effect of ncudng the data wth respect
to any fe nsurance company s to ncrease the numerator more than such data
ncreases the denomnator, he sha mt the net change n the numerator
resutng from the ncuson of such data to the net change n the denomnator
resutng therefrom.
The foowng w ustrate the appcaton of the second change made by
the amendment. The Secretary of the Treasury, havng seected the data of
fe-nsurance company as representatve, fnds that the net ncome (ad|usted
as requred by secton 202(b)) of company for the ta abe year 19 was
100,000. Ths 100,000 w be used by the Secretary n makng up the de-
nomnator of the rato whch w determne the fgure to be used for the ta abe
year 10 9. The Secretary further fnds from the data of company for the year
19 6 that the sum of ( ) 2 percent of ts reserves for deferred dvdends, I )
nterest pad by t, and (C) the product of () the mean of ts ad|usted reserves
at the begnnng and end of the ta abe year 19 and () the average rate of
nterest assumed n 19 by company In computng ts fe-nsurance reserves,
was 10 ,000. Were t not for the second change made by the amendment, the
Secretary woud add 10r,000 to the numerator of te rato, thereby ncreasng
the numerator ,000 more than the ncuson of the data of such company n-
creased the denomnator o the rato. Under the amendment, cny 100,000
woud be added to the numerator of the rato.
In the case of a few fe nsurance companes the Secretary of the Treasury
may fnd that the net effect of ncudng data wth respect to such companes s
a subtracton from the denomnator of the rato. In the treatment of the data
of such a company, the effect of the second change made by the amendment
woud be to requre the Secretary, n eu of makng an addton to the numerator
of the rato, to subtract from the numerator an amount equn to the amount
subtracted from the denomnator by reason of the Incuson of snch data.
Subsecton (b) of the frst secton of the |ont resouton amend. - cton
203(1)) of the Code to make It cear that the fgure to be used n computng the
reserve and other pocy abty credt under secton 203(b) (for the purposes
of the surta ) for any ta abe year begnnng n 19 9 or 19 0, s the same fgure
whch the Secretnry o the Treasury sha determne and procam for sveh year
under secton 202(b) of the Code as amended by subsecton (a) of the frst sec-
ton of the |ont resouton.
Subsecton (c) of the frst secton of the ont resouton provdes that the
amendments made by the |ont resouton sha be appcabe to ta abe years
begnnng after Decemer 31, 19 . owever, as noted above, the amendments
do not effect a change n the formua to be used n computng the ncome ta es of
fe-nsurance companes for ta abe years begnnng after 19 0, snce the egsa-
ton s proposed merey as a stopgap measure pendng the deveopment and enact-
ment of a satsfactory ong-range bass for the ta aton of fe-nsurance com-
panes. Subsecton (c) aso provdes that the Secretary of the Treasury sha,
wthn 00 days after the date of the enactment of the ont resouton, determne
and procam the fgures to be used by fe-nsurance companes n computng
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ther reserve and other pocy abty credts for ta abe years begnnng n
19 9. .
S CTION 02. FILING OF R TURNS FOR T L T R 19 9
Ths secton, as reported by your commttee, s the same as secton 02 of the
ouse b, e cept that the secton as been restrcted to the tng of returns for
ta abe years begnnng n 19 9. The secton provdes for the fng of returns
and the payment of ta es by fe-nsurance companes wth respect to ta abe
yenrs begnnng n 19 9.
Under these provsons, every fe-Insurance company sub|ect to the ta es
mposed by secton 201 of the Code Is requred to e a return for 11) 9, even
though under e stng aw t may have fed a return for such year. The return
requred under these provsons for such year may not be fed before the Secre-
tary has procamed (after he enactment of ths ct) the fgure to be used n
computng the reserve and other pocy abty credts for such year and must
be fed on or before the oth day of the thrd month foowng the cose of the
month In whch ths ct s enacted. ny such return sha consttute the
return for the ta abe year for a purposes of the Code, must meet the requre-
ments of secton 2(a), and sha be fed as requred by secton 3(b) (2) and
other reevant provsons of- the Code. Thus, such a return sha consttute the
return for the purposes of Suppement L-, reatng to the assessment and coec-
ton of defcences; Suppement M, reatng to Interest and addtons to the ta ;
and Suppement O, reatng to overpayments. No return wth respect to the
ta es mposed by secton 201 of the Code for a ta abe year begnnng n 19 9,
whch Is ted by a fe-nsurance company on or before the date of the Secretary s
procamaton requred under secton 01(a), sha be consdered for any of such
purposes, or for any other purpose, of the Code as the return for such year.
The provsons of secton 0(a) of the Code (reatng to the tme of payment)
w not be appcabe to the payment of ta es for the ta abe year 19 9. Instead,
such ta es sha be due and payabe on the oth day of the thrd month foowng
the cose of the month In whch ths ct s enacted. The provsons of secton
6(b) of the Code (reatng to nstament payments) ore, however, not affected,
and a fe nsurance company may, at ts eecton, pay the ta es due for such
year n four equa nstaments n accordance wth the prevsons of that secton.
Secton 02 further provdes that a payments, f any, made wth respect to
the ta es for 19 9 mposed by secton 201 of the Code under the aw n effect pror
to the enactment of ths ct, to the e tent that they have not been credted or
refunded, sha be deemed to be payments made at the tme of the fng of the
return requred by ths ct on account of the ta es for such year. The amount
whch w be so credted w ncude, n addton to the ta tsef, any amounts
pad as nterest, penaty, or addtons to the ta .
In treatng such ta es as pad at the tme of the fng of the return requred
by ths secton, such payment (n the event the return s fed before the due
date prescrbed by ths secton) w be sub|ect to the provsons f secton
322(b) ( ) of the Code whch provdes speca rues appcabe for certan pur-
poses where a ta payment s made at the tme of fng a return whch s fed
before ts due date.
TITL . ST T T
S CTION 01. TR NSF RS IN CONT MPL TION OF DF. T
Ths secton of the b, whch s dentca wth secton 01 of the b as passed
by the ouse, amends secton S of the Code, reatng to the gross estate, by
addng a new subsecton, desgnated (1), to change n two respects the rues
wth respect to transfers n contempaton of death.
Frst, the new subsecton (1) provdes that (e cept n the case of a bona fde
sae for an adequate and fu consderaton n money or money s worth) the
transfer of an nterest n property, the renqushment of a power descrbed n
secton 11(d), or the e ercse or reease of a power of appontment, as defned n
secton 11(f), effected by a decedent wthn 3 years pror to hs death sha,
uness shown to the contrary, be deemed to have been made n contempaton of
death. Ths 3-year rebuttabe presumpton repaces the smar 2-yenr presump-
ton heretofore provded by the ast sentence of secton 11(c)(1)( ) and
paragraph ( ) of secton 11(d).
Second, the new subsecton (1) provdes that no such transfer, renqushment,
e ercse, or reease made more than 3 years pror to the decedent s death sha
be deemed or hed to have been made n contempaton of death.
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estates of decedents dyng after the date of enactment of the b.
S CTION 02. R I L OF D DUCTION FOR SUPPORT OF D P ND NTS
Ths secton of the b, whch Is dentca wth secton 02 of the b as passed
by the ouse, amends secton 12(b) of the Code (reatng to deductons from
gross estate of a decedent) to emnate, effectve wth respect to estates of dece-
dents dyng after the date of enactment of the b, the deducton for amounts
e pended for the support, durng the settement of the estate, of dependents of
the decedent.
Under e stng aw amounts e pended n accordance wth the oca aw for
support of the survvng spouse of the decedent are. by reason of ther deduct-
bty under secton 12(b), not aowabe as a marta deducton under secton
12(e) of the Code. owever, as a resut of the amendment made by ths sec-
ton, such amounts heretofore deductbe under secton 12(b) w be aowabe
as a marta deducton sub|ect to the condtons and mtatons of secton 12(e).
S CTION 03. R RSION Rr INT R STS IN C S OF LIF INSUR NC
Ths secton, whch was not In the b as passed by the ouse, amends secton
0 (c) of the Revenue ct of 10 2 to change the rues governng the ncuson n
the gross estate of a decedent for estate ta purposes of proceeds of fe-nsurance
poces purchased by hm upon hs own fe and recevabe by persons other than
hs e ecutor.
The present formua for determnng the e tent to whch proceeds of a fe-
nsurance pocy recevabe by persons other than the nsured s e ecutor are
ncudbe n the gross estate of the nsured by reason of the payment of premums
or other consderaton drecty or ndrecty by hm s as foows: Such proceeds
are ncudbe n the proporton that the amount of premums or other consdera-
ton pad drecty or ndrecty by the nsured hears to the tota premums pad
(secton S(g-) (2) ( ) of the Interna Revenue Code) ; however, f the nsured
possessed no ncdent of ownershp n the pocy at any tme after anuary 10,
19 1, then the proceeds are Incudbe (under secton 11(g)(2)( )) ony In
the proporton that the amount of premums or other consderaton pad drecty
or ndrecty by the nsured after that date bears to the tota premums pad
(secton 0 (c) of the Revenue ct of 19 2). reversonnry nterest s regarded
as an ncdent of ownershp for ths purpose.
ecton 03 of the b modfes ths formua by redefnng the term ncdent
of ownershp to ncude a reversonary nterest ony f such reversonary nterest
(1) at some tme after anuary 10, 19 1, e ceeded n vaue percent of the vaue
of the pocy and (2) arose by the e press terms of the pocy or other nstru-
ment and not by operaton of aw.
The foowng e ampe ustrntes the appcaton of ths amendment: The
decedent, pror to anuary 10, 19 1, assgned a 100,000 pocy of nsurance upon
hs fe to a trust provdng that at hs death the proceeds shoud be coected and
hed for the beneft of hs son f then vng; but f the decedent s son was not
then vng, the proceeds were to be dstrbuted to the decedent s e ecutor. The
decedent retaned no ncdent of ownershp n the pocy other than ths possbty
of reverter. The decedent was survved by hs son. Premums aggregatng
0,000 were pad for the pocy, of whch the decedent pad 2 ,000 on or before
anuary 10, 19 1, and 1 ,000 after tat date. The remanng premums of
10,000 were pad by the son. If at any tme after anuary 10,19 1, the decedent s
reversonary nterest e ceeded n vaue percent of the vaue of the pocy, then
the nsurance proceeds are ncudbe n hs gross estate under secton
11(g) (2) ( ) to the e tent of 0,000 (that proporton of the proceeds, 100,000,
whch the amount of premums pad by the decedent, 0,000, bears to the tota
premums pad for the pocy, 0,000). owever, f the reversonary nterest at
no tme after anuary 10, 19 1, e ceeded n vaue percent of the vaue of the
pocy, then the proceeds are ncudbe under secton 11(g)(2)( ) to the
e tent of ony . O.OOO (that proporton of the proceeds, 100,000, whch the
amount of premums pad by the decedent after anuary 10, 19 1, 1 ,000, bears
to the tota premums pad for the pocy, 0,000).
The decedent s reversonary Interest s to be vaued by recognzed vauaton
prncpes, pursuant to reguatons prescrbed by the Secretary of the Treasury,
and, of course, wthout regard to the fact of the decedent s death. The vaue of
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the reversonary Interest and of the pocy as of any date sha be ascertaned
as though the decedent were, upon that date, makng a gft of Iho pocy and
retanng the reversonary Interest. The rue of Rubnctc v. Uvvcrng (31
C. S. 1S ), under whch a reversonary Interest not havng an ascertanabe
vaue under recognzed vauaton prncpes Is consdered to have a vaue of
zero, fs to appy. reversonary Interest whch, for e ampe, e sts In ony one-
haf of a pocy sha Ik computed as a percentage of the vaue of such one-haf.
The term reversonary nterest Incudes a possbty, whether vested or con-
tngent, that the pocy or the proceeds thereof may return to the decedent or
hs estate or may become sub|ect to a power of dsposton by the decedent.
possbty that the decedent may be abe to dspose of te pocy under cer-
tan condtons sha be. deemed to be as vauabe as a rght to the return of the
property to hm under those condtons.
The amendment made by ths secton of the b does not restrct the ncud-
bty n the decedent s gross estate of proceeds of Insurance poces upon hs
fe under any provson other than secton 11(g)(2)( ). For nstance, pro-
ceeds whch, by reason of the enactment of ths secton, are not ncudbe n
the gross estate under secton M g) (2) ( ) may, n the case of the estate of a
decedent dyng on or before the enactment of the b and hence unaffected by
the amendment made by secton 01 thereof, be ncudbe under secton
11(c) (1) ( ) as a transfer n contempaton of death.
The amendment made by secton 03 s appcabe ony wth respect to estates
of decedents dyng after October 21, 19 2, the date of enactment of the Revenue
ct of 19 2. No nterest sha be aowed or pad on any overpayment resutng
from the enactment of secton 03 wth respect to any payment made pror to
the enactment of the b.
TITL I CIS T S
S CTION 001. UCTION S L S OF W LRY ND FURS
Ths secton Is dentca wth secton 102(e) of the use b.
Under e stng aw saes of |ewery or furs by auctoneers or other agents
on behaf of estates of decedents not engaged n the busness of seng ke art-
ces, and on behaf of other persons (ncudng mnors, ncompetents, and other
persons represented by ega representatves) not engaged n such busness, are
not consdered saes at reta. The amendment adds n new secton 2 12 to the
Interna Revenue Code makng such saes ta abe. The amendment does not
affect any of those aucton saes at whch artces sod at reta are ta abe under
present aw, such as saes by an auctoneer on hs own behaf of artces to
whch he hods tte, and saes by an auctoneer on behaf of a person, or the estate
of a decedent, engaged n the busness of seng ta abe artces at reta.
Under the amendment the auctoneer or other agent s consdered the person
wbc makes the ta abe sae, and must therefore make the return and pay the
ta . mted e empton s provded n the ease of such an aucton hed at the
home of the owner of the |ewery or furs. rtces (otherwse ta abe by reason
of the amendment) may be sod ta -free n an amount of 100. Tms, for e am-
pe, f |ewery were frst sod n the owner s home for 0 and a fur coat were
ne t sod at the same sae for 1 0, the sae of the |ewery woud be ta -free and
the remanng 00 of the 100 e empton woud be apped aganst the coat eavng
t ta abe to the e tent of 1)0 of ts saes prce. Saes of nonta abe artces
woud not be consdered n appyng the 100 e empton. Ony one e empton
Is to be aowed regardess of the perod of tms durng whch the aucton sae
takes pace. For the purposes of ths e empton, s-e at the home of a decedent
s consdered as at the home of the owner. Ths amendment has no effect upon
aucton saes of abandoned property by raroads, post offces, etc., where su h
saes are conducted by empoyees thereof rather than by auctoneers or other
agents on ther behaf.
S CTION 002. R T IL S L S Y UNIT D ST T S OR T ITS G NCI S OR
INSTRUM NT LITI S
Ths secton Is Identca wth secton 101 of the b as passed by the ouse.
In order to cear up any doubts reatve to the ta abty of artces sod at
reta wthn the Unted States (ncudng aska and awa) by the Unted
States or any agency or nstrumentaty thereof, ncudng post e changes, shps
stores, etc., ths secton of the b adds secton 2 13 to the Interna Revenue
Code so as to e pressy provde that the ta es on artces sod at reta sha
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appy to artces sod by the Unted States or any agency or nstrumentaty
thereof uness saes by such agency or nstrumentaty are specfcay e empted
therefrom by statute. Whe the amendment s sub|ect to the effectve dae
provsons set forth n secton 60 of the b, It s beeved that the amendment
docs not change e stng aw.
S CTION 603. T ON COIN-OP R T D G MING D IC S
Ths secton corresponds to secton 1 2 (a) and (c) of the b as passed bv
th ouse. Subsecton (a) amended secton 3 67(a) of the Interna Revenue
Code to ncrease the present rate of the speca (occupatona) ta thereby
mposed wth respect to con-operated gamng devces from 100 to 1 0 per
year.
Subsecton (b) provdes that the amendment made by ths secton shn take
effect on the frst day of the frst month whch begns more than 10 days after
the date of enactment of ths ct.
S CTION 60 . F D t L G NCI S OR INSTRUM NT LITI S
Ths secton s dentca wth secton 1 of the b as passed by the ouse.
In order to cear up doubts reatve to the appfcaton to agences and Instru-
mentates of the Unted States, such as post e changes, shps stores, etc., of
tr speca (occupatona) ta es mposed by chapter 27 of the Interna Revenue
Code, ths secton adds to the Interna Revenue Code a new secton desgnated
32 3, whch e pressy makes such ta es appy to such agences and nstru-
mentates whch are not specfcay e empted therefrom by statute.
S CTION 00 . IMPOSITION OF T ON T L ISION R C I ING S TS
There s no correspondng provson for ths secton n the ouse b. Sub-
secton (a) of ths secton amends secton 3 0 (a) of the Interna Revenue
Code to mpose on a teevson recevng sets and on such sets n combnaton
wth ether or both rado recevng sets or phonographs, when sod by the
manufacturer, producer, or mporter a ta equvaent to 10 percent of the
prce for whch sod. In connecton wth the mposton of such ta , subsecton
(b) of secton 3 0 s aso amended by strkng out the words reproducng
unts, power packs and nsertng n eu thereof the words speakers, ampfers,
power suppy unts. Ths s done to descrbe adequatey the component parts
of teevson recevng sets to whch the ta appes, wthout otherwse affectng
the appcaton of subsecton (b) as so amended to artces enumerated n such
subsecton pror to ths amendment.
Subsectons (b) and (c) of ths secton amend sectons 3 03 (c) and (e),
3 2, 3 3(a)(1), and 3 (a) (reatng to ta n ense of sae of tres, tubes,
and automobe rado recevng sets to manufacturers of automobes, etc.. and
credt on sae) to aow, wth respect to automobe teevson recevng sets
sod or used n connecton wth the sae of automobes and smar artces,
a credt smar to that aowed wth respect to tres, tubes, and automobe
rado recevng sets.
S CTION 000. IMPOSITION OF T ON UIC -FR Z UNITS
Ths secton amends secton 3 0 of the Interna Revenue Code to mpose
a new ta at the rate of 10 percent on househod typo unts for quck freezng
or frozen storage of foods, operated by eectrcty, gas, kerosene, or gasone
and on artces sutabe for use as prts of or wth such unt. Thus ths
secton corresponds n part to secton 1 of the ouse b whch aso mposed
a ta (but at the rate of 7 percent) on househod type quck-freeze unts. ouse-
hod type refrgerators are now ta ed at the rate of 10 ercent under secton
3 0 , and combnatons of such househod type refrgerators and quck-freeze
unts are ta ed at the rate of 10 percent under ths amendment. Under e stng
aw no ta s mposed on the sae of certan artces sutabe for use as parts of
or wth househod type refrgerators used by the vendee n the manufacture
or producton of, or as component parts of, such refrgerators. Under the
amendment, whch n ths respect aso corresponds wth secton 1 of the
ouse b, no ta w appy n the case of saes of certan artces sutabe for
use as parts of or wth househod type refrgerators or unts for quck freezng
or frozen storage to n manufnetnrer or producer of compete refrgerators,
refrgeratng or coong apparatus, or quck-freeze unts, whether or not of the
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househod type. If any such artces are resod by such vendee otherwse than
on or n connecton wth, or wth the sae of, compete refrgerators, refrgerat-
ng or coong apparatus, or quck-freeze unts, manufactured or produced by
hm, then he sha be consdered the manufacturer or producer of such artces
so resod.
S CTION C07. TR NSPORT TION W IC GINS ND NDS WIT IN T
UNIT D ST T S
Ths secton, for whch there Is no correspondng provson In the ouse
b, amends sectons 3 9 and 3 7 of the Interna Revenue Code (reatng
respectvey to the ta on the transportaton of persons and property).
Subsecton (a) reates to the ta on transportaton of persons. Secton
3 69(n) of the Code now mposes a ta upon the amount pad wthn the Unted
States for the transportaton of persons by ra, motor vehce, water, or ar.
wthn or wthout the Unted Stntes. Under the amendment the ta woud aso
be appcabe to amounts pad wthout the Unted States for such transportaton
whch begns and ends n the Unted States. Secton 3 69(c) of the Code now
mposes a ta upon the amount pad wthn the Unted States for seatng or
seepng accommodatons n connecton wth transportaton wth respect to whch
a ta s mposed by subsecton (a). Under the amendment the ta woud aso
be appcabe to amounts pad wthout the Unted States for seatng or seepng
accommodatons n connecton wth transportaton wth respect to whch a ta
s mposed by subsecton (a). The amendment contnues the rue now contaned
n the second sentence of secton 3 09(d) that each person recevng any payment
specfed n secton . 0)9 (a) or (c) sha coect the amount of the ta mposed
from the person makng the payment for the transportaton, but e cepts from
such rue the case n whch payment s made outsde the Unted States for a
prepad order, e change order, or a smar order, and requres that the person
furnshng the nta transportaton n the Unted States pursuant to such order
sha coect the amount of the ta . Forms of such orders and the provsons
contaned theren are so vared that no attempt s made to enumerate the types
of orders to whch ths e cepton appes. It s ntended to cover any form of
order accepted by a carrer n e change n whoe or n part for transportaton or
seatng or seepng accommodatons n the Unted States. The requrement of
subsecton (d) as t now e sts s modfed to make ts provsons respectng co-
ecton and return of the ta specfed n secton 3 69 (a) and (c) appcabe
to the person furnshng the nta transportaton pursuant to orders specfed n
the foregong e cepton when payment therefor s made outsde the Unted
States.
Subsecton (b) reates to the ta on transportaton of property. Secton
3 7 (a) of the Code now mposes a ta upon the amount pad wthn the Unted
States for the transportaton of property by ra, motor vehce, water, or ar
from one pont n the Unted States to another. Under the amendment the ta
woud be appcabe to such amounts pad for the transportaton of property,
whether the payment s made wthn or wthout the Unted States.
The Commssoner of Interna Revenue has ssued press reeases whch ndcate
that the ureau s takng a poston n accordance wth the ntent of Congress to
mpose the ta on transportaton wthn the Unted States n cases where
attempts are made to avod the ta by unusua methods purportng to make
payment outsde the Unted States. It s your commttee s vew that the poston
of the ureau propery appes e stng aw, and, therefore, that wth respect
to the stuatons covered by the press reeases, the amendments are merey decar-
atory of e stng aw. owever, the ureau has not hed that the ta Is appca-
be f a person physcay outsde the Unted States purchases a tcket for hs
transportaton whch begns and ends n the Unted States. Subsecton (c)
provdes that the amendments made by ths secton sha appy to amounts pad
on or after the frst day of the frst month whch begns more than 10 days
after the date of enactment of the ct for transportaton whch begns on or
after such frst day.
S CTION 60 . FF CTI D T OF S CTIONS 001, 002. 00 , ND 600
Ths secton provdes that the amendments made by secton 601, 002, 60 , and
C06 sha appy ony to artces sod on or after the 1st day of the frst month
whch begns more than 10 days after the date of the enactment of the ct. For
such purpose an artce s consdered to be sod when possesson or the rght to
possesson passes to the purchaser. For e ampe, n the case of a ease or cond-
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tona saes contract under whch rght to possesson of the artce passed to the
essee or purchaser pror to such frst day, e stng aw w contnue to appy
wth respect to any renta or nstament payment made after such frst day on
such ease or condtona sae, even though, n the case of such condtona sae
tte to the artce does not pass to the purchaser unt after such frst cay.
ven though for securty purposes, the ega rght to possesson of an artce may
reman n the seer, f the purchaser In fact takes actua possesson pror to such
frst day, e stng aw w kewse contnue to appy.
C NG S IN ISTING L W
In the opnon of the commttee, t s necessary, n order to e pedte the busness
of the Senate, to dspense wt the requrements of subsecton of rue I
of the Standng Rues of the Senate (reatng to the showng of changes In
e stng aw made by the b, as reported).
19 0-26-13 0
R NU CT OF 19 0
ouse of Representatves Report No. 312 , ghty Drat Congress, Seooud Sesson
September 21, 10 0
Mr. Doughton, from the commttee of conference, submtted the foowng
conference report to accompany . R. 920 :
The commttee of conference on the dsagreeng votes of the two ouses on
the amendments of the Senate to the b ( . R. 920) to reduce e cse ta es,
and for other purposes, havng met, after fu and free conference, have agreed
to recommend and do recommend to ther respectve ouses as foows:

ST T M NT OP T M N G RS ON T P RT OF T OUS
The managers on the part of the ouse at the conference on the dsagreeng
votes of the two ouses on the amendments of the Senate to the h ( . R. 920)
to reduce e cse ta es, and for other purposes, submt the foowng stntement
n e panaton of the effect of the acton agreed upon by the conferees and rec-
ommended n the accompanyng conference report:
mendments Nos. 1 to 37, Incusve: These amendments strke out a of
the provsons of tte I of the ouse b, whch deat wth e cse ta es. ow-
ever, those provsons of the ouse b whch ncrease the revenue derved
from e cse ta es are shfted to tte I of the b by Senate amendments Nos.
1 3, 1 , 1 , 1 6. and 1 . The ouse recedes from ts dsagreement to each
of the amendments Nos. 1 to 37, ncusve, other than amendments Nos. 1 and
31. In the case of amendment No. 1 , whch strkes out secton 133 of the
ouse b (reatng to the attachng of stamps In foregn countres to certan
tobacco products), the ouse recedes wth an amendment addng to tte I
of the b a new secton 60 whch s substantay dentca to secton 13
strcken from the ouse b. In the case of amendment No. 31, whch strkes
out secton 162 of the ouse b (reatng to credts and refunds of manufac-
turers e cse ta In the ease of artces sod for use of arcraft engaged n foregn
trade), the ouse recedes wth an amendment addng tc tte I of the b
a new secton 609 whch s Identca to secton 162 strcken from the ouse b.
The conferees recognze that there are nequtes In our e cse ta system and
beeve that the sub|ect shoud have contnung consderaton.
mendment No. 3 : Ths s the frst of a seres of amendments addng a new
tte I to the b provdng for ncreases n ncome ta rates. Ths amendment
adds sectons 101 to 10 , ncusve, to the b whch (together wth secton 131.
added to te b by Senate amendment No. 0) resut n an ncrease n the n-
dvdua ncome ta for a ta abe years endng after September 30, 1960. Ths
s accompshed as foows : For ta abe years begnnng after September 30.1960.
the percentage reductons of the tentatve ta provded by the Revenue ct of
19 and by the Revenue ct of 19 are entrey emnated. For the caendar
year 10 0 the percentage reductons are cut by appro matey 2 percent. In
the case of ndvduas who have fsca years begnnng pror to October 1, 1 0,
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and endng subsequent to that date, proportonate cuts In (e reductons arc
made by computng a porton of tbe ta on the bass cf e stng ta rates nnd the
other porton of the ta on the bass of the ta rates appcabe to ta abe years
begnnng after September 30, 19 0. The ouse recedes wth an amendment
carfyng the effectve date provson contaned n the Senate amendment.
mendment No. 39: Ths amendment adds to the ouse b the headng
Part II Corporaton Income Ta es nnd subsectons (a) and (b) of a new
secton 121, reatng to Increase In rate of corporaton ncome ta es. Ths
amendment and Senate amendment No. 0 defne norma ta net ncome nnd
surta net ncome, and emnate the so-caed notch provsons, n substantay
the snme manner ns provded n secton 21 of the ouse b. Under amendment
No. 39 a norma ta of 23 percent s mposed on corporatons for ta abe years
begnnng after une 30, 19 0, and a norma ta of 23 percent s mposed on cor-
poratons for the caendar year 19 0. Speca provson s made by Senate
amendment No. 0 for ta abe years (other than the caendar year 1030) whch
begn before uy 1, 19 0, and end after une SO, 19 0. The ouse recedes wth
an amendment whch makes a cerca amendment to secton 1 of the Interna
Revenue Code.
mendment No. 0: In addton to defnng corporaton surta net ncome,
ths amendment provdes for a surta of 20 percent on corporaton surta net
ncome for ta abe years begnnng after une 30, 19 0, and a surta of 19 percent
for the caendar year 19 0. Speca provson s made by Senate amendment
No. 0 for ta abe years (other than the caendar year 19 0) whch begn before
uy 1, 19 0, and end after une 30, 19 0. Senate amendment No. 0 (together
wth Senate amendment No. , whch adds a new secton 20(|) to the Interna
evenue Code) aso aows a credt n the case of a ta abe year whch s the
caendar year 19 0 for a certan percentage of partay ta -e empt Interest
receved by a corporaton. The ouse recedes wth amendments whch pro-
vde that, n eu of such credt, the surta for the caendar year 19 0 sha be
reduced by one percent of the ower of the corporaton s credt under secton
26(a) or the amount by whch the corporaton s surta net ncome e ceeds
2 ,000. The credt under secton 20(a) s, n effect, the amount of the par-
tay ta -e empt nterest ad|usted as provded n the Interna Revenue Code.
mendment No. 1: Ths amendment makes certan amendments n secton
207(a) of the Interna Revenue Code to refect the new corporate ta rates pro-
vded n Senate amendments Nos. 39 and 0. The ouse recedes wth a technca
amendment.
mendment No. 2: Ths amendment reates to the norma ta and surta on
reguated nvestment companes, nnd amends secton 302(b) of the Interna
Revenue Cede to refect the new corporate ta rates provded n Senate amend-
ments Nos. 39 and 0. The ouse recedes.
mendment No. 3: Ths amendment reates to the computaton and payment
of ta on consodated returns. It provdes that the 2 percent addtona surta
provded by secton 1 1(c) of the Interna Revenue Code sha not appy to the
porton of the consodated corporaton surta net ncome attrbutabe to Western
emsphere trade corporatons n the affated group. The ouse recedes.
mendment No. : Ths amendment makes certan technca amendments.
The ouse recedes wth further technca amendments.
mendment No. : Ths amendment makes certan amendments to secton
20(b) of the Interna Revenue Code, reatng to credts nowed corporatons
wth respect to dvdends receved. The ouse recedes wth two amendments
emnatng the mtatons on the credt aowed n secton 20(b)(2) ( ) and
(C) n respect of dvdends receved on the preferred stock of certan pubc
uttes, and wth a further amendment provdng that the provsons of amend-
ment No. wth respect to dvdends n knd sha appy to such dvdends
receved after ugust 31, 19 0, nstead of after the date of the enactment of
tbe Revenue ct of 19 0.
mendment No. 6: Ths amendment, reatng to amount of credt for dv-
dends pad on certan preferred stock, corresponds to secton 21 (c) of the ouse
b wth the necessary changes to refect the dfferent ta rates provded by the
Senate amendments. The ouse recedes.
mendment No. 7: Ths amendment corresponds to secton 21 (d) of the
ouse b. It amends secton 26 of the Interna Revenue Code by addng a new
subsecton () whch provdes n credt for Western emsphere trade corporatons
appcabe n computng both norma ta net ncome and surta net ncome.
The ouse recedes.
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mendment No. : Ths amendment provdes corporatons a speca surta
credt for the caendar year 19 0 n respect of partay ta -e empt nterest.
Ths amendment s no onger necessary In vew of the amendment to Senate
amendment No. 0 and Is emnated. The Senate recedes.
mendment No. 9: Ths amendment provdes the effectve dates for the
Increases n the corporate rates. The ouse recedes wth a carfyng
amendment.
mendment No. 0: Ths amendment provdes for the computaton of the nd-
vdua ncome ta n the case of a ta abe year (other than the caendar vear
19 0) whch begns pror to October 1, 19 0, and ends after September 30, 19 0,
and for the computaton of the corporaton Income ta In the case of a ta abe
year (other than the caendar year 19 0) whch begns before uy 1, 19 0, and
ends after une 30, 19 0. The ouse recedes wth technca amendments.
mendment No. 1: ffectve wth respect to wages pad on or after October
1, 19 0, ths amendment changes the percentage rate of wthhodng of ta from
1 to 1 percent and provdes new wage bracket wthhodng tabes to refect the
Increased ta rates. The ouse recedes.
mendment No. 2: Ths s a cerca amendment whch changes the headng
of tte II of the b. The ouse recedes.
mendment No. 3: Ths amendment strkes out secton 201 of the ouse b
provdng that where proceeds of nsurance are pad In nstaments the nterest
eement n each nstament be sub|ected to ncome ta . The ouse recedes.
mendment No. : Ths amendment e tends for 1 year the appcaton of
sectons 22(b) (9) and (10) of the Interna Revenue Code, whch permt a corpo-
raton to e cude from ncome certan amounts attrbutabe to dscharge of
Indebtedness. The ouse recedes.
mendment No. : Ths amendment (together wth Senate amendments Nos.
6 and 7) grants an e cuson from gross ncome n the case of compensaton
receved pror to anuary 1, 19 2, for servce as a member of the rmed Force
of the Unted States based on the tme spent n a combat zone n the ta abe
year n whch the compensaton was receved. In the case of an ensted man,
the e cuson woud be the same porton of hs tota compensaton for servce for
the ta abe year as the number of months durng any part of whch he served
In a combat zone n the ta abe year s of the tota number of months he served
anywhere n the ta abe year. In the case of an offcer, the e cuson woud e
200 tmes the number of months durng any part of whch he served n a combat
zone durng the ta abe year.
The ouse recedes wth an amendment whch w base the e cuson on serv ce
pror to anuary 1, 19 2, n a combat zone. In the case of an ensted man, the
e cuson w be the compensaton receved durng the ta abe year for servce
for any month durng any part of whch he served n a combat zone. In the case
of an offcer, the e cuson w be the frst 200 of the compensaton receved for
servce for any month durng any part of whch he served In a combat zone, ard
the baance of such compensaton receved n any ta abe year w not be
e cuded. The fact that the compensaton s receved outsde a combat zone or
n a dfferent year (ncudng years after 19 1) from that n whch such servce
s performed w be mmatera.
mendment No. 0: Ths amendment woud e empt from the requrement of
wthhodng wages pad on or after the 1st day of the second month whch
begns after the date of enactment of the act for actve servce as a member of the
rmed Forces of the Unted States for a month durng any part of whch sut h
member served n a combat zone. The ouse recedes wth an amendment to
provde that no wthhodng of ta w be made on wages pad on or after
November 1, 19 0, for servce performed pror to 19 2 n a combat zone.
mendment No. 7: Ths amendment reates to the ncome ta wthhodng
statement furnshed members of the armed servces. The ouse recedes wth an
amendment whch requres the statement to show (1) the amount of ta abe
compensaton pad durng the caendar year, and (2) the amount of ta wthhed
durng such year. The amendment requres the statement to be furnshed f any
ta was wthhed durng the ta abe year or f (even though no ta was wth-
hed) any ta abe compensaton was pad durng the caendar year.
mendment No. : Ths Is a cerca amendment. The ouse recede .
mendment No. 9: Ths amendment provdes that the provsons of the b
reatng to treatment of bond premum n case of deaers n ta -e empt securtes
sha be appcabe to ta abe years endng after une 30, 19 0, but In the case
of a ta h e year hcrnn ns before and end na after such date such provson
are to appy ony wth respect to obgatons acqured after such date. Under
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the ouse b such provsons woud have apped to ta abe years begnnng
after 19 9. The ouse recedes.
mendment No. 60: Ths amendment strkes out secton 203 of the ouse
b, reatng to credts aowed corporatons wth respect to dvdends receved
n property other than money. The provsons of ths secton, wth a chnnfte
n the effectve date, are Incorporated n secton 122 as added to the b by
Senate amendment No. . The ouse recedes.
mendment No. 61: Ths amendment adds to secton 23 of the Interna Reve-
nue Code a new subsecton (bb) provdng, effectve wth respect to ta abe years
begnnng after December 31, 19 , for the deducton by a pubsher from gross
Income of e pendtures (wth certan e ceptons) to estabsh, mantan, or n-
crease the crcuaton of a newspaper, magazne, or other perodca, but aows
the pubsher to eect to captaze, Instead of deductng, that porton of such
e pendtures whch Is chargeabe to captn account under reguatons prescrbed
by te Secretary. Such eecton to captaze s bndng for the ta abe year
for whch made and such trentment must be adhered to wth respect to smar
e pendtures made n a subsequent years uness the Secretary permts a change.
Ths Senate amendment aso makes a conformng change n secton 113(b) (1) ( )
of the Interna Revenue Code. The ouse recedes wth a carfyng amend-
ment as to the e pendtures whch nre to be e cepted from the rue of the new
subsecton nnd wth a further amendment provdng for certan mtatons on
the retronctve appcaton of the provson n the case of any ta abe year be-
gnnng after December 31,19 , and before anuary 1, 19 0.
These retroactve mtatons nre as foows: (1) The provsons of the new
subsecton sha not be appcabe wth respect to crcuaton e pendtures for
whch a deducton was not aowed the ta payer for such year, f aowance of
a credt or refund wth respect to such year s barred on the dnte of enactment
of the b by reason of any aw or rue of aw; and (2) the eecton provded
n the new subsecton sha not (despte the ast sentence of such provson)
be permtted wth respect to any crcuaton e pendture for whch a deducton
was camed t y the ta payer under hs atest treatment (pror to the date of
enactment of the b) of such e pendture n connecton wth hs ta abty
for such year. The frst mtaton has the effect of preventng ts appcaton
to e pendtures whch have been captazed for any ta abe year begnnng
after December 31, 19 , and before anuary 1, 19 0, where the aowance of
credt or refund for such year attrbutabe to such deducton woud be barred
on the date of enactment of the b. ccordngy, such captazaton w con-
tnue to be refected In bass. owever, where the aowance of a credt or
refund for such ta abe year s not barred on the (ate of enactment of the b,
such e pendtures by such a ta payer may not be captazed (uness he so
eects) and he may obtan n refund by camng a deducton for such e pend-
tures n eu of ther prevous captazaton. The second mtaton prevents
a ta payer who, for any ta abe year begnnng after December 31, 19 , and
before anuary 1, 19 0, camed a deducton from gross ncome for a crcuaton
e pendture from subsequenty eectng under secton 23(bb) of the Code, to
captaze such e pendtures for such a year n eu of the deducton. Whether
a deducton s to be consdered camed by such a ta payer, for the purposes of
ths mtaton, depends on hs atest treatment (for e ampe, n a return, cam
for refund, or petton or amended petton to the Ta Court), pror to the enact-
ment of the b, of such e pendture n connecton wth hs ta abty for
such year.
mendment No. 02: Ths amendment adds to the b secton 20 , reatng
to payment of ncome ta by nstament payments. Ths secton s dentca
to secton 003 of the ouse b whch s strcken by Senate amendment No. 1 2.
The ouse recedes wth an amendment addng a provson contaned n the
ouse b to e tend for 1 month the date for fng the return of (and for payng
the ta mposed upon) an estate or trust.
mendment No. 03: Ths amendment restores, wth respect to certan cor-
porate dstrbutons made pursuant to a pan of qudaton adopted after De-
cember 31, 19 0, and effected durng any one caendar month n 19 1, the pro-
vsons of sectons 112(b)(7) nnd 113(a) (1 ) of the Interna Revenue Code
(reatng to eecton as to recognton of gan n certan corporate qudatons
and reatng to the bass of property receved n such qudatons). The ouse
recedes.
mendment No. 6 : Ths amendment provdes for the nonrecognton of gan
n certan cases where, pursuant to a pan of reorganzaton, a sharehoder of
a corporaton whch s a party to the reorganzaton receves stock (other than
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preferred stock) n another corporaton, a party to the reorganzaton, wthout
the surrender by such sharehoder of stock. The Senate recedes.
mendment No. 6 : The ouse b (1) ncreased the percentage depeton
aowance for coa, (2) aowed percentage depeton for the frst tme for certnn
mneras, and (3) provded that the gross ncome from mnng upon whch
percentage depeton aowances are based shoud n no case ncude transporta-
ton beyond the property. The Senate amendment (1) strkes out these prov-
sons of the ouse b, (2) provdes, effectve wth respect to ta abe years
begnnng after December 31, 19 9, that gross Income from mnng sha ncude
transportaton from the pont of e tracton from the ground to the pants or
ms n whch the ordnary treatment processes are apped thereto, and (3)
amends, effectve wth respect to ta abe years begnnng after December 31,
19 6, the defnton of ordnary treatment processes wth respect to bentonte.
The ouse recedes wth an amendment whch emnates those provsons of
the Senate amendment reatng to bentonte and mts the transportaton per-
mtted by the Senate amendment to be ncuded as gross ncome from mnng
to so much of such transportaton as does not e ceed 0 mes uness the Secre-
tary fnds condtons to be such that the mnera must be transported to a greater
dstance to the pant or m n whch the ordnary treatment processes are
apped.
mendment No. 66: Ths amendment strkes out secton 20 of the ouse b
whch provded for the ta aton as dvdends to the stockhoder of dstrbutons
made out of corporate earnngs and profts accumuated pror to March 1. 1913,
or out of apprecaton n the vaue of property whch accrued before that date.
The ouse recedes.
mendment No. 67: Ths amendment strkes out secton 206 of the ouse
b reatng to the treatment for ncome ta purposes of dstrbutons to domestc
corporatons n qudaton of certan foregn subsdares. The ouse recedes.
mendment No. 6 : Ths s a cerca amendment. The ouse recedes wth
an amendment makng a change n secton number.
mendment No. 69: Ths s a technca amendment conformng to Senate
amendment No. 66. The ouse recedes.
mendment No. 70: Ths s a cerca amendment. The ouse recedes.
mendment No. 71: Secton 11 (g) of the Interna Revenue Code provdes
for the treatment as ta abe dvdends of amounts dstrbuted by a corporaton
n canceaton or redempton of ts stock f the canceaton or redempton and
the reated dstrbuton are effected so as to be essentay equvaent to the ds-
tbuton of a ta abe dvdend. Secton 207 of the ouse b amended secton
11 (g) to cover the stuaton where shares n a parent corporaton are purchased
by ts subsdares or where shares of one corporaton are acqured by another
corporaton and both corporatons are controed drecty or Indrecty by the
same nterests. The Senate amendement mts the appcaton of the b to
purchases by a subsdary. The ouse recedes.
mendment No. 72: Secton 207 of the ouse b (reatng to treatment of
certan redemptons of stock as dvdends) apped ony wth respect to amounts
receved after December 31, 19 9. The Senate amendment provded a ater
effectve date. The ouse recedes wth an amendment makng such provsons
appcabe to amounts receved after ugust 31, 19 0.
mendment No. 73: Ths s a cerca amendment. The ouse recedes wth
an amendment makng n change n secton number.
mendment No. 7 : Under the ouse b certan dstrbutons n redempton
of stock ncuded n a decedent s gross estate were e cepted from the appcaton
of secton 11 (g) of the Interna Revenue Code f made wthn the perod of
mtatons provded n secton 7 (a). The Senate amendment provded that
the perod wthn whch dstrbutons mght be made ta -free shoud ncude the
perod of any sus enson under secton 7 , where appcabe. The ouse re-
cedes wth an amendment permttng the dstrbuton to be ta -free f made
wthn the perod provded n secton 7 (a) or wthn 90 days after the e pra-
ton of such perod, but specfcay e cudng any suspenson under secton 73.
Thus, under the conference amendment, no suspenson of the 3-year perod of
mtatons provded for by secton 7 (a) w operate to e tend the tme wthn
whch such dstrbutons must be made.
mendment No. 7 : Under the ouse b dstrbutons n redempton of stock
ncuded n a decedent s gross estate woud be reeved from the appcaton
of secton 11 (g) of the Interna Revenue Code ony If the vaue of such stock
comprsed more than 70 percent of the vaue of the decedent s net estate. The
Senate amendment emnated ths mtaton. The ouse recedes wth an
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amendment restorng the provsons of the ouse b, but provdng that the
vaue of the stock of the corporaton must comprse more than 0 percent of
the vaue of the net estate. The percentage reatonshp s computed by takng,
as the numerator, the vaue of the stock ncuded n determnng the vaue of
the decedent s gross estate, and y takng, ns the denomnator, the vaue of the
decedent s net estate.
mendment No. 76: Ths s a cerca amendment The ouse recedes wth
mendments Nos. 77 and 7 : The b as passed by the ouse nmended sec-
ton 117(a) (1) of the Interna Revenue Code so as to e cude copyrghts,
patents, Inventons, desgns, and terary, musca, or artstc compostons, and
smar property from the defnton of capta assets when hed by certan
ta payers. mendments Nos. 77 and 7 remove patents, nventons, aud desgns
from ths e cuson. The ouse recedes.
mendment No. 79: Ths amendment emnates the amendment made by the
ouse b to secton 117( ) of the Interna Revenue Code whch. In genera,
woud have treated gan aud oss from the sae or e change of property used
n a trade or busness as gan an oss from the sae or e change of capta
assets. The ouse recedes.
mendment No. 0: Ths s a conformng amendment to amendment No. 3.
The ouse recedes.
The ouse recedes.
mendment No. 2: Ths amendment e cudes copyrghts and terary, mus-
ca, or artstc compostons, and smar property n the hands of certan ta -
payers from, and ncudes certan catte used for breedng or dary purposes n,
the defnton of property used n a trade or busness whch s entted to the
benefts of secton 117(|) of the Interna Revenue Code. The ouse recedes
wth an amendment whch emnates that part of the Senate amendment deang
wth catte. Whe t may be necessary for Congress to egsate wth respect to
the ta treatment of saes of vestock, the conferees agree that catte aone
shoud not be deat wth to the e cuson of other vestock, the treatment of whch
was not n conference, and that the sub|ect matter s deservng of further study.
It s the hope of the conferees that, pendng such study and further egsaton,
the Treasury w foow the decson of the ghth Crcut Court n the brght
case (173 Fed. (2d) 339).
mendment No. 3: Ths amendment emnates the provsons of the ouse
b whch woud change the hodng perod used for determnng whether a
capta gan or oss s ong-term or short-term from 6 to 3 months. The ouse
recedes wth conformng amendments.
mendment No. : Ths s a conformng amendment to amendments Nos. 77
and 7 . The ouse recedes.
mendment No. So : Ths s a cerca amendment. The ouse recedes.
The ouse recedes wth a carfyng amendment.
mendment No. 7: Ths amendment provdes for the effectve date of that
part of amendment No. whch woud ncude certan catte n the defnton of
property used n a trade or busness whch s entted to the benefts of secton
117( ) of the Interna Revenue Code. In vew of the acton on that part of
amendment No. 2, the Senate recedes.
mendments Nos. , 9, 90, 91, 92, and 93: These amendments are cerca.
The ouse recedes wth amendments makng the necessary changes n secton
numbers and cross-references.
mendments Nos. 9 , 9 , and 90: These amendments make technca and
carfyng changes n the secton deang wth coapsbe corporatons. The
ouse recedes.
mendment No. 97: Ths amendment e tends the appcaton of secton
117 m), added to the Interna Revenue Code by ths b, to a sharehoder who,
at any tme after the commencement of the manufacture, constructon, or pro-
ducton of property by a coapsbe corporaton, owned stock whch was con-
sdered as owned at such tme by another sharehoder who then owned (or
was consdered as ownng) more than 10 percent n vaue of the outstandng
stock of the corporaton. The ouse recedes.
mendment No. 9 : Ths s a cerca amendment. The nouse recedes.
mendment No. 99: Ths amendment, effectve for ta abe years begnnng
after December 31, 19 0, adds a secton to the b whch provdes that amounts
receved by an assgnor for the assgnment of certan o, gas, and mnera
923 30 61 3
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rghts, where such rghts termnate upon the recept by the assgnee of a f ed or
determnabe amount of o, gas, or mnera, sha be treated as amounts receved
from the sae or e change of capta assets. The Senate recedes.
mendments Nos. 100, 101, 102, 103, 10 , and 10 : These amendments are
cerca. The ouse recedes wth amendments makng the necessary changes n
secton numbers.
mendment No. 106: Ths amendment nserts n the Interna Revenue Code
a new secton 12 , appcabe wth respect to ta abe rears endng after Decem-
ber 31, 19 0, provdng for the amortzaton over a perod of 00 months of emer-
gency factes constructed or acqured after December 31,19 9, and certfed as
necessary In the nterest of natona defense durng the present emergency perod.
The determnaton of that part of an nvestment n a facty whch Is attrbutabe
to defense purposes w be made under such standards and procedures as may
be ncuded n reguatons prescrbed by the certfyng authorty wth the approva
of the Presdent. The amortzaton deducton may be taken at the eecton of the
ta payer, n eu of deprecaton, and may be dscontnued (and deprecaton
resumed) before the e praton of the 60-month perod. The provson s smar
to secton 12 of the Code whch authorzed the amortzaton of emergency
factes durng Word War II. Ths amendment aso makes a technca change
In secton 23 (t) of the Code to conform It to the new secton 12 . The ouse
recedes wth amendments, one of whch adds to secton 117(g) of the Code a new
paragraph (3) provdng that gan from the sae or e change of property, to the
e tent that the ad|usted bass of such property s ess than ts ad|usted bass
determned wthout regard to secton 12 , sha be consdered as ordnary
ncome. For e ampe, on December 31, 19 0, a ta payer makng hs ncome ta
returns on the caendar-year bass acqures at a cost of 10,000 an emergency
facty (used n hs busness) whch normay woud have a usefu fe of 20
years. Under secton 12 he eects to begn the 60-month amortzaton perod
on anuary 1, 19 1. e takes amortzaton deductons n the amount of ,000
for the years 19 1 and 19 2 (2 months). On December 31, 19 2, he ses the
facty for 9, 00. The ad|usted bass of the facty on that date s 6,000
( 10,000 cost ess ,000 amortzaton). Wthout regard to secton 12 . the
facty woud have been deprecated at the rate of 00 a year, and ts ad|usted
bass on December 31, 19 2, woud have been 9,000 ( 10,000 cost ess 1,000
deprecaton). The dfference between the facty s actua ad|usted bass
( 6,000), and ts ad|usted bass determned wthout regard to secton 12
( 9,000) s 3,000. ccordngy under the ouse amendment, of the 3, 00 gan
on the sae of the facty ( 9, 00 sae prce ess 6,000 ad|usted bass), 3,000
woud be treated as ordnary ncome and 00 as ong-term capta gan.
If the ta payer acqured other property, n a ta -free e change, for an emer-
gency facty wth respect to whch the amortzaton deducton was aowed, the
bass of such other property woud be determned wth regard to secton 12
of the Interna Revenue Code, and therefore the provsons of secton 117(g) (3)
of such Code woud appy wth respect to gan reazed on a sae or e change of
such other property. The provsons of secton 117(g)(3) kewse appy wth
respect to gan reazed upon the sae or e change of an emergency facty (or
other property, as descrbed n the precedng sentence) by a ta payer n whose
hands the bass of such facty (or other property) s determned by reference to
the bass thereof In the hands of another person who was aowed deductons wth,
respect to such facty under secton 12 .
mendment No. 107: Ths amendment s cerca. The ouse recedes wth an
amendment makng a change n secton number.
mendment No. 10S: Ths amendment adds n new secton 130 to the Interna
Revenue Code to provde speca ncome ta treatment of ncome n respect of
restrcted stock optons n cases where the opton prce s at east So percent
of the far market vaue of the stock sub|ect to the opton. The ouse recedes
wth amendments provdng ordnary ncome treatment, at dsposton of the
stock In certan cases, to the amount of the spread, at the tme the opton was
granted. The amendments revse subsecton (a) of secton 130 and nsert a
new subsecton (b).
New subsecton (b) provdes a speca rue appcabe where the opton prce
In respect of a restrcted stock opton Is, at the tme the opton s granted, be-
tween and 9 percent of the far market vaue of the stock. Ths rue pro-
vdes that f no dsposton of a share of stock, acqured by an ndvdua upon hs
e ercse after 19 9 of a restrcted stock opton, Is made by hm wthn 2 years
from the date of the grantng of the opton, nor wthn 6 months after the trans-
fer of such share to hm, but, at the tme the restrcted stock opton was granted,
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the opton prce was ess than 0 percent of the far market vaue at such tme
of such share, then, In the event of any dsposton of such share by hm, there
sha be Incuded as compensaton (and not as gan upon the sae or e change of a
capta asset) n hs gross Income, for the ta abe year durng whch the date of
such dsposton fas, an amount equa to the amount, If any, by whch the
opton prce s e ceeded by the esser of (1) the far market vaue of the share
at the tme of such dsposton or (2) the far market vaue of the share at the
tme the opton was granted. Death of the ndvdua, at any tme (ncudng
death wthn the 2-year perod or wthn the 6-month perod) whe he owns the
share of stock, has the same effect for the purposes of subsecton (b) as a ds-
poston of such share by hm durng the ta abe yenr cosng wth hs death.
Subsecton ( ) aso provdes that. In case of a dsposton of such a share of
stock by the Indvdua, the bass of the share In hs hands as of the tme of such
dsposton sha e Increased by an amount equa to the amount ncudbe as
condensaton In hs gross Income. The rue of subsecton (a) regardng dena
of deducton under secton 23(a) to the empoyer corporaton or ts parent or
subsdary aso appes to any amounts treated as ordnary ncome under subsec-
ton (b).
In order to make It cear that the speca treatment provded In subsecton (a)
and new subsecton (b), when appcabe, uppes separatey to each share of
stock, subsecton (a) of secton 130 has been rephrased to refer to a share of
Stock. nstead of to stock. Former subsectons (b), (c), and (d) have been
redesgnated (c), ( 1). and (e), respectvey.
The operaton of new subsecon (b) may be ustrated by the foowng
e ampes:
(1) On anuary 1, 19 1, . an empoyee of M corporaton receves a restrcted
stock opton to purchase a share of stock of M corporaton for . The far
market vaue on that date s 100. On anuary 1, 19 3, e ercses the opton,
the far market vaue of the share on that date beng 12 . On anuary 1, 19 ,
ses the share for 1 0. The dfference between the far market vnue at the
date the opton was granted and the opton prce was 1 . Therefore, 1 s
Incuded as ordnary ncome n s gross ncome for 19 . Ths 1 Increases
the cost bass of the share to , thus gvng hm a bass for determnng gan
or oss on the sae of the share of stock of 100. avng sod the share for 1 0,
has a gan on the sae of 0, of whch 2 s taken Into account as ong-
term capta gan.
(2) If the far mnrket vaue nf the share n e ampe (1) above at the tme
of the sa e had been ony 7 . and f had sod It for 7 , no amount n respect
of the sae woud he ncudbe as compensaton In s gross Income for 19 .
In such case. s bass for determnng gan or oss on the sae woud reman
. avng sod the share for 7 , woud have a oss on the sae of 10, of
whch woud be taken nto account as a ong-term capta oss.
(3) If, n e ampe (1) above, nstead of seng the share on anuary 1, 19 ,
had made a gft of the share on that day, the 1 woud be ncuded as com-
pensaton n s gross ncome for 19 . Smary. s bass n respect of the
share s ncreased to 100, whch woud become the donee s bass, as of the
tme of the gft, for determnng gan or oss on the share of stock.
( ) If, n e ampe (2) above, nstead of seng the share on anuary 1, 19 ,
had mae a gft of the share on that date, no amount In respect of the transac-
ton woud be ncudbe as compensaton n s gross ncome for 19 . s bass
woud reman , whch aso woud become the donee s bass, as of the tme of
the gft, for the purpose of determnng gan on the share of stock. The donee s
bass for the purpose of deTonrtnng oss woud be determned under secton
113(a) (2), and woud be 7 .
( ) If. n e ampe (1) above, after acqurng the stock on anuary 1, 19 3,
ded durng the year 1 ) 3. at a tme when the share hnd a far market vaue of
1 0, the 1 spread whch e sted at the tme the opton was granted woud
be ncuded as compensaton n s gross ncome for the ta abe year cosng
wth hs death. Ths s the rue whether s death occurred durng or after a
6-month perod runnng from the date the share was acqured. The bass of the
share n the estate of for the purposes of determnng gan or oss woud be
determned under secton 113(a) ( ) and woud be 1 0.
mendment No. 109: Ths amendment reates to the tme of payment of ta
wthhed at source from nonresdent aens and corresponds, e cept for a mnor
change, to secton 601(d) of the ouse b. The ouse recedes wth an amend-
-t makng a change n secton number.
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mendment No. 110: Ths amendment adds to the Interna Revenue Code
certan rues appcabe to the treatment of famy partnershps for ncome ta
purposes, retroactve to ta abe years begnnng after 193S. The Senate recedes.
mendment No. I: Ths s a cerca amendment. The ouse recedes wth
on amendment makng a change In secton number.
mendment No. 112: Ths s a cerca amendment. The ouse recedes.
mendment No. 113: Ths amendment changes the effectve date for the
ta aton of amounts pad for servces performed n a possesson of the Unted
States by a ctzen of the Unted States as an empoyee of the Unted States or
any agency thereof from ta abe years begnnng after December 31, 19 9, to
ta abe years begnnng after December 31, 19 0. The ouse recedes wth nn
amendment whch restores the effectve date contaned n the ouse b.
mendment No. 11 : Ths s a cerca amendment. The ouse recedes wth
mendments os. 11 and 110: These are carfyng amendments. The ouse
recedes.
mendment No. 117: Ths amendment amends secton 3S11 of the Interna
Revenue Code to e tend to Puerto Rco admnstratve, coecton, and enforce-
ment provsons consdered necessary because of the changes made by the b
reatng to the ncome ta treatment of ndvduas resdent n Puerto Rco. The
ouse recedes.
mendment No. 11 : Ths amendment makes technca and conformng changes
to secton 1(a) (7) of the Interna Revenue Code and to secton 211(a)(7) of
the Soca Securty ct, each of whch reates to the computaton of net earnngs
from sef-empoyment n the case of resdents of Puerto Rco. These changes
are necessary because of the changes made by the b n the ta treatment of
resdents of Puerto Rco. The ouse recedes.
mendment No. 119; Ths s a cerca amendment. The ouse recedes.
mendment No. 120: Ths amendment provdes that the amendment made by
Senate amendment No. 117 sha be effectve on the date of the enactment of the
b. The ouse recedes.
mendment No. 121: Ths amendment adds to the Interna Revenue Code a
new paragraph whch, for certan purposes, woud aow a reguated nvestment
company, at ts opton, to treat certan dvdends as havng been pad n the
ta abe year precedng that of ther actua payment. The ouse recedes wth
mendment No. 122: Ths amendment provdes that secton 02(f) of the
Interna Revenue Code, reatng to use of corporaton property by a sharehoder,
sha not appy to rents receved durng ta abe years endng after December 31,
19 , and pror to anuary 1, 19 0, f such rents were receved for the use by
the essee, n the operaton of a bona fde commerca, ndustra, or mnng
enterprse, of property of the corporaton. The ouse recedes wth an amend-
ment makng a change n secton number.
mendment No. 123: Ths amendment strkes out secton 21S of the ouse
b, reatng to ncrease n rate of corporaton-ncome ta es. The ncrease n
corporate rates s effected under Senate amendments Nos. 39 and 0. The ouse
recedes.
mendments Nos. 12 and 12 : These are cerca amendments whch change
the headngs of part I of tte III of the b, and of Suppement U of chapter 1
of the Interna Revenue Code, respectvey, to conform to the changes made by
Senate amendment No. 1 1. The ouse recedes.
mendment No. 120: Ths s a technca amendment to conform the rate of
ta on organzatons sub|ect to the Suppement U R at corporate rates to the
Increased corporate ta rate provded n Senate amendment No. 39. The ouse
recedes.
mendments Nos. 127 and 12S: These are carfyng amendments. They make
cear that the word church n the new secton 21(b)(1) of the Interna
Revenue Code as t appeared Id the ouse b, ncudes a conventon or assoca-
ton of churches as an organzaton e empt from the Suppement U ta . The
ouse recedes.
mendment No. 129: Ths s a technca amendment to conform to Senate
amendment No. 1 1. whch emnates the proposed ta on accumuated nvest-
ment ncome. The ouse recedes.
mendment No. 130: Ths amendment contnues the e cuson of dvdends.
Interest, and annutes from unreated busness net ncome for purposes of the
Suppement U ta as provded for n the comparabe ouse b provson and
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ets forth spec ay the royates whch are nso to be e cuded from unreated
busness net ncome. The ouse recedes.
mendment No. 131: Ths amendment s a change In paragrnph number. The
ouse recedes.
mendment No. 132: Ths Is a technca amendment. The provson strcken
thereby from the ouse b s covered In Senate amendment No. 13 . The
ouse recedes.
mendments Nos. 1 3 and 131: These amendments are changes In paragraph
numbers. The ouse recedes.
mendment No. 13 : Ths amendment adds a new paragraph, ( ) to the new
secton 22(a) of the Interna Revenue Code whch broadens the e cuson from
unreated busness net ncome sub|ect to the Suppement T ta provded In sec-
ton 22(n) (2) n the ouse b for capta gnns or osses. The ouse recedes.
mendment No. 136: Ths amendment s a change In a paragrnph number.
The ouse recedes.
mendme.t No. 137: Ts amendment e tends the ouse b provson whch
e cuded, from unreated busness ncome sub|ect to the Suppement T ta . In-
come derved from research for the Unted States or any of ts agences. The
amendment adds to the Code n eu of the ouse provson a secton numbered
22(a) (7) whch e cudes a ncome derved from work performed under a con-
tract wth the Unted States or any of Its agences or nstrumentates or wth
any State or potca subdvson thereof. The amendment aso adds a pro-
vson, numbered secton 22(n) ( ), e cudng ncome derved by a coege, un-
versty, or hospta from research performed for nny person.
The ouse recedes wth amendments mtng the e cuson n secton
22(a) (7) to ncome derved from research for the Federa Government or the
States and adnc a subparagraph to secton 22(a)( ) provdng that, n the
case of an organzaton operated prmary for the purposes of carryng on fun-
damenta research the resuts of whch are freey avaabe to the genera pub-
c, Income derved from a research Is to be e cuded from unreated busness
ncome.
mendments Nos. 13 and 139: These amendments change paragraph numbers.
The ouse recedes.
mendment No. 1 0: Ths amendment s cerca. The ouse recedes.
mendment No. 1 1: Ths amendment e cepts from the defnton of unre-
ated trde or busness under new Code secton 22(b) as t appeared n the
ouse h, any trade or busness whch conssts of seng merchandse, substan-
tay a of whch has been receved by the organzaton as gfts or contrbutons.
The ouse coedes.
mendment No. 1 2: Ths Is a technca amendment conformng to Senate
amendment No. 1 9. The ouse recedes.
mendment No. 1 3: Ths amendment changes the defnton n new Code
secton 23(a) of the phrase Suppement U ease to mean, n genera, a ease
for a term of more than years of rea pro erty on whch there s a Suppe-
ment U ease ndebtedness; whereas, under the correspondng provson of the
ouse b, eases of years or more were covered where such ndebtedness
e sted. The ouse ecedes.
mendments Nos. 1 and 1 : These are cerca amendments. The ouse
recedes.
mendment No. 1 6: Ths amendment e cepts certan types of eases from
the defnton of a Suppement U ease as such term s denned n new Code
secton 23(a). Rents from such eases w not be sub|ect to the Suppement
U ta . The e cepted types of eases are those entered nto prmary for pur-
poses whch are substantay reated to the essor organzaton s e empt pur-
poses: enses of premses n a budng prmary desgned for occupancy by the
essor organzaton; certan ong-term eases of portons of the premses where
both the rents derved from such eases are ess than certan percentages of the
tota rents derved from the entre premses and he area covered under such
ong-term eases represents ess than certan percentages of the tota area cov-
ered by eases or the entre premses. The ouse recedes wth a technca amend-
ment conformng to Senate amendment No. 1 3 and wth an amendment requrng
that the budng prmary desgned for occupancy by the organzaton aso be
occuped by the organzaton f a ease of premses In such a budng s to be
e cepted from the defnton of a Suppement U ease.
mendment No. 1 7: Ths s a technca amendment conformng to Senate
amendment No. 1 3. The ouse recedes.
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90
mendment No. 1 : Ths amendment carfes the manner n whch a Sup-
pement U ease Indebtedness may be ncurred. The ouse recedes.
mendment No. 1 9: Ths amendment provdes that where rea property was
acqured by gft, bequest, or devse pror to uy 1, 19 0, sub|ect to a mortgage
or sub|ect to a ease requrng mprovements, the mortgage ndebtedness or n-
debtedness ncurred n so mprovng the property sha not be consdered as
Suppement U ndebtedness. smar resut s aso provded under certan
crcumstances where an organzaton descrbed n secton 101 (1), (6), or (7)
acqures a the stock of a corporaton descrbed In secton 101(1 ). The ouse
recedes wth a carfyng amendment.
mendment No. 1 0: Ths Is a cerca amendment. The ouse recedes.
mendment No. 1 1: Ths amendment strkes out provsons of the ouse b
whch woud have added sectons 2 and 2 to the Interna Revenue Code,
whch woud have sub|ected to the Suppement U ta certan accumuated n-
vestment ncome of trusts and certan other organzatons e empt under secton
101 (6) of the Code. The ouse recedes.
mendment No. 1 2: Ths amendment s a change n secton number. The
ouse recedes.
mendment No. 1 3: Ths amendment strkes out secton 301(c) of the ouse
b whch set up specfc standards under whch certan organzatons e empt
under secton 101(6) of the Interna Revenue Code must operate n order to re-
tan ther e empt status. owever, the provsons of ths secton, wth modf-
catons, are ncorporated n new Code secton 3 13 as added by Senate amend-
ment No. 162. The ouse recedes.
mendments Nos. 1 , 1 , and 1 0: These amendments are cerca and tech-
nca conformng changes. The ouse recedes.
mendment No. 1 7: Ths amendment ndds secton 302 to the b, for whch
there was no correspondng secton n the b as t was passed by the ouse.
Secton 302 deas wth possbe ta abty for ta abe years begnnng pror to
19 1 of certan organzatons whch for such years were carryng on a trade or
busness the profts of whch were dedcated e cusvey to e empt purposes; such
secton aso deas wth deductbty of contrbutons made pror to 19 1 to such
organzatons.
The ouse recedes wth an amendment whch revses secton 302 of the b.
s amended, secton 302(a) provdes that for ta abe years begnnng pror
to 19 1, no organzaton sha be dened e empton under secton 101 (1), (6).
or (7) of the Code on the ground that t s carryng on a trade or busness for
proft, f the ncome from ths source woud not be ta abe under Suppement U
as amended by ths b, or If such trade or busness s the renta by such
organzaton of ts rea property (ncudng persona property eased there-
wth).
Subsecton (b) of secton 302 provdes that the statute of mtatons aganst
assessment of ncome ta sha begn to run, for any ta abe year pror to 19 1,
wth the fng of an nformaton return (Form 990) In the case of an organza-
ton whch woud be e empt under secton 101 of the Code were It not carryng
on a trade or busness for proft. If under secton (f) of the Code such
organzaton was not requred to fe an nformaton return, assessment s
barred 3 years after the date such return woud have been due f such organza-
ton had been requred to fe such return. owever, the provsons of ths
subsecton are not to appy to a ta abe year wth respect to whch, pror to
September 20, 19 0, any amount of ta was assessed or pad, or a notce of
defcency under secton 272 of the Code was sent to the organzaton.
Subsecton (c) of secton 302 provdes that a gft or bequest for chartabe,
etc., purposes, otherwse aowabe as a deducton under the approprate In-
come-, estate- or gft-ta provsons of the Code, may not be dened for any
ta abe year pror to anuary 1, 19 1, f the dena of e empton to the recpent
organzaton for the tme n whch such contrbuton was made s prevented by
secton 302.
The conferees were unabe to consder the queston of ta abty for years pror
to 19. of ncome derved by a coege or unversty from the conduct of a
trade or busness whether carred on drecty by the nsttuton or through a
subsdary. Ths matter s n tgaton and was not n conference. owever,
t s the vew of the conferees that undue hardshp w arse f such nsttu-
tons are requred to pay ta es on Income whch has aready been spent to carry
out ther educatona programs; and the conferees e press the hope that ths
matter may be revewed n subsequent egsaton.
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91
mendment No. 1 : Ths amendment Is a change In secton number. The
ouse recedes.
mendment No. 1 9: Ts amendment emnates those provsons of the
ouse b whch woud have dened a deducton under secton 162(a) of
the Interna Revenue Code wth respect to Income whch was accumuated, and
aso the prvege of eecton whch woud have been granted trustees to deduct
under secton 102(a) for certan dstrbutons made after the cose of the
ta abe year. Ths amendment retans, wth modfcatons, the mtatons pro-
posed n the ouse b on the unmted chartabe deducton aowed trusts
under secton 162(a) of the Code. These provsons appeared n secton 162(g)
(2) and ( ), as added to the Code by secton 321 of the b as passed by the
ouse. These mtatons, whch now appear as secton 162(g) (1) and (2),
resut In the dena of a deducton under secton 162(a) of the Code for amounts
attrbutabe to Income derved from busness actvtes of the trust and for
amounts n e cess of 1 percent of the net Income If the trust has engaged n
certan prohbted transactons, drecty or ndrecty wth the creator of, or
a substanta donor to, such trust. Secton 162(g) (2) (C) and (D) provdes rues
wth res|ect to the ta abe years affected where the deducton of a trust has
been so mted because of engagng n prohbted transactons. Secton
162(g) (2)( ) provdes rues for the dsaowance to the donor of a deducton
under the approprate Income-, estate-, and gft-ta provsons of the Interna
Revenue Code, for gfts or bequests n trust where at the tme of the gft or
bequest the trust s not aowed the unmted deducton under secton 162(a)
of the Code.
The ouse recedes wth cerca amendments and an amendment whch
adds paragraph ( to secton 162(g), whch paragraph provdes that the
amount whch woud otherwse be aowed under secton 162(a) as a deduc-
ton for amounts permanenty set asde for chartabe and reated purposes
dnrng the ta abe year or any pror ta abe year and not actuay pad out
at the end of the ta abe year sha be mted to such amounts as actuay
pad out as are not n e cess of 1 percent of the net ncome of the trust,
computed wthout the beneft of secton 162(a), where the accumuatons are
(1) unreasonabe ether n sze or duraton, or (2) used to a substanta degree
for other than chartabe or reated purposes, or (3) nvested In such a manner
as to |eopardze the nterests of the regous, chartabe, scentfc, etc., bene-
fcares. The deductons are to be so mted as provded n ths paragraph
n the year n whch the accumuaton becomes unreasonabe or s msused and
w contnue to be so mted unt such stuaton s corrected.
mendment No. 100: Ths s a technca amendment. The ouse recedes.
mendment No. 101: Ths s a technca amendment to conform the effectve
date of part II of tte III of ths b to addtons made theren by Senate amend-
ment No. 1 9. The ouse recedes.
mendment No. 162: Ths amendment strkes part III of tte III of the b
as t was passed by the ouse, the provsons of whch dsaowed certan
chartabe, etc., deductons for ncome-, estate-, and gft-ta purposes for gfts
and bequests to certan organzatons e empt under secton 101(0) of the In-
terna Revenue Code where the nstruments under whch the recpent organza-
tons were operated dd not provde that such organzatons mght not engage
n certan prohbted acts. owever, the provsons of ths part, wth certan
modfcatons, are Incorporated n secton 3 13 as added to the Interna Revenue
Code by ths amendment.
The prncpa changes made by the Senate amendment are to broaden the
categores of organzatons not sub|ect to the provsons of the secton; to omt
the requrement that the mandate aganst prohbted transactons be ncorpo-
rated n the governng Instrument of the organzaton ; to mt the categores
of prohbted transactons to those whch are not at arm s ength; to omt the
provsons denyng chartabe deductons for certan contrbutons of stock n a
famy busness; and to provde specfc rues regardng the ta abe years
affected when an organzaton engages n a prohbted transacton.
The ouse recedes wth cerca and technca amendments and an amendment
addng after secton 3 13 of the Code a new secton 3 1 . Secton 3S1 provdes
that e empton under secton 101(6) of the Code sha be dened for the ta abe
year n the case of an organzaton descrbed n secton 101(6) to whch secton
3 13 of the Code Is appcabe, f the accumuatons out of ncome durng the
ta abe year or any pror ta abe year and not actuay pad out by the end of
the ta abe year, ae ether unreasonabe n amount or duraton n order to
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92
carry ont the organzaton s e empt purposes; or are used to a substanta
degree for purposes or functons other than such organzaton s e empt pur-
poses ; or are nvested n such a manner as to |eopardze the carryng out of the
organzaton s e empt purposes. In effect, secton 3 1-1 denes e empton to a
secton 101(6) organzaton |n the year n whch ts accumuaton of ncotue De-
comes unreasonabe or s msused, and such organzaton w contnue to be
dened e empton as ong as such stuaton contnues.
mendment No. 163: Ths amendment adds to tte III of the b as t passed
the ouse a new part desgnated part I whch requres, for ta abe years
begnnng after December 31, 19 9, that certan organzatons e empt under
secton 101(6) of the Interna Revenue Code and trusts ta abe under Suppe-
ment of the Code camng chartabe, etc., deductons under secton 162(a)
of the Code sha furnsh annuay nformaton respectng ncome, e penses, ds-
bursements, accumuatons, and a baance sheet, whch nformaton s to be made
avaabe to the pubc. The ouse recedes.
mendments Nos. 16 to 17 , ncusve: These amendments restrct the pro-
vsons whch woud appy a corrected formua n computng the ncome ta es of
fe nsurance companes to 19 9 and 19 0, nstead of to 19 7, 19 , 0, and
19 0. as provded for by the ouse b. The ouse recedes.
mendment No. 17 : Ths amendment strkes out secton 03 of the ouse
b reatng to ncome ta es of nsurance companes n recevershp durng U- 7
or 19 . The ouse recedes.
mendments Nos. 176 and 177: These amendments are cerca. The ouse
recedes.
mendment No. 17 : Ths amendment adds to the b a new secton whch
amends secton 01(c) of the Revenue ct of 19 2 to mt the Incuson n the
gross estate of a decedent for estate-ta purposes of proceeds of fe-nsurance
poces upon hs own fe, purchased n whoe or n part wth premums or other
consderaton pad by hm on or before anuary 10, 19 1, and recevabe by per-
sons other than hs e ecutor. The ouse recedes.
mendments Nos. 179 and 1 0: These amendments strke out tte I and
secton 001 of the ouse b provdng for coecton of ncome ta at source on
dvdends. The ouse recedes.
mendment No. 1 1: Ths amendment strkes out secton 602 of the ouse
b, whch deat wth the reducton of the rate of nterest on overpayments.
The ouse recedes.
mendment No. 1 2: Ths amendment strkes out secton 603 of the ouse
b, reatng to payment of ncome ta by nstament payments. The provsons
of tat secton are ncorporated n Senate amendment No. 62. The ouse
recedes.
mendment No. 1 3: Ths amendment adds to the b the headng Tte I
cse Ta es and secton 001 reatng to retaers e cse ta es In the case of
.saes of |ewery or furs by an auctoneer or other agent. Ths secton Is dent-
ca to subsecton (e) of secton 102 of the ouse b, whch was strcken by
Senate amendment No. 3. The ouse recedes.
mendment No. 1 : Ths amendment adds to the b a new secton 602. re-
atng to reta saes by the Unted States or by ts agences or nstrumentates.
Ths secton Is dentca to secton 10 of the ouse b, whch was strcken by
Senate amendment No. . The ouse recedes.
mendment No. 1 : Ths amendment adds to the b a new secton 603,
reatng to e cse ta on con-operated gamng devces. The amendment made
by ths secton to the Interna Revenue Code s the same as the amendment made
by secton 1 2(a) of the ouse b, strcken by Senate amendment No. 17. The
ouse recedes.
mendment No. ISO: Ths amendment ndds to the b a new secton 60 , re-
atng to the payment of occupatona ta es by Federa agences and nstru-
mentates. Ths secton s dentca to secton 1 of the ouse b strcken by
Senate amendment No. 19. The ouse recedes.
mendment No. 1 7: Ths amendment adds to the b a new secton C0 whch
e tends the 10 percent manufacturers e cse ta on rado recevng-sets and
parts to teevson recevng sets and parts. The ouse recedes.
mendment No. 1 : Ths amendment adds to the b a new secton 606 whch
e tends the 10 percent manufacturers e cse ta on mechanca refrgerators
and ar-condtonng unts to quck-freeze unts. Secton 1 of the ouse h
(strcken by Senate amendment No. 2 ) aso provded for ta ng quck-freeze
unts, but at a ower rate. The ouse recedes.
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93
mendment No. ISO: Ths amendment adds to the h a new secton 607,
reatng to ta es on transportaton. Subsecton (a), reatng to the ta on the
transportaton of persons, m oses the ta on amounts pnd wthout the Unted
States for the transportaton of persona whch begns and ends In the Unted
States, and subsecton (b), reatng to the ta on the transportaton of property,
Imposes the ta on amounts pad wthout the Unted States for the transportaton
of property from one pont In the Unted States to another. The ouse recedes.
mendment No. I M: Ths amendment provdes an effectve date for the amend-
ments made by the new sectons C01, 602, 00 . and 60U The provsons of ths
secton are substantay the same as the correspondng provsons of the ouse
b. The ouse recedes wth a change In secton number.
mendment No. 101: Senate amendment No. 191 added a new secton to the b
drectng the ouse Commttee on Ways and Means and the Senate Commttee
on Fnance to report to the respectve ouses a b for rasng revenue by the
evyng, coecton, and payment of corporate e cess profts ta es wth retro-
actve effect to October 1 or uy 1, 19 0, such b to orgnate as requred by
artce I, secton 7 of the Consttuton. Such b was to be reported ns eary
as practcabe durng the frst sesson of the ghty-second Congress. The
Senate amendment further drected the ont Cenuttee on Interna Revenue
Ta aton to make a fu and compete study of the probems nvoved n the ta -
aton of e cess profts accrung to corporatons as the resut of the nntona-
defense program n whch the Unted States s now engaged, and to report the
resuts of Its study to the ouse Commttee on Ways and Means and the Senate
Commttee on Fnance as soon as practcabe.
The ouse (by the adopton of . Res. -12) agreed to Senate amendment No.
191 wth an amendment whch drected that such b be reported as eary as
practcabe durng the second sesson of the ghty-frst Congress. In a other
respects, the anguage of the ouse amendment was dentca to Senate amend-
ment No. 101.
The Senate recedes wth an nmemment whch provdes that the b requred
by both Senate amendment No. 191 and the ouse amendment thereto sha be
reported as eary as practcabe after November 1 , 19 0, to the ghty-frst
Congress, f n sesson after such date; and f the Congress s not n sesson In
19 0 after such date, the b sha be reported as eary as practcabe durng
the frst sesson of the ghty-second Congress.
mendment No. 192: Ths amendment conforms the tabe of contents to the
amendments made by the Senate to the ouse b. The ouse recedes wth an
amendment conformng the tabe of contents to the b as agreed to n conference.
mendment to the tte: The ouse recedes.
R. L. Doughton,
kbe Coopke,
ohn D. Dnoe,
Wbub D. Ms,
Dane . Reed,
Rot O. Woodruff,
Thomas . enkns.
Managers on the Part of the Iouse.
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IND
ffated corporatons, eecton to fe separate returns
grcutura abor, changes effected by the Soca Securty ct
mendments of 19 0
mendment :
Interna Revenue Code
Secton 322(b)(3)
Secton 01(b)(6)
Reguatons 116
Secton 0 .601
Sectons 0 .60 , 0 ,60 , 0 . 02, 0 . 0 (a), 0 . 0
Reguatons 11
Sectons 11.003, 11.00 (a)...
Reguatons 111
Secton 29.11-3. - ---
Sectons 29.22(b)(9)-, 29.22(b)(10)-1, 29.322-7
Sectons 29.23(q)-, 29. -7, 29.102-
Sectons 29. 3-1, 29. 6-1, 29.201-1, 29.322-7...
Sectons 29.131- and 29.1 - (deeted)..
Reguatons 10
Secton 6.2(6)
Reguatons 107
Secton 03.227
Sectons 03.603, 03.60 (a) .-
Reguatons 106
Secton 02.227
Secton 02.606
Sectons 02. 02, 02. 0 (a)
Reguatons 10
Sectons 1.9 and 1.70...
Secton 1.2 (fc)
Reguatons 103
Secton 19.131-
Secton 19.322-7
Reguatons 71
Sectons 113.3 , etc
Reguatons 3 (192 )
rtces 2, 3, , and
Reguatons 2
Sectons 176.17d, etc.
Reguatons 20
Secton 19 .20
Reguatons 1
Sectons 190. 3a (added), 190.69Ca (added)
Reguatons 11
Secton 1 9.20 a (added)
Reguatons 10
Sectons 1 .602a (added), 1 .622a (added).
Secton 1 .626a
Reguatons (193 )
rtces 11 and 12 1
Reguatons 7
Sectons 17 . , etc
ng N..
13 99
13 02
13129
13 20
13 01
13 02
13 02
13 9
13 3
1339
13 00
13 CO
13 63
13 26
13 02
13 26
13 01
13 02
13 06
13 62
13 60
13 3
13 09
13 07
13 27
13
13 66
13 66
13 66
13 39
13 0
13 0
( 9 )
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06
Rung No,
mendments Contnued
Reguatons
Secton 1 . 93a
Reguatons
Secton 1 3. 2a
Reguatons No. , coho Ta ct
Reguatons 3
Sectons 1 2.1, etc
Revocaton of Treasury Decson 111, Treasury Decson
132, and Treasury Decson 1
Treasury Decson 9 , secton 63D.
Treasury Decson 6 6 as amended by Treasury Decson
763 C. . 19 9-2, 13 ...
mortzaton, premum on caabe and convertbe bonds, pad
for converson prvege
nnutes:
mounts reported as appcaton of secton 29.22(b) (2)-
of Reguatons 111, as amended by T. D. 6
Perodca nstaments receved under endowment or so-
caed annuty contracts for a f ed term of years, revoca-
ton and modfcaton of pubshed rungs
rgentna, equvaent e empton requrements
ssgnments, ncome of Pennsyvana spendthrft trust by
ncome benefcary
anks, osses from saes or e changes of securtes, appcaton

of secton 117(), I. R. C...
onds:
Caabe and convertbe, amortzaton of premum pad
Losses from saes or e changes bv banks, appcaton of
secton 117(), I. R. C
randy, producton, Reguatons amended
settement of
Canceaton of ndebtedness, dscount upon
purchase-money mortgage before maturty
Casuaty osses, deprecabe nonbusness property partay
covered by nsurance
Cgarettes and sma cgars:
Manufactured n and removed from domestc factores
une, 19 0 and 19 9 . ,
uv, 19 0 and 19 9
ugust, 19 0 and 19 9 -
Septem er, 19 0 and 19 9
October, 19 0 and 19 9
Cgars:
Large-
pr,
May,
une,
u
19 0 and 19 9.
19 0 and 19 9
19 0 and 19 9
19 0 and 1919..
ugust, 19 0 and 19 9
September, 19 0 and 19 9.
Sma-
une, 19 0 and 19 9
uv, 19 0 and 19 9
September, 19 0 and 1919.
October, 19 0 and 1919....
13 39
1 0
13 39
13 03
1 0
200
13 1
1
13 19
13 3
197
3
13 17
1
133 7

13
1
13 9
13 0
16
17
13 92
66
13 7
60
13 2
133 7
13 2
13 39
13392
13 S
13 0
13 21
13 3
13 76
13 S7
133 9
13 10
13 31
13 71
13 7
13 97
13 0
13 21
13 3
13 76
13 7
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97
Uune Mo
Pago
Ctzen of Unted States, defnton. Reguatons 111 amended..
Cams for refund, amounts reported as annutes pror to
amendment of secton 20.22(b)(2)-1 of Reguatons 111 by
T. D. 6
Coomba, percent ta mposed under Decree No. 0 1 of
10 9, credt aganst Unted State ncome ta
Commttee reports:
Revenue ct of 19 0
Conference ( ouse Rept. 312 )
ouse of Representatves Report No. 2319
Senate Report No. 237
Soca Securty ct mendments of 19 ,
Conference ( ouse Rept. 2771)
Commodty Credt Corporaton, oans unter 1C cotton oan
program, when ncudbe
Communst organzaton , requrng regstraton, to protect the
Unted States aganst certan un- mercan and subversve
actvtes P. L. 31
Communty ncome, separatey owned rea property n the State
of Washngton
Compensaton:
Corporate offcers and empoyees, reports, Reguatons 111
amended
Dsabty retrement pay receved by members of the
unformed servces under Career Compensaton ct
of 19 9 ....
Lvng quarters or meas furnshed empoyees, effectve
date for wthhodng cf ncome ta
Payments by empoyer to wdow of deceased o cer or
empoyee
Contracts:
ppcaton of nson ct where ordnary sub|ect to
Renegotaton ct of 19
Department of Defense, appcaton of Renegotaton
ct of 19 ..
ndowment or so-caed annuty, perodca nstaments
receved for a f ed term qf years, revocaton and mod-
fcaton of pubshed rungs
Contrbutons:
Chartabe, by corporatons, Reguatons 111 amended
Made by ndvduas to organzatons of vounteer fremen..
Corporatons:
ffated, eecton to fe separate returns
Chartabe contrbutons, Reguatons 111 amended
Raroad, dscharge of ndebtedness, Reguatons 111
amended
Reports of compensaton of offcers and empoyees, Regua-
tons 111 amended
Cotton oans, Commodty Credt Corporaton 19 cotton oan
Court decsons:
Commssoner; arrs v
Commssoner v. ore
arrs v. Commssoner
ones, Coector; Phps Petroeum Co. v
ore; Commssoner v
Phps Petroeum Co. v. ones, Coector
13 9
7
13
1
13 16
9
13 0
13 6
13 3
0
3 0
3
13 77
13 1
13 9
36
2
302
133
20
13 70
13 23
13 2
2 0
31
72
13 60

13391
12
13 1
11
13 7
9
13 07
1 7
13
2
131 9
13 0
16
17
1339
13 1
2
23
13 99
1339
7
2
13 3
1
13 60

133
20
13 01
133 7
13 01
13393
133 7
13393
77

77
13

13
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0
Court decsons Contnued
Powe v. Rothenses
Rothenses; Powe v
Sanchez and Mota; Unted Sates v
Securty Trust Savngs ank of San Dego, ecutor, tc.,
et a.; Unted States v
Unted States v. Sanchez and Mota
Unted Staes v. Securty Trust Savngs Dank of San Dego,
ecutor, tc., et a
Credts aganst estate ta , State estate, nhertance, etc., ta es,
Reguatons 10 amended
Credts aganst ta :
Coomba, percent ta mposed under Decree No. 0 1
of 19 9 - -
Federa Repubc of German , ta mposed under Cor-
poraton Ta Law n the Wordng of September , 19 9
Foregn ta es refunded, Reguatons 103 and 111 amended..
ong ong ta mposed under Inand Revenue Ordnance
of 19 7 -
New Zeaand ta wthhed from dvdends under Soca
Securty ct, 193
Peruvan ta es mposed under ct 790 , ct 9001, and
ct 10 16
enezuean addtona ta mposed on ncome from roya-
tes and operaton of mnes or hydrocarbon deposts
Credts or refunds, tme for fng cams wth respect to war
osses, Reguatons 103 and 111 amended
Ru:nc No.
Decaratons of estmated ta , farmers , Reguatons 111
amended
Deductons, medca e penses pad by parents for daughter who
fed |ont return wth her husband
Department stores empoyng the reta nventory and eectve
nventory methods, prce ndces for uy 19 0
Dependents, marred daughter, more than one-haf of support,
ncudng medca e penses, pad by parents
Depeton, o and gas wes, property ta es pad for essor by
essee
Dsabty retrement pay receved by members of the un-
formed .servces under Career Compensaton ct of 19 9
Dscharge of ndebtedness, ncome from, Reguatons 111
amended
Dscount, settement of purchase-money mortgage before
maturty
Dsted sprts:
ottng of ta -pad, Reguatons 11 amended
Gaugng Manua, conformng tabes 1 through 7 of 193
edton to 19 0 edton
Producton, Reguatons amended
Rectfcaton, Reguatons 1 amended
Revocaton of Trcasurv Decson 111, Treasury Decson
132. and Treasury Decson 1
Sprts and wnes, drawback, Reguatons 2 amended
Warehousng, Reguatons 10 amended
Dvorce, transfers under property settement agreement survv-
ng decree, gft ta ...... .
12 3
13 3
13 9
I
1 1
139
13 9
13 9
1 1
139
13 9
1 1
13 06
7
13 16
9
13 37
13 60
1

13 9
2
13 06

13 36
60
13 91

13 3
IS
1339
2
13 7
2
13 2
20
13 7
2
13 2
0
13391
12
13 3
1
13392
20
13 66
1S9
13 2
13 39
13 66
20
ISO
y
13 19
13 27
13 39
13 66
197
193
ISO
1 9
13 01
77
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99
RuR No.
I
r
ectve nventory method, nvountary qudaton and repace-

ment, secton 22(d)(6)( ). I. R. C, amended 1 13 2
mpoyees tru ts, e empton under secton 16 (a), I. . C,
revocaton of 30 percent rue . 13 00
mpoyment ta es:
Interna Revenue Code
cepted servces
grcutura a r, changes effected by the Soca
Securty ct mendments of 19 0 ) 13 02
Returns
Faure to fe, penates 13 02
Tme of fng Form 9 1 13 01
erfcaton of, penates of per|ury 13 02
Soca Securty ct mendments of 19 0 13 03
Ta es-
Interest and penates I 13 02
Wages
I ayments by empoyer of traveng and other e -
penses, reguatons amended 13120
Traveng and other e penses, determnaton un-
der revsed reguatons I 13 3
Reguatons 106, 107, 11 amended. _ 13 02
Soca Securty ct-
mendments of 19 0
e panaton of changes effected n subchapters , I
C, D, and , Interna Revenue Code 13 03
quvaent e empton requrements, rgentna 13 02
state ta :
Credt for State estate, nhertance, etc., ta es, Reguatons
10 amended... 13 06
Gross estate of nonresdent aens, e cuson of certan
works of art 13 1
Refunds or credts, e tenson of mtaton perod 13
Reease of powers of appontment, Reguatons 10 amend-
ed 13 62
Returns, e tenson of tme for fng, Reguatons 10
amended 13 06
states, deductons for treaty-e empt ncome dstrbuted to
benefcares 13399
stmated ta , farmers decaratons, Reguatons 111 amended.. 1339
cess Profts Ta Counc, restatement of pocy wth respect
to appcatons for reef under secton 722 fed by ta payers
havng base perods endng after December 31, 1939 13 3
ecutve order, desgnatng the certfyng authorty wth re-
spect to te amortzaton of emergency factes ( . O. 10172) _ 13 72
tenson of tme, fe nsurance company returns and ta es for
19 9 133
F
Farmers, returns as decaratons of estmated ta , Reguatons
111 amended 1339
Federa Repubc of Germany, ta mposed under Corporaton
Ta Law n the Wordng of September , 19 9, credt
aganst Unted States ncome ta 13 37
Frearms, sezures an forfetures 13 17
Foregn ncome, bocked, used for purchase of nvestment or
busness property 13 90
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Foregn ta es:
Coomba, percent ta mposed under Decree No. 0 1 of
19 9, credt aganst Unted States ncome ta
Federa Repubc of Germany, mposed under Corporaton
, Ta Law n the Wordng of September , 19 9, credt
aganst Unted States ncome ta .
ong ong, mposed under Inand Revenue Ordnance of
19 7, credt aganst Unted Stater ncome ta
New Zeaand ta wthhed from dvdends under Soca Se-
curty ct, 193
Peru, mposed under ct 790 , ct 9001, and ct 10 16,
credt aganst Unted States ncome ta
Reducton of refund for whch credt has been granted,
Reguatons 103 and 111 amended
enezuea, mposed on ncome from royates and operaton
of mnes or hydrocarbon deposts, credt aganst Unted
States ncome ta
Form W-2, Wthhodng Statements 19 1, rues for reproduc-
ng -- -
Furs, aucton saes, Reguatons 1 (19 1) amended
Gan or oss, bass, nvestment or busness property purchased
wth bocked foregn ( deferabe ) ncome
Gaugng Manua, conformng tabes 1 through 7 of 193 edton
to 19 0 edton
Gft ta :
Reease of powers of appontment, Reguatons 10 amend-
ed
Transfers under property settement agreement survvng
dvorce decree
Gfts, made by ndvduas to organzatons of vounteer fremen..
Gross estate, nonresdent aens, e cuson of certan works of art.
Gross ncome:
Incusons, payments by empoyer to wdow of deceased
offcer or empoyee
When ncuded
Investment or busness property purchased wth
bocked foregn ( deferabe ) ncome
Loans under Commodty Credt Corporaton 191S
cotton oan program
Guam, provdng a cv government, and for other purposes
ong ong, ta mposed under Inand Revenue Ordnance of

11( 7, credt aganst Unted States ncome ta
usband and wfe:
Income from separatey owned rea property n the State of
Washngton
Transfers under property settement agreement survvng
dvorce decree, gft ta
ncome from dscharge, Reguatons 111
and gas royates receved from
Indebtedness,
amended
Indans, restrcted Osage, o
mnera eases of the trbe
Industra acoho, Reguatons 3 amended
Ru nc No.
13 16
13 37
13 9
13 06
13 36
13 60
13 91
13 6
13 0S
13 90
13 2
13 63
13 01
13 1
13 1
131 7
13 90
133
13 11
13 9
/ 13 23
13 2
13 01
13 3
13 1
13 1
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601
Inspecton of returns:
Certfcaton of copes by coectors, etc
Senate Speca Commttee to Investgate Organzed Crme
n Interstate Commerce
Insurance companes, fe:
tenson of tme for fng returns and payment of ta es
for 19 9 - ----
Fgure to be used n computng reserve and other pocy
abty credt, ta abe year 19 9
Fng of returns for caendar year 19 9
Interest redetermnaton of ta based on refund of foregn ta
or ta of a possesson, Reguatons 103 and 111 amended...
Inventores:
ectve method, prce ndces for uy 19 0 for use by
department stores
Invountary qudaton and repacement, secton 22(d)(6)
( ), I. R. C, amended
ewery, aucton
, Reguatons 1 (19 1) amended.
L
Leases, o and gas wes, property ta es pad for essor by
essee, depeton
Legsaton:
ght v-frst Congress
Pubc Law No. 7 .
Pubc Law No. 030
6 0
716.
7 0.
7 9.
761.
Pubc Law No
Pubc I-aw No,
Pubc Law No. 73
Pubc Law No. 7 9
Pubc Law No
Pubc Law No
Pubc Law No
Pubc I-aw No. 0
Pubc Law No. 31
Pubc Law No. 2
Pubc Law No. 69
Len for ta es, prorty over credtor s attachment en
Lfe nsurance companes:
tenson of tme for fng returns and payment of ta es
for 19 9
Fgure to be used n computng reserve and other pocy
abty credt, ta abe year 19 9
Fng of returns for caendar year 19 9
Lquor:
Part 171, msceaneous reguatons
Sae by agences and nstrumentates of the Unted
States -
Lvng quarters furnshed empoyees, effectve date for wth-
hodng of ncome ta
Loans, Commodty Credt Corporaton 19 cotton oan
Losses:
Casuaty, deprecabe nonbusness property partay
covered by nsurance
Dscount upon settement of purchase-money mortgage
before maturty
Rung No.
13 3
133 6
133
13161
13 32
13 00
13 60
13 2
13 2
13 0
13 2
13396
13 11
13 20
13 29
13 0
13 1
13 2
13
13
13 6
13 70
13 67
13 6
13 9
133
13 61
13 32
13 00
13
13
13 1
133
13
13392
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602
Losses Contnued
Saes or e changes of securtes by banks, appcaton of
secton 117(), I. R. C
War, tme for fng cams for credt or refund, Reguatons
103 and 111 amended ---------.
Lumber, e empton from mport ta , secton 3 2 (a), I. R. C,
amended
M
Marhuana, consttutonaty of ta mposed upon transfer..-..
Meas furnshed empoyees, effectve date for wthhodng of
ncome ta .
Medca e penses, pad by parents for daughter who fed |ont
hu
return wth her husband..
Meta scrap, contnung unt the cose of une 30, 19 1, the
suspenson of dutes and mport ta es
Msceaneous e cse ta es:
Marhuana, consttutonaty of ta mposed upon transfer..
Persona abty of coector for aeged ega assessment
and coecton of ta
Stamp ta es
Conveyances, o and gas eases, Okahoma and
ansas
Documentary, e empt transfers between corporatons
and ther nomnees; emnaton of returns of brokers
and deaers n stocks and bonds
Stamps attached n foregn countres to certan tobacco
products
Mortgages, purchase-money, dscount upon settement before
maturty
Rn n|; No. Pace
N
Narcotc drugs, transportaton, amendng secton 322 (b) of
the Interna Revenue Code ----- - v a -.7.
New Zeaand, ta wthhed from dvdends under Soca Securty
ct 193 , credt aganst Unted States ncome ta
Nonresdent aens, e cuson of certan works of art from gross
estate
O and gas royates receved by restrcted members of the
Osage Trbe of Indans
O and gas wes, property ta es pad for essor by essee,
depeton
Od- ge and Survvors Insurance System, Federa, e tendng
and mprovng, Pubc Law 73
Oeomargarne:
mnaton, Reguatons 3 (102 ) amended.
Statstcs of producton and materas used
May, 19 0 and 19 9
une, 19 0 and 19 9 -
Payment of ta . fe nsurance companes, e tenson of tme for
19 9.
Pennsyvan , p n thrf t usrassgnment of ncome by ncome
benefcary . - r c - vT
Penson trusts, e empton under secton 10 (a), 1. tt. rev
ocaton of 30 percent rue ..
13 2
3
13 3
1
13 67
2 3
13 9
13
13 1
11
13 7
2
13 6
2 3
13 9
139
13 3S
1 1
13393
13.-.
13 09
133
13 0
129
13392
20
13 6
2 9
13 06

13 1
2 7
13 1
13 2
0
13 0
217
13 07
132
1339
20.
13 13
206
133
36
13 7
60
13 00
61
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C03
Rung No.
Peru, ta es mposed under ct 790 , ct 9001, and ct 10116,
Payng cards, transportaton and devery bond, Reguatons
3 (192 ) amended...
Possessons of Unted States, ta es, reducton of refund for
whch credt has been granted, Reguatons 103 and 111
amended
Powers of appontment, reease of:
Premums, amortzaton, caabe and convertbe bonds, pad
Prorty of Federa ta es, en recorded subsequent to credtor s
attachment but pror to |udgment
Pubc aws:
ghty-frst Congress
No. 7 , e tendng tme for reease, free of estate and
gft ta , of certan powers
No. 630, provdng a cv government for Guam, and
for other purposes
No. 6 0, amendng secton 01(b)(6) of the Interna
Revenue Code
No. 710, amendng secton 322(b)(3) of the Interna
Revenue Code
No. 73 , e tendng and mprovng the Federa Od- ge
and Survvors Insurance System, etc
No. 7 9, e cudng certan works of art from gross
estate of nonresdent aens
No. 7 6, amendng secton 22(d)(6)( ), I. R. C, re-
atng to nvountary qudaton and repacement
of nventory
No. 7 9, makng appropratons for the support of the
Government for fsca year endng une 30, 19 1,
and for other purposes
No. 761, provdng for refund of certan estate ta es..
No. 0 , amendng secton 322 (b) of the Interna
Revenue Code, reatng to the transportaton of
narcotc drugs
No. 31, protectng the Unted States aganst certan
Un- mercan and subversve actvtes by requrng
regstraton of Communst organzatons, and for
other purposes
No. 2, amendng paragraph 207 of the Tarff ct of
1930 and secton 3 2 (a) of the Interna Revenue
Code. ._
No. 09, contnung unt the cose of une 30, 19 1,
the suspenson of dutes and mport ta es on meta
scrap, and for other purposes
R
Raroad corporatons, dscharge of ndebtedness, Reguatons
111 amended
Refunds:
Cams, amounts reported as annutes pror to amend-
ment of secton 29.22(b) (2)- of Reguatons 111 by
T. D. 6 . _
Foregn ta es, credt aganst Unted States ncome ta ,
Reguatons 103 and 111 amended
Refunds and credts, estate ta , e tenson of mtaton perod..
Reguatons. See mendments: Reguatons.)
Renegotaton ct of 19 , appcaton to Department of De-
fense contracts and subcontracts
13 36
13 07
13160
13162
13 63
133 7
1319
13396
13 11
13 20
13 29
13 0
13 1
13 2
13
13
13 6
13 70
13 67
13 6
13 3
13
13 60
13
13 1
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Renegotaton, appcaton of nson ct to certan contracts
or subcontracts ordnary sub|ect to Renegotaton ct of
19
Reproducton of Form W-2, Wthhodng Statements 19 1
Retaers e cse ta es:
ewery and furs, aucton saes, Reguatons 1 (19 1)
amended
Retrement pay, dsabty, receved by members of the un-
formed servces under Career Compensaton ct of 19 9
Returns:
ffated corporatons, eecton to fe separate
Certfcaton of copes by coectors, etc
state ta , e tenson of tme for fng, Reguatons 10
amended
Farmers , as decaratons of estmated ta . Reguatons
111 amended
Inspecton by Senate Speca Commttee to Investgate
Organzed Crme n Interstate Commerce
Lfe nsurance companes
tenson of tme for fng for 19 9
Caendar rear 19 9
Revenue ct of 19 0:
Commttee reports
Conference ( ouse Rcpt. 2771)
Royates, o and gas, receved by restrcted members of the
Osage Trbe of Indans
S
Rung No.
13 07
13 6
13 0
13391
13 99
13 3
13 06
1339
133S6
133
13 32
13 0
13 6
13 93
13 1
Senate Speca Commttee to Investgate Organzed Crme n
Interstate Commerce, nspecton of returns 133S6
Separate property, rea, State of Washngton, ncome 3 2
Snuff:
Mav, 19 0 and 19 9 1339
une, 19 0 and 19 9 1 13 12
uv, 19 0 and 19 9 I 13 30
ugust. 19 0 and 1 9... 13
September, 19 0 and 19 9 13 79
October, 19 0 and 1919 13 96
Soca Securty. (See mpoyment Ta es.)
Soca Securty ct mendments of 19 0:
Commttee reports
Conference ( ouse Rept. 2771 13177
ouse of Representatves Report No. 1300 13
Senate Report No. 1009 I 13 69
panaton of changes effected n subchapters , C, D,
and , Interna Revenue Code I 13 03
Stamp ta . See Msceaneous e cse ta es.)
Ta Court of the Unted States. The:
Decsons of, st of acquescence and nonaeoueseences 13 9
Ta tabes, wthhodng, 10-day and 2 -day perods I 13 6
Ta es:
Foreen
Coomba, percent ta mposed under Decree No.
10 1 of 19 9, credt aganst Unted States ncome
,. v I 13 10
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Ta es Contnued
foregn Contnued
edera Repubeof Germany, mposed under Corpora-
ton Ta Law n the Wordng of September , 19 9,
ong ong, mposed under Inand Revenue Ordnance
of 19 7, credt aganst Unted States ncome ta
New Zeaand ta wthhed from dvdends under Soc-
a Securty ct, 193 , credt aganst Unted States
ncome ta
Pent, mposed under ct 790 , ct 9001, and ct
10 16, credt aganst Unted States ncome ta
Reducton of refund for whch credt has been
granted, Reguaton 103 and 111 amended
enezuea, mposed on ncome from royates and opera-
ton of mnes or hydrocarbon deposts, credt aganst
Unted States ncome ta I
Payment, fe nsurance companes, e tenson of tme for 19 9
Property, o and gas wes, pad for essor by essee, depeton,
Tobacco:
May, 19 0 and 19 9
une, 19 0 and 19 9
uv, 19 0 and 19 9.
September, 19 0 and 19 9
October, 19 0 and 19 9
Stamps attached n foregn countres to certan tobacco
products
Treates, ncome e empt under, deductons for dstrbutons to
benefcares of estates and trusts
Trusts:
Deductons for treaty-e empt ncome dstrbuted to bene-
fcares
mpoyees , e empton under secton 1 (a), I. R. C, revo-
caton of 30 percent rue
Pennsyvana spendthrft, assgnment of ncome by ncome
benefcary
U
Unformed servces, dsabty retrement pay under Career
Compensaton ct of 19 9
enezuea, addtona ta mposed on ncome from royates and
operaton of mnes or hydrocarbon deposts, credt aganst
Unted States ncome ta
nson ct, appcaton to contracts and subcontracts sub|ect
to Renegotaton ct of 19
ounteer fremen s organzatons, contrbutons or gfts by-
ndvduas
W
under re-
Wages, traveng and other e penses, determnaton
vsed reguatons
War osses, tme for fng cams for credt or refund, Regua-
tons 103 and 111 amended
. ashngton, ncome from separatey owned rea property.
Ru.n No.
13 37
13 9
13 06
13 36
::c.O
13 91
133
13 2
1339
13 12
13 30
13
13 79
13 96
13 0
13399
13399
13 00
13 7
13391
13 91
13 07
13
13 1
13 3
13 3
13 23
13 2
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GOG
Wne:
Labeng and advertsng, Reguatons o. amended
Reguatons 7 amended .
Wthhodng of ta at source:
Changes effected by the Soca Securty ct mendments of
19 0 reatng to agrcutura abor
Federa depostares --
hvng quarters or meas furnshed empoyees, effectve
date
Returns
Faure to fe, penates
Tme for fng Form 9 1
erfcaton of, penates of per|ury
Ta es-
Interest and penates
Wthhodng Statements 19 1, Form W-2, rues for repro-
ducng
Wthhodng ta tabes, 10-day and 2 -day perods
Rung No.
13103
13 0
1 2
13 02
93
13 02
2
13 1
11
13 01
1
13 02
2
13 02
2
13 01
1
13 02
2
13 02
S2
13 6
119
13 6
116
o
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Bureau of Internal Revenue Cumulative Bulletin 1950-2

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Bureau of Internal Revenue Cumulative Bulletin 1950-2

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Copyright:

Treasury Department : nTT ureau of Interna Revenue

Interna Revenue uetn

agectt, Suse C., estate of1

nner, Irene, transferee.

aggett, Suse C, estate of

It must be attached to your U. S. ncome

D (Name, address, aod Identfcaton m

INFORM TION FOR INCOM T R TURN

Federa ncome ta wthhed,

Ffth Unabe year nd subsequent years

anks, osses from saes or e changes of securtes, appcaton

ectve nventory method, nvountary qudaton and repace-

ong ong, ta mposed under Inand Revenue Ordnance of

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