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The original documents are located in Box 24, folder "1975/03/29 HR2166 Tax Reduction
Act of 1975" of the White House Records Office: Legislation Case Files at the Gerald R.
Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Exact duplicates within this folder were not digitized.
Digitized from Box 24 of the White House Records Office Legislation Case Files at the Gerald R. Ford Presidential Library
June 4, 1975
FOR THE RECORD:
H.R. 2166 was signed by the President on March 29, 1975, during
a public address on television. No OMB letter or other file
material was ever received by the Chief Executive Clerk's Office.
Attached is all the pertinent information the Records Office
could find.
John Heiting
FOR IMMEDIATE RELEASE
MARCH 29, 1975
OFFICE OF THE WHITE HOUSE PRESS SECRETARY
THE WHITE HOUSE
ADDRESS BY THE PRESIDENT
LIVE ON NATIONWIDE
RADIO AND TELEVISION
THE OVAL OFFICE
7:31 P.M. EDT
Fellow Americans, and Fellow taxpayers:
Eleven weeks ago, in mid-January, I requested
the new Congress to pass as its first priority a simple
$16 billion reduction in Federal income taxes in order
to stimulate economic activity and put people back to
work.
I asked for a one-time refund to individual 1974
taxpayers up to a maximum of $1,000, enough to assist
in the purchase of new cars, home appliances, or other
improvements, thus helping business and workers in areas
that have been especially hard hit by the recession.
I also asked for bigger investment credits to
encourage businessmen and farmers to expand and make
more jobs.
Jobs were then and are now my main concern.
Unfortunately, though some other economic signs are
improving, the employment picture remains bleak. I want
most to help those who want to get back to work in pro-
ductive jobs. This can best be done by temporary tax
incentives to charge up our free enterprise system, not
by government handouts and make-work programs that
go on forever.
Therefore, over the past few months, I have
repeatedly urged the Congress to get a straightforward
tax cut bill on my desk by Easter, one that would restore
some of the buying power American families lost to
inflation and rising prices in 1973 and 1974.
My objective was to put money in the pockets
of the American people promptly rather than have the
Congress dream up new schemes for more of your money
to be spent by the government in Washington.
MORE
(OVER)
Page 2
Last Wednesday, before recessing, the Congress
did pass a tax reduction bill which is here before me.
The tax cut finally adopted by the Congress
represents a compromise between the $16 billion I
recommended in January and the $32 billion figure
passed ry the Senate. I said that I would accept a
reasonable compromise and the $23 billion tax reduction
is within reason.
However, this bill also distributes the cuts
differently and, in my opinion, fails to give adequate
tax relief to the millions of middle income taxpayers
who already contribute the biggest share of Federal
taxes.
But the most troublesome defect of this bill
is the fact that the Congress added to an urgently
needed anti-recession tax reduction a lot of extraneous
changes in our tax laws, some well-intentioned but
very ill-considered, which should have waited for
deliberate action in committee hearings and full debate
by all Members. Instead, they were adopted in a hectic,
last minute session before recessing.
This is no way to legislate fundamental tax
reforms and every Member of the Congress knows it. Upon
their return, I will again ask the House and Senate
to work with me on a comprehensive review of our tax
structure to eliminate inequities and to insure adequate
revenues for the future without crippling economic
growth.
I commend those Members of the Congress who
fought for a clean and uncomplicated tax cut to create
more jobs and speed economic recovery.
If I were still in the House of Representatives
I would have opposed extraneous amendments and would
have voted to send this bill back to committee for further
cleaning up.
As President, however, I cannot, under the
Constitution, accept a part of this bill and reject the
rest. It comes before me on a take it or leave it basis.
The Congress has gone home. I believe my
veto would eventually be sustained but I am by no means
sure that this Congress would send me a better bill.
It might even be worse.
MORE
Page 3
The people of this country need to know right
now how to plan their financial affairs for the rest of
this year. Farmers and businessmen have already waited
too long to find out what investments they can make to
improve their production and put people back on the
payroll.
Confidence depends on certainty, and while
the Congress deliberated, uncertainty has clouded
financial planning throughout the country.
Our country needs the stimulus and the support
of a tax cut, and needs it now.
I have, therefore, decided to sign this bill
so that its economic benefits can begin to work. I
do this despite the serious drawbacks in the bill. Most
of the drawbacks are enacted for only one year. I
strongly urge the Members of the Congress to calmly
reflect upon these provisions and let the worst expire.
However, any damage they do is outweighed by the urgent
necessity of an anti-recession tax reduction right now.
Even if I asked the Congress to send me a better
bill -- and it did -- it would take too long a time to
get one back, and I cannot, in good conscience, risk
more delay.
I will work with the Congress to not only
remedy the deficiencies in this bill, but also the dangerous
actions and attitudes towards huge Federal deficits
some Members have already shown in other legislative
decisions.
The first part of my economic recovery recommen-
dations last January -- a prompt tax cut of reasonable
size -- now becomes law.
The second and equally important part of my
economic program was to restrain Federal spending by
cutting back $17 billion in existing programs and by a
one-year moratorium on all new Federal spending programs,
except in the critical field of energy.
So far, these proposals have been mostly ignored
or rejected by a majority of the Members of the Congress.
Now that we have reduced our tax revenues by
some $7 billion more than I proposed, we must move to
reduce Federal spending in every way we can.
We cannot afford another round of inflation
due to giant and growing deficits that would cancel out
all our expected gains in economic recovery.
MORE
Page 4
Maybe I can show you the situation better
on this chart. If Congress had accepted all my economic
recovery proposals, both for tax cuts and spending cuts,
the estimated Federal deficit for fiscal year 1976 would
have been about $52 billion, as represented by this
column.
This kind of a deficit is far too high, but
most of it was unavoidable and was brought about by
mandatory Federal payment programs already on the
statute books by increased unemployment compensation
and reduced tax revenues due to the recession.
This is where we are today. The tax cuts in
the bill I have just signed and other changes will
bring the estimated fiscal year 1976 deficit up to
approximately $60 billion.
Since January, Congress has rejected, or ignored,
most of my requested spending cuts. If Congress fails
to make these reductions it will add up to about
$12 billion to the contemplated 1976 deficit. On top
of that, as I look at the new spending actions which
committees of the Congress are already seriously
considering, I can easily add up another $30 billion
of spending. This would bring the deficit to the
enormous total of $100 billion.
Deficits of this magnitude are far too dangerous
to permit. They threaten another vicious spiral of
runaway, double-digit inflation which could well choke
off any economic recovery.
Interest rates, now starting down, would again
climb as the Federal Government borrowed from the private
money market to finance its $100 billion deficit. Individual
citizens would be unable to borrow money for new homes,
cars and other needs. Businesses, despite the increased
tax credit, would delay investments and expansions to
put the unemployed back to work. I am, therefore,
serving notice now that this is as high as our fiscal
1976 deficit should go.
I am drawing the line right here. (Points to
$60 billion on chart)
MORE
Page 5
This is as far as we dare to go.
I will insist (resist) every attempt by the Congress
to add another dollar to this deficit by new spending
programs. I will make no exceptions, except where
our long-range national security interests are involved,
as in the attainment of energy independence or for urgent
humanitarian needs.
In short, in signing this bill, I am keeping
my promise to reach a reasonable compromise with the
Congress and to provide a needed boost to the economy.
I must say again, this is as far as I will go.
If we use common sense and prudence, I am
confident that the present recession will retreat into
history. If your Congressmen and your Senators return
from their recess with new awareness of your deep
concern and desire for caution and care in steering
our difficult economic course, we will soon get back
on the broad highway of increasing productivity and
prosperity for all our people.
Thank you and good evening.
END
(AT 7:45 P.M. EDT)
Calendar No. 39
94TH CONGRESS
1st Session
}
{
REPORT
SENATE
No. 94-36
Tax Reduction Act of 1975
REPORT
OF THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
TOGETHER WITH SUPPLEMENTAL VIEWS
ON
H.R. 2166
MARCH 17, 1975 (legislative day MARCH 12, 1975) Ordered to be printed
Filed under authority of the order of the Senate of March 17, 1975
(legislative day March 12, 1975)
U.S. GOVERNMENT PRINTING OFFICE
49-011 0
WASHINGTON : 1975
CONTENTS
Page
I. Summary
1
II. Reasons for the Bill
5
III. Revenue Effects
17
IV. General Explanation
25
A. Individual Income Tax Reductions
25
1. Refund of 1974 Individual Income Taxes
25
Eligibility for refunds
26
Taxable year affected
27
Procedures for making refunds
27
Other aspects of the refunds
27
Interest on refunds
28
2. Disregard of Refunds with Respect to Federally As-
sisted Benefit Programs
28
3. $200 Personal Exemption Tax Credit
29
4. Tax Rate Reduction for Individuals
31
5. Earned Income Credit
32
6. Changes in Withholding Tables to Reflect the Op-
tional Tax Credit, the Tax Rate Reduction, and
the Earned Income Credit
35
7. Housing Purchase Credit
36
8. Capital Loss Carryback for Individuals
38
B. Business Income Tax Reductions
39
1. Investment Credit
39
Increase in rate
41
Limitation on rate increase
42
Increase in 50-percent limit for public utility
property
42
Treatment of credit for ratemaking purposes
44
Limitation on investment in used property
45
Progress payments
45
Revenue effect
50
Effective date
51
2. Election to Increase Net Operating Loss Carryback
51
Revocability of election; redetermination of tax
liability
52
Special requirement for certain extended carry-
backs
53
Credit for employee plan contribution in later
redetermination of tax liability when election
is revoked
54
Other aspects of the election
54
Example of operation of election
54
3. Employee stock ownership plans
55
Investment credit and employee stock owner-
ship plans
56
Net operating loss carryback and employee stock
ownership plan
57
Employee stock ownership plan defined
58
Terms of employee stock ownership plan
59
4. Increase in Corporate Surtax Exemption and Reduc-
tion in Rates
60
5. Increase in Minimum Accumulated Earnings Credit
62
(III)
IV
IV. General Explanation-Continued
Page
Calendar No. 39
C. Changes Affecting Individuals and Businesses
62
1. Repeal of Manufacturers Excise Tax on Trucks,
94TH CONGRESS
SENATE
REPORT
Buses, Tractors, etc., and Related Parts and Ac-
1st Session
No. 94-36
cessories
62
Floor stocks refunds
63
Refunds with respect to certain consumer pur-
chases
64
Certain uses by a manufacturer, etc
65
Leases, installment sales, etc
65
Effective date
65
Revenue effect
66
TAX REDUCTION ACT OF 1975
2. The Federal Welfare Recipient Employment Incen-
tive Tax Credit
66
V. Statistical Appendix
68
VI. Cost of Carrying Out the Bill and Vote of the Committee in Report-
ing the Bill
73
MARCH 17 (legislative day, MARCH 12), 1975.-Ordered to be printed
VII. Changes in Existing Law
75
Filed under authority of the order of the Senate of March 17, 1975
VIII. Supplemental Views of Senator Byrd of Virginia
77
79
(legislative day March 12, 1975)
IX. Supplemental Views of Senators Curtis and Fannin
X. Supplemental Views of Senator Brock
81
Mr. LONG, from the Committee on Finance,
submitted the following
REPORT
together with
SUPPLEMENTAL VIEWS
[To accompany H.R. 2166]
The Committee on Finance, to which was referred the bill (H.R.
2166) to amend the Internal Revenue Code of 1954 to provide for a
refund of 1974 individual income taxes, to increase the low income
allowance and the percentage standard deduction, to provide a credit
for certain earned income, to increase the investment credit and the
surtax exemption, and for other purposes, having considered same,
reports favorably with an amendment and recommends that the bill
as amended do pass.
I. SUMMARY
The United States economy has experienced its sharpest decline
since the 1930's. The unemployment rate in January was 8.2 percent,
the highest since 1941, and the unemployment rate in February would
have increased above that level but for the fact that many had de-
spaired in looking for jobs and left the labor market. In addition,
actual gross national output is over $200 billion below the potential
output. The Finance Committee version of this bill deals with these
problems by providing a $29.2 billion tax reduction in 1975.
In providing this reduction, the Finance Committee version of the
bill-
Reduces taxes for individuals in the middle and lower income
brackets, by providing a 4-percentage-point tax reduction and
by providing a tax credit in lieu of exemptions for those in the
low and middle income brackets.
(1)
2
3
Removes from the income tax rolls families with income below
The tax credit is more generous than the personal exemption in all
the poverty level.
cases where individuals are subject to tax under present law below a
Provides relief to earners with dependent children who pay
27-percent tax rate. This change involves a revenue loss of $6.3 billion,
little or no income taxes by providing a refundable tax credit
or approximately $1 billion more than the increase in the standard de-
based on earned income.
duction which would have been provided by the House bill.
Stimulates the depressed housing industry by providing a 5-
Rate reduction on the first $4,000 of income.-The committee bill
cent credit (up to a maximum of $2,000) for the purchase of
lowers by one percentage point the tax rate applying to the first $4,000
personal residences during the remainder of 1975.
of taxable income in the case of individuals. This reduction for those
Encourages immediate increased investment in equipment by
with higher incomes means a reduction of $40 in each case. This change
increasing the investment tax credit on a permanent basis to 10
will result in a revenue loss of $2.3 billion in 1975.
percent. In addition, for a 2-year period the investment credit
Refundable credit on earned income or work bonus.-The bill pro-
is increased to 12 percent, subject in certain cases to the condition
vides for a refundable credit of 10 percent of earned income up to a
that half of this 2-percentage-point increase is invested in em-
maximum of $400-closely matching the employee and employer social
ployee stock ownership plans.
security tax on the first $4,000 of income. This credit is to be available
Aids public utilities by allowing them the same investment
only to those with dependent children. The credit is to be phased out
credit rate as other taxpayers and by increasing the fraction of
from the maximum of $400 to zero as adjusted gross income rises
their income tax liability which can be offset by the investment
from $4,000 to $8,000. This change involves a revenue loss of $1.5
credit from 50 to 100 percent for a temporary period.
billion, or about one-half of the provision in the House bill. Federal
Helps small business by increasing the corporate surtax exemp-
welfare costs will be reduced by an estimated $0.1 billion.
tion from-$25,000 to $50,000 and by reducing the rate of tax on
Credit for home purchases.-The committee bill provides a tax
the first $50,000 to 18 percent.
credit for the purchase of homes (both new and old homes) which are
Provides tax relief to companies with large losses by allowing
used as principal residences, where the settlement occurs after March
an extended net operating loss carryback in lieu of the regular
12, 1975. Generally, the house must be purchased in 1975, except that
carryback and carryforward period provided under present law.
in limited types of situations purchases begun earlier may be eligible
Assists the hard-hit automobile industry by repealing the ex-
for the credit even if they were not completed until 1976. It is esti-
cise tax on trucks and buses and related parts.
mated that this provision will result in a revenue loss of $3.0 billion in
The Finance Committee bill provides tax reductions of $9.5 billion
1975.
above those available under comparable provisions of the House bill.
Capital loss carrybacks.-The bill provides a 3-year capital loss
Of this, $4 billion represents individual income tax decreases and $5.5
carryback for individuals where their capital losses on a cumulative
billion represents business tax decreases. The increase in the case of
basis amounts to $30,000 or more. This carryback may be offset in
individual taxes is attributable to a special tax credit provided by the
these prior 3 years only to the extent of capital gains realized in those
Finance Committee for home purchases, a 4-percentage-point rate re-
years. This provision is expected to result in a loss of revenue of $110
duction, and a tax credit in lieu of exemptions for those in the middle
million in 1975 and smaller amounts thereafter.
and lower-income brackets. In the case of businesses, the additional tax
Increase in the investment credit.-The investment tax credit rate is
reduction under the Finance Committee bill is largely attributable to
increased for all taxpayers (including public utilities) to a permanent
increases in the investment credit above the House provision (particu-
rate of 10 percent from the present rate of 7 percent (4 percent in the
larly the 2-year increase of the credit to 12 percent), the provision for
case of public utilities). In addition, for a 2-year period taxpayers
an optional net operating loss carryback, lowering the corporate tax
may claim a 12-percent investment tax credit. However, if the tax-
rate primarily for small businesses, and repealing the excise tax on
payer's qualified investment for a taxable year is more than $10 million,
new trucks.
an employer must contribute one-half of the additional 2 percent to
More specifically, the Finance Committee version of the bill pro-
employee stock ownership plans. In addition, in the case of public
vides the following tax reductions:
utilities, the limitation on the amount of tax liability that may be
Refund on 1974 tax liability.-The bill provides a refund on 1974
offset by the investment credit in a year is increased from 50 percent
tax liability to be paid in one installment beginning in May 1975. It
to 100 percent for a 2-year period and then is gradually reduced back
will generally equal 10 percent of tax liability up to a maximum of
to the 50 percent level over a 5-year period. In the case of long lead-
$200. However, each taxpayer is to receive a refund of at least $100 (or
time property, the bill provides that the investment credit is to be
the full amount of his or her actual tax liability if less than $100). The
available to the extent that progress payments are made during the
refund is to be phased down from the maximum of $200 to $100 as
construction period. Finally, the $50,000 limitation in present law on
the taxpayer's income rises from $20,000 to $30,000. The revenue loss
the amount of used property eligible for the investment credit is elimi-
from the 1974 refund is estimated to be $8.1 billion.
nated. The revenue loss from these changes in the investment credit is
$200 personal exemption tax credit.-In lieu of raising the standard
estimated at $4.3 billion with respect to 1975 liabilities, or $1.9 billion
deduction, as would the House bill, the committee bill provides a $200
more than the House provision.
tax credit as an alternative to the $750 personal exemption deduction.
4
Net operating loss carryback.-The bill provides that businesses gen-
erally may elect to substitute for their present 3-year carryback and
5-year carryforward of net operating losses an 8-year carryback and no
carryforward. This is to apply for loss years back to 1970. Once such a
carryback is elected, a carryforward is not to be available unless the
taxpayer revokes his election and in effect recomputes his tax for all of
the years involved on the basis of the 3-year carryback and the 5-year
II. REASONS FOR THE BILL
carryforward. To be eligible for this treatment initially (except in
cases where the tax benefit is small), 25 percent of the tax benefit real-
The committee agrees with the House that it is imperative to pro-
ized from the first use of the extended loss carryback is to be placed
vide a substantial tax reduction at this time to check the drastic down-
in an employee stock ownership plan or in some cases to a limited
ward slide in our economy and to restore a rate of economic growth
extent, in a supplemental unemployment benefit plan. It is estimated
that will move us closer to full employment. The Finance Committee
that the initial revenue loss from this provision will be $1 billion.
version of the Tax Reduction Act of 1975 does this by providing appro-
Decrease in tax to help small business.-To aid small businesses, the
priate tax reductions-substantially larger than those provided by the
surtax exemption (the amount to which the 22-percent corporate rate
House bill-designed to increase purchasing power and investment in-
presently applies rather than the 48-percent rate) is increased from the
centives. There is widespread agreement among economists that such
present $25,000 to $50,000. In addition, the 22-percent rate applying to
action is urgently needed at this time to avoid great hardship for large
this first $50.000 of income is reduced to 18 percent, although no change
numbers of people and huge waste in unused human resources. Before
is made in the 48-percent rate on income above $50,000. Finally, the
adopting this bill, the committee held hearings in which it had the
accumulation credit under the accumulated earnings tax is increased
benefit of the views of Administration witnesses and eminent econo-
from $100,000 to $150,000. It is estimated that these changes will re-
mists, businessmen, and labor experts, representing a broad spectrum
sult in a revenue loss of $1.9 billion, or $700 million more than under
of our political and economic institutions. Virtually all recommended
the House bill.
quick action to cut taxes.
Repeal of truck excise tax.-The committee bill repeals the 10-per-
This is not surprising in view of the sharp decline in economic ac-
cent manufacturers' excise tax on new trucks and buses and also the
tivity which has taken place recently. Although characterized by
8-percent manufacturers' excise tax on truck parts. It is estimated that
marked inflation, 1974 was clearly a recession year.
this will result in a revenue loss of $700 million in 1975.
In 1974, real gross national product (that is, GNP in constant
WIN tax credit.-The present tax credit of 20 percent of wages
prices) registered the largest decline since 1946. (See table 1.) For the
paid to employees hired under the Work Incentive Program is to be
year as a whole, money GNP rose to $1,397 billion-7.9 percent over
available with respect to the hiring of former welfare recipients, even
1973-but this increase merely reflected higher prices. Real GNP fell
though they have not been in the WIN program, by both business and
2.2 percent. The decine in output and the rise in prices was especially
non-business employers. This supplement to the WIN credit is to be
marked in the fourth quarter of 1974, when real GNP fell at an annual
available until July 1, 1976.
rate of 9.1 percent and prices rose at an annual rate of 14.4 percent.
Effective date.Most of the provisions included in the committee
TABLE 1.-GROSS NATIONAL PRODUCT 1929-74
version of this bill apply only for 1975. However, the increase in the
individual rates by 4 percentage points is to apply for 2 years, the
In billions of dollars]
investment credit is increased to 10 percent on a permanent basis and
Gross national
Gross national
G ross national
to 12 percent for 2 years, and the net operating loss provision for busi-
Gross national
product in
product in
product in
product in
ness and the capital loss carryback for individuals are permanent
Year
current dollars
1958 dollars
Year
current dollars
1958 dollars
changes. The possibility of making the other changes permanent will
1929
103.1
203.6
1956
419. 2
446.1
be reviewed in subsequent legislation.
1933
55. 5
141. 5
1957
441. 1
452. 5
1939
90.5
209. 4
1958
447.3
447.3
1940
99. 7
227.2
1959
483. 7
475.9
1941
124.5
263.7
1960
503. 7
487.7
1942
157.9
297.
8
1961
520. 1
497. 2
1943
191. 5
337.
1
1962
560. 3
529, 8
1944
210.1
361.3
1963
590.5
551.0
1945
211.9
355.2
1964
632. 4
581. 1
1946
208.5
312.6
1965
684. 9
617.8
1947
231. 3
309.9
1966
749. 9
658, 1
1948
257.6
323.7
1967
793. 9
675.2
1949
236. 5
324.1
1968
864. 2
706,6
1950
284. 8
355.3
1969
930.3
725.6
1951
328.4
383.4
1970
977. 1
722. 5
1952
345. 5
395.1
1971
1,054.9
746. 3
1953
364.6
412.8
1972
1,158,0
792. 5
1954
364.8
407.0
1973
1,294.9
839.2
1955
398.0
438.0
1974
1,397.3
821.
1 Preliminary.
Source: Department of Commerce.
(5)
49-011 75 2
6
7
The falling GNP figures for 1974 reflect widespread declines in both
a budget surplus running at an annual rate of about $30 billion in
consumption and investment. The decline in consumption was par-
the second quarter of 1975. The committee believes that the best way
ticularly sharp for durable goods expenditures, including new cars.
to reduce the anticipated large budget deficits would be to take action
The leading reasons for the weakness in consumer expenditures were
to restore economic growth and thereby increase tax receipts.
falling disposable income, inflation, and lack of consumer confidence.
Moreover, without in any way seeking to diminish the vital impor-
Real gross private investment fell 8.2 percent in 1974. The decline
tance of reducing the budget deficits, the committee believes that it
in housing starts was even sharper. Housing starts totaled only 1.4
is important to note that the projected budget deficits for fiscal years
million compared with 2.4 million in 1972 and 2.1 million in 1973. By
1975 and 1976, though large in dollar amounts, are not unusually large
January 1975, housing starts were running at an annual rate of well
in relation to the gross national product for a recession year. They are
under 1 million.
expected to amount to 2.4 percent and 3.2 percent of the gross national
As the economic situation deteriorated, unemployment rates rose-
product, respectively. In other recession years the budget deficit
from 5.2 percent in January 1974 to 8.2 percent in February 1975.
amounted to 3.7 percent of gross national product in fiscal 1948, 2.7
This compares with average unemployment rates of 4.9 percent in
percent in fiscal 1959 and 2.3 percent in fiscal 1971.
1973, 5.6 percent in 1972, 5.9 percent in 1971, and rates averaging
Furthermore, under present conditions, the adoption of an appro-
3.8 percent or less from 1966 through 1969. The February unemploy-
priate tax reduction program will help to revive the economy and
ment rate was the highest since 1941.
increase employment without adding significantly to inflationary
In the absence of remedial action to cut taxes, the outlook is that
pressures. This is because there are now large amounts of available
the current recession will continue and deepen. Growth in business
unused resources which can be gainfully employed to add to our out-
investment was one of the prime forces fueling the upward move-
put. As the tax reductions stimulate the economy, these at present
ment of our economy prior to the current downturn. However, after
idle resources will be brought back into use, thus adding more goods
adjustment for price changes. capital expenditures for new plant and
and services to match the added purchasing power made available by
equipment are expected to fall significantly in 1975, according to the
the tax cut. The size of these unused resources is shown in table 2 which
most recent survey of the Commerce Department.1
sets forth estimates indicating that in 1975 the actual GNP may be as
Economic forecasters are practically unanimous in predicting that
much as 14 percent below the potential GNP, assuming the present
in 1975 the economy will continue to operate far below its potential.
budgetary picture with no tax cut. This gap would amount to $250
While the precise figure varies with different forecasters, real GNP
billion, or over $1,000 per capita.
in 1975 is generally expected to be substantially lower than in 1974,
although many forecasters anticipate a modest recovery beginning in
TABLE 2.-ACTUAL AND POTENTIAL GNP
mid-1975.
[Billions of dollars, seasonally adjusted annual rates]
In view of these further expected sharp declines in economic activity,
the committee concluded that appropriate tax reductions to stimulate
GNP gap
Actual
Potential
the economy should be enacted promptly. In arriving at this conclu-
Year and quarter
(potential
GNP
GNP1
less actual)
sion, the committee gave careful consideration to the large budgetary
1971-1
deficits that are expected in the fiscal years 1975 and 1976 and the
1971-11
1,027.2
1,081.4
54. 2
prevalence of a rapid rate of inflation despite the economic downturn.
1971-III
1,046.9
1,105.2
58. 3
1971-IV
1,063.5
1,126.0
62.5
Similarly, the committee does not view with equanimity the fact
1972-1
1,084.2
1,141.0
56. 8
1972-11
1,112.5
1,164.3
51. 8
that in 1974 the consumer price index rose 12.2 percent and the whole-
1972-111
1,142.4
1,182.9
40.5
1972-IV
1,166.5
1,202.6
36.
sale price index rose 23.5 percent. Although in December 1974 and
1973-I
1,199.2
1,223.8
24.6
1,248.9
January 1975 the rate of growth of the consumer price index moder-
1973-11
1,258.3
9.4
1973-111
1,277.9
1,293.0
15.
ated and the wholesale price index dropped slightly in December 1974
1,308.9
1973-IV
1,332.1
23.2
and the early months of 1975, inflationary pressures are still very
1974-1
1,344.0
1,373.2
29. 2
1974-1
1,358.8
1,427.7
68.9
1,383.8
1974-11
1,474.3
90.5
strong.
1,416.3
1974-IV
1,532.0
115.7
However, the committee believes that the present economic situa-
1,430.2
1975-1
1,599.1
168.9
1,432.5
tion requires the adoption of an appropriate tax reduction measure
1975-1
1,642.0
209.5
$1,454.0
1975-11
$1,686.9
232.9
1,483.5
1975-IV
*1,727.7
244.2
now. Without such timely tax reduction, there is the grave risk that
1,520.3
$1,770.3
250.0
the present recession will be prolonged and intensified, resulting in
huge waste of resources and human hardship.
1 The increase of potential GNP assumes a growth rate in real terms of 4 percent each year, composed of an increase in
the labor force of 1.8 percent, a decline in hours worked of 0.3 percent and a rise of output per man-hour of 2.5 percent.
The substantial budget deficits in prospect for fiscal years 1975 and
These trends may not be an accurate reflection of conditions during the oil embargo of late 1973 and early 1974. Like
1976 are due in large measure to the economic downturn which has
all measures of capacity, these are subject to a wide margin of error.
1 Forecasts of Chase Econometrics, Inc., assuming no tax reduction.
shrunk the tax base and cut tax receipts drastically. This is shown by
3 Staff estimates using the methodology of the Council of Economic Advisers.
the fact that if the economy were operating at its full potential, suf-
Source: Business Conditions Digest.
ficient revenue would be collected with present law taxes to produce
Appropriate tax reductions will also increase incomes, both directly
and through the multiplier effect, and the increased saving from this
1 U.S. Department of Commerce News, March 7, 1975.
additional income will provide the flow of funds needed to purchase
8
9
the government securities issued to finance the increase in the deficit
for home purchases, $2.3 billion from tax rate reductions, and ap-
resulting from the tax cut.
proximately $100 million from the addition of a capital loss carryback
In view of these considerations, the committee provided tax reduc-
provision.
tions, totaling $29.2 billion in the calendar year 1975. Of this amount
While the committee's bill adopts the same $8.1 billion refund pro-
$21.2 billion, or 73 percent, is to go to individuals in their personal
vision as is in the House bill; the committee believes that the individ-
capacity. This reduction is designed to restore purchasing power and
ual income tax reduction should be weighted less in favor of a lump-
in this way to stimulate the economy. The remaining $8 billion of
sum payment and more toward tax cuts that are reflected in lower
tax reductions, or 27 percent, is to go to businesses (both corporate and
withholding. The lump-sum payment based on 1974 tax liability has
other) and is designed to stimulate investment.
the advantage of providing a quick increase in disposable income in a
The committee's bill is similar in a number of important respects
form that will encourage taxpayers to spend their refunds on con-
to the House-passed bill, reflecting the basic similarity in objectives.
sumer durable goods, a sector of the economy where much of the
However, the committee's bill also differs from the House bill in a
current decline in production has occurred. Many individuals, how-
number of important respects.
ever, will save any lump-sum payment, or use it to repay debts, and to
The $29.2 billion total tax reduction provided by the committee's
the extent this occurs, the tax cut will not increase income and em-
bill for calendar year 1975 is $9.3 billion larger than the $19.9 billion
ployment. The tax reductions reflected in lower withholding will
tax reduction provided by the House bill for that year.
increase disposable income more slowly than a lump-sum payment, but
The committee increased the total tax reduction because it believes
individuals will be more likely to spend this additional income than
that a tax reduction in the neighborhood of $30 billion is required
the income they receive as a lump-sum payment. The committee be-
to bring the economy out of its present slump. While it would be
lieves that the best way to make sure that the tax reduction provides
helpful, the $19.9 billion tax cut provided in the House bill would
the desired stimulus is to supplement any refund by significant reduc-
not be adequate to do this job particularly in view of the fact that
tions in withheld taxes.
the economic situation has generally continued to deteriorate since
The committee believes that concentrating the tax reduction in the
the House action was taken. Moreover, because of the large amount
low- and middle-income brackets, as the committee bill does, is equi-
of available unused resources which can be gainfully employed, the
table in that these are the taxpayers who have been affected the most
economy, at this time, is able to absorb a tax cut approaching $30 bil-
by inflation. Also, a tax cut concentrated in these brackets probably
lion without creating undue inflationary pressures. Substantial tax
will be more effective since these people are more likely to spend the
reductions are also justified at the present time because individuals
tax cut and in this way increase income and employment.
have incurred a tax increase of over $7 billion in 1974 alone as a
To an appreciable extent, this tax reduction reflected in withhold-
result of increases in money incomes pushing them into higher tax
ing also compensates individuals for the increase in their real tax
brackets and the lack of adjustment of the tax brackets, the personal
burden that results from inflation. Inflation erodes the value of the
exemption and the minimum and maximum standard deduction for
personal exemption and minimum and maximum standard deductions,
inflation.
and it pushes taxpayers into higher rate brackets even when they have
The Finance Committee bill also provides reductions in 1975 liabil-
not experienced an increase in their real income. The tax increase
ity both for individuals who itemize as well as those who take the
caused by inflation was approximately $7 billion in 1974 alone.
standard deduction, instead of limiting these reductions only to those
The withholding changes made by the bill are to take effect on May 1,
who take the standard deduction. While both version of the bill pro-
1975. The new withholding rates will reflect the personal exemption
vide an earned income credit, the committee bill has redesigned the
tax credit, the earned income credit, and individual tax rate reductions.
House credit both to double its size and also to direct it exclusively to
Refund on 1974 tax liability.-As in the House bill, the committee
families with children. The committee has also added a significant
has provided individual income taxpayers a refund on 1974 tax lia-
stimulant for the construction and sale of housing during the re-
bility amounting to 10 percent of tax liability (after credits) up to a
mainder of this year. On the business side, it has, for a limited period
maximum of $200. However, taxpayers with $1,000 of tax liability or
of time, increased the investment credit by two additional percentage
less are to receive a refund of $100 or the amount of their actual tax
points, and has also made provision for a longer net operating loss
if it is less than $100. (Married people who file separate returns are to
carryback. The major changes made by the committee bill which are
receive $50 each unless a spouse's tax payment is less than $50, in which
described further below.
case that spouse is to receive a refund of the full amount of his or her
Individual Tax Reductions
tax liability.) For taxpayers whose adjusted gross income (AGI) ex-
The $21.2 billion of individual income tax reductions consists of
ceeds $20,000, the refund is to be phased down from the maximum of
$8.1 billion from a refund of part of 1974 tax liability, $6.3 billion
$200 to $100 as AGI rises from $20,000 to $30,000. The $100 minimum
from a $200 tax credit in lieu of exemptions, $1.5 billion for a refund-
refund is designed to provide some rebate for all taxpayers and espe-
able credit on earned income, $3.0 billion from the 5-percent tax credit
cially to channel the greater portion of the total revenue to families in
the income levels which are more likely to spend it. The committee
a There also is a $800 million investment credit tax reduction in the business tax liabilities
considered phasing out the refund entirely for upper-income families,
of individuals. This is included in the next discussion on business tax liabilities.
but decided it was more appropriate to give this group the same $100
10
11
minimum refund provided to other taxpayers. The revenue loss from
The personal exemption tax credit involves a revenue loss of $6.3 bil-
the refund is estimated to be $8.1 billion.
lion for 1975. 5 percent of the reduction goes to taxpayers with incomes
Taxpayers should begin receiving these payments approximately six
under $10,000, and 47 percent to taxpayers with incomes between
weeks after the date of enactment of this bill. There is no need for
$10,000 and $20,000. 57 million taxpayers will receive a tax reduction
them to make any adjustments on their 1974 tax returns; the Internal
from this provision.
Revenue Service will make the appropriate calculations and mail the
Earned income credit.-The Finance Committee's bill adopts the
refund checks without any action by taxpayers other than filing their
general concept of the earned income credit provided in the House
1974 tax returns.
bill, but significantly revises this provision in order to improve its
$200 personal exemption tax credit.-In the present situation it is
impact on the low-income taxpayers with children.
essential to extend relief generally to as broad a group of taxpayers
The Finance Committee bill revises the House earned income credit
as possible, both for equity and economic reasons. The House bill,
generally to conform with the work-bonus concept reported by the
however, provides only limited tax relief to a large group of individ-
committee previously. Under the committee's bill, the refundable
uals, namely, those who itemize their tax deductions. This is because
credit is to be 10 percent of earned income up to a maximum credit of
all of the relief on 1975 liability provided by the House bill is granted
$400 (on $4,000 of earnings). The credit is set at 10 percent in order
in the form of a higher standard deduction which provides no bene-
to correspond roughly to the added burdens placed on workers by both
fits to individuals who continue to itemize their deductions. In order
employee and employer social security contributions. The credit is to be
to remedy this situation, the Finance Committee bill substitutes for
phased out as adjusted gross income rises between $4,000 and $8,000.
the larger standard deduction provided in the House bill a $200
The credit is to be available only to taxpayers with dependent chil-
tax credit that the taxpayer may take in place of the $750 per-
dren-those who are most in need of the relief.
sonal exemption. This $200 personal exemption tax credit has the
This new refundable credit will provide relief to families who cur-
advantage of being available to taxpayers regardless of whether they
rently pay little or no income tax. These people have been hurt the
itemize their deductions or take the standard deduction.
most by rising food and energy costs. Also, in almost all cases, they
In addition, the tax credit provided by the committee is a more
are subject to the social security payroll tax on their earnings. Be-
effective means of aiding low and middle-income taxpayers than the
cause it will increase their after-tax earnings, the new credit, in effect,
higher standard deduction provided in the House bill. As shown in
provides an added bonus or incentive for low-income people to work,
table 3 the new credit raises the tax-free income level above poverty
and therefore, should be of importance in inducing individuals with
income levels. As is indicated in this table, in the case of families
families receiving Federal assistance to support themselves. Moreover,
with more than one dependent, the tax credit is more successful
the refundable credit is expected to be effective in stimulating the econ-
in bringing the tax threshold above the poverty level than would be
omy because the low-income people are expected to spend a large
the changes in the minimum standard deduction provided by the
fraction of their increased disposable incomes.
House bill. Moreover, the credit has the effect of generously increasing
The new credit provided by the committee's bill involves an esti-
the personal exemption for low and middle-income taxpayers, which is
mated revenue loss of $1.5 billion per year. It is estimated that Federal
needed to take account of the increased cost of maintaining dependents
welfare costs will be reduced $0.1 billion.
in the face of rising prices. At the same time, taxpayers whose mar-
Individual rate reduction.-The committee bill reduces individual
ginal tax rate exceeds 27 percent will continue to take the regular $750
income tax rates in the lowest tax brackets in order to provide addi-
personal exemption, thus conserving revenue.
tional relief to the low and middle-income taxpayers and to offset the
tendency of the House bill to provide insufficient relief to individuals
TABLE 3.-1975 POVERTY LEVELS AND TAX THRESHOLDS UNDER PRESENT LAW, INCREASED MINIMUM
who itemize their deductions. More specifically, the bill reduces tax
STANDARD DEDUCTION 1 AND FINANCE COMMITTEE BILL 2
rates in the lower brackets-those applicable to taxable income under
Tax
$4,000. For those at or above this income level the reduction is $40.
threshold
These rate reductions result in a revenue loss of $2.3 billion. Of this
under increa-
sed minimum
Tax
amount, 35 percent goes to taxpayers with incomes under $10,000, and
1975
Present
standard
threshold
poverty
law tax
deduction in
under $200
46 percent to taxpayers with incomes between $10,000 and $20,000,
level
thresholds
House bill
credit
although all taxpayers benefit from the reduction in the bottom rates.
Tax credit for home purchases.-The bill also provides a 5-percent
Family size:
1
$2,694
$2,050
$2,650
$2,733
tax credit (with a $2,000 maximum) for the purchase of a new or
2
3,470
2,800
4,000
4, 167
3.
4,253
3,550
1,750
5,405
used home which is a taxpayer's principal residence. This credit is
4
5,442
4,300
5,500
6,458
to be available only for the purchase of homes between March 13 and
5
6,423
5,050
250
7,511
6
7,226
5,800
7,000
8,563
December 31, 1975. This includes condominiums and trailer homes.
This new credit is designed to stimulate the housing industry, which
1 Minimum standard deduction of $1,900 for single persons and $2,500 for joint returns and $750 per personal exemption
has been operating at depression levels over the past year or SO. In
deduction.
2 Including rate reductions in lower tax brackets, but excluding the refundable earned income credit.
view of the fact that in January 1975, housing starts were running at
an annual rate of well under one million, the committee believes that it
12
13
is imperative to provide additional tax incentives to the housing indus-
utilities), and by adopting a number of other liberalizations in the
try, both to increase the supply of housing to fulfill vital needs and help
credit designed to facilitate the use of the credit and increase the
put the entire economy back on an economic growth path. While it
amount of relief provided by the credit. However, the Finance Com-
is difficult to measure the exact impact, the committee expects that
mittee believes that the current economic situation and the low level
the new housing credit provision will increase home purchases by
of investment now prevailing call for stronger remedies than those
close to 100,000 units. This might raise residential construction by
provided in the House bill. For this reason, the committee decided
something like $3 billion for the year, and probably will also increase
to increase the investment credit to 12 percent for 1975 and 1976, the
the purchases of furniture and major appliances by close to half a
2 years in which most forecasts indicate the investment stimulus will
billion dollars. This, of course, (as also is true of other individual tax
be particularly needed. In addition it decided to make the 10-percent
reductions provided in the bill) will increase the gross national prod-
investment credit permanent for 1977 and later years. Thus under the
uct significantly for 1975. This, in turn, will result in an increase in
Finance Committee action the investment credit rate will not return
revenues for the year, offsetting an important part of the revenue loss
to the 4- or 7-percent rate provided by present law (as under the
involved in this provision. The revenue loss from this provision is ex-
House bill).
pected to be $3.0 billion in 1975 and $0.6 billion in 1976.
In order to encourage the growth of employee stock ownership
Capital loss darryback.-Under present law, individuals with capital
plans, the committee bill provides that a corporate taxpayer who
losses exceeding capital gains are allowed to carry forward these losses
elects the 12-percent credit (for 1975 and 1976) must agree to put
to future years. There is no limitation on the number of future years
an amount equal to one-half of the excess over 10 percent (or one
to which these capital losses may be carried. However, such losses may
percentage point of the credit) into an employee stock ownership
not be carried back to past years. This imposes a hardship on individ-
plan if the corporation has more than $10 million of qualified invest-
uals who have incurred substantial capital losses and who have little
ment property for the year.
or no expectation of capital gains in future years against which they
Investment credit applicable for public utilities.-Under existing
can offset such losses, but who in past years have paid tax on large
law, a 4-percent investment credit is provided for most public utilities,
capital gains. To give such individuals relief, the committee bill allows
as compared to the 7-percent investment credit which applies gener-
individuals whose cumulative capital losses in the current year exceed
ally. This lower investment credit for public utilities discriminates
$30,000 to carry back the losses to offset capital gains in the previous
against investment in utilities and impedes such investment at a time
3 years. This provision is intended not only as a relief measure for
when the public utilities need large amounts of capital to build up
those with substantial capital losses, but also to help sustain current
their capacity to meet the growth in demand for their services and
investment in common stocks. The revenue loss from this provision
to convert from oil and gas to other energy sources.
is estimated to be $110 million in 1975 and to decrease in subsequent
Public utilities have experienced very considerable difficulty in
years.
recent years in securing capital for essential expansion in view of
Business Tax Reductions
the depressed state of the stock market, tight money, and the reluc-
tance of regulatory commissions to grant rate increases to cover in-
Increase in the investment credit.-In view of the low and decreas-
creased costs. The results have been especially severe for the electric
ing level of economic activity and the poor expected level of invest-
utilities which have incurred sharp rises in costs as a result of sub-
ment, the committee concluded that a balanced program which en-
stantially higher prices for their sources of energy.
courages both consumption and investment will be a more effective
As a result, the committee concluded that the investment credit
method of stimulating the economy than attempting to focus all of the
for eligible investment in public utilities should be increased from 4
tax stimulus on consumption. In addition to providing short-run
percent to the 12-percent rate provided in the bill for all other tax-
stimulus to the economy, an increase in the amount of investment
payers for 1975 and 1976 and to the same 10-percent rate for 1977
is desirable for other reasons. The investment not only creates
and later years which was provided for corporations generally.
jobs both directly and through the multiplier effect, but it also in-
The committee believes that it also is not only appropriate to in-
creases productivity. This is anti-inflationary because it increases the
crease the investment credit from 4 percent to 12 percent and then to
amount of output available to meet future consumer demands and
10 percent for utilities, but also agrees with the House that it is neces-
because it results in lower production costs which means that money
sary to focus the incentive effect of the investment credit on the less
wage increases will not exert the same degree of upward pressure on
profitable utilities which are faced with increasing problems because
product prices that they would in the absence of growing productivity.
of rising energy costs. The bill does this by increasing the limitation
Increased productivity also has favorable implications for our balance
on the amount of income tax liability which can be offset by the invest-
of payments and the exchange rate of the dollar. Finally, unless in the
ment credit in any one year from 50 percent of tax liability (above the
future the stock of capital is increased significantly, there will be
first $25,000 of tax liability) to 100 percent. This 100-percent limit
serious problems in providing enough jobs for those entering the
applies for 2 years and then the limitation is gradually phased back
labor force.
to 50 percent over a period of 5 years.
The House bill seeks to respond to these problems by increasing
In addition, in order to increase the effectiveness of the credit as
the investment credit for one year (with limited extensions beyond
a means of granting relief to public utilities, the committee deleted
that year) from 7 to 10 percent generally (from 4 percent for public
49-011 O 75 3
14
15
from the bill a House provision limiting to $100 million the total
which are hard-pressed in the current recession by giving them the op-
amount of additional credit that would be provided to any utility
portunity to obtain refunds immediately through the use of carrybacks
or group of utilities.
in exchange for an eventual recoupment through a carryforward. Com-
Utilities also will be provided another opportunity to elect to nor-
panies with losses which elect to take the longer carryback period
malize the investment credit as under the Revenue Act of 1971.
can thereby arrange to get immediate relief at a time when they need
Investment credit for progress payments.-Under present law the
the cash, instead of waiting for profitable future years to take their
investment tax credit is available only when property is placed in
loss carryforwards. Moreover, the provision is less likely to be subject
service. This has been considered an inequity in the case of property
to abuse than is a carryforward since, in many cases, companies are,
with a long construction period where payments are made during the
in effect, "sold" largely to obtain the benefit of a carryforward. How-
course of construction but are not eligible for the credit until the prop-
ever, had a carryback been available instead, it would either have been
erty is completed and placed in service. The committee believes it is
used up or would not be available to offset the other company's past
appropriate to make the credit available to the extent progress pay-
profits.
ments are made in the case of property which requires a long period
This provision involves an estimated $1 billion revenue loss. How-
of construction. As a result, the committee's bill accepts a House pro-
ever, it is believed that much of this (over one-half) will be recouped
vision that in the case of long lead-time property, that is, property that
by smaller loss offsets on carryforwards in future years. Approxi-
requires at least 2 years to construct, the investment tax credit is to be
mately $150 million of this benefit will go to the Chrysler Corpora-
available to the extent that progress payments are made during the
tion, $40 million to Pan American World Airways, Inc., and $65 mil-
construction period (rather than in the year when the property is
lion to Lockheed Aircraft Corporation. Under this provision, 1970
ultimately placed in service). This provision has an initial 5-year
is the first loss year which may be taken into account for this purpose.
transitional period to phase in the new system. The availability of the
Those electing the new operating loss carryback rule (where the tax
investment tax credit during the construction period of long lead-time
benefit is $10 million or more) in the initial application are required
property will also provide an additional financial incentive to encour-
to devote an amount equivalent to 25 percent of the tax savings to
age utilities and others to undertake longer term projects.
employee stock ownership plans. In those cases where the company
Investment credit for used property.-In order to encourage the ac-
owner has a supplemental unemployment compensation benefits plan
quisition of used property that will increase the productivity of small
(SUB), however, in order to assist the unemployed, the company and
businesses, which are frequently unable to afford new equipment, the
any union plan subject to such a contract may elect to satisfy this
House bill increased the $50,000 limit of present law on the amount of
obligation in part by putting an amount up to one-half of 25 percent
used property eligible for the investment credit to $75,000. The Fi-
of the tax savings into the SUB fund. No tax deduction is to be
nance Committee concludued that even this limit was inappropriate
available for any amount so used.
for small businesses, and therefore eliminated the limitation on used
Surtax exemption and rates applicable to small corporations.-The
property eligible for the investment credit. This is expected to cost
committee (like the House) was concerned that concentrating all the
$0.1 billion.
tax relief to business in the form of an increase in the rate of the in-
The estimated total revenue loss from the increased investment
vestment tax credit alone would not provide sufficient financial relief to
credit is $4.3 billion in 1975.
small corporations, particularly to those that are not capital intensive.
Net operating loss carryback.-The committee adopted a new pro-
The committee agreed with the House that the best way to provide
vision designed to provide immediate tax relief to companies which are
financial relief for hard-pressed small corporations was through a rate
hard-pressed financially and which might otherwise fail. Under pres-
reduction applicable primarily to them. This result was sought in the
ent law, taxpayers generally are allowed a 3-year carryback and 5-year
House bill by an increase in the surtax exemption from $25,000 to
carryforward as a period over which to average their net operating
$50,000. This, in effect, increases from $25,000 to $50,000 the income of
losses with their income. While an 8-year period generally grants
any corporation subject only to the 22-percent tax rate rather than
adequate relief for losses, the relatively brief 3-year carryback period
the full 48-percent tax rate. The committee agreed with this House
fails to grant sufficient relief in cases where taxpayers have incurred
provision. However, it realized that while the relief provided by
very substantial losses and anticipate little or only moderate profits
the House bill is of benefit to corporations with income of more than
in the period ahead.
$25,000, it provided no tax relief for corporations with smaller in-
In order to grant such taxpayers relief, the committee's bill gener-
comes. To achieve this result, the committee, in addition to enlarging
ally extends the present 3-year loss carryback for 5 additional years
the surtax exemption, reduced from 22 percent to 18 percent the tax
for taxpayers who elect to forego the 5-year carryforward of present
rate applicable under the House bill to the first $50,000 of taxable
law. This treatment, it should be noted, does not extend the overall pe-
income. As a result, on the first $50,000 of taxable income, corporations
riod over which net operating losses can be deducted, since the period
will be taxed at a rate of 18 percent rather than at a rate of 22 percent
during which either a carryback or a carryforward may be utilized re-
on the first $25,000 of their income as under present law.
mains 8 years. However, it does provide substantial relief to businesses
Increase in minimum accumulated earnings credit.-The bill also
aids small business by increasing the minimum credit in the accumu-
a Where the carryforward period is more than 5 years (as in the case of the 7-year
net operating loss carryforward for regulated transportation companies), the carryback 1s
lated earnings tax from $100,000 to $150,000. This reflects the rise in
lengthened by this additional number of years.
16
the price level that has occurred since 1958, when the credit was raised
to $100,000.
The increase in the surtax exemption to $50,000 is estimated to
cost $1.2 billion, and the reduction in the 22-percent tax rate to 18 per-
cent is estimated to cost approximately $700 million more, for a
total of approximately $1.9 billion.
III. REVENUE EFFECTS
Repeal of excise tax on trucks and buses and related parts.-The
committee also repealed the 10-percent tax on trucks and buses and the
The bill is estimated to result in a reduction in tax liability of $29.2
8-percent tax on truck parts effective for sales after March 13, 1975.
billion through calendar year 1975. Table 1 shows how the impact of
This should aid in offsetting the badly lagging sales of trucks and
this reduction is divided between individuals and business organiza-
truck trailers, the sales of which have dropped dramatically in recent
tions. It shows that $21.2 billion of the reduction goes to individuals in
months. At the same time it should reduce the price of trucks to busi-
their nonbusiness capacity and $8.0 billion to businesses. Thus, almost
nesses and consumers who have been faced with rapidly rising prices
73 percent of the tax reduction goes to individuals (in their nonbusi-
for trucks and truck parts. The tax revenues in these cases are devoted
ness capacity) and 27 percent to business.
under present law to the Highway Trust Fund which, because of im-
The $21.2 billion of tax reduction for individuals (in their nonbusi-
poundments by the administration, presently is not spending all of its
ness capacity) is made up of an $8.1 billion refund on 1974 income tax
funds. As a result this lessening of revenue for the Highway Trust
liability, a $6.3 billion increase relating to a $200 exemption tax credit,
Fund is not likely to reduce highway construction. Moreover, since it
a $2.3 billion tax decrease relating to a 1-percentage point decrease
does not affect the general fund it will not affect other programs. The
in rates on the first $4,000 of taxable income, a $3.0 billion credit for
revenue cost of this provision for 1975 is approximately $700 million.
the purchase of homes and a $1.5 billion earned income credit. Addi-
Extension of work incentive program.-The bill also modifies the
tion of a $794 million liberalization of the investment credit for indi-
tax credit of 20 percent of the first year's wages paid to employees hired
viduals in their business capacity (plus the effect of a few other items)
under the Work Incentive Program (WIN) in an attempt to make
raises the total reduction for individuals through 1975 to $22.3 billion.
the tax incentive workable. The program has not been effective in mov-
The $8.0 billion reduction in corporate tax liability is made up almost
ing welfare recipients into employment because of administrative
entirely of $4.3 billion ascribable to liberalization of investment credit,
complexities that have been added by the Labor Department. Conse-
$1.9 billion derived from increasing the corporate surtax exemption
quently, the bill extends the credit to nonbusiness employees as well
from $25,000 to $50,000 and from decreasing the starting rate for
as the present business employees, and makes it available for welfare
corporations, $1 billion from liberalizing the net operating loss carry-
recipients whether or not in the WIN program if they have been on
back provisions, and $500 million from repeal of excise taxes on
welfare for 90 days or more. In addition, after the eligible employee
trucks.
has worked the first 30 days, the employer would receive the credit
Table 2, which presents the data from Table 1 on a quarterly and
for the wages paid or incurred by the employer for the first 30 days of
a fiscal year basis, shows the impact of the tax reduction on the econ-
employment plus the wages for all days the employee continued to
omy SO far as timing is concerned. As this table shows, almost 43 per-
work after the original 30-day period. This liberalization is provided
cent of the total tax reduction ($12.5 billion) is estimated to occur
as a supplement to the present WIN credit, and this supplement is to
during the second quarter of calendar year 1975. Most of this will go
terminate on July 1, 1976.
to individuals ($1.8 billion will go to corporations). In the last two
quarters of calendar year 1975 tax collections are estimated to decline,
because of the reductions called for in the committee bill, by $13.9
billion with $11 billion of the decreased collections affecting individ-
uals. Part of this latter sum reflects underwithholding which will be
recouped in the first two quarters of calendar year 1976. The whole of
fiscal year 1976 shows individuals benefiting from $13.4 billion of
decreased receipts and corporations by $7.0 billion.
Table 3 shows, by adjusted gross income class, the distribution of
the effect of the refund of part of 1974 tax liability which produces
a tax reduction of $8.1 billion.
Table 4 shows the effect of the 1-percentage-point decrease in indi-
vidual tax rates with respect to the first $4,000 of taxable income.
As is indicated in this table, this represents a tax reduction of $2.2 bil-
lion, of which 35 percent is distributed to those with incomes under
$10,000, and 47 percent to those with incomes between $10,000 and
$20,000.
(17)
18
19
Table 5 shows the effect of allowing the $200 credit in lieu of the
TABLE 1-ESTIMATED DECREASE IN INDIVIDUAL AND CORPORATE TAX LIABILITY UNDER THE BILL-CAI.ENDAR
YEARS 1974-77
$750 personal exemption deduction. As indicated in this table, this
provision will make 7.2 million returns nontaxable and provide tax
[In millions]
reductions for 57.3 million returns. The tax reduction in this case is
Decrease in tax liability
$6.1 billion, of which 51 percent goes to those with incomes below
Provision
$10,000 and 47 percent to those with incomes between $10,000 and
1974
1975
1976
1977
$20,000.
Granting a 100-percent refund of 1974 individual income tax liability up to
Table 6 shows the effect of the 10-percent refundable earned income
$100 with no phaseout and a 10-percent refund of tax above $1,000 with
credit provided by the bill. (The amounts shown in the body of this
a maximum refund of $200 with the refund phased out between $20,000
and $30,000 of adjusted gross income but not below $100 2
$8, 125
table do not include $200 million represented by credits for those who
Decreasing by 1 percentage point the tax rates applicable to the 1st $4,000
of taxable income
$2,289
$2, 406
are not filers.) The total revenue cost of this provision is $1.5 billion
Granting a nonrefundable optional $200 tax credit in lieu of the $750 personal
and 100 percent of the amount of the tax decrease goes to those with
exemption deduction
6, 327
Granting a nonrefundable tax credit equal to 5 percent of the purchase price
incomes below $8,000.
of new and used homes (including mobile homes) to be used as the prin-
cipal residence of the taxpayer
3,000
600
Additional tables are provided in the Statistical Appendix of this
Granting returns with dependent children a refundable credit of 10 percent
report. These tables, numbered 1 through 5, give the tax burden under
of wage and salary and self-employment income with a $400 maximum
credit with a phaseout of the credit between $4,000 and $8,000 of adjusted
present law and (1) under the provision of the bill which grants a
gross income 3
1, 455
refund of 1974 tax liability; (2) under the provision of the bill which
Total, individuals, nonbusiness 4
8, 125
13,071
3, 006
decreases tax rates by 1-percentage point on each of the brackets
Granting individuals election of a 3-year carryback of capital losses
110
55
$30
applicable to the first $4,000 of taxable income; (3) under the pro-
Increasing the rate of investment credit to 12 percent for 1975 and 1976
and to 10 percent thereafter; repealing the $50,000 limitation on used
vision which grants a nonrefundable $200 tax credit in lieu of the $750
property qualified for credit; and allowing the investment credit on
personal exemption deduction; (4) under the provision of the bill
progress payment:
Individuals, business
794
892
572
which grants an earned income credit; and (5) under the combined
Corporations
3,515
4,122
2,943
provisions of the bill which grant a 1-percentage point rate reduc-
Total
4,309
5,014
3,515
tion to the first $4,000 of taxable income and a nonrefundable $200
Increasing the corporate surtax exemption from $25,000 to $50,000 on
1975 income subject to tax
1,200
tax credit in lieu of the $750 personal exemption. The tax burdens
Lowering the rate of corporate normal tax from 22 percent to 18 percent
and increasing the rate of corporate surtax from 26 percent to 30 percent
are given for single persons and married couples with differing num-
on 1975 income subject to tax
700
Repealing excise tax on trucks, buses and trailers:
bers of dependents with selected levels of adjusted gross income under
Individuals, business
162
173
165
the assumption that deductible personal expenses are equal to 17 per-
Corporations
378
403
385
cent of adjusted gross income.
Total
540
576
550
Repealing excise tax on parts and accessories of trucks:
Individuals, business
53
49
48
Corporations
123
115
Total
176
164
159
Modifying tax credit to employers of public assistance recipients under the
work incentive program (WIN):
Individuals, business
1
1
Corporations
2
1
Total
3
2
Liberalizing net operating loss carryback provisions: increase in refunds
1,000
500
200
Increasing the accumulated earnings credit allowance from $100,000 to
$150,000
(5)
(5)
(5)
Total
8, 125
21,109
317
4, 454
Individuals
8, 125
14,191
4, 176
815
Corporations
6, 918
5,141
3,639
Individuals, nonbusiness
8, 125
13,071
3, 006
Business (individuals and corporations)
8,038
6, 311
4, 454
1 The individual income tax liability figures in this table are based on income levels of the respective years and therefore
may differ from those in the distributional tables which are based on 1974 income levels.
2 Under the language of the bill this item is viewed as a refund of a payment deemed to have been made on 1974 indi-
vidual income tax Father than a decrease in tax liability.
3 Includes tax credits and/or payments, the latter going to tax returns where the tax liability before the credit is not
big enough to absorb the credit and to specially designed returns where there is no tax liability and no tax return.
4 Exclusive of the portion of the decreased tax liability under the loss carryback provision which may be ascribable to
individuals in a nonbusiness capacity.
5 An undeterminable amount deemed to be small.
20
21
TABLE 2.-ESTIMATED CHANGE IN INDIVIDUAL AND CORPORATE TAX COLLECTIONS UNDER THE BILL-
TABLE 2.-ESTIMATED CHANGE IN INDIVIDUAL AND CORPORATE TAX COLLECTIONS UNDER THE BILL-
FISCAL YEARS 1975 AND 1976
FISCAL YEARS 1975 AND 1976-Continued
[In millions]
[In millions]
FISCAL YEAR SUMMARIES
Collections
Collections
Calendar year 1975
Calendar year 1976
Calendar year 1975
Calendar year 1976
2d
3d
4th
1st
2d
Provision
quarter
quarter
quarter
quarter
quarter
2d
3d
4th
1st
2d
Provision
fiuarter
quarter
quarter
quarter
quarter
Granting a 100-percent refund of 1974 individual income tax
liability up to $100 with no phaseout and a 10-percent refund
Fiscal year 1975:
of tax above $1,000 with a maximum refund of $200 with the
Individuals
-$10,618
refund phased out between $20,000 and $30,000 of adjusted
Corporations
-1,842
gross income but not below $100
-$8,125
Individuals and corporations
-12,460
Decreasing by 1 percentage point the tax rates applicable to the
Individuals, nonbusiness
-10,435
first $4,000 of taxable income
--446
-$1,190
-$1,190
-$433
-$438
Business (individuals and corporations)
-2,025
Granting a nonrefundable optional $200 tax credit in lieu of the
Fiscal year 1976:
$750 personal exemption deduction
-1,424
-3,796
-3,796
+1,107
+1,582
Individuals
-13,356
Granting a nonrefundable tax credit equal to 5 percent of the
Corporations
-7,033
purchase price of new and used homes (including mobile
Individuals and corporations
-20,389
homes) to be used as the principal residence of the taxpayer
-300
-150
-765
-1,845
Individuals, nonbus iness
-12,229
Granting returns with dependent children a refundable credit of
Business (individuals and corporations).
-8,160
10 percent of wage and salary and self-employment income
with a $400 maximum credit with a phaseout of the credit
between $4,000 and $8,000 of adjusted gross income.
-140
-375
-375
+61
-626
1 Under the language of the bill this item is viewed as a refund of a payment deemed to have been made on 1974 indi-
vidual income tax rather than a decrease in tax liability.
Total, individuals, nonbusiness 4
-10,435
-5,511
-5,361
-30
-1,327
2 According to the Internal Revenue Service this refund will take place in fiscal year 1975 except for refunds to certain
fiscal year taxpayers and late filers.
Granting individuals election of a 3-year carryback of capital
3 Includes tax credit and/or payments, the latter going to tax returns where the tax liability before the credit is not big
losses
-11
-6
-27
-72
enough to absorb the credit and to specially designed returns where there is no tax liability and no tax return.
Increasing the rate of investment credit to 12 percent for 1975
4 Exclusive of the portion of the decreased tax liability under the loss carryback provision which may be ascribable to
and 1976 and to 10 percent thereafter; repealing the $50,000
individuals in a nonbusiness capacity.
limitation on used property qualified for credit; and allowing
5 An undeterminable amount deemed to be small.
the investment credit on progress payments:
Individuals, business
-79
-40
-203
-562
TABLE 3.-EFFECT OF THE PROVISION IN THE BILL WHICH GRANTS A REFUND OF 1974 TAX LIABILITY
1
Corporations
-1,055
-527
-527
-759
-1,884
[By adjusted gross income class-1974 income levels]
Total
-1,134
-567
-527
-962
-2,446
Increasing the corporate surtax exemption from $25,000 to
Number of returns
$50,000 on 1975 income subject to tax
-360
-180
-180
-240
-240
affected (thousands)
Decrease in tax liability
Lowering the rate of corporate normal tax from 22 percent to 18
percent and increasing the rate of corporate surtax from 26
Total
Percentage distribution of total decrease
percent to 30 percent on 1975 income subject to tax
-210
-105
-105
-140
-140
Adjusted gross
number
Number
income class
with tax
made
Amount
Repealing excise tax on trucks, buses and trailers:
By income
By
Cumulative
segment
Individuals, business
--67
-42
-42
-42
-42
(thousands)
decrease
nontaxable
(millions)
class
Corporations
-157
-98
-98
98
-98
Total
-224
-140
-140
-140
-140
0 to $3
4, 057
3,097
$230
2.8
2.8)
$3 to $5
579
1,280
685
8.4
11.2
35.7
Repealing excise tax on parts and accessories of trucks:
$5 to $7
8,273
339
795
9.8
21.0
Individuals, business
-26
-12
-12
-12
-12
-60
-28
-28
-28
-28
$7 to $10
11,428
186
1,197
14. 7
35.7)
Corporations
$10 to $15
15,952
59
2,178
26. 8
62.51
48. 9
Total
-86
-40
-40
-40
-40
$15 to $20
9,856
16
,795
22.1
84.6
$20 to $50
9,006
3
1,162
14.3
98.9)
Modifying tax credit to employers of public assistance recipients
15.3
under the work incentive program (WIN):
$50 to $100
655
(2)
65
0.8
99.
-1
TT
$100 and over
160
(2)
16
0.2
99.9
Individuals, business
Corporations
-1
-1
Total
66,966
4,980
8,125
100.0
100.0
100. 0
-1
-2
Total
Liberalizing net operating loss carryback provisions: increase
in refunds
-800
-200
-400
-100
1 Granting a 100-percent refund of 1974 income tax liability up to $100 without a phaseout and a 10-percent refund of tax
Increasing the accumulated earnings credit allowance from
above $1,000 with a maximum refund of $200 with the refund phased out between $20,000 and $30,000 of adjusted gross
$100,000 to $150,000
(5)
(5)
(5)
(5)
income but not below $100.
2 Less than 500 returns.
Total
-12,460
-7,349
-6,554
-1,979
-4,507
Note.-Details may not add to totals because of rounding.
Individuals
-10,618
-5,611
-5,415
-314
-2,016
Corporations
-1,842
-1,738
-1,139
-1,665
-2,491
Individuals, nonbusiness
-10,435
-5,511
-5,361
-30
-1,327
Business (individuals and corporations)
-2,025
-1,838
-1,193
-1,949
-3,180
See footnotes at end of table p. 21.
49-011 75 4
22
23
TABLE 4.-EFFECT OF THE PROVISION IN THE BILL WHICH DECREASES BY ONE PERCENTAGE POINT THE TAX
TABLE 6.-EFFECT OF THE PROVISION IN THE BILL WHICH GRANTS A REFUNDABLE EARNED INCOME CREDIT 1
RATES APPLICABLE TO THE FIRST $4,000 OF TAXABLE INCOME 1
[By adjusted gross income class-1974 income levels]
[By adjusted gross income class-1974 income levels]
Number of returns
Decrease in tax liability
affected (thousands)
Decrease in tax liability
Number of
Percentage distribution of total decrease
Total
Percentage distribution of total decrease
returns with
Adjusted gross
number
Number
tax decrease
Amount
income class
By income
with tax
made
Amount 3
By income
By
Adjusted gross income class (thousands)
(thousands)
(millions)
class
Cumulative
By segment
(thousands)
decrease 2
nontaxable
(millions)
class
Cumulative
segment
0 to $3
4,057
$18
0.8
0.8)
0 to $3
1, 126
66
$238
18. 5
18.5)
$3 to $5
579
115
5.3
6.1
$3 to $5
1, 565
804
531
41. 2
59.
35.5
$5 to $7
8,273
236
10. 8
17.0
$5 to $7
2, 218
732
447
34. 7
94. 4
100. 0
$7 to $10
11,428
403
18.5
35.
$7 to $8
1, 520
9
71
5.5
100.0
$10 to $15
15,952
621
28. 5
64.01
$8 and over
18. 0
82. 01
46.6
$15 to $20
9, 856
392
$20 to $50
9,006
359
16.5
98.
Total
6, 429
1,611
1, 288
100.0
100.0
100.0
$50 to $100
655
26
1.2
99.
18.0
$100 and over
160
6
0.3
100,
1 Granting returns with dependent children a refundable tax credit of 10 percent of wage and salary and self-employment
Total
66,966
2,177
100. 0
100.0
100. 0
income with a maximum credit of $400 and a phaseout of the credit between $4,000 and $8,000 of adjusted gross income.
2 Does not include returns representing beneficiaries who are nonfilers under the 1970 filing requirements.
3 Does not include an additional $200,000,000 to cover the credit on wage and salary and self-employment income
1 The tax rates are as follows; for taxable income brackets not shown the tax rates are the same as under present law.
of earners who are nonfilers under the 1970 filing requirements.
Taxable income bracket (thousands):
Tax rate
Note.-Details may not add to totals because of rounding.
Joint returns:
(percent)
0 to $1
13
$1 to $2
14
$2 to $3
15
$3 to $4
16
Single person returns:
0 to $0.5
13
$0.5 to $1
14
$1 to $1.5
15
$1.5 to $2
16
$2 to $4
18
Returns of heads of households:
0 to $1
13
$1 to $2
15
$2 to $4
17
Note.-Details may not add to totals because of rounding.
TABLE 5.-EFFECT OF THE PROVISION IN THE BILL WHICH GRANTS A $200 TAX CREDIT IN LIEU OF THE $750
PERSONAL EXEMPTION DEDUCTION
[By adjusted gross income class-1974 income levels]
Number of returns
affected (thousands)
Decrease in tax liability
Total
Percentage distribution of total decrease
Adjusted gross
number
Number
income class
with tax
made
Amount
By income
By
(thousands)
decrease
nontaxable
(millions)
class
Cumulative
segmen
0 to $3
4, 057
2,834
$217
3.6
3.6)
$3 to $5
7,579
1,748
598
9.8
13.4
$5 to $7
8, 273
1, 356
844
13.8
27.21
51.0
$7 to $10
11,413
974
1, 456
23.8
51.0
$10 to $15
15,147
278
080
34.1
85. 1)
$15 to $20
8,834
31
801
13.1
98.2)
47.1 I
$20 to $50
2,011
3
109
1.8
100.0)
$50 to $100
3
1
1
(1)
100.0}
1.8
$100 and over
1
(1)
(1)
(1)
100.0
Total
57,317
7,225
6, 106
100.0
100.0
100.0
1 Less than 500 returns, $500,000, or 0.05 percent.
Note.-Details may not add to totals because of rounding.
IV. GENERAL EXPLANATION
A. Individual Income Tax Reductions
1. Refund of 1974 Individual Income Taxes (Sec. 101 of the bill and
secs. 6428 and 6611(e) of the code)
Under present law, individual taxpayers generally are required to
file their 1974 tax returns by April 15, 1975. (This is true in the case
of calendar year taxpayers who account for the great bulk of all
individual taxpayers.)
In order to achieve the objective of infusing additional purchasing
power into the economy as speedily as possible, and on a broad basis,
your committee's bill and the House bill provide for refunds to be made
to individual taxpayers of a portion of their Federal income tax liabil-
ities for the year 1974. To achieve this objective, it is expected that the
Internal Revenue Service will make every effort to pay out all refunds
on returns filed by April 15 within 60 days of that date.
Under the provision adopted by the committee and the House, the
general rule is that individuals are to receive a refund of 10 percent of
their tax liability for 1974, but this refund is not to be less than $100
(except that the refund is not to exceed an individual's tax liability)
or more than $200. In addition, for taxpayers with adjusted gross in-
comes of $20,000 or more, the size of this refund is to be phased down
to $100 for those with adjusted gross incomes of $30,000 or more. These
computations will not have to be made by the taxpayer but instead
will be made by computers in the Internal Revenue Service.
The refund is to be $100 where the taxpayer's tax liability is at least
$100 and not more than $1,000. For tax liabilities of less than $100
the refund is to be the full amount of the 1974 tax. Where the tax
liability is over $1,000 but not over $2,000, the amount of the refund
is to be 10 percent of the tax liability (subject to the adjusted gross
income limitation described below). As a result, in this tax liability
range the refund will vary from a low of $100 to a high of $200. Where
tax liability exceeds $2,000, the refund remains at the maximum of
$200 (also subject to the income limitation described below).
In cases where a taxpayer is entitled to a refund of more than $100
by reason of his tax liability for 1974 but has an adjusted gross income
of over $20,000, the amount of refund over the $100 minimum is re-
duced. The amount of the reduction is computed by applying to the
refund in excess of the $100 minimum the ratio of his adjusted gross
income over $20,000 to $10,000 (the total difference of the phaseout
between adjusted gross income of $20,000 and $30,000). For example,
if a taxpayer whose adjusted gross income is $25,000 would otherwise
be entitled to the maximum refund of $200 by reason of his tax lia-
bility, $100 of this maximum amount-that is, the amount over and
above the minimum refund-must be reduced by 50 percent, reflecting
the ratio between $5,000 (the amount of adjusted gross income over
(25)
26
27
$20,000) and $10,000 (the total difference between $20,000 and
taxable is an individual, and to the extent that the trust's income is
$30,000). As a result, this taxpayer's 1974 refund would be $150 ($100
taxable to such person. There, too, the refund is available to the indi-
minimum refund, plus $100 additional refund by reason of tax lia-
vidual and not to the trust. In addition, the refund is available in
bility, less $50 reduction in the latter amount by reason of adjusted
fiduciary situations such as a guardianship where the tax liability
gross income).¹
reflected on the return is that of the individual beneficiary.
This phaseout on account of adjusted gross income in excess of
Taxable year affected.-The refund provisions of the bill generally
$20,000 is to reduce the refund to $100 if the adjusted gross income is
apply to the year of a taxpayer which began during the 1974 calendar
$30,000 or more-the phaseout is not to reduce the refund below $100
year. Thus, individuals who use the calendar year 1974 for tax report-
no matter how high the adjusted gross income. This minimum is $100
ing purposes, as well as those who report on a fiscal year which began
unless the taxpayer's 1974 tax liability apart from the refund is less
in 1974 and ends during 1975, generally are entitled to refunds to the
than $100, in which case he is entitled to no more than a refund of the
extent provided in the bill. However, if an individual has two taxable
full amount of that tax liability.
years which began during 1974 (where one taxable year was a short
In the case of married taxpayers who file separate returns for 1974,
year), the refund provisions of the bill apply only to the first of the
the minimum and maximum refunds and the income limitation re-
two taxable years.
ferred to above are cut in half with respect to each spouse. Each spouse
Procedures for making refunds.-Under both the committee and
is entitled to a refund of all of his or her tax liability for 1974 if that
the House bill a taxpayer computes his tax liability for 1974 as he has
liability is less than $50. If the spouse's tax liability is $50 or more, he
done in the past when no special refund was made. Therefore, in pre-
or she will be entitled to a minimum refund of $50 and a maximum
paring his return for 1974, a taxpayer should not reduce his tax lia-
refund of $100, subject, however, to reduction by reason of his or her
bility by the amount which he anticipates will be refunded to him under
adjusted gross income. Where a spouse filing a separate return has ad-
this bill. Instead, after the taxpayer's return has been filed, the Internal
justed gross income of more than $10,000 but not more than $15,000,
Revenue Service will initiate the refund based on the taxpayer's tax
the amount of refund to which the spouse would be entitled based on
liability and adjusted gross income for the year.
his or her tax liability for 1974 is reduced in proportion to the amount
In order to carry out this procedure, both versions of the bill pro-
by which his or her adjusted gross income exceeds $10,000.2
vide that the taxpayer is to be treated as if he made an additional
Table 1 in the Statistical Appendix provides specific examples of
payment to the Treasury against his 1974 income tax liability. This
the amount of refund which a single person or a married couple filing
constructive payment is to be treated as if made on the due date of the
a joint return, assuming different family size and income levels, is to
taxpayer's 1974 return (without taking into account any extension of
obtain under your committee's bill.
time to file the return) or, if later, on the date on which he actually
Eligibility for refunds.-The refund of all or part of 1974 taxes
files his 1974 return.
applies only to taxpayers who are individuals. This includes single
This constructive payment is to be in most cases processed by the
persons, heads of households, surviving spouses (within the meaning
Service as an overpayment of tax by the taxpayer and, as such, is to
of sec. 2(a)), and married persons, whether they file joint returns
be paid to him in the form of a refund of tax. In accord with the gen-
or separate returns. Where married taxpayers file a joint return for
eral rule that Federal income tax refunds do not constitute income,
1974, the amount of the refund is determined by reference to the joint
refunds received under the bill will likewise not constitute income (for
income tax liability and adjusted gross income figures as if the spouses
Federal income tax purposes) to the taxpayers who receive them.4
were one individual.
Other aspects of the refunds.-The tax liability which determines
Refunds are not to be available under the bill in the case of nonresi-
the amount of the refund under the bill is the taxpayer's tax liability
dent aliens and trusts and estates.3
for 1974, reduced by the so-called "nonrefundable" credits against this
The refund is available, of course, in a situation where a decedent's
liability to which he may be entitled. These credits are the foreign
executor or other representative files a final return of the decedent for
tax credit (sec. 33), the retirement income credit (sec. 37), the invest-
1974. In such a case, the refund is available for the decedent's final
ment credit (sec. 38), the work incentive credit (sec. 40), and the
return, but not for the estate's return for the remainder of that
credit for contributions to candidates for public office (sec. 41). The
year. The refund is also available in the case of a so-called grantor
tax liability will also be computed with certain other adjustments
trust (secs. 671-678) where the person to whom the trust's income is
necessary in order to assure speedy and efficient processing of the
refunds through the Service's computer facilities.
If the same taxpayer's tax liability apart from the refund were $1,500, so that he
would be entitled to a $150 refund by reason of tax liability. the income limitation would
Although under present law (sec. (f) (1)), interest which a
reduce the refund by $25 (i.e., 50 percent of the excess of $150 over $100). As a result,
taxpayer owes on an underpayment of his tax liability is treated as
this taxpayer's refund would be $125.
If the same taxpayer's tax liability apart from the refund were only $80, his refund
part of his liability for "tax," your committee intends that interest
would be $80. No reduction in that amount would occur under the income limitation since
the taxpayer is not otherwise entitled to more than the $100 minimum refund.
not be treated as part of the tax liability for purposes of determining
2 To illustrate the effect of the income limitation, a spouse filing a separate return who
the refunds to be made under this bill.
would be entitled to a maximum $100 refund based on tax liability. and whose adjusted
gross income on his or her separate return is $13,000, is entitled to a refund of $70 by rea-
son of the income limitation. The $100 refund amount is reduced by $30, i.e., $3,000/$5,000
4 By deeming the amount of 1974 tax which is to be refunded under the bill as a payment
of the $50 excess of the $100 refund based on tax liability over the minimum $50 refund.
of 1974 Federal income tax by the taxpayer on the due date of his return, the committee
3 Where income in respect of a decedent is includible in the income of an estate under
expects that for State income tax purposes, States will treat the Federal refund of this
present law (see. 691), no refund is available with respect to such income since the liability
deemed payment as a refund of an overpayment of Federal income tax. Such treatment
for tax on such income is that on the estate.
would also reflect the committee's view that the refunds under the bill do not involve any
reduction in the taxpayer's Federal income tax liability as such for 1974.
28
29
In determining marital status for purposes of the refund provisions
based on individually determined needs. Such programs include those
of the bill, the provisions of section 143 of present law are to be uti-
which provide supplemental security income benefits, aid to families
lized. As a result a married person living apart from his or her spouse
with dependent children, medicaid, food stamps, educational and hous-
will, under certain conditions, be treated the same as a single person,
ing benefits, and veterans' pensions.
and have his or her 1974 refund determined accordingly.
For example, an individual who is a member of a family receiving a
The amount of the refund which a taxpayer may receive and retain
payment under the program for aid to families with dependent chil-
is to be determined by reference to his tax liability as finally deter-
dren might receive, during some month in 1975, a tax refund for
mined for Federal income tax purposes. Consequently, the refund is
1974 under the bill which, if considered to be income to the recipient
not finally determined by the amount of tax liability shown on the
during that month, might make him ineligible to continue receiving
return as filed by the taxpayer, but (like refunds generally) may be
aid for that month. In some States the refund might also disqualify
subsequently increased or decreased depending on adjustments which
persons for medicaid or from eligibility to purchase food stamps, or,
may be made in the taxpayer's final tax liability for 1974.
if treated as income, the refund might make the individual ineligible
Since a refund does not result from a reduction in tax liability for
for a loan, or for a reduced rental, etc., under other aid programs.
1974 (but instead results from a constructive payment against a tax-
Your committee does not believe that these refunds of 1974 tax
payer's liability for tax), the two versions of the bill do not affect the
should change an individual's eligibility for these assistance programs
definition of a "deficiency" in tax under present law (sec. 6211),
for the month in which the refund is received. In addition, the cost of
or the computation of the negligence or civil fraud penalties (im-
identifying and making the adjustments might well exceed any sav-
posed by sec. 6653 of present law), which are based on the amount
ings in assistance funds were the refunds to be taken into account for
of the deficiency.
these purposes.
Interest on refunds.-Under present law, the Internal Revenue
Accordingly, both the House and your committee have included a
Service is not required to pay interest on an overpayment of income
provision in the bill which provides that 1974 income tax refunds under
tax if it makes a refund within 45 days after the last date prescribed
the bill are not to be considered income or resources for purposes of
for filing the return (without regard to extensions) or, if the return is
determining who is eligible to receive benefits or assistance, or the
filed late, within 45 days after the date on which the return is actually
amount or extent of benefits or assistance, under any Federal or Fed-
filed (sec. 6611 In order, however, to facilitate the speedy proc-
erally assisted program. For this purpose the concept of benefits or
essing of the special 1974 refund by the Internal Revenue Service, a
assistance is intended to include all assistance benefits in which the
provision is included which is designed to give the Service up to 60
Federal Government participates, including those made in a form
days to make 1974 refunds to individuals without incurring an obliga-
other than cash, such as a reduced rental and eligibility for a loan.
tion to pay interest on the refund. In the interest of administrative
Your committee also intends that a refund which an individual receives
feasibility, the bill extends the 45-day interest-free period both for
pursuant to the bill should not be considered part of his resources or
the special one-time refund under your committee's bill and for re-
assets for that month for purposes of any resources test under the ap-
funds of 1974 tax generally under present law. This special extension
plicable social program.
of the 45-day period under present law applies to refunds of any tax
The treatment of refunds of 1974 tax, were it not for this provision,
under Subtitle A of the code (secs. 1-1564) which are made to an in-
would be a problem since these, in effect, are additional payments made
dividual for a taxable year which began during the calendar year 1974.
by the Federal Government on behalf of the individuals involved.
As under present law, the 60-day period will run from the later of the
3. $200 Personal Exemption Tax Credit (sec. 201 of the bill and
due date of the return (disregarding extensions) or the date on which
secs. 2, 42, 63, 151, and 6201 of the code).
the return is actually filed.
If the Service takes more than 60 days to make the refund, it must
Present law provides a $750 personal exemption deduction for each
pay interest on the refund (as occurs under present law with refunds
taxpayer and each dependent with an additional exemption for tax-
payers who are age 65 or over or who are blind. In addition, present
generally). This 60-day provision does not extend to refunds made to an estate
law provides a low income allowance (also known as the minimum
or trust, to a nonresident alien individual or to a corporation. As to
standard deduction) to determine the minimum amount of income
these taxpayers, the 45-day period of present law continues to apply.
an individual must have in order to pay Federal income taxes. Under
The 45-day period is also the governing rule for all other taxable
present law, the low income allowance is $1,300 for both single indi-
years, i.e., those beginning before and after 1974.
viduals and for married couples filing joint returns ($650 for a
Revenue effect.-The refunds for 1974 individual income tax lia-
married individual filing a seaparate return). This means that under
bility are estimated to result in a revenue loss of $8.1 billion.
present law a single individual does not pay tax unless income exceeds
$2,050 (the $1,300 allowance plus $750 for one personal exemption),
2. Disregard of Refunds with Respect to Federally Assisted Bene-
a married couple does not pay tax unless their income exceeds $2,800
fit Programs (Sec. 102 of the bill)
(plus $750 for each dependent) and a married individual filing a
In some instances individuals who receive refunds of 1974 income
separate return does not pay tax unless his income exceeds $1,400
tax payments under the bill will also be receiving benefits or assistance
(plus $750 for each dependent). Under present law, the percentage
under one or more Federal or Federally assisted State social programs
49-011 o 75 5
31
30
standard deduction is 15 percent of adjusted gross income, with a
per exemption from adjusted gross income in arriving at taxable in-
maximum deduction of $2,000.
come as under present law, or by subtracting only his itemized deduc-
As indicated above in the reasons for the bill, your committee agrees
tions (or standard deduction), computing the tax on the resulting in-
with the House that persons whose income falls below the poverty
come, and then subtracting $200 per exemption from the resulting
levels should not pay income tax. The House bill met the poverty level
tentative tax to obtain his tax liability. Most of these taxpayers will
thresholds for payment of tax by raising the minimum standard de-
not need to compute their tax both ways to determine which method to
duction from $1,300 to $1,900 for single persons and $2,500 for joint
use, since the exemption deduction is worth more than the credit for
returns. In addition, the House bill increases the percentage standard
taxpayers with a marginal tax rate at 27 percent or above. This is the
deduction from 15 percent of adjusted gross income with a maximum
case for taxable income (after the deduction of $750 per exemption as
of $2,000 to 16 percent with a maximum of $2,500 for single persons
well as the standard or itemized deduction) above $10,000 for single
and $3,000 for joint returns.
persons and $16,000 for joint returns. Your committee expects that the
The committee concluded, however, that it would be more appropri-
Internal Revenue Service will provide guidelines to eliminate the need
ate to provide a $200 tax credit as an alternative to the $750 personal
for taxpayers to compute their tax both ways. Of course, the personal
exemption deduction instead of increasing the minimum standard de-
exemption credit which may require a taxpayer to compute his tax in
two ways is similar in principle to the choice between the standard
duction and the percentage standard deduction.
deduction and itemized deductions.
The committee believes that an exemption credit of $200 is a more
effective way to increase the tax-free income level above the poverty
The bill provides that any overstatement of tax liability resulting
income levels than increasing the minimum standard deduction, as
from incorrectly choosing the personal exemption deduction instead of
provided by the House (except for single persons and married couples
the credit (or vice versa) will be treated by the IRS as a math error.
with no dependents where the effect of the two approaches is virtually
Thus, the IRS will automatically check the computation made on each
identical), as is shown in the table in the Reasons For The Bill section,
return and will refund (or credit) any excess amounts paid resulting
above.
from the overstatement of tax liability.
The committee was also concerned because the standard deduction
The overall tax reduction from the personal exemption tax credit is
changes provided by the House bill do not cover middle income tax-
$6.1 billion in 1975. This is an increase of approximately $1 billion over
payers who itemize their deductions. Since the credit provides the
the standard deduction changes in the House bill, which amount to
$5.1 billion.
same amount of tax reduction for taxpayers who itemize their deduc-
tions as for those who take the standard deduction, your committee be-
The personal exemption tax credit is to apply on a one-year basis for
lieves that tax reductions provided in the form of a $200 exemption
a taxable year beginning in 1975 only.
tax credit is more equitable in providing tax reductions to low and
4. Tax Rate Reduction for Individuals (sec. 202 of the bill and sec.
middle income taxpayers than increases in the standard deduction.
1 of the Code)
Moreover, a tax credit of $200 in lieu of the personal exemption
Under present law, the individual income tax rates for joint re-
deduction provides the same tax relief for low and middle income
turns begin with a 14 percent rate on the first $1,000 of taxable income
taxpayers as does an increase in the personal exemption deduction
and an increase to 15, 16, and 17 percent for each additional $1,000 of
without giving excessive relief to high income taxpayers for whom
taxable income, as shown in the table below.¹ For single persons
an increase in the $750 exemption deduction is worth a great deal
the first 4 rates are the same as for joint returns, but the brackets in
more.
each case relate to $500 of taxable income rather than $1,000. The fifth
The committee concluded that such tax relief to larger families is
bracket which begins at $2,000, relates to the next $2,000 of income.
appropriate to compensate for the greater burden placed on families
As indicated in the reasons for the bill, the committee concluded
with more children by the recent inflation. This has been a severe prob-
that a reduction in the lower tax rates is the best way of focusing
lem for those lower and middle income taxpayers who itemize their
tax relief on low and middle income bracket taxpayers without an
deductions and would receive relatively little benefit from the House
excessive revenue cost. Moreover, a reduction in tax rates provides
bill.
tax relief to tapayers whether they itemize their deductions or take
The committee bill provides that taxpayers are to compute their tax
the standard deduction, in contrast to changes in the standard deduc-
by using either the $750 exemption deduction of present law or the tax
tion. The committee also believes that a reduction in the tax rates is
credit of $200 per exemption provided by the bill, depending on which
appropriate as a partial offset to the effect of inflation in moving
alternative results in a lower tax liability. For taxpayers using the
low and middle income taxpayers into higher tax brackets even though
optional tax tables of section 3 (i.e., those with incomes of less than
they have no increase in real income. The House did not include a pro-
$10,000 who take the standard deduction), no additional computation
vision for individual rate reductions.
is required by this provision since the tax tables will automatically
The committee bill provides a one-percentage-point reduction in
reflect the credit when it is worth more than the exemption. A taxpayer
the four tax rates applicable to the first $4,000 of taxable income in
not using the tax tables is to compute his tax either by subtracting $750
1 For heads of households the rates are 14 percent on the first $1,000 of taxable income.
16 percent on the second $1,000 of taxable income and 18 percent on the next $2,000 of
taxable income.
32
33
the case of joint returns. In the case of single persons and married
individuals filing separate returns, there are 5 brackets for the first
the social security tax rate on employees is 5.85 percent of employee
$4,000 of taxable income (3 brackets in the case of heads-of-house-
wages up to $14,100. Self-employed individuals pay a tax at a 7.9 per-
holds). The bill also reduces each of these brackets by one percentage
if that income exceeds $400.
cent rate on net earnings from self-employment income up to $14,100
point. Thus, for all taxpayers (except heads-of-households), the 14-
percent rate is cut to 13 percent, the 15-percent rate to 14 percent,
As indicated in the section above on reasons for the bill, your com-
the 16-percent rate to 15 percent, and the 17-percent rate to 16 per-
mittee agrees with the House that it is appropriate to use the income
cent. Since single persons have 5 brackets for the first $4,000 of taxable
tax system to offset the impact of the social security taxes on low-
income, the 19-percent rate in the 5th bracket is also reduced one
income persons in 1975 by adopting a refundable income tax credit
percentage point from 19 percent to 18 percent.2 These rate reductions
against earned income. Although the earned income credit may be
are shown in the table below. (The Internal Revenue Service will
viewed as a method to help compensate wage earners of low income
prepare new tax tables for the optional tax tables (under sec. 3 of
families for the social security taxes they pay, your committee wishes
the code) to reflect these changes for taxpayers with adjusted gross
to have it clearly understood that this provision of the bill is not
income under $10,000 who take the standard deduction.)
intended to provide a way of reducing social security taxes paid by
A one-percentage-point cut reduces the tax to be paid by $10 at
low income wage earners. The financing of the social security program
the top of a $1,000 bracket and by $5 for a $500 bracket. These four-
in subsequent legislation.
is a matter which the committee will be required to review in depth
percentage point reductions provide tax savings of $40 for taxable
income of $4,000 and above on joint returns; the five-percentage point
The House bill provides a new refundable income tax credit for
reduction for single returns also saves $40 for taxable income of
individuals, called the earned income credit, to compensate low in-
$4,000 and above in single persons' returns, as shown in the table
come wage earners (and low income self-employed persons) for the
below.
social security taxes (or self-employment taxes) they pay. The amount
of the credit provided by the House bill is 5 percent of earned income,
LOWER BRACKET TAX AND RATES UNDER PRESENT LAW AND UNDER THE COMMITTEE BILL
up to a maximum of $200 per taxpayer. The credit is phased out at
income levels between $4,000 and $6,000.
Tax and rate
As indicated above, the committee agrees with the House that this
Taxable Income brackets
Present law
Committee bill
tax reduction bill should provide some relief at this time from the
social security tax and the self-employment tax for low income indi-
Joint returns:
to $1,000
0 plus 14 percent
0 plus 13 percent.
viduals. The committee believes, however, that the most significant
$1,000 to $2,000
$140 plus 15 percent
$130 plus 14 percent.
$2,000 to $3,000
$290 plus 16 percent
$270 plus 15 percent.
objective of the provision should be to assist in encouraging people
$3,000 to $4,000
$450 plus 17 percent
$420 plus 16 percent.
to obtain employment, reducing the unemployment rate and re-
$4,000 to $8,000
$620 plus 19 percent
$580 plus 19 percent.
Single person returns:
ducing the welfare rolls. Thus, the provision should be similar in
to $500
0 plus 14 percent
0 plus 13 percent.
structure and objective to the work bonus credit the committee has
$500 to $1,000
$70 plus 15 percent
$65 plus 14 percent.
$1,000 to $1,500
$145 plus 16 percent
$135 plus 15 percent.
reported out previously.
$1,500 to $2,000
$225 plus 17 percent
$210 plus 16 percent.
$2,000 to $4,000
$310 plus 19 percent
$290 plus 18 percent.
As a result the committee does not agree with the House that the
$4,000 to $6,000
$690 plus 21 percent
$650 plus 21 percent.
earned income credit should be available to all individuals who have
earned income regardless of their marital status or family require-
1 Change in tax at the lower end of the bracket but no change in tax rate.
ments. For example, the House bill grants the credit to students and
This rate reduction is to apply for tax years 1975 and 1976.
retired individuals, who often have low amounts of earned income
Approximately 62 million taxpayers will receive tax reductions
because they work part-time or for short periods of time and may
from these rate reductions. The total amount of the tax reduction is
receive most of their support from family relatives or through social
estimated to be $2.3 billion. The tax savings for illustrative taxpayers
security or private pension plans. More importantly, Federal welfare
is shown in table 2 of the Statistical Appendix.
programs apply primarily to married couples with dependent children
and it is in this area where this program can be most effective in reduc-
5. Earned Income Credit (sec. 203 of the bill and secs. 43, 6201
ing any tax disincentive to work.
and 6401 of the code, and sec. 402(a)(7) of the Social Secu-
In addition, the committee believes that the amount of the credit
rity Act).
adopted in the House bill should be increased for those who are to be
Under present law an individual is not required to pay income tax
eligible for the credit. Here, also, the larger credit will largely remove
unless his income exceeds the amount of the minimum standard de-
the disincentive that the social security tax produces against seeking
duction plus the sum of available personal exemptions. Social security
employment for low-income people. It will thus encourage low income
taxes, however, are paid on all covered earnings by workers and em-
individuals to seek part-time or full-time work.
ployers, regardless of how small the amount of earnings. For 1975,
As a result the committee bill provides an income tax credit of 10
percent of earned income up to a maximum of $400. The amount of
= For heads of households the tax rate for the first bracket of $1,000 is reduced from
14 percent to 13 percent, for the second bracket of $1,000 the tax rate is reduced from 16
the credit is to be reduced by the amount of adjusted gross income, or
percent to 15 percent and for the next tax bracket of $2,000 the tax rate is reduced from
the amount of earned income, if greater, which exceeds $4,000 per
18 percent to 17 percent.
35
34
year on the basis of $1 of credit for each $10 of income in excess of
both of which were provided in the House bill. These rules were aimed
at preventing abuses in cases of young individuals and students; under
$4,000. Thus, the credit is phased out for individuals with income
levels of $8,000 and over.
the committee bill they would have no significant application.
The credit is to be calculated on a return-by-return basis. Individ-
An individual is eligible for the credit only if he maintains a house-
uals who are married and file joint returns are eligible for one credit
hold (within the meaning of sec. 214(b) (3)) in the United States for
on the combined income of the spouses. Married individuals filing sep-
himself and for one or more children (of his own or legally adopted),
arate returns are not to be eligible for the credit. A married individual
who can be claimed as a dependent by the individual under the per-
who is treated as not being married (under sec. 143 (b)) for return-
sonal exemption provision (sec. 151 (e) (1) (B)). A single individual
filing purposes (i.e., a head of a household whose spouse has not been
is considered to be maintaining a household if the individual provides
a member of the household for the entire year) is eligible for the credit
over half of the cost of maintaining the household (including costs
in the same manner as a single individual who maintains a household
attributable to children who are dependents). A married individual
and claims his child as a dependent (and any of the absent spouse's
is considered to be maintaining a household if the individual and his
income attributed to him or her under State community property
spouse together furnish over one-half of the cost of maintaining the
household.
laws is to be disregarded).
Individuals otherwise eligible for the credit are not to receive the
The credit is generally available only for taxable years representing
credit if they have amounts which are excluded from gross income
a full 12 months. However, in the case of a short year closed by reason
of the death of the taxpayer, the credit is to be allowed.
under the exclusion for income earned abroad (sec. 911) or the exclu-
Since the credit is refundable, eligible individuals with low incomes
sion of income from possessions of the United States (sec. 931).
on which little or no income tax is due are to receive a cash payment
Earned income eligible for the credit (up to the phaseout amount)
equal to the amount of the credit reduced by any tax due. It is antici-
includes all wages, salaries, tips, and other employee compensation,
pated that low income individuals not required to file returns will be
plus the amount of the taxpayer's net earnings from self-employment
provided with a simple method of obtaining any payment due by filling
as that term is presently defined in the code (sec. 1402(a)). This broad
out a brief form (such as the 1040A form) and attaching to it a copy
definition of earned income can include some types of wages and other
of their W-2 withholding statements. It is hoped that through the
income not subject to social security tax (such as government employ-
simplicity of this form, plus efforts by the Internal Revenue Service
ees' wages) but simplifies the process of determining what income is
to build public awareness of the availability of the credit, all eligible
eligible for the credit. It is anticipated that a taxpayer will be able to
taxpayers will file for the credit available to them.
calculate the amount of earned income eligible for the credit merely
The amount of the credit received is to be taken into account as
by adding together the amounts reported on form 1040 (the individual
"other income" under the Social Security Act for purposes of deter-
income tax return) as wages, salaries, tips and other employee com-
mining eligibility for aid for dependent children payments (sec. 402
pensation (line 9 of form 1040) with any amounts reported as net
(a) (7) of the Social Security Act).
earnings from self-employment (line 13 of Schedule SE of form
The earned income credit is to apply only to taxable years beginning
1040). Net earnings from self-employment are to be taken into ac-
in 1975.
count even though they are less than $400 (even though they are not
It is estimated that this provision will decrease 1975 income tax
subject to the self-employment tax).
liabilities by $1.5 billion, compared with $3.0 billion under the House
Earned income generally is to be eligible for the credit only if it is
version of the bill. Of this $1.5 billion amount, $0.1 billion will be
includible in the gross income of the taxpayer during the taxable year
offset by reduced AFDC payments resulting from the increase in in-
in which the credit is claimed. Earned income of an individual is to be
come for those receiving the credit. The savings under this tax reduc-
computed without regard to community property laws (so that a tax-
tion for illustrative taxpayers is shown in - the Statistical
payer is to take into account his or her own earnings for purposes of
Appendix.
the earned income credit even though, under the community property
laws, part of those earnings would be includible in the gross income
6. Changes in Withholding Tables to Reflect the Exemption Tax
of the spouse and not that of the earner). Amounts received as pension
Credit, the tax rate reduction, and the earned income credit
or annuity benefits are not to be taken into account for purposes of the
(sec. 204 of the bill and sec. 3402(a) of the code).
credit.
Under present law, the amount of the personal exemption, the low
Finally, the earned income credit is not to be available for income
income allowance and the percentage standard deduction are reflected
of nonresident alien individuals which is not connected with a U.S.
in statutory withholding tables. The bill requires the Secretary of the
trade or business (i.e., income not currently reported on a 1040NR
Treasury to prescribe new withholding tables which reflect the $200
form).
exemption tax credit, the rate reduction, and the earned income credit
Because the credit as provided by the committee bill applies only to
as well as the features of present law.
individuals who maintain a household and who are entitled to claim
It is anticipated that the new withholding tables will be effective
a child as a dependent, the bill omits the special rules for individuals
from May 1, 1975. Since income tax withholdings for the first one-third
under 18 years old and for individuals employed by a family relative,
of the year will have been at current rates, which on an annual basis
1 However, amounts included as net earnings from self-employment are not also to be
included as wages, salaries, tips and other employee compensation.
36
37
would result in considerable over-withholding for lower income em-
taxpayer as his principal place of residence. Under the bill, the defini-
ployees and employees who claim the standard deduction, the with-
tion of home includes, but is not limited to, a condominium, mobile
holding rates for the last two-thirds of the year are to be additionally
home or cooperative housing unit. The rate of the credit is to be equal
reduced SO that amounts withheld by the end of the year would ap-
to 5 percent of the taxpayer's basis in the home. The amount of the
proximately equal 1975 tax liabilities after the reductions made by this
credit is not to exceed the lesser of the taxpayer's tax liability or $2,000.
bill. The changes in the withholding rates prescribed by the Secretary
In the case of a husband and wife who file a joint return, the $2,000
are therefore to reflect the changes listed above in such a way that the
limitation applies to the joint return. In the case of married taxpayers
withholding change for the last 8 months of the year match as nearly
who file separate returns, the amount of the credit is limited to $1,000
as possible the change in tax liability for 1975. The committee expects
per return. Further, in the case of the joint purchase of a residence,
the new withholding tables to be available for inclusion in the final
the total credit allowable to the joint owners is not to exceed $2,000.
legislation.
For purposes of computing the credit, the purchase price of a newly
Another change in withholding rates will be required effective
acquired residence must be reduced by any gain attributable to the sale
January 1, 1976, to put the withholding rates on a full year basis and
of a former residence if such gain was not recognized for tax purposes
to reflect the expiration of the earned income credit and personal
by reason of a timely reinvestment in another residence (sec. 1034 of
exemption tax credit. A third change will be required on January 1,
the code). However, no reduction will be made for any gain excluded
1977, to reflect the fact that the rate reductions are effective only for
from tax by reason of the special treatment provided under the tax
1975 and 1976.
laws in the case of a sale by a taxpayer who has attained age 65 (sec.
The withholding changes made by the bill are to take effect on May
121 of the code). In any case where part of the property is to be used
1, 1975. This will provide the Internal Revenue Service approximately
by the taxpayer as his principal residence and part is to be used for
45 days to prepare and distribute new tables.
other purposes, an allocation of the purchase price of the property
must be made. Only SO much of the purchase price as is allocable to
7. Housing Purchase Credit (Sec. 205 of the bill and sec. 44 of
the residential portion is to be eligible for the credit.
the code)
Generally, to be eligible for the credit, the taxpayer must have
There is no tax credit under present law for the purchase of homes.
acquired the home as his principal place of residence after March 12,
However, homeowners (including ownership of condominiums and
1975, and before January 1, 1976. However, a taxpayer will still be
in certain cases tenant-stockholders in housing cooperatives) are able
eligible for the credit even though the contract for purchase was en-
to deduct their mortgage interest and property taxes as itemized
tered into prior to March 13, 1975 (and even if equitable title passed
deductions. Although no similar provision applies to renters, owners
prior to such date), if the settlement and occupancy occurred on or
of rental units can take deductions for accelerated depreciation and
after that date (and before 1977). On the other hand, a taxpayer will
may expense their interest and tax charges during the construction
be entitled to the credit if he has entered into a binding contract for the
period of the building.
purchase of a home before January 1, 1976, even though he does not
The current weakness in the economy is centered disproportionately
enter into settlement before that date, SO long as the settlement occurs
on the housing industry. Housing starts have declined from a level
and the taxpayer occupies the home as his principal place of residence
of approximately 2.4 million units in 1972 to a level of approximately
before 1977.1
1.4 million units in 1974. This decline has created severe unemployment
The credit is also to apply in the case of a principal place of resi-
problems among the various construction trades and industries sup-
dence that is constructed, reconstructed, or erected by the taxpayer
plying construction materials. The average rate of unemployment in
where he occupies the home as his principal place of residence before
the construction industry is significantly higher than the average
1977, SO long as the construction actually began before 1976. In this
based on the overall labor force.
case, however, the credit is to be available only with respect to that part
According to Department of Labor statistics, as of January 1974,
of the basis of the property attributable to construction, etc., after
the overall average unemployment rate was 5.2 percent (seasonally
March 12, 1975. Construction is to be considered to begin only when
adjusted), while the average unemployment rate in the construction
physical work actually begins (i.e., not design, blueprints, planning,
industry was 9.1 percent (seasonally adjusted). Similarly, as of Janu-
etc.).
ary 1975, the overall unemployment rate was 8.2 percent (seasonally
A taxpayer will not be eligible for the credit if he purchases a resi-
adjusted), while the unemployment rate for the construction indus-
dence from related persons whose relationship to the taxpayer would
try was 15.0 percent (seasonally adjusted).
result in the disallowance of losses (sec. 267). Further, if a taxpayer
While general tax cuts stimulate the economy, the effect of the
acquires a residence by gift or inheritance he will not be eligible
stimulation is diffused throughout all segments of the economy. The
for the credit except to the extent of any reconstruction by him.
committee believes that it is necessary to direct a portion of the eco-
Under the committee's bill, there will be a recapture of the credit
nomic stimulus specifically toward the housing industry, which has
if the taxpayer disposes of the home within 3 years from the date of
suffered disproportionately from the current economic downturn.
To provide this needed stimulus, the committee has provided a tax
1 Of course, if a calendar year taxpayer enters into settlement in 1976, he will be en-
titled to the credit in 1976, not in 1975.
credit in the case of the purchase by an individual taxpayer of a new
or used home (but not rental apartment units) which is used by the
38
39
purchase. However, to the extent that the taxpayer acquires or con-
structs another principal residence by reinvesting the proceeds from
their capital gains in those prior years. Individuals who elect the cap-
the disposition of his former principal residence within one year from
ital loss carryback will have to recompute their regular income tax
the date of disposition, there is to be no recapture if the combined pe-
liability for the years to which the losses are being carried back. They
riod of use satisfies the 3-year requirement. In addition, there would
will first carry their losses back to the third year prior to the year for
be no recapture if the taxpayer died before the 3-year period expired.
which the carryback election is made and will carry back to the second
Thus, if the taxpayer received a credit of $2,000 for the purchase
prior year only those losses that cannot be deducted against capital
of a home and subsequently sold this home before the 3-year period
gains in the third prior year. Similarly, the only losses that may be
expired, realizing $60,000 from the sale, there will be no recapture if
carried back to the year immediately preceding the year in which the
the taxpayer purchases another home to be used as his principal resi-
carryback election is made will be those losses that are not usable as
dence within one year from the date of disposition, and the acquisition
carrybacks to the third and second prior years. The amount of losses
cost is at least $60,000 or more. However, if the taxpayer's acquisition
that may be carried back to a prior year will be limited to the capital
cost is only $45,000, one-fourth of the credit, or $500, would be recap-
gains in that year. In addition, a capital loss carryback may not create
tured. In this latter case, the amount recaptured is the amount which
or increase a net operating loss in a prior year. All capital losses that
bears the same ratio to the credit allowed as the amount realized from
are carried back (both short-term and long-term) will be treated as
the sale of the first residence minus the cost of acquisition of the newly
long-term capital losses and hence will be deductible first against long-
acquired residence bears to the amount realized from the sale of the
term capital gains. They may be deducted against short-term capital
first residence.
gains in a year only after that year's long-term capital gains are
It is estimated that the credit described above would result in a reve-
exhausted.
nue loss of approximately $3.0 billion for calendar year 1975, and a
Capital losses which are carried back but are in excess of the capital
revenue loss of approximately $.6 billion for 1976. This estimate does
gains for the 3 prior years may be carried forward indefinitely, as
not take into account the stimulative effect which such a provision
under present law.
might provide.
In order to determine whether a taxpayer has capital losses in excess
8. Capital Loss Carryback for Individuals (sec. 206 of the bill
of $30,000 for a year, the capital losses in that year may be aggregated
and sec. 1212 of the code)
with capital loss carryforwards from prior years in order to reach the
Under present law individuals can deduct their capital losses to
$30,000 minimum. For example, if a taxpayer has a capital loss in a
year of $25,000, this special capital loss carryback provision is not
the extent of their capital gains in the taxable year. In addition, if an
individual's capital losses exceed his capital gains, he can deduct
available. However, if the taxpayer also has capital losses from prior
years of $10,000 which are carried forward, the taxpayer will thus
capital losses against up to $1,000 of ordinary income each year ($500
qualify for the $30,000 level since the current capital loss of $25,000
for married individuals who file separate returns). If the excess capi-
plus the prior capital loss of $10,000 is in excess of the $30,000 level.
tal losses are short-term these may be deducted on a dollar-for-dollar
basis (up to the $1,000 limitation) ; 1 but only 50 percent of long-term
Thus, the taxpayer in this case may carry back the $35,000 capital loss
in the manner described above.
capital losses incurred in taxable years beginning after December 31,
1969, in excess of short-term capital gains, can be deducted against
When a taxpayer carries a capital loss back, he will not recompute
his minimum tax.
ordinary income. (Thus, $2,000 of post-1969 long-term capital losses
The capital loss carryback will result in a revenue loss of $110
is required to offset $1,000 or ordinary income.) Individuals' capital
million in 1975, $55 million in 1976, and $30 million in 1977.
losses in excess of the $1,000 limitation may not be carried back to
prior years, but there is an unlimited carryover to future years. The
The capital loss carryback applies to losses incurred in taxable years
beginning after December 31, 1974, including carryforwards into those
same rules apply to estates and trusts.
years.
As indicated above, if an individual sustains capital losses in one
B. Business Income Tax Reductions
year and capital gains in the next year, he can carry over the capital
losses and deduct them against the subsequent capital gains. However,
1. Investment Credit
if his capital gains precede his capital losses, he cannot carry the capi-
tal losses back and deduct them against prior capital gains. Your com-
(Secs. 301, 302, and 304 of the bill and secs. 46, 47, and 48 of the code)
mittee believes that a capital loss carryback should be permitted where
Present law provides a 7-percent investment credit (4 percent with
a taxpayer has large capital losses. The House had no such provision
respect to certain public utility property). The investment credit is
in its bill.
available with respect to: (1) tangible personal property; (2) other
The bill therefore provides that individuals with more than $30,000
tangible property (not including a building and structural compo-
of capital losses in a year (including carryforwards from prior years)
nents) which is an integral part of manufacturing, production, etc.,
may elect to carry them back for up to 3 years and deduct them against
or which constitutes a research or storage facility and (3) elevators
and escalators. Generally, the credit is not available with respect to
1 Capital losses incurred in taxable years beginning before January 1, 1970, also are
property used outside the United States.
deducted on a dollar-for-dollar basis.
To be eligible for the credit, the property must be depreciable
property with a useful life of at least 3 years. Property with a useful
40
41
life of 3 or 4 years qualifies for the credit to the extent of one-third
If, within 90 days after enactment of the Revenue Act of 1971 the
of its cost; property with a useful life of 5 or 6 years qualifies with
taxpayer has SO elected, then the investment credit is to be available to
respect to two-thirds of its cost; and property with a useful life of
the taxpayer with respect to any of its public utility property if the
7 years or more qualifies for the credit to the full extent of the prop-
credit to which it would otherwise be entitled is flowed through to in-
erty's cost. (However, in the case of used property, not more than
come ratably over the useful life of the property; however, in this case
$50,000 of cost may be taken into account by a taxpayer as qualified
there must not be any adjustment to reduce the rate base. An addi-
investment for purposes of the credit for a taxable year.)
tional elective rule was provided to permit certain types of utilities
Property becomes eligible for the credit when it is placed in service.
(primarily electric utilities) to immediately flow through benefits to
Property is considered to be placed in service in the earlier of (1) the
consumers. Immediate flow through is permitted in situations where
taxable year in which depreciation on the property begins, or (2) the
the tax benefits of accelerated depreciation rules enacted under the
taxable year in which the property is placed in a condition or state of
Tax Reform Act of 1969 are flowed through to consumers. This elec-
readiness and availability for a specifically assigned function.
tion was provided in recognition of the special competitive conditions
The amount of the credit that a taxpayer may take in any one year
under which a company subject to the accelerated depreciation flow-
cannot exceed the first $25,000 of tax liability (as otherwise com-
through rules was operating. A special election is provided with re-
puted) plus 50 percent of the tax liability in excess of $25,000. Invest-
spect to local steam distribution systems and gas or steam pipelines
ment credits which because of this limitation cannot be used in the
where the regulatory body involved determined that the natural do-
current year may be carried back 3 taxable years and then carried
mestic supply of gas or steam was insufficient to meet the present and
forward 7 taxable years and used in those years to the extent permis-
future requirements of the domestic economy. In this case, if the tax-
sible within the limitations applicable in those years.
payer elected (within 90 days after enactment of the Revenue Act of
Present law provides for a recapture of the investment credit to
1971) the investment credit is not to be available unless (1) no part
the extent property is disposed of before the end of the period (that
of the credit is flowed through to income, and also (2) no part of the
is, 3-5, 5-7, or 7 or more years) which was used in determining the
credit is used to reduce the rate base.
amount of the credit originally allowed. Thus, if property is dis-
Increase in rate.-As indicated in the discussion of the reasons for
posed of, or otherwise ceases to be qualified, the tax for the current
the bill, the committee concluded as did the House, that the 7-percent
year is increased (or unused credit carryovers are reduced) by the
investment credit (or 4 percent in the case of public utility property)
reductions in investment credits which would have resulted if the
should be increased in order to stimulate the economy.
credit were computed on the basis of the actual useful life of the
Generally, under the House bill, the investment credit rate for 1975
property rather than its estimated useful life.
would be increased for all taxpayers (including public utilities) to 10
Public utility property to which the 4-percent investment tax credit
percent from 7 percent, or from 4 percent in the case of certain public
applies is property used predominantly in the trade or business of
utility property. Generally, the House bill made the 10-percent in-
furnishing or selling (1) electrical energy, water, or sewage disposal
vestment credit available only for property placed in service in 1975,
services, (2) gas through a local distribution system, or (3) telephone
after January 21, although it also made the credit available for prop-
service, telegraph service through domestic telegraph operations, or
erty placed in service in 1976 which was acquired under an order placed
other communications services (other than international telegraph
before that time. In addition, in the case of constructed property,
services). In general, the reduced credit applies only if the rates for
the 10-percent credit would be available for the portion of the con-
these services or items are established or approved by certain types of
struction (that is, the basis) attributable to the construction which
governmental regulatory bodies.
occurs after January 21, 1975, and before January 1, 1976.
With respect to the treatment of the investment credit of regulated
The committee concluded that the 10-percent rate should be adopted
companies for ratemaking purposes, special limitations are imposed
without a termination date in order to provide a stimulus to invest-
on the allowance of the credit to prevent the tax benefits of the credit
ment in productive equipment on a long-run basis. Moreover, in light
from immediately being passed on to the consumers. These limitations
of the current economic situation, the committee concluded that the
are applicable to property used predominantly in the trade or business
rate for all taxpayers should be further increased to 12 percent for a
of furnishing or selling (1) the products or services described in the
period of nearly two years. Thereafter, the 10-percent credit is to ap-
preceding paragraph and (2) steam through a local distribution
ply.
system or the transportation of gas or steam by pipeline if the rates
Thus, under these provisions if certain requirements are met, a 12-
for those businesses are subject to government regulation.
percent credit is to be available with respect to property acquired and
The special limitations generally provide that the investment credit
placed in service after January 21, 1975, and before January 1, 1977.
is not to be available to a company with respect to any of its public
Similarly, in the case of property constructed, reconstructed, or erected
utility property if any part of the credit to which it would otherwise
by the taxpayer, the 12-percent credit is also to be available with re-
be entitled is flowed through to income (i.e., increases the utility's
spect to property completed by the taxpayer after January 21, 1975,
income for ratemaking purposes) however, in this case the tax bene-
to the extent of the part of the basis of the property properly attribut-
fits derived from the credits may (if the regulatory commission so
able to construction, etc., after January 21, 1975, and before January 1,
requires) be used to reduce the rate base, if this reduction is restored
1977. In addition, the 12-percent rate is to be available for qualified
over the useful life of the property.
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42
a local distribution system, or (3) telephone service, most domestic
progress expenditures (described below under Progress payments) for
telegraph service, or other communications services-but only where
the period after January 21, 1975, and before January 1, 1977.
the rates for the furnishing or sale are regulated by a utilities com-
In cases where the property on which a taxpayer may claim an in-
mission or similar agency. (This modification of the 50-percent limit
vestment credit (qualified investment in property) for a year exceeds
does not apply to communication property even though used predomi-
$10 million, the 12-percent rate is to be available only if the taxpayer
nantly for communication purposes if the rates for furnishing of the
establishes or maintains an employee stock ownership plan (described
services are not regulated.)
below under 3. Employee stock ownership plan).
The computation of the percentage limitation for public utility
To be eligible for the 12-percent rate in this case, a corporation will
property is to be made on a taxpayer-by-taxpayer basis. Thus, a group
be required to contribute to the plan for the taxable year common
of corporations which file a consolidated return together are to be
stock, securities convertible into common stock (or cash for the ac-
treated as one taxpayer.
quisition of such stock or securities) of the employer in an amount
Your committee intends that the benefit of the relaxation of the 50-
equal to one of the additional 2-percentage-point increase above the
percent limit go primarily to public utilities. However, it recognizes
10-percent rate (i.e., one-twelfth of the total allowable investment
that many public utilities have varying amounts of nonpublic utility
credit in this case). If these requirements are not satisfied, only the
property. In addition, many public utilities are members of controlled
10-percent rate is to be available for the investment, and not the 12-
groups that file consolidated returns. To achieve this objective in the
percent rate. However, the 12-percent rate will be available without
most practical way administratively, the committee decided to prorate
regard to the requirement for an employee stock ownership plan if the
the increase in the credit limit in accordance with the extent to which
qualified investment property for the taxable year is less than $10
the company (or the group filing the consolidated return) has qualified
investment in public utility property, as compared to its qualified in-
million. Limitation on rate increase.-Under the House bill, a limit of $100
vestment in other property.
million is imposed on the increase in the investment credit that could
Thus, if in 1975, 50 percent of the company's qualified investment is
be claimed by any one public utility by reason of the increase in the
in public utility property, then the applicable limit is to be 75 percent
rate of the investment credit. This limit applies only to American
of tax liability (the basic 50-percent limit plus one-half of the maxi-
Telephone and Telegraph Company.
mum additional limit allowable in 1975). If 70 percent of the com-
The committee's bill deletes this limitation.
pany's qualified investment is in public utility property, then the ap-
Increase in 50-percent limit for public utility property.-The com-
plicable limit is to be 85 percent of the tax liability. In order to sim-
mittee agrees with the House that the 50-percent limitation on the
plify such computations for most companies, if 75 percent or more of
amount of tax liability that may be offset by the investment credit
the qualified investment for a given year is in public utility property,
should be temporarily increased in the case of public utility property.
then the full increase is to apply to that company for that year. Thus,
The committee adopted this provision of the House bill with a minor
the typical public utility, which has relatively little qualified invest-
change. Under the House bill the temporary increase in the 50-percent
ment in other property, is to get the full benefit of the increase in the
limit applies for taxable years beginning in 1975. However, there are
percentage limitation.
many public utilities on fiscal years ending in the latter half of the cal-
If less than 25 percent of the qualified investment consists of public
endar year, which under the House bill would not benefit from the tem-
utility property, then no part of the additional limitation is to apply.
porary increase in the 50-percent limit until 1976. To provide benefits
In such a case, the company (or the group filing the consolidated
for these companies sooner, the committee made the increase in the 50-
return) is to be treated in its entirety as not being a public utility
percent limit available for taxable years ending in 1975 (and ending
under this provision.
in each of the following years during the temporary period) rather
The percentage applicable to a taxpayer for a year is to apply to the
than beginning in those years. This change will have no effect on cal-
aggregate of the credits arising from the taxpayer's public utility prop-
endar year taxpayers but will accelerate the increase in the 50-per-
erty and other property-it is not to apply separately to each cate-
cent limit by one year for fiscal year taxpayers.
gorv of property.
Under the bill the percentage limitation for public utility property
If a taxpayer has credit that remains unusable despite the higher
is increased in 1975 and 1976 to 100 percent of the income tax liability
limits, any such excess is to be allowed as a carryback (3 years) and
(computed without regard to the investment credit, and in the manner
carryover (7 years), as under present law. If there is a carryover or
provided under existing law). In each of the next succeeding taxable
carryback to a year to which these higher limits apply, then the exact
years the percentage limitation is reduced by 10 percentage points
amount of the applicable limit is to be determined by the relative
until, in taxable years ending in 1981 and thereafter, the 50-percent
investments in the year to which the excess credit is carried. For ex-
limitation goes back into effect. Thus, the percentage limitation is 90
ample, assume that in 1975, 50 percent of company X's qualified in-
percent in 1977, 80 percent in 1978, 70 percent in 1979, and 60 percent
vestment is in public utility property. The maximum percentage limit
in 1980.
in this case, as indicated above, is 75 percent of tax liability. Assume,
Public utility property for this purpose means property used pre-
further, that in 1976, 75 percent of company X's qualified investment
dominantly in the trade or business of the furnishing or sale of (1)
consists of public utility property. The maximum credit for 1976 would
electrical energy, water, or sewage disposal services, (2) gas through
then be (as indicated above) 100 percent of tax liability. If any of the
44
45
excess credit from 1975 would be carried over to 1976 (after having
into effect. The rules provided under present law with respect to de-
been first carried back to 1972, 1973, and 1974, as under present law),
terminations made by a regulatory body and the finality of its orders
the 1976 limit would not be affected by whether the amount carried
would apply to this provision.
over to that year could be traced originally to public utility property
Limitation on investment in used property.-Present law provides
or to other property.
that in the case of used property, not more than $50,000 ($25,000 in the
Treatment of credit for ratemaking purposes.-The House bill did
case of a husband and wife filing separate returns) of cost may be
not contain any new provisions relating to the treatment of the increase
taken into account by a taxpayer as qualified investment for pur-
in the investment credit for ratemaking purposes. The effect of this
poses of the credit for a taxable year. As an aid to small business,
was to leave the rules applied as a result of the action taken in 1971
the House bill increases the limitation on used property to $75,000
still in effect. The committee, however, was concerned that the stimu-
($37,500 in the case of a husband and wife filing separate returns).
lation for the acquisition of productive facilities intended by the
The committee believes that in view of the special needs of small
increase in the investment tax credit allowable with respect to public
business the limitation on used property should be eliminated entirely.
utility property would be frustrated if any of the benefits were re-
As a result, the committee's bill repeals the present limitation with
quired to be flowed through immediately to consumers in the form of
respect to used property acquired by a taxpayer after January 21,
lower rates. Moreover, the committee believed that public utilities
1975.
should have the opportunity to make new elections with respect to the
Progress payments.-Under present law, a tax credit may be taken
treatment of the additional credit provided under the bill.
for investment in qualified property at the time the property is placed
Under the committee's bill, the additional credit provided for a
in service and therefore is ready for use. The committee agrees with
tation based on tax liability is generally not to be available if the
public utility by reason of the rate increase or the increase in the limi-
the House that in cases where taxpayers pay for long lead time prop-
erty as it is being constructed and substantially before the property
additional credit is used to reduce the rate base, unless the credit is
can be placed in service, to wait for the allowance of the investment
then restored to the rate base at least as fast as ratably over the useful
credit until the property is placed in service represented too long a
life of the property. Also, this additional credit is generally not to be
delay in the claiming of the credit. The bill overcomes this problem
allowed if it is flowed though to income as a reduction in cost faster
in present law by allowing an investment credit for what are called
than ratably over the useful life of the property to which the increased
"progress payments."
credit applies. This rule with respect to the additional credit is to
The Committee adopted the provisions of the House bill without
apply with respect to property used predominantly in the trade or
change. Under the bill, a taxpayer, at his election, is to be permitted to
business of the furnishing or sale of electrical energy, water, or sewage
treat "qualified progress expenditures" made for new property as a
disposal services, gas through a local distribution system, telephone
part of the base for which he can claim an investment credit. In gen-
service, domestic telegraph service, or other domestic communications
eral, these qualified progress expenditures are amounts actually paid
service, if the rates for the furnishing or sale are regulated by a
(or incurred in the case of self-construction property) for construc-
governmental body.
tion (or acquisition or reconstruction) of property which has a normal
Under the bill, if the governmental regulatory agency requires rat-
construction period of at least two years and which will have an esti-
able flow through to income, it cannot require any adjustment to the
mated useful life in the hands of the taxpayer of at least seven years.
rate base; if the agency requires adjustments to the rate base, it cannot
The normal construction period generally begins when physical
require flow through to income.¹
work on the property commences (i.e., not design, blueprints, planning,
A special election is provided to permit the immediate flow through
etc.) and ends when the property is available to be "placed in service"
of the additional credit without the consequence of disallowance in
by the taxpayer.
certain cases. This election is to be available only with respect to
The commencement of physical work for this purpose is to include
property where the benefits of accelerated depreciation are flowed
the physical work done by a subcontractor. For example, if a ship-
through to customers. The election must be made by the taxpayer
yard orders a turbine before it begins work on building a ship, the
within 90 days after the date of enactment of the bill. In this case, the
normal construction period is to be considered as beginning when the
taxpayer must make the election at its own option and without regard
builder of the turbine commences physical work on it. Thus, the 2-
to any requirement imposed by a regulatory body.
year construction period is measured by the time it normally takes
Under the bill, if a regulatory agency requires the flowing through
the subcontractor to complete its work (if it is normal for such work
of a company's additional investment credit at a rate faster than per-
to precede the work of the main contractor) and the time it would
mitted, or insists upon a greater rate base adjustment than is per-
normally take the prime contractor to complete the property once it
mitted, the additional investment credit is to be disallowed, but only
receives the property from the subcontractor. Of course, for the work
after a final determination (made after enactment of this bill) is put
of any subcontractor to be included, the work must be specifically
designated as part of the project. The normal construction period, in
1 bill also provides that the additional allowable credit may be taken into account for
ratably over if the taxpayer elects this treatment within 90 days
The the useful life of the utility property as a reduction in the cost of service after the
no case, includes a period of construction before January 22, 1975 (the
general effective date of these provisions), and, where progress pay-
date viously of made such an election under the comparable provisions enacted under
ratemaking enactment purposes of the bill. This treatment is also to be available if the taxpayer the Revenue pre-
ment treatment is elected by the taxpayer for years beginning after
Act of 1971.
46
47
that date, no normal construction period will begin before the first day
of the taxable year for which the election is in effect.
the property is to be regarded as irrevocably allocated, even though the
Where possible, the normal construction period is to be estimated by
item has not yet become a part of the property, and even though it
reference to normal industry practice in producing similar items. The
has not yet been delivered to the site of the property. Other items
estimate is to be based on the information available at the close of the
may be treated as allocated when they have been delivered to the site
taxable year in which physical work on the property is started (or,
under circumstances where it would be impractical to then remove
if later, the close of the first taxable year for which the taxpayer has
the items to some other project (i.e., pumps delivered to locations on
elected to change to this "progress payments" method). Once the nor-
a tundra pipeline could be treated as allocated to that pipeline even
mal construction period has been reasonably estimated, the actual time
though they (but for their location on the tundra) would be usable on
that it takes to complete work on the property would generally be
other projects). In many cases, the items would not be treated as allo-
irrelevant for purposes of determining the property tax treatment of
cated until they were actually attached or consumed in the construc-
the taxpayer's progress payments.2
tion of the property. Mere bookkeeping notations are not to be suf-
For purposes of the 2-year test, property which will be placed in
ficient to establish to the satisfaction of the Secretary or his delegate
service by the taxpayer separately is to be considered separately (for
that the necessary allocation has occurred.
example, if two ships were contracted for at the same time, each ship
In the case of acquired property, qualified progress expenditures are
would be considered separately). On the other hand, property which
to be the amounts paid by the taxpayer to the manufacturer, but only
must be placed in service by the taxpayer as part of an integrated unit
to the extent that there is actual progress made in the construction of
(for example, equipment which will all be placed in service at the same
the property. (This is further limited by the "pro rata" rule, dis-
time as part of the same plant) is to be treated as a unit for purposes
cussed below.)
of the test.³ Thus, if the taxpayer is constructing a pipeline which will
For this purpose, "progress" will generally be the percentage of
not be operational for five years after construction begins, the fact that
completion, measured in terms of the manufacturer's incurred cost, as
some equipment used in connection with the pipeline (such as pumps
a fraction of his anticipated cost (as adjusted from year to year)
for the pumping stations) take less than five years to manufacture, is
based upon cost accounting records or in some cases on engineer or
not to affect the status of the pipeline for progress payment purposes.
architect certificates.
Also, the taxpayer may treat all amounts expended in connection with
Where several manufacturers or contractors are used in connection
the pipeline as progress payments (including amounts expended for
with the same property, "progress" is to be measured on a manufac-
the pumps). On the other hand, if some segments of the pipeline can be
turer-by-manufacturen basis, SO that the taxpayer may utilize pay-
placed in service in less than two years, progess payment treatment
ments made to a manufacturer who has made "progress" within the
is not to be available with respect to that segment.
meaning of these rules, even if payments have also been made to
In the case of self-constructed property (i.e., property where it is
another manufacturer who has made no progress. By the same token,
reasonable to believe that the taxpayer will bear more than half of
payments to one manufacturer in excess of that manufacturer's prog-
the construction costs directly) "qualified progress expenditures" will
ress are not to give rise to credits merely because another manufac-
generally equal the costs incurred by the taxpayer which are properly
turer's progress exceeds the payments made to that other
chargeable to capital account in connection with that property (for
manufacturer.
purposes of the investment credit). Thus, qualified progress expendi-
In the case of self-constructed property, "progress" will generally
tures would not include any depreciation sustained with respect to
equal "progress expenditures," SO no separate percentage-of-comple-
other property (machinery, equipment, etc.) used in the construction
tion test is needed.
of new section 38 property (because such depreciation is not part of
"Progress expenditures", as well as "progress" are not to be taken
the basis for purposes of section 38 although it is capitalized for other
into account to the extent that they occur before the start of the
purposes), nor generally would it include the adjusted basis of recon-
"normal construction period" of the property nor to the extent alloca-
structed property at the time the reconstruction is commenced.
ble to nonqualified property. Thus, progress expenditures and progress
Also, in the case of self-constructed property, qualified progress
which occur before January 22, 1975, cannot be utilized by the tax-
expenditures can include amounts expended for materials by the tax-
payer to increase his qualified investment prior to the year in which
payer to the extent that the taxpayer can establish, to the satisfaction
the property is placed in service. Likewise, progress expenditures and
of the Internal Revenue Service, that these materials have been ir-
revocably allocated to the construction of the property. For purposes
4 For example, assume that in 1980 a taxpayer makes a payment of $11,000 under
of these rules, an item which is suitable only for use in connection with
of $110,000 and an estimated cost to the manufacturer of $100,000. During 1980, the
contract which provides for delivery of the property in 1985, with a fixed purchase price a
manufacturer incurs $10,000 of cost in connection with the property.
Under these circumstances the manufacturer will be considered to have made 10 percent
Of course, if there were a significant error in estimating the normal construction period,
this could be evidence that the estimate had not been reasonable in the first place, par-
of total estimated cost). The taxpayer will be permitted to treat his full $11,000 payment
progress in connection with the property ($10,000 of costs incurred divided by $100,000
ticularly where the error could not be explained by a later change in circumstances.
as qualified investment for 1980. since this payment does not exceed 10 percent of the
³Of course. the construction period for property not qualifying for the investment credit.
total cost. to the taxpayer. of the section 38 property.
such as real estate, will not affect the "normal construction period" of any qualifying prop-
If. on the other hand. the manufacturer had incurred only $5,000 of costs in connection
erty which may be used on the premises. Thus, if a plant is being constructed. and qualify-
with the property in 1980, the taxpayer would be allowed to treat only 50 percent of his
ing equipment has a normal construction period of less than two years, the progress Day-
$11,000 payment as qualified investment in 1980 ($5,500) because there had been only 5
ments for the equipment are not to be treated as qualified investment. even if the building
percent "progress" in that year. However. in that case, if the manufacturer incurred an
in which the equipment is to be housed will take more than two years to construct.
additional $5,000 of cost in connection with the property in 1981. the taxpayer could
in effect, a carryover of his unused 1980 payment) even if no further payments were made
treat the $5,500 of unused 1980 payment as qualified investments for 1981 (receiving,
to the manufacturer in 1981.
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49
progress which occur before the year for which the taxpayer first
in service, any amounts which were treated as qualified investments in
elects to come under the progress payment rules cannot be SO utilized.
prior years are, of course, to be subject to full recapture in a manner
Similarly, progress expenditures and progress allocable to a building
generally similar to present law.'
(or its structural components) would not be taken into account.
As discussed above, progress expenditure treatment is to be al-
To prevent a possible abuse situation, where a manufacturer might
lowed only in the case of property which has an estimated useful life
certify unrealistic amounts of progress in connection with a project,
(measured from the time the property is placed in service by the tax-
the committee bill contains a "pro rata" rule. Under this rule, it will
payer) of seven years or more. If the estimated useful life of the prop-
be presumed that generally progress will not occur with respect to a
erty is less than seven years at the time it is placed in service (even if
project more rapidly than ratably over the expected construction
previous estimates were for a longer useful life and were reasonable
period for the property.5 However, this presumption could be rebutted
when made) any excess credits previously allowed under the progress
if the taxpayer shows by clear and convincing evidence that progress
payment rules are to be subject to recapture.8
had, in fact, been more rapid.
Where the rate of the investment credit for the year in which quali-
Progress expenditures may be made in cash, or in the form of prop-
fied progress expenditure treatment was allowed with respect to the
erty furnished by the taxpayer to the manufacturer for use in the
property is different from the rate in effect for the year of recapture,
construction of the property. However, if the taxpayer furnishes
then recapture is to occur with respect to the rate in effect when quali-
property, that property is to be taken into account only to the extent
fied progress expenditure treatment was allowed. For example, re-
that that property could be included in the basis of the completed
capture of 1975 progress expenditures would be 12 percent of those
section 38 property at the time that it is placed in service.
expenditures for taxpayers entitled to a 12-percent credit for that
Progress payments may be made out of the taxpayer's capital, or
year.
from borrowed funds. However, to prevent an obvious abuse situation,
Where the actual useful life of the property is less than the esti-
the committee bill provides that progress expenditures made with
mated life (estimated as of the time when the property is placed in
funds borrowed, directly or indirectly, from the manufacturer of the
service), any excess credits previously allowed under the progress
property may not be treated as qualified investment.
payment rules will be subject to recapture on the same basis as other
Under the committee bill, the taxpayer is to be allowed to claim the
excess credits.
full credit to which he is entitled with respect to property in the year
In the case where property is subject to a sale-leaseback transaction
in which it is placed in service. Of course, amounts which were treated
before the property is placed in service, the following rules are appli-
as qualified investments with respect to the property in preceding
cable. Where the seller-lessee makes progress payments, but the prop-
years, due to the operation of the progress payment rules, are to be
erty is sold to a lessor before the property is placed in service, generally
subtracted from the amount for which the taxpayer may obtain a
this will be treated as a recapture situation. For example, if a seller-
credit.6
lessee makes progress payments of $10,000 each in 1980, 1981, and 1982,
The provisions discussed above are to apply only if the taxpayer
but the section 38 property is sold to a lessor for $100,000 in 1984, be-
makes an election (in a time and manner to be prescribed in regula-
fore the property is placed in service, the lessor would be entitled to the
tions) to come under these rules. Once made, the election would apply
investment credit on his $100,000 basis, but credits previously allowed
to all subsequent taxable years, and can only be revoked with the per-
to the seller-lessee based on his $30,000 of progress expenditures would
mission of the Commissioner. It is anticipated that taxpayers gen-
be subject to recapture.
erally will exercise the election because this will accelerate their op-
However, where the lessor and lessee enter into an agreement pro-
portunity to use the investment credit. However, taxpayers who are
viding that the seller-lessee will be entitled to some or all of the credit,
currently in a loss situation may not wish to make the election, SO that
it is contemplated that there would be no recapture of the credits pre-
progress payments are not treated as qualified investments until the
viously allowed with respect to the seller-lessee's progress expendi-
year in which the property is placed in service, in order to obtain a
tures since recapture would, in effect, permit the seller-lessee to revive
more favorable carryover period with respect to those payments.
If property is sold or otherwise disposed of by the taxpayer before
if property is placed in service, is to be treated as a disposition. A similar result is to
7 For example, sale of the property, or of the contract rights to the property before the
he places it in service, or if (under Treasury regulations) it becomes
apparent that the property will not be section 38 property when placed
would be of the property by gift is also to be treated as a disposition. However, there
Conveyance the contract for the property is cancelled, or If the project is abandoned by the taxpayer. follow
action, cessor" but of the decedent, or corporation (as the case may be) would be treated as a "prede- trans-
no recapture in the event of a transfer by death. or pursuant to a sec. 381
5 For example, if physical work pursuant to a contract is begun by July 1, 1980, for
successor. sor would have to be taken into account in reducing the qualified investment of the
the person receiving the sec. 38 property, and progress payments of the predeces-
the manufacture of a machine to be delivered on July 1, 1985 (5 years later) it will
be presumed that there would not be more than 10 percent progress during calendar 1980,
8 For example, If a taxpayer made $10,000 of progress expenditures in 1980 with
and not more than 20 percent progress during the fiscal year from July 1, 1980, through
to have a piece of section 38 property, reasonably believing at that time that the property respect would
June 30, 1981. (The determination as to the normal construction period of the property
to a seven-year useful life in his hands (so that a full credit was allowable with
will be made only once, at the close of the taxable year in which work on the property
those payments) but reduces the estimated useful life to 5 years in 1983, when the respect
commences.)
erty is placed in service, so that only a two-thirds credit is allowable. the one-third prop-
6 Otherwise, the taxpayer might obtain two credits with respect to the same property.
the time the property is placed in service.
credit previously allowed in connection with the 1980 payment is subject to recapture excess at
For example. assume that section 38 property placed in service in 1985 has a basis of $100,-
000, and that of that amount $10,000 has been treated as qualified investment in each of the
years 1982. 1983, and 1984 under the progress payment rules. The taxpayer's basis in the
property. for purposes of determining his qualified investment in 1985 is to be $70,000. (Of
course. the taxpayer's basis for purposes of determining depreciation, or his gain or loss
from the sale of the property, would not be affected by this adjustment, which is made for
investment credit purposes.)
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51
otherwise unusable investment credits. Accordingly, recapture is
provided except to the extent that the lease agreement provides for the
The changes made by the committee increase the revenue loss to
pass through of the credit to the seller-lessee.
$4.3 billion. The revenue effect in 1975 of increasing the rate of the
To minimize the possible doubling up effect of these provisions,
investment credit to 12 percent is $3.4 billion (or $1.4 billion above the
where taxpayers would be taking investment credits for all property
$2 billion revenue loss of the 10-percent rate in the House bill). Elimi-
placed in service this year (even though progress payments had been
nating the $100 million limitation on public utilities adds $400 mil-
made with respect to that property in prior years) as well as progress
payments made in the year, the committee bill provides that the prog-
results in a revenue loss of $175 million over the $85 million in the
lion to the House bill. The elimination of the ceiling on used property
ress payment provisions are to be phased in over a 5-year period.
Under these transition rules, 20 percent of a taxpayer's 1975 prog-
the credit from $50,000 to $75,000). Allowing the investment credit on
House bill (which increased the amount of used property eligible for
ress expenditures may be treated as part of his qualified investment for
progress payments costs $90 million. (This was not changed from the
1975. The remaining 80 percent of those payments may be taken into
provision in the House bill.)
account ratably over the next 4 years (20 percent a year) 40 percent
with respect to property acquired after January 21, 1975, the basis
Effective date.-In general, the rate increase provisions are to apply
of the progress expenditures made in 1976 may be taken into account
in 1976, with the remaining 60 percent of the payments to be taken
into account in the remaining 3 years of the phase in period; 60 per-
to qualified progress expenditures made after that date.
of property constructed, reconstructed, or erected after that date, and
cent of the progress expenditures made in 1977 can be treated as quali-
The 12-percent rate would terminate with respect to property ac-
fied investments in 1977, with 40 percent of the payments to be phased
quired and placed in service after January 1, 1977. Property acquired
in ratably in the succeeding two years; 80 percent of the taxpayer's
or constructed during this period is to be subject to the 10-percent rate
progress expenditures in 1978 could be taken into account as qualified
if the taxpayer does not satisfy the requirements for the 12-percent
investments in 1978, while the remaining 20 percent of the payments
would be taken into account in 1979. By 1979, the phase in period
rate is to be generally in effect for all taxpayers.
rate. Upon expiration of the temporary 12-percent rate, a 10-percent
would be complete, and all progress expenditures made in that year
The increase in the 50-percent-of-tax-limitation applicable with re-
and later years could be treated as qualified investments. Also, in 1979
after 1974.
spect to public utility property is to apply to taxable years ending
the taxpayer would take into account the final 20-percent phase-in
portions of the expenditures in fact made in the four preceding years.
The provisions relating to the treatment of the additional credit
For example, assume that a progress expenditure of $10,000 were
allowable for public utility property for ratemaking purposes are to
made in 1975. Two thousand dollars of this amount would be treated
take effect on January 1, 1975.
as a qualified investment in that year, and $2,000 would be available
The elimination of the limitation upon the amount of used property
to be treated as qualified investment in each of the next 4 years. On the
which is eligible for the investment tax credit is to apply with respect
other hand, if a $10,000 progress expenditure were to be made in 1977
to used property acquired and placed in service after January 21, 1975.
then $6,000 of that payment would be treated as a qualified investment
The provisions relating to qualified progress expenditures are to
in that year, and the remaining $4,000 would be taken into account
apply to taxable years ending after December 31, 1974.
ratably in 1978 and 1979.
When a taxpayer places in service the property with respect to
2. Election to increase net operating loss carryback (sec. 304 of
the bill and sec. 172 of the code)
which the taxpayer has been making progress payments, the taxpayer
is to be entitled to the full investment credit, reduced by the progress
Present law, in general, provides that a taxpayer is allowed to carry
payments credits already taken. In the case of property placed in serv-
a net operating loss back as a deduction against income for the 3 years
ice by such a taxpayer during the 5-year transition period, this would
preceding the year in which the loss occurred and to carry any remain-
also include the remaining portions of the credit that otherwise would
ing unused losses over to the 5 years following the loss year. This gen-
have been phased in at the rate of 20 percent each year.
eral rule enables taxpayers to balance out income and loss years over a
The progress payment rules will apply to progress expenditures
moving 9 year cycle, to the extent of taxable income in the 3 years
made after January 21, 1975, in taxable years ending after De-
preceding and the 5 years following any loss year.1
cember 31, 1974.
Revenue effect.-The changes in the investment credit under the
allows carryover rule in the case of certain industries or categories of taxpayers. One
1 Present law also provides exceptions to the general three year carryback-five year
House bill result in a revenue loss of $2.4 billion in 1975 and $1.5 billion
losses for certain regulated transportation corporations to carry back and deduct net exception
prohibits the usual 3 years and to carry over such losses for 7 years. Another operating
is expected to occur in 1976.
lowed attributable for to a foreign expropriation loss. However, a 10-year carryover period is was al-
the carryback of a net operating loss to the extent the net operating exception loss
9 For example, assume that the taxpayer (who has elected to use the progress payment
loss). after A third exception, applicable to financial institutions for taxable
the foreign expropriation loss (15 years in the case of a Cuban expropriation
rules) has been constructing a long-lead-time piece of property for a number of years and
has had excess investment credits for those years (i.e., his investment credits have exceeded
the amount that could be used because his taxable income was low for those years). Assume
A presently allowed to carry net operating losses back for 10 years and forward for 5
years and allow the usual 5-year carryover period. Similarly a bank for cooperatives to 10 is
December 31, 1975, will lengthen the carryback period for net operating years losses beginning
further that it becomes evident that some of these excess investment credits will not be
able to be used in any of the years to which they could be carried under the carryover
resulting from increased imports of competing products under trade concessions
fourth exception is provided for taxpayers which have incurred net operating years. losses
rules. The taxpayer is not to be permitted to "revive" those unused credits by entering
into a sale-leaseback operation which would result in a recapture of the prior (unusable)
certification 5-year as provided by this Act, it is allowed a 5-year carryback period and the to obtain usual
pursuant to the Trade Expansion Act of 1962. Where a taxpayer has elected made
credits and could result in the taxnayer and the new lessor agreeing to pass the new invest-
ment credit on to the taxpayer when the property is placed in service (when the taxpayer
to years losses incurred for taxable years ending after December 31, 1966, and prior
of American 3 Motors for Corporation permitting a 5-year carryback period and a carryover period
carryover period. Finally, present law also contains a provision designed for
expects good profit years and therefore expects that the full credit could be utilized in those
years).
January 1, 1969.
52
53
Your committee's bill, as an aid to all sectors of the business com-
The bill permits a taxpayer to revoke the election and to return to
munity adversely affected by the current recession, provides for an
the carryback and carryover periods to which he would be entitled
election whereby taxpayers may obtain needed funds through addi-
if he had not made the election. A taxpayer might want to revoke the
tional refunds of income taxes which have been paid for prior years.
election, for example, if, after having incurred a net operating loss
Taxpayers presently covered by the general rule, which allows a 3-
for which he elected an extended carryback under the bill, he incurs
year carryback and a 5-year carryover for net operating losses in-
another net operating loss in the following year and then, in the year
curred in a particular year, may, under the bill, elect to convert the 5-
after that, has an operating profit. In such a situation (or in compa-
year carryover period into a carryback period and thereby obtain an
rable situations), the taxpayer should not be permitted, by reason of
8-year carryback period and no carryover period. This provision ap-
having obtained an extended carryback, to obtain a tax benefit which
plies to all business taxpayers, both individuals and corporations.2
he would not have obtained if he had not made the election. In order
The election does not apply to certain taxpayers allowed extended
to accomplish this objective, when a taxpayer revokes an election, SO as
carryover or carryback periods under present law-those having for-
to become entitled to carry over a subsequent net operating loss, the
eign expropriation losses which qualify under section 172 (1) (D),
bill provides that the taxpayer must determine the tax benefit, if any,
certain financial institutions which qualify under section 172 (b) (1)
which he obtained from the additional carryback and in effect repay
(F), and Banks for Cooperatives which qualify under section 172 (b)
that benefit (without interest). He makes this determination by re-
(1) (G).
calculating his tax liability for taxable years preceding the taxable
This election is applicable to net operating losses for taxable years
year in which he revokes the election as if he had not obtained an ex-
ending after January 1, 1970.
tended carryback of one or more net operating losses. The taxpayer
If the taxpayer has more than one taxable year which has ended
must recompute his tax liability for the earliest taxable year effected
prior to the time the election is made and in which net operating losses
by the carryback of a net operating loss under the election, and for
were incurred, it may select the year for which the election is to be
each succeeding taxable year up to (but not including) the taxable year
first applied. However, a net operating loss for any year subsequent to
in which the election is revoked. In such latter year (the taxable year
the first loss year to which the election is applied must also be carried
in which the election is revoked), the taxpayer must increase his tax
back pursuant to the election. For example, if a taxpayer subject to
liability for that year by the amount of tax liability of which he was
the general 3-year carryover and 5-year carryback rule had net operat-
relieved by reason of carrying back a net operating loss for additional
ing losses for each of calendar years 1972, 1973, and 1974 and the elec-
years under the election.
tion is made during 1975 to convert carryover years to carryback years,
A special rule which affects the redetermination of tax liability in
effective with the 1973 loss, the election must also be applied to the net
cases where a taxpayer was required to fund an employee stock owner-
operating loss for 1974 and such loss may not be carried over SO long
ship plan as a condition to obtaining an extended loss carryback is
as the taxpayer is governed by the election. However, the 1972 loss
described below.
remains governed by the regular carryback and carryover rules, and
Special requirement for certain extended carrybacks.-Where a cor-
to the extent it is not absorbed by income from 1969, 1970 and 1971,
porate taxpayer will obtain a large current refund as a result of mak-
this loss may be carried over and applied against income for 1975, 1976
ing an election under the bill, your committee believes that the com-
and 1977. Your committee intends, however, that the present rules of
pany should share with its employees the financial benefit which it
sec. 172 (b) (2), pertaining to priorities in the application of net op-
receives from the extended loss carryback. Such benefit should be
erating losses, shall continue to apply.1
shared through an employee stock ownership plan in a manner analo-
Revocability of election; redetermination of tax liability.-Once a
gous to the provision in sec. 301 of your committee's bill, which con-
taxpayer has elected to obtain an extended net operating loss carry-
ditions a portion of the increase in the investment credit on the tax-
back, the election continues to apply (unless revoked on the condi-
payer's creating or funding such a plan for the benefit of its
tions described below) to net operating losses incurred in taxable
employees.
years subsequent to such loss year (or years).
Under the net operating loss provision of the bill, an employee stock
2 Similarly, the bill allows elective 10-year carryback periods with no carryovers to tax-
ownership plan is required where a company, as a result of electing
payers with net operating losses arising from increased imports of competing products and
the extended net operating loss carryback, becomes entitled to an ag-
which, under present law, may carry a loss back 5 years and forward 5 years. The bill also
allows certain regulated transportation corporations (of the type which are presently sub-
gregate credit or refund of more than $10 million. (This requirement
ject to the provisions of section 172(b) (1) (C) to elect to switch their present 7-year
is discussed in more detail below in 3. Employee Stock Ownership
carryover period to an additional carryback period, which will result in a 10-year carry-
back and no carryover for these taxpayers.
Plans.)
1 As a result, the 1972 loss in this example will be applied first against income for the
years 1969 through 1971, and will have priority in this application as compared to the
However, once an employee stock ownership plan is created and
1973 and 1974 losses. Similarly, the 1973 loss must be carried back to the eighth preceding
funded by a taxpayer by reason of one or more carrybacks, the tax-
which the 1974 loss may be carried back and applied. If the application of the 1973 and
taxable year and then to subsequent profit years prior to 1973 until it is absorbed, after
payer is not again to be required to make payments for such a plan as
1974 losses completely eliminates income for the years from 1965 through 1968 and some
continues to have priority. Also, the losses to which the election applies must be carried
portion of these losses remain, the application of the 1972 loss to 1969 through 1971
a result of carrying subsequent losses back to a taxable year in an
extended carryback period. Nevertheless, payments must be made into
back in their entirety to the earliest year to which these losses may be carried under the
election, even if these losses had previously been carried back for three years under the
an employee stock ownership plan for all loss years ending prior to
regular rule. In the example above. assuming that there was income rather than loss for
1972 and that the 1973 loss had, prior to the enactment of this provision. been carried back
the time the first extended carryback election is made if the aggregate
for 8 years under this provision will result in a recomputation of taxable income for
to 1970, 1971, and 1972 under the regular rules, the election to carry back the 1973 loss
1970, 1971, and 1972.
54
55
amount of refunds or credits from these carrybacks amounted to more
In the case of a net operating loss year which begins before the date
than $10 million.
of enactment of the bill, the taxpayer is allowed to elect under these
Allowance for employee plan contribution in later redetermination of
provisions and to file for a tentative or "quickie" refund attributable
tax liability when election is revoked.-In cases where a taxpayer is
to the election within 90 days following enactment of this provision or
required to create and fund an employee stock ownership plan as a
within the 12-month period prescribed by sec. 6411 (a), whichever pro-
condition to carrying back a net operating loss for an extended period,
vides the taxpayer with the longer time in which to file the tentative
the bill provides a special rule which comes into play if and when
refund application. For years for which the period for filing a tenta-
the taxpayer revokes his election. In recomputing the company's tax
tive refund application has expired, the taxpayer may file a claim for
liability for the additional carryback years obtained under the elec-
refund during the time provided by sec. 6511 (d) (2), which is gener-
tion (as if the election had not been made), the taxpayer can reduce
ally by the end of the 15th day of the 40th month following the end
his redetermined tax liability for these additional carryback years by
of the net operating loss year, or by the end of the 39th month follow-
the amount actually paid in to an employee plan up to the date of the
ing the loss year in the case of corporations.
redetermination. (This reduction for amounts paid in to an employee
In the case of loss years beginning before the date this bill is enacted,
plan only applies if the taxpayer received an aggregate refund of
a refund received pursuant to an election under the bill is considered
more than $10 million.)
to have been paid for the first taxable year ending after the date of
Other aspects of the election.-Under the bill, an election by the tax-
enactment for the purposes of computing interest on the refund. Simi-
payer applies with respect to the entire net operating loss of a given
larly, the statute of limitations, for purposes of determining a defi-
year and cannot be made with respect to only a portion of such a loss.
ciency attributable to a loss year (or attributable to a year to which a
A taxpayer may revoke an election under the bill in such manner
loss is carried back) under this election beginning before the date this
and at such time as the Service prescribes by regulations. The bill
provision is enacted, will be considered to begin to run as if the loss
provides that a taxpayer may revoke a previous election without ob-
year was the first taxable year ending after the date this provision is
taining the consent of the Commissioner at any time within 60 months
enacted.
after the close of the taxable year in which he originally made the
The bill also provides for measures to prevent abuse of these pro-
election. If the taxpayer desires to revoke his election at any later
visions in corporate acquisition situations where different loss carry-
time than this 60-month period, he must obtain the consent of the
back and carryover periods are in effect for the acquiring corporation
Commissioner. (This latter requirement is imposed in order that the
and the transferor corporation. The bill amends sec. 381 (c) to dele-
Commissioner can be satisfied that, if the election is revoked, sufficient
gate authority to the Secretary or his delegate to prescribe regulations
records will be available from which the redetermination of tax lia-
for these situations. Your committee also contemplates the Secretary
bility for the extended carryback years can be made.)
will similarly draft regulations to prevent abuse where corporations
Under the bill, an election which a taxpayer revokes on or before the
with differing loss carryback and carryover periods file consolidated
due date for filing his return for a given taxable year (including exten-
income tax returns.
sions of time for filing the return) is effective with respect to such
By substituting the elective carryback provisions of the bill for
taxable year. An election which is revoked after the due date for
sec. 172 (b) (1) (E) of present law, the bill in effect repeals the "Ameri-
filing a return for a given taxable year (including extensions of time
can Motors rule," which has ceased by its own terms to be applicable
to file the return) is effective with respect to the taxable year in which
and can be removed from the code as obsolete.
the revocation is actually made. Thus, for example, if a taxpayer in-
3. Employee stock ownership plans (secs. 301 and 304 of the bill)
curs a net operating loss in 1975 which (under the bill) he elects to
carry back for a total of 8 years, and then incurs another net operat-
The committee bill generally requires corporations to establish or
ing loss in 1976 followed by a profit in 1977, he may want to revoke his
maintain an employee stock ownership plan if they are to claim a 12
election in order to be able to carry over his 1976 loss against his 1977
percent (instead of a 10 percent) investment credit and if they are
income. If the taxpayer makes his revocation during 1977 or early in
to elect a long carryback (generally 8 years). A corporation electing a
1978, before the due date for filing his return for 1977, the revocation
12-percent credit must establish an employee stock ownership plan
is effective with respect to 1977, SO that the taxpayer may benefit as to
only if its qualified investment property is in excess of $10 million.
his income for that year by any carryover of his 1976 loss to which he
If a corporation's qualified investment is above $10 million and it
may be entitled in light of the revocation of his carryback election.
elects the 12-percent rate (instead of the 10-percent rate) the amount
to be contributed is 1/12 of the investment credit.
A taxpayer is not limited to only one election under the bill. Thus,
a taxpayer who makes an election to obtain an extended carryback and
The committee bill also provides that for certain corporations to be
then later revokes his election may make another election in a later
eligible for the optional long net operating loss carryback, they are
year to carry back a net operating loss for the extended period, as pro-
to contribute to an employee stock ownership plan 25 percent of the
vided in the bill.2
tax benefit received from the additional years of the carryback in the
first year in which this carryback is used. A corporation is to be sub-
2 However, the taxpayer may not make a second extended carryback election for a loss
ject to this requirement if the refund it receives on the first use of the
year which had previously been subject to an election. In addition, a loss from a year
for which an election had previously been made and revoked may not be carried over
long carryback exceeds $10 million.
to any years after a subsequent loss year for which the election is in effect. Such carry-
over losses in this situation become a part of the loss for the subsequent year and are
carried back as with the loss for the subsequent loss year.
56
57
The committee has conditioned these two tax benefits on the estab-
lishment and maintenance of an employee stock ownership plan be-
fied investment property is more than $10 million for the year. For ex-
stock ownership plan are to be required only if the amount of its quali-
cause it believes that some of these tax benefits should flow directly to
the employees and not just to the employer. Also, through their par-
ticipation in an employee stock ownership plan, employees will be
then ¹/₁₂ of the applicable investment credit (or 1/12 of $1,144,000) is to
ample, if in 1975 the company has qualified investment of $12 million,
able to share in the ownership of corporate capital and in the growth
be contributed to a plan if the employer is to qualify for the 12-percent
and profitability of the employer. In addition, the employee stock own-
credit (rather than the 10-percent credit). However, if in 1976 the
ership plan offers the companies involved a new technique of finance
company has qualified investment of $9 million, then no contributions
to meet their general financing requirements. The committee believes
would be required to the plan in 1976 for the employer to receive the
full 12-percent rate in that year.
that through the employee stock ownership plan, many corporate em-
ployers will be introduced to a new technique of corporate finance
there is a recapture of the investment credit, the recapture is to be
If the company prematurely disposes of the eligible property SO
that will enable the company to build its own investment capital while
providing equity ownership for their employees, and in this way bene-
computed without regard to the fact that a contribution to an employee
fit society as a whole.
stock ownership plan was attributable to the allowance of credit. For
Since the assets which are to be contributed by the employer to the
example, if the recapture would be $1 million had there been no em-
plan come from tax benefits (the investment credit or a refund based
ployee stock ownership plan contribution, this same amount is to be
on net operating loss carrybacks), the contribution required by the
recaptured even if a percentage of the credit with respect to the
bill is not to be deductible. Of course, any additional contribution over
property in question had previously been contributed to a plan.
the required amounts is to be deductible under the rules of present law.
The committee recognizes that good faith errors may occur in fol-
Contributions may be in stock or in cash; however, if cash is contrib-
lowing the employee stock ownership plan requirement. For example,
uted, it is to be used to buy common stock of the employer (or securities
since it may be difficult to value an employer's stock, if stock is con-
convertible into common stock).
tributed to the plan it may not be possible to know whether a sufficient
An employee stock ownership plan is required under the committee
amount of the stock has been contributed. The committee intends that
bill only for corporations, since only in this case can the employees
if the employer makes a good faith effort to establish the fair market
acquire ownership of stock of their employer.¹
value of the stock and makes contributions to the plan on the basis
Investment credit and employee stock ownership plans.-Under the
of this good faith valuation, the employer will be entitled to the in-
committee bill, for a corporation (subject to these provisions by
vestment credit even if, on later audit, it is determined that more
reason of having qualified investment in excess of $10 million) to
stock should have been contributed. In this case, however, the employer
have an investment credit of 12 percent (instead of 10 percent) for
is to make up the deficiency by contributing additional shares of stock
the years 1975 and 1976, it is to contribute to an employee stock owner-
(based on the value at the time the contribution originally was to
ship plan an amount equal to one of the two additional percentage
have been made) plus dividends paid between the time that the contri-
points above the 10-percent rate (that is, 1/12 of the available credit).
butions should have been made and the actual time of contribution. The
To meet the contribution requirement under the investment credit
burden is to be on the employer to demonstrate a good faith effort in
rules, amounts are to be contributed to the employee stock ownership
complying with the rules of this provision. To sustain this showing,
plan not less rapidly than ratably over a ten year period from the date
of claim for the credit. The amount of securities to be contributed over
independent, reputable outside organization.
it may be necessary for the employer to have his stock valued by an
the 10 year period is to be determined by the value of the securities at
Net operating loss carryback and employee stock ownership plan.-
the time the claim is made SO the employees will receive the benefit cf
Under the committee bill, for a corporation to use the optional long
any appreciation in value over the 10 year period. If the employer
net operating loss carryback, it is to contribute to an employee stock
fails to make the required contributions, it will not be eligible for the
ownership plan 25 percent of the tax benefit derived from the addi-
credit (or refund, in the case of the long carryback). In addition, the
tional years of the carryback the first time it is used. For example, if
employer is to be subject to a nondeductible civil penalty equal to the
the initial refund under this provision is $40 million, $10 million is
amount involved in failing to make the required contributions. This
penalty is to be not less than one-half of 1 percent of the total amount
however, no contribution would be required.
to be contributed to an employee stock ownership plan. In later years,
that (over 10 years) must be contributed to the plan under these
In the case of net operating loss carrybacks, the committee bill also
provisions.
includes a "de minimis" rule. Under the bill, a contribution to an em-
Your committee recognizes that in many cases the amount of in-
ployee stock ownership plan is not required unless the tax benefit (that
vestment credit would be too low to justify requiring the employer
to establish and contribute to a plan. Therefore, the committee bill
provision is more than $10 million.
is, the refund received) from the first use of the optional carryback
includes a "de minimis" rule, SO that contributions to an employee
Good faith errors may occur in the case of the net operating loss
carryback as well as with the investment credit. As with the invest-
1 However, it is intended that an employee stock ownership plan is not to be required
for those corporations which, by the very nature of their organization and operation,
ment credit, the employer will be able to correct such good faith errors
do not issue stock to shareholders. For example, an employee stock ownership plan would
as long as any contributions plus dividends lost to the plan on account
not be required for mutual insurance companies. However, this exclusion does not apply to
corporations which have the option of issuing stock but choose not to do SO.
of such errors are contributed by the employer.
58
59
Following the rule with respect to the investment credit, the required
expansion purposes, and will use this money to buy stock of the em-
amounts are to be contributed not less rapidly than ratably over a ten
ployer. The employer then will guarantee the debt obligation of the
year period from the date of claim for the refund. The amount of se-
plan and will agree to make annual contributions to the plan sufficient
curities to be contributed over the ten year period is to be determined
to meet the plan's obligation of paying interest and principal on its
by the value of the securities at the time the claim is made. In this
debt. As the plan's debt is paid off, the employees share in the profit-
way the employees will receive the benefit of any appreciation in the
ability of the employer and in any increase in the market value of
value of the securities over the ten year period.
the employer's securities. In this way, workers may share in the own-
If the claim for refund is denied (or, in the case of the investment
ership of corporate capital without redistributing the property or
credit, if the investment credit is not fully allowed), all or part of these
profits from existing assets belonging to existing shareholders.
amounts; as appropriate, (plus dividends earned on the contribution)
Under the committee bill, an employee stock ownership plan may
may be returned to the employer.
be a tax-qualified plan or a nonqualified plan. While the committee
The employee stock ownership plan will benefit persons who are
recognizes that the full benefit of financing through an employee
currently employed by the employer. However, the committee recog-
stock ownership plan may occur only under a qualified plan, neverthe-
nizes that because of the current recession people who otherwise would
less it also recognizes that a company may prefer to establish a non-
be employed by corporations that will benefit from the net operating
qualified plan, in which case the provisions of title I of the Employee
loss carryback may be out of work. The committee also understands
Retirement Income Security Act of 1974 generally are to apply. An
that the basic financial support of such people may be a supplemental
employee stock ownership plan also is to meet such other require-
unemployment compensation benefit plan. Consequently, the commit-
ments as may be prescribed by the Secretary of the Treasury.
tee bill provides that the employer may elect to contribute to a supple-
Terms of employee stock ownership plan.-Under the committee
mental unemployment compensation benefit plan cash in an amount up
bill, a plan established pursuant to the investment credit and net oper-
to one-half of the amount that would otherwise go to the employee
ating loss carryback provisions is not to be used as a tradeoff for other
stock ownership plan. To be eligible for this election, the employer
existing employee benefits or rights. Therefore, if the employer al-
must currently participate in a supplemental unemployment compen-
ready has a pension, profit-sharing, etc. plan, the contribution re-
sation benefit plan, and the plan and trust must meet the requirements
quired under the investment credit or net operating loss provisions is
of sec. 501 (c) (17). Following the basic provisions, the employer may
to be "added on" to the benefits of the existing plan. (Additionally,
choose to contribute to this plan ratably, over a 10-year period.
if an employer wishes to take advantage of both the operating loss
Employee stock ownership plan defined.-Generally. an employee
carryback and the 12-percent investment credit provisions, a con-
stock ownership plan is a stock bonus plan designed to invest primarily
tribution is to be required under each of these provisions.) If the
in securities of the employer. Also, a money purchase pension plan
employer already has an existing plan which meets the requirements
may be coupled with the stock bonus plan. Additionally, in some cases
of an employee stock ownership plan or which is amended to meet
a profit-sharing plan may be used. The committee understands that a
these requirements, the benefits under that plan may be increased as
key element of the employee stock ownership plan is that it provides a
required by the committee bill rather than a new plan being formally
new technique of corporate finance. Therefore. an employee stock
established.
ownership plan is to provide that it may be used (i) to meet general
The committee intends that plan benefits under the investment
financing requirements of the corporation, including capital growth
credit and net operating loss carryback provisions are not to be de-
and transfers in the ownership of corporate stock; (ii) to build into
pendent upon contributions by the employees. Consequently, "match-
employees beneficial ownership of stock of their employer or its affili-
ing" plans or other mandatory contribution plans are not to qualify
ated corporations, substantially in proportion to their relative incomes,
under this provision. If a company has an existing matching plan, it
without requiring any cash outlay, any reduction in pay or other em-
may use this plan to meet the requirements of the bill, as long as no
ployee benefits, or the surrender of any other rights on the part of such
matching payment is required with respect to amounts contributed
employees; and (iii) to receive loans or other forms of credit to ac-
under the terms of the bill, and as long as participation in the plan
quire stock of the employer corporation or its affiliated corporations,
with respect to these contributions is not dependent upon employee
with such loans and credit secured primarily by a legally binding com-
payments.
mitment by the employer to make future payments to the trust in
Generally, contributions to the plan are to be allocated to partici-
amounts sufficient to enable such loans to be repaid. Since the commit-
pants' accounts in proportion to their annual compensation. For this
tee intends that this is to be an introduction to the employee stock
purpose, annual compensation which is greater than $100,000 is to be
ownership plan concept, the plan is to include these provisions, but
disregarded. Also, a qualified and nonqualified plan is to meet the
there is to be no requirement that the plan engage in the activities au-
requirements of sec. 415. Under the bill, if contributions in any one
thorized by these provisions.
year to a participant's account would exceed the limits of section 415,
The committee also understands that, through this technique of
the contribution is to be reallocated to the accounts of other partici-
corporate finance, the employee stock ownership plan may be used to
pants (in proportion to annual compensation) until the additions to
provide employees with the ownership of equity capital. In this regard,
the account of each person participating in the plan reach the limits
generally the plan will borrow money needed by the corporation for
of sec. 415. If, even after such reallocation, contributions otherwise re-
quired under the investment credit and net operating loss carryback
60
61
provisions would be greater than otherwise allowed by the limits of
is exempt from the surtax. In effect, then, the first $25,000 of corporate
sec. 415, it is intended that this amount may be held in escrow and may
income is taxed at the rate of 22 percent and the income in excess of
be allocated to participants' accounts in later years in proportion to an-
$25,000 is taxed at a 48 percent rate.
nual compensation. The beneficiary of the escrow is to be the plan. The
In order to provide tax relief to small businesses that are not par-
employer may establish the escrow and contribute stock or cash to the
ticularly capital intensive and would not be able to benefit as much
escrow, but there is to be no reversion of assets from the escrow to the
from the investment credit, the House bill increases the surtax exemp-
employer unless the employer is not entitled to the full tax benefit on
tion from $25,000 to $50,000. Your committee agrees with the House
which the contribution is based. The escrow agent is to transfer assets
in providing tax relief to small businesses but believes that it is
to the plan each year to the maximum extent possible without violating
appropriate to provide rate reductions in addition to the increase in
the limitations of sec. 415.
the surtax exemption in order to benefit small businesses with tax-
If a plan is not tax-qualified, nevertheless the participation rules of
able incomes under $25,000. As a result, your committee's bill reduces
the Internal Revenue Code are to apply. Since plan assets are to be al-
the normal tax by 4 percentage points (from 22 percent to 18 percent)
located to participants in proportion to compensation (without re-
while at the same time increasing the surtax by 4 percentage points
gard to compensation in excess of $100,000 per year), the plan is not
(from 26 percent to 30 percent). Thus, all corporations, including those
to be integrated directly or indirectly with social security.
with taxable incomes of $25,000 or less, are to receive a tax reduction.
To qualify, the employee stock ownership plan is to provide that
Corporations with taxable incomes of $50,000 or less will save an
the employees are to have the right to vote any stock allocated to their
amount equal to 4 percent of their taxable income. (This is because
accounts.
of the reduction of the normal tax from 22 percent to 18 percent.)
Under the bill, cash or employer securities may be contributed to the
Since the surtax exemption is increased from $25,000 to $50,000, the
employee stock ownership plan. If cash is contributed, it is to be used
normal tax rate, as reduced by the committee to 18 percent, now ap-
to purchase qualifying employer securities. Qualifying employer secu-
plies up to the first $50,000 of a corporation's taxable income. As a
rities are to be common stock with voting and dividend rights that are
result, a corporation having $50,000 or more of taxable income will
the same as those of outstanding common stock. In addition, qualify-
have an annual tax savings of $8,500. (Under present law the tax on
ing securities may be preferred stock that is convertible into common
$50,000 of taxable income is $17,500-22 percent of the first $25,000,
stock. Qualifying securities also may be stock of an affiliate of the
plus 48 percent of the remaining $25,000; under the committee bill,
employer. For this purpose. it is intended that an "affiliate" be de-
the tax is $9,000-18 percent of $50,000.) In effect, then, all corpora-
fined by sec. 407 (d) (7) of ERISA. Cash contributed to an employees'
tions with taxable incomes of $50,000 or more will receive this amount
stock ownership plan may be used to buy new or existing shares.
of tax savings while being taxed at the rate of 48 percent on their tax-
The bill requires employee stock ownership plans to invest in securi-
able income above $50,000.
ties of the employer (or its affiliates). Therefore, even if these securi-
Corporations with taxable incomes between $25,000 and $50,000 will
ties earn no current income (and even if it appears that the company
save $1,000 on the first $25,000 of taxable income (4 percent-the dif-
whose stock is held by the plan will have little if any earnings in the
ference between the present 22 percent and the 18 percent rate pro-
future), the plan trustees may acquire and hold these securities without
vided in the committee bill-of $25,000) plus 30 percent of the corpo-
being subject to any penalty or surcharge and without violating any
rations taxable income between $25,000 and $50,000 (that is, the dif-
law that may govern the prudence or quality of investment (including
ference between the present 48 percent tax rate and the provision
the Employee Retirement Income Security Act of 1974). The commit-
in the committee's bill for the 18-percent rate up to $50,000).
tee intends that no inference is to be drawn in this respect with re-
The increase in the corporate surtax exemption and the reduction in
gard to any other plans.
the corporate rates are effective for taxable years ending after De-
The committee intends that there is not to be a partial termination
cember 31, 1974. They are to apply, however, for only one year in this
of an employee stock ownership plan because the rate of contribution
bill and are to cease to apply for taxable years ending after Decem-
to the plan is decreased after the employer has made his required con-
ber 31, 1975.
tributions under the investment credit and net operating loss
In the case of a corporation which is not on a calendar year basis,
provisions.
the bill provides that the one year increase in the surtax exemption
In the case of amounts contributed to nonqualified plans under these
and the rate reductions are to be treated as an increase and decrease
provisions, beneficiaries generally are to be taxed on distribution to
in rates (sec. 21 of the code). As a result, in the case of a fiscal year
them (under sec. 72) and not at an earlier date (and therefore, not
taxpayer, the increase in the surtax exemption and the rates for the
under sec. 83).
year ending in 1975 will be prorated based on the number of days from
4. Increase in corporate surtax exemption and reduction in rates
January 1, 1975, to the end of that taxable year, and the decrease in the
(sec. 303 of the bill and sec. 11(d), 12(7), 962(c), and 1561(a)
surtax exemption and the rates, for years ending after 1975, will be
of the code)
prorated based on the number of days from the beginning of that tax-
Under present law, corporate income is subject to a normal tax
able year through December 31, 1975. Thus, the tax benefit resulting
at a rate of 22 percent and a surtax at a rate of 26 percent (for a total
from the one year increase in the surtax exemption and the rate re-
tax rate of 48 percent). However, the first $25,000 of corporate income
ductions will, in effect, be spread over two taxable years in the case of
fiscal year taxpayers.
62
63
This increase in the corporate surtax exemption and the rate reduc-
excise tax on trucks, etc. (1) camper coaches and bodies for self-
tions are expected to result in a revenue loss of $1.9 billion, of which it
propelled mobile homes; (2) feed, seed, and fertilizer equipment;
is estimated about 60 percent, or $1.2 billion, will go to businesses
(3) house trailers; (4) ambulances and hearses; (5) concrete mixer
with incomes under $100,000.
units placed or mounted on a truck or trailer chassis; (6) local transit
buses used predominantly in'mass transit service in urban areas; and
5. Increase in minimum accumulated earnings credit (sec. 305 of
(7) units designed as trash containers.
the bill and sec. 535(c) of the code).
Present law also imposes an 8-percent manufacturers excise tax (5
In addition to the regular corporate income tax, present law im-
percent as of October 1, 1977) on the sale of truck and bus-related
poses an accumulated earnings tax of 271/2 percent to 381/2 percent on
parts and accessories (sec. 4061
improperly accumulated corporate earnings where the accumulation
As indicated under the discussion with respect to reasons for the
occurs in an attempt to avoid the individual income tax. In computing
bill, the excise tax on trucks and buses, etc. (and related parts) is
the base on which this tax is imposed, there is excluded an amount
repealed both to provide a stimulus for the purchase of trucks and
equal to the earnings and profits of the taxable year which are re-
buses and because of the additional employment this is expected to
tained for the reasonable needs of the business. This is known as the
create. In recent years, costs of trucks and buses have risen signif-
accumulated earnings credit. Present law provides, however, that in
icantly due to general inflation and added safety requirements. Sales
any case, there is to be a minimum credit of $100,000 of earnings which
of trucks have declined significantly in recent months as the price has
may be accumulated before any income is subject to this tax. This is
risen and as the economy has slackened, thus adding to the unemploy-
a cumulative credit, however, rather than an annual credit.
ment rate. Factory production of the truck-trailer units has shown an
Since 1958, when the accumulated earnings credit was increased
even greater drop. The committee believes that the cost increases will
from $60,000 to its present level of $100,000, there have been substan-
be reduced by the repeal of the excise tax. The committee also intends
tial increases in costs which require additional capital to make an in-
that the repeal of the 10-percent excise tax on trucks and buses, etc.
vestment of the same type and scope. Increased borrowing costs cause
and the 8-percent excise tax on related parts and accessories should be
small businesses to rely more heavily upon internal generation of capi-
fully passed on to the purchasers, as it intended in the repeal of the
tal for posible future needs. Quite often small businesses do not have
excise tax on passenger automobiles and light-duty trucks in the
the specific plans for expansion which are required, under the law, to
Revenue Act of 1971.
justify accumulations of corporate earnings in excess of the minimum
Under the bill, the repeal is effective the day after the enactment
credit. An increase in the credit not only adjusts for the rise in costs.
of the bill, with floor stocks refunds and consumer purchase refunds
but also provides a wider margin for the retention of earnings for
(as described below) available with respect to trucks and buses, etc.
future contingencies, and thus reduces borrowing pressures on small
(and related parts) sold after March 13, 1975.
businesses. As a result, your committee believes it is appropriate to
Floor stocks refunds.-Under present law (sec. 6412(a) (2)), floor
increase the amount of the credit.
stocks refunds would be made available in the case of rate reductions
The committee's bill increases the amount of the accumulated earn-
on trucks and buses, etc. (and related parts), scheduled for October 1,
ings credit from $100,000 to $150,000. Thus, a corporation may accum-
1977.
ulate as much as $150,000 of earnings before its retained earnings may
To avoid creating competitive disadvantages because of the rela-
be subject to the accumulated earnings tax. The House bill did not
tive sizes of dealers' inventories and in conformity with prior prac-
include any such provision.
tice, the bill makes provision for floor stocks refunds with respect
The amendments related to the increase in the minimum accumu-
to trucks and buses, etc. (and related parts), in dealers' inventories on
lated earnings credit apply to taxable years beginning after Decem-
the tax repeal date (the day after the date of the enactment of the
ber 31, 1974.
bill). This floor stocks refund (or credit) is available with respect to
trucks and buses, etc. (and related parts), sold by the manufacturer
C. Changes Affecting Individuals and Businesses
or importer before the tax repeal date, which are still held by the
dealer on that date, and which have not been used but are intended for
1. Repeal of manufacturers excise tax on trucks, buses, tractors,
sale by him. The credit or refund for these floor stocks must be claimed
etc. and related parts and accessories (sec. 402 of the bill and
by the manufacturer or importer before the first day of the 10th
sections 4061-63 of the code)
calendar month beginning after the tax repeal date, based upon re-
Under existing law, there is imposed a 10-percent manufacturers
ports submitted to him from the dealer before the first day of the 7th
excise tax (5 percent on or after October 1, 1977) on the sale of
calendar month beginning after the tax repeal date. Also, before the
trucks and buses, truck trailers and semi-trailers, and highway tractors
first day of the 10th calendar month, the manufacturer or importer
used in combination with trailers and semitrailers (sec. 4061
must have reimbursed the dealer for the tax or obtained his written
The Revenue Act of 1971 exempted light-duty trucks, etc. (those
consent to the allowance of the refund or credit. In addition, the
having a gross vehicle weight of 10,000 pounds or less) at the time
manufacturer or importer must have in his possession evidence of the
when the tax on the sale of passenger automobiles was repealed. There
inventories on which the credit or refund is claimed (to the extent re-
are currently the following exemptions (under sec. 4063) from the
quired by regulations prescribed by the Secretary of the Treasury or
his delegate).
64
65
A truck, bus, etc. (or a part or accessory the tax on which is re-
calendar month after the date of repeal of the tax. The reimbursement
pealed by this provision), is not to be treated as having been sold
may be made directly by the manufacturer to the consumer or may
before the tax repeal date (and, generally, is to be treated as being
be made through the dealer who originally sold the article.
in the dealer's inventory on that date) unless possession or right to
The committee intends and expects the Internal Revenue Service
possession of the vehicle (or part) passes to the purchaser before that
to allocate the necessary personnel to process consumer refund claims
date.
as soon as possible. The manufacturer is not to be permitted to claim a
It is expected that these floor stocks refund claims will be processed
refund until he shows he has already reimbursed the ultimate pur-
promptly. It is anticipated that the Internal Revenue Service will
chaser. However, there is no intention that the Government delay re-
make refunds within 45 days of the receipts of the claims. There is no
funding taxes or that the manufacturers be out-of-pocket for the taxes
intention to have the Government unreasonably retain these excess
any longer than is necessary for administrative reasons. Indeed, any
taxes or to have the manufacturers be out-of-pocket the amounts of
unnecessary delays would detract from the stimulative purposes of
these taxes for an extended period of time. Indeed, any such unneces-
these repeal provisions.
sary delays would tend to detract from the stimulative purposes of
Certain uses by a manufacturer, etc.-Under present law, if a manu-
these provisions.
facturer (or importer) of a truck, bus, etc. (or related part), uses the
Refunds with respect to certain consumer purchases.-In connec-
vehicle himself (other than in the manufacture of another taxable
tion with the repeal of the excise tax on trucks and buses, etc. (and
article), he is liable for tax in the same manner as if the article were
related parts), the committee's bill also makes provision for refunds
sold by him (sec. 4218(a)). In this case, the tax is computed on the
of the excise tax to consumers with respect to their purchases after
price at which he (or other manufacturers or importers) sells the same
March 14, 1975, and before the day after the date of enactment of this
or similar articles in the ordinary course of trade.
bill, when the tax is actually eliminated. Provision for these refunds
The committee intends that where a manufacturer (or importer)
is necessary to forestall the postponement of purchases of trucks and
pays a tax on account of his use of the article during the consumer re-
buses, etc. (and related parts), until the date of the repeal of the tax.
fund period, he is as much entitled to reimbursement as would be any
(This provision is consistent with Congress' actions in 1965 and 1971
other consumer. Accordingly, the bill provides that where a truck, bus,
with regard to passenger automobiles, light-duty trucks, and related
etc. (or related part), is used by a manufacturer (or importer) and as
parts, such as air conditioners, etc.-articles where it was thought
a result of this use a tax was paid after March 13, 1975, the payment is
delays in purchases might adversely affect total sales.)
to be treated as an overpayment.
The bill provides that the government is to refund (or credit) to
Leases, installment sales, etc.-In the case of partial payments in
the manufacturer (or importer) of the tax-repealed truck, bus, etc.
connection with leases, certain types of installment sales, conditional
(or related part), the tax he paid on his sale of the article. However,
sales, or certain types of chattel mortgage arrangements, present law
to obtain this refund (or credit) the manufacturer (or importer) must
(sec. provides that the manufacturers excise tax is to be
file his claim with the Internal Revenue Service before the beginning
paid upon each partial payment and is to be based on the tax rate in
of the 10th calendar month beginning after the day the tax is repealed.
effect on the date each partial payment is due. To avoid windfall bene-
This claim is to be based on information submitted to him by the
fits to a manufacturer where the lease, installment sale, etc., took into
dealer (or other person) who sold the article to the ultimate pur-
account the 10-percent tax (or 8-percent parts tax), the bill provides
chaser. This information must be submitted to the manufacturer be-
that no tax is due on partial payments after the tax repeal date if the
fore the first day of the 7th month after the date of repeal. Also,
lessor or vender establishes that the amount of the payments payable
before the beginning of the 10th calendar month after the date of
after that date has been reduced by the amount of tax that would other-
repeal, the "ultimate purchaser" must be reimbursed for the tax paid
wise have been due with each partial payment after that date. If the
on the article he purchased. The "ultimate purchaser" is the consumer
lessor or seller does not reduce the amount of the payments, however,
or user of the new article.
the tax reduction provided by the bill will not apply to the article on
A truck, bus, etc. (or related part), is not to be treated as having
which those partial payments are being made. In other words, for the
been sold before the date of enactment unless possession or right to
tax reduction to be available in partial payment cases, the benefit of
possession of the vehicle has passed to the purchaser before that date.
the repeal must be passed on to the lessee or purchaser.
It is expected that a consumer who purchases a truck, bus, etc. (or
Effective date.-The repeal of the manufacturers excise tax on
related part) during the post-March 13 period will be informed that,
trucks and buses, etc. (and related parts and accessories) applies to
if these excise taxes are repealed, he will be refunded the amount of
articles sold on or after the day after the date of the enactment of the
the tax. In these cases, the dealer is to notify the manufacturer as to
bill. The bill also provides that an article is not to be considered as
the persons to whom he sold specific trucks, buses, etc. (or related
sold before the day after the date of enactment unless possession or
parts), during the refund period. This notification must reach the
right to possession passes to the purchaser before that day.
manufacturer before the beginning of the 7th calendar month after
The bill also allows floor stock refunds for tax-paid articles held by
the repeal of the tax. This gives the manufacturer time to process the
a dealer on the day after the date of enactment, and consumer refunds
claims, make reimbursements, and file his overall claim (or claims)
for tax-paid articles sold to ultimate consumers after March 13, 1975,
with the Internal Revenue Service before the beginning of the 10th
and on or before the date of enactment.
66
67
Revenue effect.-The revenue loss from the repeal of the excise tax
The tax credit amounts to 20% of the wages paid or incurred by the
on trucks and buses, etc. is estimated to be $224 million for the re-
taxpayer for services rendered to the employer before July 1, 1976.
mainder of fiscal 1975 and $560 million for fiscal 1976. The repeal of
Thus, after the eligible employee had worked the first 30 days, the tax-
the excise tax on truck and bus parts and accessories is expected to re-
payer would receive the credit for the wages paid or incurred by the
sult in a revenue reduction of $86 million for fiscal 1975 and $160 mil-
taxpayer for the first 30 days' of employment plus the wages for all
lion for fiscal 1976. Thus, the combined revenue loss for fiscal 1975
days the employee continued to work after the original 30 day period
will be about $310 million and $720 million for fiscal 1976. The revenue
through June 30, 1976. The Federal welfare recipient incentive em-
loss will come out of the Highway Trust Fund.
ployment tax credit would be available to both business and non-busi-
2. The Federal Welfare Recipient Employment Incentive Tax
ness employers. The tax credit applies only to the wages paid or in-
Credit (sec. 401) of the bill and secs. 50A and 50B of the code)
curred by a taxpayer for an AFDC recipient whom such taxpayer
The Committee adopted an amendment to the work incentive (WIN)
hires after the date of enactment of this act.
tax credit to provide that an employer who hires a recipient of the
The sum of the credits allowed under the WIN tax credit provi-
aid to dependent children (AFDC) program under Title IVA of the
sions for employment under a work incentive program established
Social Security Act would be eligible for a federal welfare recipient
under Section 432 (b) (1) of the Social Security Act and under the
employment incentive tax credit equal to 20 percent of the gross wages
Federal welfare recipients employment incentive tax credit is subject
paid to the recipient.
to a limitation based on the tax liability of the taxpayer. The sum of
The WIN tax credit which was authorized under the 1971 Revenue
such credit is 100 percent of the first $25,000 of tax liability for the
Act applies only to AFDC recipients who are placed in employment
taxable year plus 50 percent of SO much of the tax liability for the
through the Work Incentive program. The WIN tax credit amounts
taxable year as exceeds $25,000. A tax credit for wages paid to an in-
to 20 percent of the gross wages paid the employee for the first 12
dividual may be allowable under either the WIN tax credit or under
months of employment during the period of 24 months from the first
the Federal welfare recipients employment incentive tax credit, but is
day of employment. The maximum amount of the WIN tax credit
not allowable under both for the same wages paid to the same in-
which may be claimed by an employer in any tax year is $25,000 plus 50
dividual.
percent of any remaining tax liability in excess of $25,000. Excess
The Committee believes that any revenue loss under this program
credit may be carried forward for seven years or carried back for three
will be offset by the revenue saved under the AFDC Program.
previous years. There are restrictions on eligibility for the WIN tax
credit which include (1) the individual must be retained by the em-
ployer for an additional 12 month period following completion of
the first 12 month eligibility; and (2) an employer must certify that
the position to be filled is not the result of (A) a layoff with other
employees waiting to be recalled, (B) a strike or lock-out, and (C)
a reduction in the wages, employment benefits, or regular hours of
other workers currently in positions similar to the job vacancy being
filled.
The federal welfare recipient employment incentive tax credit
applies solely to the employment of an AFDC recipient who:
(A) has been certified by the State or local welfare department as
being eligible for financial assistance for AFDC and as having con-
tinuously received such financial assistance during the 90 day period
which immediately precedes the date on which such individual is hired
by the taxpayer,
(B) has been employed by the taxpayer for a period in excess of 30
consecutive days on a substantially full-time basis,
(C) has not displaced any other individual for employment by the
taxpayer, and
(D) is not a migrant worker (for purposes of this tax credit, a
migrant worker means an individual who is employed for services for
which the customary period of employment by one employer is less
than 30 days if the nature of such services requires the employee to
travel from place to place for a short period of time).
(E) bears any relationship to the taxpayer described in paragraphs
(1) through (8) of Section 152(a) of the Internal Revenue code of
1954 as amended.
V. STATISTICAL APPENDIX
TABLE 1.-INDIVIDUAL INCOME TAX BURDEN 1 UNDER PRESENT LAW AND UNDER THE PROVISION IN THE BILL WHICH GRANTS A REFUND OF 1974 INCOME TAX LIABILITY
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personal expenses of 17 percent of income)]
Tax liability
Married couple with
Married couple with
Married couple with
Married couple with
Single person
no dependents
1 dependent
2 dependents
4 dependents
Under
Under
Under
Under
Under
Under
Under
Under
Under
Under
the
Reduc-
present
the
Reduc-
present
the
Reduc-
present
the
Reduc-
present
the
Reduc-
present
law
bill
tion
law
bill
tion
law
bill
tion
law
bill
tion
law
bill
tion
Adjusted gross income
$28
0
$28
0
0
0
0
0
0
0
0
0
68
0
$3,000
$138
$38
$100
491
391
100
322
$222
100
$208
$108
$100
$98
0
$98
0
0
$5,000
100
484
384
100
362
262
100
245
$145
100
$28
0
$28
$6,000
681
581
$212
109
837
737
100
694
594
100
559
459
100
312
100
$8,000
1,087
978
1,152
1,037
115
1,010
909
101
867
767
100
586
486
100
$10,000
1,482
1,334
148
976
876
100
1,996
1,797
200
1,573
1,415
157
1,408
1,267
141
1,261
1,135
126
$12,500
$15,000
2,549
200
2,029
1,829
200
1,864
1,678
186
1,699
1,529
170
1,371
1,233
137
2,349
200
1,826
1,643
183
3,145
2,945
200
2,516
2,316
200
2,329
2,129
200
2,156
1,956
$17,500
$20,000
3,784
3,584
200
3,035
2,835
200
2,848
2,648
200
2,660
2,460
200
2,285
2,085
200
3,600
150
3,330
3,180
150
5,230
5,080
150
4,170
4,020
150
3,960
3,810
150
3,750
$25,000
6,850
6,750
100
5,468
5,368
100
5,228
5,128
100
4,988
4,888
100
4,508
4,408
100
$30,000
100
6,398
6,298
100
5,858
5,758
100
8,625
8,525
100
6,938
6,838
100
6,668
6,568
$35,000
$40,000
10,515
10,415
100
8,543
8,443
100
8,251
8,151
100
7,958
7,858
100
7,373
7,273
100
1 Computed without reference to the tax tables for returns with adjusted gross income under $10,000.
between $20,000 and $30,000 of adjusted gross income but not below $100.
2 Granting a 100-percent refund of 1974 income tax liability up to $100 without a phaseout and a
Note: Details may not add to totals because of rounding.
10-percent refund of tax above $1,000 with a maximum refund of $200 with the refund phased out
TABLE 2.-INDIVIDUAL INCOME TAX BURDEN 1 UNDER PRESENT LAW AND UNDER THE PROVISION IN THE BILL WHICH DECREASES BY 1 PERCENTAGE POINT THE TAX RATES
APPLICABLE TO THE FIRST $4,000 OF TAXABLE INCOME
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personal expenses of 17 percent of income)]
Tax liability
Married couple with
Married couple with
Married couple with
Married couple with
Single person
no dependents
1 dependent
2 dependents
4 dependents
Under
Under
Under
Under
Under
Under
Under
Under
Under
Under
present
the
Reduc-
present
the
Reduc-
present
the
Reduc-
present
the
Reduc-
present
the
Reduc-
Adjusted gross income
law
bill
tion
law
bill
tion
law
bill
tion
law
bill
tion
law
bill
tion
$3,000
$138
$128
$9
$28
$26
$2
0
0
0
0
0
0
0
0
0
69
$5,000
491
461
29
322
300
22
$208
$193
$14
$98
$91
$7
0
0
0
$6,000
681
641
39
484
452
32
362
338
24
245
228
17
$28
$26
$2
$8,000
1,087
1,047
40
837
797
40
694
654
40
559
522
36
312
291
21
$10,000
1,482
1,442
40
1,152
,112
40
1,010
970
40
867
827
40
586
548
38
$12,500
1,996
1,956
40
1,573
1,533
40
408
1,368
40
1,261
1,221
40
976
936
40
$15,000
2,549
2,509
40
2,029
1,989
40
1,864
1,824
40
1,699
1,659
40
1,371
1,331
40
$17,500
3,145
3,105
40
2,516
2,476
40
2,329
2,289
40
2,156
2,116
40
1,826
1,786
40
$20,000
3,784
3,744
40
3,035
2,995
40
2,848
2,808
40
2,660
2,620
40
2,285
2,245
40
$25,000
5,230
5,190
40
4,170
4,130
40
3,960
3,920
40
3,750
3,710
40
3,330
3,290
40
$30,000
6,850
6,610
40
5,468
5,428
40
5,228
5,188
40
4,988
4,948
40
4,508
4,468
40
$35,000
8,625
8,585
40
6,938
6,898
40
6,668
6,628
40
6,398
6,358
40
5,858
5,818
40
$40,000
10,515
10,475
40
8,543
8,503
40
8,251
8,211
40
7,958
7,918
40
7,373
7,333
40
1 Computed without reference to the tax tables for returns with adjusted gross income under
Note: Details may not add to totals because of rounding.
10,000.
TABLE 3.-INDIVIDUAL INCOME TAX BURDEN UNDER PRESENT LAW AND UNDER THE PROVISION IN THE BILL WHICH GRANTS A NONREFUNDABLE $200 TAX CREDIT IN LIEU OF THE $750
PERSONAL EXEMPTION DEDUCTION
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personal expenses of 17 percent of income)]
Tax liability
Married couple with
Married couple with
Married couple with
Married couple with
Single person
no dependents
I dependent
2 dependents
4 dependents
Under
Under
Under
Under
Under
Under
Under
Under
Under
Under
present
the
Reduc-
present
the
Reduc-
present
the
Reduc-
present
the
Reduc-
present
the
Reduc-
Adjusted gross income
law
bill
tion
law
bill
tion
law
bill
tion
law
bill
tion
law
bill
tion
$3,000
$138
$59
$79
$28
0
$28
0
0
0
0
0
0
0
0
0
70
$5,000
491
433
58
322
$169
153
$208
0
$208
$98
0
$98
0
0
0
$6,000
681
637
44
484
353
131
362
$153
209
245
0
245
$28
0
$28
$8,000
1,087
1,064
23
837
722
115
694
522
173
559
$322
237
312
0
312
$10,000
1,482
1,465
17
1,152
1,046
106
1,010
846
164
867
646
221
586
$246
340
$12,500
1,996
1,991
5
1,573
1,503
70
1,408
1,303
105
1,261
1,103
159
976
703
274
$15,000
2,549
2,549
0
2,029
1,973
57
1,864
1,773
92
1,699
1,573
127
1,371
1,173
198
$17,500
3,145
3,145
0
2,516
2,491
25
2,329
2,291
38
2,156
2,091
64
1,826
1,691
134
$20,000
3,784
3,784
0
3,035
3,028
7
2,848
2,828
20
2,660
2,628
32
2,285
2,228
57
$25,000
5,230
5,230
0
4,170
4,170
0
3,960
3,960
0
3,750
3,750
0
3,330
3,330
0
$30,000
6,850
6,850
0
5,468
5,468
0
5,228
5,228
0
4,988
4,988
0
4,508
4,508
0
$35,000
8,625
8,625
0
6,938
6,938
0
6,668
6,668
0
6,398
6,398
0
5,858
5,858
0
$40,000
10,515
10,515
0
8,543
8,543
0
8,251
8,251
0
7,958
7,958
0
7,373
7,373
0
1 Computed without reference to the tax tables for returns with adjusted gross income under
Note: Details may not add to totals because of rounding.
$10,000.
TABLE 4.-INDIVIDUAL INCOME TAX BURDEN 1 UNDER PRESENT LAW AND UNDER THE PROVISION IN THE BILL WHICH GRANTS AN EARNED INCOME CREDIT
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personal expenses of 17 percent of income)]
Tax liability
Married couple with
Single person
Married couple with
no dependents
Married couple with
1 dependent
Married couple with
2 dependents
4 dependents
Under
Under
Under
Under
Under
present
the
Reduc-
Under
Under
Adjusted gross income
present
the
Reduc-
Under
Under
law
bill
present
the
Reduc-
Under
tion
law
bill
tion
present
the
Reduc-
law
bill
present
the
tion
law
Reduc-
bill
tion
law
bill
tion
$3,000
$138
-$163
$5,000
$300
$28
-$272
491
$300
0
191
300
-$300
322
$300
0
-$300
$300
0
$6,000
22
300
-$300
$300
681
481
$208
200
-93
$8,000
484
300
284
$98
200
-202
362
300
0
1,087
1,087
162
200
-300
$10,000
837
245
300
0
837
45
0
1,482
694
200
694
$28
-173
200
1,482
71
0
0
1,152
559
1,152
559
$12,500
0
0
1,010
1,010
312
312
1,996
0
0
1,573
867
0
1,996
867
$15,000
1,573
0
0
1,408
586
586
0
2,549
2,549
0
1,408
0
$17,500
2,029
2,029
0
1,261
1,261
0
1,864
976
1,864
976
0
0
3,145
3,145
0
$20,000
2,516
2,516
1,699
0
1,699
0
2,329
2,329
1,371
1,371
0
3,784
3,784
0
0
$25,000
3,035
3,035
2,156
0
5,230
5,230
2,848
2,156
0
2,848
0
1,826
1,826
0
0
4,170
4,170
0
2,660
2,660
0
$30,000
3,960
3,960
2,285
0
2,285
0
6,850
6,850
0
5,468
5,468
3,750
0
3,750
0
$35,000
8,625
0
5,228
5,228
3,330
0
3,330
0
8,625
6,938
6,938
4,988
D
4,988
0
$40,000
10,515
6,668
6,668
0
4,508
6,398
4,508
0
10,515
0
8,543
8,543
0
6,398
0
8,251
8,251
5,858
0
5,858
0
7,958
7,958
0
7,373
7,373
0
$10,000. 1 Computed without reference to the tax tables for returns with adjusted gross income under
Note: Details may not add to totals because of rounding.
2 Granting to returns with dependent children a refundable tax credit of 10 percent of wage and
$4,000 and $8,000 of adjusted gross income.
salary and self-employment income with a $400 maximum credit with a phaseout of the credit between
72
Reduc-
tion
0
0
$28
312
380
314
238
174
97
40
40
40
40
Married couple with
4 dependents
0
0
Under
the
bill
0
0
$206
663
133
ininion 2,188
1,651
290
468
818
333
VI. COSTS OF CARRYING OUT THE BILL AND VOTE OF
0
Under
present
law
0
$28
312
586
976
1,371
826
2,285
3,330
330
508
858
invoice
THE COMMITTEE IN REPORTING THE BILL
0
Reduc-
tion
$98
245
277
261
199
166
104
72
40
40
40
40
In compliance with section 252 (a) of the Legislative Reorganization
Act of 1970, the following statement is made relative to the costs
incurred in carrying out this bill. Your committee estimates that the
TABLE 5.-INDIVIDUAL INCOME TAX BURDEN 1 UNDER PRESENT LAW AND UNDER THE PROVISIONS IN THE BILL WHICH DECREASE BY 1 PERCENTAGE POINT THE TAX RATES APPLICABLE TO THE
Married couple with
2 dependents
the
bill
0
0
0
$282
606
3,710
4,948
918
bill will reduce tax liability by $29.2 billion in calendar year 1975, $9.3
Under
1,063
1,533
2,051
2,588
6,358
billion in 1976, and $4.5 billion in 1977. The Treasury Department
FIRST $4,000 OF TAXABLE INCOME AND GRANT A NONREFUNDABLE $200 TAX CREDIT IN LIEU OF THE $750 PERSONAL EXEMPTION DEDUCTION
present
law
0
$98
559
- 4,988
699
156
660
750
398
Note: Details may not add to totals because of rounding.
agrees with this statement. Part III of this report contains a more
detailed statement of the revenue effect of the bill.
Under
245
867
261
958
In compliance with section 133 of the Legislative Reorganization
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personal expenses of 17 percent of income)]
Act of 1946, the following statement is made relative to the record
tion
0
Reduc-
$207
249
212
203
145
131
77
59
40
40
40
40
vote by the committee of the motion to report the bill.
The bill was ordered reported by a recorded vote of 16 ayes and 2
nays, as follows:
Tax liability
Married couple with
1 dependent
the
0
0
Under
bill
$113
482
806
1,263
788
920
188
invoice
1,733
2,251
628
211
In favor-16 (Messrs. Long, Talmadge, Hartke, Ribicoff, Byrd of
Virginia, Nelson, Mondale, Gravel, Bentsen, Hathaway, Haskell, Han-
sen, Dole, Packwood, Roth and Brock).
Under
present
law
0
$208
362
694
1,010
1,408
1,864
329
848
3,960
228
6,668
251
Opposed-2 (Messrs. Curtis and Fannin).
(73)
Reduc-
tion
$28
190
171
155
146
110
96
65
47
40
40
40
40
Married couple with
no dependents
bill
0
Under
the
$132
313
682
1,006
1,463
1,933
451
2,988
4,130
5,428
898
503
Under
present
law
$28
322
484
837
1,152
1,573
029
516
3,035
4,170
468
938
543
Reduc-
tion
$95
94
83
63
57
45
40
40
40
40
40
40
40
Single person
Under
the
bill
$42
396
597
1,024
- 8,585
1,425
1,951
509
3,105
3,744
5,190
6,810
Under
present
law
$138
491
681
1,087
1,482
1,996
549
3,145
3,784
5,230
6,850
850
8,625
Computed without reference to the tax tables for returns with adjusted gross income under
Adjusted gross income
$3,000
$5,000
$6,000
$8,000
$10,000
$12,500
$15,000
$17,500
$20,000
$25,000
$30,000
$35,000
$40,000
$10,000.
VII. CHANGES IN EXISTING LAW
In the opinion of the committee, it is necessary in order to expedite
the business of the Senate, to dispense with the requirements of sub-
section 4 of rule XXIX of the Standing Rules of the Senate (relating
to the showing of changes in existing law made by the bill, as
reported).
(75)
VIII. SUPPLEMENTAL VIEWS OF SENATOR HARRY F.
BYRD, JR.
"I believe this legislation should be reported to the Senate, but I
reserve judgment as to how I shall vote when the bill comes before
the Senate.
"I am deeply concerned that the $29 billion revenue loss will greatly
increase the deficit. In the absence of a reduction in spending, this
legislation could accelerate inflation, which itself is a cruel tax."
HARRY F. BYRD, Jr.
(77)
IX. SUPPLEMENTAL VIEWS OF SENATORS CURTIS AND
FANNIN
We cannot support H.R. 2166. In its present form, it simply fails
to meet the needs of our economy. Today, our economy is beset both
by recession and by inflation. These two problems are interrelated.
Inflation is a persistent and cancerous malady which can be overcome
only by firm and courageous actions. Inflation cannot be ignored; it
is a cause of recession. In his testimony before the Committee on
Finance, Secretary of the Treasury Simon said:
More than anything else it is inflation which has created
our current recession. Inflation destroys consumer confidence,
investor confidence, and public confidence in the ability of our
government to perform its obligations.
We do not oppose the use of a reasonable tax cut to stimulate the
economy, but if a tax cut is to be used to combat recession it must,
in our view, meet several criteria. First, a tax cut must strike a balance
in our economic policy. The recession is severe and we must seek to
counteract it. Nevertheless, we cannot follow policies which will again
overheat the economy and lead to additional period of double-digit
inflation. Second, a tax cut should be temporary in nature, cast in the
form of a rebate or refund, and coupled with modification of those
provisions of the tax law (such as the investment tax credit) that are
proven job-producers. Permanent reduction in taxes (whether ac-
complished by rate reductions or otherwise) have no place in a tempo-
rary anti-recession tax cut. Permanent changes tend to invite budge-
tary problems for future years. Third, special consideration should
be given to those individuals with low incomes who, because of infla-
tion, face severe hardship. Many of the problems of the poor cannot be
met by reducing taxes, but where tax relief is effective, action should
be taken. Fourth, we believe that to provide jobs the relief should go
to business, but if it is to go to individuals, it should give particular
consideration to middle income taxpayers who have been hit hardest
by increased taxation due to the inflationary rise in incomes. Sub-
stantial rebates of tax reduction to middle income taxpayers could
have the greatest impact on consumer purchase of durable goods
which, in turn, would put more employees to work in the industrial
sector.
Unfortunately, H.R. 2166 fails to meet these criteria. For calendar
year 1975, the bill would reduce Federal revenues by $29.2 billion.
This is $9.3 billion more than the House bill and $13 billion more than
requested by the President. At this level, we risk both unacceptable
budgetary deficits and a new round of inflation.
Moreover, although cast as a temporary tax cut, the bill contains
provisions which are either expressly made permanent or likely to
become permanent features of our tax structure. Of $29.2 billion in
tax reductions provided for in the bill, $21.2 billion is for relief to
(79)
80
individuals. Of this amount, $9.9 billion is attributable to provisions
we consider to be permanent in nature. These "permanent" provisions
include a $200 optional tax credit in lieu of the $750 personal exemp-
tion ($6.1 billion), a reduction of one percentage point in the four
lowest income tax brackets ($2.0 billion), a refundable 10 per cent
credit against earned income for workers with families who earn
X. SUPPLEMENTAL VIEWS OF SENATOR BROCK
$8,000 or less annually ($1.7 billion), and a provision permitting
individuals to carryback capital losses for three years ($0.1 billion).
Although I have reservations about the size of the tax cut and
The bill also makes permanent changes in the pattern of business
various tax "reform" sections of the Tax Reduction Act of 1975, I
taxation. The investment tax credit rate is increased to 12 per cent
am particularly concerned about the earned income credit section of
on a temporary basis and to 10 per cent on a permanent basis. A
this bill. My remarks will be addressed to the latter issue.
special loss carryback provision for corporations has been added and
There are many serious problems related to the present inequities
made permanent. The manufacturer's excise tax on trucks has been
in Aid to Families with Dependent Children (AFDC), employed vs.
repealed. Additionally, the bill increases the corporate surtax exemp-
unemployed assistance, and other long-standing weaknesses within
tion to $50,000 and reduces the rate at which corporations with less
welfare assistance programs, that lead me to conclude that if we adopt
than $50,000 in earnings will be taxed. These last two provisions are
an earned income credit at the present time there will be little eco-
technically temporary, but they may well become permanent. These
nomic impact and no welfare reform.
provisions may well be desirable as a matter of tax policy, but they
This bill is not a welfare reform bill. Our attention should be con-
do not belong in an ostensibly temporary anti-recession tax cut. They
centrated on those measures which give us an immediate economic
can be, and should be considered in the context of general tax reform
stimulus. The earned income credit is little more than an income main-
later in this session of the Congress.
The bill does grant tax relief of low income families, but we are
tenance proposal and should be discussed as such. In approving this
concerned that, given the very special and particular purpose of this
measure we would be adding just another program to the proliferation
of the presently inadequate public assistance statutes. Specifically the
legislation, the bill may be tilted too far in this direction. While low
income taxpayers are likely to spend a tax reduction, the recession
proposal could complicate the present coverage of employed AFDC
is particularly pronounced in the case of durable goods. During 1974,
recipients. In addition, consideration should be given to the way the
earned income credit would relate to other programs to assist low-
personal consumption expenditures (measured in constant 1958 dol-
income families, such as the food stamp, housing, and health care
lars) dropped almost 9 per cent. A broadly-based stimulus for the
programs, as well as AFDC.
purchase of all durable goods (the so-called "big ticket" items) is
needed. This the bill does not do. For example, the maximum rebate
In conclusion, the earned income credit should not be a part of this
of 1974 taxes is $200 and no taxpayer with adjusted gross income in
bill. This section is a welfare reform measure that attempts to build
excess of $20,000 can receive even this "maximum" amount. The bill
upon a weak welfare system. We should focus our attention on the
should provide relief to low income taxpayers, but its purpose as a
measures that promote economic activity and employment.
stimulative device requires that the tax reductions be balanced.
BILL BROCK.
(81)
For these reasons, we have reluctantly concluded that we cannot
support H.R. 2166 in its present form.
o
We need to remember certain economic facts of life. The total public
debt outstanding as of March 12, 1975, was $501,559,000,000. The esti-
mated deficit for the year ending July 1, 1975, (Fiscal Year 1975) is
$45 billion, and for the year ending July 1, 1976, (Fiscal Year 1976) is
$80 billion. The interest on the national debt in Fiscal Year 1975 was
$32.9 billion, and it is estimated it will climb to $36 billion in Fiscal
Year 1976.
The greatest spur that we could give to our economy would be to put
the Federal government's house in order. This would restore confidence
throughout all segments of our economy.
CARL T. CURTIS,
U.S. Senator.
PAUL J. FANNIN,
U.S. Senator.
94TH CONGRESS
1st Session
}
HOUSE OF REPRESENTATIVES
{
REPORT
No. 94-19
TAX REDUCTION ACT OF 1975
REPORT
OF THE
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
TOGETHER WITH SUPPLEMENTAL AND
MINORITY VIEWS
ON
H.R. 2166
FEBRUARY 25, 1975.-Committed to the Committee of the Whole House
on the State of the Union and ordered to be printed
U.S. GOVERNMENT PRINTING OFFICE
47-320 0
WASHINGTON : 1975
CONTENTS
Page
I. Summary
3
II. Reasons for the Bill
5
III. Revenue Effects
14
IV. General Explanation
21
A. Refund of 1974 Individual Income Taxes
21
Eligibility for refunds
22
Taxable year affected
23
Procedures for making refunds
23
Other aspects of the refunds
23
Interest on refunds
24
B. Disregard of Refunds with Respect to Federally Assisted
Benefit Programs
25
C. 1975 Income Tax Reductions for Individuals
26
1. Increase in low income allowance and standard
deduction (secs. 201 and 202 of the bill and secs.
141 (b) and (c), 3402(m)(1) and 6012(a) (1) of
the code)
26
2. Income tax credit against earned income (sec. 203
of the bill and secs. 42 and 6401 (b) of the code)
27
3. Change in withholding tables to reflect increases
in standard deduction and low income allowance
and the earned income credit (sec. 204 of the bill
and sec. 3402 of the code)
29
D. Investment Credit
30
Increase in rate to 10 percent
32
Limitation on rate increase
32
Increase in 50-percent limit for utility property
33
Increase in limitation for used property
35
Progress payments
35
E. Increase in Corporate Surtax Exemption
41
V. Statistical Appendix
42
VI. Effect on the Revenues of the Bill and Vote of the Committee in
Reporting the Bill
47
VII. Changes in Existing Law Made by the Bill as Reported
47
VIII. Other Matters Required to be Discussed under House Rules
77
IX. Supplemental Views of Hon. Charles A. Vanik
83
X. Supplemental views of Hon. Richard F. Vander Veen
85
XI. Minority Views of Hons. Schneebeli, Conable, Duncan, Clancy,
Steiger and Frenzel
87
XII. Minority Views of Hons. Archer, Vander Jagt, Crane, Martin and
Bafalis
91
XIII. Additional Minority Views of Hon. Guy Vander Jagt
97
XIV. Additional Minority Views of Hon. Bill Frenzel
101
(III)
94TH CONGRESS
HOUSE OF REPRESENTATIVES
REPORT
1st Session
No. 94-19
TAX REDUCTION ACT OF 1975
FEBRUARY 25, 1975.-Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
Mr. ULLMAN, from the Committee on Ways and Means,
submitted the following
REPORT
together with
SUPPLEMENTAL AND MINORITY VIEWS
[To accompany H.R. 2166]
The Committee on Ways and Means, to whom was referred the bill
(H.R. 2166) to amend the Internal Revenue Code of 1954 to provide
for a refund of 1974 individual income taxes, to increase the low-
income allowance and the percentage standard deduction, to provide
a credit for certain earned income, to increase the investment credit
and for other purposes, having considered the same, report favorably
thereon with amendments and recommend that the bill as amended do
pass.
The amendments are as follows:
The amendment to the text of the bill strikes out all after the enact-
ing clause and inserts in lieu thereof a substitute text which appears in
italic type in the reported bill.
The title of the bill is amended to reflect the amendment to the text
of the bill.
(1)
I. SUMMARY
The U.S. economy has experienced its sharpest decline since the
1930's. The unemployment rate in January 1975 was 8.2 percent, the
highest since 1941, and actual output is over $200 billion below poten-
tial output. This bill deals with these problems by providing a $20
billion tax reduction in 1975.
The bill also will---
Remove from the income tax rolls families with incomes below
the poverty level by substantially increasing the minimum stand-
ard deduction (also known as the low-income allowance).
Simplify the tax system by encouraging individuals to use the
standard deduction instead of itemized deductions.
Provide relief to earners with little or no tax liability by provid-
ing a refundable tax credit based on earned income.
Increase investment in equipment by increasing the investment
tax credit from 7 to 10 percent and for public utilities from 4 per-
cent to 10 percent.
Aid hard-pressed public utilities by increasing the fraction of
their income tax liability which can be offset by the investment
credit from 50 to 100 percent for a temporary period.
Help small business by increasing the corporate surtax exemp-
tion from $25,000 to $50,000.
More specifically, the bill provides the following tax reductions:
Refund on 1974 tax liability.-The bill provides a refund on 1974
tax liability to be paid in one installment beginning in May 1975. It
will generally equal 10 percent of tax liability up to a maximum of
$200. However, each taxpayer is to receive a refund of at least $100 (or
the full amount of his or her actual tax liability if less than $100). The
refund is to be phased down from the maximum of $200 to $100 as the
taxpayer's income rises from $20,000 to $30,000. The revenue loss from
the 1974 refund is estimated to be $8.1 billion.
Increase in the standard deduction.-The bill raises the minimum
standard deduction from $1,300 to $1,900 for single persons and $2,500
for joint returns. It also increases the percentage standard deduction
from 15 percent of adjusted gross income with a maximum of $2,000
to 16 percent with a maximum of $2,500 for single persons and $3,000
for joint returns. These changes involve a revenue loss of $5.2 billion,
and are expected to result in a shift of almost 10 million returns from
itemized deductions to the standard deduction.
Refundable credit on earned income.-The bill provides for a re-
fundable credit of 5 percent of earned income up to a maximum of
$200-closely matching the social security tax on the first $4,000 of
income (but not in any sense coming from the social security trust
fund or reducing the receipts available for such purposes). The credit
is to be phased out from the maximum $200 to zero as adjusted gross
(3)
4
income rises from $4,000 to $6,000. This change involves a revenue loss
of $2.9 billion.
Increase in the investment tax credit.-The investment tax credit
rate is increased for all taxpayers (including public utilities) to 10
percent from 7 percent (from 4 percent in the case of certain public
utilities). (The additional credit for public utilities is limited to $100
million for any one taxpayer.) In addition, in the case of public utili-
II. REASONS FOR THE BILL
ties the limitation on the amount of tax liability that may be offset by
the investment tax credit in a year is increased from 50 percent to 100
The Tax Reduction Act of 1975 takes prompt and effective action
percent for a 2-year period and then is gradually reduced back to the
to check the drastic downward slide in our economy and to restore
economic growth and move us closer to full employment. It does this
50-percent level over a 5-year period. In the case of long lead-time
by providing appropriate tax reductions designed to increase pur-
the bill further provides that the investment tax credit is to be avail-
property, that is, property that requires at least 2 years to construct,
chasing power and investment incentives. There is widespread agree-
able to the extent that progress payments are made during the construc-
ment among economists that such action is urgently needed at this time
tion period (rather than in the year when the property is ultimately
to avoid great hardship for large numbers of people and huge waste
placed in service), with an initial 5-year transitional rule to phase in
in unused human and natural resources. Before adopting this bill, your
the new system. Finally, the amount of used property eligible for the
committee held hearings in which it had the benefit of the views of
investment tax credit is increased from $50,000 to $75,000. The in-
administration witnesses, the Chairman of the Federal Reserve Board,
and eminent economists, businessmen, and labor experts, representing
creased 10-percent credit is to be available for property placed in serv-
a broad spectrum of our political and economic institutions. Virtually
ice after January 21, 1975, and before January 1, 1976. (In the case
all recommended quick action to cut taxes.
of property acquired pursuant to an order placed before January 1,
This is not surprising in view of the sharp decline in economic
1976, the 10-percent credit is to be available if the property is placed
activity which has taken place recently. Although characterized by
in service by the end of 1976; and in the case of construction occurring
marked inflation, 1974 was clearly a recession year.
after January 21, 1975, the 10-percent credit is to be available for the
In 1974, real gross national product (that is, GNP in constant
portion of the construction occurring before January 1, 1976 regard-
prices) registered the largest decline since 1946. (See table 1.) For the
less of when the property is placed in service.) The revenue loss from
these changes in the investment credit is estimated at $3.9 billion (of
year as a whole, money GNP rose to $1,397 billion-7.9 percent over
1973, but this increase merely reflected higher prices. After taking into
which $1.5 billion is expected to occur in 1976).
Increase in the corporate surtax exemption.-To aid small busi-
consideration a 10.3-percent increase in prices (as measured by the
GNP implicit price deflator, which is the broadest measure of infla-
nesses, the surtax exemption (the amount to which the 22-percent cor-
tion), real GNP fell 2.2 percent. The decline in output and the rise in
porate tax rate rather than the 48-percent rate applies) is increased
prices was especially marked in the fourth quarter of 1974 when real
from the present $25,000 to $50,000. This is expected to reduce revenue
GNP fell at an annual rate of 9.1 percent and prices rose at an annual
by $1.2 billion.
Effective date.-In general, the provisions included in the Tax Re-
rate of 14.4 percent.
TABLE 1.-GROSS NATIONAL PRODUCT 1929-74
duction Act of 1975 are to apply for a one-year period (for the
calendar year 1975). This is because the bill is intended to provide
[In billions of dollars]
an immediate stimulus for the economy at this time. In the case of
Gross national
Gross nationa
Gross national
Gross national
individuals, the stimulus is a lump sum refund of part (or in some
product in
product in
product in
product in
Year
current dollars
1958 dollars
Year
current dollars
1958 dollars
cases all) of a taxpayer's 1974 tax liability plus increased take-
home pay as a result of lower withholding reflecting the changes
1929
103. 1
203.6
1956
419.2
446. 1
in the standard deduction and the new earned income credit.
1933
55. 5
141. 5
1957
441.1 1
452. 5
1939
90. 5
209. 4
1958
447. 3
In the case of corporations, the stimulus is the incentive to purchase
447.3
1940
99. 7
227. 2
1959
483.7
475.9
machinery and equipment as a result of the increased investment
1941
124, 5
263. 7
1960
503.7
487.7
1942
157.9
297.8
1961
520.1
497.2
credit and also reduced taxes, primarily for small corporations, as a
1943
191.5
337. 1
1962
560.3
529.8
1944
210. 1
361.3
1963
590. 5
551.0
result of the increase in the surtax exemption.
1945
211.9
355. 2
1964
632. 4
581.1
1946
208. 5
312.6
1965
684.9
617.8
1947
231. 3
309. 9
1966
749.9
658.1
1948
257.6
323. 7
1967
793.9
675.2
1949
236. 5
324.
1968
864.2
706.6
1950
284.8
355. 3
1969
930.3
725.6
1951
328.4
383.4
1970
977.1
722.5
1952
345.5
395. 1
1971
1,054.9
746.3
1953
364.6
412.8
1972
1,158.0
785.4
1954
364.8
407. 0
1973
1,294.9
828.4
1955
398.0
438.0
1974
1,397.0
812.5
1 Preliminary.
Source: Department of Commerce.
(5)
6
7
The falling GNP figures for 1974 reflect widespread declines in both
shrunk the tax base and cut tax receipts drastically. This is shown by
consumption and investment. The decline was particularly sharp for
the fact that if the economy were operating at its full potential,
durable goods expenditures, including new cars. The leading reasons
sufficient revenue would be collected with present law taxes to pro-
for the weakness in consumer expenditures were falling disposable
duce a budget surplus running at an annual rate of about $30 billion
income, inflation, and lack of consumer confidence.
in the second quarter of 1975. Your committee believes that the best
Real gross private investment fell 8.5 percent in 1974. The decline
way to reduce the anticipated large budget deficits would be to take
in housing starts was even more sharp. By November, 1974, housing
action to restore economic growth and thereby increase tax receipts.
starts were running at an annual rate of less than one million, com-
Moreover, without in any way seeking to diminish the vital impor-
pared with 2.4 million in 1972 and 2.1 million in 1973.
tance of reducing our budget deficits, your committee believes that it
As the economic situation deteriorated, unemployment rates rose-
is important to note that the projected budget deficits for fiscal years
from 5.2 percent in January 1974 to 7.2 percent in December 1974
1975 and 1976, though large in dollar amounts, are not unusually large
and to 8.2 percent in January 1975. This compares with average un-
in relation to the gross national product for a recession year. They are
employment rates of from 4.9 percent to 5.9 percent in the period from
expected to amount to 2.4 percent and 3.2 percent of the gross national
1973 back to 1971, and rates averaging 3.8 percent or less from 1966
product, respectively. In other recession years the budget deficit
through 1969. The January unemployment rate is the highest since
amounted to 3.7 percent of gross national product in fiscal 1948, 2.7
1941.
percent in fiscal 1959 and 2.3 percent in fiscal 1971.
In the absence of remedial action to cut taxes, the outlook is that
Furthermore, under present conditions, the adoption of an appro-
the current recession will continue and deepen. Growth in business
priate tax reduction program would help to revive the economy and
investment was one of the prime forces fueling the upward move-
increase employment without adding significantly to inflationary
ment of our economy prior to the current downturn. However, after
pressures. This is because there are now large amounts of available
adjustment for price changes, capital expenditures for new plant and
unused resources which could be gainfully employed to add to our
equipment are expected to fall significantly in 1975, according to the
output. As the tax reductions stimulate the economy, these at present
most recent survey of the Commerce Department.1
idle resources will be brought back into use, thus adding more goods
Economic forecasters are practically unanimous in predicting that
and services to match the added purchasing power made available by
in 1975 the economy will continue to operate far below its potential.
the tax cut. The size of these unused resources is shown in table 2 which
While the precise figure varies with different forecasters. real GNP
sets forth estimates indicating that in 1975 the actual GNP may be as
in 1975 is generally expected to be substantially lower than in 1974,
much as 14 percent below the potential GNP, assuming the present
although many forecasters anticipate a modest recovery beginning in
budgetary picture with no tax cut. This gap would amount to $215
mid-1975.
billion, or $1,000 per capita.
In view of these further expected sharp declines in economic activity,
TABLE 2.-ACTUAL AND POTENTIAL GNP
your committee concluded that it would be courting economic disaster
to delay providing appropriate tax reductions to stimulate the econ-
[Billions of dollars, seasonally adjusted annual rates]
omy. In arriving at this conclusion, your committee gave careful con-
GNP gap
sideration to the large budgetary deficits that are expected in the fiscal
Actual
Potential
(potential
vears 1975 and 1976 and the prevalence of a rapid rate of inflation
Year and quarter
GNP
GNP
less actual)
despite the economic downturn. Your committee does not believe that
1971-I
1,027.2
1,081.4
54.2
the budgetary deficits of $34.7 billion for fiscal year 1975 and $51.9
1971-II
1,046.9
1,105.2
58. 3
1971-III
billion for fiscal year 1976 projected in the administration's budget
1,063.5
1,126.0
62.5
1971-IV
1,084.2
1,141.0
56.8
represents a satisfactory long-run situation.
1972-I
1,112.5
1,164.3
51.8
1972-II
1,142.4
1,182.9
40.5
Similarly, your committee does not view with equanimity the fact
1972-III
1,166.5
1,202.6
36. 1
1972-IV
that in 1974 the consumer price index rose 12.2 percent and the whole-
1,199.2
1,223.8
24.6
1973-1
1,248.9
1,258.3
9.4
sale price index 23.5 percent. Although in December 1974 and January
1973-11
1,277.9
1,293.0
15.
1973-III
1,308.9
1,332.1
23.2
1975 the rate of growth of the consumer price index moderated and the
1973-IV
1,344.0
1,373.2
29.2
1974-1
1,358.8
1,427.7
68. 9
wholesale price index dropped slightly in December 1974, inflationary
1974-11
1,383.8
1,474.3
90.5
pressures are still very strong.
1974-III
1,416.3
1,532.0
115.7
1974-IV
1,430.2
1,597.0
166.8
However, your committee believes that the present economic situa-
1975-I
1,448.6
31,648.5
199.9
1975-III
1,484.4
$1,698.9
214.5
tion requires the adoption of an appropriate tax reduction measure
1975-III
1,529.0
3 744.7
215.7
now. Without such timely tax reduction, there is the grave risk that
1975-IV
579.7
31,792.7
213.0
the present recession will be prolonged and intensified, resulting in
1 The increase of potential GNP assumes a growth rate in real terms of 4 percent each year, composed of an increase in
huge waste of resources and human hardship.
the labor force of 1.8 percent, a decline in hours worked of 0.3 percent and a rise of output per man-hour of 2.5 percent.
The substantial budget deficits in prospect for fiscal years 1975 and
These trends may not be an accurate reflection of conditions during the oil embargo of late 1973 and early 1974. Like all
measures of capacity, these are subject to a wide margin of error.
1976 are due in large measure to the economic downturn which has
2 Forecasts of Chase Econometrics, Inc.
3 Staff estimates using the methodology of the Council of Economic Advisers.
1 U.S. Department of Commerce News, January 8, 1975.
Source: Business Conditions Digest.
8
9
Appropriate tax reductions will also increase incomes, both directly
The bill makes increases in the standard deduction and provides a
and through the multiplier effect, and the increased saving from this
refundable earned income credit only for the year 1975.
additional income will provide the flow of funds to purchase the gov-
Refund on 1974 tax liability.-The refund on 1974 tax liability is to
ernment securities issued to finance the increase in the deficit resulting
be 10 percent of tax liability (after credits) up to a maximum of $200.
from the tax cut.
However, taxpayers with $1,000 of tax liability or less are to receive
In view of these considerations, your committee has provided for tax
a refund of $100 or the amount of their actual tax if it is less than
reductions amounting to a total of $19.8 billion in calendar 1975 plus
$100. (Married people who file separate returns are to receive $50 each
an additional $1.5 billion reduction in calendar 1976, which represents
unless a spouse's tax payment is less than $50, in which case that spouse
the lagged revenue effect of taxpayers' actions taken in 1975. This tax
is to receive a refund of the full amount of his or her tax liability.)
reduction in your committee's view is large enough to stimulate the
For taxpayers whose adjusted gross income (AGI) exceeds $20,000,
economy without creating new inflationary pressures. Of this amount,
the refund is to be phased down from the maximum of $200 to $100 as
$16.2 billion, or 76 percent, of the total is to go to individuals, in view
AGI rises from $20,000 to $30,000. The $100 minimum refund is de-
of the need to restore some of their purchasing power to stimulate the
signed to provide some rebate for all taxpayers and especially to chan-
economy. The remaining $5.1 billion of tax reduction, or 24 percent of
nel the greater portion of the total revenue to families in the income
the total is provided for businesses in order to stimulate investment.
levels which are more likely to spend it. Your committee considered
The overall tax cut provided by your committee's bill is larger than
phasing out the refund entirely for upper-income families, but decided
the $16 billion tax cut recommended by the administration. However,
it was more appropriate to give this group the same $100 minimum
your committee believes that the larger tax cut is more appropriate in
refund provided to other taxpayers. The revenue loss from the refund
the present situation, because the economic situation has deteriorated
is estimated to be $8.1 billion.
and forecasts of future economic activity in absence of remedial action
Taxpayers should begin receiving these payments approximately six
are more pessimistic than at the time the administration presented its
weeks after the date of enactment of this bill. There is no need for
recommendations. Also, individuals have incurred a tax increase of
them to make any adjustments on their 1974 tax returns; the Internal
about 6 percent in 1974 because increases in money incomes resulting
Revenue Service will make the appropriate calculations and mail the
from inflation (which do not represent an advance in real incomes)
refund checks without any action by taxpayers other than filing their
have pushed them into higher tax brackets under the graduated rates
1974 tax returns.
of the individual income tax.
Increase in standard deduction.-The large increases in the stand-
Individual tax reductions
ard deduction provided in the bill are made necessary by the sharp
increases in the poverty income levels that have occurred in the past
The $16.9 billion of individual income tax reductions consists of an
two years as a result of inflation, especially higher food and energy
$8.1 billion refund on 1974 tax liability, an increase in the standard
costs. In the past, your committee has tried to remove from the tax
deduction that is estimated to result in a $5.2 billion reduction in 1975
rolls all families whose incomes are below the so-called poverty income
tax liability, a $2.9 billion refundable credit on earned income for
level by adjusting the personal exemption and the minimum standard
1975, and a $700 million liberalization of the investment credit.
deduction (also known as the low-income allowance). Table 3 shows
Your committee believes that the individual income tax reduction
the poverty level for 1975 and the tax threshold, the income level at
should be divided, approximately equally, between a lump-sum pay-
which families start to pay income tax, both under existing law and
ment and tax cuts that are reflected in lower withholding. The lump-
with the increases in the low-income allowance provided in this bill.
sum payment based on 1974 tax liability has the advantage of provid-
For a family of four, the tax threshold is currently $4,300, which was
ing a quick increase in disposable income in a form that will encourage
also approximately the poverty level in 1972, when the personal ex-
taxpayers to spend their refunds on consumer durable goods, which is
the sector in the economy where much of the current decline in produc-
emption and low-income allowance were last increased. Today, how-
ever, the poverty level of such a family has grown to an estimated
tion has occurred. Many individuals, however, will save any lump-sum
payment, or use it to repay debts, and to the extent this occurs, the tax
$5,442. This bill raises the tax threshold to $5,500 for a family of four.
This is accomplished by increasing the minimum standard deduc-
cut will not increase income and employment. The tax reductions re-
flected in lower withholding will increase disposable income more
tion from $1,300 to $1,900 for single persons and to $2,500 for joint
slowly than a lump-sum payment, but individuals will be more likely
returns (from $650 to $1,250 for married persons filing separate re-
to spend this additional income than the income they receive as a lump-
turns). Your committee decided to provide a larger low-income al-
sum payment. Your committee believes that the best way to make sure
lowance for joint returns than for single returns to take account of
their higher living costs and to reduce the tax increase that occurs
that the tax reduction provides the desired stimulus is to divide it
equally between the two types of reduction.
other. when two single people with approximately equal incomes marry each
10
11
TABLE 3.-1975 POVERTY LEVELS AND TAX THRESHOLDS UNDER PRESENT LAW AND TAX REDUCTION ACT OF 1975
ceived by taxpayers with adjusted gross income below $10,000, and 90
percent by people with income below $20,000. Your committee believes
Tax
threshold
that concentrating the tax reduction in the low- and middle-income
1975
Present
under Tax
brackets is equitable in that these are the taxpayers who have been af-
poverty
law tax
Reduction
level
thresholds
Act of 1975 1
fected the most by inflation. Also, a tax cut concentrated in these
brackets will be more effective since these people will be more likely
Family size:
$2,694
$2,650
to spend the tax cut and in this way increase income and employment.
$2,050
3, 470
2,800
4,000
To an appreciable extent, this tax reduction also compensates indi-
2
550
4, 750
3
253
4
5,442
4,300
500
viduals for the increase in their real tax burden that results from in-
423
5,050
6, 250
5
7,226
000
flation. Inflation erodes the value of the personal exemption and mini-
5,800
6
mum and maximum standard deductions, and it pushes taxpayers into
1 Minimum standard deduction of $1,900 for single persons and $2,500 for joint returns and $750 per personal exemption
higher rate brackets even when they have not experienced an increase
in their real income. The tax increase, in real terms, caused by infla-
deduction.
tion was approximately $7 billion in 1974 alone.
The bill also increases the percentage standard deduction from 15
The withholding changes made by the bill are to take effect on May 1.
percent of adjusted gross income, with a maximum of $2,000, to 16
The incorporation of the minimum and percentage standard deduc-
percent of adjusted gross income with a maximum of $2,500 for single
tion changes into the withholding system is expected to reduce with-
persons and $3,000 for joint returns (from $1,000 to $1,500 for mar-
holding by approximately 1.5 times the reduction in liability, that is,
ried persons filing separate returns). These changes are designed to
$7.8 billion rather than $5.2 billion on a full year basis (since it applies
give tax relief to people in the middle income brackets. The maxi-
to all returns, not merely those taking the standard deduction). The
mum standard deduction is raised more for joint returns than for
additional reduction in withholding will result almost entirely in re-
single returns for the same reasons that this distinction was made for
duced refunds for itemizers. Also, the earned income credit is expected
the minimum standard deduction.
to be reflected in reduced withholding of $1.8 billion for a total of $9.6
The increases in the standard deduction involve a revenue loss of
billion. Because of the fact that these annual changes are to be reflected
$5.1 billion. Ninety-two percent of the reduction goes to taxpayers
in withholding over an 8-month period (in order to achieve the maxi-
with adjusted gross incomes below $20,000. Altogether, 44 million
mum impact on consumer's disposable income and the economy during
taxpayers are expected to experience a tax reduction as a result of
the second half of the year) the change in withholding during the
these changes in the standard deduction.
second half of the year is expected to be approximately $7.7 billion, as
The increases in the standard deduction also effect a major simpli-
shown in table 2 in the Revenue E ffects section.
fication of the income tax. Almost 10 million taxpayers are expected
Business tax reductions
to shift from itemizing deductions to using the standard deduction.
Increase in the investment credit.-In view of the low and decreas-
This would raise the number of tax returns that use the standard de-
ing level of economic activity and the poor expected level of invest-
duction to almost 60 million, or 72 percent of all returns.
Earned income credit.-The refundable credit is to be 5 percent of
ment, your committee concluded that a balanced program which en-
courages both consumption and investment will be a more effective
earned income up to a maximum credit of $200 (on $4,000 of earn-
method of stimulating the economy than attempting to focus all of the
ings). The credit is to be phased out as adjusted gross income rises be-
tax stimulus on consumption. In addition to providing short-run
tween $4,000 and $6,000. The revenue loss is estimated to be $2.9 billion,
stimulus to the economy, an increase in the amount of investment
all of which would be received by taxpayers whose incomes are below
is desirable for other reasons. The investment not only creates
$6,000.
jobs both directly and through the multiplier effect in the short
Your committee believes that the refundable credit is needed to
run, but it also increases productivity. This is anti-inflationary be-
provide relief to families who currently pay little or no income tax.
cause it increases the amount of output available to meet future con-
These people have been hurt the most by rising food and energy
sumer demands and because it results in lower production costs which
costs. Also, in almost all cases they are subject to the social security
means that money wage increases will not exert the same degree of
payroll tax on their earnings. The refundable credit is expected to be
upward pressure on product prices that they would in the absence of
effective in stimulating the economy because the low-income people
growing productivity. Increased productivity also has favorable im-
are expected to spend a large fraction of their increased disposable
plications for our balance of payments and the exchange rate of the
incomes.
dollar. Finally, unless in the future the stock of capital is increased
For workers with income tax liability, the earned income credit
significantly, there will be serious problems in providing enough jobs
can be reflected in lower withholding shortly after this bill is en-
for those entering the labor force. In view of these considerations, your
acted. Those without tax liability, or whose tax is less than their
committee concluded that it would be appropriate to increase the in-
credit, are to receive a refund in 1976 after they file tax returns.
Total individual reductions.-The individual tax reductions total
$16.2 billion. Fifty-six percent of this reduction is expected to be re-
12
13
vestment credit rate to 10 percent from the 7 percent rate currently
provide an additional financial incentive to encourage utilities and
available.
others to undertake longer term projects.
Investment credit applicable for public utilities.-Under existing
Investment credit for used property.-In order to encourage the
law, a 4-percent investment credit is provided for most public utilities,
acquisition of used property that will increase the productivity of
as compared to the 7-percent investment credit which applies generally.
small businesses, which are frequently unable to afford new equipment,
This lower investment credit for public utilities discriminates against
the amount of used property eligible for the investment credit is in-
investment in utilities and impedes such investment at a time when the
creased from $50,000 to $75,000.
public utilities need large amounts of capital to build up their capacity
Increase in corporate surtax exemption.-Your committee was con-
to meet the growth in demand for their services.
cerned that concentrating all the tax relief to business in the form of
Public utilities have experienced very considerable difficulty in
an increase in the rate of the investment tax credit would not provide
recent years in securing capital for essential expansion in view of
sufficient financial relief to small corporations, particularly to those
the depressed state of the stock market, tight money, and the reluc-
that are not particularly capital intensive and would not be able to
tance of regulatory commissions to grant rate increases to cover in-
benefit as much from the investment credit. Your committee consid-
creased costs. The results have been especially severe for the electric
ered reducing the corporate tax rate as one method of providing finan-
utilities which have incurred sharp rises in costs as a result of sub-
cial relief to hard-pressed small corporations but decided that a more
stantially higher prices for their sources of energy.
effective way to do this would be to increase the surtax exemption (the
As a result, your committee concluded that the investment credit
amount to which the corporate tax rate of 22 percent rather than 48
for eligible investment in public utilities should be increased from 4
percent applies) from $25,000 to $50,000. Of the estimated revenue
percent to the 10-percent rate provided in the bill for all other
cost of $1.2 billion of this provision, about 60 percent, or $730 million,
taxpayers.
is expected to go to businesses with incomes under $100,000.
To prevent an excessive proportion of the revenue reduction from
going to any one company, an upper limit of $100 million was placed
on the amount of investment credit that any one utility company could
receive from the 6 percentage point increase in the investment credit
from 4 to 10 percent (or with respect to other property, the increase
from 7 percent to 10 percent).
Your committee believes that it also is not only appropriate to in-
crease the investment credit from 4 to 10 percent for utilities, but it
also is necessary to focus the incentive effect of the investment credit
on the less profitable utilities which are faced with increasing problems
because of rising energy costs. This is done in the bill by increasing
the limitation on the amount of income tax liability which can be
offset by the investment credit in any one year from 50 percent of tax
liability (above the first $25,000 of tax liability) to 100 percent. This
100 percent limit applies for 2 years and then the limitation is gradu-
ally phased back to 50 percent over a period of 5 years.
Investment credit for progress payments.-Under present law the
investment tax credit is available only when property is placed in
service. This has been considered an inequity in the case of property
with a long construction period where payments are made during the
course of construction but are not eligible for the credit until the
property is completed and placed in service. Your committee believes
it is appropriate to make the credit available to the extent progress
payments are made in the case of property which requires a long
period of construction. As a result, the bill provides that in the case
of long lead-time property, that is, property that requires at least
2 years to construct, the investment tax credit is to be available to the
extent that progress payments are made during the construction
period (rather than in the year when the property is ultimately placed
in service). This provision has an initial 5-year transitional period to
phase in the new system. The availability of the investment tax credit
during the construction period of long lead-time property will also
47-320
III. REVENUE EFFECTS
The bill is estimated to result in a reduction in tax liability of $21.3
billion through calendar year 1976. Table 1 shows how the impact of
this reduction is divided between individuals and business organiza-
tions. It shows that $16.2 billion of the reduction goes to individuals in
their nonbusiness capacity and $5.1 billion to businesses. Thus, slightly
over three-fourths of the tax reduction goes to individuals (in their
nonbusiness capacity) and nearly a quarter to business.
The $16.2 billion of tax reduction for individuals (in their indi-
vidual capacity) is made up of an $8.1 billion refund on 1974 income
tax liability, a $5.2 billion liberalization of the standard deduction
and a $2.9 billion earned income credit. Addition of a $685 million
liberalization of the investment credit for individuals in their business
capacity raises the total reduction for individuals to $16.9 billion. The
$4.4 billion reduction in corporate tax liability is made up of $3.2
billion ascribable to liberalization of the investment credit and $1.2
billion derived from increasing the corporate surtax exemption from
$25,000 to $50,000.
Table 2, which presents the data from Table 1 on a quarterly
and a fiscal year basis, shows the impact of the tax reduction on the
economy so far as timing is concerned. As this table shows, half of
the total tax reduction ($10.6 billion) is estimated to become avail-
able during the next quarter of calendar year 1975. Most of this
will be received or retained by individuals ($941 million will be re-
tained by corporations). In the last two quarters of calendar year 1975
tax collections are estimated to decline, because of the reductions called
for in your committee's bill, by $8.7 billion with $7.7 billion of the
decreased collections affecting individuals. Part of this latter sum
reflects underwithholding which will be recouped in the first two
quarters of calendar year 1976. The whole of fiscal year 1976 shows
individuals benefiting from $7.1 billion of decreased receipts and cor-
porations by $2.6 billion.
Table 3 shows the distribution by adjusted gross income class of the
$15.9 billion representing the estimated individual income tax reduc-
tion, at 1974 income levels, ascribable to them as individuals (as dis-
tinct from businesses). 1 Table 3 indicates that $8.7 billion, or 55.1
percent, of the total reduction accrues to tax returns with adjusted
gross income under $10,000; $5.5 billion, or 34.4 percent, accrues to
tax returns with adjusted gross income between $10,000 and $20,000;
and $1.7 billion, or 10.5 percent, accrues to tax returns with adjusted
gross income of $20,000 and over.
Table 3 also indicates that over 80 million tax returns (as measured
against 1970 filing requirements) are beneficiaries of the tax refunds,
1 This does not include $275 million which covers the earned income credit on wage and
salary and self-employment income of earners who are nonfilers under 1970 filing
requirements.
(15)
16
17
tax reductions and/or Treasury payments; 9.5 million presently tax-
TABLE 1.-ESTIMATED DECREASE IN INDIVIDUAL AND CORPORATE INCOME TAX LIABILITY UNDER THE BILL-
able returns are rendered non-taxable; and almost 10 million returns
CALENDAR YEARS 1974-76
will find it advantageous to shift from itemizing their deductions to
[Dollar amounts in millions]
using the standard deduction.
Table 4 shows, by adjusted gross income class, the distribution of the
Decrease in tax liability
effects of the standard deduction and the earned income provisions
which produce a tax reduction of $7.8 billion ($5.1 billion for the stand-
Provision
1974-76
ard deduction changes and $2.7 billion for the earned income credit).
1974
Percent
1975
1976
2
Amount
of total
As Table 4 also shows, the bill, through the standard deduction provi-
sions, makes it advantageous for almost 10 million tax returns to shift
Title 1: Granting a 100-percent refund of 1974 individual income
tax liability up to $100 with no phaseout and a 10-percent
to the standard deduction. Other effects of the combined earned income
refund of tax above $1,000 with a maximum refund of $200
credit and standard deduction provisions, as set forth in Table 4, are
with the refund phased out between $20,000 and $30,000 of
adjusted gross income but not below $100 ᵃ
tax decreases for 58.4 million tax returns (which would be filing under
Title II:
$8, 125
$8,125
38. 2
Secs. 201-202: Converting the minimum standard deduc-
the 1970 filing requirements) and nontaxability for 9.5 million pres-
tion from $1,300 to $1,900 for single person returns and
ently taxable returns.
$2,500 for joint returns; the percentage standard deduc-
tion from 15 percent to 16 percent; and the maximum
Tables 5 and 6 break down Table 4 into its two components: the
standard deduction from $2,000 to $2,500 for single
person returns and $3,000 for joint returns
contribution of the standard deduction provisions and the earned
Sec. 203: Granting a refundable tax credit of 5 percent wage
$5, 192
5,192
24.4
income credit provisions of your committee's bill, respectively. As
and self-employment income with a $200 maximum
credit with a phaseout of the credit between $4,000 and
indicated in Table 5. the standard deduction provisions provide tax
$6,000 of adjusted gross income 4
2, 894
2,894
13.6
reductions for 44 million tax returns, render 4.6 million returns non-
Total for title II
Total for titles I and II (Individuals, nonbusiness)
8, 086
taxable, shift almost 10 million returns to the standard deduction and
8, 125
8,086
16,211
76.
Title III:
save the benefiting tax returns $5.1 billion in tax liability. Table 6
Secs. 301-302: Increasing the rate of the investment credit
shows that the earned income credit provisions are estimated to result
to 10 percent; increasing the amount of used property
in 28.6 million tax returns (which would be filing under the 1970
eligible for the investment credit to $75,000; allowing
the investment credit on progress payments B: and limit-
filing requirement) receiving a tax reduction and/or Federal pay-
ing the increase in the credit to $100,000,000
Individuals, business
ment; 5.5 million presently taxable returns being made nontaxable;
Corporations
435
$250
685
3.2
1,937
250
3,187
15. 0
and a tax reduction and/or payments total of $2.7 billion.¹ All of these
Total investment credit
Sec. 303: Increasing the corporate surtax exemption from
2,372
500
872
18.2
benefits go to those with adjusted gross income under $6,000.
$25,000 to $50,000
1,200
Table 7 presents the distribution, by adjusted gross income class,
200
5.6
Total for title III
of the $8.1 billion refund of 1974 tax liability. Of the total refund
572
1,500
072
23.8
Titles I, II and III
$2.9 billion, or 35.7 percent, goes to tax returns with adjusted gross
8, 125
11,658
1, 500
21,283
100. 0
income under $10,000; almost $4 billion, or 48.9 percent, to tax
Individuals
Corporations
8,125
8, 521
250
16,896
79. 4
returns with adjusted gross income between $10,000 and $20,000; and
Individuals, nonbusiness
3, 137
1,250
4,387
20. 6
Business (Individuals and corporations)
8,125
8,086
16,211
76. 2
$1.2 billion, or 15.3 percent, to tax returns with over $20,000 of
3,572
1,500
5,072
23. 8
adjusted gross income. As indicated in the table, almost 67 million
1 Items in this column are at estimated 1975 income levels.
returns (or all taxable returns) receive a refund on 1974 income tax
2 Items in this column are at estimated 1976 income levels.
liability and almost 5 million tax returns become nontaxable.
vidual income tax rather than a decrease in tax liability.
3 Under the language of title I this item is viewed as a refund of a payment deemed to have been made on 1974 indi-
Additional tables are provided in the Statistical Appendix of this
big & The enough to absorb the credit and to specially designed returns where there is no tax liability and no tax return.
4 Includes tax credits and/or payments, the latter going to tax returns where the tax liability before the credit is not
report. These tables, numbered 1 through 5, give the tax burden under
after 1976 at present law investment credit percentages.
permanent provision for an investment credit on progress payments will continue to have effect on tax liabilities
present law and (1) under the combined provisions of Titles I and
II of your committee's bill; (2) under the provisions of Title II of
Note: Details may not add to totals because of rounding.
the bill; (3) under the standard deduction provisions of the bill; (4)
under the earned income credit provisions; and (5) under the tax
refund provisions, respectively. The tax burdens are given for single
persons and married couples with differing numbers of dependents
with selected levels of adjusted gross income under the assumption
that deductible personal expenses are equal to 17 percent of adjusted
gross income.
1 This does not include $275 million which covers the earned income credit on wage and
salary and self-employment income of earners who are nonfilers under 1970 filing require-
ments.
19
18
TABLE 2.-ESTIMATED CHANGE IN INDIVIDUAL AND CORPORATE INCOME TAX LIABILITY AND COLLECTIONS
TABLE 2.-ESTIMATED CHANGE IN INDIVIDUAL AND CORPORATE INCOME TAX LIABILITY AND COLLECTIONS
UNDER THE BILL-CALENDAR YEARS 1974-76; FISCAL YEARS 1975 AND 1976 (continued)
UNDER THE BILL-CALENDAR YEARS 1974-76; FISCAL YEARS 1975 AND 1976
[In millions)
[In millions]
FISCAL YEAR SUMMARIES
Collections
Calendar
Calendar year 1975
Calendar year 1976
Fiscal year 1975:
Provision
year
liability
2d
3d
1st
2d
Individuals
-$9,612
4th
quarter
quarter
quarter
quarter
quarter
Corporations
-941
Individuals and corporations
-10,553
Individuals, nonbusiness
-9,568
Business (individuals and corporations)
-985
Title I: 1974: Granting a 100-percent refund on 1974
Fiscal year 1976:
individual income tax liability up to $100 with no
Individuals
4-7,059
phaseout and a 10-percent refund of tax above
Corporations
-2,571
$1,000 with a maximum refund of $200 with the
Individuals and corporations
-9,630
refund phased out between $20,000 and $30,000
Individuals, nonbusiness
€-6,643
of adjusted gross income but not below $100'
-$8, 1252
Business (individuals and corporations)
-2,987
Title II: 1975:
Sections 201-202:
Converting the minimum standard deduc-
1 Under the language of title I this item is viewed as a refund of a payment deemed to have been made on 1974 individual
tion from $1,300 to $1,900 for single
income tax rather than a decrease in tax liability.
person returns and $2,500 for joint
2 According to the Internal Revenue Service this refund will take place in fiscal year 1975 except for refunds to certain
returns; the percentage standard de-
fiscal year taxpayers and late filers.
duction from 15 to 16 percent; and the
3 These items are at estimated 1975 income levels.
maximum standard deduction from
4 Includes tax credits and/or payments, the latter going to tax returns where the tax liability before the credit is not
$2,000 to $2,500 for single person returns
-1,168
-$3,115
-$3,115
-$390
big enough to absorb the credit and to specially designed returns where there is no tax liability and no tax return.
and $3,000 for joint returns
+1,298
+$1,298
5 These items are at estimated 1976 income levels.
Change in refunds
6 The permanent provision for an investment credit on progress payments will continue to have effect on tax liabilities
Net
-5,192
after 1976 at present law investment credit percentages.
Section 203:
7 Includes $225,000,000 which will decrease collections in fiscal year 1977.
Granting a refundable tax credit of 5 per-
8 Includes $875,000,000 which will decrease collections in fiscal year 1977.
cent of wage and self-employment income
9 Includes $1,100,000,000 which will decrease collections in fiscal year 1977.
with a $200 maximum credit with a
phaseout of the credit between $4,000
-275
-735
-1,481
Note: Details may not add to totals because of rounding.
-735
-92
and $6,000 of adjusted gross income
+212
+212
Change in refunds
Net
-2,894
Net total for titles I and II
-16,211
-9,568
-3,850
-3,850
+1,028
+29
TABLE 3.-ESTIMATED DECREASE IN INDIVIDUAL INCOME TAX LIABILITY RESULTING FROM THE PROVISIONS
IN THE BILL
Title III:
[By adjusted gross income class-1974 income levels]
1975: 3
Increasing the rate of the investment
credit to 10 percent; increasing the
Number of returns affected (thousands)
Decrease in tax liability
amount of used property eligible for the
investment credit to $75,000; allowing
Number
Percentage distribution of
the investment credit on progress pay-
Total
shifting
total decrease
ments; and limiting the increase in the
number
Number
to the
credit to $100,000,000:
-44
-22
-109
-260
Adjusted gross income
with tax
made non-
-435
standard
Amount 3
By income
Cumu-
By
Individuals, business
-581
-291
-291
-387
-387
class (thousands)
decrease a
taxable
deduction
(millions)
class
lative
-1,937
segment
Corporations
-2,372
-625
-313
-291
-496
-647
Total
0 to $3
16,543
4,000
99
$1,665
10. 5
10.5)
$3 to $5
8,697
710
546
2,654
16. 7
27.2
Increasing the corporate surtax exemp-
-1,200
-360
-180
-180
-240
-240
55. I
$5 to $7
8,484
697
1,287
1,934
12. 2
39.
tion from $25,000 to $50,000
$7 to $10
11,428
88
2,674
2,494
15.7
55.
1976:
5
$10 to $15
15,952
(4)
2,663
3,136
19.7
74.81
Increasing the rate of the investment
$15 to $20
9,856
(4)
1,546
2,337
14.7
89.5
34.4
credit to 10 percent; increasing the
$20 to $50
9,006
(1)
1,016
566
9.9
99.
amount of used property eligible for
$50 to $100
655
(6)
18
78
0.5
99.9
10. 5
the investment credit to $75,000; allow-
$100 and over
160
(4)
2
18
0.1
100.0
ing the investment credit on progress
payments 8. and limiting the increase
Total
80,781
9,497 ⁵
9,851
15,882
100.0
100.0
100.0
in the credit to $100,000,000 :
-25
Individuals, business
7 -250
-187
-188
Corporations
8-1,250
1 Granting a refund of 1974 income tax liability, increasing the standard deduction, and granting a tax credit on wage and
-187
-213
-1,500
salary and self-employment income. For a more detailed description of these provisions see Table 1.
Total
2 Does not include returns representing beneficiaries of the earned income credit who are nonfilers under the 1970 filing
requirements.
1975-1976:
1 Does not include an additional $275,000,000 to cover the earned income credit on wage and salary and self-employment
Investment credit:
1(-685)
(-44)
(-22)
(----)
(-109)
(-285)
income of earners who are nonfilers under 1970 filing requirements.
Individuals, business
Corporations
$(-3,187)
(-581)
(-291)
(-291)
(-574)
(-575)
4 Less than 500 returns.
5 The number made nontaxable is shown to be the same in this table and in Table 4 because the additional returns made
8(-3,872)
(-625)
(-313)
(-291)
(-683)
(-860)
nontaxable by the refund of 1974 taxes are not available in the magnitudes required to represent additional but not inter-
Total
acting nontaxable returns. For the number of returns made nontaxable by the refund of 1974 taxes when considered
-471
-923
-1,100
independently see Table 7.
Total for title III
-5,072
-985
-493
-21,283
-10,553
-4,343
-4,321
+105
-1,071
Note: Details may not add to totals because of rounding.
Titles I, II, and III
7-16,896
-9,612
-3,872
-3,850
+919
-256
Individuals
$-4,387
-941
-471
-471
-814
-815
Corporations
Individuals, nonbusiness
-16,211
-9,568
-3,850
-3,850
+1,028
+29
Business (individuals and corporations)
-5,072
-985
-493
-471
-923
-1,100
(continued)
20
21
TABLE 4.-ESTIMATED DECREASE IN INDIVIDUAL INCOME TAX LIABILITY RESULTING FROM THE PROVISIONS
TABLE 6.-ESTIMATED DECREASE IN INDIVIDUAL INCOME TAX LIABILITY RESULTING FROM THE PROVISION
IN THE BILL WHICH GRANTS AN EARNED INCOME CREDIT 1
IN THE BILL WHICH INCREASE THE STANDARD DEDUCTION, AND GRANT A TAX CREDIT ON EARNED INCOME
[By adjusted gross income class-1974 income levels]
[By adjusted gross income class-1974 income levels]
Number of returns
Number of returns affected (thousands)
Decrease in tax liability
affected (thousands)
Decrease in tax liability
Number
Percentage distribution of
Total
Total
shifting
total decrease
Adjusted gross
number
Number
Percentage distribution of total decrease
number
Number
to the
income class
with tax
made
Amount 3
with tax
made non-
standard
Amount 3
By
(thousands)
decrease 2
By income
Adjusted gross income
By income
Cumu-
nontaxable
(millions)
By
class
Cumulative
class (thousands)
decrease 2
taxable
deduction
(millions)
class
lative
segment
segment
0 to $3
16,355
3,719
$1,213
0 to $3
16,543
99
18. 5
$3 to $5
45. 2
8, 162
45.
4,000
$1,435
18. 5
695
$3 to $5
8,638
710
546
1,969
25. 4
$5 to $6
1,261
47. 0
43.9
4, 132
92.2
111
100.0
14. 7
58.6
75. 3
208
$6 to $10
7.8
100. 0)
$5 to $7
8,158
697
287
1,139
$7 to $10
9,194
88
2,674
297
16. 7
75. 3
$10 to $15
$10 to $15
821
(4)
2,663
958
12. 4
87. 7
$15 to $20
$15 to $20
4,053
(4)
1, 546
541
7.0
94.1 7
19. 4
$20 to $50
$20 to $50
1,998
(4)
016
404
5. 2
99. 9
$50 to $100
$50 to $100
38
(1)
18
13
0.2
100. 0
5.4
$100 and over
$100 and over
4
(4)
2
2
(4)
100. 0
Total
28,649
5, 525
2,683
100. 0
100. 0
100.0
Total
58,447
9,497
9,351
7,757
100. 0
100. 0
100. 0
1 Increasing the minimum standard deduction to $1,900 for single person returns and $2,500 for joint returns, the per-
of $200 and a phaseout of the credit between $4,000 and $6,000 of adjusted gross income.
1 Granting a refundable tax credit of 5 percent of wage and salary and self-employment income with a maximum credit
centage standard deduction to 16 percent, and the maximum standard deduction to $2,500 for single person returns and
2 Does not include returns representing beneficiaries who are nonfilers under the 1970 filing requirements.
$3,000 for joint returns and granting a refundable tax credit of 5 percent of wage and salary and self-employment income
of earners who are nonfilers under the 1970 filing requirements.
3 Does not include an additional $275,000,000 to cover the credit on wage and salary and self-employment income
with a maximum credit of $200 and a phaseout of the credit between $4,000 and $6,000 of adjusted gross income.
2 Does not include returns representing beneficiaries of the earned income credit who are nonfilers under the 1970 filing
requirements.
Note: Details may not add to totals because of rounding.
3 Does not include an additional $275,000,000 to cover the credit on wage and salary and self-employment income of
earners who are nonfilers under 1970 filing requirements.
4 Less than 500 returns or 0.05 percent.
TABLE 7.-ESTIMATED DECREASE IN INDIVIDUAL INCOME TAX LIABILITY RESULTING FROM THE PROVISION
Note: Details may not add to totals because of rounding.
IN THE BILL WHICH GRANTS A REFUND OF 1974 INCOME TAX LIABILITY 1
[By adjusted gross income class-1974 income levels]
TABLE 5.-ESTIMATED DECREASE IN INDIVIDUAL INCOME TAX LIABILITY RESULTING FROM THE PROVISION
Number of returns
IN THE BILL WHICH INCREASES THE STANDARD DEDUCTION 1
affected (thousands)
Decrease in tax liability
[By adjusted gross income class-1974 income levels]
Total
Adjusted gross
number
Percentage distribution of total decrease
Number
income class
with tax
made
Number of returns affected (thousands)
Decrease in tax liability
Amount
(thousands)
decrease
By income
nontaxable
(millions)
By
class
Cumulative
segment
Total
Number
Percentage distribution of total decrease
number
Number
shifting to
0 to $3
4,057
3,097
Adjusted gross income
with tax
made non-
the standard
Amount
By income
$3 to $5
$230
2.8
7,579
2.8)
280
class (thousands)
decrease
taxable
deduction
(millions)
class
Cumulative
By segment
$5 to $7
685
8.4
273
11.2
339
$7 to $10
795
11,428
9.8
21.
35. 7
186
$10 to $15
, 197
14. 7
15,952
35.
59
0 to $3
4,039
2,837
99
$221
4.4
4. 4)
$15 to $20
2,178
26. 8
9,856
62.
16
$3 to $5
7,347
1,278
546
707
13. 9
18. 3
$20 to $50
1,796
22. 1
9,006
84.6
48. 9
62.2
3
$5 to $7
7,671
445
1,287
931
18. 3
36.6(
$50 to $100
1, 162
14. 3
655
98.
(1)(2)
$7 to $10
9,194
88
2,674
1,297
25. 6
62.
$100 and over
65
0.8
160
99.7
15. 3
$10 to $15
9,821
(2)
2,663
958
18. 9
81.1)
(1)(2)
16
0.2
99. 9]
29.6
$15 to $20
4,053
(2)
1, 546
541
10. 7
91. 8)
Total
66,966
$20 to $50
1,998
404
8.0
99, 8)
4,980
(2)
1,016
8,125
100. 0
100. 0
100. 0
$50 to $100
38
(2)
18
13
0.3
100.
8.3
$100 and over
4
(1)
2
2
(2)
100. 0)
tax $1,000 with a maximum refund of $200 with the refund phased out between $20,000 and $30,000 of adjusted
I Granting above a 100-percent refund of 1974 income tax liability up to $100 without a phaseout and a 10-percent refund of
gross income but not below $100.
Total
44,164
4,649
851
5, 074
100. 0
100. 0
100. 0
2 Less than 500 returns.
Note: Details may not add to totals because of rounding.
1 Increasing the minimum standard deduction to $1,900 for single person returns and $2,500 for joint returns; the
percentage standard deduction to 16 percent; and the maximum standard deduction to $2,500 for single person returns
and $3,000 for joint returns.
2 Less than 500 returns or 0.05 percent.
Note: Details may not add to totals because of rounding.
IV. GENERAL EXPLANATION
A. Refund of 1974 Individual Income Taxes
(Sec. 101 of the bill and secs. 6428 and 6611 (e) of the code)
Under present law, individual taxpayers generally are required to
file their 1974 tax returns by April 15, 1975. (This is true in the case
of calendar year taxpayers who account for the great bulk of all
individual taxpayers.)
In order to achieve your committee's objective of infusing addi-
tional purchasing power into the economy as speedily as possible, and
on a broad basis, the bill provides for refunds to be made to individual
taxpayers of a portion of their Federal income tax liabilities for the
year 1974. To achieve this objective, it is expected that the Internal
Revenue Service will make every effort to pay out all refunds on re-
turns filed by April 15 within 60 days of that date.
Under the provision adopted by the committee, the general rule
is that individuals are to receive a refund of 10 percent of their tax
liability for 1974, but this refund is not to be less than $100 (except that
the refund is not to exceed an individual's tax liability) or more than
$200. In addition, for taxpayers with adjusted gross incomes of $20,000
or more, the size of this refund is to be phased down to $100 for those
with adjusted gross incomes of $30,000 or more. These computations
will not have to be made by the taxpayer but instead will be made
by computers in the Internal Revenue Service.
The refund is to be $100 where the taxpayer's tax liability is at least
$100 and not more than $1,000. For tax liabilities of less than $100
the refund is to be the full amount of the 1974 tax. Where the tax
liability is over $1,000 but not over $2,000, the amount of the refund
is to be 10 percent of the tax liability (subject to the adjusted gross
income limitation described below). As a result, in this tax liability
range the refund will vary from a low of $100 to a high of $200. Where
tax liability exceeds $2,000, the refund remains at the maximum of
$200 (also subject to the income limitation described below).
In cases where a taxpayer is entitled to a refund of more than $100
by reason of his tax liability for 1974 but has an adjusted gross income
of over $20,000, the amount of refund over the $100 minimum is re-
duced. The amount of the reduction is computed by applying to the
refund in excess of the $100 minimum the ratio of his adjusted gross
income over $20,000 to $10,000 (the total difference of the phaseout
between adjusted gross income of $20,000 and $30,000). For ex-
ample, if a taxpayer whose adjusted gross income is $25,000 would
otherwise be entitled to the maximum refund of $200 by reason
of his tax liability, $100 of this maximum amount- that is, the amount
over and above the minimum refund-must be reduced by 50 percent,
reflecting the ratio between $5,000 (the amount of adjusted gross in-
(23)
24
25
come over $20,000) and $10,000 (the total difference between $20,000
year. The refund is also available in the case of a so-called grantor
and $30,000). As a result, this taxpayer's 1974 refund would be $150
trust (secs. 671-678) where the person to whom the trust's income is
($100 minimum refund, plus $100 additional refund by reason of tax
taxable is an individual, and to the extent that the trust's income is
liability, less $50 reduction in the latter amount by reason of adjusted
taxable to such person. There, too, the refund is available to the indi-
gross income).¹
vidual and not to the trust.' In addition, the refund is available in
This phaseout on account of adjusted gross income in excess of
fiduciary situations such as a guardianship where the tax liability
$20,000 is to reduce the refund to $100 if the adjusted gross income is
reflected on the return is that of the individual beneficiary.
$30,000 or more-the phaseout is not to reduce the refund below $100
Taxable year affected.-The refund provisions of the bill generally
no matter how high the adjusted gross income. This minimum is $100
apply to the year of a taxpayer which began during the 1974 calendar
unless the taxpayer's 1974 tax liability apart from the refund is less
year. Thus, individuals who use the calendar year 1974 for tax report-
than $100, in which case he is entitled to no more than a refund of the
ing purposes, as well as those who report on a fiscal year which began
full amount of that tax liability.
in 1974 and ends during 1975, generally are entitled to refunds to the
In the case of married taxpayers who file separate returns for 1974,
extent provided in the bill. However, if an individual has two taxable
the minimum and maximum refunds and the income limitation re-
years which began during 1974 (where one taxable year was a short
ferred to above are cut in half with respect to each spouse. Each spouse
year), the refund provisions of the bill apply only to the first of the
is entitled to a refund of all of his or her tax liability for 1974 if that
two taxable years.
liability is less than $50. If the spouse's tax liability is $50 or more, he
Procedures for making refunds.-Under the bill a taxpayer com-
or she will be entitled to a minimum refund of $50 and a maximum
putes his tax liability for 1974 as he has done in the past when no
refund of $100, subject, however, to reduction by reason of his or her
special refund was made. Therefore, in preparing his return for 1974,
adjusted gross income. Where a spouse filing a separate return has ad-
a taxpayer should not reduce his tax liability by the amount which he
justed gross income of more than $10,000 but not more than $15,000,
anticipates will be refunded to him under this bill. Instead, after the
the amount of refund to which the spouse would be entitled based on
taxpayer's return has been filed, the Internal Revenue Service will
his or her tax liability for 1974 is reduced in proportion to the amount
initiate the refund based on the taxpayer's tax liability and adjusted
by which his or her adjusted gross income exceeds $10,000.2
gross income for the year.
Table 5 in the Statistical Appendix provides specific examples of
In order to carry out this procedure, the bill provides that the tax-
the amount of refund which a single person or a married couple filing
payer is to be treated as if he made an additional payment to the
a joint return, assuming different family size and income levels, is to
Treasury against his 1974 income tax liability. This constructive pay-
obtain under your committee's bill.
ment is to be treated as if made on the due date of the taxpayer's 1974
Eligibility for refunds.-The refund of all or part of 1974 taxes
return (without taking into account any extension of time to file the
applies only to taxpayers who are individuals. This includes single
persons, heads of households, surviving spouses (within the meaning
return. return) or, if later, on the date on which he actually files his 1974
of sec. 2(a)), and married persons, whether they file joint returns
This constructive payment is to be in most cases processed by the
or separate returns. Where married taxpayers file a joint return for
Service as an overpayment of tax by the taxpayer and, as such, is to
1974, the amount of the refund is determined by reference to the joint
be paid to him in the form of a refund of tax. In accord with the gen-
income tax liability and adjusted gross income figures as if the spouses
eral rule that Federal income tax refunds do not constitute income,
were one individual.
refunds received under the bill will likewise not constitute income (for
Refunds are not to be available under the bill in the case of nonresi-
Federal income tax purposes) to the taxpayers who receive them.4
dent aliens and trusts and estates.3
Other aspects of the refunds.-The tax liability which determines
The refund is available, of course, in a situation where a decedent's
the amount of the refund under the bill is the taxpayer's tax liability
executor or other representative files a final return of the decedent for
for 1974, reduced by the so-called "nonrefundable" credits against this
1974. In such a case, the refund is available for the decedent's final
liability to which he may be entitled. These credits are the foreign
return, but not for the estate's return for the remainder of that
tax credit (sec. 33), the retirement income credit (sec. 37), the invest-
ment credit (sec. 38), the work incentive credit (sec. 40), and the
1 If the same taxpayer's tax liability apart from the refund were $1,500, SO that he would
be entitled to a $150 refund by reason of tax liability. the income limitation would reduce
credit for contributions to candidates for public office (sec. 41). The
the refund by $25 (i.e., 50 percent of the excess of $150 over $100). As a result, this
tax liability will also be computed with certain other adjustments
taxpayer's refund would be $125.
If the same taxpayer's tax liability apart from the refund were only $80, his refund
necessary in order to assure speedy and efficient processing of the
would be $80. No reduction in that amount would occur under the income limitation
since the taxpayer is not otherwise entitled to more than the $100 minimum refund.
refunds through the Service's computer facilities.
2 To illustrate the effect of the income limitation, a spouse filing a separate return who
would be entitled to a maximum $100 refund based on tax liability, and whose adjusted
gross income on his or her separate return is $13,000, is entitled to a refund of $70 by rea-
son of the income limitation. The $100 refund amount is reduced by $30, i.e., $3,000/$5,000
of 1974 Federal Income tax by the taxpayer on the due date of his return, the committee
4 By deeming the amount of 1974 tax which is to be refunded under the bill as a payment
of the $50 excess of the $100 refund based on tax liability over the minimum $50 refund.
deemed expects that for State income tax purposes, States will treat the Federal refund of this
3 Where income in respect of a decedent is includible in the income of an estate under
reduction in the taxpayer's Federal Income tax liability as such for 1974.
would also reflect the committee's view that the refunds under the bill do not involve any
payment as a refund of an overpayment of Federal income tax. Such treatment
present law (sec. 691), no refund is available with respect to such income since the liability
for tax on such income is thac " the estate.
27
26
B. Disregard of Refunds with Respect to Federally Assisted
Although under present law (sec. 6601 (f) (1)), interest which a
Benefit Programs
taxpayer owes on an underpayment of his tax liability is treated as
part of his liability for "tax," your committee intends that interest
(Sec. 102 of the bill)
not be treated as part of the tax liability for purposes of determining
the refunds to be made under this bill.
In some instances individuals who receive refunds of 1974 income
In determining marital status for purposes of the refund provisions
tax payments under the bill will also be receiving benefits or assistance
of the bill, the provisions of section 143 of present law are to be uti-
under one or more Federal or Federally assisted State social programs
lized. As a result a married person living apart from his or her spouse
based on individually determined needs. Such programs include those
will, under certain conditions, be treated the same as a single person,
which provide supplemental security income benefits, aid to families
and have his or her 1974 refund determined accordingly.
with dependent children, medicaid, food stamps, educational and hous-
The amount of the refund which a taxpayer may receive and retain
ing benefits, and veterans' pensions. Many individuals who receive
is to be determined by reference to his tax liability as finally deter-
State or Federal/State assistance under programs of these kinds do
mined for Federal income tax purposes. Consequently, the refund is
not incur any liability for Federal income taxes. However, in those
not finally determined by the amount of tax liability shown on the
instances where the recipient does incur Federal income tax liability
return as filed by the taxpayer, but (like refunds generally) may be
for 1974 and receives a refund under the bill, serious consequences
subsequently increased or decreased depending on adjustments which
could result if the refund is treated as income which, in turn, reduces
may be made in the taxpayer's final tax liability for 1974.
the amount of benefits or assistance which the individual is entitled to
Since a refund under the bill does not result from a reduction in tax
receive under the assistance program.
liability for 1974 (but instead results from a constructive payment
For example, an individual who is a member of a family receiving a
definition of a "deficiency" in tax under present law (sec. 6211),
against a taxpayer's liability for tax), the bill does not affect the
payment under the program for aid to families with dependent chil-
dren might receive, during some month in 1975, a tax refund for
or the computation of the negligence or civil fraud penalties (im-
1974 under the bill which, if considered to be income to the recipient
posed by sec. 6653 of present law), which are based on the amount
during that month, might make him ineligible to continue receiving
of the deficiency.
aid for that month. In some States the refund might also disqualify
Interest on refunds.-Under present law, the Internal Revenue Serv-
persons for medicaid or from eligibility to purchase food stamps, or,
ice is not required to pay interest on an overpayment of income tax
if treated as income, the refund might make the individual ineligible
if it makes a refund within 45 days after the last date prescribed for
for a loan, or for a reduced rental, etc. under other aid programs.
filing the return (without regard to extensions) or, if the return is
Your committee does not believe that these refunds of 1974 tax
filed late, within 45 days after the date on which the return is actually
should change an individual's eligibility for these assistance programs.
filed (sec. 6611 In order, however, to facilitate the speedy proc-
In addition, the cost of identifying and making the adjustments might
essing of the special 1974 refund by the Internal Revenue Service, the
well exceed any savings in assistance funds were the refunds to be
bill includes a provision designed to give the Service up to 60 days to
taken into account for these purposes.
make 1974 refunds to individuals without incurring an obligation to
Accordingly, your committee has included a provision in the bill
pay interest on the refund. In the interest of administrative feasibility,
which provides that 1974 income tax refunds under the bill are not to
the bill extends the 45-day interest-free period both for the special one-
be considered income or resources for purposes of determining who is
time refund under your committee's bill and for refunds of 1974 tax
eligible to receive benefits or assistance, or the amount or extent of
generally under present law. This special extension of the 45-day pe-
benefits or assistance, under any Federal or Federally assisted pro-
riod under present law applies to refunds of any tax under Subtitle A
gram. For this purpose the concept of benefits or assistance is intended
of the Code (secs. 1-1564) which are made to an individual for a tax-
to include all assistance benefits in which the Federal government
able year which began during the calendar year 1974. As under present
participates, including those made in a form other than cash, such as a
law, the 60-day period will run from the later of the due date of the
reduced rental and eligibility for a loan. Your committee also intends
return (disregarding extensions) or the date on which the return is
that a refund which an individual receives pursuant to the bill should
actually filed.
not be considered part of his resources or assets for that month for
If the Service takes more than 60 days to make the refund, it must
purposes of any resources test under the applicable social program.
pay interest on the refund (as occurs under present law with refunds
The treatment of refunds of 1974 tax, were it not for this provision,
would be a problem since these, in effect, are additional payments made
generally). This 60-day provision does not extend to refunds made to an estate
by the Federal Government on behalf of the individuals involved. The
or trust, to a nonresident alien individual or to a corporation. As to
reductions in 1975 liabilities under title II of this bill, however, do
these taxpayers, the 45-day period of present law continues to apply.
not give rise to this problem since they are not payments in effect on
The 45-day period is also the governing rule for all other taxable
behalf of the individual. Instead, they merely represent reductions in
years, i.e., those beginning before and after 1974.
tax applicable in that year and do not in any year affect the income of
Revenue effect.-The refunds for 1974 individual income tax lia-
the individual for 1975.
bility are estimated to result in a revenue loss of $8.1 billion.
28
29
C. 1975 Income Tax Reductions for Individuals
Conforming changes are also made in the provision dealing with
1. Increase in low income allowance and standard deduction
the withholding allowances for itemized deductions (sec. 3402 (m) (1)
(secs. 201 and 202 of the bill and secs. 141(b) and (c), 3402(m)
(B)) by increasing the 15 percent to 16 percent and by substituting
(1) and 6012(a) (1) of the code)
for $2,000, the present maximum standard deduction, the amounts pro-
vided under the bill; that is, $3,000 in the case of a joint return and
The low income allowance (also known as the minimum standard
$2,500 in the case of an individual who is not married (within the
deduction) determines the minimum amount of income an individual
meaning of sec. 143) and who is not a surviving spouse (as defined in
must have in order to pay Federal income taxes. Under present law,
sec. 2(a)).
the low income allowance is $1,300 for both single individuals and for
The increase in the low income allowance and the changes in the
married couples filing joint returns ($650 for a married individual fil-
standard deduction apply to tax years ending in 1975.
ing a separate return). This means that under present law a single in-
Increasing the low income allowance, the percentage standard de-
dividual does not pay tax unless income exceeds $2,050 (the $1,300
duction and the maximum standard deduction together are expected
allowance plus $750 for one personal exemption), a married couple
to result in tax reductions of $5.2 billion for 1975 liabilities and cause
does not pay tax unless their income exceeds $2,800 (plus $750 for each
9.9 million taxpayers to switch to the standard deduction. The savings
dependent), and a married individual filing a separate return does not
under this tax reduction is shown in table 3 of the Statistical
pay tax unless his income exceeds $1,400 (plus $750 for each depend-
Appendix.
ent). Under present law, the percentage standard deduction is 15 per-
cent of adjusted gross income, with a maximum deduction of $2,000.
2. Income tax credit against earned income (sec. 203 of the bill
As indicated above in the reasons for the bill, your committee be-
and secs. 42 and 6401(b) of the code)
lieves that the low income allowance needs to be increased SO that per-
Under present law an individual is not required to pay income tax
sons whose income falls below poverty levels will not pay income tax.
unless his income exceeds the amount of the minimum standard de-
Accordingly, your committee's bill increases the low income allowance
duction plus the sum of available personal exemptions. Social security
to $2,500 in the case of surviving spouses and married individuals filing
taxes, however, are paid on all covered earnings by workers and em-
joint returns (the increase is to $1,250 for married individuals filing
ployers, regardless of how small the amount. For 1975, the social se-
separate returns) and to $1,900 for single individuals who are not
curity tax rate on employees is 5.85 pecent of employee wages up to
surviving spouses. The increase in the allowance for married couples
$14,100. Self-employed individuals pay a tax at a 7.9 percent rate on
is twice that provided for single individuals in order to bring the low
net earnings from self employment income up to $14,100 if that income
income allowance levels as nearly as possible into line with the ex-
exceeds $400.
pected difference in poverty level of those with a different marital
As indicated in the section above on reasons for the bill, your com-
status and to reduce the tax increase that results when two single
mittee believes it is appropriate to use the income tax system to offset
people with relatively equal earnings marry each other.
the impact of the social security taxes on low-income persons in 1975
In connection with increasing the low income allowance, your com-
by adopting for this one year only a refundable income tax credit
mittee also concluded that some amount of additional tax relief should
against earned income. Although the earned income credit may be
be provided to middle-income taxpayers by increasing the percentage
viewed as a method to help compensate wage earners of low income
and maximum standard deduction. As a result your committee's bill
families for much of the social security taxes they pay, your committee
increases the percentage standard deduction from 15 to 16 percent of
wishes to have it clearly understood that this provision of the bill is
adjusted gross income and raises the ceiling on the standard deduc-
not intended to provide a way of reducing social security taxes paid
tion from $2,000 to $3,000 for surviving spouses and married individ-
by low income wage earners. The financing of the social security pro-
uals filing joint returns ($1,500 in the case of a separate return by a
gram is a matter which the committee will be required to review in
married individual) and to $2,500 for single individuals who are not
depth in subsequent legislation. The earned income credit provision in
surviving spouses. The lower maximum deduction for single individ-
your committee's bill does not amend the Social Security Act or the
uals corresponds with the lower increases in the minimum standard
provisions of the Internal Revenue Code relating to social security
deduction for those taxpayers.
taxes nor does this provision apply to any year except 1975.
Because of the increase in the minimum standard deduction the bill
The bill provides a refundable income tax credit of 5 percent of an
increases the amount of income required before a return must be filed
individual's "adjusted earned income" for the taxable year. "Adjusted
by $600 in the case of single persons and by $1,200 in the case of mar-
earned income" is defined as an individual's earned income up to $4,000,
ried couples entitled to file joint returns. This increases the filing re-
reduced by twice the amount by which the taxpayer's adjusted gross
quirements for single persons under age 65 from $2,050 to $2,650 and
income (or, if larger, the taxpayer's earned income) exceeds $4,000.
from $2,800 to $3,400 for single individuals age 65 and over. It also
The effect of this reduction is to phase down the amount of the credit
increases the filing requirements for married couples under age 65
at income levels between $4,000 and $6,000 and to phase out the credit
from $2,800 to $4,000. For married couples with one spouse age 65 or
altogether at the $6,000 income level.
over, the filing requirements are increased from $3,550 to $4,750, and
Earned income eligible for the credit (up to the phaseout amount)
where both are over age 65 the increase is from $4,300 to $5,500.
includes all wages, salaries, tips, and other employee compensation,
plus the amount of the taxpayer's net earnings from self-employment
as that term is presently defined in the code (sec. 1402 (a)). This broad
30
31
definition of earned income can include some types of wages and other
Married individuals filing separate returns are not eligible for the
income not subject to social security tax (such as government employ-
credit. A married individual who is treated as not being married
ees' wages) but simplifies the process of determining what income is
(under sec. (b)) for return-filing purposes (i.e., a head of a house-
eligible for the credit. It is anticipated that a taxpayer will be able to
hold whose spouse has not been a member of the household for the
calculate the amount of earned income eligible for the credit merely
entire year) is eligible for the credit in the same manner as a single
by adding together the amounts reported on form 1040 (the individual
individual (and any of the absent spouse's income attributed to him
income tax return) as wages, salaries, tips and other employee com-
under State community property laws is to be disregarded).
pensation (line 9 of form 1040) with any amounts reported as net
The credit is generally available only for taxable years representing
earnings from self-employment (line 13 of Schedule SE of form
a full 12 months. However, in the case of a short year closed by reason
1040). Except as indicated below with regard to people under 18, net
of the death of the taxpayer, the credit is to be allowed.
earnings from self-employment are to be taken into account even
Since the credit is refundable, individuals with low incomes on
though they are less than $400 (and so, even though they are not sub-
which little or no income tax is due will receive a cash payment equal
ject to the self-employment tax).
to the amount of the credit reduced by any tax due. It is anticipated
Earned income generally is to be eligible for the credit only if it is
that low income individuals not required to file returns will be pro-
includible in the gross income of the taxpayer during the taxable year
vided with a simple method of obtaining any payment due by filling
in which the credit is claimed. Earned income of an individual is to be
out a brief form (such as the 1040A form) and attaching to it a copy
computed without regard to community property laws (so that a tax-
of any W-2 statements. It is hoped that through the simplicity of this
payer is to take into account his or her own earnings for purposes of
form, plus efforts by the Internal Revenue Service to build public
the earned income credit even though, under the community property
awareness of the availability of the credit, all eligible taxpayers will
laws part of those earnings would be includible in the gross income
file for the credit available to them.
of the spouse and not that of the earner). Amounts received as pension
The earned income credit is to apply to taxable years beginning after
or annuity benefits are not to be taken into account for purposes of the
December 31, 1974, and before January 1, 1976. Calendar year tax-
credit.
payers are to receive the credit on 1975 income, and fiscal year tax-
Special rules are provided with respect to individuals employed
payers are to receive the credit for their first taxable year beginning
by members of their family and those under age 18. First, an individual
in 1975.
employed by his spouse, father, mother, son, or daughter is eligible
It is estimated that this provision will decrease 1975 income tax
for the credit on income earned through such employment only if his
liabilities by $2.9 billion. The savings under this tax reduction by
earnings are subject to social security tax and are evidenced as being
income levels is shown in Table 4 of the Statistical Appendix.
subject to that tax by a W-2 form attached to the income tax return
claiming the earned income credit. Second, in the case of other income
3. Change in withholding tables to reflect increases in standard
of individuals who have not attained the age of 18 by the close of the
deduction and low income allowance and the earned income
year, wages, salaries, tips, and other employee compensation are to be
credit (sec. 204 of the bill and sec. 3402(a) of the code)
eligible for the credit only if that compensation is evidenced by the
Under present law, the amount of the personal exemption, the low
W-2 form attached to the income tax return regardless of whether the
income allowance, and the percentage standard deduction are reflected
income is subject to social security taxes. Third, net earnings from self-
in statutory withholding tables. The bill provides a new annual per-
employment are to be eligible for the credit only if individuals under
centage-method withholding table which reflects the increases in the
18 have self-employment income for the taxable year (i.e., have filed a
low income allowance, the percentage standard deduction, and the pro-
Schedule SE indicating net earnings from self-employment which ex-
vision for an earned income credit (from which the tables for other
ceed $400). The purpose of these special rules for individuals under
periods are to be calculated by the Internal Revenue Service). The
18 and for individuals employed by close relatives is to avoid any in-
Internal Revenue Service also is to calculate wage bracket withholding
centive to establish artificial employment arrangements in order to
tables which are consistent with the percentage-method withholding
obtain eligibility for the credit.
table referred to above.
Finally, the earned income credit is not to be available for income
It is anticipated that the new withholding tables will be effective
of nonresident alien individuals which is not connected with a U.S.
from May 1, 1975. Since income tax withholdings for the first one-
trade or business (i.e., income not currently reported on a 1040NR
third of the year will have been at current rates, which on an annual
form).
basis would result in considerable over-withholding for lower income
Since the credit is 5 percent of earned income up to $4,000, with a
employees and employees who claim the standard deduction, the with-
phaseout between $4,000 and $6,000. the maximum amount of the credit
holding rates for the last two-thirds of the year are to be additionally
is $200. The credit is to be calculated on a return-by-return basis.
reduced SO that amounts withheld by the end of the year would ap-
Individuals who are married and filing a joint return are eligible
bill. proximately equal 1975 tax liabilities after the reductions made by this
for only one credit on the combined income of both individuals.
The withholding tables assume that employees subject to with-
1 However, amounts included as net earnings from self-employment are not also to be
holding will claim the standard deduction on their annual income tax
included as wages, salaries, tips, and other employee compensation.
32
33
return. As a result of the standard deduction increases and the provi-
sion for the earned income credit, lesser amounts are to be withheld
nents) which is an integral part of manufacturing, production, etc.,
or which constitutes a research or storage facility and (3) elevators
from wage or salary income consistent with the decrease in tax
and escalators. Generally, the credit is not available with respect to
liability. In the past the Internal Revenue Service has provided on the back
property used outside the United States.
To be eligible for the credit, the property must be depreciable
of the Employee's Withholding Certificate, Form W-4, a table which
property with a useful life of at least 3 years. Property with a useful
provides the maximum number of withholding exemptions for esti-
life of 3 or 4 years qualifies for the credit to the extent of one-third
mated itemized deductions that can be claimed by employees who
of its cost; property with a useful life of 5 or 6 years qualifies with
plan to itemize their deductions and for whom the withholding tables
respect to two-thirds of its cost; and property with a useful life of
(which assume the claiming of the standard deduction) would with-
7 years or more qualifies for the credit to the full extent of the prop-
hold an excessive amount. The permissible number of allowances pro-
erty's cost. (However, in the case of used property, not more than
vided in the table on Form W-4 is consistent with the employee's
$50,000 of cost may be taken into account by a taxpayer as qualified
marital status and the estimated amounts of his annual salary and
investment for purposes of the credit for a taxable year.)
itemized deductions. Since the income tax reductions in your com-
Property becomes eligible for the credit when it is placed in service.
mittee's bill are effective only for 1975, all employees, particularly
Property is considered to be placed in service in the earlier of (1) the
those claiming additional allowances for estimated itemized deduc-
taxable year in which depreciation on the property begins, or (2) the
tions, should review their withholding position and if necessary
taxable year in which the property is placed in a condition or state of
file new Forms W-4 with their employers showing the correct num-
readiness and availability for a specifically assigned function.
ber of withholding allowances they are entitled to claim, prior to the
The amount of the credit that a taxpayer may take in any one year
time the new withholding tables go into effect. If the Internal Revenue
cannot exceed the first $25,000 of tax liability (as otherwise com-
Service is not able to issue new Forms W-4 that have the table for
puted) plus 50 percent of the tax liability in excess of $25,000. Invest-
determining withholding allowances for estimated itemized deduc-
ment credits which because of this limitation cannot be used in the
tions prior to the institution of the new withholding rates in sufficient
current year may be carried back 3 taxable years and then carried
quantity for general distribution, it is expected that the Internal
forward 7 taxable years and used in those years to the extent permis-
Revenue Service, through its public information resources will pub-
sible within the limitations applicable in those years.
licize the changes and the desirability of employees reviewing their
Present law provides for a recapture of the investment credit to
withholding situation, and where necessary their filing new Forms
the extent property is disposed of before the end of the period (that
W-4 with their employers.
is, 3-5, 5-7, or 7 or more years) which was used in determining the
Although the initial tax withholding rate for single persons is 33
amount of the credit originally allowed. Thus, if property is dis-
percent, this does not mean that the individuals subject to this with-
posed of, or otherwise ceases to be qualified, the tax for the current
holding tax rate will not receive a tax reduction. The rate applies only
year is increased (or unused credit carryovers are reduced) by the
to the first $1,500 of wages above $3,000 on an annual basis, and is a
reductions in investment credits which would have resulted if the
function of the phaseout of the earned income credit. The adjustment,
credit were computed on the basis of the actual useful life of the
moreover, is to be achieved over two-thirds of the taxable year, which
property rather than its estimated useful life.
requires the withholding rate in this income range to be greater than
Public utility property to which the 4-percent investment tax credit
it would be were the withholding changes applicable over the entire
applies is property used predominantly in the trade or business of
calendar year. However, due to the larger zero bracket in the withhold-
furnishing or selling (1) electrical energy, water, or sewage disposal
ing tables, there is a net decrease in the amount of income tax with-
services, (2) gas through a local distribution system, or (3) telephone
holding under the bill.
service, telegraph service through domestic telegraph operations, or
The withholding changes made by the bill are to take effect on
other communications services (other than international telegraph
May 1. It is assumed that this will provide the Service with 45 days to
services). In general, the reduced credit applies only if the rates for
prepare and distribute the new tables. The change in the amount of
these services or items are established or approved by certain types of
withholding is discussed above in Reasons For The Bill.
governmental regulatory bodies.
With respect to the treatment of the investment credit of regulated
D. Investment Credit
companies for ratemaking purposes, special limitations are imposed
on the allowance of the credit to prevent the tax benefits of the credit
(Secs. 301, 302, and 304 of the bill and secs. 46, 47, and 48 of the code)
from immediately being passed on to the consumers. These limitations
are applicable to property used predominantly in the trade or business
Present law provides a 7-percent investment credit (4 percent with
of furnishing or selling (1) the products or services described in the
respect to certain public utility property). The investment credit is
preceding paragraph and (2) steam through a local distribution
available with respect to: (1) tangible personal property; (2) other
system or the transportation of gas or steam by pipeline if the rates
tangible property (not including a building and structural compo-
for those businesses are subject to government regulation.
34
35
The special limitations generally provide that the investment credit
credit rate. Because the largest rate increase is that available to public
is not to be available to a company with respect to any of its public
utility property (the rate for which is increased from 4 percent to 10
utility property if any part of the credit to which it would otherwise be
percent) this limit is to apply only to public utilities.
entitled is flowed through to income (i.e., increases the utility's income
For this purpose, a public utility is defined as a taxpayer whose
for ratemaking purposes) however, in this case the tax benefits de-
investment in qualified public utility property is 50 percent or more
rived from the credits may (if the regulatory commission SO requires)
of its aggregate investment in qualified property for the taxable
be used to reduce the rate base, if this reduction is restored over the
year. "Public utility property" here is defined as property which
useful life of the property.
under present law is eligible for only a 4-percent investment credit
If, within 90 days after enactment of the Revenue Act of 1971 the
and is used in rate-regulated activities. The calculation as to the appli-
taxpayer has SO elected, then the investment credit is to be available to
cation of this 50-percent test is to be made with regard to controlled
the taxpayer with respect to any of its public utility property if the
groups of corporations (as defined in sec. 1563 whether or not
credit to which it would otherwise be entitled is flowed through to in-
they file consolidated returns. Any such controlled group is to be
come ratably over the useful life of the property; however, in this case
treated as one taxpayer for this purpose.
there must not be any adjustment to reduce the rate base. An addition-
The $100 million limitation represents the amount of the increased
al elective rule was provided to permit certain types of utilities (pri-
credit, and not the amount of the qualified investment. So, $100 million
marily electric utilities) to flow through benefits more rapidly to con-
would be the amount of the increase in credit from public utility prop-
sumers. A special election is provided with respect to local steam
erty investments of $12/3 billion; applied to nonutility property, it
distribution systems and gas or steam pipelines where the regulatory
would represent qualified investments of $31/3 billion.
body involved determined that the natural domestic supply of gas or
The $100 million limit is to be computed by taking into account any
steam was insufficient to meet the present and future requirements of
increase in the allowable investment credit by reason of the rate change,
the domestic economy. In this case, if the taxpayer elected (within 90
that is, the increase on public utility property from 4 to 10 percent
days after enactment of the Revenue Act of 1971) the investment
and on other property from 7 to 10 percent. The amount of the credit
credit is not to be available unless (1) no part of the credit is flowed
allowable to a public utility by reason of this change in rates may not
through to income and also (2) no part of the credit is used to reduce
exceed $100 million. Thus, for example, if a public utility makes quali-
the rate base.
fied investments of $9 billion, $8 billion of which is in public utility
Increase in rate to 10 percent.-Your committee's bill increases from
property, its tentative investment credit under present rates would be
7 to 10 percent the general rate of the investment tax credit. However,
$390 million (4 percent of $8 billion, plus 7 percent of $1 billion). The
the 10-percent investment credit is to apply to public utility property
rate increase in the bill would (but for the $100 million limit) increase
which at present is subject to the 4-percent investment credit as well as
the credit to $900 million. However, because of the $100 million limit,
to property eligible for the 7-percent investment credit under present
the maximum credit is $490 million.2
law.
Any amount of investment credit which is disallowed because of
The 10-percent credit is to be available with respect to property
the $100 million limit is to be available as a carryback or carryover
which is acquired and placed in service after January 21, 1975, and
under the regular rules, but only to taxable years to which the $100
before January 1, 1976; it is also to be available with respect to prop-
million limit applies. Since the 10-percent investment credit is to ap-
erty placed in service in 1976, if the taxpayer can clearly establish that
ply only to 1975 and (in the case of property ordered by December 31,
the property was acquired pursuant to an order placed before Janu-
1975, and placed in service by December 31, 1976) 1976, this would
ary 1, 1976.
allow a carryover from 1975 to 1976 and a carryback from 1976 to
In the case of property constructed, reconstructed, or erected by
1975, but not to or from any other year. In the year to which the credit
the taxpayer, the 10-percent credit is also to be available with respect
is carried, the $100 million cap is to be applied in determining whether
to property completed by the taxpayer after January 21, 1975. How-
any of the credit carried to that year may be used in that year, by add-
ever, in this case, the 10-percent credit is to be available only with re-
ing this carryover to the additional investment credit allowable for
spect to that part of the basis of the property which is properly at-
that year by reason of the rate change.3
tributable to construction, etc., by the taxpayer after January 21, 1975,
Increase in 50-percent limit for utility property.-Your committee's
and before January 1, 1976. Similarly, the 10-percent rate is to be
bill modifies the 50-percent-of-tax-limitation in the case of most public
available to qualified progress expenditures (described below under
Progress payments) for the period after January 21, 1975, and before
investment credit.
utility property which under present law is entitled to only a 4-percent
January 1, 1976.
Limitation on rate increase.-Since the purpose of the increase in the
investment credit is to provide stimulus to a large range of businesses,
$100 million limit.
utilities (described below) is not to be taken into account for purposes of computing the
1 The percentage-of-tax-liability limit, which is to be changed by this bill as to public
and not to provide an unreasonable benefit to any single company, your
2 The disallowed credit is to be allocated among the qualified investments and qualified
committee has placed an upper limit of $100 million on the extent to
progress flow-through expenditures limitations (see of section Progress 46(e). payments, below) for the year for purposes of the
which a single company can benefit from the increased investment
For example, if by reason of the $100 million limit $60 million of investment credit
ment were carried from 1975 to 1976 and if in 1976 there is an additional $70 million of invest-
could be credit used. by reason of the rate increase to 10 percent, $30 million of the carryover
36
37
The percentage limitation for public utility property is increased in
1975 and 1976 under the bill to 100 percent of the income tax liability
property and that taxpayer's other property-it is not to apply sep-
(computed without regard to the investment credit, and in the manner
arately to each category of property.
provided under existing law). In each of the next succeeding taxable
If a taxpayer has credit that remains unusable despite the higher
years the percentage limitation is reduced by 10 percentage points
limits, any such excess is to be allowed as a carryback (3 years) and
until, in taxable years beginning in 1981 and thereafter, the 50-percent
carryover (7 years), as under present law. If there is a carryover or
limitation goes back into effect. Thus, the percentage limitation is 90
carryback to a year to which these higher limits apply, then the exact
amount of the applicable limit is to be determined by the relative
percent in 1977, 80 percent in 1978, 70 percent in 1979, and 60 percent
investments in the year to which the excess credit is carried. For ex-
in 1980.
Public utility property for this purpose means property used pre-
ample, assume that in 1975, 50 percent of company X's qualified in-
vestment is in public utility property. The maximum percentage limit
dominantly in the trade or business of the furnishing or sale of (1)
in this case, as indicated above, is 75 percent of tax liability. Assume,
electrical energy, water, or sewage disposal services, (2) gas through
further, that in 1976, 75 percent of company X's qualified investment
a local distribution system, or (3) telephone service, most domestic
consists of public utility property. The maximum credit for 1976 would
telegraph service, or other communications services-but only where
then be (as indicated above) 100 percent of tax liability. If any of the
the rates for the furnishing or sale are regulated by a utilities com-
excess credit from 1975 would be carried over to 1976 (after having
mission or similar agency. (This modification of the 50-percent limit
been first carried back to 1972, 1973, and 1974, as under present law),
does not apply to communication property even though used predomi-
the 1976 limit would not be affected by whether the amount carried
nantly for communication purposes if the rates for furnishing of the
over to that year could be traced originally to public utility property
services are not regulated.)
or to other property.
The computation of the percentage limitation for public utility
Increase in limitation for used property.-You committee's bill, as
property is to be made on a taxpayer-by-taxpayer basis. Thus, a group
an aid to small business, increases the amount of used property which
of corporations which file a consolidated return together are to be
can qualify for the investment credit for any one year. The dollar
treated as one taxpayer.
Your committee intends that the benefit of the relaxation of the 50-
limitation is raised from $50,000 to $75,000 ($37,500 in the case of
percent limit go primarily to public utilities. However, it recognizes
a husband and wife who file separate returns).
that many public utilities have varying amounts of nonpublic utility
The increased limitation on used property is to apply to taxable
property. In addition, many public utilities are members of controlled
years beginning after December 31, 1974, and before January 1, 1976.
groups that file consolidated returns. To achieve this objective in the
Progress payments.-Under present law, a tax credit may be taken
most practical way administratively, the committee decided to prorate
for investment in qualified property at the time the property is placed
the increase in the credit limit in accordance with the extent to which
in service and therefore is ready for use. As indicated previously, the
the company (or the group filing the consolidated return) has qualified
committee concluded that in cases where taxpayers pay for long lead
time property as it is being constructed and substantially before the
investment in public utility property, as compared to its qualified in-
property can be placed in service, to wait for the allowance of the
vestment in other property.
Thus, if in 1975, 50 percent of the company's qualified investment is
investment credit until the property is placed in service represented
too long a delay in the claiming of the credit. The bill overcomes this
in public utility property, then the applicable limit is to be 75 percent
problem in present law by allowing an investment credit for what are
of tax liability (the basic 50-percent limit plus one-half of the maxi-
called "progress payments."
mum additional limit allowable in 1975). If 70 percent of the com-
Under the bill, a taxpayer, at his election, is to be permitted to treat
pany's qualified investment is in public utility property, then the ap-
"qualified progress expenditures" made for new property as a part of
plicable limit is to be 85 percent of the tax liability. In order to simplify
the base for which he can claim an investment credit. In general, these
such computations for most companies, if 75 percent or more of the
qualified progress expenditures are amounts actually paid (or incurred
qualified investment for a given year is in public utility property, then
the full increase is to apply to that company for that year. Thus, the
in the case of self-construction property) for construction (or acquisi-
tion or reconstruction) of property which has a normal construction
typical public utility, which has relatively little qualified investment
period of at least two years and which will have an estimated useful
in other property, is to get the full benefit of the increase in the
percentage limitation.
life in the hands of the taxpayer of at least seven years.
If less than 25 percent of the qualified investment consists of public
The normal construction period generally begins when physical work
utility property, then no part of the additional limitation is to apply.
on the property commences (i.e., not design, blueprints, planning, etc.)
In such a case, the company (or the group filing the consolidated
and ends when the property is available to be "placed in service" by
the taxpayer. However, no normal construction period is to include a
return) is to be treated in its entirety as not being a public utility
under this provision.
period of construction before January 22, 1975 (the general effective
The percentage applicable to a taxpayer for a year is to apply to the
date of these provisions), and, where progress payment treatment is
aggregate of the credits arising from that taxpayer's public utility
elected by the taxpayer for years beginning after that date, no normal
construction period will begin before the first day of the taxable year
for which the election is in effect.
38
39
Where possible, the normal construction period is to be estimated by
item has not yet become a part of the property, and even though it
reference to normal industry practice in producing similar items. The
has not yet been delivered to the site of the property. Other items
estimate is to be based on the information available at the close of the
may be treated as allocated when they have been delivered to the site
taxable year in which physical work on the property is started (or,
under circumstances where it would be impractical to then remove
if later, the close of the first taxable year for which the taxpayer has
the items to some other project (i.e., pumps delivered to locations on
elected to change to this "progress payments" method). Once the nor-
a tundra pipeline could be treated as allocated to that pipeline even
mal construction period has been reasonably estimated, the actual time
though they (but for their location on the tundra) would be usable on
that it takes to complete work on the property would generally be
other projects). In many cases, the items would not be treated as allo-
irrelevant for purposes of determining the proper tax treatment of the
cated until they were actually attached or consumed in the construc-
taxpayer's progress payments.4
tion of the property. Mere bookkeeping notations are not to be suf-
For purposes of the 2-year test, property which will be placed in
ficient to establish to the satisfaction of the Secretary or his delegate
service by the taxpayer separately, is to be considered separately (for
that the necessary allocation has occurred.
example, if two ships were contracted for at the same time, each ship
In the case of acquired property, qualified progress expenditures are
would be considered separately). On the other hand, property which
to be the amounts paid by the taxpayer to the manufacturer, but only
must be placed in service by the taxpayer as part of an integrated unit
to the extent that there is actual progress made in the construction of
(for example, equipment which will all be placed in service at the same
the property. (This is further limited by the "pro rata" rule, dis-
time as part of the same plant) is to be treated as a unit for purposes
cussed below.)
of the test.5 Thus, if the taxpayer is constructing a pipeline which will
For this purpose, "progress" will generally be the percentage of
not be operational for five years after construction begins, the fact that
completion, measured in terms of the manufacturer's incurred cost, as
some equipment used in connection with the pipeline (such as pumps
a fraction of his anticipated cost (as adjusted from year to year)
for the pumping stations) take less than five years to manufacture, is
based upon cost accounting records or in some cases on engineer or
not to affect the status of the pipeline for progress payment purposes.
architect certificates.⁶
Also, the taxpayer may treat all amounts expended in connection with
Where several manufacturers or contractors are used in connection
the pipeline as progress payments (including amounts expended for
with the same property, "progress" is to be measured on a manufac-
the pumps). On the other hand, if some segment of the pipeline can be
turer by manufacturer basis, so that the taxpayer may utilize pay-
placed in service in less than two years, progress payment treatment
ments made to a manufacturer who has made "progress" within the
is not to be available with respect to that segment.
meaning of these rules, even if payments have also been made to
In the case of self-constructed property (i.e., property where it is
another manufacturer who has made no progress. By the same token,
reasonable to believe that the taxpayer will bear more than half of
payments to one manufacturer in excess of that manufacturer's prog-
the construction costs directly) "qualified progress expenditures" will
ress are not to give rise to credits merely because another manufac-
generally equal the costs incurred by the taxpayer which are properly
turer's progress exceeds the payments made to that other
chargeable to capital account in connection with that property (for
manufacturer.
purposes of the investment credit). Thus, qualified progress expendi-
In the case of self-constructed property, "progress" will generally
tures would not include any depreciation sustained with respect to
equal "progress expenditures," SO no separate percentage-of-comple-
other property (machinery, equipment, etc.) used in the construction
tion test is needed.
of new section 38 property (because such depreciation is not part of
"Progress expenditures", as well as "progress" are not to be taken
the basis for purposes of section 38), nor generally would it include the
into account to the extent that they occur before the start of the
adjusted basis of reconstructed property at the time the reconstruction
"normal construction period" of the property nor to the extent alloca-
is commenced.
ble to nonqualified property. Thus, progress expenditures and progress
Also, in the case of self-constructed property, qualified progress
which occur before January 22, 1975, cannot be utilized by the tax-
expenditures can include amounts expended for materials by the tax-
payer to increase his qualified investment prior to the year in which
payer to the extent that the taxpayer can establish, to the satisfaction
of the Internal Revenue Service, that these materials have been ir-
For example, assume that in 1980 a taxpayer makes a payment of $11,000 under a
contract which provides for delivery of the property in 1985, with a fixed purchase price
revocably allocated to the construction of the property. For purposes
of $110,000 and an estimated cost to the manufacturer of $100,000. During 1980, the
of these rules, an item which is suitable only for use in connection with
manufacturer incurs $10,000 of cost in connection with the property.
Under these circumstances the manufacturer will be considered to have made 10 percent
the property is to be regarded as irrevocably allocated, even though the
progress in connection with the property ($10,000 of costs incurred divided by $100,000
of total estimated cost). The taxpayer will be permitted to treat his full $11,000 payment
as qualified investment for 1980, since this payment does not exceed 10 percent of the
4 Of course, if there were a significant error in estimating the normal construction period,
total cost, to the taxpayer, of the section 38 property.
this could be evidence that the estimate had not been reasonable in the first place, par-
If, on the other hand, the manufacturer had incurred only $5,000 of costs in connection
ticularly where the error could not be explained by a later change in circumstances.
with the property in 1980, the taxpayer would be allowed to treat only 50 percent of his
5 Of course, the construction period for property not qualifying for the investment credit,
$11,000 payment as qualified investment in 1980 ($5,500) because there had been only 5
such as real estate, will not affect the "normal construction period" of any qualifying prop-
percent "progress" in that year. However, in that case, if the manufacturer incurred an
erty which may be used on the premises. Thus, If a plant is being constructed. and qualify-
additional $5,000 of cost in connection with the property in 1981, the taxpayer could
ing equipment has a normal construction period of less than two years, the progress pay-
treat the $5,500 of unused 1980 payment as qualified investments for 1981 (receiving,
ments for the equipment are not to be treated as qualified investment, even if the building in
in effect, a carryover of his unused 1980 payment) even if no further payments were made
which the equipment is to be housed will take more than two years to construct.
to the manufacturer in 1981
40
41
the property is placed in service. Likewise, progress expenditures and
If property is sold or otherwise disposed of by the taxpayer before
progress which occur before the year for which the taxpayer first
he places it in service, or if (under Treasury regulations) it becomes
elects to come under the progress payment rules cannot be SO utilized.
apparent that the property will not be section 38 property when placed
Similarly, progress expenditures and progress allocable to a building
in service, any amounts which were treated as qualified investments in
(or its structural components) would not be taken into account.
prior years are, of course, to be subject to full recapture in a manner
To prevent a possible abuse situation, where a manufacturer might
generally similar to present law.9
certify unrealistic amounts of progress in connection with a project,
As discussed above, progress expenditure treatment is to be al-
the committee bill contains a "pro rata" rule. Under this rule, it will
lowed only in the case of property which has an estimated useful life
be presumed that generally progress will not occur with respect to a
(measured from the time the property is placed in service by the tax-
project more rapidly than ratably over the expected construction
payer) of seven years or more. If the estimated useful life of the prop-
period for the property.⁷ However, this presumption could be rebutted
erty is less than seven years at the time it is placed in service (even if
if the taxpayer shows by clear and convincing evidence that progress
previous estimates were for a longer useful life and were reasonable
had, in fact, been more rapid.
when made) any excess credits previously allowed under the progress
Progress expenditures may be made in cash, or in the form of prop-
payment rules are to be subject to recapture.¹⁰
erty furnished by the taxpayer to the manufacturer for use in the
Where the rate of the investment credit for the year in which quali-
construction of the property. However, if the taxpayer furnishes
fied progress expenditure treatment was allowed with respect to the
property, that property is to be taken into account only to the extent
property is different from the rate in effect for the year of recapture,
that that property could be included in the basis of the completed
then recapture is to occur with respect to the rate in effect when quali-
section 38 property at the time that it is placed in service.
fied progress expenditure treatment was allowed. For example, re-
Progress payments may be made out of the taxpayer's capital, or
capture of 1975 progress expenditures would be 10 percent of those
from borrowed funds. However, to prevent an obvious abuse situation,
expenditures, since, under the committee bill, the investment credit
the committee bill provides that progress expenditures made with
for 1975 is to be 10 percent.
funds borrowed, directly or indirectly, from the manufacturer of the
Where the actual useful life of the property is less than the esti-
property may not be treated as qualified investment
mated life (estimated as of the time when the property is placed in
Under the committee bill, the taxpayer is to be allowed to claim the
service), any excess credits previously allowed under the progress
full credit to which he is entitled with respect to property in the year
payment rules will be subject to recapture on the same basis as other
excess credits.
in which it is placed in service. Of course, amounts which were treated
as qualified investments with respect to the property in preceding
In the case where property is subject to a sale-leaseback transaction
years, due to the operation of the progress payment rules, are to be
before the property is placed in service, the following rules are appli-
subtracted from the amount for which the taxpayer may obtain a
cable. Where the seller-lessee makes progress payments, but the prop-
credit.⁸
erty is sold to a lessor before the property is placed in service, generally
The provisions discussed above are to apply only if the taxpayer
this will be treated as a recapture situation. For example, if a seller-
makes an election (in a time and manner to be prescribed in regula-
lessee makes progress payments of $10,000 each in 1980, 1981, and 1982,
tions) to come under these rules. Once made, the election would apply
but the section 38 property is sold to a lessor for $100,000 in 1984, before
to all subsequent taxable years, and can only be revoked with the per-
the property is placed in service, the lessor would be entitled to the
mission of the Commissioner. It is anticipated that taxpayers gen-
investment credit on his $100,000 basis, but credits previously allowed
erally will exercise the election because this will accelerate their op-
to the seller-lessee based on his $30,000 of progress expenditures would
portunity to use the investment credit. However, taxpayers who are
be subject to recapture.
currently in a loss situation may not wish to make the election, SO that
However, where the lessor and lessee enter into an agreement pro-
progress payments are not treated as qualified investments until the
viding that the seller-lessee will be entitled to some or all of the credit,
year in which the property is placed in service, in order to obtain a
it is contemplated that there would be no recapture of the credits previ-
more favorable carryover period with respect to those payments.
For example, sale of the property, or of the contract rights to the property before the
property is placed in service, is to be treated as a disposition. A similar result is to follow
7 For example, if physical work pursuant to a contract is begun by July 1, 1980, for
if the contract for the property is cancelled, or if the project is abandoned by the taxpayer.
the manufacture of a machine to be delivered on July 1, 1985, (5 years later) it will
Conveyance of the property by gift is also to be treated as a disposition. However, there
be presumed that there would not be more than 10 percent progress during calendar 1980,
would be no recapture in the event of a transfer by death, or pursuant to a sec. 381 trans-
and not more than 20 percent progress during the fiscal year from July 1, 1980, through
action, but the decedent, or corporation (as the case may be) would be treated as a "prede-
June 30, 1981. (The determination as to the normal construction period of the property
cessor" of the person receiving the sec. 38 property, and progress payments of the predeces-
will be made only once, at the close of the taxable year in which work on the property
sor would have to be taken into account in reducing the qualified invesment of the
successor.
commences.)
8 Otherwise, the taxpayer might obtain two credits with respect to the same property.
10 For example, If a taxpayer made $10,000 of progress expenditures in 1980 with respect
For example, assume that section 38 property placed in service in 1985 has a basis of $100,-
to a piece of section 38 property. reasonably believing at that time that the property would
000, and that of that amount $10,000 has been treated as qualified investment in each of the
have a seven-year useful life in his hands (so that a full credit was allowable with respect
years 1982, 1983, and 1984 under the progress payment rules. The taxpayer's basis in the
to those payments) but reduces the estimated useful life to 5 years in 1983, when the prop-
property, for purposes of determining his qualified investment in 1985 is to be $70,000. (Of
erty is placed in service, S0 that only a two-thirds credit is allowable, the one-third excess
course, the taxpayer's basis for purposes of determining depreciation, or his gain or loss
credit previously allowed in connection with the 1980 payment is subject to recapture at
from the sale of the property, would not be affected by this adjustment, which is made for
the time the property is placed in service.
investment credit purposes.)
42
43
ously allowed with respect to the seller-lessee's progress expenditures
The progress payment rules will apply to progress expenditures
since recapture would, in effect, permit the seller-lessee to revive other-
made after January 21, 1975, in taxable years ending after De-
wise unusable investment credits.¹¹ Accordingly, recapture is provided
cember 31, 1974.
except to the extent that the lease agreement provides for the pass-
Revenue effect.-These changes in the investment credit are expected
through of the credit to the seller-lessee.
to reduce liabilities by $2.4 billion in 1975 and $1.5 billion in 1976.
To minimize the possible doubling up effect of these provisions,
where taxpayers would be taking investment credits for all property
E. Increase in Corporate Surtax Exemption
placed in service this year (even though progress payments had been
made with respect to that property in prior years) as well as progress
(Sec. 303 of the bill and sec. 11(d), 12(7), 962(c), and 1561 (a) of
payments made in the year, the committee bill provides that the prog-
the code)
ress payment provisions are to be phased in over a 5-year period.
Under these transition rules, 20 percent of a taxpayer's 1975 progress
Under the present law, corporate income is subject to a normal tax
expenditures may be treated as part of his qualified investment for
at a rate of 22 percent and a surtax at a rate of 26 percent (for a total
1975. The remaining 80 percent of those payments may be taken into
tax rate of 48 percent). However, the first $25,000 of corporate income
account ratably over the next 4 years (20 percent a year) 40 percent
is exempt from the surtax. In effect, then, the first $25,000 of corporate
of the progress expenditures made in 1976 may be taken into account
income is taxed at the rate of 22 percent and the income in excess of
in 1976, with the remaining 60 percent of the payments to be taken
$25,000 is taxed at a 48 percent rate.
into account in the remaining 3 years of the phase in period; 60 per-
In order to provide tax relief to small businesses that are not par-
cent of the progress expenditures made in 1977 can be treated as quali-
ticularly capital intensive and would not be able to benefit as much
fied investments in 1977, with 40 percent of the payments to be phased
from the investment credit, your committee's bill increases the surtax
in ratably in the succeeding two years; 80 percent of the taxpayer's
exemption from $25,000 to $50,000. This means that the first $50,000
progress expenditures in 1978 could be taken into account as qualified
of corporate taxable income will be taxed at the 22 percent rate, while
investments in 1978, while the remaining 20 percent of the payments
any additional corporate income will be taxed at the 48 percent rate.
would be taken into account in 1979. By 1979, the phase in period
This will result in an annual tax savings of $6,500 for a corporation
would be complete, and all progress expenditures made in that year
having $50,000 or more of taxable income. (Under present law the
and later years could be treated as qualified investments. Also, in 1979
tax on $50,000 of taxable income is $17,500-22 percent of the first
the taxpayer would take into account the final 20-percent phase-in por-
$25,000 of income, plus 48 percent of the remaining $25,000; under
tions of the expenditures in fact made in the four preceding years.
the bill the tax is $11,000-22 percent of $50,000.)
For example, assume that a progress expenditure of $10,000 were
The increase in the corporate surtax exemption is effective for tax-
made in 1975. Two thousand dollars of this amount would be treated
able years ending after December 31, 1974. It is to apply, however, for
as a qualified investment in that year, and $2,000 would be available
only one year in this bill and is to cease to apply for taxable years
to be treated as qualified investment in each of the next 4 years. On the
ending after December 31, 1975.
other hand, if a $10,000 progress expenditure were to be made in 1977
In the case of a corporation which is not on a calendar year basis,
then $6,000 of that payment would be treated as a qualified investment
the bill provides that the one year increase in the surtax exemption
in that year, and the remaining $4,000 would be taken into account
is to be treated as an increase and decrease in rates (sec. 21 of the code).
ratably in 1978 and 1979.
As a result, in the case of a fiscal year taxpayer, the increase in the
When a taxpayer places in service the property with respect to which
surtax exemption for the year ending in 1975 will be prorated based
the taxpayer has been making progress payments, the taxpayer is to be
on the number of days from January 1, 1975, to the end of that taxable
entitled to the full investment credit, reduced by the progress payments
year, and the decrease in the surtax exemption, for years ending after
credits already taken. In the case of property placed in service by such
1975, will be prorated based on the number of days from the beginning
a taxpayer during the 5-year transition period, this would also include
of that taxable year through December 31, 1975. Thus, the tax benefit
the remaining portions of the credit that otherwise would have been
resulting from the one year increase in the surtax exemption will, in
phased in at the rate of 20 percent each year.
effect, be spread over two taxable years in the case of fiscal year
taxpayers.
11 For example, assume that the taxpayer (who has elected to use the progress payment
This increase in the corporate surtax exemption is expected to result
rules) has been constructing a long-lead-time piece of property for a number of years and
in a revenue loss of $1.2 billion, of which it is estimated about 60
has had excess investment credits for those years (i.e., his investment credits have exceeded
the amount that could be used because his taxable income was low for those years). Assume
percent, or $730 million, will go to businesses with incomes under
further that it becomes evident that some of these excess investment credits will not be
$100,000.
able to be used in any of the years to which they could be carried under the carryover
rules. The taxpayer is not to be permitted to "revive" those unused credits by entering
into a sale-leaseback operation which would result in a recapture of the prior (unusable)
credits and could result in the taxpayer and the new lessor agreeing to pass the new invest-
ment credit on to the taxpayer when the property is placed in service (when the taxpayer
expects good profit years and therefore expects that the full credit could be utilized in those
years).
V- STATISTICAL APPENDIX
TABLE 1.-INDIVIDUAL INCOME TAX BURDEN 1 UNDER PRESENT LAW AND UNDER THE PROVISIONS IN THE BILL WHICH GRANT A REFUND OF 1974 INCOME TAX LIABILITY, INCREASE THE
STANDARD DEDUCTION, AND GRANT AN EARNED INCOME CREDIT
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personal expenses of 17 percent of income)]
Tax liability
Married couple with
Married couple with
Married couple with
Married couple with
Single person
no dependents
1 dependent
2 dependents
4 dependents
Under
Under
Under
Under
Under
present
Under
Reduc-
present
Under
Reduc-
present
Under
Reduc-
present
Under
Reduc-
present
Under
Reduc-
Adjusted gross income
law
H.R. 2166
tion
law
H.R.2166
tion
law
H.R. 2166
tion
law
H.R.2166
tion
law
H.R. 2166
tion
44
$3,000
$138
-$201
$339
$28
-$178
$206
0
-$150
$150
0
-$150
$150
0
-$150
$150
$5,000
491
177
314
322
-60
382
$208
-165
373
$98
-198
296
0
-100
100
$6,000
681
467
214
484
190
294
362
77
285
245
-30
275
$28
-28
56
$8,000
1,087
865
222
837
520
317
694
392
302
559
270
289
312
40
272
$10,000
1,482
1,286
196
1,152
885
267
1,010
757
253
867
615
252
586
350
236
$12,500
1,996
1,796
200
1,573
1,333
240
1,408
1,192
216
1,261
1,064
197
976
805
171
$15,000
2,549
2,349
200
2,029
1,829
200
1,864
1,678
186
1,699
1,529
170
1,371
1,234
137
$17,500
3,145
2,945
200
2,516
2,316
200
2,329
2,129
200
2,156
1,956
200
1,826
1,643
183
$20,000
3,784
3,584
200
3,035
2,835
200
2,848
2,648
200
2,660
2,460
200
2,285
2,085
200
$25,000
5,230
5,080
150
4,170
4,020
150
3,960
3,810
150
3,750
3,600
150
3,330
3,180
150
$30,000
6,850
6,750
100
5,468
5,368
100
5,228
5,128
100
4,988
4,888
100
4,508
4,408
100
$35,000
8,625
8,525
100
6,938
6,838
100
6,668
6,568
100
6,398
6,298
100
5,858
5,758
100
$40,000
10,515
10,415
100
8,543
8,443
100
8,251
8,151
100
7,958
7,858
100
7,373
7,273
100
1 Computed without reference to the tax tables for returns with adjusted gross income under $10,000.
Note: Details may not add to totals because of rounding.
2 For a more detailed description of these provisions see table 1 in the Revenue Effects section of
this report.
75 O 47-320
TABLE 2.-INDIVIDUAL INCOME TAX BURDEN 1 UNDER PRESENT LAW AND UNDER THE PROVISIONS IN THE BILL WHICH INCREASE THE STANDARD DEDUCTION AND GRANT AN EARNED INCOME
CREDIT2
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personel expenses of 17 percent of income)]
Tax liability
Married couple with
Married couple with
Married couple with
Single person
Married couple with
no dependents
1 dependent
2 dependents
4 dependents
Under
Under
Under
Under
Under
present
Under
Reduc-
present
Under
Reduc-
present
Under
Reduc-
Adjusted gross income
present
Under
Reduc-
law
H.R. 2166
present
Under
tion
Reduc-
law
H.R. 2166
tion
law
H.R. 2166
tion
law
H.R. 2166
tion
law
H.R. 2166
tion
$3,000
$138
-$101
$239
$28
-$150
$178
0
-$150
$150
0
$5,000
-$150
$150
0
491
277
214
-$150
322
40
$150
45
282
$208
-65
273
$6,000
$98
-100
198
0
681
-100
567
114
100
484
290
194
362
178
185
245
$8,000
70
175
$28
1,087
974
0
28
113
837
620
217
694
493
202
559
$10,000
370
189
312
1,482
1,434
140
48
172
1,152
1,000
152
1,010
858
152
867
$12,500
715
152
586
1,996
450
136
1,996
0
1,573
1,490
83
1,408
1,333
75
$15,000
1,261
1,190
71
2,549
976
2,549
905
0
2,029
71
2,029
0
1,864
1,864
0
$17,500
1,699
1,699
0
3,145
3,145
1,371
1,371
0
0
2,516
2,516
0
2,329
2,329
0
$20,000
2,156
3,784
2,156
0
3,784
1,826
0
3,035
1,826
0
3,035
0
2,848
2,848
0
$25,000
2,660
2,660
0
5,230
5,230
2,285
4,170
2,285
0
0
4,170
0
3,960
3,960
0
$30,000
3,750
6,850
3,750
0
3,330
6,850
0
3,330
0
5,468
5,468
0
5,228
5,228
0
$35,000
4,988
4,988
0
8,625
8,625
4,508
0
4,508
0
6,938
6,938
0
6,668
6,668
0
$40,000
6,398
6,398
0
10,515
5,858
10,515
5,858
0
0
8,543
8,543
0
8,251
8,251
0
7,958
7,958
0
7,373
7,373
0
1 Computed without reference to the tax tables for returns with adjusted gross income under
$10,000.
Note: Details may not add to totals because of rounding.
2 For a more detailed description of these provisions see Table 1 in the Revenue Effects section of
this report.
TABLE 3.-INDIVIDUAL INCOME TAX BURDEN 1 UNDER PRESENT LAW AND UNDER THE PROVISION IN THE BILL WHICH INCREASES THE STANDARD DEDUCTION 2
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personal expenses of 17 percent of income)]
Tax liability
Married couple with
Married couple with
Married couple with
Married couple with
Single person
no dependents
1 dependent
2 dependents
4 dependents
Under
Under
Under
Under
Under
Under
Under
Under
Under
Under
present
H.R.
Reduc-
present
H.R.
Reduc-
present
H.R.
Reduc-
present
H.R.
Reduc-
present
H.R.
Reduc-
Adjusted gross income
law
2166
tion
law
2166
tion
law
2166
tion
law
2166
tion
law
2166
tion
$3,000
$138
$49
$89
$28
0
$28
0
0
0
0
0
0
0
0
0
$5,000
491
377
114
322
$140
182
$208
$35
$173
$98
0
$98
0
0
46
0
$6,000
681
567
114
484
290
194
362
178
185
245
$70
175
$28
0
$28
$8,000
1,087
974
113
837
620
217
694
493
202
559
370
189
312
$140
172
$10,000
1,482
1,434
48
1,152
1,000
152
1,010
858
152
867
715
152
586
450
136
$12,500
1,996
1,996
0
1,573
1,490
83
1,408
1,333
75
1,261
1,190
71
976
905
71
$15,000
2,549
2,549
0
2,029
2,029
0
1,864
1,864
0
1,699
1,699
0
1,371
1,371
0
$17,500
3,145
3,145
0
2,516
2,516
0
2,329
2,329
0
2,156
2,156
0
1,826
1,826
0
$20,000
3,784
3,784
0
3,035
3,035
0
2,848
2,848
0
2,660
2,660
0
2,285
2,285
0
$25,000
5,230
5,230
0
4,170
4,170
0
3,960
3,960
0
3,750
3,750
0
3,330
3,330
0
$30,000
6,850
6,850
0
5,458
5,468
0
5,228
5,228
0
4,988
4,988
0
4,508
4,508
0
$35,000
8,625
8,625
0
6,938
6,938
0
6,668
6,668
0
6,398
6,398
0
5,858
5,858
0
$40,000
10,515
10,515
0
8,543
8,543
0
8,251
8,251
0
7,958
7,958
0
7,373
7,373
0
1 Computed without reference to the tax tables for returns with adjusted gross income under $10,000.
2 Increasing the minimum standard deduction to $1,900 for single person returns and $2,500 for
joint returns; the percentage standard deduction to 16 percent; and the maximum standard deduction
to $2,500 for single person returns and $3,000 for joint returns.
Note: Details may not add to totals because of rounding.
TABLE 4.-INDIVIDUAL INCOME TAX BURDEN 1 UNDER PRESENT LAW AND UNDER THE PROVISION IN THE BILL WHICH GRANTS AN EARNED INCOME CREDIT 2
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personal expenses of 17 percent of income)]
Tax liability
Married couple with
Married couple with
Married couple with
Married couple with
Single person
no dependents
1 dependent
2 dependents
4 dependents
Under
Under
Under
Under
Under
Under
Under
Under
Under
Under
present
H.R.
Reduc-
present
H.R.
Reduc-
present
H.R.
Reduc-
present
H.R.
Reduc-
present
H.R.
Reduc-
Adjusted gross income
law
2166
tion
law
2166
tion
law
2166
tion
law
2166
tion
law
2166
tion
$3,000
$138
-$13
$150
$28
-$122
$150
0
-$150
$150
0
-$150
$150
0
-$150
$150
$5,000
491
391
100
322
222
100
$208
108
100
$98
-2
100
0
-100
100
$6,000
681
681
0
484
484
0
362
362
0
245
245
0
$28
28
0
47
$8,000
1,087
1,087
0
837
837
0
694
694
0
559
559
0
312
312
0
$10,000
1,482
1,482
0
1,152
1,152
0
1,010
1,010
0
867
867
0
586
586
0
$12,500
1,996
1,996
0
1,573
1,573
0
1,408
1,408
0
1,261
1,261
0
976
976
0
$15,000
2,549
2,549
0
2,029
2,029
0
1,864
1,864
0
1,699
1,699
0
1,371
1,371
0
$17,500
3,145
3,145
0
2,516
2,516
0
2,329
2,329
0
2,156
2,156
0
1,826
1,826
0
$20,000
3,784
3,784
0
3,035
3,035
0
2,848
2,848
0
2,660
2,660
0
2,285
2,285
0
$25,000
5,230
5,230
0
4,170
4,170
0
3,960
3,960
0
3,750
3,750
0
3,330
3,330
0
$30,000
6,850
6,850
0
5,468
5,468
0
5,228
5,228
0
4,988
4,988
0
4,508
4,508
0
$35,000
8,625
8,625
0
6,938
6,938
0
6,668
6,668
0
6,398
6,398
0
5,858
,858
0
$40,000
10,515
10,515
0
8,543
8,543
0
8,251
8,251
0
7,958
7,958
0
7,373
7,373
0
1 Computed without reference to the tax tables for returns with adjusted gross income under $10,000.
2 Granting a refundable tax credit of 5 percent of wage and salary and self-employment
income with a maximum credit of $200 and a phaseout of the credit between $4,000 and
$6,000 of adjusted gross income.
Note: Details may not add to totals because of rounding.
48
tion
0
0
Reduc-
$28
100
100
100
137
183
200
150
100
100
100
Married couple with
4 dependents
0
0
Under
H.R.
2166
$212
486
876
1,233
1,643
2,085
3,180
4,408
5,758
7,273
VI. EFFECT ON THE REVENUES OF THE BILL AND VOTE
law
0
0
Under
present
$28
312
586
976
1,371
1,826
2,285
3,330
4,508
5,858
OF THE COMMITTEE IN REPORTING THE BILL
In compliance with clause 7 of rule XIII of the Rules of the House
0
Reduc-
tion
$98
100
100
100
126
170
200
200
150
100
100
100
of Representatives, the following statement is made relative to the
effect on the revenues of this bill. Your committee estimates that the
Married couple with
bill will reduce tax liability by $19.8 billion in calendar year 1975, $1.5
2 dependents
0
0
Under
H.R.
2166
$145
459
767
1,135
1,529
1,956
2,450
3,600
4,888
6,298
7,858
billion in 1976, and $130 million in 1977. The Treasury Department
TABLE 5.--INDIVIDUAL INCOME TAX BURDEN UNDER PRESENT LAW AND UNDER THE PROVISION IN THE BILL WHICH GRANTS A REFUND OF 1974 INCOME TAX LIABILITY
agrees with this statement. Part III of this report contains a more
detailed statement of the revenue effect of the bill.
0
Under
present
law
$98
245
559
867
1,261
1,699
2,156
2,660
3,750
4,988
6,398
7,958
[Single person and married couple with no, 1, 2, and 4 dependents (assuming deductible personal expenses of 17 percent of income)]
Note: Details may not add to totals because of rounding.
In compliance with clause 2(1) (2) (B) of Rule XI of the Rules
of the House of Representatives, the following statement is made rela-
0
tive to the record vote by the committee on the motion to report the
Reduc-
tion
$100
100
100
101
141
186
200
200
150
100
100
100
bill. The bill was ordered reported by a roll call vote of 29 in favor
and 6 opposed.
Tax liability
Married couple with
1 dependent
Under
H.R.
2166
$108
262
594
909
1,267
- 2,129
1,678
2,648
810
5,128
568
151
VII. CHANGES IN EXISTING LAW MADE BY THE BILL,
AS REPORTED
0
Under
present
law
$208
362
694
1,010
1,408
1,834
329
2,848
3,960
228
668
251
In compliance with clause 3 of Rule XIII of the Rules of the
House of Representatives, changes in existing law made by the bill,
as reported, are shown as follows (existing law proposed to be omitted
Reduc-
ion
$28
100
100
100
115
157
200
200
200
150
100
100
100
is enclosed in black brackets, new matter is printed in italics, existing
law in which no change is proposed is shown in roman) :
Married couple with
no dependents
Under
H.R.
2166
$222
384
737
1,037
1,415
1,829
2,316
2,835
4,020
5,368
6,838
INTERNAL REVENUE CODE OF 1954
*
*
*
*
*
*
*
Under
present
law
$28
322
484
837
1,152
1,573
2,023
2,516
3,035
4,170
5,458
6,938
1 Computed without reference to the tax tables for returns with adjusted gross income under $10,000.
Granting a 100-percent refund of 1974 income tax liability up to $100 without a phaseout and a
10-percent refund of tax above $1,000 with a maximum refund of $200 with the refund phased out
CHAPTER 1-NORMAL TAXES AND
SURTAXES
Reduc-
tion
$100
100
100
109
148
200
200
200
200
150
100
100
100
*
*
*
*
Single person
Under
H.R.
2166
391
581
978
1,334
1,797
2,343
2,945
3,584
5,030
6,750
8,525
10,415
Subchapter A-Determination of Tax
Liability
Under
present
law
$138
491
681
1,087
1,482
1,996
2,543
3,145
3,784
5,230
6,850
8,625
10,515
between $20,000 and $30,000 of adjusted gross income but not below $100.
*
*
*
PART II-TAX ON CORPORATIONS
Sec. 11. Tax imposed.
Sec. 12. Cross references relating to tax on corporations.
SEC. 11. TAX IMPOSED.
*
*
Adjusted gross income
(a)
*
*
*
*
*
*
*
*
(d) SURTAX EXEMPTION.-For purposes of this subtitle, the surtax
$3,000
$5,000
$6,000
$8,000
$10,000
$12,500
$15,000
$17,500
$20,000
$25,000
$30,000
$35,000
$40,000
exemption for any taxable year is [$25,000] $50,000, except that with
respect to a corporation to which section 1561 or 1564 (relating to
(49)
50
51
surtax exemptions in case of certain controlled corporations) applies
year, each change made by the Revenue Act of 1971 in section 141
for the taxable year, the surtax exemption for the taxable year is the
(relating to the standard deduction) and section 151 (relating to per-
amount determined under such section.
sonal exemptions) shall be treated as a change in a rate of tax.
*
(f) INCREASE IN SURTAX EXEMPTION, ETC.-In applying subsection
SEC. 12. CROSS REFERENCES RELATING TO TAX ON CORPORATIONS.
(a) to a taxable year of a taxpayer which is not a calendar year, the
(1) For tax on the unrelated business income of certain charitable
change made by section 303, and the change made by the second sen-
and other corporations exempt from tax under this chapter, see section
tence of section 304(c) (1), of the Tax Reduction Act of 1975 in sec-
511.
tion 11 (d) (relating to corporate surtax exemption) and in section
(2) For accumulated earnings tax and personal holding company tax,
see parts I and II of subchapter G (sec. 531 and following).
(3) For doubling of tax on corporations of certain foreign countries,
shall each be treated as a change in a rate of tax.
962 (c) (relating to individuals electing to be taxed at corporate rates)
see section 891.
*
(4) For alternative tax in case of capital gains, see section 1201 (a).
(5) For rate of withholding in case of foreign corporations, see sec-
PART IV-CREDITS AGAINST TAX
tion 1442.
(6) For withholding of tax on tax-free covenant bonds, see section
Subpart A. Credits allowable.
1451.
(7) For limitation on the [$25,000] $50,000 exemption from surtax
Subpart B. Rules property. for computing credit for investment in certain depreciable
provided in section 11 (c), see section 1551.
(8) For minimum tax for tax preferences, see section 56.
Subpart A-Credits Allowable
PART III-CHANGES IN RATES DURING A TAXABLE
Sec. 31. Tax withheld on wages.
YEAR
Sec. 32. Tax withheld at source on nonresident aliens and foreign corpora-
tions and on tax-free covenant bonds.
Sec. 21. Effect of changes.
Sec. 33. Taxes of foreign countries and possessions of the United States.
SEC. 21. EFFECT OF CHANGES.
Sec. 35. Partially tax-exempt interest received by individuals.
(a) GENERAL RULE.-If any rate of tax imposed by this chapter
Sec. 36. Credits not allowed to individuals paying optional tax or taking
standard deduction.
changes, and if the taxable year includes the effective date of the change
Sec. 37. Retirement income.
(unless that date is the first day of the taxable year), then-
Sec. 38. Investment in certain depreciable property.
(1) tentative taxes shall be computed by applying the rate for
Sec. 39. Certain uses of gasoline, special fuels, and lubricating oil.
the period before the effective date of the change, and the rate for
Sec. 40. Expenses of work incentive programs.
the period on and after such date, to the taxable income for the
Sec. 41. Contributions to candidates for public office.
Sec. 42. Earned income credit.
entire taxable year; and
Sec. [42] 43. Overpayments of tax.
(2) the tax for such taxable year shall be the sum of that pro-
*
*
*
portion of each tentative tax which the number of days in each
SEC. 42. EARNED INCOME CREDIT.
period bears to the number of days in the entire taxable year.
(b) REPEAL OF Tax.-For purposes of subsection (a)
(a) ALLOWANCE OF CREDIT.-In the case of an individual, there
(1) if a tax is repealed, the repeal shall be considered a change
shall be allowed as α credit against the tax imposed by this chapter
of rate; and
for the taxable year an amount equal to 5 percent of the taxpayer's
(2) the rate for the period after the repeal shall be zero.
adjusted earned income for the taxable year.
(c) EFFECTIVE DATE OF CHANGE.-For purposes of subsections (a)
(b) ADJUSTED EARNED INCOME.-For purposes of this section, the
and (b)
term "adjusted earned income" means-
(1) if the rate changes for taxable years "beginning after" or
(1) 80 much of the individual's earned income for the taxable
"ending after" a certain date, the following day shall be considered
year as does not exceed $4,000, reduced by
the effective date of the change; and
(2) two times the excess over $4,000 of the greater of---
(2) if a rate changes for taxable years "beginning on or after"
(A) the taxpayer's adjusted gross income for the taxable
a certain date, that date shall be considered the effective date of
year, or
the change.
(d) CHANGES MADE BY TAX REFORM ACT OF 1969 IN CASE OF INDI-
(c) EARNED INCOME DEFINED.-
(B) the taxpayer's earned income for the taxable year.
VIDUALs.-In applying subsection (a) to a taxable year of an individual
which is not a calendar year, each change made by the Tax Reform
income" means-
(1) IN GENERAL.-For purposes of this section, the term "earned
Act of 1969 in part I or in the application of part IV or V of subchapter
tion, plus
(A) wages, salaries, tips, and other employee compensa-
B for purposes of the determination of taxable income shall be treated
as a change in a rate of tax.
(B) the amount of taxpayer's net earnings from self-
(e) CHANGES MADE BY REVENUE ACT OF 1971.-In applying subsec-
section 1402
employment for the taxable year (within the meaning of
tion (a) to a taxable year of an individual which is not a calendar
52
53
(2) SPECIAL RULES.-For purposes of paragraph (1)-
(A) 10-PERCENT CREDIT.-Except as provided in subpara-
(A) except as provided in subparagraph (B), any amount
graph (B), the amount of the credit allowed by section 38 for
shall be taken into account only if such amount is includible
the taxable year shall be equal to 10 percent of the qualified
in the gross income of the taxpayer for the taxable year,
investment (as determined under subsections (c) and (d)).
(B) the earned income of an individual shall be computed
(B) 7-PERCENT credit.-In the case of property-
without regard to any community property laws,
(i) the construction, reconstruction, or erection of
(C) no amount received as a pension or annuity shall be
which is completed by the taxpayer before January 22,
taken into account,
1975, or
(D) compensation described in paragraph (1) (A) for
(ii) which is acquired by the taxpayer before Janu-
services performed by an individual in the employ of his
ary 22, 1975,
spouse, father, mother, son, or daughter (within the mean-
the amount of the credit allowed by section 38 for the taxable
ing of section 3121 (b) (3)) shall be taken into account only
year shall be equal to of percent of the qualified investment (as
if such compensation constitutes wages (as defined in section
defined in subsection (c)).
3121 (a)) and only if such wages are evidenced by a receipt
(C) TRANSITIONAL RULE.-In the case of property-
required to be furnished under section 6051 (a) (relating to
(i) the construction, reconstruction, or erection of
receipts for employees),
which is begun by the taxpayer before January 22, 1975,
(E) in the case of an individual who has not attained the
and
age of 18 years by the close of his taxable year-
(ii) the construction, reconstruction, or erection of
(i) compensation described in paragraph (1) (A)
which is completed by the taxpayer after January 21,
shall be taken into account only if such compensation is
1975,
evidenced by a receipt required to be furnished under sec-
subparagraph (B) shall apply to the property to the extent
tion 6051 (a), and
of that portion of the basis which is properly attributable to
(ii) earnings described in paragraph (1) (B) shall be
construction, reconstruction, or erection before January 22,
taken into account only if such individual has self-
1975, and subparagraph (4) shall apply to such property to
employment income for the taxable year (within the
the extent of that portion of the basis which is properly
meaning of section 1402(b)), and
attributable to construction, reconstruction, or erection after
(F) no amount to which section 871(a) applies (relating
January 21, 1975.
to income of nonresident alien individuals not connected with
(1)² GENERAL RULE.-The amount of the credit allowed by
United States business) shall be taken into account.
section 38 for the taxable year shall be equal to 7 percent of the
(d) REQUIREMENT OF JOINT RETURN.-In the case of an individual
qualified investment (as defined in subsection (c) (as deter-
who is married (within the meaning of section 143), this section shall
mined under subsections (c) and (d)).
apply only if a joint return is filed for the taxable year under section
(2) LIMITATION BASED ON AMOUNT OF TAX.-Notwithstanding
6013.
paragraph (1), the credit allowed by section 38 for the taxable
(e) TAXABLE YEAR MUST BE FULL TAXABLE YEAR.-Except in the
year shall not exceed-
case of a taxable year closed by reason of the death of the taxpayer,
(A) SO much of the liability for tax for the taxable year
no credit shall be allowable under this section in the case of a taxable
as does not exceed $25,000, plus
year covering a period of less than 12 months.
(B) for taxable years ending on or before the last day of
SEC. [42] 43. OVERPAYMENTS OF TAX.
the suspension period (as defined in section 48(j)), 25 percent
For credit against the tax imposed by this subtitle for overpayments of
of SO much of the liability for tax for the taxable year as ex-
tax, see section 6401.
ceeds $25,000, or
(C) for taxable years ending after the last day of such
Subpart B-Rules for Computing Credit for Investment in
suspension period, 50 percent of SO much of the liability for
Certain Depreciable Property
tax for the taxable year as exceeds $25,000.
*
*
*
*
*
*
SEC. 46. AMOUNT OF CREDIT.
(6) ALTERNATIVE LIMITATION IN THE CASE OF CERTAIN UTILITIES.-
(a) DETERMINATION OF AMOUNT.-
(A) IN GENERAL.-If. for a taxable year beginning after
[(1) GENERAL RULE.-The amount of the credit allowed by
1974 and before 1981, the amount of the qualified investment
section 38 for the taxable year shall be equal to 7 percent of the
of the taxpayer which is attributable to public utility prop-
qualified investment (as defined in subsection (c)
erty is 25 percent or more of his aggregate qualified invest-
(1)¹ GENERAL RULE.-
2 Section 302 (b) (2) of the bill amends this paragraph as in effect without the amend-
ment made by section 301(a).
1 As amended by section 301(a) of the bill.
54
55
ment, then subparagraph (0) of paragraph (2) of this sub-
(A) [In the case of section 38] To the extent that subsec-
section shall be applied by substituting for 50 percent his
tion (a) (1) (B) applies to property which is public utility
applicable percentage for such year.
property, the amount of the qualified investment shall be 4/7
(B) APPLICABLE PERCENTAGE.-The applicable percentage
of the amount determined under paragraph (1).
of any taxpayer for any taxable year is-
(B) For purposes of subparagraph (A), the term "public
(i) 50 percent, plus
utility property" means property used predominantly in the
(ii) that proportion of the tentative percentage for
trade or business of the furnishing or sale of-
the taxable year which the taxpayer's amount of quali-
(i) electrical energy, water, or sewage disposal services,
fied investment which is public utility property bears to
(ii) gas through a local distribution system, or
his aggregate qualified investment.
(iii) telephone service, telegraph service by means of
If the proportion referred to in clause (ii) is 75 percent or
domestic telegraph operations (as defined in section 222
more, the applicable percentage of the taxpayer for the year
(a) (5) of the Communications Act of 1934, as amended;
shall be 50 percent plus the tentative percentage for such
47 U.S.C., sec. 222 (a) (5)), or other communication serv-
ices (other than international telegraph service),
year. (C) TENTATIVE PERCENTAGE.-For purposes of subpara-
if the rates for such furnishing or sale, as the case may be,
graph (B), the tentative percentage shall be determined
have been established or approved by a State or political
under the following table:
subdivision thereof, by an agency or instrumentality of the
If the taxable year
The tentative
United States, or by a public service or public utility com-
begins in:
percentage is:
mission or other similar body of any State or political sub-
50
division thereof. Such term also means communications prop-
1975 or 1976
1977
40
erty of the type used by persons engaged in providing tele-
30
1978
phone or microwave communication services to which clause
20
1979
(iii) applies, if such property is used predominantly for
10.
1980
communication purposes.
(D) PUBLIC UTILITY PROPERTY DEFINED.-For purposes of
(C) In the case of any interest in a submarine cable circuit
this paragraph, the term "public utility property" has the
used to furnish telegraph service between the United States
meaning given to such term by the first sentence of subsection
and a point outside the United States of a taxpayer engaged
(c) (3) (B).
in furnishing international telegraph service (if the rates for
such furnishing have been established or approved by a gov-
ernmental unit, agency, instrumentality, commission, or
(c) QUALIFIED INVESTMENT-
(1) IN GENERAL.-For purposes of this subpart, the term "quali-
similar body described in subparagraph (B)), the qualified
fied investment" means, with respect to any taxable year, the ag-
investment shall not exceed the qualified investment attribut-
able to SO much of the interest of the taxpayer in the circuit as
gregate of-
(A) the applicable percentage of the basis of each new sec-
does not exceed 50 percent of all interests in the circuit.
tion 38 property (as defined in section 48(b)) placed in serv-
(4) COORDINATION WITH SUBSECTION (d).-The amount which
ice by the taxpayer during such taxable year, plus
would (but for this paragraph) be treated as qualified investment
(B) the applicable percentage of the cost of each used
under this subsection with respect to any property shall be re-
section 38 property (as defined in section (1)) placed
duced (but not below zero) by any amount treated by the tax-
payer or a predecessor of the taxpayer (or, in the case of a sale
in service by the taxpayer during such taxable year.
(2) APPLICABLE PERCENTAGE.-For purposes of paragraph (1),
and leaseback described in section 47 (a) (3) (C), by the lessee) as
the applicable percentage for any property shall be determined
qualified investment with respect to such property under subsec-
tion (d), to the extent the amount 80 treated has not been required
under the following table:
The applicable
to be recaptured by reason of section 47 (a) (3).
If the useful life is-
percentage is-
(d) QUALIFIED PROGRESS EXPENDITURES.-
3 years or more but less than 5 years
331/3
(1) IN GENERAL.-In the case of any taxpayer who has made an
5 years or more but less than 7 years
66%
100
election under paragraph (6), the amount of his qualified invest-
7 years or more
ment for the taxable year (determined under subsection (c) with-
For purposes of this subpart, the useful life of any property shall
out regard to this subsection) shall be increased by an amount
be the useful life used in computing the allowance for depreciation
equal to his aggregate qualified progress expenditures for the tax-
under section 167 for the taxable year in which the property is
able year with respect to progress expenditure property.
placed in service.
(2) PROGRESS EXPENDITURE PROPERTY DEFINED.-
(3) PUBLIC UTILITY PROPERTY.-
56
57
(A) IN GENERAL.-For purposes of this subsection, the
chargeable (during such taxable year) to capital account
term "progress expenditure property" means any property
with respect to such property.
which is being constructed by or for the taxpayer and which-
(B) CERTAIN BORROWINGS DISREGARDED.-Any amount bor-
(i) has a normal construction period of 2 years or
rowed directly or indirectly by the taxpayer from the person
more, and
constructing the property for him shall not be treated as an
(ii) it is reasonable to believe will be new section 38
amount expended for such construction.
property having a useful life of my years or more in the
(C) CERTAIN UNUSED EXPENDITURES CARRIED OVER.-In the
hands of the taxpayer when it is placed in service.
case of non-self-constructed property, if for the taxable
Clauses (i) and (ii) of the preceding sentence shall be applied
year-
on the basis of facts known at the close of the taxable year
(i) the amount under clause (i) of paragraph (3) (B)
of the taxpayer in which construction begins (or, if later,
exceeds the amount under clause (ii) of paragraph
at the close of the first taxable year to which an election under
(3) (B), then the amount of such excess shall be taken into
this subsection applies).
account under such clause (i) for the succeeding taxable
(B) NORMAL CONSTRUCTION PERIOD.-For purposes of sub-
year, or
paragraph (A), the term "normal construction period" means
(ii) the amount under clause (ii) of paragraph (3) (B)
the period reasonably expected to be required for the con-
exceeds the amount under clause (i) of paragraph (3)
struction of the property-
(B), then the amount of such excess shall be taken into
(i) beginning with the date on which physical work
account under such clause (ii) for the succeeding taxable
on the construction begins (or, if later, the first day of
year.
the first taxable year to which an election under this
(D) DETERMINATION OF PERCENTAGE OF COMPLETION.-In the
subsection applies), and
case of non-self-constructed property, the determination un-
(ii) ending on the date on which it is expected that
der paragraph (3) (B) (ii) of the proportion of the overall
the property will be available for placing in service.
cost to the taxpayer of the construction of any property which
(3) QUALIFIED PROGRESS EXPENDITURES DEFINED.-For purposes
is properly attributable to construction completed during any
of this subsection-
taxable year shall be made, under regulations prescribed by
(A) SELF-CONSTRUCTED PROPERTY.-In the case of any self-
the Secretary or his delegate, on the basis of engineering or
constructed property, the term "qualified progress expendi-
architectural estimates or on the basis of cost accounting
tures" means the amount which, for purposes of this subpart,
records. Unless the taxpayer establishes otherwise by clear
is properly chargeable (during such taxable year) to capital
and convincing evidence, the construction shall be deemed to
account with respect to such property.
be completed not more rapidly than ratably over the normal
(B) NON-SELF-CONSTRUCTED PROPERTY.-In the case of non-
construction period.
self-constructed property, the term "qualified progress ex-
(E) No QUALIFIED PROGRESS EXPENDITURES FOR CERTAIN
penditures" means the lesser of-
PRIOR PERIODS.-In the case of any property, no qualified
(i) the amount paid during the taxable year to an-
progress expenditures shall be taken into account under this
other person for the construction of such property, or
subsection for any period before January 22, 1975 (or, if
(ii) the amount which represents that proportion of
later, before the first day of the first taxable year to which an
the overall cost to the taxpayer of the construction by
election under this subsection applies).
such other person which is properly attributable to that
(F) No QUALIFIED PROGRESS EXPENDITURES FOR PROPERTY FOR
portion of such construction which is completed during
YEAR IT IS PLACED IN SERVICE, ETC.-In the case of any prop-
such taxable year.
erty, no qualified progress expenditures shall be taken into
(4) SPECIAL RULES FOR APPLYING PARAGRAPH (3).-For pur-
account under this subsection for the earlier of-
poses of paragraph (3)-
(i) the taxable year in which the property is placed
(A) COMPONENT PARTS, ETC.-Property which is to be a
in service, or
component part of, or is otherwise to be included in, any
(ii) the first taxable year for which recapture is re-
progress expenditure property shall be taken into account-
quired under section 47(a) (3) with respect to such
(i) at a time not earlier than the time at which it be-
property,
comes irrevocably devoted to use in the progress expendi-
or for any taxable year thereafter.
ture property, and
(5) OTHER DEFINITIONS.-For purposes of this subsection-
(ii) as if (at the time referred to in clause (i)) the
(A) SELF-CONSTRUCTED PROPERTY.--The term "self-con-
taxpayer had expended an amount equal to that portion
structed property" means property more than half of the con-
of the cost to the taxpayer of such component or other
struction expenditures for which it is reasonable to believe
property which, for purposes of this subpart, is properly
will be made directly by the taxpayer.
58
59
(B) NON-SELF-CONSTRUCTED PROPERTY.-The term "non-
(2) RATABLE SHARE.-For purposes of paragraph (1), the rat-
self-constructed property" means property which is not self-
able share of any person for any taxable year of the items de-
constructed property.
scribed therein shall be-
(C) CONSTRUCTION, ETC.-The term "construction" in-
(A) in the case. of an organization referred to in para-
cludes reconstruction and erection, and the term "constructed"
graph (1) (A), 50 percent thereof,
includes reconstructed and erected.
(B) in the case of a regulated investment company or a
(D) ONLY CONSTRUCTION OF SECTION 38 PROPERTY TO BE
real estate investment trust, the ratio (i) the numerator of
TAKEN INTO ACCOUNT.-Construction shall be taken into
which is its taxable income and (ii) the denominator of which
account only if, for purposes of this subpart, expenditures
is its taxable income computed without regard to the deduc-
therefor are properly chargeable to capital account with re-
tion for dividends paid provided by section 852 (b) (2) (D) or
spect to the property.
857 (b) (2) (C), as the case may be, and
(6) ELECTION.-An election under this subsection may be made
(C) in the case of a cooperative organization, the ratio (i)
at such time and in such manner as the Secretary or his delegate
the numerator of which is its taxable income and (ii) the
may by regulations prescribe. Such an election shall apply to the
denominator of which is its taxable income increased by
taxable year for which made and to all subsequent taxable years.
amounts to which section 1382 (b) or (c) applies and similar
Such an election, once made, may not be revoked except with the
amounts the tax treatment of which is determined without
consent of the Secretary or his delegate.
regard to subchapter T (sec. 1381 and following).
(7) TRANSITIONAL RULES.-The qualified investment taken into
For the purposes of subparagraph (B) of the preceding sentence,
account under this subsection for any taxable year beginning be-
the term "taxable income" means in the case of a regulated invest-
fore January 1, 1980, with respect to any property shall be (in
ment company its investment company taxable income (within
lieu of the full amount) an amount equal to the sum of-
the meaning of section 852 (b) (2)), and in the case of a real
(A) the applicable percentage of the full amount deter-
estate investment trust its real estate investment trust taxable
mined under the following table:
income (within the meaning of section 857 (b) (2)).
For a taxable year
The applicable
(3) NONCORPORATE LESSORS.-A credit shall be allowed by sec-
beginning in:
percentage is:
tion 38 to a person which is not a corporation with respect to
property of which such person is the lessor only if-
1974 or 1975
20
1976
40
(A) the property subject to the lease has been manufac-
1977
60
tured or produced by the lessor, or
1978
80
(B) the term of the lease (taking into account options to
1979
100;
renew) is less than 50 percent of the useful life of the prop-
plus
erty, and for the period consisting of the first 12 months
(B) in the case of any property to which this subsection
after the date on which the property is transferred to the
applied for one or more preceding taxable years, 20 percent
lessee the sum of the deductions with respect to such property
of the full amount for each such preceding taxable year.
which are allowable to the lessor solely by reason of section
For purposes of this paragraph, the term "full amount", when
162 (other than rents and reimbursed amounts with respect
used with respect to any property for any taxable year, means the
to such property) exceeds 15 percent of the rental income
amount of the qualified investment for such property for such
produced by such property.
year determined under this subsection without regard to this
In the case of property of which a partnership is the lessor, the
paragraph.
credit otherwise allowable under section 38 with respect to such
[d] (e) LIMITATIONS WITH RESPECT TO CERTAIN PERSONS.-
property to any partner which is a corporation shall be allowed
(1) IN GENERAL.-In the case of-
notwithstanding the first sentence of this paragraph. For purposes
(A) an organization to which section 593 applies,
of this paragraph, an electing small business corporation (as
(B) a regulated investment company or a real estate invest-
defined in section 1371) shall be treated as a person which is not
ment trust subject to taxation under subchapter M (sec. 851
a corporation.
and following), and
[(e)] (f) LIMITATION IN CASE OF CERTAIN REGULATED COMPANIES.-
(C) a cooperative organization described in section
(1) GENERAL RULE.-Except as otherwise provided in this sub-
1381 (a),
section, no credit shall be allowed by section 38 with respect to
the qualified investment and the $25,000 amount specified under
any property described in section 50 which is public utility prop-
subparagraphs (A) and (B) of subsection (a) (2) shall equal
erty (as defined in paragraph (5)) of the taxpayer-
such person's ratable share of such items.
(A) Cost OF SERVICE REDUCTION.-If the taxpayer's cost of
service for ratemaking purposes is reduced by reason of any
60
61
portion of the credit allowable by section 38 (determined
(i) before the date that the first final determination,
without regard to this subsection) or
or a subsequent determination, which is inconsistent with
(B) RATE BASE REDUCTION.-If the base to which the tax-
paragraph (1) or (2) (as the case may be) is put into
payer's rate of return for ratemaking purposes is applied is
effect, and'
reduced by reason of any portion of the credit allowable by
(ii) on or after the date that a determination referred
section 38 (determined without regard to this subsection).
to in clause (i) is put into effect and before the date that
Subparagraph (B) shall not apply if the reduction in the rate
a subsequent determination thereafter which is consistent
base is restored not less rapidly than ratably. If the taxpayer
with paragraph (1) or (2) (as the case may be) is put
makes an election under this sentence within 90 days after the date
into effect.
of the enactment of this paragraph in the manner prescribed by
(B) DETERMINATIONS.-For purposes of this paragraph, a
the Secretary or his delegate, the immediately preceding sentence
determination is a determination made with respect to public
shall not apply to property described in paragraph (5) (B) if any
utility property (to which this subsection applies) by a gov-
agency or instrumentality of the United States having jurisdic-
ernmental unit, agency, instrumentality, or commission or
tion for ratemaking purposes with respect to such taxpayer's trade
similar body described in subsection (c) (3) (B) which deter-
or business referred to in paragraph (5) (B) determines that the
mines the effect of the credit allowed by section 38 (deter-
natural domestic supply of the product furnished by the taxpayer
mined without regard to this subsection)-
in the course of such trade or business is insufficient to meet the
(i) on the taxpayer's cost of service or rate base for
present and future requirements of the domestic economy.
rate-making purposes, or
(2) SPECIAL RULE FOR RATABLE FLOW-THROUGH.-If the taxpayer
(ii) in the case of a taxpayer which made an election
makes an election under this paragraph within 90 days after the
under paragraph (2), on the taxpayer's cost of service
date of the enactment of this paragraph in the manner prescribed
for ratemaking purposes or in its regulated books of ac-
by the Secretary or his delegate, paragraph (1) shall not apply,
count or rate base for ratemaking purposes.
but no credit shall be allowed by section 38 with respect to any
(C) SPECIAL RULES.-For purposes of this paragraph-
property described in section 50 which is public utility property
(i) a determination is final if all rights to appeal or
(as defined in paragraph (5)) of the taxpayer-
to request a review, a rehearing, or a redetermination,
(A) COST OF SERVICE REDUCTION.-If the taxpayer's cost of
have been exhausted or have lapsed,
service for ratemaking purposes or in its regulated books of
(ii) the first final determination is the first final deter-
account is reduced by more than a ratable portion of the credit
mination made after the date of the enactment of this
allowable by section 38 (determined without regard to this
subsection, and
subsection), or
(iii) a subsequent determination is a determination
(B) RATE BASE REDUCTION.-If the base to which the tax-
subsequent to a final determination.
payer's rate of return for ratemaking purposes is applied is
(5) PUBLIC UTILITY PROPERTY.-For purposes of this subsection,
reduced by reason of any portion of the credit allowable by
the term "public utility property" means—
section 38 (determined without regard to this subsection).
(A) property which is public utility property within the
(3) SPECIAL RULE FOR IMMEDIATE FLOW-THROUGH IN CERTAIN
meaning of subsection (c) (3) (B), and
CASES.-In the case of property to which section 167(1) (2) (C)
(B) property used predominantly in the trade or business
applies, if the taxpayer makes an election under this paragraph
of the furnishing or sale of (i) steam through a local distri-
within 90 days after the date of the enactment of this paragraph
bution system or (ii) the transportation of gas or steam by
in the manner prescribed by the Secretary or his delegate, para
pipeline, if the rates for such furnishing or sale are estab-
graphs (1) and (2) shall not apply to such property.
lished or approved by a governmental unit, agency, instru-
(4) LIMITATION.-
mentality, or commission described in subsection (c) (3) (B).
(A) IN GENERAL.-The requirements of paragraphs (1)
(6) RATABLE PORTION.-For purposes of determining ratable
and (2) regarding cost of service and rate base adjustment
restorations to base under paragraph (1) and for purposes of
shall not be applied to public utility property of the taxpayer
determining ratable portions under paragraph (2) (A), the period
to disallow the credit with respect to such property before the
of time used in computing depreciation expense for purposes of
first final determination which is inconsistent with paragraph
reflecting operating results in the taxpayer's regulated books of
(1) or (2) (as the case may be) is put into effect with respect
account shall be used.
to public utilitv property (to which this subsection applies) of
(7) REORGANIZATIONS, ASSETS ACQUISITIONS, ETC.-If by reason
the taxpayer. Thereupon, paragraph (1) or (2) shall apply to
of a corporate reorganization, by reason of any other acquisition
disallow the credit with respect to public utility property (toy
of the assets of one taxpayer by another taxpayer, by reason of
which this subsection applies) placed in service by the
the fact that any trade or business of the taxpayer is subject to
taxpayer-
ratemaking by more than one body, or by reason of other circum-
47-320 0. 75
62
63
stances, the application of any provisions of this subsection to any
(A) for the taxable year in which the property is placed in
public utility property does not carry out the purposes of this sub-
service.
section, the Secretary or his delegate shall provide by regulations
(C) CERTAIN SALES AND LEASEBACKS.-Under regulations
for the application of such provisions in a manner consistent with
prescribed by the Secretary or his delegate, a sale by, and
the purposes of this subsection.
leaseback to, a taxpayer who, when the property is placed in
SEC. 47. CERTAIN DISPOSITIONS, ETC., OF SECTION 38 PROPERTY.
service, will be a lessee to whom section 48(d) applies shall
(a) GENERAL RULE-Under regulations prescribed by the Secretary
not be treated as a cessation described in subparagraph (4)
or his delegate-
to the extent that the qualified investment which will be
(1) EARLY DISPOSITION, ETC.-If during any taxable year any
passed through to the lessee under section 48 (d) with respect
property is disposed of, or otherwise ceases to be section 38 prop-
to such property does not exceed the qualified progress ex-
erty with respect to the taxpayer, before the close of the useful life
penditures properly taken into account by the lessee with re-
which was taken into account in computing the credit under
spect to such property.
section 38, then the tax under this chapter for such taxable year
(D) COORDINATION WITH PARAGRAPH (1).-If, after prop-
shall be increased by an amount equal to the aggregate decrease
erty is placed in service, there is a disposition or other cessa-
in the credits allowed under section 38 for all prior taxable years
tion described in paragraph (1), paragraph (1) shall be
which would have resulted solely from substituting, in determin-
applied as if any credit which was allowable by reason of
ing qualified investment. for such useful life the period beginning
section 46(d) and which has not been required to be recap-
with the time such property was placed in service by the taxpayer
tured before such cessation were allowable for the taxable
and ending with the time such property ceased to be section 38
year the property was placed in service.
property.
[(3)](4) CARRYBACKS AND CARRYOVERS ADJUSTED.-In the case
(2) PROPERTY BECOMES PUBLIC UTILITY PROPERTY.-If during
of any cessation described in paragraph (1) or (3) or any change
any taxable year any property taken into account in determining
in use described in paragraph (2), the carrybacks and carryovers
qualified investment becomes public utility property (within the
under section 46 (b) shall be adjusted by reason of such cessation
meaning of section 46 (c) (3) (B)), then the tax under this chapter
(or change in use).
for such taxable year shall be increased by an amount equal to
(5) CERTAIN PROPERTY REPLACED AFTER APRIL 18, 1969.-In any
the aggregate decrease in the credits allowed under section 38 for
case in which-
all prior taxable years which would have resulted solely from
(A) section 38 property is disposed of, and
treating the property, for purposes of determining qualified in-
(B) property which would be section 38 property but for
vestment, as public utility property (after giving due regard to
section 49 is placed in service by the taxpayer to replace the
the period before such change in use). If the application of this
property disposed of,
paragraph to any property is followed by the application of para-
the increase under paragraph (1) and the adjustment under para-
graph (1) to such property, proper adjustment shall be made in
graph [(3)](4) shall not be greater than the increase or adjust-
applying paragraph (1).
ment which would result if the qualified investment of the prop-
(3) PROPERTY CEASES TO BE PROGRESS EXPENDITURE PROPERTY.-
erty described in subparagraph (B) (determined as if such prop-
(A) IN GENERAL.-If during any taxable year any property
erty were section 38 property) were substituted for the qualified
taken into account in determining qualified investment under
investment of the property disposed of (as determined under
section (d) ceases (by reason of sale or other disposition,
paragraph (1)). Except in the case of a disposition by reason of a
cancellation or abandonment of contract, or otherwise) to be,
casualty or theft occurring before April 19, 1969, the preceding
with respect to the taxpayer, property which, when placed in
sentence shall apply only if the section 38 property disposed of is
service, will be new section 38 property, then the tax under
replaced within 6 months after the date of such disposition.
this chapter for such taxable year shall be increased by an
(6) AIRCRAFT USED OUTSIDE THE UNITED STATES AFTER APRIL 18,
amount equal to the aggregate decrease in the credits allowed
1969.
under section 38 for all prior taxable years which would have
(A) GENERAL RULE.-Any aircraft which was new section
resulted solely from reducing to zero the qualified investment
38 property for the taxable year in which it was placed in
taken into account with respect to such property.
service and which is used outside the United States under a
(B) CERTAIN EXCESS CREDITS RECAPTURED.-Any amount
qualifying lease or leases shall be treated as not ceasing to be
which would have been applied as a reduction of the qualified
section 38 property by reason of such use until such aircraft
investment in property by reason of paragraph (4) of section
has been SO used for a period or periods exceeding 31/2 years
46(c) but for the fact that a reduction under such paragraph
in total. For purposes of the preceding sentence, the registra-
cannot reduce qualified investment below zero shall be treated
tion of such aircraft under the laws of a foreign country shall
be treated as used outside the United States.
as an amount required to be recaptured under subparagraph
64
65
(B) COMPUTATION OF QUALIFIED INVESTMENT.-If an air-
(ii) constitutes a research facility used in connection
craft described in subparagraph (A) is disposed of or other-
with any of the activities referred to in clause (i), or
wise ceases to be section 38 property, the increase under para-
(iii) constitutes a facility used in connection with any
graph (1) and the adjustment under paragraph [(3)] (4)
of the activities referred to in clause (i) for the bulk
shall not be greater than the increase or adjustment which
storage of fungible commodities (including commodities
would result if the qualified investment of such aircraft were
in a liquid or gaseous state), or
based upon a useful life equal to the lesser of (i) the actual
(C) elevators and escalators, but only if-
useful life of such aircraft with respect to the taxpayer, or,
(i) the construction, reconstruction, or erection of the
(ii) twice the number of full calendar months during which
elevator or escalator is completed by the taxpayer after
such aircraft was registered by the Administrator of the Fed-
June 30, 1963, or
eral Aviation Agency and was used in the United States,
(ii) the elevator or escalator is acquired after June 30,
operated to and from the United States, or operated under
1963, and the original use of such elevator or escalator
contract with the United States. For purposes of the preced-
commences with the taxpayer and commences after such
ing sentence, an aircraft shall be treated as used in the United
date.
States for any calendar month beginning after such aircraft
was placed in service, if such month is included in a taxable
Such term includes only property with respect to which depreci-
year ending before January 1, 1971, for which such aircraft
ation (or amortization in lieu of depreciation) is allowable and
was section 38 property (determined without regard to this
having a useful life (determined as of the time such property is
paragraph).
placed in service) of 3 years or more.
(C) QUALIFYING LEASE DEFINED.-For purposes of subpar-
*
*
*
*
*
*
*
agraph (A), the term "qualifying lease" means a lease from
(c) USED SECTION 38 PROPERTY.-
an air carrier (as defined in section 101 of the Federal Avia-
(1) IN GENERAL.-For purposes of this subpart, the term "used
tion Act of 1958, as amended (49 U.S.C. 1301)) which com-
section 38 property" means section 38 property acquired by pur-
plies with the provisions of the Federal Aviation Act of 1958,
chase after December 31, 1961, which is not new section 38 prop-
as amended, and the rules and regulations promulgated by
erty. Property shall not be treated as "used section 38 property"
the Civil Aeronautics Board thereunder, but only if such lease
if, after its acquisition by the taxpayer, it is used by a person who
was executed after April 18, 1969.
used such property before such acquisition (or by a person who
(b) SECTION NOT TO APPLY IN CERTAIN CASEs.-Subsection (a) shall
bears a relationship described in section 179 (d) (2) (A) or (B)
not apply to—
to a person who used such property before such acquisition).
(1) a transfer by reason of death, or
(2) DOLLAR LIMITATION.-
(2) a transaction to which section 381 (a) applies.
(A) IN GENERAL-The cost of used section 38 property
For purposes of subsection (a), property shall not be treated as ceasing
taken into account under section 46(c) (1) (B) for any tax-
to be section 38 property with respect to the taxpayer by reason of a
able year shall not exceed [$50,000] $75,000. If such cost ex-
mere change in the form of conducting the trade or business SO long
ceeds [$50,000] $75,000, the taxpayer shall select (at such
as the property is retained in such trade or business as section 38
time and in such manner as the Secretary or his delegate
property and the taxpayer retains a substantial interest in such trade
shall by regulations prescribe) the items to be taken into
or business.
account, but only to the extent of an aggregate cost of
(c) SPECIAL RULE.-Any increase in tax under subsection (a) shall
[$50,000] $75,000. Such a selection, once made, may be
not be treated as tax imposed by this chapter for purposes of deter-
changed only in the manner, and to the extent, provided by
mining the amount of any credit allowable under subpart A.
such regulations.
SEC. 48, DEFINITIONS; SPECIAL RULES.
(B) MARRIED INDIVIDUALs.-In the case of a husband or
(a) SECTION 38 PROPERTY.-
wife who files a separate return, the limitation under sub-
(1) IN GENERAL-Except as provided in this subsection, the
paragraph (A) shall be [$25,000] $37,500 in lieu of
term "section 38 property" means—
[$50,000] $75,000. This subparagraph shall not apply if the
(A) tangible personal property, or
spouse of the taxpayer has no used section 38 property which
(B) other tangible property (not including a building and
may be taken into account as qualified investment for the
its structural components) but only if such property-
taxable year of such spouse which ends within or with the
(i) is used as an integral part of manufacturing, pro-
taxpayer's taxable year.
duction, or extraction or of furnishing transportation,
(C) CONTROLLED GROUPS.-In the case of a controlled group,
communications, electrical energy, gas, water, or sewage
the [$50,000] $75,000 amount specified under subparagraph
disposal services, or
(A) shall be reduced for each component member of the
group by apportioning [$50,000] $75,000 among the com-
66
67
ponent members of such group in accordance with their
(1) an organization to which section 593 applies,
respective amounts of used section 38 property which may
(2) a regulated investment company or a real estate invest-
be taken into account.
ment trust subject to taxation under subchapter M (section 851
(D) PARTNERSHIPS.-In the case of a partnership, the limi-
and following), and
tation contained in subparagraph (A) shall apply with
(3) a cooperative organization described in section 1381 (a),
respect to the partnership and with respect to each partner.
rules similar to the rules provided in section (d) 46(e) shall
*
*
*
*
*
*
apply under regulations prescribed by the Secretary or his delegate.
(d) CERTAIN LEASED PROPERTY.-
*
*
*
*
*
*
*
(1) GENERAL RULE.-A person (other than a person referred to
in section [46(d) (1) (1)) who is a lessor of property may
PART IV-STANDARD DEDUCTION FOR INDIVIDUALS
(at such time, in such manner, and subject to such conditions as
are provided by regulations prescribed by the Secretary or his
Sec. 141. Standard deduction.
delegate) elect with respect to any new section 38 property (other
Sec. 142. Individuals not eligible for standard deduction.
than property described in paragraph (4)) to treat the lessee as
Sec. 143. Determination of marital status.
having acquired such property for an amount equal to-
Sec. 144. Election of standard deduction.
(A) except as provided in subparagraph (B), the fair
Sec. 145. Cross reference.
market value of such property, or
SEC. 141. STANDARD DEDUCTION.
(B) if the property is leased by a corporation which is a
(a) STANDARD DEDUCTION.-Except as otherwise provided in this
component member of a controlled group (within the mean-
section, the standard deduction referred to in this title is the larger
ing of section 46(a) (5)) to another corporation which is a
of the percentage standard deduction or the low income allowance.
component member of the same controlled group, the basis of
[(b) PERCENTAGE STANDARD DEDUCTION.-The percentage standard
such property to the lessor.
deduction is an amount equal to the applicable percentage of adjusted
(2) SPECIAL RULE FOR CERTAIN SHORT TERM LEASES.-
gross income shown in the following table, but not to exceed the maxi-
(A) IN GENERAL-A person (other than a person referred
mum amount shown in such table (or one-half of such maximum
to in section (1)] 46(e) (1)) who is a lessor of prop-
amount in the case of a separate return by a married individual)
erty described in paragraph (4) may (at such time, in such
manner, and subject to such conditions as are provided by
regulations prescribed by the Secretary or his delegate) elect
Applicable
Maximum
[Taxable years beginning in-
percentage
amount
with respect to such property to treat the lessee as having
acquired a portion of such property for the amount deter-
mined under subparagraph (B).
(1970
10
$1,000
1971
13
(B) DETERMINATION OF LESSEE'S INVESTMENT-The amount
1,500
"1972 and thereafter
15
2,000]
for which a lessee of property described in paragraph (4)
shall be treated as having acquired a portion of such property
is an amount equal to a fraction, the numerator of which is
(b) PERCENTAGE STANDARD DEDUCTION.-The percentage standard
the term of the lease and the denominator of which is the
deduction is an amount equal to 16 percent of adjusted gross income
class life of the property leased (determined under section
but not to exceed-
167 (m)), of the amount for which the lessee would be treated
(1) $3,000 in the case of-
as having acquired the property under paragraph (1).
(A) a joint return under section 6013, or
(C) DETERMINATION OF LESSOR'S QUALIFIED INVESTMENT.-
(B) a surviving spouse (as defined in section 2(a)),
The qualified investment of a lessor of property described in
(2) $2,500 in the case of an individual who is not married and
paragraph (4) in any such property with respect to which
who is not a surviving spouse (as 80 defined), or
he has made an election under this paragraph is an amount
(3) $1,500 in the case of a married individual filing a separate
equal to his qualified investment in such property (as deter-
return.
mined under section 46(c)) multiplied by a fraction equal to
[(c) Low INCOME ALLOWANCE.-The low income allowance is $1,300
the excess of one over the fraction used under subparagraph
($650 in the case of a married individual filing a separate return).
(B) to determine the lessee's investment in such property.
(c) Low INCOME ALLOWANCE.-The low income allowance is-
*
*
*
*
*
*
(1) $2,500 in the case of-
SEC. 50B. DEFINITIONS; SPECIAL RULES.
(A) a joint return under section 6013, or
(a) Work INCENTIVE PROGRAM EXPENSES.-
(B) a surviving spouse (as defined in section 2(a)),
(2) $1,900 in the case of an individual who is not married and
*
*
*
*
*
*
who is not a surviving spouse (as 80 defined), or
(f) LIMITATIONS WITH RESPECT TO CERTAIN PERSONS.-In the case
(3) $1,250 in the case of a married individual filing a separate
of-
return.
68
69
(d) MARRIED INDIVIDUALS FILING SEPARATE RETURNS.-Notwith-
income under section 951 (a) for the taxable year bears to his pro rata
standing subsection (a)-
share of the earnings and profits for the taxable year of all controlled
(I) The low income allowance shall not apply in the case of a
foreign corporations with respect to which such United States share-
separate return by a married individual if the tax of the other
holder includes any amount in gross income under section 951 (a).
spouse is determined with regard to the percentage standard de-
duction.
(2) A married individual filing a separate return may, if the
low income allowance is less than the percentage standard deduc-
CHAPTER 6-CONSOLIDATED RETURNS
tion, and if the low income allowance of his spouse is greater
than the percentage standard deduction of such spouse, elect
(under regulations prescribed by the Secretary or his delegate) to
have his tax determined with regard to the low income allowance
Subchapter B-Related Rules
in lieu of being determined with regard to the percentage stand-
ard deduction.
(e) LIMITATIONS IN CASE OF CERTAIN DEPENDENT TAXPAYERs.-In
the case of a taxpayer with respect to whom a deduction under section
PART II-CERTAIN CONTROLLED CORPORATIONS
151 (e) is allowable to another taxpayer for the taxable year-
*
(1) the percentage standard deduction shall be computed only
with reference to so much of his adjusted gross income as is at-
SEC. 1561. LIMITATIONS ON CERTAIN MULTIPLE TAX BENEFITS
tributable to his earned income (as defined in section 911(b)),
IN THE CASE OF CERTAIN CONTROLLED CORPORATIONS.
and
(2) the low income allowance shall not exceed his earned in-
(a) GENERAL RULE.-The component members of a controlled group of cor-
porations on a December 31 shall, for their taxable years which include such
come for the taxable year.
December 31, be limited for purposes of this subtitle to
(1) one [$25,000] $50,000 surtax exemption under section 11(d),
(2) one $100,000 amount for purposes of computing the accumulated
Subpart F-Controlled Foreign Corporations
earnings credit under section 535(c) (2) and (3), and
(3) one $25,000 amount for purposes of computing the limitation on the
small business deduction of life insurance companies under sections 804
SEC. 962. ELECTION BY INDIVIDUALS TO BE SUBJECT TO TAX AT
(a) (4) and 809 (d) (10).
CORPORATE RATES
The amount specified in paragraph (1) shall be divided equally among the com-
(a) GENERAL RULE.-Under regulations prescribed by the Secretary
ponent members of such group on such December 31 unless all' of such com-
ponent members consent (at such time and in such manner as the Secretary or
or his delegate, in the case of a United States shareholder who is an
his delegate shall by regulations prescribe) to an apportionment plan providing
individual and who elects to have the provisions of this section apply
for an unequal allocation of such amount. The amounts specified in paragraphs
for the taxable year-
(2) and (3) shall be divided equally among the component members of such
(1) the tax imposed under this chapter on amounts which are
group on such December 31 unless the Secretary or his delegate prescribes regu-
lations permitting an unequal allocation of such amounts.
included in his gross income under section 951 (a) shall (in lieu of
the tax determined under section 1) be an amount equal to the
tax which would be imposed under section 11 if such amounts were
received by a domestic corporation, and
Subtitle C-Employment Taxes
(2) for purposes of applying the provisions of section 960 (re-
lating to foreign tax credit) such amounts shall be treated as if
they were received by a domestic corporation.
(b) ELECTION.-An election to have the provisions of this section
CHAPTER 24-COLLECTION OF INCOME
apply for any taxable year shall be made by a. United States share-
holder at such time and in such manner as the Secretary or his delegat
TAX AT SOURCE ON WAGES
shall prescribe by regulations. An election made for any taxable year
may not be revoked except with the consent of the Secretary or his
delegate.
SEC. 3402. INCOME TAX COLLECTED AT SOURCE.
(c) SURTAX EXEMPTION.- For purposes of applying subsection (a)
(1), the surtax exemption provided by section 11 (c) shall not exceed
[(a) REQUIREMENT OF WITHHOLDING.-Every employer making
in the case of any United States shareholder, an amount which bears
payment of wages shall deduct and withhold upon such wages (except
the same ratio to [$25,000] $50,000 as the amount included in his gross
as otherwise provided in this section) a tax determined in accordance
70
71
with the following tables. For purposes of applying such tables, the
term "the amount of wages" means the amount by which the wages
Table 3-If the payroll period with respect to an employee is SEMI-
exceed the number of withholding exemptions claimed, multiplied by
MONTHLY
the amount of one such exemption as shown in the table in subsection
(à) Single Person-Including Head of Household
(b) (1) :
The amount of income tax to be with-
If the amount of wages is
held shall be
Not over $23
0.
Over $23 but not over $75
14% of excess over $23.
Table 1-If the payroll period with respect to an employee is WEEKLY
Over $75 but not over $158
$7.28 plus 18% of excess over $75.
(a) Single Person-Including Head of Household
Over $158 but not over $438
$22.22 plus 21% of excess over $158.
The amount of income tax to be with-
Over $438 but not over $500
$81.02 plus 23% of excess over $438.
Over $500 but not over $583
held shall be:
$95.28 plus 27% of excess over $500.
If the amount of wages is
Over $583 but not over $721
$117.69 plus 31% of excess over $583.
Not over $11
0.
14% of excess over $11.
Over $721
$160.47 plus 35% of excess over $721.
Over $11 but not over $35
Over $35 but not over $73
$3.36 plus 18% of excess over $35.
(b) Married Person :
Over $73 but not over $202
$10.20 plus 21% of excess over $73.
Over $202 but not over $231
$37.29 plus 23% of excess over $202.
The amount of income tax to be with-
Over $231 but not over $269
$43.96 plus 27% of excess over $231.
If the amount of wages is
held shall be
$54.22 plus 31% of excess over $269.
Not over $28
0.
Over $269 but not over $333
Over $23 but not over $85
Over $333
$74.06 plus 35% of excess over $333.
14% of excess over $23.
Over 85 but not over $363
$8.68 plus 16% of excess over $85.
(b) Married Person :
The amount of income tax to be with-
Over $363 but not over $448
$53.16 plus 20% of excess over $363.
Over 4448 but not over $702
$70.16 plus 24% of excess over $448.
If the amount of wages is
held shall be
Over $702 but not over $885
$131.12 plus 28% of excess over $702.
Not over $11
0.
Over $885 but not over $1,052
$182.36 plus 32% of excess over $885.
Over $11 but not over $39
14% of excess over $11.
$3.92 plus 16% of excess over $39.
Over $1,052
$235.80 plus 36% of excess over $1,052.
Over $39 but not over $167
Over $167 but not over $207
$24.40 plus 20% of excess over $167.
Table 4-If the payroll period with respect to an employee is MONTHLY
Over $207 but not over $324
$32.40 plus 24% of excess over $207.
Over $324 but not over $409
$60.48 plus 28% of excess over $324.
(a) Single Person-Including Head of Household
Over $409 but not over $486
$84.28 plus 32% of excess over $409.
The amount of income tax to be with-
Over $486
$108.92 plus 36% of excess over $486.
If the amount of wages is :
held shall be
Not over $46
0.
Table 2-If the payroll period with respect to an employee is BIWEEKLY
Over $46 but not over $150
14% of excess over $46.
Over $150 but not over $317
$14.56 plus 18% of excess over $150.
(a) Single Person-Including Head of Household
Over $817 but not over $875
$44.62 plus 21% of excess over $317.
The amount of income tax to be with-
Over $875 but not over $1,000
$161.80 plus 23% of excess over $875.
If the amount of wages is
held shall be :
Over $1,000 but not over $1,167
$190.55 plus 27% of excess over $1,000.
Not over $21
0.
Over $1,167 but not over $1,442
$235.64 plus 31% of excess over $1,167.
Over $21 but not over $69
14% of excess over $21.
Over $1,442
$320.89 plus 35% of excess over $1,442.
Over $69 but not over $146
$6.72 plus 18% of excess over $69.
Over $146 but not over $404
$20.58 plus 21% of excess over $146.
(b) Married Person
Over $404 but not over $462
$74.76 plus 23% of excess over $404.
The amount of income tax to be with-
If the amount of wages is
Over $462 but not over $538
$88.10 plus 27% of excess over $462.
held shall be
Over $538 but not over $665
$108.62 plus 31% of excess over $538.
Not over $46
0.
$147.99 plus 35% of excess over $665.
Over $46 but not over $171
14% of excess over $46.
Over $665
(b) Married Person
The amount of income tax to be with-
Over $171 but not over $725
$17.50 plus 16% of excess over $171.
held shall be
Over $725 but not over $896
$106.14 plus 20% of excess over $725.
If the amount of wages is
0.
Over $896 but not over $1,404
$140.34 plus 24% of excess over $896.
Not over $21
Over $21 but not over $79
14% of excess over $21.
Over $1,404 but not over $1,771
262.26 plus 28% of excess over $1,404.
Over $79 but not over $335
$8.12 plus 16% of excess over $79.
Over $1,771 but not over $2,104
$365.02 plus 32% of excess over $1,771.
$49.08 plus 20% of excess over $335.
Over $2,104
Over $335 but not over $413
$471.58 plus 36% of excess over $2,104.
Over $413 but not over $648
$64.68 plus 24% of excess over $413.
Over $648 but not over $817
$121.08 plus 28% of excess over $648.
Over $817 but not over $971
$168.40 plus 32% of excess over $817.
Over $971
$217.68 plus 36% of excess over $971.
73
72
Table 5-If the payroll period with respect to an employee is QUARTERLY
Table 7-If the payroll period with respect to an employee is ANNUAL
(a) Single Person-Including Head of Household
(a) Single Person-Including Head of Household
The amount of income tax to be withheld
The amount of income tax to be with-
If the amount of wages is
shall be
If the amount of wages is
held shall be:
0.
Not over $550
Not over $138
0.
Over $138 but not over $450
14% of excess over $138.
Over $550 but not over $1,800
14% of excess over $550.
Over $450 but not over $950
$43.68 plus 18% of excess over $450.
Over $1,800 but not over $3,800
$175 plus 18% of excess over $1,800.
Over $950 but not over $2,625
$133.68 plus 21% of excess over $950.
Over $3,800 but not over $10,500
$535 plus 21% of excess over $3,800.
Over $2,625 but not over $3,000
$485.43 plus 23% of excess over $2,625.
Over $10,500 but not over $12,000
$1,942 plus 23% of excess over $10,500.
Over $3,000 but not over $3,500
$571.68 plus 27% of excess over $3,000.
Over $12,000 but not over $14,000
$2,287 plus 27% of excess over $12,000.
Over $3,500 but not over $4,325
$706.68 plus 31% of excess over $3,500.
Over $14,000 but not over $17,300
$2,827 plus 31% of excess over $14,000.
$962.43 plus 35% of excess over $4,325.
Over $17,300
Over $4,325
$3,850 plus 35% of excess over $17,300.
(b) Married Person
(b) Married Person
The amount of income tax to be withheld
The amount of income tax to be with-
If the amount of wages is
shall be
If the amount of wages is
held shall be:
Not over $138,
0.
Not over $550
0.
Over $138 but not over $513
14% of excess over $138.
Over $550 but not over $2,050
14% of excess over $550.
Over $513 but not over $2,175
$52.50 plus 16% of excess over $513.
Over $2,050 but not over $8,700
$210 plus 16% of excess over $2,050.
Over $2,175 but not over $2,688
$318.42 plus 20% of excess over $2,175.
Over $8,700 but not over $10,750
$1,274 plus 20% of excess over $8,700.
Over $2,688 but not over $4,213
$421.02 plus 24% of excess over $2,688.
Over $10,750 but not over $16,850
$1,684 plus 24% of excess over $10,750.
Over $4,213 but not over $5,313
$787.02 plus 28% of excess over $4,213.
Over $16,850 but not over $21,250
$3,148 plus 28% of excess over $16,850.
Over $5,313 but not over $6,313
$1,095.02 plus 32% of excess over $5,313.
Over $21,250 but not over $25,250
$4,380 plus 32% of excess over $21,250.
Over $6,313
$1,415.02 plus 36% of excess over $6,313.
Over $25,250
$5,660 plus 36% of excess over $25,250.
Table 6-If the payroll period with respect to an employee is SEMI-
Table 8-If the payroll period with respect to an employee is a DAILY
ANNUAL
payroll period or a miscellaneous payroll period
(a) Single Person-Including Head of Household
(a) Single Person-Including Head of Household
The amount of income tax to be with-
If the amount of wages divided by the
If the amount of wages is:
held shall be
number of days in the payroll period
The amount of income tax to be with-
is:
0.
held shall be:
Not over $275
14% of excess over $275.
Not over $1.50
0.
Over $275 but not over $900
$87.50 plus 18% of excess over $900.
Over $1.50 but not over $4.90
Over $900 but not over $1,900
14% of excess over $1.50.
Over $1,900 but not over $5,250
$267.50 plus 21% of excess over $1,900.
Over $4.90 but not over $10.40
$0.48 plus 18% of excess over $4.90.
Over $5,250 but not over $6,000
$971.00 plus 23% of excess over $5,250.
Over $10.40 but not over $28.80
$1.47 plus 21% of excess over $10.40.
$1,143.50 plus 27% of excess over $6,000.
Over $28.80 but not over $32.90
$5.33 plus 23% of excess over $28.80.
Over $6,000 but not over $7,000
$1,413.50 plus 31% of excess over $7,000.
Over $32.90 but not over $38.40
$6.27 plus 27% of excess over $32.90.
Over $7,000 but not over $8,650
$1,925.00 plus 35% of excess over $8,650.
Over $88.40 but not over $47.40
$7.76 plus 31% of excess over $38.40.
Over $8,650
Over $47.40
$10.55 plus 35% of excess over $47.40.
(b) Married Person
The amount of income tax to be with-
If the amount of wages is:
held shall be:
(b) Married Person
0.
If. the amount of wages divided by the
Not over $275
14% of excess over $275.
number of days in the payroll period
The amount of income tax to be with-
Over $275 but not over $1,025
Over $1,025 but not over $4,350
$105.00 plus 16% of excess over $1,025.
is:
held shall be:
$637.00 plus 20% of excess over $4,350.
Not over $1.50
0.
Over $4,350 but not over $5,375
$842.00 plus 24% of excess over $5,375.
Over $1.50 but not over $5.60
14% of excess over $1.50.
Over $5,375 but not over $8,425
Over $8,425 but not over $10,625
$1,574.00 plus 28% of excess over $8,425.
Over $5.60 but not over $23.80
$0.57 plus 16% of excess over $5.60.
Over $10,625 but not over $12,625
$2,190.00 plus 32% of excess over
Over $23.80 but not over $29.50
$3.48 plus 20% of excess over $23.80.
$10,625.
Over $29.50 but not over $46.20
$4.62 plus 24% of excess over $29.50.
$2,830.00 plus 36% of excess over
Over $46.20 but not over $58.20
$8.63 plus 28% of excess over $46.20.
Over $12,625
$12,625.
Over $58.20 but not over $69.20:
$11.99 plus 32% of excess over $58.20.
Over $69.20
$15.51 plus 36% of excess over $69.20.
47-320 o 75 6
74
75
(a) REQUIREMENT OF WITHHOLDING.-
in subsection (a) the table for an annual payroll period set forth
(1) GENERAL RULE.-Except as otherwise provided in this sec-
in subsection (a) (2).
tion, every employer making payment of wages shall deduct and
*
*
withhold upon such wages a tax determined in accordance with-
(m) WITHHOLDING ALLOWANCES BASED ON ITEMIZED DEDUCTIONS.-
(4) in the case of wages paid on the basis of an annual
(1) GENERAL RULE.-An employee shall be entitled to with-
payroll period, the table set forth in paragraph (2), or
(B) in the case of wages paid on the basis of other payroll
holding allowances under this subsection with respect to a pay-
ment of wages in a number equal to the number determined by
periods, tables prescribed by the Secretary or his delegate.
dividing by $750 the excess of-
In the tables prescribed under subparagraph (B), the amounts
(A) his estimated itemized deductions, over
set forth as the amount of wages and the amount of income tax to
be deducted and withheld shall be computed on the basis of the
[(B) an amount equal to the lesser of (i) $2,000 or (ii)
15 percent of his estimated wages.
table set forth in paragraph (2). For purposes of this subsection,
the term "the amount of wages" means the amount by which the
(B) an amount equal to the lesser of (i) 16 percent of his
wages exceed the number of withholding exemptions claimed,
estimated wages, or (ii) $3,000 ($2,500 in the case of an indi-
multiplied by the amount of one such exemption as shown in the
vidual who is not married (within the meaning of section
143) and who is not a surviving spouse (as defined in section
table in subsection (3) (1).
2(a))).
(2) ANNUAL PAYROLL PERIOD.-
For purposes of this subsection, a fractional number shall not be taken
(A) Single Person-Including Head of Household:
into account unless it amounts to one-half or more, in which case it
The amount of income tax to be withheld
shall be increased to 1.
If the amount of wages is:
shall be:
Not over $3,000
0.
Over $3,000 but not over $4500
33% of excess over $3,000.
Over $4,500 but not over $7,500
$495 plus 21% of excess over $4,500.
Over $7,500 but not over $10,500
$1,125 plus 26% of excess over $7,500.
$1,905 plus 21% of excess over $10,500.
Subtitle F-Procedure and
Over $10,500 but not over $14,000
Over $14,000 but not over $15,200
$2,640 plus 28% of excess over $14,000.
Over $15,200 but not over $18,000
$2,976 plus 30% of excess over $15,200.
Over $18,000
$3,816 plus 35% of excess over $18,000.
Administration
(B) Married Person:
The amount of income tax to be withheld
If the amount of wages is:
shall be:
CHAPTER 61-INFORMATION AND
Not over $2,450
0.
Over $2,450 but not over $5,450
16% of excess over $2,450.
Over $5,450 but not over $9,250
$480 plus 20% of excess over $5,450.
RETURNS
Over $9,250 but not over $12,250
$1,240 plus 21% of excess over $9,250.
Over $12,250 but not over $14,750
$1,870 plus 15% of excess over $12,250.
Over $14,750 but not over $20,950
$2,245 plus 26% of excess over $14,750.
Over $20,950 but not over $25,650
$3,857 plus 30% of excess over $20,950.
Subchapter A-Returns and Records
Over $25,650
$5,267 plus 36% of excess over $25,650.
*
(c) WAGE BRACKET WITHHOLDING.-
PART II-TAX RETURNS OR STATEMENTS
(1) At the election of the employer with respect to any em-
ployee, the employer shall deduct and withhold upon the wages
paid to such employee a tax (in lieu of the tax required to be
Subpart B-Income Tax Returns
deducted and withheld under subsection (a)) determined in ac-
*
*
*
cordance with tables prescribed by the Secretary or his delegate
SEC. 6012. PERSONS REQUIRED TO MAKE RETURNS OF INCOME.
in accordance with paragraph (6).
(a) GENERAL RULE.-Returns with respect to income taxes under
(6) In the case of wages paid after December 31, 1969, the
subtitle A shall be made by the following:
amount deducted and withheld under paragraph (1) shall be
[(1) (A) Every individual having for the taxable year a gross
determined in accordance with tables prescribed by the Secretary
income of $750 or more, except that a return shall not be required
or his delegate. In the tables SO prescribed, the amounts set forth
of an individual (other than an individual referred to in section
142(b))-
as amounts of wages and amounts of income tax to be deducted
and withheld shall be computed on the basis of [table 7 contained
[(i) who is not married (determined by applying sec-
tion 143 (a)) and for the taxable year has a gross income
of less than $2,050, or
77
76
subject to the tax imposed by section 871 and foreign corporations
[(ii) who is entitled to make a joint return under with sec-
subject to the tax imposed by section 881 may be exempted from
tion 6013 and whose gross income, when combined
the requirement of making returns under this section; and
the gross income of his spouse, is, for the taxable year,
(6) Every political organization (within the meaning of sec-
less than $2,800 but only if such individual and his spouse,
tion 527 (e) (1)), and-every fund treated under section 527 (g) as
at the close of the taxable year, had the same household
if it constituted a political organization, which has political orga-
makes a separate return or any other taxpayer is entitled to
Clause (ii) shall not apply if for the taxable year such spouse
as their home.
nization taxable income (within the meaning of section 527 (c)
(1)) for the taxable year;
an exemption for such spouse under section 151 (e).
CHAPTER 65-ABATEMENTS, CREDITS,
shall be increased to $2,800 in the case of an individual en-
[(B) The $2,050 amount specified in subparagraph (A) (i)
AND REFUNDS
titled to an additional personal exemption under section 151
(c) (1), and the $2,800 amount specified in subparagraph (A)
*
exemption to which the individual or his spouse is entitled
(ii) shall be increased by $750 for each additional personal
Subchapter A-Procedure in General
under section 151
income of $750 or more, except that a return shall not be required
(1) (A) Every individual having for the taxable year a gross
SEC. 6401. AMOUNTS TREATED AS OVERPAYMENTS.
of an individual (other than an individual referred to in section
(a)
*
142(b))-
(b) EXCESSIVE CREDITS.-If the amount allowable as credits under
143), is not a surviving spouse (as defined in section 2(a)),
(i) who is not married (determined by applying section
sections 31 (relating to tax withheld on wages), 39 (relating to certain
uses of gasoline, special fuels, and lubricating oil), 42 (relating to
and for the taxable year has a gross income of less than
earned income credit), and 667 (b) (relating to taxes paid by certain
trusts) exceeds the tax imposed by subtitle A (reduced by the credits
$2,650, (ii) who is a surviving spouse (as 80 defined) and for the
allowable under subpart A of part IV of subchapter A of chapter 1,
taxable year has a gross income of less than $3,250, or
other than the credits allowable under sections 31 [and 39], 39, and
(iii) who is entitled to make a joint return under section
42), the amount of such excess shall be considered an overpayment.
6013 and whose gross income, when combined with the gross
*
*
income of his spouse, is, for the taxable year, less than $4,000
but only if such individual and his spouse, at the close of the
taxable year, had the same household as their home.
Subchapter B-Rules of Special Application
Clause (iii) shall not apply if for the taxable year such spouse
makes a separate return or any other taxpayer is entitled to an
Sec. 6411. Tentative carryback adjustments.
Sec.
6412. Floor stocks refunds.
exemption for such spouse under section 151 (e).
Sec. 6413. Special rules applicable to certain employment taxes.
(B) The amount specified in clause (i) or (ii) of subparagraph
Sec.
6414.
Income tax withheld.
(A) shall be increased by $750 in the case of an individual en-
Sec. 6415. Credits or refunds to persons who collected certain taxes.
titled to an additional personal exemption under section 151 (c)
Sec.
6416. Certain taxes on sales and services.
Sec. 6417. Coconut and palm oil.
shall be increased by $750 for each additional personal exemption
(1), and the amount specified in clause (iii) of subparagraph (A)
Sec. 6418. Sugar.
Sec. 6419. Excise tax on wagering.
to which the individual or his spouse is entitled under section
Sec. 6420.
Gasoline used on farms.
Sec.
6421. Gasoline used for certain nonhighway purposes or by local tran-
151 (c)
sit systems.
income of $750 or more and to whom section 141 (e) (relating
(C) Every individual having for the taxable year a gross
Sec. 6422.
Cross references.
Sec. 6423. Conditions to allowance in the case of alcohol and tobacco taxes.
to limitations in case of certain dependent taxpayers) applies;
Sec. 6424. Lubricating oil not used in highway motor vehicles.
(2) Every corporation subject to taxation under subtitle A;
Sec. 6425. Adjustment of overpayment of estimated income tax by
corporation.
(3) Every estate the gross income of which for the taxable year
Sec. 6426. Refund of aircraft use tax where plane transports for hire in
is $600 or more;
foreign air commerce.
(4) Every trust having for the taxable year any taxable in-
Sec. 6427. Fuels not used for taxable purposes.
come, or having gross income of $600 or over, regardless of the
Sec. 6428 Refund of 1974 individual income taxes.
*
*
*
*
*
*
amount of taxable income;
(5) Every estate or trust of which any beneficiary is a non-
SEC. 6428. REFUND OF 1974 INDIVIDUAL INCOME TAXES.
resident alien; except that subject to such conditions, limitations,
(a) GENERAL RULE.-Except as otherwise provided in this section,
and exceptions and under such regulations as may be prescribed
each individual shall be treated as having made a payment against
by the Secretary or his delegate, nonresident alien individuals
78
79
the tax imposed by chapter 1 for his first taxable year beginning in
(h) CERTAIN PERSONS Not ELIGIBLE.-This section shall not apply
1974 in an amount equal to 10 percent of the amount of his liability for
to any estate or trust, nor shall it apply to any nonresident alien
individual.
tax for such taxable year.
(b) MINIMUM PAYMENT.-The amount treated as paid by reason of
*
this section shall not be less than the lesser of-
(1) the amount of the taxpayer's liability for tax for his first
CHAPTER 67-INTEREST
taxable year beginning in 1974, or
(2) $100 ($50 in the case of a married individual filing a sepa-
rate return).
(c) MAXIMUM PAYMENT.-
Subchapter B-Interest on Overpayments
(1) IN GENERAL-The amount treated as paid by reason of this
section shall not exceed $200 ($100 in the case of a married in-
*
*
dividual filing a separate return).
SEC. 6611. INTEREST ON OVERPAYMENTS.
(2) LIMITATION BASED ON ADJUSTED GROSS INCOME.-The excess
(a)
(if any) of-
(A) the amount which would (but for this paragraph)
be treated as paid by reason of this section, over
(e) INCOME TAX REFUNDED WITHIN [45] 60 DAYS AFTER RETURN Is
(B) the applicable minimum payment provided by sub-
FILED.-If any overpayment of tax imposed by subtitle A is refunded
section (b),
within [45] 60 days after the last date prescribed for filing the return
shall be reduced (but not below zero) by an amount which bears
of such tax (determined without regard to any extension of time for
the same ratio to such excess as the adjusted gross income for the
filing the return) or, in case the return is filed after such last date, is
taxable year in excess of $20,000 bears to $10,000. In the case of a
refunded within [45] 60 days after the date the return is filed, no
married individual filing a separate return, the preceding sen-
interest shall be allowed under subsection (a) on such overpayment.
tence shall be applied by substituting "$10,000" for "$20,000" and
by substituting "$5,000" for "$10,000".
*
(d) LIABILITY FOR Tax.-For purposes of this section, the liability
for tax for the taxable year shall be the sum of-
3 The amendment to section 6611 (e) applies only to individuals (other than nonresident
(1) the tax imposed by chapter 1 for such year, reduced by the
alien individuals and other than estates and trusts), and is effective only for a taxable year
beginning in 1974.
sum of the credits allowable under-
(A) section 33 (relating to foreign tax credit),
(B) section 37 (relating to retirement income),
(C) section 38 (relating to investment in certain depreci-
able property),
(D) section 40 (relating to expenses of work incentive pro-
grams), and
(E) section 41 (relating to contributions to candidates for
public office), plus
(2) the tax on amounts described in section 3102 (c) or 3202(c)
which are required to be shown on the taxpayer's return of the
chapter 1 tax for the taxable year.
(e) DATE PAYMENT DEEMED ADE.-The payment provided by this
section shall be deemed made on whichever of the following dates is
the later:
(1) the date prescribed by law (détermined without extensions)
for filing the return of tax under chapter 1 for the taxable year,
or
(2) the date on which the taxpayer files his return of tax under
chapter 1 for the taxable year.
(f) JOINT RETURN.-For purposes of this section. in the case of a
joint return under section 6013 both spouses shall be treated as one
individual.
(g) MARITAL STATUS.-The determination of marital status shall
be made under section 143.
VIII. OTHER MATTERS REQUIRED TO BE DISCUSSED
UNDER HOUSE RULES
In compliance with clauses 2 (1) (3) and 2 (1) (4) of Rule XI of the
Rules of the House of Representatives, the following statements are
made.
With regard to subdivision (A) of clause 3, relating to oversight
findings, the committee advises that in its review of the economic
situation generally, it concluded that changes in taxation should be
made, and that from the standpoint of administration and compliance
the best action to take in the case of individuals, in addition to a re-
fund of 1974 taxes, was to increase the standard deduction, both the
minimum, the maximum, and the percentage applicable. In the area
of business taxation, the committee in its review of existing pro-
visions concluded that under present economic conditions the invest-
ment credit should be increased from 7 percent generally to 10 per-
cent. In its review of the application of the investment credit, the
committee made certain other changes: for public utilities the limita-
tion on the amount of tax liability that may be offset by the investment
credit is increased for a temporary period; to aid small business the
amount of used property eligible for the investment credit is in-
creased; and for long-lead time property, the credit is to be available
as progress payments are made during the construction period. In
addition, the bill increases the surtax exemption (the amount to which
the 22-percent corporate tax rate rather than the 48-percent rate
applies) as an aid to small business.
In compliance with subdivision (B) of clause 3, the committee states
that the changes made by this bill involve no new budgetary authority.
The bill provides no permanent changes in tax expenditures because
the provisions make only temporary tax changes for 1975. The
temporary direct effects of the provisions in the bill on tax expendi-
tures are: (1) the excess of the percentage standard deduction over
the minimum standard deduction (in terms of tax liabilities) is de-
creased by the bill with the result that tax expenditures are decreased
by about $800 million in the calendar year 1975; (2) the earned
income credit increases tax expenditures by $2,894 million in calendar
year 1975 tax liabilities and by $275 million and $2,619 million, respec-
tively, in fiscal year 1975 and 1976 revenues; (3) the investment credit
changes increase tax expenditures in terms of calendar year tax liabil-
ities by $2,372 million in 1975 and $1,500 million in 1976, and fiscal
year revenues by $625 million in 1975; $2,147 million in 1976; and
$1,139 in 1977; and (4) the increased surtax exemption increases tax
expenditures by $1,200 million on calendar year 1975 tax liability and
fiscal year revenues by $360 million in 1975 and $840 million in 1976.
With respect to subdivisions (C) and (D) of clause 3, the Com-
mittee advises that no estimate or comparison has been prepared by
the Director of the Congressional Budget Office relative to any of the
(81)
82
mendations been made by the Committee on Government Operations
provisions of H.R. 2166, nor have any oversight findings or recom-
with respect to the subject matter contained in H.R. 2166.
In compliance with clause 2(1) (4) of rule XI, the committee states
that the Tax Reduction Act of 1975 is not expected to have a signifi-
cant inflationary impact on prices or on costs of the operation of the
IX. SUPPLEMENTAL VIEWS OF HON. CHARLES A. VANIK
national economy. Any inflationary impact that might arise from de-
I support H.R. 2166 but only with considerable concern that it
creased funds being available for borrowing by others is conjectural at
can effectively meet its expectations.
the present time and can be offset by appropriate monetary policy. In
a recession of the current seriousness the inflationary impact is not the
The price tag for this legislation is grossly underestimated. It will
be difficult to limit the increased investment tax credit to one year
major consideration.
or to roll it back next year. It will also prove impossible to withdraw
tax relief to the low income group or to reduce the standard deduction.
These long-overdue changes for low income groups must become
permanent law.
The investment credit could have been made more effective by
applying the increase in the tax credit to capital improvements above
a base period. Some accommodation could also have been made to
labor-intensive industries-extending credit to those which create
new jobs above a base period level.
The investment credit for utilities was increased 250% from 4%
to 10%. While utility expansion is needed in many areas, the tax
incentive may tempt an excessive rate of expansion-particularly since
expanded capital expenditures contribute to escalating rate base
structures.
The legislation commits the nation to a $21.3 billion in revenue loss,
a substantial part of which will remain permanent. It becomes our
obligation to restore this permanent treasury loss with an effective tax
reform program designed to restore balance in the federal accounts.
(83)
CHARLES A. VANIK.
X. SUPPLEMENTAL VIEWS OF HON. RICHARD F.
VANDER VEEN
The U.S. economy is experiencing the most severe recession in over
thirty years. This recession, however, is not affecting all U.S. busi-
nesses and employees equally. Some businesses are reporting record
or normal profits, while other businesses have been extremely hard-hit.
For depressed businesses, the reduction in business activity has pro-
duced widespread unemployment, severe shortages of working capital,
and strained lines of credit.
The bill (H.R. 2166) is deficient in that it does not contain any
provision aimed directly at the hard-hit businesses. Rather, the House
bill channels all the benefits for business into its increase in the invest-
ment tax credit, which will generally provide immediate and direct
relief only to companies that are realizing profits.
Under present law, businesses, like individuals, are permitted to
temper the effects of nonprofitable years by averaging their income
over a period of years. The general rule is that business losses may be
carried back three years and forward five years. On a number of
occasions in the past, the Congress has recognized the necessity of
modifying this general averaging rule when abnormally large oper-
ating losses have occurred. There are seven such modifications in
present law.
After consulting with the staff of the Joint Committee on Internal
Revenue Taxation, I, assisted by Congressman Vander Jagt, offered
an amendment in Committee that would have granted businesses an
elective loss carryback period of eight years. Such an amendment
would permit struggling businesses to receive an immediate infusion
of cash, which would reduce capital shortages and lessen the pres-
sure on lines of credit. These companies, by necessity, would immedi-
ately invest these funds in the economy, and thereby reduce unem-
ployment and preserve existing jobs. The proposal would rifle the tax
benefits to the point where the need is the greatest and where the
desired expenditures would be made. Additionally, the "overpay-
ments" produced by this proposal would result from the adoption of
an averaging period which stays within the cycle of present law (nine
years) but would be more equitable in view of the abnormally large
losses created by the 1974-1975 recession.
The investment credit increase adopted by the Committee is un-
responsive to the needs of the hard-hit businesses, whereas the loss-
averaging provision would have been responsive to that need by per-
mitting taxpayers to immediately recover past overpayments of tax
at a time when the funds are urgently required. My efforts, and those
of my colleagues, to persuade the Committee to include this proposal in
the bill, failed on a tie vote of 18 to 18. The proposal was supported by
12 Democrats and 6 Republicans. I remain convinced that this pro-
posal should have been adopted by the Committee, and that this bill
is incomplete without it.
RICHARD F. VANDER VEEN.
(85)
XI. MINORITY VIEWS OF HONS. SCHNEEBELI, CONABLE,
DUNCAN, CLANCY, STEIGER, AND FRENZEL
On balance, we support this legislation. We have reservations con-
cerning a number of its aspects.
The President has proposed a 12 percent rebate of 1974 individual
income taxes at a cost of $12 billion and increases in the investment tax
credit to stimulate business activity which will cost $4 billion. This
$16 billion package is designed to stimulate our sagging economy
and should be viewed in this context. As such, it is necessary and
timely.
H.R. 2166 as reported by the Ways and Means Committee, unfor-
tunately, is not as much a measure to provide immediate economic
stimulus as it is a bill to redistribute income on a permanent basis.
In this regard, it is highly inflationary at a time when we must proceed
cautiously to guard against future inflationary spirals.
The Committee bill provides for an $8.1 billion rebate of 1974 taxes
(Title I), permanent tax reductions for low-income Americans
amounting to another $8 billion (Title II) and increases in the In-
vestment Tax Credit and the Corporate surtax exemption of $5.1 bil-
lion (Title III). The total revenue loss of H.R. 2166 is over $21 billion,
or $5 billion more than the package recommended by the President.
The basic problem with H.R. 2166 is that it is neither fish nor fowl.
In our view the $8 billion stimulus in Title I in the form of tax rebates
is not sufficient to accomplish its intended purpose, since most of it
will redound to taxpayers who will not use it to purchase "large ticket
items" such as automobiles, appliances and other durable goods.
In addition, the increases in the low income allowance and the
standard deduction, as well as the establishment of a tax credit on
earned income-all of which are contained in Title II-are merely
designed to redistribute income in the form of tax relief to those at
the lower end of the income spectrum. Most regrettably, it also ex-
cludes all the taxpayers who itemize their deductions. Those excluded
are the ones most recommended by circumstances for a tax cut and
include those persons whose low income is offset by unusually high de-
ductible expenses resulting from mortgages or other debt, medical
expenses, casualty losses and the like.
The AFL_CIO, for example, has estimated that 12.1 million tax-
payers (out of a total of 26.0 million, or more than 46 percent) with
adjusted gross incomes between $10,000 and $20,000 would receive no
benefit from the tax reductions included in Title II of this bill. A
portion of a memorandum in which these estimates appear is shown
below. That memorandum was generally available to Members of this
Committee at the time that Title II was under consideration.
(87)
88
89
"AMERICAN FEDERATION OF LABOR AND
TABLE 4.-ESTIMATED DECREASE IN FEDERAL INDIVIDUAL INCOME TAX LIABILITY RESULTING FROM THE PRO-
VISIONS IN H.R. 2166 WHICH INCREASE THE LOW-INCOME ALLOWANCE AND THE PERCENTAGE STANDARD
CONGRESS OF INDUSTRIAL ORGANIZATIONS,
DEDUCTION; AND THE PROVISION WHICH GRANTS A REFUNDABLE TAX CREDIT ON CERTAIN EARNED INCOME
Washington, D.C., February 5, 1975.
[By adjusted gross income class-1974 income levels)
MEMORANDUM
Number of returns affected (thousands)
Decrease in tax liability
"To: Andrew J. Biemiller, Director, Department of Legislation.
Number
Percentage distribution of
Total
shifting
total decrease
From: Arnold Cantor, Assistant Director, Department of Research.
number
Number
to the
Adjusted gross income
with tax
made non-
standard
Amount 2
By income
Cumu-
By
class (thousands)
decrease 1
taxable
deduction
(millions)
class
lative
segment
Subject: Taxpayers who would receive little or no benefit from the
1975 Tax Reduction Proposal adopted by the Ways & Means
0 to $3
16,543
4,000
99
$1,435
18.5
18.
Committee.
$3 to $5
8, 638
4,710
546
1,969
25.4
43.
75.3
$5 to $7
158
697
287
1,139
14.7
58. 6
The following table shows, by income class, the substantial number
$7 to $10
9,194
88
2,674
297
16.7
75. 3
$10 to $15
9,821
(3)
2,663
958
12.4
87. 7
19.4
of middle income taxpayers who would receive no benefit from the
$15 to $20
4,053
(3)
1,546
541
7.0
94. 7
$20 to $50
1, 998
(3)
1,016
404
5.2
99. 9
Ways & Means action.
$50 to $100
38
(3)
18
13
0.2
100. 0
5.4
$100 and over
4
(3)
2
2
(3)
100.
Total
58,447
9,497
9,851
7,757
100.0
100.0
100.0
Total
Total
taxpayers
Percent of
number of
receiving no
taxpayers
1 Does not include returns representing beneficiaries of the earned income credit who are nonfilers under the 1970 filing
taxpayers
reduction
receiving no
requirements.
Adjusted gross income
(millions)
(millions)
reduction
2 Does not include an additional $275,000,000 to cover the credit on wage and salary and self-employment income of
earners who are nonfilers under 1970 filing requirements.
3 Less than 500 returns or 0.05 percent.
0 to $5,000
11.6
0.3
2.5
$5,000 to $7,000
8.6
.9
10.5
Note: Details may not add to totals because of rounding.
$7,001 to $10,000
11.7
2.5
21. 4
$10,001 to $15,000
16.1
6.3
39.1
$15,001 to $20,000
9.9
5.8
58.6
We also object to a provision in Title II which establishes a new tax
$20,001 to $50,000
9.0
7.0
77.8
$50,000 and over
.8
credit of 5 percent of earned income up to $4,000, with a phase-out of
8'
(1)
the credit as income rises to $6,000. This new scheme is intended to
1Virtually all.
provide further tax relief to some individuals in the form of a rebate
of about the equivalent of the amount of Social Security tax they pay.
"Thus, almost half (46.2%) of taxpayers in the broad middle
To the extent that it is available to persons who have no tax liability,
($10-20,000 income range) would receive no relief.
it amounts to a negative income tax.
"Sgnificantly, even among the middle income taxpayers who do
We are sympathetic with the problems facing low income Americans
receive a reduction (because they do not itemize or would switch to
and feel appropriate changes in the tax structure should be made to
standard deduction) the average reduction is less than $100 per tax-
deal with their plight. However, we believe permanent alternatives—
payer in the $10-15,000 income group and less than $135 in the
such as those in Title II-should be considered in conjunction with
$15-20,000 group."
overall tax reform where the total revenue implications can be deter-
The staff of the Joint Committee on Internal Revenue Taxation
mined, rather than in three days of Committee deliberations at the
has made similar projections which are depicted in the following
start of a new Congress.
charts which the Joint Committee has supplied regarding the dis-
CONCLUSION
tributive effects of Title II.
For the reasons above stated, we favor a change in the thrust of
H.R. 2166 which will assure adequate economic stimulation now, while
avoiding the inflationary problems which will be caused by the perma-
nent tax changes made by Title II of this legislation. The substitute
offered in Committee by our colleague, Congressman Conable, is one
alternative to the approach of Titles I and II of the bill. That substi-
tute offers a one-shot rebate of 1974 taxes on a graduated scale, with a
maximum rebate of $430, at a total cost of $12.2 billion.
We believe it important that the Rules Committee grant a rule
specifically making the Conable substitute in order on the floor of the
House, SO that it may receive a fair hearing before all the Members.
H. T. SCHNEEBELI,
BARBER B. CONABLE, Jr.,
JOHN J. DUNCAN,
WILLIAM A. STEIGER,
BILL FRENZEL,
DONALD D. CLANCY.
47-320 0 75
XII. MINORITY VIEWS OF HONS. ARCHER, VANDER
JAGT, CRANE, MARTIN, AND BAFALIS
We believe this legislation, originally put forth as an emergency
measure to provide stimulus to the economy, is an ill-conceived, slap-
dash effort which degenerated into a poorly designed vehicle for in-
come redistribution. While we feel that a nation now paying over 40
percent of its national income in taxes desperately needs tax relief, to
be fiscally responsible such relief should be matched with restraint on
the spending side of the ledger. Otherwise, you incubate future rounds
of inflation.
In our opinion, tax cut legislation such as H.R. 2166, namely, legis-
lation not coupled with any matching restrictions on overall federal
spending, must meet a number of specific criteria. If done at all, it
must be prudent in amount, temporary, carefully designed to give
across-the-board stimulative effect to the economy and equitably re-
lated to the tax burden borne by all Americans. How does H.R. 2166
meet these criteria?
With regard to the first of these criteria, H.R. 2166 is scarcely pru-
dent in the amount of tax reduction which it effects. It is an inflation-
ary package, totaling in its revenue losses slightly over $21 billion.
This cost, and its effects on what are already huge federal deficits pro-
jected for Fiscal Years 1975 and 1976, simply are not balanced by the
dubious stimulative effects it may have on the economy. It is more
likely to stimulate inflation and add to a crisis in the capital markets
than make any real contribution to economic recovery.
As for being temporary, the changes included in Title II of this
bill, which increase both the minimum and percentage standard de-
ductions and introduce an earned income credit, can scarcely be
deemed temporary. In fact, it is difficult to imagine any changes in this
area potentially more permanent than those in Title II of H.R. 2166.
Therefore, this bill runs the danger of a permanent erosion in our tax
base, with accompanying continued higher deficits, as well as enacting
additional stimulation for the economy which may be continued long
past the point when such stimulation is appropriate.
This bill does not provide across-the-board stimulation for the
economy. In an economy as complex as ours, if all major sectors are
to be aided, it is crucial that any tax reduction be broadly distributed
SO that diverse buying habits at various income levels may result in
broad-based assistance throughout the economy. In this legislation,
however, because middle income Americans receive SO few of the
benefits, the resulting economic stimulation may well be spotty. This
is especially the case with regard to large ticket items such as auto-
mobiles, appliances, and other durable goods.
On the question of fairness, this bill also fails. The distribution of
benefits under H.R. 2166 is not equitably related to the tax burden
borne by all Americans. The middle income American who pays the
lion's share of federal taxes receives far too little consideration under
this bill. Additionally, millions of hard-working middle income
(91)
92
93
Americans who own their own homes, and as a consequence itemize
deductions on their tax returns, receive nothing under Title II of
of this Committee and by the Administration. Such an approach would
this bill.
have been a relatively simple means of achieving an equitable distribu-
In addition to our general objections to this bill, as related to the
tion of benefits and would have offered the best opportunity for keep-
criteria which we would apply to any tax reduction bill of this type,
ing the reduction in taxes temporary.
we specifically oppose the introduction of an "earned income" credit,
Instead, this bill increases substantially both the minimum and per-
created in Title II of this bill. Under this provision, many individ-
centage standard deductions. While such changes may be desirable,
uals who now pay no income taxes will receive a direct payment from
they should not be made in the absence of revenue or reduced spend-
the federal government, inasmuch as the credit is refundable in those
ing elsewhere to pay for them. Neither deduction has ever been re-
cases where it is greater than tax liability. This introduces a
duced and no one honestly suggests these changes will be temporary.
"negative income tax" for many with incomes under $6,000. Such a
These substantial increases could, in addition, have unintended ad-
fundamental change in our tax system should not be made by this
verse side effects on charitable contributions because of the reduced
backdoor route.
attractiveness of itemizing deductions caused by this bill. Also, the
middle Americans who shoulder most of the income tax burden are
TITLE I-Refund of 1974 Individual Income Taxes
receiving few of the benefits. Much of the total benefit goes to those
who now pay little, if any, taxes. The average distribution of benefits
The 1974 tax rebate provisions of Title I of this bill, while well
under this Title, as set forth in the table below, reflects a most inequi-
intentioned, are irresponsible and disastrous in their effect. When
table approach.
the President proposed a 12 percent rebate of 1974 individual income
taxes, with a maximum refund of $1,000, he was clearly attempting to
TABLE 1.-ESTIMATED DECREASE IN FEDERAL INDIVIDUAL INCOME TAX LIABILITY RESULTING FROM THE PRO-
pass tax relief on an emergency basis with the aim of stimulating
VISIONS IN H.R. 2166 WHICH INCREASE THE LOW-INCOME ALLOWANCE AND THE PERCENTAGE STANDARD
DEDUCTION; AND THE PROVISION WHICH GRANTS A REFUNDABLE TAX CREDIT ON CERTAIN EARNED INCOME
a flagging economy. The revenue cost of even that provision, $12.2
billion, without attendant cuts in spending, is a matter of concern to
[By adjusted gross income class-1974 income levels]
us. Rebates under the President's proposal, however, in our opinion
Number of returns affected (thousands)
Decrease in tax liability
would have had a more favorable stimulative effect on the economy,
Number
Percentage distribution of
especially with regard to large ticket items, such as automobiles, ap-
Total
shifting
total decrease
pliances and other durable goods.
number
Number
to the
Adjusted gross income
with tax
made non-
standard
Amount 2
By income
Cumu-
By
Greater purchases of such items will probably not result from Title
class (thousands)
decrease 1
taxable
deduction
(millions)
class
lative
segment
I, given both the low cap ($200) on the maximum rebate and the
fact that most of the rebates will go to those at lower income levels
0 to $3
16,543
4,000
99
$1,435
18.5
18.5
$3 to $5
8, 638
4,710
546
969
25. 4
43.9
where discretionary income for purchase of expensive goods such as
$5 to $7
8, 158
697
1,287
1,139
14.7
58.6
75.3
$7 to $10
9,194
88
2,674
1,297
16.7
75.3
automobiles and large appliances is somewhat limited.
$10 to $15
9,821
(3)
2,663
958
12. 4
87.7
$15 to $20
4,053
What is really an income redistribution provision, adopted hastily
(3)
1,546
541
7.0
94.7
19.4
$20 to $50
998
(3)
1,016
404
5.2
99.9
in this Committee in the course of a single day, should not masquerade
$50 to $100
38
(3)
18
13
0.2
100.0
5.4
$100 and over
4
(3)
2
2
(3)
100.0
as any sort of well-reasoned program designed to stem the present
Total
58,447
9, 497
economic decline.
9,851
7, 757
100.0
100.0
100.0
1 Does not include returns representing beneficiaries of the earned income credit who are nonfilers under the 1970 filing
TITLE II-Reductions in Individual Income Taxes in 1975
requirements.
2 Does not include an additional $275,000,000 to cover the credit on wage and salary and self-employment income of
earners who are nonfilers under 1970 filing requirements.
The income redistribution theme of Title I is continued in Title II,
3 Less than 500 returns or 0.05 percent.
only here it worsens. Any stimulation of the economy resulting from
Note: Details may not add to totals because of rounding.
the provisions of this Title will be secondary. Title II is a faulty in-
come redistribution proposal. The provisions of this Title are a disas-
Even within income classes, the changes in Title II distribute bene-
ter both because of the potentially permanent character of the reduc-
fits in an exceptionally random manner. For example, according to
tions made, reductions which are intended to be temporary in nature,
an analysis by the AFL-CIO, shown in part below, almost half (over
and the illogical and inequitable matter in which this Title grants
46 percent) of all taxpayers in the $10,000 to $20,000 adjusted gross
relief. If income redistribution is to be accomplished in this Congress,
income categories will receive no benefits from the changes included
it should be fashioned in a careful and deliberative manner as part
in Title II of this bill. This astonishing result flows from the fact that
of overall tax reform where the total revenue implications can be de-
Title II provides no tax relief for the many hard working Americans
termined. It should not be attemped after three days of Committee de-
in these income categories who own their homes, make mortgage pay-
liberations at the start of a new Congress. The Committee is scheduled
ments, pay property taxes, and, therefore, itemize their deductions,
to work on reform later in the year and these kinds of changes should
using neither the low nor percentage standard deduction. Needless to
be deferred until that time.
say, this estimate by the AFL-CIO scarcely comes from an organiza-
What does this Title accomplish Certainly temporary tax relief
tion which could be generally considered hostile to the Democratic
in 1975 could have been brought about by alterations in the tax tables
Majority of this Committee which fashioned Title II.
and schedules. This was an approach supported by various Members
94
95
"AMERICAN FEDERATION OF LABOR AND CONGRESS
OF INDUSTRIAL ORGANIZATIONS,
mendation and grants a rule making the Conable substitute in order
Washington, D.C., February 5, 1975.
on the floor of the House.
We cannot support H.R. 2166. To restate our objections briefly,
MEMORANDUM
first, the tax cuts in the bill are imprudently large, unmatched by
restraints in federal spending and adding to what are already huge
"To: Andrew J. Biemiller, Director, Department of Legislation.
federal deficits in the next two fiscal years. Its inflationary dangers
From: Arnold Cantor, Assistant Director, Department of Research.
are obvious.
Subject: Taxpayers who would receive little or no benefit from the
Second, the changes in Title II of the bill are potentially permanent
1975 Tax Reduction Proposal, adopted by the Ways and Means
in nature, in what is purportedly an emergency tax bill with tem-
Committee.
porary tax cuts. The bill runs the risk of permanent erosion of our
"The following table shows, by income class, the substantial number
tax base, with long-term federal deficits, and continued stimulation
of middle income taxpayers who would receive no benefit from the
of the economy long past the point when such stimulation will be
Ways and Means action.
appropriate.
The bill does not provide across-the-board stimulation for the econ-
omy. Middle income Americans receive SO few of the benefits that
Total
Total
taxpayers
Percent of
economic stimulation, especially of large ticket items, may be spotty.
number of
receiving no
taxpayers
taxpayers
reduction
receiving no
Also, the distribution of benefits under this bill is not equitably
Adjusted gross income
(millions)
(millions)
reduction
related to the tax burden borne by all Americans. The hard-working
Americans who pay most of our taxes receive a relatively small share
0 to $5,000.
11.6
0.3
2.5
$5,001 to $7,000
8.6
.9
10.5
of the tax reduction here. Those who itemize get nothing under
$7,001 to $10,000
11.7
2.5
21.4
Title II.
$10,001 to $15,000
16.1
6.3
39.1
$15,001 to $20,000
9.9
5.8
58.6
Finally, the "earned income" credit in Title II introduces a "nega-
$20,001 to $50,000
9.0
7.0
77.8
$50,000 and over
.8
.8
(1)
tive income tax" to the tax code and includes in a so-called "tax cut"
many who now pay no taxes. This is neither the time nor place for
1 Virtually all.
such a provision.
We urge our colleagues to defeat H.R. 2166.
"Thus, almost half (46.2%) of taxpayers in the broad middle ($10-
BILL ARCHER,
20,000 income range) would receive no relief.
Guy VANDER JAGT,
"Significantly, even among the middle income taxpayers who do
PHILIP M. CRANE,
receive a reduction (because they do not itemize or would switch to
JAMES G. MARTIN,
standard deduction) the average reduction is less than $100 per tax-
L. A. BAFALIS.
payer in the $10-15,000 income group and less than $135 in the $15-
20,000 group."
Glued onto the end of Title II (Section 203) is a credit for "earned
income." Title II incorporates a novelty Tax Cut for People Who
Don't Pay Taxes. The $29 billion "refund" of the "earned income
credit" creates a negative income tax for many whose adjusted gross
income is less than $6,000. Such a fundamental and profound change
in tax policy has no place in a bill to provide a stimulative tax cut.
Once the principle is established at this relatively cheap level of $200,
the philosophical objection will have been overcome, and the next
step will be to fatten the payoff for those for whom the unsuccessful
1972 candidate for President advocated a guaranteed income of $1,000
apiece. In simplest terms, people who pay no taxes should not par-
ticipate in this tax cut.
CONCLUSION
As a substantial improvement, we intend to support the substitute
for Titles I and II which Mr. Conable offered before the Committee,
assuming that the Rules Committee accepts the Committee recom-
XIII. ADDITIONAL MINORITY VIEWS OF HON.
GUY VANDER JAGT
In the face of a troubling coincidence of severe inflation and reces-
sion, and confronting a potential two-year Federal deficit of more than
$100 billion, Congress' job clearly is to target its fiscal decisions SO as
to maximize their impact in support of precisely defined goals and
minimize their unwanted side effects. I am disturbed that the decisions
of the Committee on Ways and Means in this bill suggest a failure
to keep sight of a goal and to achieve this targeting.
In succumbing to the politically appealing temptation to weight re-
ductions in individual income taxes toward lower income brackets,
the Committee majority has jeopardized the stimulative effect of the
cuts, particularly in terms of the hard-pressed durable goods sector of
the economy. The Committee's publication entitled "Analysis of Ad-
ministration's Tax Cut Recommendations and Possible Alternatives"
cites a survey conducted by Sindlinger and Company as a basis for
concluding that as many as two-thirds of the population may save or
invest a 1974 tax refund, or use it to pay off debts. But this analysis
fails to mention another observation in the January 15, 1975 report of
the Sindlinger poll: "Another paradox-and one that could distort
the impact of any tax cut-is that willingness to spend the money saved
is greatest in the upper income brackets among people who are less
fearful about the future. In contrast, low-income persons, more con-
cerned about their own economic security, are heavily disposed to put
the money aside or use it to clear up bills. Inasmuch as tax-cut pro-
ponents are saying just the opposite-that the tax-cut must go to low-
income individuals who will spend it rather than high-income people
who will bank it-these findings suggest that tax reduction may have
unforeseen consequences."
Through this weighting as well as through increasing the standard
deduction for 1975 returns (with an implication of permanency), the
Committee has fallen prey to the majority's political instinctiveness
toward accelerating the redistribution of income, rather than main-
taining its focus upon the Nation's compelling need for a quick, across-
the-board reduction in taxes to stimulate business and halt the rise in
unemployment. To be sure, the majority party in Congress is not the
only source of concern about the equity of Federal taxes or the weight
of inflation upon the budgets of low- and moderate-income families.
The President's concern for equity and his concern for the well-being
of lower-income Americans was displayed in his inclusion of a system
of alterations in tax rates and $80 payments to non-taxpaying adults
as a part of his program of energy conservation taxes and fees. Re-
maining inequities in the tax system should be thoughtfully addressed
by the Committee in its deliberations on tax reform, subsequent to the
sessions on energy taxes. The present bill is not an appropriate vehicle
for the initiatives pushed forward by the majority.
(97)
98
99
In my judgment, America's economic crisis is too grave and her
I regret that I was unable to convince the Committee to include this
need for economic stimulus too pressing to permit the distortion of
provision in the bill. Defeated on a tie vote of 18 to 18, the proposal
purpose that is implicit in the bill as reported. The recommendations
received the support of 12 Democrats and 6 Republicans. I continue to
indicate that the Committee lost sight of the fundamental objective in
believe that this emergency tax bill would have been significantly
this emergency reduction in taxes, which is to immediately stimulate
strengthened and its goal better served by the incorporation of this loss
those areas of the economy which are most seriously affected by the
carryback provision.
recession and which therefore are contributing most heavily to our
Finally, in the course of the hearings I queried witnesses from the
rising unemployment.
business and labor communities as to the desirability of providing tax
In his State of the Union Address, President Ford expressed our
incentives for the establishment and expansion of employee stock
need succinctly: "To bolster business and industry and to create new
ownership plans. In light of the depth of interest revealed in this ap-
jobs, I propose a one-year tax reduction of $16 billion." He also stated
proach, its constructive influence upon corporate productivity, and its
at that time, "This tax cut does not include the more fundamental re-
relevance to the stimulation of capital formation as a corollary to
forms needed in our tax system. But it points us in the right direc-
liberalization of the investment credit, it is un fortunate that the Com-
tion-allowing us as taxpayers rather than the Government to spend
mittee did not include such a provision in this bill.
our pay." Clearly, the President shared the perception of the Con-
America's need for effective fiscal policy is great and urgent. I re-
gressional majority that consideration should be given to basic re-
gret the Committee's apparent confusion of goals and its failure to
forms in the tax system. But I regret that the Committee has blunted
maximize the potential of this sizeable tax cut, particularly in view of
the impact of its anti-recession weapon, a cut in personal income taxes,
the related Federal deficit with which the American people must con-
by allowing its desire for redistribution of the tax burden to intrude
tend today and tomorrow. Nonetheless, I deeply hope that the result
at this time. Congress could have better addressed that need in another
of the legislative process' inevitable compromises will prove equal to
bill this year.
the task once again.
In seeking to respond to the need for corporate tax relief, the Com-
Guy VANDER JAGT.
mittee missed a major opportunity to help those companies that have
been hit the hardest, that have suffered the greatest losses, and that
thus have produced a considerable portion of the unemployment prob-
lem. Under present law businesses may average their income over a
period of years. Generally, business losses may be carried backward
three years and forward five years. But in response to abnormally
sizable operating losses, Congress occasionally has modified this gen-
eral averaging rule.
I offered an amendment in Committee which would have granted
businesses an option to carry losses backward for whatever period of
years they were willing to surrender the opportunity to carry losses
forward. A panel of economists testifying on the problems of the
hard-hit industries unanimously attested to the stimulative benefit that
this carryback modification would bring to the economy. The amend-
ment would have enabled those businesses most crippled by the reces-
sion to receive a prompt infusion of cash in the form of a refund drawn
against taxes in profitable years. Pressures on credit would have been
reduced and capital availability enhanced by the adoption of this
amendment. These companies would have been able to preserve exist-
ing jobs and to provide new opportunities for employment. Simply
stated, this optional extension of the loss carryback provision would
have brought corporate tax benefit to the point of greatest need. Fur-
thermore, the unique combination of inflationary and recessionary
forces with which our economy is now beleagured cries out for this
medication. This is a prescription for recession that would not have
been inflationary, because in opting to carry losses backward, com-
panies would have foregone the opportunity to soften future profits by
carrying losses forward. In other words, they would have paid greater
taxes on future profits, thereby relieving the Federal deficit and damp-
ening inflationing pressures.
XIV. ADDITIONAL MINORITY VIEWS OF HON.
BILL FRENZEL
1. I support H.R. 2166 with the following reservations.
2. Title I, which provides for an immediate $8 billion rebate on
1974 taxes, is approximately the right amount of money, but, in my
judgment, the distribution tables provide too low a ceiling ($200) for
maximum stimulation to the economy. I prefer the distribution pro-
vided in the Conable Amendment, but I do not support the $12 bil-
lion total figure of that amendment.
3. Title II is the most difficult and controversial part of the bill. I
agree with those who say the economy needs the continuing monthly
stimulus that can best be provided by an adjustment in the withhold-
ing tables during the second half of 1975. fortunately, the Conable
amendment does not provide this ongoing stimulus.
However, the Title II distribution is designed about as poorly as
possible. Title II represents a serious collapse of standards for a com-
mittee which prides itself on craftsmanship. Changes in the regular
tax table are grossly unfair, as has been pointed out dramatically in
the AFL-CIO "internal memo."
The worst feature of the bill is section 203, which provides a tax re-
bate for citizens who may not have paid any federal income tax at all.
I happen to be one who looks with favor on the concept of a negative
income tax, but to inaugurate such a policy in an emergency tax cut bill
is silly. The Committee doesn't know who the people are who will re-
ceive this bonanza. We may as well drop dollar bills from airplanes.
We are apparently helping some of the poor, but only a few of them,
and surely not the poorest of the poor. Section 203 represents an unin-
formed wasting of tax resources.
This kind of program could be useful, but the Committee has turned
it into an uninformed misadventure. I believe the best way to handle
this bill simply is to delete section 203 and pass the rest of it despite
the imperfections in the tables under both Title I and Title II.
In general, the Committee has obviously tried to use a tax-cut bill to
redistribute income. Playing Robin Hood is not a bad idea, but it's not
a good idea to do so on an emergency bill. It's a worse idea when the
role is played poorly. However noble the Committee's motivations, the
payout tables prove that its income distribution plan is inequitable.
In my opinion, a tax cut should be a tax cut, and the problems of re-
distribution of income should be taken up separately and carefully.
4. Finally, the bill leaves the Ways and Means Committee with a
recommendation for a closed rule. I do not oppose all closed rules, but
I think it is nonsense for a committee to lean on the crutch of a closed
rule every time it reports out a bill. This bill is relatively simple. I
urge the Rules Committee to give it an open rule waiving only those
points of order which are clearly identified and necessary.
(101)
102
5. An attempt will be made to attach an amendment eliminating the
oil depletion allowance. I support the elimination of that allowance,
but I believe, along with the Chairman, that this bill is not an ap-
propriate vehicle for such a rider. This is an emergency tax cut. The
attachment of a depletion amendment will probably slow the bill down
enough so that we cannot get the tax cut in the hands of the people in
May and June, as the Committee wishes. I shall therefore oppose the
attachment of the depletion amendment to this bill.
BILL FRENZEL.
94TH CONGRESS
HOUSE OF REPRESENTATIVES
REPORT
1st Session
No. 94-120
TAX REDUCTION ACT OF 1975
MARCH 26, 1975.-Ordered to be printed
Mr. ULLMAN, from the committee of conference,
submitted the following
CONFERENCE REPORT
[To accompany H.R. 2166]
The committee of conference on the disagreeing votes of the two
Houses on the amendment of the Senate to the bill (H.R. 2166) to
amend the Internal Revenue Code of 1954 to provide for a refund of
1974 individual income taxes, to increase the low income allowance
and the percentage standard deduction, to provide a credit for certain
earned income, to increase the investment credit and the surtax ex-
emption, and for other purposes, having met, after full and free con-
ference, have agreed to recommend and do recommend to their respec-
tive Houses as follows:
That the House recede from its disagreement to the amendment of
the Senate and agree to the same with an amendment as follows:
In lieu of the matter proposed to be inserted by the Senate amend-
ment insert the following:
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) SHORT TITLE.-This Act may be cited as the "Tax Reduction
Act of 1975".
(b) TABLE OF CONTENTS.-
Sec. 1. Short title; table of contents.
Sec. 2. Amendment of 1954 Code.
TITLE I-REFUND OF 1974 INDIVIDUAL INCOME TAXES
Sec. 101. Refund of 1974 individual income taxes.
Sec. 102. Refunds disregarded in the administration of Federal programs and
federally assisted programs.
TITLE II-REDUCTIONS IN INDIVIDUAL INCOME TAXES
Sec. 201. Increase in low income allowance.
Sec. 202. Increase in percentage standard deduction.
Sec. 203. Credit for personal exemptions.
Sec. 204. Credit for certain earned income.
Sec. 205. Withholding tax.
38-006
2
Sec. 206. Increase deduction. in income limitation applicable to child and dependent care
Sec. 207. Extension of period for replacing old residence for purposes of non-
recognition of gain under section 1034.
Sec. 208. Credit for purchase of new principal residence.
Sec. 209. Effective dates.
TITLE I-REFUND OF 1974 INDI-
TITLE III-CERTAIN CHANGES IN BUSINESS TAXES
Sec. 301. Increase in investment credit.
VIDUAL INCOME TAXES
Sec. 302. Allowance of investment credit where construction of property will
take more than 2 years.
Sec. 303. Change in corporate tax rates and increase in surtax exemption.
SEC. 101. REFUND OF 1974 INDIVIDUAL INCOME TAXES.
Sec. 304. Increase in minimum accumulated earnings credit from $100,000 to
(a) IN GENERAL-Subchapter B of chapter 65 (relating to rules of
$150,000.
Sec. 305. Effective dates.
special application in the case of abatements, credits, and refunds) is
amended by adding at the end thereof the following new section:
TITLE IV-CHANGES AFFECTING INDIVIDUALS AND BUSINESSES
"SEC. 6428. REFUND OF 1974 INDIVIDUAL INCOME TAXES.
Sec. 401. Federal welfare recipient employment incentive tax credit.
(a) GENERAL RULE.-Except as otherwise provided in this section,
Sec. 402. Time when contributions deemed made to certain pension plans.
each individual shall be treated as having made a payment against the
TITLE V--PERCENTAGE DEPLETION
tax imposed by chapter 1 for his first taxable year beginning in 1974
Sec. 501. Limitations on percentage depletion for oil and gas.
in an amount equal to 10 percent of the amount of his liability for tax
for such taxable year.
TITLE VI-TAXATION OF FOREIGN OIL AND GAS INCOME AND OTHER
(b) MINIMUM PAYMENT.-The amount treated as paid by reason of
FOREIGN INCOME
this section shall not be less than the lesser of-
Sec. 601. Limitations on foreign tax credit for taxes paid in connection with
"(1) the amount of the taxpayer's liability for tax for his first
foreign oil and gas income.
taxable year beginning in 1974, or
Sec. 602. Taxation of earnings and profits of controlled foreign corporations and
'(2) $100 ($50 in the case of a married individual filing a sepa-
their shareholders.
rate return).
Sec. 603. Denial products. of DISC benefits with respect to energy resources and other
"(c) MAXIMUM PAYMENT.-
Sec. 604. Treatment for purposes of the investment credit of certain property
(1) IN GENERAL.-The amount treated as paid by reason of
used in international or territorial waters.
this section shall not exceed $200 ($100 in the case of a married
individual filing a separate return).
TITLE VII-MISCELLANEOUS PROVISIONS
(2) LIMITATION BASED ON ADJUSTED GROSS INCOME.-The excess
Sec. 701. Certain unemployment compensation.
(if any) of-
Sec. 702. Special payment to recipients of benefits under certain retirement and
(4) the amount which would (but for this paragraph) be
survivor benefit programs.
treated as paid by reason of this section, over
*
*
*
*
(B) the applicable minimum payment provided by sub-
SEC. 2. AMENDMENT OF 1954 CODE.
section (b),
Except as otherwise expressly provided, whenever in this Act an
shall be reduced (but not below zero) by an amount which bears
amendment or repeal is expressed in terms of an amendment to, or re-
the same ratio to such excess as the adjusted gross income for the
peal of, a section or other provision, the reference shall be considered
taxable year in excess of $20,000 bears to $10,000. In the case of a
to be made to a section or other provision of the Internal Revenue
married individual filing a separate return, the preceding sen-
Code of 1954.
tence shall be applied by substituting '$10,000' for '$20,000' and
by substituting '$5,000' for '$10,000'.
" (d) LIABILITY FOR Tax.-For purposes of this section, the liability
for tax for the taxable year shall be the sum of-
(1) the tax imposed by chapter 1 for such year, reduced by the
sum of the credits allowable under-
(A) section 33 (relating to foreign tax credit),
" (B) section 37 (relating to retirement income),
(C) section 38 (relating to investment in certain depreci-
able property),
(3)
4
"(D) section 40 (relating to expenses of work incentive
programs), and
(E) section 41 (relating to contributions to candidates for
public office), plus
(2) the tax on amounts described in section 3102 or 3202 (c)
TITLE II-REDUCTIONS IN INDI-
which are required to be shown on the taxpayer's return of the
chapter 1 tax for the taxable year.
VIDUAL INCOME TAXES
"(e) DATE PAYMENT DEEMED ADE.-The payment provided by
this section shall be deemed made on whichever of the following dates
SEC. 201. INCREASE IN LOW INCOME ALLOWANCE.
is the later:
(a) IN GENERAL.-Subsection (c) of section 141 (relating to low
"(1) the date prescribed by law (determined without exten-
income allowance) is amended to read as follows:
sions) for filing the return of tax under chapter 1 for the taxable
'(c) Low INCOME ALLOWANCE.-The low income allowance is-
year,..or
"(1) $1,900 in the case of-
"(2) the date on which the taxpayer files his return of tax under
'(A) a joint return under section 6013, or
chapter 1 for the taxable year.
((B) a surviving spouse (as defined in section 2(a)),
"(f) JOINT RETURN.-For purposes of this section, in the case of a
"(2) $1,600 in the case of an individual who is not married and
joint return under section 6013 both spouses shall be treated as one
who is not a surviving spouse (as 80 defined), or
individual.
(3) $950 in the case of a married individual filing a separate
"(g) MARITAL STATUS.-The determination of marital status for
return."
purposes of this section shall be made under section 143.
(b) CHANGE IN FILING REQUIREMENTS To REFLECT INCREASE IN Low
"(h) CERTAIN PERSONS Not ELIGIBLE.-This section shall not apply
INCOME ALLOWANCE.-So much of paragraph (1) of section 6012 (a)
to any estate or trust, nor shall it apply to any nonresident alien
individual."
(relating to persons required to make returns of income) as precedes
subparagraph (0) thereof is amended to read as follows:
(b) No INTEREST ON INDIVIDUAL INCOME TAX REFUNDS FOR 1974 RE-
"(1) (4) Every individual having for the taxable year a gross
FUNDED WITHIN 60 DAYS AFTER RETURN Is FILED.-In applying sec-
income of $750 or more, except that a return shall not be required
tion 6611 (e) of the Internal Revenue Code of 1954 (relating to income
of an individual (other than an individual referred to in section
tax refund within 45 days after return is filed) in the case of any over-
payment of tax imposed by subtitle A of such Code by an individual
142(b))-
(other than an estate or trust and other than a nonresident alien indi-
(i) who is not married (determined by applying section
vidual) for a taxable year beginning in 1974, "60 days" shall be substi-
143), is not a surviving spouse (as defined in section 2(a)),
tuted for "45 days" each place it appears in such section 6611 (e).
and for the taxable year has a gross income of less than
$2,350,
(c) CLERICAL AMENDMENT.-The table of sections for such sub-
chapter B is amended by adding at the end thereof the following new
" (ii) who is a surviving spouse (as so defined) and for the
item:
taxable year has a gross income of less than $2,650, or
"Sec. 6428. Refund of 1974 individual income taxes."
" (iii) who is entitled to make a joint return under section
6013 and whose gross income, when combined with the gross
SEC. 102. REFUNDS DISREGARDED IN THE ADMINISTRA-
income of his spouse, is, for the taxable year, less than $3,400
TION OF FEDERAL PROGRAMS AND FEDER-
but only if such individual and his spouse, at the close of the
ALLY ASSISTED PROGRAMS.
taxable year, had the same household as their home.
Clause (iii) shall not apply if for the taxable year such spouse
Any payment considered to have been made by any individual by
makes a separate return or any other taxpayer is entitled to an
reason of section 6428 of the Internal Revenue Code of 1954 shall not
exemption for such spouse under section 151 (e).
be taken into account as income or receipts for purposes of determining
((B) The amount specified in clause (i) or (ii) of subparagraph
the eligibility of such individual or any other individual for benefits
(A) shall be increased by $750 in the case of an individual en-
or assistance, or the amount or extent of benefits or assistance, under
titled to an additional personal exemption under section 151
any Federal program or under any State or local program financed
(c) (1), and the amount specified in clause (iii) of subparagraph
in whole or in part with Federal funds.
(A) shall be increased by $750 for each additional personal exemp-
tion to which the individual or his spouse is entitled under section
151(c);".
(5)
6
7
(c) CHANGE IN OPTIONAL TAX TABLES.-Section 3 (relating to op-
(b) TECHNICAL AND CLERICAL AMENDMENTS.-
tional tax tables) is amended by striking out "$10,000" and by insert-
ing in lieu thereof "$15,000".
(1) The table of sections for such subpart is amended by strik-
ing out the last item and inserting in lieu thereof the following:
SEC. 202. INCREASE IN PERCENTAGE STANDARD DE-
"Sec. 42. Credit for personal exemptions.
DUCTION.
"Sec. 43. Overpayments of tax."
(a) INCREASE-Subsection(b) of section 141 (relating to percent-
(2) Section 56 (a) (2) (relating to imposition of minimum tax)
age standard deduction) is amended to read as follows:
is amended by striking out "and" at the end of clause (iv), by
"(b) PERCENTAGE STANDARD DEDUCTION.-The percentage standard
striking out ; and" at the end of clause (v) and inserting in
deduction is an amount equal to 16 percent of adjusted gross income
lieu thereof and", and by inserting after clause (v) the follow-
but not to exceed—
ing new clause:
"(1) $2,600 in the case of-
"(vi) section 42 (relating to credit for personal exemp-
(A) a joint return under section 6013, or
tions) ; and".
(B) a surviving spouse (as defined in section 2(a)),
(3) Section 56 (1) (relating to tax carryovers) is amended
"(2) $2,300 in the case of an individual who is not married and
by striking out "and" at the end of subparagraph (D), by striking
who is not a surviving spouse (as 80 defined), or
out "exceed" at the end of subparagraph (E) and inserting in lieu
"(3) $1,300 in the case of a married individual filing a separate
thereof "and", and by inserting after subparagraph (E) the fol-
return."
lowing new subparagraph:
(b) CONFORMING AMENDMENT.-Subparagraph (B) of section
(F) section 42 (relating to credit for personal exemp-
3402(1 (1) (relating to withholding allowances based on itemized
tions), exceed".
deductions) is amended to read as follows:
(4) Section 6096 (b) (relating to designation of income tax pay-
(B) an amount equal to the lesser of (i) 16 percent of his
ments to Presidential Election Campaign Fund) is amended by
estimated wages, or (ii) $2,600 ($2,300 in the case of an individual
striking out "and 41" and inserting in lieu thereof "41, and 42".
who is not married (within the meaning of section 143) and who
SEC. 204. CREDIT FOR CERTAIN EARNED INCOME.
is not a surviving spouse (as defined in section 2(a)))
SEC. 203. TAX CREDIT FOR PERSONAL EXEMPTIONS.
(a) ALLOWANCE OF CREDIT.-Subpart A of part IV of subchapter
A of chapter 1 (relating to credits against tax) is amended by redesig-
(a) IN GÉNERAL.-Subpart A of part VI of subchapter A of chapter
nating section 43 as section 44, and by inserting after section 42 the
1 (relating to credits allowable against tax) is amended by redesignat-
following new section:
ing section 42 as section 43 and by inserting after section 41 the follow-
ing new section:
"SEC. 43. EARNED INCOME.
"SEC. 42. CREDIT FOR PERSONAL EXEMPTIONS.
"(a) ALLOWANCE OF CREDIT.-In the case of an eligible individual,
there shall be allowed as a credit against the tax imposed by this chap-
"(a) GENERAL RULE.-In the case of an individual, there shall be al-
ter for the taxable year an amount equal to 10 percent of 80 much of
lowed as a credit against the tax imposed by this chapter for the tax-
the earned income for the taxable year as does not exceed $4,000.
able year $30, multiplied by each exemption for which the taxpayer
"(b) LIMITATION.-The amount of the credit allowable to a taxpayer
is entitled for the taxable year under subsection (b) or (e) of section
under subsection (a) for any taxable year shall be reduced (but not
151.
below zero) by an amount equal to 10 percent of so much of the ad-
"(b) APPLICATION WITH OTHER CREDITS.-The credit allowed by
justed gross income (or, if greater, the earned income) of the taxpayer
subsection (a) shall not exceed the amount of the tax imposed by this
for the taxable year as exceeds $4,000.
chapter for the taxable year. In determining the credits allowed
"(c) DEFINITION.-For purposes of this section-
under-
"(1) ELIGIBLE INDIVIDUAL.-The term 'eligible individual'
"(1) section 33 (relating to foreign tax credit),
means an individual who, for the taxable year-
(2) section 37 (relating to retirement income),
(A) maintains a household (within the meaning of section
(3) section 38 (relating to investment in certain depreciable
214(b) (3)) in the United States which is the principal place
property),
of abode of that individual and of a child of that individual
(4) section 40 (relating to expenses of work incentive pro-
with respect to whom he is entitled to claim a deduction under
grams), and
section 151 (e) (1) (B) (relating to additional exemption for
"(5) section 41 (relating to contributions to candidates for pub-
dependents), and
lic office),
(B) is not entitled to exclude any amount from gross in-
the tax imposed by this chapter shall (before any other reductions) be
come under section 911 (relating to earned income from
reduced by the credit allowed by this section."
sources without the United States) or section 931 (relating to
income from sources within the possessions of the United
States).
8
9
(2) EARNED INCOME.-
and withhold upon such wages a tax determined in accordance with
(A) The term 'earned income' means-
tables prescribed by the Secretary or his delegate. The tables 80 pre-
(i) wages, salaries, tips, and other employee compen-
scribed shall be the same as the tables contained in this subsection as
sation, plus
in effect on January 1, 1975, except that the amounts set forth as
(ii) the amount of the taxpayer's net earnings from
amounts of income tax to be withheld with respect to wages paid after
self-employment for the taxable year (within the mean-
April 30, 1975, and before January 1, 1976, shall reflect the full cal-
ing of section 1402(a)).
endar year effect for 1975 of the amendments made by section 201, 202,
(B) For purposes of subparagraph (4)-
203, and 204 of the Tax Reduction Act of 1975. For purposes of apply-
(i) except as provided in clause (ii), any amount
ing such tables, the term 'the amount of wages' means the amount
shall be taken into account only if such amount is includi-
by which the wages exceed the number of withholding exemptions
ble in the gross income of the taxpayer for the taxable
claimed, multiplied by the amount of one such exemption as shown in
year,
the table in subsection (b) (1)."
(ii) the earned income of an individual shall be com-
(b) CONFORMING AMENDMENT.-Section 3402 (c) (6) (relating to
puted without regard to any community property laws,
wage bracket withholding) is amended by striking out "table 7 con-
(iii) no amount received as a pension or annuity shall
tained in subsection (a) and inserting in lieu thereof "the table for
be taken into account, and
an annual payroll period prescribed pursuant to subsection (a)"
(iv) no amount to which section 871 (a) applies (re-
SEC. 206. INCREASE IN INCOME LIMITATION APPLICA-
lating to income of nonresident alien individuals not
BLE TO CHILD AND DEPENDENT CARE DE-
connected with United States business) shall be taken
into account.
DUCTION.
"(d) MARRIED INDIVIDUALs.-In the case of an individual who is
Section 214 (relating to expenses for household and dependent care
married (within the meaning of section 143), this section shall apply
services necessary for gainful employment) is amended by striking out
only if a joint return is filed for the taxable year under section 6013.
"$18,000" each place it appears in subsection (d) and inserting in lieu
"(e) TAXABLE YEAR MUST BE FULL TAXABLE YEAR.-Except in the
thereof "$35,000".
case of a taxable year closed by reason of the death of the taxpayer,
SEC. 207. EXTENSION OF PERIOD FOR REPLACING OLD
no credit shall be allowable under this section in the case of a taxable
RESIDENCE FOR PURPOSES OF NONRECOG-
year covering a period of less than 12 months."
(b) REFUND To BE MADE WHERE CREDIT EXCEEDS LIABILITY FOR
NITION OF GAIN UNDER SECTION 1034.
TAX.-
(a) ONE-YEAR PERIOD INCREASED TO 18 MONTHS.-
(1) Section 6401 (b) (relating to excessive credits) is
(1) Subsections (a), (c) (4), (c) (5), (d), and (h) of sec-
amended-
tion 1034 (relating to nonrecognition of gain on sale or exchange
(A) by inserting "43 (relating to earned income credit),"
of residence) are each amended by striking out "1 year" each
before "and 667 (b)" and
place it appears and inserting in lieu thereof "18 months".
(B) by striking out "and 39" and inserting in lieu thereof
(2) Subsection (c) (5) of section 1034 is amended by strik-
a comma and "39 and 43".
ing out "one year" and inserting in lieu thereof "18 months".
(2) Section 6201 (a) (4) (relating to assessment authority) is
(b) 18-MONTH PERIOD FOR CONSTRUCTING NEW RESIDENCE INCREASED
amended by-
TO 2 YEARS-Subsection (c) (5) of section 1034 is amended by strik-
(A) inserting "or 43" after "section 39" in the caption of
ing out "18 months" and inserting in lieu thereof "2 years".
such section; and
SEC. 208. CREDIT FOR PURCHASE OF NEW PRINCIPAL
(B) striking out "oil)," and inserting in lieu thereof "oil)
RESIDENCE.
or section 43 (relating to earned income),'
(c) CLERICAL AMENDMENT.-The table of sections for such subpart is
(a) ALLOWANCE OF CREDITS.-Subpart A of part IV of subchapter A
amended by striking out the last item and inserting in lieu thereof the
of chapter 1 (relating to credits allowed) is amended by redesignating
following:
section 44 as section 45 and by inserting after section 43 the following
9
new section:
"Sec. 43. Credit for certain earned income.
"Sec. 44. Overpayments of tax."
"SEC 44. PURCHASE OF NEW PRINCIPAL RESIDENCE.
SEC. 205. WITHHOLDING TAX.
(a) GENERAL RULE.-In the case of an individual there is al-
(a) REQUIREMENT OF WITHHOLDING.-Subsection (a) of section 3402
lowed, as a credit against the tax imposed by this chapter for the
(relating to income tax collected at source) is amended to read as
taxable year, an amount equal to 5 percent of the purchase price of a
follows:
new principal residence purchased or constructed by the taxpayer.
"(a) REQUIREMENT OF Withholding.-Except as otherwise provided
"(b) LIMITATIONS.-
in this section, every employer making payment of wages shall deduct
"(1) MAXIMUM CREDIT.-The credit allowed under subsection
(a) may not exceed $2,000.
10
11
"(2) LIMITATION TO ONE RESIDENCE.-The credit under this sec-
imposed under this chapter for the taxable year in which termi-
tion shall be allowed with respect to only one residence of the tax-
nates the replacement period under paragraph (2) with respect to
payer.
the disposition is increased by an amount equal to the amount al-
"(3) MARRIED INDIVIDUALs.-In the case of a husband and wife
lowed as a credit for the purchase of such property.
who file a joint return under section 6013, the amount specified
"(2) ACQUISITION OF NEW RESIDENCE.-If, in connection with a
under paragraph (1) shall apply to the joint return. In the case of
disposition described in paragraph (1) and within the applicable
a married individual filing a separate return, paragraph (1) shall
period prescribed in section 1034, the taxpayer purchases or con-
be applied by substituting '$1,000' for '$2,000'.
structs a new principal residence, then the provisions of paragraph
"(4) CERTAIN OTHER TAXPAYERS.-In the case of individuals
(1) shall not apply and the tax imposed by this chapter for the
to whom paragraph (3) does not apply who together purchase the
taxable year following the taxable year during which disposition
same new principal residence for use as their principal residence,
occurs is increased by an amount which bears the same ratio to the
the amount of the credit allowed under section (a) shall be allo-
amount allowed as a credit for the purchase of the old residence
cated among such individuals as prescribed by the Secretary or his
as (A) the adjusted sales price of the old residence (within the
delegate, but the sum of the amounts allowed to such individuals
meaning of section 1034), reduced (but not below zero) by the
shall not exceed $2,000 with respect to that residence.
taxpayer's cost of purchasing the new residence (within the
"(5) APPLICATION WITH OTHER CREDITS.-The credit allowed
meaning of such section) bears to (B) the adjusted sales price of
by subsection (a) shall not exceed the amount of the tax imposed
the old residence.
by this chapter for the taxable year, reduced by the sum of the
"(3) DEATH OF OWNER; CASUALTY LOSS; INVOLUNTARY CONVER-
credits allowable under sections 33, 37, 38, 40, 41, and 42.
SION; ETC.-The provisions of paragraph (1) do not apply to-
"(c) DEFINITIONS.-For purposes of this section-
"(A) a disposition of a residence made on account of the
"(1) NEW PRINCIPAL RESIDENCE.-The term 'new principal
death of any individual having a legal or equitable interest
residence' means a principal residence (within the meaning of
therein occurring during the 36 month period to which ref-
section 1034), the original use of which commences with the tax-
erence is made under such paragraph,
payer, and includes, without being limited to, a single family
"(B) a disposition of the old residence if it is substantially
structure, a residential unit in a condominium or cooperative
or completely destroyed by a casualty described in section
housing project, and a mobile home.
165 (c) (3) or compulsorily and involuntarily converted
"(2) PURCHASE PRICE.-The term 'purchase price' means the
(within the meaning of section 1033 or
adjusted basis of the new principal residence on the date of the
(σ) a disposition pursuant to a settlement in a divorce or
acquisition thereof.
legal separation proceeding where the other spouse retains
"(3) PURCHASE.-The term 'purchase' means any acquisition
the residence as principal residence.
of property, but only if-
(e) PROPERTY TO WHICH SECTION APPLIES.-
(A) the property is not acquired from a person whose
"(2) SELF-CONSTRUCTED PROPERTY BEGUN BEFORE MARCH 13,
relationship to the person acquiring it would result in the
1975.-In the case of property the construction of which was
disallowance of losses under section 267 or 707(b) (but, in
begun by the taxpayer before March 13, 1975, only that portion of
applying section 267 (b) and (c) for purposes of this section,
the basis of such property properly allocable to construction after
paragraph (4) of section 267 (c) shall be treated as providing
March 12, 1975, shall be taken into account in determining the
that the family of an individual shall include only his spouse,
amount of the credit allowable under subsection (a).
ancestors, and lineal descendants), and
"(3) BINDING CONTRACT.-For purposes of this subsection, a
"(B) the basis of the property in the hands of the person
contract for the purchase of a residence which is conditioned upon
acquiring it is not determined-
the purchaser's obtaining a loan for the purchase of the residence
(i) in whole or in part by reference to the adjusted
(including conditions as to the amount or interest rate of such
basis of such property in the hands of the person from
loan) is not considered non-binding on account of that condition.
whom acquired, or
"(1) IN GENERAL.-The provisions of this section apply to a
" (ii) under section 1014(a) (relating to property
new principal residence-
acquired from a decedent).
'(A) the construction of which began before March 26,
"(d) RECAPTURE FOR CERTAIN DISPOSITIONS.-
1975,
"(1) IN GENERAL.-Except as provided in paragraphs (2) and
(B) which is acquired and occupied by the taxpayers
(3), if the taxpayer disposes of property with respect to the
after March 12, 1975, and before January 1, 1977, and
purchase of which a credit was allowed under subsection (a) at
"(C) if not constructed by the taxpayer, which was ac-
any time within 36 months after the date on which he acquired it
quired by the taxpayer under a binding contract entered into
(or, in the case of construction by the taxpayer, on the day on
by the taxpayer before anuary 1, 1976.
which he first occupied it) as his principal residence, then the tax
12
13
"(4) CERTIFICATION MUST BE ATTACHED TO RETURN.-This section
SEC. 209. EFFECTIVE DATES.
shall not apply to any residence (other than a residence con-
(a) SECTIONS 201, 202(a), AND 203.-The amendments made by sec-
structed by the taxpayer) unless there is attached to the return
tions 201, 202 (a), and 203 shall apply to taxable years ending after
of tax on which the credit is claimed a certification by the seller,
December 31, 1974. Such amendments shall cease to apply to taxable
in accordance with regulations prescribed by the Secretary or his
years ending after December 31, 1975.
delegate, that the purchase price is the lowest price at which the
(b) SECTION 204.-The amendments made by section 204 shall apply
residence was ever offered for sale."
(b) SUITS To RECOVER AMOUNTS OF PRICE INCREASES.-If-
to taxable years beginning after December 31, 1974, and before Jan-
(1) any person certifies under section 44(e) (4) of the Internal
uary 1, 1976.
(c) SECTIONS 202(b) AND 205.-The amendments made by sections
Revenue Code of 1954 that the price for which a residence was
sold is the lowest price at which the residence was ever offered for
202(b) and 205 shall apply to wages paid after April 30, 1975, and
before January 1, 1976.
sale, and
(2) the price for which the residence was sold exceeded the
(d) SECTION 206.-The amendments made by section 206 apply to
taxable years beginning after the date of enactment of this Act.
lowest price at which the residence was ever offered for sale,
(e) SECTION 207.-The amendments made by section 207 shall apply
such person shall be liable to the purchaser of such residence in an
amount equal to three times the amount of such excess. The United
to old residences (within the meaning of section 1034 of the Internal
States district courts shall have jurisdiction of suits to recover such
Revenue Code of 1954) sold or exchanged after December 31, 1974, in
amounts without regard to any other provision of law. In any suit
taxable years ending after such date.
brought under this subsection in which judgment is entered for the
purchaser, he shall also be entitled to recover a reasonable attorney's
fee,
(c) DENIAL OF DEDUCTION.-Notwithstanding the provisions of sec-
tion 162 or 212 of the Internal Revenue Code of 1954, no deduction
shall be allowed in computing taxable income for two-thirds of any
amount paid or incurred on a judgment entered against any person in
a suit brought under subsection (b).
(d) TECHNICAL AND CLERICAL AMENDMENTS.-
(1) The table of sections for such subpart is amended by strik-
ing out the last item and inserting in lieu thereof the following:
"Sec. 44. Credit for purchase of new principal residence.
"Sec. 45. Overpayments of tax.'
(2) Section 56 (a) (2) (relating to imposition of minimum tax)
is amended by striking out "and" at the end of clause (v), by
striking out and" at the end of clause (vi) and inserting in
lieu thereof and", and by inserting after clause (vi) the follow-
ing new clause:
"(vii) section 44 (relating to credit for purchase of new principal residence) ;
and".
(3) Section 56(c) (1) (relating to tax carryovers) is amended
by striking out "and" at the end of subparagraph (E), by striking
out "exceed" at the end of subparagraph (F) and inserting in lieu
thereof "and", and by inserting after subparagraph (F) the fol-
lowing new subparagraph:
"(G) section 44 (relating to credit for purchase of new principal residence),
exceed".
(4) Section 6096 (b) (relating to designation of income tax pay-
ments to Presidential Election Campaign Fund) is amended by
striking out "and 42" and inserting in lieu thereof "42, and 44".
TITLE III-CERTAIN CHANGES IN
BUSINESS TAXES
SEC. 301. INCREASE IN INVESTMENT CREDIT.
(a) INCREASE OF INVESTMENT CREDIT.-Paragraph (1) of section 46
(a) (determining the amount of the investment credit) is amended
to read as follows:
"(1) GENERAL RULE.-
"(A) TEN PERCENT CREDIT.-Except as otherwise provided
in this paragraph, in the case of a property described in sub-
paragraph (D), the amount of the credit allowed by section
38 for the taxable year shall be an amount equal to 10 percent
of the qualified investment (as determined under subsections
(c) and (d)).
'(B) ELEVEN PERCENT CREDIT.-Except as otherwise pro-
vided in this paragraph, in the case of a corporation which
elects to have the provisions of this subparagraph apply, the
amount of the credit allowed by section 38 for the taxable
year with respect to property described in subparagraph (D)
shall be an amount equal to 11 percent of the qualified invest-
ment (as determined under subsections (c) and (d)). An elec-
tion may not be made to have the provisions of this subpara-
graph apply for the taxable year unless the corporation meets
the requirements of section 301 (d) of the Tax Reduction Act
of 1975. An election by a corporation to have the provisions of
this subparagraph apply shall be made at such time, in such
form, and in such manner as the Secretary or his delegate
may prescribe.
(C) SEVEN PERCENT CREDIT.-Except as otherwise provided
in this paragraph, the amount of credit allowed by section 38
for the taxable year shall be an amount equal to 7 percent of
the qualified investment (as determined under subsections
(c) and (d)).
"(D) TRANSITIONAL RULES.-The provisions of subpara-
graphs (A) and (B) shall apply only to-
(i) property to which subsection (d) does not apply,
the construction, reconstruction, or erection of which is
completed by the taxpayer after January 21, 1975, but
only to the extent of the basis thereof attributable to the
construction, reconstruction, or erection after January 21,
1975, and before January 1, 1977."
(ii) property to which subsection (d) does not apply,
acquired by the taxpayer after January 21, 1975, and
before January 1, 1977, and placed in service by the tax-
payer before January 1, 1977, and
(15)
16
17
"(iii) property to which subsection (d) applies, but only
"(8) PROHIBITION OF IMMEDIATE FLOWTHROUGH.-An election
to the extent of the qualified investment (as determined under
made under paragraph (3) shall apply only to the amount of the
subsections (c) and (d)) with respect to qualified progress
credit allowable under section 38 with respect to public utility
expenditures made after January 21, 1975, and before Janu-
property (within the meaning of subsection (a) (6) (D)) deter-
ary 1, 1977."
mined as if the Tax Reduction Act of 1975 had not been enacted.
(b) PUBLIC UTILITY PROPERTY.-
Any taxpayer who had timely made an election under paragraph
(1) DETERMINATION OF QUALIFIED INVESTMENT.-Subparagraph
(3) may, at his own option and without regard to any requirement
(A) of section 46(c) (3) (relating to determination of qualified
imposed by an agency described in subsection (c) (3) (B), elect
investment in the case of public utility property) is amended to
within 90 days after the date of the enactment of the Tax Reduc-
read as follows:
tion Act of 1975 (in such manner as the Secretary or his delegate
(A) To the extent that subsection (a) (1) (0) applies to
shall prescribe) to have the provisions of paragraph (3) apply
property which is public utility property, the amount of the
with respect to the amount of the credit allowable under section
qualified investment shall be 4/7 of the amount determined
38 with respect to such property which is in excess of the amount
under paragraph (1).".
determined under the preceding sentence. If such taxpayer does
(2) INCREASE IN 50-PERCENT LIMITATION.-Section 46(α) (re-
not make such an election, paragraph (1) or (2) (whichever
lating to determination of amount of credit) is amended by add-
paragraph is applicable without regard to this paragraph) shall
ing at the end thereof the following new paragraph:
apply to such excess credit, except that if neither paragraph (1)
"(6) ALTERNATIVE LIMITATION IN THE CASE OF CERTAIN UTILITIES.-
nor (2) is applicable (without regard to this paragraph), para-
(A) IN GENERAL.-If, for a taxable year ending after calendar
graph (1) shall apply unless the taxpayer elects (in such manner
year 1974 and before calendar year 1981, the amount of the quali-
as the Secretary or his delegate shall prescribe) within 90 days
fied investment of the taxpayer which is attributable to public
after the date of the enactment of the Tax Reduction Act of 1975
utility property is 25 percent or more of his aggregate qualified
to have the provisions of paragraph (2) apply. The provisions of
investment, then subparagraph (C) of paragraph (2) of this sub-
this paragraph shall not be applied to disallow such excess credit
section shall be applied by substituting for 50 percent his appli-
before the first final determination which is inconsistent with such
cable percentage for such year.
requirements is made, determined in the same manner as under
(B) APPLICABLE PERCENTAGE.-The applicable percentage of
paragraph (4)."
any taxpayer for any taxable year is-
(4) EFFECTIVE DATES.-The amendment made by paragraph (1)
(i) 50 percent, plus
of this subsection shall apply to property placed in service after
(ii) that portion of the tentative percentage for the tax-
January 21, 1975, in taxable years ending after January 21, 1975.
able year which the taxpayer's amount of qualified invest-
The amendments made by paragraphs (2) and (3) shall apply to
ment which is public utility property bears to his aggregate
taxable years ending after December 31, 1974.
qualified investment.
(c) INCREASE FROM $50,000 TO $100,000 OF DOLLAR LIMITATION ON
If the proportion referred to in clause (ii) is 75 percent or more,
USED PROPERTY.-
the applicable percentage of the taxpayer for the year shall be 50
(1) IN GENERAL.-Paragraph (2) of subsection 48(c) ( relating
percent plus the tentative percentage for such year.
to dollar limitation in case of used section 38 property) 28
"(0) TENTATIVE PERCENTAGE.-For purposes of subparagraph
amended-
(B), the tentative percentage shall be determined under the
(A) by striking out "$50,000" each place it appears and
following table:
inserting in lieu thereof "$100,000", and
"If the taxable year
The tentative
(B) by striking out "$25,000" and inserting in lieu thereof
ends in:
percentage is:
"$50,000".
1975 or 1976
50
(2) EFFECTIVE DATE.-The amendments made by paragraph
1977
40
(1) shall apply only to taxable years beginning after December 31,
1978
30
20
1974, and before January 1, 1977.
1979
1980
10
(d) PLAN REQUIREMENTS FOR TAXPAYERS ELECTING 11-PERCENT
CREDIT.-In order to meet the requirements of this subsection-
"(D) PUBLIC UTILITY PROPERTY DEFINED.-For purposes of this
(1) A corporation (hereinafter in this subsection referred to as
paragraph, the term 'public utility property' has the meaning
the "employer") must establish an employee stock ownership plan
given to such term by the first sentence of subsection (c) (3) (B).'
(described in paragraph (2)) which is funded by transfers of em-
(3) LIMITATION IN CASE OF CERTAIN REGULATED COMPANIES.-Sec-
ployer securities in accordance with the provisions of paragraph
tion 46(f), as redesignated by section 302 (a) of this Act (relating
(6) and which meets all other requirements of this subsection.
to limitation in case of certain regulated companies), is amended
(2) The plan referred to in paragraph (1) must be a defined
by adding at the end thereof the following new paragraph:
contribution plan established in writing which-
18
19
(4) is a stock bonus plan, a stock bonus and a money pur-
dividends thereon shall not be considered income of the par-
chase pension plan, or a profit-sharing plan,
ticipant or his beneficiary under the Internal Revenue Code
(B) is designed to invest primarily in employer securities,
of 1954 until actually distributed or made available to the
and
participant or his beneficiary and, at such time, shall be tax-
(C) meets such other requirements (similar to require-
able under section 72 of such Code (treating the participant
ments applicable to employee stock ownership plans as de-
or his beneficiary as having a basis of zero in the contract).
fined in section 4975 (e) (7) of the Internal Revenue Code of
(B) no amount shall be allocated to any participant in ex-
1954) as the Secretary of the Treasury or his delegate may
cess of the amount which might be allocated if the plan met
prescribe.
the requirements of section 401 of such Code, and
(3) The plan must provide for the allocation of all employer
(0) the plan must meet the requirements of sections 410
securities transferred to it or purchased by it (because of the re-
and 415 of such Code.
quirements of section 46 (a) (1) (B) of the Internal Revenue Code
(8) If the amount of the credit determined under section 46(a)
of 1954) to the account of each participant (who was a participant
(1) (B) of the Internal Revenue Code of 1954, is recaptured in
at any time during the plan year, whether or not he is a partici-
accordance with the provisions of such Code, the amounts trans-
pant at the close of the plan year) as of the close of each plan year
ferred to the plan under this subsection and allocated under the
in an amount which bears substantially the same proportion to
plan shall remain in the plan or in participant accounts, as the case
the amount of all such securities allocated to all participants in
may be, and continue to be allocated in accordance with the origi-
the plan for that plan year as the amount of compensation paid
nal plan agreement.
to such participant (disregarding any compensation in excess of
(9) For purposes of this subsection, the term-
the first $100,000 per year) bears to the compensation paid to all
(A) "employer securities" means common stock issued by
such participants during that year (disregarding any compensa-
the employer or a corporation which is in control of the em-
tion in excess of the first $100,000 with respect to any participant).
ployer (within the meaning of section 368 (c) of the Internal
Notwithstanding the first sentence of this paragraph, the alloca-
Revenue Code of 1954) with voting power and dividend rights
tion to participants' accounts may be extended over whatever
no less favorable than the voting power and dividend rights
period may be necessary to comply with the requirements of sec-
of other common stock issued by the employer or such con-
tion 415 of the Internal Revenue Code of 1954.
trolling corporation, or securities issued by the employer or
(4) The plan must provide that each participant has a nonfor-
such controlling corporation, convertible into such stock, and
feitable right to any stock allocated to his account under para-
(B) "value" means the average of closing prices of the
graph (3), and that no stock allocated to a participant's account
employer's securities, as reported by a national exchange on
may be distributed from that account before the end of the eighty-
which securities are listed, for the 20 consecutive trading days
fourth month beginning after the month in which the stock is allo-
immediately preceding the date of transfer or allocation of
cated to the account except in the case of separation from the serv-
such securities or, in the case of securities not listed on a na-
ice, death, or disability.
tional exchange, the fair market value as determined in good
(5) The plan must provide that each participant is entitled to
faith and in accordance with regulations issued by the Secre-
direct the plan as to the manner in which any employer securities
tary of the Treasury or his delegate.
allocated to the account of the participant are to be voted.
(10) The Secretary of the Treasury or his delegate shall pre-
(6) On making a claim for credit, adjustment, or refund under
scribe such regulations and require such reports as may be neces-
section 38 of the Internal Revenue Code of 1954, the employer
sary to carry out the provisions of this subsection.
states in such claim that it agrees, as a condition of receiving any
(11) If the employer fails to meet any requirement imposed
such credit, adjustment, or refund, to transfer employer securities
under this subsection or under any obligation undertaken to com-
forthwith to the plan having an aggregate value at the time of the
ply with the requirement of this subsection, he is liable to the
claim of 1 percent of the amount of the qualified investment (as
United States for a civil penalty of an amount equal to the amount
determined under section 46 (c) and (d) of such Code) of the tax-
involved in such failure. The preceding sentence shall not apply
payer for the taxable year. For purposes of meeting the require-
if the taxpayer corrects such failure (as determined by the Secre-
ments of this paragraph, a transfer of cash shall be treated as a
tary of the Treasury or his delegate) within 90 days after notice
transfer of employer securities if the cash is, under the plan, used
thereof. For purposes of this paragraph, the term "amount in-
to purchase employer securities.
volved" means an amount determined by the Secretary or his dele-
(7) Notwithstanding any other provision of law to the contrary,
gate, but not in excess of 1 percent of the qualified investment of
if the plan does not meet the requirements of section 401 of the
the taxpayer for the taxable year under section 46 (a) (1) (B) and
Internal Revenue Code of 1954-
not less than the product of one-half of one percent of such amount
(A) stock transferred under paragraph (6) and allocated
multiplied by the number of months (or parts thereof) during
to the account of any participant under paragraph (3) and
which such failure continues. The amount of such penalty may be
20
21
collected by the Secretary of the Treasury in the same manner in
tures' means the amount which, for purposes of this subpart,
which a deficiency in the payment of Federal income tax may be
is, properly chargeable (during such taxable year) to capital
collected.
account with respect to such property.
(12) Notwithstanding any provisions of the Internal Revenue
'(B) NON-SELF-CONSTRUCTED PROPERTY.-In the case of non-
Code of 1954 to the contrary, no deduction shall be allowed under
self-constructed property, the term 'qualified progress
section 162, 212, or 404 of such Code for amounts transferred to
expenditures' means the lesser of-
an employee stock ownership plan and taken into account under
"(i) the amount paid during the taxable year to
this subsection.
another person for the construction of such property, or
(ii) the amount which represents that proportion of
SEC. 302. ALLOWANCE OF INVESTMENT CREDIT WHERE
the overall cost to the taxpayer of the construction by
CONSTRUCTION OF PROPERTY WILL TAKE
such other person which is properly attributable to that
MORE THAN 2 YEARS.
portion of such construction which is completed during
such taxable year.
(α) GENERAL RULE.-Section 46 (relating to amount of credit) is
SPECIAL RULES FOR APPLYING PARAGRAPH (3).-For purposes
amended by redesignating subsections (d) and (e) as subsections (e)
of paragraph (3)-
and (f), respectively, and by inserting after subsection (c) the follow-
(A) COMPONENT PARTS, ETC.-Property which is to be a
ing new subsection:
component part of, or is otherwise to be included in, any
" (d) QUALIFIED PROGRESS EXPENDITURES.-
progress expenditure property shall be taken into account-
"(1) IN GENERAL.-In the case of any taxpayer who has made
"(i) at a time not earlier than the time at which it be-
an election under paragraph (6), the amount of his qualified
comes irrevocably devoted to use in the progress expendi-
investment for the taxable year (determined under subsection (c)
ture property, and
without regard to this subsection) shall be increased by an amount
"(ii) as if (at the time referred to in clause (i)) the
equal to his aggregate qualified progress expenditures for the
taxpayer had expended an amount equal to that portion
taxable year with respect to progress expenditure property.
of the cost to the taxpayer of such component or other
"(2) PROGRESS EXPENDITURE PROPERTY DEFINED.-
property which, for purposes of this subpart, is properly
"(A) IN GENERAL.-For purposes of this subsection, the
chargeable (during such taxable year) to capital account
term progress expenditure property' means any property
with respect to such property.
which is being constructed by or for the taxpayer and
(B) CERTAIN BORROWINGS DISREGARDED.-Any amount
which-
borrowed directly or indirectly by the taxpayer from the
"(i) has a normal construction period of two years or
person constructing the property for him shall not be treated
more, and
as an amount expended for such construction.
"(ii) it is reasonable to believe will be new section 38
'(C) CERTAIN UNUSED EXPENDITURES CARRIED OVER.-In the
property having a useful life of 7 years or more in the
case of non-self-constructed property, if for the taxable
hands of the taxpayer when it is placed in service.
year-
Clauses (i) and (ii) of the preceding sentence shall be
"(i) the amount under clause (i) of paragraph (3) (B)
applied on the basis of facts known at the close of the taxable
exceeds the amount under clause (ii) of paragraph
year of the taxpayer in which construction begins (or, if later,
(3) (B), then the amount of such excess shall be taken
at the close of the first taxable year to which an election under
into account under such clause (i) for the succeeding
this subsection applies).
taxable year, or
(B) NORMAL CONSTRUCTION PERIOD.-For purposes of sub-
(ii) the amount under clause (ii) of paragraph (3)
paragraph (A), the term 'normal construction period' means
(B) exceeds the amount under clause (i) of paragraph
the period reasonably expected to be required for the con-
(3) (B), then the amount of such excess shall be taken
struction of the property-
into account under such clause (ii) for the succeeding
"(i) beginning with the date on which physical work
taxable year.
on the construction begins (or, if later, the first day of the
(D) DETERMINATION OF PERCENTAGE OF COMPLETION.-In the
first taxable year to which an election under this sub-
case of non-self-constructed property, the determination un-
section applies), and
der paragraph (3) (B) (ii) of the proportion of the overall
"(ii) ending on the date on which it is expected that
cost to the taxpayer of the construction of any property
the property will be available for placing in service.
which is properly attributable to construction completed dur-
"(3) QUALIFIED PROGRESS EXPENDITURES DEFINED.-For purposes
ing any taxable year shall be made, under regulations pre-
of this subsection-
scribed by the Secretary or his delegate, on the basis of engi-
"(A) SELF-CONSTRUCTED PROPERTY.-In the case of any self-
neering or architectural estimates or on the basis of cost ac-
constructed property, the term 'qualified progress expendi-
counting records. Unless the taxpayer establishes otherwise
22
23
by clear and convincing evidence, the construction shall
plus
be deemed to be completed not more rapidly than ratably
"(B) in the case of any property to which this subsection
over the normal construction period.
applied for one or more preceding taxable years, 20 percent of
'(E) No QUALIFIED PROGRESS EXPENDITURES FOR CERTAIN
the full amount for "each such preceding taxable year.
PRIOR PERIODS.-In the case of any property, no qualified
For purposes of this paragraph, the term 'full amount', when used
progress expenditures shall be taken into account under this
with respect to any property for any taxable year, means the
subsection for any period before January 22, 1975 (or, if later,
amount of the qualified investment for such property for such year
before the first day of the first taxable year to which an elec-
determined under this subsection without regard to this
tion under this subsection applies).
paragraph."
"(F) No QUALIFIED PROGRESS EXPENDITURES FOR PROPERTY
(b) CONFORMING AMENDMENTS.-
FOR YEAR IT IS PLACED IN SERVICE, ETC.-In the case of any
(1) AMENDMENT OF SECTION 46(c).-Section 46(c) (relating to
property, no qualified progress expenditures shall be taken
qualified investment) is amended by adding at the end thereof
into account under this subsection for the earlier of-
the following new paragraph:
(i) the taxable year in which the property is placed
"(4) COORDINATION WITH SUBSECTION (d).-The amount which
in service, or
would (but for this paragraph) be treated as qualified investment
(ii) the first taxable year for which recapture is re-
under this subsection with respect to any property shall be re-
quired under section (a) (3) with respect to such
duced (but not below zero) by any amount treated by the tax-
property,
payer or a predecessor of the taxpayer (or, in the case of a sale
or for any taxable year thereafter.
and leaseback described in section 47 (a) (3) (σ), by the lessee)
"(5) OTHER DEFINITIONS.-For purposes of this subsection-
as qualified investment with respect to such property under sub-
"(4) SELF-CONSTRUCTED PROPERTY.-The term 'self-con-
section (d), to the extent the amount 80 treated has not been re-
structed property' means property more than half of the
quired to be recaptured by reason of section (3)."
construction expenditures for which it is reasonable to be-
(2) DISPOSITION, ETC.-
lieve will be made directly by the taxpayer.
(A) Subsection (a) of section 47 (relating to certain dis-
(B) NON-SELF-CONSTRUCTED PROPERTY.-The term 'non-
positions, etc., of section 38 property) is amended by redesig-
self-constructed property' means property which is not self-
nating paragraph (3) as paragraph (4) and by inserting
constructed property.
after paragraph (2) the following new paragraph:
"(C) CONSTRUCTION, ETC.-The term 'construction' includes
"(3) PROPERTY CEASES TO BE PROGRESS EXPENDITURE PROPERTY.-
reconstruction and erection, and the term 'constructed' in-
"(A) IN GENERAL.-If during any taxable year any prop-
cludes reconstructed and erected.
erty taken into account in determining qualified investment
"(D) ONLY CONSTRUCTION OF SECTION 38 PROPERTY TO BE
under section 46(d) ceases (by reason of sale or other disposi-
TAKEN INTO ACCOUNT.-Construction shall be taken into ac-
tion, cancellation or abandonment of contract, or otherwise)
count only if, for purposes of this subpart, expenditures there-
to be, with respect to the taxpayer, property which, when
for are properly chargeable to capital account with respect
placed in service, will be new section 38 property, then the
to the property.
tax under this chapter for such taxable year shall be increased
(6) ELECTION.-An election under this subsection may be made
by an amount equal to the aggregate decrease in the credits
at such time and in such manner as the Secretary or his delegate
allowed under section 38 for all prior taxable years which
may by regulations prescribe. Such an election shall apply to the
would have resulted solely from reducing to zero the quali-
taxable year for which made and to all subsequent taxable years.
fied investment taken into account with respect to such
Such an election, once made, man not be revoked except with the
property.
consent of the Secretary or his delegate.
"(B) CERTAIN EXCESS CREDIT RECAPTURED.-Any amount
(7) TRANSITIONAL RULES.-The qualified investment taken into
which would have been applied as a reduction of the qualified
account under this subsection for any taxable year beginning be-
investment in property by reason of paragraph (4) of section
fore January 1, 1980, with respect to any property shall be (in lieu
46(c) but for the fact that a reduction under such paragraph
of the full amount) an amount equal to the sum of-
cannot reduce qualified investment below zero shall be treated
(A) the applicable percentage of the full amount de-
as an amount required to be recaptured under subparagraph
termined under the following table:
(A) for the taxable year in which the property is placed in
"For a taxable year
The applicable
service.
beginning in:
percentage is:
"(0) CERTAIN SALES AND LEASEBACKS.-Under regulations
1974 or 1975
20
prescribed by the Secretary or his delegate, a sale by, and
1976
40
leaseback to, a taxpayer who, when the property is placed in
1977
60
service. will be a lessee to whom section 48 (d) applies shall not
1978
80
1979
100;
be treated as a cessation described in subparagraph (A) to
24
25
the extent that the qualified investment which will be passed
through to the lessee under section 48(d) with respect to such
(2) Paragraph (7) of section 12 (relating to cross references
property is not less than the qualified progress expenditures
for tax on corporations) is amended by striking out "$25,000"
properly taken into account by the lessee with respect to such
and inserting in lieu thereof "$50,000".
property.
(3) Section 962 (c) (relating to surtax exemption for indi-
(D) COORDINATION WITH PARAGRAPH (1).-If, after prop-
viduals electing to be subject to tax at corporate rates) is amended
erty is placed in service, there is a disposition or other cessa-
by striking out "$25,000" and inserting in lieu thereof "$50,000".
tion described in paragraph (1), paragraph (1) shall be ap-
SEC. 304. INCREASE IN MINIMUM ACCUMULATED EARN-
plied as if any credit which was allowable by reason of sec-
INGS CREDIT FROM $100,000 TO $150,000.
tion 46(d) and which has not been required to be recaptured
(a) INCREASE.-Paragraphs (2) and (3) of section 535 (c) (relating
before such cessation were allowable for the taxable year the
property was placed in service."
to accumulated earnings credit) are each amended by striking out
"$100,000" and inserting in lieu thereof "$150,000".
(c) CLERICAL AMENDMENTS.-
(1) Paragraph (4) of section 47(a) (as redesignated by sub-
(b) CONFORMING AMENDMENTS.-Sections 243 (b) (3) (C) (i) (relating
section (b) (2) (A) of this section) is amended by striking out
to qualifying dividends for purposes of the dividends received de-
"paragraph (1)" and inserting in lieu thereof "paragraph (1) or
duction), 1551 (a) (relating to disallowance of surtax exemption and
(3)"
accumulated earnings credit) and 1561(a) (2) (relating to limita-
(2) Paragraphs (5) and (6) (B) of section (a) are each
tions on certain multiple tax benefits in the case of certain controlled
amended by striking out "paragraph (3)" and inserting in lieu
corporations) are each amended by striking out "$100,000" and insert-
thereof "paragraph (4)".
ing in lieu thereof "$150,000".
(3) Paragraphs (1) and (2) of section (d) are each amended
SEC. 305. EFFECTIVE DATES.
by striking out "section 46(d) (1)" and inserting in lieu thereof
(a) SECTION 302.-The amendments made by section 302 shall apply
"section (1)
to taxable years ending after December 31, 1974.
(4) Subsection (f) of section 50B is amended by striking out
(b) SECTION 303.-
"section 46(d)" and inserting in lieu thereof "section 46(e)".
(1) IN GENERAL-The amendments made by section 303 shall
SEC. 303. CHANGE IN CORPORATE TAX RATES AND IN-
apply to taxable years ending after December 31, 1974. The
CREASE IN SURTAX EXEMPTION.
amendments made by subsections (b) and (c) of such section shall
cease to apply for taxable years ending after December 31, 1975.
(a) TAX RATES.-Section 11(b) (relating to corporate normal tax)
(2) CHANGES TREATED AS CHANGES IN TAX RATE.-Section 21 (re-
is amended to read as follows:
lating to change in rates during taxable year) is amended by
"(b) NORMAL Tax.-The normal tax is equal to-
adding at the end thereof the following new subsection:
(1) in the case of a taxable year ending before January 1,
"(f) INCREASE IN SURTAX EXEMPTION.-In applying subsection (α)
1975, or after December 31, 1975, 22 percent of the taxable income,
to a taxable year of a taxpayer which is not a calendar year, the change
and
made by section 303(b) of the Tax Reduction Act of 1975 in section
" (2) in the case of a taxable year ending after December 31,
11 (d) (relating to corporate surtax exemption) shall be treated as
1974, and before January 1, 1976, the sum of-
a change in a rate of tax."
'(A) 20 percent of so much of the taxable income as does
(c) SECTION 304.-The amendments made by section 304 apply to
not exceed $25,000, plus
taxable years beginning after December 31, 1974.
(B) 22 percent of so much of the taxable income as exceeds
$25,000.".
(b) SURTAX EXEMPTION.-Section 11 (d) (relating to surtax exemp-
tion) is amended by striking out "$25,000" and inserting in lieu thereof
"$50,000".
(c) TECHNICAL AND CONFORMING AMENDMENTS.-
(1) Paragraph (1) of section 1561 (a) (as in effect for taxable
years beginning after December 31, 1974) (relating to limitations
on certain multiple tax benefits in the case of certain controlled
corporations) is amended by striking out "$25,000" and inserting
in lieu thereof "$50,000". In applying subsection (b) (2) of sec-
tion 11, the first $25,000 of taxable income and the second $25,000
of taxable income shall each be allocated among the component
members of a controlled group of corporations in the same manner
as the surtax exemption is allocated.
TITLE IV-CHANGES AFFECTING
INDIVIDUALS AND BUSINESSES
SEC. 401. FEDERAL WELFARE RECIPIENT EMPLOYMENT
INCENTIVE TAX CREDIT.
(α) IN GENERAL.-
(1) Section 50A (a) (relating to determination of amount of
credit) is amended by adding at the end thereof the following new
paragraph:
"(6) LIMITATION WITH RESPECT TO NONBUSINESS ELIGIBLE
EMPLOYEES.-Notwithstanding paragraph (1), the credit allowed
by section 40 with respect to Federal welfare recipient employ-
ment incentive expenses paid or incurred by the taxpayer during
the taxable year to an eligible employee whose services are not
performed in connection with a trade or business of the taxpayer
shall not exceed $1,000."
(2) Section 50A (c) (2) (4) (relating to amount of credit) is
amended-
(A) by striking out "or at the end of clause (ii),
(B) by striking out the period at the end of clause (iii)
and inserting in lieu thereof a comma and "or", and
(σ) by inserting at the end thereof the following new
clause:
'(iv) a termination of employment of an individual
with respect to whom Federal welfare recipient employ-
ment incentive expenses (as described in section 50B
(a) (2)) are taken into account under subsection (a)."
(3) Section 50B (a) (relating to definitions; special rules) is
amended to read as follows:
"(a) WORK INCENTIVE PROGRAM EXPENSES.-
"(1) IN GENERAL.-For purposes of this subpart, the term 'work
incentive program expenses' means the sum of-
"(A) the amount of wages paid or incurred by the taxpayer
for services rendered during the first 12 months of employ-
ment (whether or not consecutive) of employees who are
certified by the Secretary of Labor as-
"(i) having been placed in employment under a work
incentive program established under section 432(b) (1)
of the Social Security Act, and
"(ii) not having displaced any individual from em-
ployment, plus
(B) the amount of Federal welfare recipient employment
incentive expenses paid or incurred by the taxpayer during
the taxable year.
(27)
28
29
"(2) DEFINITION.-For purposes of this section, the term 'Fed-
(1) in subsection (b) by striking out "(c) through (h)," and
eral welfare recipient employment incentive expenses' means the
inserting in lieu thereof (c) through (i) and
amount of wages paid or incurred by the taxpayer for services
(2) by adding at the end thereof the following new subsection:
rendered to the taxpayer before July 1, 1976, by an eligible em-
"(i) CONTRIBUTIONS TO H:R. 10 PLANS.-Notwithstanding subsec-
ployee.
tions (b) and (c) (2), in the case of a plan in existence on January 1,
(3) Exclusion.-No item taken into account under paragraph
1974, the amendment made by section 1013 (c) (2) of this Act shall
(1) (A) shall be taken into account under paragraph (1) (B). No
apply, with respect to a plan which provides contributions or benefits
item taken into account under paragraph (1) (B) shall be taken
for employees some or all of whom are employees within the meaning
into account under paragraph 1(A).'
of section 401 (c) (1) of the Internal Revenue Code of 1954, for plan
(4) Section 50B (c) is amended-
years beginning after December 31, 1974, but only if the employer
(A) by striking out "subsection (a)" in paragraph (1)
(within the meaning of section 401 (c) (4) of such Code) elects in
and inserting in lieu thereof "subsection (a) (1) (A)", and
such manner and at such time as the Secretary of the Treasury or his
(B) by striking out "subsection (a)" in paragraph (4) and
delegate shall by regulations prescribe, to have such amendment 80
inserting in lieu thereof "subsection (a) (1) (A)"
apply. Any election made under this subsection, once made, shall be
(5) Section 50B is amended by redesignating subsection (g)
irrevocable."
as (h) and by inserting immediately after subsection (f) the fol-
lowing new subsection:
"(g) ELIGIBLE EMPLOYEE.-
"(1) ELIGIBLE EMPLOYEE.-For purposes of subsection (α)(1)
(B), the term 'eligible employee' means an individual-
"(A) who has been certified by the appropriate agency of
State or local government as being eligible for financial as-
sistance under part A of title IV of the Social Security Act
and as having continuously received such financial assistance
during the 90 day period which immediately precedes the date
on which such individual is hired by the taxpayer,
'(B) who has been employed by the taxpayer for a period
in excess of 30 consecutive days on a substantially full-time
basis,
(C) who has not displaced any other individual from em-
ployment by the taxpayer, and
(D) who is not a migrant worker.
The term 'eligible employee' includes an employee of the taxpayer
whose services are not performed in connection with a trade or
business of the taxpayer.
"(2) MIGRANT WORKER.-For purposes of paragraph (1), the
term 'migrant worker' means an individual who is employed for
services for which the customary period of employment by one
employer is less than 30 days if the nature of such services requires
that such individual travel from place to place over a short period
of time."
(b) EFFECTIVE DATE.-The amendments made by this section with
respect to federal welfare recipient employment incentive expenses
shall apply to such expenses paid or incurred by a taxpayer to an
eligible employee whom such taxpayer hires after the date of the
enactment of this Act.
SEC. 402. TIME WHEN CONTRIBUTIONS DEEMED MADE
TO CERTAIN PENSION PLANS.
Section 1017 of the Employee Retirement Income Security Act of
1974 (relating to effective dates for funding, etc., provisions of that
Act) is amended-
TITLE V-PERCENTAGE
DEPLETION
SEC. 501. LIMITATIONS ON PERCENTAGE DEPLETION
FOR OIL AND GAS.
(a) IN GENERAL.-Part I of subchapter I of chapter 1 (relating to
natural resources) is amended by inserting after section 613 the fol-
lowing new section:
"SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION
IN CASE OF OIL AND GAS WELLS.
"(a) GENERAL RULE.-Except as otherwise provided in this sec-
tion, the allowance for depletion under section 611 with respect to any
oil or gas well shall be computed without regard to section 613.
(b) EXEMPTION FOR CERTAIN DOMESTIC GAS WELLS.-
"(1) IN GENERAL.-The allowance for depletion under section
611 shall be computed in accordance with section 613 with respect
to-
(A) regulated natural gas,
(B) natural gas sold under a fixed contract, and
" (C) any geothermal deposit in the United States or in a
possession of the United States which is determined to be a
gas well within the meaning of section 613 (b) (1) (A),
and 22 percent shall be deemed to be specified in subsection (b)
of section 613 for purposes of subsection (a) of that section.
(2) DEFINITIONS.-For purposes of this subsection-
(A) NATURAL GAS SOLD UNDER A FIXED CONTRACT.-The
term 'natural gas sold under a fixed contract' means do-
mestic natural gas sold by the producer under a contract, in
effect on February 1, 1975, and at all times thereafter before
such sale, under which the price for such gas cannot be
adjusted to reflect to any extent the increase in liabilities of
the seller for tax under this chapter by reason of the repeal
of percentage depletion for gas. Price increases after Feb-
ruary 1, 1975, shall be presumed to take increases in tax
liabilities into account unless the taxpayer demonstrates to
the contrary by clear and convincing evidence.
(B) REGULATED NATURAL GAS.-The term 'regulated natu-
ral gas' means domestic natural gas produced and sold by
the producer, before July 1, 1976, subject to the jurisdiction
of the Federal Power Commission, the price for which has
not been adjusted to reflect to any extent the increase in
(31)
32
33
liability of the seller for tax under this chapter by reason of
"(B) PHASE-OUT TABLE.-For purposes of subparagraph
the repeal of percentage depletion for gas. Price increases
(A)-
after February 1, 1975, shall be presumed to take increases
"In the case of production during the calendar year:
in tax liabilities into account unless the taxpayer demon-
The tentative
strates the contrary by clear and convincing evidence.
quantity in barrels is
"(c) EXEMPTION FOR INDEPENDENT PRODUCERS AND ROYALTY
1975
2,000
OWNERS.-
1976
1,800
"(1) IN GENERAL.-Except as provided in subsection (d), the
1977
1,600
allowance for depletion under section 611 shall be computed in
1978
1,400
accordance with section 613 with respect to-
1979
1,200
"(A) so much of the taxpayer's average daily production
1980 and thereafter
1,000
of domestic crude oil as does not exceed the taxpayer's de-
pletable oil quantity; and
"(4) DAILY DEPLETABLE NATURAL GAS QUANTITY.-For pur-
(B) so much of the taxpayer's average daily production
poses of paragraph (1), the depletable natural gas quantity
of domestic natural gas as does not exceed the taxpayer's
of any taxpayer for any taxable year shall be equal to 6,000 cubic
feet multiplied by the number of barrels of the taxpayer's
depletable natural gas quantity;
depletable oil quantity to which the taxpayer elects to have this
and the applicable percentage (determined in accordance with the
paragraph apply. The taxpayer's depletable oil quantity for any
table contained in paragraph (5)) shall be deemed to be specified
calendar year shall be reduced by the number of barrels with
in subsection (b) of section 613 for purposes of subsection (a) of
that section.
respect to which an election under this paragraph applies. Such
election shall be made at such time and in such manner as the
(2) AVERAGE DAILY PRODUCTION.-F purposes of paragraph
Secretary or his delegate shall by regulations prescribe.
(1)-
"(A) the taxpaper's average daily production of domestic
"(5) APPLICABLE PERCENTAGE.-For purposes of paragraph
(1)-
crude oil or natural gas for any taxable year, shall be deter-
mined by dividing his aggregate production of domestic
"In the case of production
The applicable
crude oil or natural gas, as the case may be, during the taxable
during the calendar year:
percentage is:
1975
year by the number of days in such taxable year, and
22
1976
22
" (B) in the case of a taxpayer holding a partial interest
1977
22
in the production from any property (including an interest
1978
22
held in a partnership) such taxpayer's production shall be
1979
22
1980
considered to be that amount of such production determined
2°
1981
20
by multiplying the total production of such property by the
1982
18
taxpayer's percentage participation in the revenues from such
1983
16
property.
1984 and thereafter
15
In applying this paragraph, there shall not be taken into account
"(6) OIL AND NATURAL GAS RESULTING FROM SECONDARY OR TERTI-
any production of crude oil or natural gas resulting from second-
ARY PROCESSES.-
ary or tertiary processes (as defined in regulations prescribed by
'(A) IN GENERAL.-Except as provided in subsection (d),
the Secretary or his delegate).
the allowance for depletion under section 611 shall be com-
(b) applies.
puted in accordance with section 613 with respect to-
(3) DEPLETABLE OIL QUANTITY.-
(i) so much of the taxpayer's average daily secondary
(A) IN GENERAL.-For purposes of paragraph (1), the
or tertiary production of domestic crude oil as does not
taxpayer's depletable oil quantity shall be equal to-
exceed the taxpayer's depletable oil quantity (determined
"(i) the tentative quantity determined under the table
with regard to paragraph (3) (A) (ii) ; and
contained in subparagraph (B), reduced (but not below
" (ii) so much of the taxpayer's average daily second-
zero) by
(ii) the taxpayer's average daily secondary or terti-
ary or tertiary production of domestic natural gas as does
ary production for the taxable year.
not exceed the taxpayer's depletable natural gas quantity
(determined without regard to paragraph (3) (A) (ii) ;
34
35
and 22 percent shall be deemed to be specified in subsection
"(O) TAXABLE INCOME FROM THE PROPERTY.-If both oil
(b) of section 613 for purposes of subsection (a) of that
and gas are produced from the property during the taxable
section.
year, for purposes of subparagraphs (A) and (B) the tax-
((B) AVERAGE DAILY SECONDARY OR TERTIARY PRODUCTION.-
able income from the property, in applying the 50-percent
For purposes of this subsection--
limitation in section 613(a), shall be allocated between the
"(i) the taxpayer's average daily secondary or tertiary
oil production and the gas production in proportion to the
production of domestic crude oil or natural gas for any
gross income during the taxable year from each.
taxable year shall be determined by dividing his aggre-
"(D) PARTNERSHIPS.-In the case of a partnership, the de-
gate production of domestic crude oil or natural gas, as
pletion allowance in the case of oil and gas wells to which this
the case may be, resulting from secondary or tertiary
subsection applies shall be computed separately by the part-
processes during the taxable year by the number of days
ners and not by the partnership.
in such taxable year, and
(E) SECONDARY OR TERTIARY PRODUCTION.-If the taxpayer
(ii) in the case of a taxpayer holding a partial interest
has production from secondary or tertiary recovery processes
in the production from any property (including any
during the taxable year, this paragraph (under regulations
interest held in any partnership) such taxpayer's pro-
prescribed by the Secretary or his delegate) shall be applied
duction shall be considered to be that amount of such
separately with respect to such production.
production determined by multiplying the total produc-
(8) BUSINESSES UNDER COMMON CONTROL; MEMBERS OF THE SAME
tion of such property by the taxpayer's percentage par-
FAMILY.-
ticipation in the revenues from such property.
"(A) Component members of controlled group treated as
"(C) TERMINATION.-This paragraph shall not apply after
one taxpayer.-For purposes of this subsection, persons who
December 31, 1983.
are members of the same controlled group of corporations
"(7) SPECIAL RULES.-
shall be treated as one taxpayer.
"(A) PRODUCTION OF CRUDE OIL IN EXCESS OF DEPLETABLE
'(B) Aggregation of business entities under common con-
OIL QUANTITY.-If the taxpayer's average daily production
trol.-If 50 percent or more of the beneficial interest in two or
of domestic crude oil exceeds his depletable oil quantity, the
more corporations, trusts, or estates is owned by the same or
allowance under paragraph (1) (A) with respect to oil pro-
related persons (taking into account only persons who own
duced during the taxable year from each property in the
at least 5 percent of such beneficial interest), the tentative
United States shall be that amount which bears the same ratio
quantity determined under the table in paragraph (3) (B)
to the amount of depletion which could have been allowable
shall be allocated among all such entities in proportion to the
under section 613 (a) for all of the taxpayer's oil produced
respective production of domestic crude oil during the period
from such property during the taxable year (computed as if
in question by such entities.
section 613 applied to all of such production at the rate speci-
(C) Allocation among members of the same family.-In
fied in paragraph (5) or (6), as the case may be as his deplet-
the case of individuals who are members of the same family,
able oil quantity bears to the aggregate number of barrels
the tentative quantity determined under the table in para-
representing the average daily production of domestic crude
graph (3) (B) shall be allocated among such individuals in
oil of the taxpayer for such year.
proportion to the respective production of domestic crude oil
"(B) PRODUCTION OF NATURAL GAS IN EXCESS OF DEPLET-
during the period in question by such individuals.
ABLE NATURAL GAS QUANTITY.-If the taxpayer's average
"(D) Definition and special rules.-For purposes of this
daily production of domestic natural gas exceeds his de-
paragraph-
pletable natural gas quantity, the allowance under para-
(i) the term 'controlled group of corporations' has
graph (1) (B) with respect to natural gas produced during
the meaning given to such term by section 1563 ex-
the taxable year from each property in the United States
cept that section 1563(b) (2) shall not apply and except
shall be that amount which bears the same ratio to the
that 'more than 50 percent' shall be substituted for 'at
amount of depletion which would have been allowable under
least 80 percent' each place it appears in section 1563 (a),
section (a) for all of the taxpayers natural gas produced
(ii) a person is a related person to another person if such
from such property during the taxable year (computed as
persons are members of the same controlled group of corpo-
if section 613 applied to all of such production at the rate
rations or if the relationship between such persons would re-
specified in paragraph (5) or (6) as the case may be) as the
sult in a disallowance of losses under section 267 or (b),
amount of his depletable natural gas quantity in cubic feet
except that for this purpose the family of an individual in-
bears to the aggregate number of cubic feet representing the
cludes only his spouse and minor children,
average daily production of domestic natural gas of the tax-
(iii) the family of an individual includes only his spouse
payer for such year.
and minor children, and
36
37
(iv) each 6,000 cubic feet of domestic natural gas shall be
"(2) RETAILERS EXCLUDED.-Subsection (c) shall not apply in the
treated as 1 barrel of domestic crude oil.
case of any taxpayer who directly, or through a related person, sells oil
(9) TRANSFER OF OIL OR GAS PROPERTY.-
or natural gas, or any product derived from oil or natural gas-
" (4) In the case of a transfer (including the subleasing of a
"(A) through any retail outlet operated by the taxpayer or a
lease) after December 31, 1974 of an interest (including an
related person, or
interest in a partnership or trust) in any proven oil or gas prop-
(B) to any person-
erty, paragraph (1) shall not apply to the transferee (or sub-
(i) obligated under an agreement or contract with the
lessee) with respect to production of crude oil or natural gas
taxpayer or a related person to use a trademark, trade name,
attributable to such interest, and such production shall not be
or service mark or name owned by such taxpayer or a related
taken into account for any computation by the transferee (or sub-
person, in marketing or distributing oil or natural gas or any
lessee) under this subsection, A property shall be treated as a
product derived from oil or natural gas, or
proven oil or gas property if at the time of the transfer the prin-
(ii) given authority, pursuant to an agreement or con-
cipal value of the property has been demonstrated by prospecting
tract with the taxpayer or a related person, to occupy any
or exploration or discovery work.
retail outlet owned, leased, or in any way controlled by the
(B) Subparagraph (A) shall not apply in the case of-
taxpayer or a related person.
(i) a transfer of property at death, or
(3) RELATED PERSON.-For purposes of this subsection, a per-
(ii) the transfer in an exchange to which section 351
son is a related person with respect to the taxpayer if a significant
applies if following the exchange the tentative quantity de-
ownership interest in either the taxpayer or such person is held
termined under the table contained in paragraph (3) (B) is
by the other, or if a third person has a significant ownership inter-
allocated under paragraph (8) between the transferor and
est in both the taxpayer and such person. For purposes of the pre-
transferee.
ceding sentence, the term 'significant ownership interest' means-
(10) SPECIAL RULE FOR FISCAL YEAR TAXPAYERS.-In applying this
(A) with respect to any corporation, 5 percent or more in
subsection to a taxable year which is not a calendar year, each portion
value of the outstanding stock of such corporation,
of such taxable year which occurs during a single calendar year shall
(B) with respect to a partnership, 5 percent or more in-
be treated as if it were a short taxable year.
terest in the profits or capital of such partnership, and
(11) CERTAIN PRODUCTION NOT TAKEN INTO ACCOUNT.-In applying
(C) with respect to an estate or trust, 5 percent or more of
this subsection, there shall not be taken into account the production
the beneficial interests in such estate or trust.
of natural gas with respect to which subsection (b) applies.
"(4) CERTAIN REFINERS EXCLUDED. If the taxpayer or a related
(d) LIMITATIONS ON APPLICATIONS OF SUBSECTION (c).-
person engages in the refining of crude oil, subsection (c) shall not
'(1) Limitation based on taxable income.-The deduction for the
apply to such taxpayer if on any day during the taxable year the
taxable year attributable to the application of subsection (c) shall not
refinery runs of the taxpayer and such person exceed 50,000
exceed 65 percent of the taxpayer's taxable income for the year com-
barrels.
puted without regard to-
'(e) DEFINITIONS.-For purposes of this section-
((A) depletion with respect to production of oil and gas
"(1) CRUDE oIL.-The term 'crude oil' includes α natural
subject to the provisions of subsection (c),
gas liquid recovered from a gas well in lease separators or
(B) any net operating loss carryback to the taxable year under
field facilities.
section 172, and
"(2) NATURAL GAS.-The term 'natural gas' means any
'(O) any capital loss carryback to the taxable year under sec-
product (other than crude oil) of an oil or gas well if a de-
tion 1212.
duction for depletion is allowable under section 611 with re-
If an amount is disallowed as a deduction for the taxable year by rea-
spect to such product.
son of application of the preceding sentence, the disallowed amount
"(3) Domestic.-The term 'domestic' refers to production
shall be treated as an amount allowable as a deduction under subsec-
from an oil or gas well located in the United States or in a
tion (c) for the following taxable year, subject to the application of
possession of the United States.
the preceding sentence to such taxable year. For purposes of basis
"(4) BARREL.-The term 'barrel' means 42 United States
adjustments and determining whether cost depletion exceeds per-
gallons."
centage depletion with respect to the production from a property,
(b) TECHNICAL AMENDMENTS.-
any amount disallowed as a deduction on the application of this para-
(1) Section 613(d) (relating to percentage depletion) is
graph shall be allocated to the respective properties from which the
amended to read as follows:
oil or gas was produced in proportion to the percentage depletion
"(d) DENIAL OF PERCENTAGE DEPLETION IN CASE OF OIL AND GAS
otherwise allowable to such properties under subsection (c).
WELLS.-Except as provided in section 613A, in the case of any oil or
gas well, the allowance for depletion shall be computed without ref-
erence to this section."
38
(2) Section 613 (b) is amended-
(A) by striking out subparagraph (A) of paragraph (1)
and redesignating subparagraphs (B) and (C) as subpara-
graphs (A) and (B), respectively,
(B) by striking out "(1) (C)" each place it appears in
paragraphs (3), (4), and (7) and inserting in lieu thereof
TITLE VI-TAXATION OF FOREIGN
(1) (B)", and
(σ) by amending the last sentence of paragraph (7)-
OIL AND GAS AND OTHER FOR-
(i) by striking out "or" at the end of clause (A),
(ii) by striking out the period at the end of clause (B)
EIGN INCOME
and inserting in lieu thereof ; or", and
(iii) by adding at the end thereof the following new
SEC. 601. LIMITATIONS ON FOREIGN TAX CREDIT FOR
clause:
TAXES PAID IN CONNECTION WITH FOREIGN OIL AND
"(O) oil and gas wells."
GAS INCOME.
(3) Section 703 (a) (2) (relating to deductions not allowable
to a partnership) is amended by striking out "and" at the end
(a) IN GENERAL.-Subpart A of part III of subchapter N of chap-
of subparagraph (E), by striking out the period at the end of
ter 1 (relating to foreign tax credit) is amended by adding at the end
subparagraph (F) and inserting in lieu ", and", and by adding
thereof the following new section:
at the end thereof the following new subparagraph:
"SEC. 907. SPECIAL RULES IN CASE OF FOREIGN OIL AND
"(G) the deduction for depletion under section 611 with
respect to oil and gas production subject to the provisions of
GAS INCOME
section 613A (c).
"(a) REDUCTION IN AMOUNT ALLOWED AS FOREIGN TAX UNDER SEC-
(c) EFFECTIVE DATES.-The amendments made by this section shall
TION 901.-In applying section 901, the amount of any income, war
take effect on January 1, 1975, and shall apply to taxable years ending
profits, and excess profits taxes paid or accrued (or deemed to have
after December 31, 1974.
been paid) during the taxable year with respect to foreign oil and gas
extraction income which would (but for this subsection) be taken into
account for purposes of section 901 shall be reduced by the amount
(if any) by which the amount of such taxes exceeds the product of-
(1) the amount of the foreign oil and gas extraction income
for the taxable year, multiplied by
(2) the percentage which is-
'(A) in taxable years ending in 1975, 110 percent of,
(B) in taxable years ending in 1976, 105 percent of, and
(σ) in taxable years ending after 1976, 2 percentage
points above,
the sum of the normal tax rate and the surtax rate for the taxable year
specified in section 11.
(b) APPLICATION OF SECTION 90.4 LIMITATION.-The provisions of
section 904 shall be applied separately with respect to-
" (1) foreign oil related income, and
(2) other taxable income.
With respect to foreign oil related income, the overall limitation pro-
vided by section 90.4 (a) (2) shall apply and the per-country limitation
provided by section 904(a) (1) shall not apply.
(c) FOREIGN INCOME DEFINITIONS AND SPECIAL RULES.-For pur-
poses of this section-
(1) FOREIGN OIL AND GAS EXTRACTION INCOME.-The term
'foreign oil and gas extraction income' means the taxable income
derived from sources without the United States and its possessions
from-
(39)
40
41
(A) the extraction (by the taxpayer or any other person)
posed of, or is acquired other than from the government of a foreign
of minerals from oil or gas wells, or
country, at a posted price (or other pricing arrangement) which
(B) the sale or exchange of assets used by the taxpayer
differs from the fair market value for such oil or gas, such fair mar-
in the trade or business described in subparagraph (A).
ket value shall be used in lieu of such posted price (or other pricing
"(2) FOREIGN OIL RELATED INCOME.-The term 'foreign oil re-
arrangement).
lated income' means the taxable income derived from sources out-
"(e) TRANSITIONAL RULES.-
side the United States and its possessions from-
"(f) RECAPTURE OF FOREIGN OIL RELATED Loss.-
'(A) the extraction (by the taxpayer or any other person)
(1) GENERAL RULE.-For purposes of this subpart, in the case
of minerals from oil or gas wells,
of any taxpayer who sustains a foreign oil related loss for any tax-
"(B) the processing of such minerals into their primary
able year-
products,
(A) that portion of the foreign oil related income for each
(C) the transportation of such minerals or primary
succeeding taxable year which is equal to the lesser of-
products,
"(i) the amount of such loss (to the extent not used
(D) the distribution or sale of such minerals or primary
under this paragraph in prior years) or
products, or
(ii) 50 percent of the foreign oil related income for
'(E) the sale or exchange of assets used by the taxpayer
such succeeding taxable year,
in the trade or business described in subparagraph (A),
shall be treated as income from sources within the United
(B), (C), or (D).
States (and not as income from sources without the United
'(3) DIVIDENDS, INTEREST, PARTNERSHIP DISTRIBUTION, ETC.-
States), and
The term 'foreign oil and gas extraction income' and the term
((B) the amount of the income, war profits, and excess
'foreign oil related income' include-
profits taxes paid or accrued (or deemed to have been paid)
(A) dividends and interest from a foreign corporation
to a foreign country for such succeeding taxable year with
in respect of which taxes are deemed paid by the taxpayer
respect to foreign oil related income shall be reduced by an
under section 902,
amount which bears the same proportion to the total amount
(B) dividends from a domestic corporation which are
of such foreign taxes as the amount treated as income from
treated under section 861 (a) (2) (A) as income from sources with-
sources within the United States under subparagraph (4)
out the United States,
bears to the total foreign oil related income for such succeed-
"(0) amounts with respect to which taxes are deemed
ing taxable year.
paid under section 960 and
For purposes of this chapter, the amount of any foreign taxes for
'(D) the taxpayer's distributive share of the income of
which credit is denied under subparagraph (B) of the preceding
to the partnerships. extent such dividends, interest, amounts, or distributive
sentence shall not be allowed as a deduction for any taxable year.
For purposes of this subsection, foreign oil related income shall
share is attributable to foreign oil and gas extraction income, or
be determined without regard to this subsection.
to foreign oil related income, as the case may be; except that
(2) FOREIGN OIL RELATED LOSS DEFINED.-For purposes of this
interest described in subparagraph (A) and dividends described
subsection, the term 'foreign oil related loss' means the amount
in subparagraph (B) shall not be taken into account in computing
by which the gross income for the taxable year from sources
foreign oil and gas extraction income but shall be taken into
without the United States and its possessions (whether or not
account in computing foreign oil-related income.
the taxpayer chooses the benefits of this subpart for such taxable
"(4) CERTAIN LOSSES.-If for any foreign country for any tax-
year) taken into account in determining the foreign oil related
able year the taxpayer would have a net operating loss if only
income for such year is exceeded by the sum of the deductions
items from sources within such country (including deductions
properly apportioned or allocated thereto, except that there shall
properly apportioned or allocated thereto) which relate to the
not be taken into account-
extraction of minerals from oil or gas wells were taken into
(A) any net operating loss deduction allowable for such
account, such items-
year under section 172(a) or any capital loss carrybacks and
"(A) shall not be taken into account in computing foreign
carryovers to such year under section 1212, and
oil and gas extraction income for such year, but
(B) any-
"(B) shall be taken into account in computing foreign oil
(i) foreign expropriation loss for such year, as de-
related income for such year.
fined in section (1), or
"(d) DISREGARD OF CERTAIN POSTED PRICES, Ero.-For purposes
(ii) loss for such year which arises from fire, storm,
of this chapter, in determining the amount of taxable income in the
shipwreck, or other casualty, or from theft,
case of foreign oil and gas extraction income, if the oil or gas is dis-
to the extent such loss is not compensated for by insurance
or otherwise.
42
43
"(3) Dispositions.-
(B) such amount may not exceed the amount which could
"(A) IN GENERAL.-For purposes of this chapter, if prop-
have been used in such succeeding taxable year if the per-
erty used in a trade or business described in subparagraph
country limitation continued to apply.
(A), (B), (C), or (D) of subsection (c) (2) is disposed of
(b) CERTAIN PAYMENTS Nor To BE CONSIDERED AS TAXES.-Section
during any taxable year-
901 is amended by redesignating subsection (f) as subsection (g), and
(i) the taxpayer notwithstanding any other provision
by adding after subsection (e) the following new subsection:
of this chapter (other than paragraph (1)) shall be
"(0) EXCEPTIONS.-Notwithstanding subparagraph (B),
deemed to have received and recognized foreign oil
the term 'disposition' does not include-
related income in the taxable year of the disposition,
"(i) a disposition of property which is not a material
by reason of such disposition, in an amount equal to the
factor in the realization of income by the taxpayer, or
lesser of the excess of the fair market value of such
"(ii) a disposition of property to a domestic corpora-
property over the taxpayer's adjusted basis in such
tion in a distribution or transfer described in section
property or the remaining amount of the foreign oil
381(a).
related losses which were not used under paragraph
"(g) WESTERN HEMISPHERE TRADE CORPORATIONS WHICH ARE MEM-
(1) for such taxable year or any prior taxable year, and
BERS OF AN AFFILIATED GROUP.-If a Western Hemisphere trade cor-
(ii) paragraph (1) shall be applied with respect to
poration is a member of an affiliated group for the taxable year, then
such income by substituting '100 percent' for '50 percent'.
in applying section 901, the amount of any income, war profits, and
"(B) DISPOSITION DEFINED.-For purposes of this subsec-
excess profits taxes paid or accrued (or deemed to have been paid)
tion, the term 'disposition' includes a sale, exchange, distri-
during the taxable year with respect to foreign oil and gas extraction
bution, or gift of property, whether or not gain or loss is
income which would (but for this section and section 1503(b)) be
recognized on the transfer.
taken into account for purposes of section 901 shall be reduced by the
"(1) TAXABLE YEARS ENDING AFTER DECEMBER 31, 1974.-In ap-
greater of-
plying subsections (d) and (e) of section 904 for purposes of
"(1) the reduction with respect to such taxes provided by sub-
determining the amount which may be carried over from a taxable
section (a) of this section, or
year ending before January 1, 1975, to any taxable year ending
(2) the reduction determined under section 1503(b) by
after December 31, 1974-
applying section 1503(b) separately with respect to such taxes,
"(A) subsection (a) of this section shall be deemed to have
but not by both such reductions."
been in effect for such prior taxable year and for all taxable
"(f) CERTAIN PAYMENTS FOR OIL OR GAS Not CONSIDERED AS TAXES.-
years thereafter, and
Notwithstanding subsection (b) and sections 102 and 960, the amount
((B) the carryover from such prior year shall be divided
of any income, or profits, and excess profits taxes paid or accrued dur-
(effective as of the first day of the first taxable year ending
ing the taxable year to any foreign country in connection with the pur-
after December 31, 1974) into-
chase and sale of oil or gas extracted in such country is not to be con-
(i) a foreign oil related carryover, and
sidered as tax for purposes of section 275(a) and this section if-
'(ii) another carryover,
"(1) the taxpayer has no economic interest in the oil or gas to
on the basis of the proportionate share of the foreign oil
which section 611 (a) applies, and
related income, or the other taxable income, as the case may
(2) either such purchase or sale is at a price which differs from
be, of the total taxable income taken into account in comput-
the fair market value for such oil or gas at the time of such pur-
ing the amount of such carryover.
chase or sale."
"(2) TAXABLE YEARS ENDING AFTER DECEMBER 31, 1975.-In ap-
(c) CLERICAL AMENDMENT.-The table of sections for subpart A of
plying subsections (d) and (e) of section 904 for purposes of
part III of subchapter N of chapter 1 is amended by adding at the end
determining the amount which may be carried over from a taxable
thereof the following new item:
year ending before January 1, 1976, to any taxable year ending
"Sec. 907. Special rules in case of foreign oil and gas income."
after December 31 1975, if the per-country limitation provided
(d) EFFECTIVE DATES.-The amendments made by this section shall
by section 904(a) (1) applied to such prior taxable year and to
apply to taxable years ending after December 31, 1974; except that—
the taxpayer's last taxable year ending before January 1, 1976,
(1) the second sentence of section 907 (b) shall apply to taxable
then in the case of any foreign oil related carryover-
years ending after December 31, 1975, and
(A) the first sentence of section 904(e) (2) shall not ap-
(2) the provisions of section 907(f) shall apply to losses sus-
ply, but
tained in taxable years ending after December 31, 1975.
44
45
SEC. 602. TAXATION OF EARNINGS AND PROFITS OF
(5) REPEAL OF SECTION 955.-Section 955 (relating to with-
CONTROLLED FOREIGN CORPORATIONS AND
drawal of previously excluded subpart F income from qualified
investment) is hereby repealed.
THEIR SHAREHOLDERS.
(6) LESS DEVELOPED COUNTRY CORPORATION DEFINED.-Subsec-
(a) REPEAL OF MINIMUM DISTRIBUTION EXCEPTION To REQUIRE-
tion (d) of section 902 is amended to read as follows:
MENT OF CURRENT TAXATION OF SUBPART F INCOME.-
"(d) LESS DEVELOPED COUNTRY CORPORATION DEFINED.-For pur-
(1) REPEAL OF MINIMUM DISTRIBUTION PROVISIONS.-Section
poses of this section, the term 'less developed country corporation'
963 (relating to receipt of minimum distributions by domestic
means-
corporations) is hereby repealed.
"(1) a foreign corporation which, for its taxable year, is a less
(2) CERTAIN DISTRIBUTIONS BY CONTROLLED FOREIGN CORPORA-
developed country corporation within the meaning of paragraph
TIONS TO REGULATED INVESTMENT COMPANIES TREATED AS DIVI-
(3) or (4), and
DENDS.-Subsection (b) of section 851 (relating to limitations on
(2) a foreign corporation which owns 10 percent or more of
definition of regulated investment company) is amended by add-
the total combined voting power of all classes of stock entitled to
ing at the end thereof the following new sentence:
vote of a foreign corporation which is a less developed country
"For purposes of paragraph (2), there shall be treated as dividends
corporation within the meaning of paragraph (3), and-
amounts included in gross income under section 951 (a) (1) (A) (i) for
"(A) 80 percent or more of the gross income of which for
the taxable year to the extent that, under section 959 (a) (1), there is a
its taxable year meets the requirement of paragraph (3) (A),
distribution out of the earnings and profits of the taxable year which
and
are attributable to the amounts so included."
"(B) 80 percent or more in value of the assets of which on
(3) CONFORMING AMENDMENTS.-
each day of such year consists of property described in para-
(A) The table of sections for subpart F of part III of sub-
graph (3) (B).
chapter N of chapter 1 is amended by striking out the item
A foreign corporation which is a less developed country corporation
relating to section 963.
for its first tarable year beginning after December 31, 1962, shall, for
(B) Subparagraph (A) (i) of section 951 (a) (1) (relating
purposes of this section, be treated as having been a less developed
to general rule for amounts included in gross income of
country corporation for each of its taxable years beginning before
United States shareholders) is amended by striking out
January 1, 1963.
"except as provided in section 963,".
(3) The term 'less developed country corporation' means a
(b) LIMITATION ON DEFINITION OF FOREIGN BASE COMPANY SALES IN-
foreign corporation which during the taxable year is engaged in
come-Paragraph (1) of section 954(d) (relating to definition of
the active conduct of one or more trades or businesses and-
foreign base company sales income) is amended by adding at the end
(A) 80 percent or more of the gross income of which for
thereof the following new sentence: "For purposes of this subsection,
the taxable year is derived from sources within less developed
personal property does not include agricultural commodities which are
countries; and
not grown in the United States in commercially marketable quantities."
"(B) 80 percent or more in value of the assets of which on
(c) REPEAL OF EXCEPTION TO REQUIREMENT OF CURRENT TAXATION
each day of the taxable year consists of-
OF SUBPART F INCOME FOR REINVESTMENT IN LESS DEVELOPED COUN-
(i) property used in such trades or businesses and lo-
TRIES.-
cated in less developed countries,
(1) REPEAL OF SECTION (b)(1).-Paragraph (1) of sub-
"(ii) money, and deposits with persons carrying on the
section (b) of section 954 (relating to exclusions and special rules
banking business,
regarding foreign base company income) is hereby repealed.
(iii) stock, and obligations which, at the time of their
(2) REPEAL OF SECTION 954(f).-Subsection (f) of section 954
acquisition, have a maturity of one year or more, of any
(relating to increase in qualified investments in less developed
other less developed country corporation,
countries) is hereby repealed.
" (iv) an obligation of a less developed country,
(3) AMENDMENT OF SECTION (1) (A) (ii).-Clause (ii)
(v) an investment which is required because of re-
of section 951 (a) (1) (A) is amended by striking out (deter-
strictions imposed by a less developed country, and
mined under section 955 (3)) and inserting in lieu thereof
'(vi) property described in section 956 (b) (2).
(determined under section 955 (a) (3) as in effect before the en-
For purposes of subparagraph (A), the determination as to
actment of the Tax Reduction Act of 1975)".
whether income is derived from sources within less developed
(4) REPEAL OF SECTION 951(a)(3).-Paragraph (3) of section
countries shall be made under regulations prescribed by the Secre-
951 (a) (relating to limitation on pro rata share of previously
tary or his delegate.
excluded subpart F income withdrawn from investment) is here-
(4) The term 'less developed country corporation' also means a
by repealed.
a foreign corporation-
46
47
(A) 80 percent or more of the gross income of which for
designation in effect on March 26, 1975, under section 955 (c) (3) (as
the taxable year consists of-
(i) gross income derived from, or in connection with,
in effect before the enactment of the Tax Reduction Act of 1975) shall
be treated as made under this paragraph."
the using (or hiring or leasing for use) in foreign com-
merce of aircraft or vessels registered under the laws of
(7) CLERICAL AMENDMENT.-The table of sections for subpart
a less developed country, or from, or in connection with,
F of part III of subchapter N of chapter 1 is amended by striking
out the item relating to section 955.
the performance of services directly related to use of
(d) SHIPPING PROFITS OF CONTROLLED FOREIGN CORPORATION TO BE
such aircraft or vessels, or from the sale or exchange of
TAXED CURRENTLY EXCEPT TO EXTENT REINVESTED IN SHIPPING OPERA-
such aircraft or vessels, and
TIONS—
(ii) dividends and interest received from foreign cor-
(1) SHIPPING PROFITS INCLUDED IN GROSS INCOME OF UNITED STATES
porations which are less developed country corporations
SHAREHOLDERS.-
within the meaning of this paragraph and 10 percent or
more of the total combined voting power of all classes of
(A) Section 954(a) (relating to foreign base company
stock of which are owned by the foreign corporation, and
income) is amended by striking out "and" at the end of para-
gain from the sale or exchange of stock or obligations of
graph (2), by striking out the period at the end of paragraph
foreign corporations which are such less developed coun-
(3) and inserting in lieu thereof and and by adding at the
end thereof the following new paragraph:
try corporations, and
(B) 80 percent or more of the assets of which on each day
"(4) the foreign base company shipping income for the taxable
of the taxable year consists of (i) assets used, or held for
year (determined under subsection (f) and reduced as provided
use, for or in connection with the production of income de-
in subsection (b) (5))
scribed in subparagraph (A), and (ii) property described
(B) Paragraph (2) of section 954(b) is amended to read
as follows:
in section (2).
'(5) The term 'less developed country' means (in respect to any
"(2) EXCLUSION FOR REINVESTED SHIPPING INCOME.-For pur-
foreign corporation) any foreign country (other than an area
poses of subsection (a), foreign base company income does not
within the Sino-Soviet bloc) or any possession of the United
include foreign base company shipping income to the extent that
States with respect to which, on the first day of the taxable year,
the amount of such income does not exceed the increase for the
there is in effect an Executive order by the President of the United
taxable year in qualified investments in foreign base company
States designating such country or possession as an economically
shipping operations of the controlled foreign corporation (as
determined under subsection (g)).'
less developed country for purposes of this section. For purposes
(C) Subparagraphs (A) and (B) of section 954(b) (3)
of the preceding sentence, an overseas territory. department, prov-
ince, or possession may be treated as a separate country. No
are each amended by striking out "paragraphs (1) and (5)
and inserting in lieu thereof "paragraphs (2) and (5)".
designation shall be made under this paragraph with respect to-
(D) Subparagraph (B) of section 954(b) (3) is amended
Australia
Luxembourg
by striking out "paragraphs (1), (2)," and inserting in lieu
Austria
Monaco
thereof "paragraph (2)
Belgium
Netherlands
(E) Paragraph (5) of section 954(b) is amended by strik-
Canada
New Zealand
ing out "and the foreign base company services income" and
Denmark
Norway
inserting in lieu thereof "the foreign base company services
France
Union of South Africa
income, and the foreign base company shipping income".
Germany (Federal Republic)
San Marino
(F) Section 954(b) is amended by adding at the end thereof
Hong Kong
Sweden
the following new paragraph:
Italy
Switzerland
"(6) SPECIAL RULES FOR FOREIGN BASE COMPANY SHIPPING IN-
Japan
United Kingdom
COME.-Income of a corporation which is foreign base com-
Liechtenstein
pany shipping income under paragraph (4) of subsection (a)
After the President has designated any foreign country or any pos-
(determined without regard to the exclusion under paragraph
session of the United States as an economically less developed country
(2) of this subsection)-
for purposes of this section, he shall not terminate such designation
"(A) shall not be considered foreign base company income
(either by issuing an Executive order for that purpose or by issuing an
of such corporation under any other paragraph of subsection
Executive order under the first sentence of this paragraph which has
(a) and
the effect of terminating such designation) unless, at least 30 days
(B) if distributed through a chain of ownership described
prior to such termination, he has notified the Senate and the House of
under section 958(a), shall not be included in foreign base
Representatives of his intention to terminate such designation. Any
company income of another controlled foreign. corporation in
such chain."
48
49
(G) Section 954 is amended by adding at the end thereof
(B) the part of such year during which the corporation is
the following new subsections:
a controlled foreign corporation bears to the entire year."
"(f) FOREIGN BASE COMPANY SHIPPING INCOME.-For purposes of
(3) WITHDRAWAL OF PREVIOUSLY EXCLUDED SUBPART F INCOME
subsection (a) (4), the term 'foreign base company shipping income'
FROM QUALIFIED INVESTMENT.-
means income derived from, or in connection with, the use (or hiring
(A) Subpart F of part III of subchapter N of chapter 1
or leasing for use) of any aircraft or vessel in foreign commerce, or
from, or in connection with, the performance of services directly re-
section: is amended by inserting after section 954 the following new
lated to the use of any such aircraft, or vessel, or from the sale, ex-
"SEC. 955. WITHDRAWAL OF PREVIOUSLY EXCLUDED
change, or other disposition of any such aircraft or vessel. Such term
includes, but is not limited to-
SUBPART F INCOME FROM QUALIFIED IN-
"(1) dividends and interest received from a foreign corporation
VESTMENT.
in respect of which taxes are deemed paid under section 902, and
"(a) GENERAL RULES.-
gain from the sale, exchange, or other disposition of stock or obli-
"(1) AMOUNT WITHDRAWN.-For purposes of this subpart, the
gations of such a foreign corporation to the extent that such divi-
amount of previously excluded subpart F income of any controlled
dends, interest, and gains are attributable to foreign base company
foreign corporation withdrawn from investment in foreign base.
shipping income, and
company shipping operations for any taxable year is an amount
(2) that portion of the distributive share of the income of a
equal to the decrease in the amount of qualified investments in
partnership attributable to foreign base company shipping income.
foreign base company shipping operations of the controlled for-
"(g) INCREASE IN QUALIFIED INVESTMENTS IN FOREIGN BASE Com-
eign corporation for such year, but only to the extent that the
PANY SHIPPING OPERATIONS.-For purposes of subsection (b) (2), the
amount of such decrease does not exceed an amount equal to-
increase for any taxable year in qualified investments in foreign base
"(A) the sum of the amounts excluded under section 954
company shipping operations of any controlled foreign corporation is
(b) (2) from the foreign base company income of such cor-
the amount by which-
poration for all prior taxable years, reduced by
"(1) the qualified investments in foreign base company shipping
"(B) the sum of the amounts of previously excluded sub-
operations (as defined in section 955(b)) of the controlled for-
part F income withdrawn from investment in foreign base
eign corporation at the close of the taxable year, exceed
company shipping operations of such corporation determined
(2) the qualified investments in foreign base company shipping
under this subsection for all prior taxable years.
operations (as so defined) of the controlled foreign corporation
(2) DECREASE IN QUALIFIED INVESTMENTS.-For purposes of
at the close of the preceding taxable year."
paragraph (1), the amount of the decrease in qualified investments
(2) AMOUNTS INCLUDED IN GROSS INCOME OF UNITED STATES SHARE-
in foreign base company shipping operations of any controlled
HOLDERS.-
foreign corporation for any taxable year is the amount by which-
(A) Subparagraph (A) of section 951 (a) (1) is amended
"(A) the amount of qualified investments in foreign base
by striking out "and" at the end of clause (i), by striking out
company shipping operations of the controlled foreign corpo-
the semicolon at the end of clause (ii) and inserting in lieu
ration at the close of the preceding taxable year, exceeds
thereof a comma, and by adding at the end thereof the follow-
(B) the amount of qualified investments in foreign base
ing new clause:
company shipping operations of the controlled foreign corpo-
(iii) his pro rata share (determined under section
ration at the close of the taxable year,
955 (a) (3)) of the corporation's previously excluded sub-
to the extent that the amount of such decrease does not exceed
part F income withdrawn from foreign base company
the sum of the earnings and profits for the taxable year and the
shipping operations for such year; and ".
earnings and profits accumulated for prior taxable years begin-
(B) Section 951(a) is amended by inserting after para-
ning after December 31, 1975, and the amount of previously ex-
graph (2) the following new paragraph:
cluded subpart F income invested in less developed country corpo-
(3) LIMITATION ON PRO RATA SHARE OF PREVIOUSLY EXCLUDED
rations described in section 955 (c) (2) (as in effect before the enact-
SUBPART F INCOME WITHDRAWN FROM INVESTMENT.-For pur-
ment of the Tax Reduction Act of 1975) to the extent attributable
poses of paragraph (1) (A) (iii), the pro rata share of any United
to earnings and profits accumulated for taxable years beginning
States shareholder of the previously excluded subpart F income
after December 31, 1962. For purposes of this paragraph, if quali-
of a controlled foreign corporation withdrawn from investment in
fied investments in foreign base company shipping operations are
foreign base company shipping operations shall not exceed an
disposed of by the controlled foreign corporation during the tax-
amount-
able year, the amount of the decrease in qualified investments in
"(A) which bears the same ,ratio to his pro rata share of
foreign base company shipping operations of such controlled
such income withdrawn (as determined under section 955 (a)
foreign corporation for such year shall be reduced by an amount
(3)) for the taxable year, as
equal to the amount (if any) by which the losses on such disposi-
50
51
tions during such year exceed the gains on such dispositions dur-
"(5) INCOME EXCLUDED UNDER PRIOR LAW.-Amounts invested
ing such year.
in less developed country corporations described in section 955
(3) PRO RATA SHARE OF AMOUNT WITHDRAWN.-In the case of
(c) (2) (as in effect before the enactment of the Tax Reduction
any United States shareholder, the pro rata share of the amount
Act of 1975) shall be treated as qualified investments in foreign
of previously excluded subpart F income of any controlled for-
base company shipping operations and shall not be treated as in-
eign corporation withdrawn from investment in foreign base
vestments in less developed countries for purposes of section 951
company shipping operations for any taxable year is his pro rata
(a) (1) (A) (ii).'
share of the amount determined under paragraph (1).
(B) The table of sections of subpart F of part III of sub-
"(b) QUALIFIED INVESTMENTS IN FOREIGN BASE COMPANY SHIPPING
chapter N of chapter 1 is amended by inserting after the item
OPERATIONS.-
relating to section 954 the following new item:
"(1) IN GENERAL.-For purposes of this subpart, the term
"Sec. 955. Withdrawal of previously excluded subpart F income from
'qualified investments in foreign base company shipping opera-
qualified investment."
tions' means investments in-
(e) EXCLUSION FROM FOREIGN BASE COMPANY INCOME WHERE For-
((A) any aircraft or vessel used in foreign commerce, and
EIGN BASE COMPANY INCOME IS LESS THAN 10 PERCENT OF GROSS IN-
(B) other assets which are used in connection with the
come.-Paragraph (3) of section 954(b) is amended by striking out
performance of services directly related to the use of any
"30 percent" each place it appears and inserting in lieu thereof "10
such aircraft or vessel.
percent".
Such term includes, but is not limited to, investments by a con-
(f) EFFECTIVE DATE.-The amendments made by this section shall
trolled foreign corporation in stock or obligations of another
apply to taxable years of foreign corporations beginning after De-
controlled foreign corporation which is a related person (within
cember 31, 1975, and to taxable years of United States shareholders
the meaning of section (d) (3)) and which holds assets de-
(within the meaning of 951 (b) of the Internal Revenue Code of 1954)
scribed in the preceding sentence, but only to the extent that such
within which or with which such taxable years of such foreign corpo-
assets are 80 used.
rations end.
"(2) QUALIFIED INVESTMENTS BY RELATED PERSONS.-For pur-
poses of determining the amount of qualified investments in
SEC. 603. DENIAL OF DISC BENEFITS WITH RESPECT TO
foreign. base company shipping operations, an investment (or
ENERGY RESOURCES AND OTHER PRODUCTS.
a decrease in investment) in such operations by one or more con-
trolled foreign corporations may, under regulations prescribed
(a) AMENDMENT OF SECTION 993 (c).(2).-Section 993(c) (2) (re-
by the Secretary or his delegate, be treated as an investment (or
lating to property excluded from export property) is amended by
a decrease in investment) by another corporation which is a con-
striking out "or" at the end of subparagraph (A), by striking out the
trolled foreign corporation and is a related person (as defined
period at the end of subparagraph (B) and inserting in lieu thereof
in section 954(d) (3)) with respect to the corporation actually
" or", and by adding at the end thereof the following:
"(C) products of a character with respect to which a deduc-
making or withdrawing the investment.
"(3) SPECIAL RULE.-For purposes of this subpart, a United
tion for depletion is allowable (including oil, gas, coal, or
States shareholder of a controlled foreign corporation may, under
uranium products) under section 611, or
'(D) products the export of which is prohibited or cur-
regulations prescribed by the Secretary or his delegate, elect to
tailed under section 4(b) of the Export Administration Act
make the determinations under subsection (a) (2) of this section
and under subsection (g) of section 954 as of the close of the years
of 1969 (50 U.S.C. App. 2403(b)) to effectuate the policy set
following the years referred to in such subsections, or as of the
forth in paragraph (2) (A) of section 3 of such Act (relating
close of such longer period of time as such regulations may permit,
to the protection of the domestic economy).
in lieu of on the last day of such years. Any election under this
Subparagraph (C) shall not apply to any commodity or product at
least 50 percent of the fair market value of which is attributable to
paragraph made with respect to any taxable year shall apply to
such year and to all succeeding taxable years unless the Secretary
manufacturing or processing, except that subparagraph (σ) shall
apply to any primary product from oil, gas, coal, or uranium. For
or his delegate consents to the revocation of such election.
"(4) AMOUNT ATTRIBUTABLE TO PROPERTY.-The amount taken
purposes of the preceding sentence, the term "processing" does not
into account under this subpart with respect to any property de-
include extracting or handling, packing, packaging, grading, storing,
or transporting."
scribed in paragraph (1) shall be its adjusted basis, reduced by
(b) EFFECTIVE DATE.-The amendments made by subsection (a)
any liability to which such property is subject.
shall apply to sales, exchanges, and other dispositions made after
March 18, 1975, in taxable years ending after such date.
52
SEC. 604. TREATMENT FOR PURPOSES OF THE INVEST-
MENT CREDIT OF CERTAIN PROPERTY USED
IN INTERNATIONAL OR TERRITORIAL
WATERS.
(a) AMENDMENT TO 1954 CODE.-
(1) IN GENERAL.-Clause (x) of section 48(a) (2) (B) (relating
TITLE VII-MISCELLANEOUS
to property used outside the United States) is amended by striking
out "territorial waters" and inserting in lieu thereof "territorial
PROVISIONS
waters within the northern portion of the Western Hemisphere".
(2) DEFINITION.-Subparagraph (B) of section 48(a) (2) is
amended by adding at the end thereof the following new sentence:
SEC. 701. CERTAIN UNEMPLOYMENT COMPENSATION.
"For purposes of clause (x), the term 'northern portion of the
(a) AMENDMENT OF EMERGENCY UNEMPLOYMENT COMPENSATION Act
Western Hemisphere' means the area lying west of the 30th meri-
OF 1974.-Section 102 (e) of the Emergency Unemployment Compen-
dian west of Greenwich, east of the international dateline, and
sation Act of 1974 is amended-
north of the Equator, but not including any foreign country which
(1) in paragraph (2) thereof, by striking out "The amount"
is a country of South America.".
and inserting in lieu thereof "Except as provided in paragraph
(3), the amount"; and
(b) Effective DATE.-
(2) by adding at the end thereof the following new paragraph:
(1) IN GENERAL.-The amendments made by subsection (a)
(3) Effective only with respect to benefits for weeks of unemploy-
shall apply to property, the construction, reconstruction, or erec-
ment ending before July 1, 1975, the amount established in such ac-
tion of which was completed after March 18, 1975, or the acquisi-
count for any individual shall be equal to the lesser of-
tion of which by the taxpayer occurred after such date.
(A) 100 per centum of the total amount of regular compensa-
(2) BINDING CONTRACT.-The amendments made by subsection
tion (including dependents' allowances) payable to him with
(a) shall not apply to property constructed, reconstructed,
respect to the benefit year (as determined under the State law) on
erected, or acquired pursuant to a contract which was on April 1,
the basis of which he most recently received regular compensation;
1974, and at all times thereafter, binding on the taxpayer.
or
(3) CERTAIN LEASE-BACK TRANSACTIONS, ETC.-Where a person
"(B) twenty-six times his average weekly benefit amount (as
who is a party to a binding contract described in paragraph (2)
determined for purposes of section 202 (b) (1) (C) of the Federal-
transfers rights in such contract (or in the property to which
State Extended Unemployment Compensation Act of 1970) for
such contract relates) to another person but a party to such con-
his benefit year."
tract retains a right to use the property under a lease with such
(b) MODIFICATION OF AGREEMENTS.-The Secretary of Labor shall,
other person, then to the extent of the transferred rights such
at the earliest practicable date after the enactment of this Act, pro-
other person shall, for purposes of paragraph (2), succeed to the
pose to each State with which he has in effect an agreement entered
position of the transferor with respect to such binding contract
into pursuant to section 102 of the Emergency Unemployment Com-
and such property. The preceding sentence shall apply, in any
pensation Act of 1974 a modification of such agreement designed to
case in which the lessor does not make an election under section
cause payments of emergency compensation thereunder to be made
48(d) of the Internal Revenue Code of 1954, only if a party to
in the manner prescribed by such Act, as amended by subsection (a)
such contract retains a right to use the property under a long-
of this section. Notwithstanding any provision of the Emergency Un-
term lease.
employment Compensation Act of 1974, if any such State shall fail or
refuse, within a reasonable time after the date of the enactment of this
Act, to enter into such a modification of such agreement, the Secretary
of Labor shall terminate such agreement.
SEC. 702. SPECIAL PAYMENT TO RECIPIENTS OF BENE-
FITS UNDER CERTAIN RETIREMENT AND
SURVIVOR BENEFIT PROGAMS.
(a) PAYMENT.-The Secretary of the Treasury shall, at the earliest
practicable date after the enactment of this Act, make a $50 payment
to each individual, who for the month of March, 1975, was entitled
(without regard to sections 202(j) (1) and 223 (b) of title II of the
(53)
54
55
Social Security Act and without the application of section 5(a) (ii)
for certain earned income, to increase the investment credit and the
of the Railroad Retirement Act of 1974) to—
surtax exemption, to reduce percentage depletion for oil and gas, and
(1) a monthly insurance benefit payable under title II of the
for other purposes."
And the Senate agree to the same.
Social Security Act,
(2) a monthly annuity or pension payment under the Rail-
AL ULLMAN,
road Retirement Act of 1935, the Railroad Retirement Act of
JAMES A. BURKE,
1937, or the Railroad Retirement Act of 1974, or
DAN ROSTENKOWSKI,
(3) a benefit under the supplemental security income benefits
PHIL LANDRUM,
program established by title XVI of the Social Security Act;
CHARLES A. VANIK,
except that, (A) such $50 payment shall be made only to individuals
Managers on the Part of the House.
who were paid a benefit for March 1975 in a check issued no later
RUSSELL B. LONG,
than August 31, 1975; (B) no such $50 payment shall be made to any
HERMAN TALMADGE,
individual who is not a resident of the United States (as defined in
VANCE HARTKE,
section 210(i) of the Social Security Act); and (σ) if an individual
ABRAHAM RIBICOFF,
is entitled under two or more of the programs referred to in clauses
W.D. HATHAWAY,
(1), (2), and (3), such individual shall be entitled to receive only one
FLOYD K. HASKELL,
such $50 payment. For purposes of this subsection, the term "resident"
ROBERT DOLE,
means an individual whose address of record for check payment pur-
Managers on the Part of the Senate.
poses is located within the United States.
(b) RECIPIENT IDENTIFICATION-The Secretary of Health, Educa-
tion, and Welfare and the Railroad Retirement Board shall provide
the Secretary of the Treasury with such information and data as
may be needed to enable the Secretary of the Treasury to ascertain
which individuals are entitled to the payment authorized under sub-
section (α).
(c) COORDINATION WITH OTHER FEDERAL PROGRAMS.-Any payment
made by the Secretary of the Treasury under this section to any indi-
vidual shall not be regarded as income (or, in the calendar year 1975,
as a resource) of such individual (or of the family of which he is
a member) for purposes of any Federal or State program which under-
takes to furnish aid or assistance to individuals or families, where
eligibility to receive such aid or assistance (or the amount of such aid
or assistance) under such program is based on the need therefor of
the individual or family involved. The requirement imposed by the
preceding sentence shall be treated as a condition for Federal financial
participation in any State (or local) welfare program for any calendar
quarter commencing after the date of enactment of this Act.
(d) APPROPRIATIONS AUTHORIZATION.There are hereby authorized
to be appropriated, out of any funds in the Treasury not otherwise
appropriated, such sums as may be necessary to carry out the provisions
of this section.
(e) PAYMENT Not To BE CONSIDERED INCOME.-Payments made under
this section shall not be considered as gross income for purposes of
the Internal Revenue Code of 1954.
And the Senate agree to the same.
Amend the title SO as to read "An Act to amend the Internal Reve-
nue Code of 1954 to provide for a refund of 1974 individual income
taxes, to increase the low income allowance and the percentage stand-
ard deduction, to provide a credit for personal exemptions and a credit
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE
The managers on the part of the House and the Senate at the
conference on the disagreeing votes of the 2 Houses on the amendment
of the Senate to the bill (H.R. 2166) to amend the Internal Revenue
Code of 1954 to provide for a refund of 1974 individual income taxes,
to increase the low income allowance and the percentage standard
deduction, to provide a credit for certain earned income, to increase
the investment credit and the surtax exemption, and for other pur-
poses, submit the following joint statement to the House and the
Senate an explanation of the effect of the action agreed upon by the
managers and recommended in the accompanying conference report:
REFUND OF 1974 INDIVIDUAL INCOME TAXES
House bill.-The House bill provides for a refund of 1974 tax lia-
bility to be made in one installment beginning in May, 1975. The
amount of the refund is to be 10 percent of tax liability up to a maxi-
mum refund of $200. Each taxpayer is to receive a refund of at least
$100 (or the full amount of his or her actual tax liability if it is less
than $100). The refund is to be phased down from the maximum of
$200 to $100 as the taxpayer's adjusted gross income rises from $20,000
to $30,000.
Senate amendment.-The Senate amendment provides for a similar
refund of 1974 tax liability except that the amount of the refund will
be equal to 12 percent of tax liability up to a maximum refund of $240
with a minimum of $120 (or the full amount of the taxpayer's tax
liability if it is less than $120).
Conference substitute.-The conference substitute provides for the
same refund of 1974 tax liability as in the House bill.
REFUNDS DISREGARDED IN THE ADMINISTRATION OF FEDERAL PROGRAMS
AND FEDERALLY ASSISTED PROGRAMS
House bill.-The House bill provides that 1974 income tax refunds
under section 101 of the bill are not to be considered income or re-
sources for purposes of determining who is eligible to receive benefits
or assistance, or the amount or extent of benefits or assistance, under
any Federal or Federally assisted program.
Senate amendment.-The Senate amendment is identical to the
House provision.
Conference substitute.-The conference substitute is the same as the
House bill and Senate amendment.
REDUCTION IN INDIVIDUAL INCOME TAXES
(Increase In Low-Income Allowance and Standard Deduction;
Personal Exemption Credit)
House bill.-The bill raises the minimum standard deduction ("low-
income allowance") to $1,900 for single persons and to $2,500 for joint
(57)
58
59
returns. It also increases the percentage standard deduction to 16 per-
hold in the United States for themselves and for 1 or more dependent
cent, with a maximum of $2,500 for single persons and $3,000 for joint
children are eligible to claim the credit under the Senate amendment.
returns. These increases under the House bill are effective only for the
As in the House bill, the Senate amendment applies only to taxable
1975 tax year.
years beginning in 1975.
Senate amendment.-Instead of the increase in the low-income al-
Conference substitute.-The conference substitute adopts the Senate
lowance and the percentage standard deduction provided by the
version of the earned income credit. The language in the Senate amend-
House bill, the Senate amendment provides a $200 optional tax credit
ment with reference to the income being taken into account for welfare
for each personal exemption deduction to which a taxpayer is entitled
purposes, however, is not included as the conferees intend that the
in lieu of the $750 deduction and a reduction of 1 percentage point in
language applicable under present law is not changed.
the tax rates applicable to the first $4,000 of taxable income. The $200
optional tax credit is for the 1975 tax year, and the rate reduction is
CHANGE IN WITHHOLDING RATES
for 1975 and 1976 tax years.
The amendment provides that taxpayers are to compute their tax
House bill.-The bill provides a new annual percentage withholding
tax credit of $200 per exemption provided by the amendment depend-
by using either the $750 exemption deduction of present law or the
table, which reflects the increases in the low income allowance, the
percentage standard deduction, and the provision for an earned in-
ing on which alternative results in a lower tax liability. The amend-
come credit provided in the House bill. The Internal Revenue Service
ment also provides that any overstatement of tax liability resulting
is required to calculate withholding tables for other periods and for
from incorrectly choosing the personal exemption deduction instead
wage bracket withholding.
of the credit (or vice versa) will be treated by the Internal Revenue
Senate amendment.-The Senate amendment requires the Secretary
Service as a mathematical error. The Internal Revenue Service will
of the Treasury to prescribe new withholding tables which reflect the
automatically check the computation made on each return and will
$200 personal exemption tax credit provided by the Senate amendment,
refund (or credit) any excess amounts paid resulting from the over-
the reduction in income tax rates provided by the Senate amend-
statement of tax liability. Under the amendment the personal exemp-
ment, and the earned income credit as modified by the Senate
tion tax credit is to apply on a 1 year basis for a taxable year begin-
amendment. The changes in the withholding tables are to take effect,
as in the House bill, on May 1, 1975.
ning in 1975 only.
In addition to the optional tax credit for personal exemptions, the
Conference substitute.-The conference substitute requires the Sec-
Senate amendment provides a 1 percentage point reduction in the
retary to prescribe new withholding tables which reflect the temporary
tax rates applicable to the first $4,000 of taxable income in the case
increases in the minimum standard deduction and the percentage
of joint returns. In the case of single persons and married individuals
standard deduction, the earned income credit, and the additional tax
filing separate returns, there are 5 brackets for the first $4,000 of
credit provided in the conference substitute. The changes in the with-
taxable income (3 brackets in the case of heads of households). The
holding tables are to take effect on May 1, 1975.
amendment also reduces each of these brackets by 1 percentage point.
Conference substitute.-The conference substitute raises the mini-
DEDUCTION OF CERTAIN EXPENSES NECESSARY FOR GAINFUL
mum standard deduction to $1,600 for single persons and to $1,900
EMPLOYMENT (CHILDCARE DEDUCTION)
for joint returns. It also increases the percentage standard deduction
to 16 percent, with a maximum of $2,300 for single persons and
House bill.-The House bill does not contain this provision.
$2,600 for joint returns. This is to be effective for 1975.
Senate amendment.-The Senate amendment removes the present
In addition, the conference substitute provides for a tax credit, in
limits on deductible expenditures (maximum of $4,800 per year) and
addition to the personal exemption, of $30 for each taxpayer, spouse,
the income phaseout (the $4,800 maximum phased out $1 for each $2
of adjusted gross income in excess of $18,000 for the husband and
and dependent. The credit is effective for 1975.
wife). It changes the deduction from an itemized deduction (deduct-
EARNED INCOME Tax CREDIT
ible from adjusted gross income) to a "business deduction" (deductible
from gross income in determining AGI). Payments to related persons
House bill.-The bill provides for a refundable credit of 5 percent
are also made deductible, if the transaction is made in an "arms-
of earned income up to a maximum of $200. The credit is to be phased
length" fashion (pursuant to Treasury regulations).
out from the maximum $200 to zero as earned income (or adjusted
The Senate amendment also provides for an optional tax credit for
gross income, if greater) increases from $4,000 to $6,000. The earned
50 percent of the allowable child care expenses, up to a maximum
income credit applies only for 1975.
credit of $50 per month ($25 in the case of a married person filing a
Senate amendment.-The Senate amendment provides a tax credit
separate tax return). The changes in the Senate amendment are effec-
of 10 percent of earned income up to a maximum of $400. The amount
tive for taxable years beginning after the date of enactment.
of the credit is to be phased out from the maximum amount down to
Conference substitute.-The conference substitute provides for an
zero as the earned income (or adjusted gross income, if greater) in-
increase in the maximum adjusted gross income level from $18,000 to
creases from $4,000 to $8,000. Only individuals who maintain a house-
$35,000, before the phaseout begins. This change is effective for taxable
years beginning after date of enactment.
61
60
EXTENSION OF PERIOD FOR REPLACING OLD RESIDENCE 1034 FOR PURPOSES
the general 50 percent limit to 100 percent of the income tax liability
for 1975 and 1976. In each of the next five taxable years, the increase
OF NONRECOGNITION OF GAIN UNDER SECTION
for public utilities is to be reduced by 10 percentage points until 1981,
and thereafter, at which time the 50 percent limitation again is effec-
House bill.-No amendment.-The provision. Senate amendment provides an subsequent extension
tive. Additionally, the House provision increases from $50,000 to
of the residence and thereby defer gain, from one year the period to
Senate time period in which a taxpayer may purchase a 18
$75,000 the amount of use property which can qualify for the invest-
ment credit for any 1 year.
principal or after sale). The amendment also extends from 18
The 10 percent investment credit rate is to be available for property
months which (before the taxpayer may construct a subsequent residence months after
acquired and placed in service after January 21, 1975, and before
January 1, 1976. It is also to be available for property placed in serv-
in to 24 months (if construction begins within 18 for sales
the months sale of the former residence). The extension is effective
ice in 1976 if the property was acquired pursuant to an order placed
before January 1, 1976. In addition, in the case of property con-
of after December 31, 1973.
residences substitute.-The conference substitute follows the for sales Sen-
structed, reconstructed, or erected by the taxpayer, the 10 percent in-
ate Conference amendment except that it makes the provision effective
vestment credit rate is to be available for property completed by the
taxpayer after January 21, 1975, but only to the extent of the portion
of residences after December 31, 1974.
of the value actually attributable to construction, etc., by the tax-
payer after January 21, 1975, and before January 1, 1976. The provi-
TAX CREDIT FOR HOME PURCHASES
sions increasing the amount of used property which can qualify for
the investment credit apply to taxable years beginning in 1975. The
Senate House amendment.-The Senate amendment provides a tax of credit new
bill.-No provision.
provisions with respect to progress payments apply to payments made
the purchase or construction by an individual taxpayer of a new
after January 21, 1975, in taxable years ending after December 31,
principal residence includes, but is not limited to, a single and
for residence. Under the amendment, the definition family a
1974.
Senate amendment.-The Senate amendment provides that, if cer-
structure, principal unit in a condominium or cooperative housing project, of the tax-
tain requirements are met, a 12 percent investment credit is to be
home. a The rate of the credit is equal to 5 percent credit is
available with respect to property acquired and placed in service after
a payer's mobile basis in the new residence and the amount of the
January 21, 1975, and before January 1, 1977. Similarly, in the case
limited to maximum of $2,000.
of property constructed, reconstructed, or erected by the taxpayer, the
Generally, a to be eligible for the credit, the taxpayer must March have ac- 12,
12 percent credit is also to be available with respect to property com-
the home as his principal place of residence after will apply to
pleted by the taxpayer after January 21, 1975, to the extent of the part
quired 1975, and before January 1, 1976. However, the credit settlement
of the basis of the property properly attributable to construction, etc.,
binding contracts entered into before January 1, 1976, if
after January 21, 1975, and before January 1, 1977.
and occur before January 1, 1977.
In cases where the property on which a taxpayer may claim an
Conference occupancy substitute.-The conference substitute follows the Sen-
investment credit (qualified investment in property) for a year ex-
ate that it allows a credit only with respect to a new principal
amendment on the 5-percent credit and $2,000 maximum, residence except
ceeds $10,000,000, the 12 percent rate is to be available only if the
taxpayer establishes or maintains an employee stock ownership plan.
that was constructed or was under construction before March 26, 1975.
To be eligible for the 12 percent rate in this case, a corporation will
his income tax return a certification by the seller that the purchase
In addition, to be eligible for the credit the taxpayer must attach to
be required to contribute to the plan for the taxable year common stock
or securities convertible into common stock (or cash for the acquisi-
price paid by the buyer is the lowest price at which the new residence will be
tion of such stock or securities) of the employer in an amount equal
was ever offered for sale. Both civil and criminal penalties
to one-half of the additional 2 percentage points increase above the
imposed for false certification.
permanent 10 percent rate (i.e., one-twelfth of the total allowable in-
vestment credit in this case). If these requirements are not satisfied,
INCREASE IN INVESTMENT CREDIT
the taxpayer will be eligible only for the 10 percent investment credit
House bill.-The House bill provides for an increase in the invest-
which the committee provision adopts as a permanent increase in the
investment tax credit rate. However, the 12 percent rate will be avail-
ment credit rate for all taxpayers (including public utilities) to 10 per-
cent from 7 percent (4 percent in the case of certain public utility
able without regard to the requirement for an employee stock owner-
property). The additional credit for public utilities is limited to $100
ship plan if the qualified investment property of the taxpayer for the
taxable vear is less than $10,000,000.
million for any one taxpayer. The House provision modifies the limita-
tion on the amount of tax liability that may be offset by the investment
The Senate provision puts no limit on the amount of the increase
tax credit for a year in the case of most public utility property (which
in the investment credit which will be allowed to a public utility.
under present law is entitled to only a 4 percent investment credit).
Additionally, the Senate provision adopts the temporary increase in
The percentage limit for public utility property is to be increased from
the 50 percent limitation on the amount of tax liability that may be
62
63
offset by the investment credit with the modification that such increase
In the case of a corporate taxpayer, a taxpayer may elect an 11-
shall be available for taxable years ending in 1975 rather than for
percent credit with respect to qualified investment for the period be-
taxable years beginning in 1975.
ginning January 22, 1975, and ending December 31, 1976, if an amount
The Senate provision also provides that the additional credit pro-
equal to one percent of the qualified investment is contributed to an
vided for a public utility by reason of the rate increase or the increase
employee stock ownership plan.
in the limitation based on tax liability is generally not to be available
The rules governing such employee stock ownership plans are sub-
if the additional credit is used to reduce the rate base, unless the credit
stantially the same as in the Senate amendment. However, under the
is then restored to the rate base at least as fast as ratably over the
conference substitute the entire contribution is to be transferred to
useful life of the property. The additional credit is generally not to be
the plan at one time, and not over 10 years. Also, participants are to
allowed if it is flowed through to income as a reduction in cost faster
be immediately vested in the full amount of such contributions, as
than ratably over the useful life of the property to which the increased
soon as the contributions are allocated to their accounts. Additionally,
credit applies. This rule with respect to the additional credit is to
distributions of such contributions cannot occur for 7 years (or may
apply with respect to property used predominately in the trade or
occur upon death or disability).
business of the furnishing or sale of electrical energy, water, or sewage
The conference substitute is the same as the Senate amendment which
disposal services, gas through a local distribution system, telephone
deleted the $100 million limitation on the increase in the investment
service, domestic telegraph service, or other domestic communication
credit attributable to the rate change that could be claimed by any one
service, if the rates for furnishing or sale are regulated by a govern-
public utility.
With respect to the increase in the 50 percent of tax limitation for
mental body.
If the governmental regulatory agency requires ratable flow through
public utility property, the conference substitute is the same as the
to income, it cannot require any adjustment to the rate base; if the
Senate amendment.
agency requires adjustments to the rate base, it cannot require flow
With respect to the treatment of the increased credit for utility rate-
making purposes, the conference substitute is the same as the Senate
through to income.
of the additional credit without the consequence of disallowance in
A special election is provided to permit the immediate flow through
amendment but for technical changes which would make new elections
by a public utility unnecessary if ratable flowthrough, or ratable
certain cases. This election is to be available only with respect to prop-
rate base restoration treatment already applied to a utility under pres-
erty where the benefits of accelerated depreciation are flowed through
ent law.
to customers. The election must be made by the taxpayer within 90
With respect to the limitation on qualified investment in used prop-
days after the date of enactment of the bill. In this case the taxpayer
erty, the conference substitute provides an increase to $100,000 from
must make the election at its own option and without regard to any
$50,000 for taxable years beginning after December 31, 1974, and be-
requirement imposed by a regulatory agency.
fore January 1, 1977. Thereafter, the $50,000 limitation under present
If a regulatory agency requires the flowing through of a company's
law is to apply.
additional investment credit at a rate faster than permitted, or insists
upon a greater rate base adjustment than is permitted, the additional
ALLOWANCE OF INVESTMENT CREDIT WHERE CONSTRUCTION OF
investment credit is to be disallowed, but only after a final determina-
PROPERTY WILL TAKE MORE THAN Two YEARS
tion (made after enactment of this provision) is put into effect. The
rules provided under present law with respect to determinations made
House bill.Section 302 of the House bill provides that in the case
by a regulatory body on the finality of its orders will apply to the flow
of long lead time property, that is, property that requires at least 2
through provision. Lastly, the Senate provision repeals the limitation
years to construct, the investment tax credit is to be available to the ex-
on the amount of used property which may be included as qualified
tent that progress payments are made during the construction period
investment for the purposes of the investment credit with respect to
(rather than being allowed in the later year when the property is ulti-
used property acquired by the taxpayer after January 21, 1975.
mately placed in service). During the first 5 years this provision is in
Conference substitute.-The conference substitute provides for a
effect, a transitional rule provides for a phase-in of the new system at
10-percent investment credit for all taxpayers (including public utili-
the rate of 20 percent a year. The temporary 10 percent rate for the
ties) for property acquired and placed in service after January 21,
investment credit is to be available for qualified progress expenditures
1975, and before January 1, 1977. In the case of property acquired
made in the period after January 21, 1975, and before January 1, 1976.
after December 31, 1976, the 7-percent investment credit (or 4 percent
In general, the provisions with respect to progress payments apply to
for public utility property) provided under present law is to apply
payments made after January 21, 1975, in taxable years ending after
(even if ordered bv the taxpayer before 1977). In the case of con- of
December 31, 1974.
structed property, the 10-percent credit is to apply to the portion
Senate amendment.-Tho Senate amendment adopts the House pro-
the basis attributable to construction occurring after January 21,
vision for progress payments without change.
Conference substitute.-The conference substitute is the same as the
1975, and before January 1, 1977.
House bill and Senate amendment.
64
65
INCREASE IN CORPORATE SURTAX EXEMPTION AND CHANGE IN
CORPORATE Tax RATES
percent of this amount (of the 25 percent) into a supplemental unem-
ployment benefit plan if transferred within one year from the time
of election.
House bill.Section 303 of the House bill provides for an increase
in the corporate surtax exemption from $25,000 to $50,000 for the
Conference substitute.-The conference substitute does not contain
this provision.
period which is calendar year 1975.
Senate amendment.-The Senate amendment adopts the House pro-
FEDERAL WELFARE RECIPIENTS EMPLOYMENT INCENTIVE CREDIT
vision with respect to the increase in the corporate surtax exemption
without change. Additionally, the Senate provision reduces the nor-
House bill.-No provision.
mal tax by 4 percentage points (from 22 percent to 18 percent) while
Senate amendment.-The State amendment makes the 20-percent
at the same time increasing the surtax by 4 percentage points (from 26
credit of the present law WIN credit available also with respect to
percent to 30 percent). The increase in the corporate surtax exemption
wages paid to certain AFDC recipients. The AFDC recipient must
and the reduction in the corporate rates are effective for taxable years
have been continuously receiving such financial assistance during the
ending after December 31, 1974. They are to apply, however, only for
90-day period immediately preceding the date on which the individual
1 year and are to cease to apply for taxable years ending after Decem-
is hired by the employer, and the AFDC recipient must have been em-
ber 31, 1975.
ployed by the taxpayer for a period in excess of 30 consecutive days
Conference substitute.-The Conference substitute is the same as the
on a full-time basis before the credit is allowable. The credit is not
House bill and the Senate amendment with regard to the increase in
allowable for any person who has displaced an individual from em-
the corporate surtax exemption from $25,000 to $50,000 for 1975 only.
ployment nor for a migrant worker. For nonbusiness employers, there
In addition, the conference substitute provides a reduction for 1975
is a limit of $1,000 per individual SO employed each year.
in the corporate normal tax rate from 22 percent to 20 percent on the
The provision is effective for hirings after the date of enactment
first $25,000 of net income (with the 22 percent rate applicable to the
and for services rendered to the employer before July 1, 1976.
second $25,000 of net income).
Conference substitute.-The conference substitute follows the Sen-
ate amendment.
INCREASE IN MINIMUM ACCUMULATED EARNINGS CREDIT FROM
$100,000 TO $150,000
TIME FOR MAKING CONTRIBUTIONS TO "H.R. 10" PLANS
House bill.-No comparable provision in the House bill.
House bill.-No provision.
Senate amendment.-The Senate amendment provides for an in-
Senate amendment.-The Senate amendment added a provision
crease of the accumulated earnings credit from $100,000 to $150,000.
under which, as to 1974 and subsequent years, a contribution to a
Thus, a corporation may accumulate as much as $150,000 of earnings
pension, profit-sharing, etc., plan would be treated for deduction pur-
before its retained earnings may be subject to the accumulated earn-
poses as being made for a given year even though it was not in fact
ings tax. The amendments relating to the increase in the minimum
made until after the end of that year, but only if the contribution was
accumulated earnings credit apply to taxable years beginning after
in fact made by the time for filing the tax return for that year (includ-
December 31, 1974.
ing extensions of time for filing). This amendment would apply only to
Conference substitute.-The conference substitute is the same as the
contributions for plans of self-employed people (so-called "H.R. 10"
Senate amendment.
plans) and only if the employer elects to have this rule apply.
Under present law (the 1974 pension act), this rule is to apply as to
ELECTION To SUBSTITUTE NET OPERATING Loss CARRYBACK YEARS FOR
1976 and subsequent years for existing plans, both H.R. 10 plans and
CARRYFORWARD YEARS
corporate plans.
House bill.-The House bill does not have this provision.
Conference substitute.-Under the conference substitute, the rule of
Senate amendment.-The Senate amendment allows taxpayers gen-
not for 1974).
the Senate amendment is to apply for 1975 and subsequent years (but
erally an election to convert carryover periods for which they are pres-
ently eligible into additional carryback years for net operating losses
REPEAL OF EXCISE TAX ON MOTOR VEHICLES
incurred for taxable years 1975 and 1976. (Present law provides gen-
erally for a 3-year carryback and a 5-year carryforward for net
House bill.-No provision.
operating losses incurred by business taxpayer.)
Senate amendment.-The Senate amendment repeals the present 10-
In addition, the Senate amendment provides that, where a corpo-
ration would receive a tax benefit under this change of more than $10
and highway tractors used in combination with trailers and semi-
1977) on the sale of trucks and buses, truck trailers and semi-trailers,
percent manufacturers excise tax (5 percent on or after October 1,
million, 25 percent of such tax benefit from the first year of the ex-
tended loss carryback is to be placed in an employee stock ownership
trailers. The Senate amendment also repeals the 8-percent manufac-
plan over a 10-year period. A corporation could also put up to 50
turers excise tax (5 percent on or after October 1, 1977) on the sale of
67
66
truck and bus-related parts and accessories. The Senate amendment
PERCENTAGE DEPLETION FOR OIL AND GAS
also provides for floor stock refunds and refunds for certain consumer
House bill.-The House bill repeals percentage depletion generally
purchases. Conference substitute.-The conference substitute does not include
for oil or gas produced on or after January 1, 1975. Depletion is con-
tinued for natural gas sold under a fixed price contract in effect
the Senate amendment.
While the Conference Committee is quite aware of the depressed
February 1, 1975, which does not permit price adjustment after that
date to reflect repeal of depletion. Depletion is also continued until
condition existing in the truck manufacturing and marketing indus-
July 1, 1976, for gas sold in interstate commerce if no price adjust-
try, it felt that the repeal of these excise taxes should more properly
ment is permitted after February 1, 1975, to reflect repeal of depletion.
be considered in conjunction with the Public Works Committees, at the a
For geothermal steam, present law is unaffected, SO that if steam
later date when Congress considers the Federal Highway Act and
is ultimately held by the courts to be a gas entitled to a 22-percent
Highway Trust Fund of which these taxes are a part.
rate of depletion, this treatment will be continued.
Senate amendment.-Under the Senate amendment, the deduction
TAX CREDIT FOR QUALIFIED INSULATION AND SOLAR ENERGY
for percentage depletion is generally eliminated with respect to oil
EQUIPMENT EXPENDITURE
and gas produced on or after January 1, 1975, with certain exceptions.
These include the exceptions provided under the House bill. In addi-
House bill.-No provision.
Senate amendment.-The Senate amendment provides a tax credit
tion, the Senate amendment retains percentage depletion at 22 per-
for qualified insulation expenditures for new and used residences and of
cent on a permanent basis for the small independent producer to the
commercial buildings of 40 percent of the first $500 and 20 percent
extent that his average daily production of oil does not exceed 2,000
any excess expenditures. In addition, a tax credit is allowed for quali-
barrels a day, or his average daily production of natural gas does not
fied solar energy equipment expenditures for new and used residences
exceed 12,000,000 cubic feet. Where the independent producer has
and commercial buildings of 40 percent on the first $1,000 of expendi-
both oil and natural gas production, the exemption must be allocated
tures and 20 percent of any excess up to $2,000. For new residences,
between the two types of production.
the credit is available only to the extent the qualified original insula-
In determining how much of a taxpayer's total production for the
tion materials exceed the minimum HUD standards; this limitation
year will be entitled to the 22-percent rate, his total production for
does not apply to storm windows, storm doors and solar heating and
the year is averaged over the entire taxable year to arrive at an
average daily figure, regardless of when the production might actually
cooling equipment.
have occurred.
Under the Senate amendment, unused credits may be carried back
Where the producer has a partial interest in mineral property, his
to any year for which this provision is in effect and carried over after 4
production from that property, for purposes of the exemption, will
years. The provision is effective during taxable years beginning
be proportional to his interest. For example, an individual owning
December 31, 1974, and ending before January 1, 1980.
a 10-percent interest in property with 2,000 barrels of average daily
Conference substitute.-The conference substitute does not contain
production will be treated as having used 200 barrels of his exemption
this provision. The conferees decided to defer consideration of this be-
in connection with that property.
cause incentives for insulation and solar energy equipment expendi-
If the taxpayer's average daily production exceeds 2,000 barrels
tures are being considered in the Ways and Means Committee energy
(or 12,000,000 cubic feet of gas) the Senate amendment requires that
bill.
the small production exemption be allocated among all of the
properties in which the taxpayer has an interest. The allocation is
TAX EXEMPTION FOR HOMEOWNER'S ASSOCIATIONS, ETC.
made by totaling the production from all properties and allocating
House bill.-The House bill does not contain this provision.
to each property the same proportion of the small production exemp-
Senate amendment.-The Senate amendment provides that a home-
tion as that property's total production bears to the taxpayer's total
owner's association, etc., may be exempt from taxation if it is orga-
production from all properties.
nized and operated exclusively for the operation, management, pres-
Under the amendment, the 2,000 barrel (12,000,000 cubic feet) ex-
ervation, maintenance and repair of (1) the residential units owned the
emption is to be allocated (a) among the corporations which are mem-
by its members or (2) the common areas or facilities owned by
bers of the same controlled group of corporations (as defined in sec.
association or its members. The provision is effective for taxable years
1563 (a), but with a 50 percent common control test) among corpora-
tion trusts and estates if 50 percent of the beneficial interest is owned
beginning after December 31, 1973.
Conference substitute.-The conference substitute does not contain
by the same or related persons; and (c) among the taxpayer and his
this provision. The conferees deferred consideration of this provision
spouse and minor children.
believing it appropriate to consider it in tax reform legislation.
The small producer exemption is not to be available, under the
Senate amendment, with respect to any oil or gas property trans-
68
69
ferred after December 31, 1974, if the principal value of the property
LIMITATION ON FOREIGN TAX CREDIT FOR TAXES PAID IN CONNECTION
has been demonstrated before the transfer, except in the case of a
WITH FOREIGN OIL AND GAS INCOME
transfer by reason of death, or a transfer pursuant to a section 351
transaction.
House bill.-No provision.
Also, the small producer exemption is only to be available in the
Senate amendment.-The Senate amendment repeals the foreign tax
case of the independent oil or gas producer. The exemption is not
credit on all foreign oil-related income and allows any taxes on that
available to any producer owning or controlling a retail outlet for the
income as a deduction. The amendment also provides that foreign oil-
sale of oil or natural gas or petroleum products, or for a producer
related income is to be taxed at a 24-percent rate.
who refines more than 50,000 barrels of oil on any one day of the tax-
Conference substitute.-The conference substitute modifies the Sen-
able year.
ate amendment and applies a strict limitation on the use of foreign
The deduction resulting from the small producer exemption may
tax credits from foreign oil extraction income and foreign oil-related
not exceed 50 percent of the taxpayer's net income from all sources
income. The substitute limits the amount of payments in the form of
foreign taxes on foreign oil extraction income which will be treated
(computed without regard to depletion allowed under the small pro-
ducer exemption, net operating loss carrybacks and capital loss carry-
as creditable taxes to 52.8 percent of taxable income from foreign oil
backs). Percentage depletion which may not be used as a result of this
extraction in taxable years ending in 1975, 50.4 percent of such taxable
limitation may be carried forward on an unlimited basis and used in
income in 1976, and 50 percent of such taxable income in subsequent
taxable years. Any taxes paid in excess of that amount are to be dis-
a succeeding year (subject to the 50 percent limitation applicable to
regarded and not allowed as a deduction. Any excess credits within
that year).
the respective percentage limitations are to be allowed to offset U.S.
In addition, the deduction resulting from the small producer exemp-
tax only against foreign oil-related income.
tion is to be available, under the Senate amendment, only to the extent
Also, any payments to a foreign country in connection with the
of the taxpayer's qualified plowback investment for the year (as well
purchase and sale of oil or gas extracted in that country are not to be
as any qualified plowback investment which was unused in the preced-
considered as a tax if the taxpayer has no economic interest in the
ing year). The plowback requirement does not apply, under the amend-
oil or gas to which section 611 (a) of the code applies and either such
ment, to percentage depletion attributable to a royalty interest.
purchase or such sale is made at a price other than the fair market
Conference substitute.-The conference substitute follows the Senate
price of such oil or gas at the time of such purchase or sale. The market
amendment in providing a small producer exemption from the repeal
price is to be determined without regard to any tax liabilities to the
of percentage depletion for oil and gas. Initially the exemption ("de-
country of extraction to which the oil or gas is subject upon purchase.
pletable oil quantity") is 2,000 barrels of average daily production
This provision, of course, is not to apply to fees or other types of in-
(or 12,000,000 cubic feet of natural gas). However, the exemption is
come from the provision of services which relate to the extraction of
to be phased down gradually, but not eliminated, SO as to minimize
oil or gas for another person. Any payments not allowed as taxes
the impact of the reduction on small independent producers.
under this provision are to be allowed as deductions.
Under the substitute, the exemption is to be reduced 200 barrels a
In addition, the conferees agreed that beginning in 1976 the per
year for 5 years from 1976 through 1980, when the permanent exemp-
country limitation on creditable foreign taxes is not to apply to foreign
tion of 1,000 barrels per day will be reached. The depletion rate for
oil-related income. Instead, the amount of creditable taxes with respect
oil and gas covered under the small producer exemption will also be
to such income is to be calculated under the overall limitation. The
phased down gradually from 22 percent. In 1981, the rate will be 20
in judging requests to revoke consolidated return elections.
conferees believe that this change should be considered significant
percent; in 1982, 18 percent; in 1983, 16 percent; and in 1984 the rate
will be reduced to a permanent level of 15 percent. However, under the
The conferees also agreed that beginning in 1975 any losses with
substitute, a taxpayer will be permitted to take percentage depletion,
respect to foreign oil-related income should be recaptured against
at a 22 percent rate, on all production resulting from secondary or
future oil-related income by limiting the foreign tax credits available
tertiary recovery methods until 1984 (but not in excess of 1,000 bar-
with respect to such future income.
rels per day).
The deduction resulting from the small producer exemption may
date of enactment.
The conference substitute is to apply to taxable years ending after
not exceed 65 percent of the taxpayer's net income from all sources
(computed without regard to depletion allowed under the small pro-
TAXATION OF EARNINGS AND PROFITS OF CONTROLLED FOREIGN
ducer exemption, net operating loss carrybacks and capital loss
CORPORATIONS AND THEIR SHAREHOLDERS
carrybacks).
Also, under the substitute, there is to be no plowback requirement
House bill.-No provision.
in connection with percentage depletion under the small producer
Senate amendment.-The Senate amendment provides that U.S.
exemption.
persons holding a one-percent or greater interest in foreign corpora-
70
71
tions are to be taxed currently on their proportionate share of the
subject to export control under section 4(b) of the Export Administra-
for which an allowance for cost depletion is provided) and for products
income from those corporations in cases where more than 50 percent
of the stock of the corporations is controlled by U.S. persons.
Conference substitute.-The conference substitute provides for a
tion 1975. Act of 1969. The provision applies to sales made after March 18,
number of specific measures which substantially expand the extent
to which foreign subsidiaries of U.S. corporations are subject to cur-
amendment. Conference substitute.-The conference substitute follows the Senate
rent U.S. taxation on tax haven types of income under the so-called
subpart F rules of the Code.
INVESTMENT TAX CREDIT ON FOREIGN DRILLING RIGS
The conferees expressed their belief that the foreign tax provisions
of present law relating to the deferral of foreign income should be
House bill.-No provision.
further reviewed at the earliest possible date. The conferees indicated
Senate amendment.-The Senate amendment denies the investment
that this review should include an examination of the adequacy of
half of the Western Hemisphere. The provision applies to
tax credit for foreign situs drilling rigs used outside of the northern
existing provisions dealing with the disclosure and reporting of in-
come (and related deductions) of foreign subsidiaries of U.S.
placed in service after March 18, 1975, unless such property is property covered
corporations.
by a binding contract which was in effect on April 1, 1974.
The conference substitute repeals the minimum distribution excep-
ate amendment.
Conference substitute.-The conference substitute follows the Sen-
tion to the subpart F rules which, under present law, permits a de-
ferral of U.S. taxation on tax haven types of income in cases where
the foreign corporation (or various combinations of foreign-related
EXTENSION OF UNEMPLOYMENT COMPENSATION Act OF 1974
corporations) distributes certain minimum dividends to their U.S.
House bill.-No provision.
shareholders. The effect of repealing this exception is to tax currently
all income of foreign subsidiaries of U.S. corporations which is deemed
to be tax haven income under the existing so-called subpart F rules
the Emergency Unemployment Compensation Act of 1974 for an addi-
Senate amendment.-The Senate amendment extends the benefits of
of the Code. An exception to this provision was made for agricultural
tional 13 weeks to those who have exhausted 52 weeks of benefits. This
commodities not produced in commercially marketable quantities in
is available only for the period ending June 30, 1975. The provision
the United States. Under the exception, these commodities grown (or
states that the Secretary of Labor shall, at the earliest practicable date
raised) abroad are to be excluded from foreign base company sales
after the enactment, propose to each State with which he has in effect
income.
an agreement under section 102 of the 1974 Act a modification of such
The conference agreement also repeals the exception from the sub-
provided in the Senate amendment.
agreement designed to cause payments of emergency compensation as
part F rules which presently permits a deferral of taxation in cases
in which the tax haven income is reinvested in less-developed countries.
amendment. Conference substitute.-The conference substitute follows the Senate
In addition, the conference agreement repeals the rule of present law
which permits a deferral of U.S. tax for shipping income received by
SPECIAL PAYMENTS TO PEOPLE RECEIVING BENEFITS UNDER SOCIAL
a foreign subsidiary of a U.S. corporation. However, deferral of tax
SECURITY, RAILROAD RETIREMENT, OR SUPPLEMENTAL SECURITY IN-
is to be continued to the extent that the profits of these corporations
COME PROGRAMS
are reinvested in shipping operations.
Finally, the conferees agreed to modify the present rule in the sub-
House bill.-No provision.
part F provisions which permits corporations having less than 30
percent of their gross income in the form of tax haven income to avoid
the bill, under which a one-time special payment of $100 is to be made
Senate amendment.-The Senate amendment added a provision to
the current taxation provisions of subpart F. The conference sub-
by the Secretary of the Treasury to each individual who, for March,
stitute provides that such tax haven income will be taxed currently
1975, was entitled to monthly insurance benefits under title II of the
under the subpart F rules in any case where it equals or exceeds 10 per-
Social Security Act, to monthly pension or annuity benefits under the
cent of gross income.
Railroad Retirement Acts, or to supplemental security income bene-
These provisions are to apply to taxable years beginning after
December 31, 1975.
even though he was entitled, for March, 1975, to benefits under 2 or
fits. An individual could receive only one such $100 special payment,
more of the above-mentioned programs.
ELIMINATION OF DOMESTIC INTERNATIONAL SALES CORPORATION TREAT-
The Secretary of Health, Education, and Welfare and the Railroad
MENT FOR CERTAIN NATURAL RESOURCES AND ENERGY PRODUCTS
Retirement Board are to provide the Treasury with such data and in-
House bill.-No provision.
formation as may be necessary to determine who is entitled to these
special payments.
Senate amendment.-The Senate amendment denies the benefits
provided for domestic international sales corporations (DISC's) for
Receipt of the special payment by an individual is not to affect his
the export of natural resources and energy products (i.e., products
eligibility for, or the amount of, the aid or assistance which he or his
72
family would otherwise be entitled to receive under a welfare-type
program. Federal financial participation in any State (or local) wel-
fare-type program is to cease if that program violates the "disregard"
requirement described in the preceding sentence.
Conference substitute.-The conference substitute generally follows
the Senate amendment, except that the amount of the special payment
is to be $50 per qualified recipient. In addition, the conference sub-
stitute restricts it to residents of the United States who have applied
for benefits under one of the three programs prior to April 1, 1975,
and who actually receive a benefit for the month of March 1975 which
is paid by August 31, 1975. The conference agreement includes the re-
quirement that these payments be disregarded in determining eligi-
bility under other programs and clarifies their non-taxable nature for
income tax purposes.
The conferees emphasize that these payments are not social security
benefits in any sense but are intended to provide to the aged, blind,
and disabled a payment comparable in nature to the tax rebates which
the bill provides to those who are working. These payments, therefore,
should be clearly identifiable as Treasury Department payments and
not be included in or confused with social security benefit checks.
DYEING OF CERTAIN HEATING OIL
House bill.-No provision.
Senate amendment.-The Senate amendment requires that certain
heating fuel oil be colored with an oil soluble dye, SO that such non-
taxed fuel oil may be distinguishable from taxable diesel fuel oil for
highway use. The Administrator of the Federal Energy Administra-
tion is to determine the appropriate soluble dye and the point of the
petroleum distribution system to add the dye; and he may enter the
premises (during business hours) to inspect for violations. Violators
are to be subject to a fine of not more than $25,000, or imprisonment of
not more than 5 years, or both.
The provision is to be effective on the date of enactment.
Conference substitute.-The conference substitute does not contain
this provision. The conferees deferred consideration of this because
the subject would be reviewed during the Ways and Means Committee
consideration of the energy bill.
AL ULLMAN,
JAMES A. BURKE,
DAN ROSTENKOWSKI,
PHIL LANDRUM,
CHARLES A. VANIK,
Managers on the Part of the House.
RUSSELL B. LONG,
HERMAN TALMADGE,
VANCE HARTKE,
ABRAHAM RIBICOFF,
W.D. HATHAWAY,
FLOYD K. HASKELL,
ROBERT DOLE,
Managers on the Part of the Senate.
Public Law 94-12
94th Congress, H. R. 2166
March 29, 1975
An Act
To amend the Internal Revenue Code of .1954 to provide for a refund of 1974
individual income taxes, to increase the low income allowance and the per-
centage standard deduction, to provide a credit for personal exemptions and
a credit for certain earned income, to increase the investment credit and the
surtax exemption, to reduce percentage depletion for oil and gas, and for other
purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
Tax Reduction
Act of 1975.
SEC. 1. SHORT TITLE; TABLE OF CONTENTS.
(a) SHORT TITLE.-This Act may be cited as the "Tax Reduction 26 USC 1 note.
Act of 1975".
(b) TABLE OF CONTENTS.-
Sec. 1. Short title table of contents.
Sec. 2. Amendment of 1954 Code.
TITLE I-REFUND OF 1974 INDIVIDUAL INCOME TAXES
Sec. 101. Refund of 1974 individual income taxes.
Sec. 102. Refunds disregarded in the administration of Federal programs and
federally assisted programs.
TITLE II-REDUCTIONS IN INDIVIDUAL INCOME TAXES
Sec. 201. Increase in low income allowance.
Sec. 202. Increase in percentage standard deduction.
Sec. 203. Credit for personal exemptions.
Sec. 204. Credit for certain earned income.
Sec. 205. Withholding tax.
Sec. 206. Increase in income limitation applicable to child and dependent care
deduction.
Sec. 207. Extension of period for replacing old residence for purposes of non-
recognition of gain under section 1034.
Sec. 208. Credit for purchase of new principal residence.
Sec. 209. Effective dates.
TITLE III-CERTAIN CHANGES IN BUSINESS TAXES
Sec. 301. Increase in investment credit.
Sec. 302. Allowance of investment credit where construction of property will
take more than 2 years.
Sec. 303. Change in corporate tax rates and increase in surtax exemption.
Sec. 304. Increase in minimum accumulated earnings credit from $100,000 to
$150,000.
Sec. 305. Effective dates.
TITLE IV-CHANGES AFFECTING INDIVIDUALS AND BUSINESSES
Sec. 401. Federal welfare recipient employment incentive tax credit.
Sec. 402. Time when contributions deemed made to certain pension plans.
TITLE V-PERCENTAGE DEPLETION
Sec. 501. Limitations on percentage depletion for oil and gas.
TITLE VI-TAXATION OF FOREIGN OIL AND GAS INCOME AND OTHER
FOREIGN INCOME
Sec. 601. Limitations on foreign tax credit for taxes paid in connection with
foreign oil and gas income.
Sec. 602. Taxation of earnings and profits of controlled foreign corporations and
FORD
their shareholders.
Sec. 603. Denial of DISC benefits with respect to energy resources and other
products.
Sec. 604. Treatment for purposes of the investment credit of certain property
used in international or territorial waters.
GERALD
LIBRARY
89 STAT. 26
Pub. Law 94-12
- 2 -
March 29, 1975
March 29, 1975
- 3 -
Pub. Law 94-12
TITLE VII-MISCELLANEOUS PROVISIONS
"(E) section 41 (relating to contributions to candidates for 26 USC 41.
Sec. 701. Certain unemployment compensation.
public office), plus
Sec. 702. Special payment to recipients of benefits under certain retirement and
(2) the tax on amounts described in section 3102( or 3202 26 USC 3102,
survivor benefit programs.
which are required to be shown on the taxpayer's return of the 3202.
SEC. 2. AMENDMENT OF 1954 CODE.
chapter 1 tax for the taxable year.
Except as otherwise expressly provided, whenever in this Act an
'(e) DATE PAYMENT DEEMED MADE.-The payment provided by
amendment or repeal is expressed in terms of an amendment to, or
this section shall be deemed made on whichever of the following dates
repeal of, a section or other provision, the reference shall be con-
is the later:
sidered to be made to a section or other provision of the Internal
"(1) the date prescribed by law (determined without exten-
26 USC 1 et
Revenue Code of 1954.
sions) for filing the return of tax under chapter. 1 for the taxable
seq.
year, or
TITLE I-REFUND OF 1974 INDIVIDUAL
"(2) the date on which the taxpayer files his return of tax under
chapter 1 for the taxable year.
INCOME TAXES
'(f) JOINT RETURN.-For purposes of this section, in the case of a
joint return under section 6013 both spouses shall be treated as one
individual.
SEC. 101. REFUND OF 1974 INDIVIDUAL INCOME TAXES.
(a) IN GENERAL.-Subchapter B of chapter 65 (relating to rules of
"(g) MARITAL STATUS.-The determination of marital status for
special application in the case of abatements, credits, and refunds) is
purposes of this section shall be made under section 143.
(h) CERTAIN PERSONS NoT ELIGIBLE.-This section shall not apply
amended by adding at the end thereof the following new section:
to any estate or trust, nor shall it apply to any nonresident alien
26 USC 6428.
"SEC. 6428. REFUND OF 1974 INDIVIDUAL INCOME TAXES.
individual."
"(a) GENERAL RULE.-Except as otherwise provided in this section,
(b) No INTEREST ON INDIVIDUAL INCOME TAX REFUNDS FOR 1974 26 USC 6611
each individual shall be treated as having made a payment against the
REFUNDED WITHIN 60 DAYS AFTER RETURN Is FILED.-In applying note.
26 USC 1.
tax imposed by chapter 1 for his first taxable year beginning in 1974
section 6611 (e) of the Internal Revenue Code of 1954 (relating to Ante, p.
26.
in an amount equal to 10 percent of the amount of his liability for tax
income tax refund within 45 days after return is filed) in the case of
for such taxable year.
any overpayment of tax imposed by subtitle A of such Code by an indi-
"(b) MINIMUM PAYMENT.-The amount treated as paid by reason
vidual (other than an estate or trust and other than a nonresident alien
of this section shall not be less than the lesser of-
individual) for a taxable year beginning in 1974, "60 days" shall be
(1) the amount of the taxpayer's liability for tax for his first
substituted for "45 days" each place it appears in such section 6611 (e).
taxable year beginning in 1974, or
(c) CLERICAL AMENDMENT.-The table of sections for such sub-
(2) $100 ($50 in the case of a married individual filing a sepa-
chapter B is amended by adding at the end thereof the following new
rate return).
item:
" (c) MAXIMUM PAYMENT.-
"Sec. 6428. Refund of 1974 individual income taxes."
(1) IN GENERAL-The amount treated as paid by reason of
this section shall not exceed $200 ($100 in the case of a married
SEC. 102. REFUNDS DISREGARDED IN THE ADMINISTRATION OF FED- 26 USC 6428
ERAL PROGRAMS AND FEDERALLY ASSISTED PROGRAMS. note.
individual filing a separate return).
(2) LIMITATION BASED ON ADJUSTED GROSS INCOME.-The excess
Any payment considered to have been made by any individual by
(if any) of-
reason of section 6428 of the Internal Revenue Code of 1954 shall not
(A) the amount which would (but for this paragraph) be
be taken into account as income or receipts for purposes of determining
treated as paid by reason of this section, over
the eligibility of such individual or any other individual for benefits
"(B) the applicable minimum payment provided by sub-
or assistance, or the amount or extent of benefits or assistance, under
section (b),
any Federal program or under any State or local program financed
shall be reduced (but not below zero) by an amount which bears
in whole or in part with Federal funds.
the same ratio to such excess as the adjusted gross income for the
taxable year in excess of $20,000 bears to $10,000. In the case of a
TITLE II-REDUCTIONS IN INDIVIDUAL
married individual filing a separate return, the preceding sen-
INCOME TAXES
tence shall be applied by substituting '$10,000' for '$20,000' and
by substituting '$5,000' for '$10,000'.
SEC. 201. INCREASE IN LOW INCOME ALLOWANCE.
(d) LIABILITY FOR Tax.-For purposes of this section, the liability
for tax for the taxable year shall be the sum of-
(a) IN GENERAL-Subsection (c) of section 141 (relating to low 26 USC 141.
"(1) the tax imposed by chapter 1 for such year, reduced by the
income allowance) is amended to read as follows:
sum of the credits allowable under-
"(c) Low INCOME ALLOWANCE.-The low income allowance is-
26 USC 33.
"(A) section 33 (relating to foreign tax credit),
"(1) $1,900 in the case of-
26 USC 37.
"(B) section 37 (relating to retirement income),
((A) a joint return under section 6013, or
26 USC 6013.
26 USC 38.
'(C) section 38 (relating to investment in certain depreci-
"(B) a surviving spouse (as defined in section 2(a)),
26 USC 2.
able property),
"(2) $1,600 in the case of an individual who is not married and
26 USC 40.
"(D) section 40 (relating to expenses of work incentive
who is not a surviving spouse (as SO defined), or
programs), and
"(3) $950 in the case of a married individual filing a separate
return."
89 STAT. 28
89 STAT. 27
Pub. Law 94-12
- 4 -
March 29, 1975
March 29, 1975
- 5 -
Pub. Law 94-12
(b) CHANGE IN FILING REQUIREMENTS To REFLECT INCREASE IN
"SEC. 42. CREDIT FOR PERSONAL EXEMPTIONS.
26 USC 42.
Low INCOME ALLOWANCE.-So much of paragraph (1) of section
"(a) GENERAL RULE.-In the case of an individual, there shall be
26 USC 6012.
6012(a) (relating to persons required to make returns of income) as
allowed as a credit against the tax imposed by this chapter for the tax-
precedes subparagraph (C) thereof is amended to read as follows:
able year $30, multiplied by each exemption for which the taxpayer
"(1) (A) Every individual having for the taxable year a gross
is entitled for the taxable year under subsection (b) or (e) of sec-
income of $750 or more, except that a return shall not be required
tion 151.
26 USC 151.
of an individual (other than an individual referred to in section
(b) APPLICATION WITH OTHER CREDITS.-The credit allowed by
26 USC 142.
142(b))-
subsection (a) shall not exceed the amount of the tax imposed by this
(i) who is not married (determined by applying section
chapter for the taxable year. In determining the credits allowed
26 USC 143,
143), is not a surviving spouse (as defined in section 2(a)),
under-
2.
and for the taxable year has a gross income of less than
"(1) section 33 (relating to foreign tax credit),
26 USC 33.
$2,350,
"(2) section 37 (relating to retirement income),
26 USC 37.
(ii) who is a surviving spouse (as SO defined) and for the
(3) section 38 (relating to investment in certain depreciable
26 USC 38.
taxable year has a gross income of less than $2,650, or
property).
(iii) who is entitled to make a joint return under section
"(4) section 40 (relating to expenses of work incentive pro- 26 USC 40.
26 USC 6013.
6013 and whose gross income, when combined with the gross
grams), and
income of his spouse, is, for the taxable year, less than
"(5) section 41 (relating to contributions to candidates for 26 USC 41.
$3,400 but only if such individual and his spouse, at the close
public office),
of the taxable year, had the same household as their home.
the tax imposed by this chapter shall (before any other reductions) be
Clause (iii) shall not apply if for the taxable year such spouse
reduced by the credit allowed by this section."
makes a separate return or any other taxpayer is entitled to an
(b) TECHNICAL AND CLERICAL AMENDMENTS.-
26 USC 151.
exemption for such spouse under section 151(e).
(1) The table of sections for such subpart is amended by strik-
"(B) The amount specified in clause (i) or (ii) of subparagraph
ing out the last item and inserting in lieu thereof the following:
(A) shall be increased by $750 in the case of an individual entitled
"Sec. 42. Credit for personal exemptions.
to an additional personal exemption under section 151 (c) (1), and
"Sec. 43. Overpayments of tax."
the amount specified in clause (iii) of subparagraph (A) shall
(2) Section 56(a) (2) (relating to imposition of minimum tax) 26 USC 56.
be increased by $750 for each additional personal exemption to
is amended by striking out "and" at the end of clause (iv), by
which the individual or his spouse is entitled under section
striking out "; and" at the end of clause (v) and inserting in
151
lieu thereof ", and", and by inserting after clause (v) the follow-
26 USC 3.
(c) CHANGE IN OPTIONAL TAX TABLES.Section 3 (relating to
ing new clause:
optional tax tables) is amended by striking out "$10,000" and by
"(vi) section 42 (relating to credit for personal exemp- Supra.
inserting in lieu thereof "$15,000".
tions) ; and".
SEC. 202. INCREASE IN PERCENTAGE STANDARD DEDUCTION.
(3) Section 56(c) (1) (relating to tax carryovers) is amended
26 USC 141.
(a) INCREASE.-Subsection (b) of section 141 (relating to percentage
by striking out "and" at the end of subparagraph (D), by striking
standard deduction) is amended to read as follows:
out "exceed" at the end of subparagraph (E) and inserting in lieu
(b) PERCENTAGE STANDARD DEDUCTION.-The percentage standard
thereof "and", and by inserting after subparagraph (E) the fol-
deduction is an amount equal to 16 percent of adjusted gross income
lowing new subparagraph:
but not to exceed—
(F) section 42 (relating to credit for personal exemp-
"(1) $2,600 in the case of-
tions), exceed".
'(A) a joint return under section 6013, or
(4) Section 6096(b) (relating to designation of income tax pay-
26 USC 6096.
(B) a surviving spouse (as defined in section 2(a)),
ments to Presidential Election Campaign Fund) is amended by
(2) $2,300 in the case of an individual who is not married and
striking out "and 41" and inserting in lieu thereof "41, and 42".
who is not a surviving spouse (as SO defined), or
SEC. 204. CREDIT FOR CERTAIN EARNED INCOME.
(3) $1,300 in the case of a married individual filing a separate
(a) ALLOWANCE OF CREDIT.-Subpart A of part IV of subchapter
return."
A of chapter 1 (relating to credits against tax) is amended by redesig-
(b) CONFORMING AMENDMENT-Subparagraph (B) of section 3402
nating section 43 as section 44, and by inserting after section 42 the
26
USC
3402.
(m) (1) (relating to withholding allowances based on itemized deduc-
following new section:
tions) is amended to read as follows:
"SEC. 43. EARNED INCOME.
26 USC 43.
(B) an amount equal to the lesser of (i) 16 percent of his
estimated wages, or (ii) $2,600 ($2,300 in the case of an indi-
(a) ALLOWANCE OF CREDIT.-In the case of an eligible individual,
vidual who is not married (within the meaning of section
there shall be allowed as a credit against the tax imposed by this chap-
26 USC 143.
143) and who is not a surviving spouse (as defined in section
ter for the taxable year an amount equal to 10 percent of SO much of
2(a))).'
the earned income for the taxable year as does not exceed $4,000.
(b) LIMITATION.-The amount of the credit allowable to a tax-
SEC. 203. TAX CREDIT FOR PERSONAL EXEMPTIONS.
payer under subsection (a) for any taxable year shall be reduced (but
(a) IN GENERAL-Subpart A of part VI of subchapter A of chapter
not below zero) by an amount equal to 10 percent of SO much of the
1 (relating to credits allowable against tax) is amended by redesignat-
adjusted gross income (or, if greater, the earned income) of the tax-
26 USC 42.
ing section 42 as section 43 and by inserting after section 41 the follow-
payer for the taxable year as exceeds $4,000.
ing new section:
89 STAT. 30
89 STAT. 29
Pub. Law 94-12
- 6 -
March 29, 1975
March 29, 1975
- 7 -
Pub. Law 94-12
"(c) DEFINITIONS.-For purposes of this section-
(c) CLERICAL AMENDMENT.-The table of sections for such subpart
"(1) ELIGIBLE INDIVIDUAL-The term 'eligible individual'
is amended by striking out the last item and inserting in lieu thereof
means an individual who, for the taxable year-
the following:
"(A) maintains a household (within the meaning of section
"Sec. 43. Credit for certain earned income.
26 USC 214.
214 (b) (3)) in the United States which is the principal place
"Sec. 44. Overpayments of tax."
of abode of that individual and of a child of that individual
SEC. 205. WITHHOLDING TAX.
with respect to whom he is entitled to claim a deduction under
(a) REQUIREMENT OF WITHHOLDING.-Subsection (a) of section
26 USC 151.
section 151 (e) (1) (B) (relating to additional exemption for
3402 (relating to income tax collected at source) is amended to read 26 USC 3402.
dependents), and
as follows:
(B) is not entitled to exclude any amount from gross
(a) REQUIREMENT OF WITHHOLDING.-Except as otherwise pro-
26 USC 911.
income under section 911 (relating to earned income from
vided in this section, every employer making payment of wages shall
26 USC 931.
sources without the United States) or section 931 (relating to
deduct and withhold upon such wages a tax determined in accordance
income from sources within the possessions of the United
with tables prescribed by the Secretary or his delegate. The tables SO
States).
prescribed shall be the same as the tables contained in this subsection
(2) EARNED INCOME.-
as in effect on January 1, 1975, except that the amounts set forth as
'(A) The term 'earned income' means—
amounts of income tax to be withheld with respect to wages paid after
(i) wages, salaries, tips, and other employee compen-
April 30, 1975, and before January 1, 1976, shall reflect the full cal-
sation, plus
endar year effect for 1975 of the amendments made by sections 201,
'(ii) the amount of the taxpayer's net earnings from
202, 203, and 204 of the Tax Reduction Act of 1975. For purposes of
Ante, pp. 28-
self-employment for the taxable year (within the mean-
applying such tables, the term 'the amount of wages' means the amount
30.
26 USC 1402.
ing of section 1402
by which the wages exceed the number of withholding exemptions
"The amount
(B) For purposes of subparagraph (A)-
claimed, multiplied by the amount of one such exemption as shown in
of wages.
(i) except as provided in clause (ii), any amount
the table in subsection (b) (1)."
shall be taken into account only if such amount is includi-
(b) CONFORMING AMENDMENT.-Section 3402(c) (6) (relating to
ble in the gross income of the taxpayer for the taxable
wage bracket withholding) is amended by striking out "table 7 con-
year,
tained in subsection (a) and inserting in lieu thereof "the table for
(ii) the earned income of an individual shall be com-
an annual payroll period prescribed pursuant to subsection (a)".
puted without regard to any community property laws,
SEC. 206. INGREASE IN INCOME LIMITATION APPLICABLE TO CHILD
(iii) no amount received as a pension or annuity shall
AND DEPENDENT CARE DEDUCTION.
be taken into account, and
Section 214 (relating to expenses for household and dependent care
26 USC 214.
26 USC 871.
'(iv) no amount to which section 871 (a) applies
services necessary for gainful employment) is amended by striking
(relating to income of nonresident alien individuals not
out "$18,000" each place it appears in subsection (d) and inserting in
connected with United States business) shall be taken
lieu thereof "$35,000".
into account.
"(d) MARRIED INDIVIDUALs.-In the case of an individual who is
SEC. 207. EXTENSION OF PERIOD FOR REPLACING OLD RESIDENCE
26 USC 143.
married (within the meaning of section 143), this section shall apply
FOR PURPOSES OF NONRECOGNITION OF GAIN UNDER
26 USC 6013.
only if a joint return is filed for the taxable year under section 6013.
SECTION 1034.
(e) TAXABLE YEAR MUST BE FULL TAXABLE YEAR.-Except in the
(a) ONE-YEAR PERIOD INCREASED TO 18 MONTHS.-
case of a taxable year closed by reason of the death of the taxpayer,
(1) Subsections (a), (c) (4), (c) (5), (d), and (h) of section
no credit shall be allowable under this section in the case of a taxable
1034 (relating to nonrecognition of gain on sale or exchange of
26 USC 1034.
year covering a period of less than 12 months."
residence) are each amended by striking out "1 year" each place it
(b) REFUND To BE MADE WHERE CREDIT EXCEEDS LIABILITY FOR
appears and inserting in lieu thereof "18 months".
TAX.-
(2) Subsection (c) (5) of section 1034 is amended by striking
26 USC 6401.
(1) Section (b) (relating to excessive credits) is
out "one year" and inserting in lieu thereof "18 months".
amended-
(b) 18-MONTH PERIOD FOR CONSTRUCTING NEW RESIDENCE INCREASED
Ante, pp. 29,
(A) by inserting "43 (relating to earned income credit),
TO 2 YEARS-Subsection (c) (5) of section 1034 is amended by strik-
30.
before "and 667 (b)"; and
ing out "18 months" and inserting in lieu thereof "2 years".
(B) by striking out "and 39" and inserting in lieu thereof
SEC. 208. CREDIT FOR PURCHASE OF NEW PRINCIPAL RESIDENCE.
26 USC' 39.
a comma and ", 39, and 43".
26 USC 6201.
(a) ALLOWANCE OF CREDIT.-Subpart A of part IV of subchapter A
(2) Section 6201 (a) (4) (relating to assessment authority) is
amended by-
of chapter 1 (relating to credits allowed) is amended by redesignating
(A) inserting "or 43" after "section 39" in the caption of
section 44 as section 45 and by inserting after section 43 the following
Ante, p. 30.
new section:
such section; and
(B) striking out "oil)," and inserting in lieu thereof "oil)
"SEC. 44. PURCHASE OF NEW PRINCIPAL RESIDENCE.
26 USC 44.
or section 43 (relating to earned income),".
(a) GENERAL RULE.-In the case of an individual there is allowed,
as a credit against the tax imposed by this chapter for the taxable year,
89 STAT. 31
an amount equal to 5 percent of the purchase price of a new principal
residence purchased or constructed by the taxpayer.
89 STAT. 32
Pub. Law 94-12
- 8
March 29, 1975
March 29, 1975
- 9 -
Pub. Law 94-12
"(b) LIMITATIONS-
"(1) MAXIMUM CREDIT.-The credit allowed under subsection
nates the replacement period under paragraph (2) with respect
to the disposition is increased by an amount equal to the amount
(a) may not exceed $2,000.
(2) LIMITATION TO ONE RESIDENCE.-The credit under this sec-
allowed as a credit for the purchase of such property.
tion shall be allowed with respect to only one residence of the
"(2) ACQUISITION OF NEW RESIDENCE.-If, in connection with a
disposition described in paragraph (1) and within the applicable
taxpayer.
"(3) MARRIED INDIVIDUALs.-In the case of a husband and wife
period prescribed in section 1034, the taxpayer purchases or con- Ante, p. 32.
who file a joint return under section 6013, the amount specified
structs a new principal residence, then the provisions of paragraph
26 USC 6013.
under paragraph (1) shall apply to the joint return. In the case of
(1) shall not apply and the tax imposed by this chapter for the
a married individual filing a separate return, paragraph (1) shall
taxable year following the taxable year during which disposition
occurs is increased by an amount which bears the same ratio to the
be applied by substituting '$1,000' for '$2,000'.
amount allowed as a credit for the purchase of the old residence
(4) CERTAIN OTHER TAXPAYERS.-In the case of individuals
to whom paragraph (3) does not apply who together purchase the
as (A) the adjusted sales price of the old residence (within
same new principal residence for use as their principal residence,
the meaning of section 1034), reduced (but not below zero) by the 26 USC 1034.
the amount of the credit allowed under subsection (a) shall be
taxpayer's cost of purchasing the new residence (within the
allocated among such individuals as prescribed by the Secretary
meaning of such section) bears to (B) the adjusted sales price of
the old residence.
or his delegate, but the sum of the amounts allowed to such indi-
viduals shall not exceed $2,000 with respect to that residence.
"(3) DEATH OF OWNER; CASUALTY LOSS; INVOLUNTARY CONVER-
"(5) APPLICATION WITH OTHER CREDITS.-The credit allowed
SION; ETC.-The provisions of paragraph (1) do not apply to-
by subsection (a) shall not exceed the amount of the tax imposed
"(A) a disposition of a residence made on account of the
by this chapter for the taxable year, reduced by the sum of the
death of any individual having a legal or equitable interest
therein occurring during the 36 month period to which ref-
26
USC
33,
37,
credits allowable under sections 33, 37, 38, 40, 41, and 42.
erence is made under such paragraph,
38, 40, 41,
"(c) DEFINITIONS.-For purposes of this section-
"(B) a disposition of the old residence if it is substantially
42.
"(1) NEW PRINCIPAL RESIDENCE.-The term 'new principal resi-
or completely destroyed by a casualty described in section
dence' means a principal residence (within the meaning of section
165 (c) (3) or compulsorily and involuntarily converted 26 USC 165.
26 USC 1034.
1034), the original use of which commences with the taxpayer,
(within the meaning of section 1033 (a)) or
26 USC 1033.
and includes, without being limited to, a single family structure,
'(C) a disposition pursuant to a settlement in a divorce or
a residential unit in a condominium or cooperative housing proj-
legal separation proceeding where the other spouse retains
ect, and a mobile home.
the residence as principal residence.
(2) PURCHASE PRICE.-The term 'purchase price' means the
"(e) PROPERTY TO WHICH SECTION APPLIES.-
adjusted basis of the new principal residence on the date of the
"(1) IN GENERAL-The provisions of this section apply to a
acquisition thereof.
new principal residence-
(3) PURCHASE.-The term 'purchase' means any acquisition of
"(A) the construction of which began before March 26,
property, but only if-
1975,
"(A) the property is not acquired from a person whose
"(B) which is acquired and occupied by the taxpayer after
relationship to the person acquiring it would result in the
March 12, 1975, and before January 1, 1977, and
26 USC 267,
disallowance of losses under section 267 or 707(b) (but, in
"(C) if not constructed by the taxpayer, which was
707.
applying section 267 (b) and (c) for purposes of this section,
acquired by the taxpayer under a binding contract entered
paragraph (4) of section 267 (c) shall be treated as providing
into by the taxpayer before January 1, 1976.
that the family of an individual shall include only his spouse,
"(2) SELF-CONSTRUCTED PROPERTY BEGUN BEFORE MARCH 13,
ancestors, and lineal descendants), and
1975.-In the case of property the construction of which was
"(B) the basis of the property in the hands of the person
begun by the taxpayer before March 13, 1975, only that portion of
acquiring it is not determined—
the basis of such property properly allocable to construction after
"(i) in whole or in part by reference to the adjusted
March 12, 1975, shall be taken into account in determining the
basis of such property in the hands of the person from
amount of the credit allowable under subsection (a).
whom acquired, or
"(3) BINDING CONTRACT.-For purposes of this subsection, a
26 USC 1014.
"(ii) under section 1014(a) (relating to property
contract for the purchase of a residence which is conditioned upon
acquired from a decedent).
the purchaser's obtaining a loan for the purchase of the residence
"(d) RECAPTURE FOR CERTAIN DISPOSITIONS.-
(including conditions as to the amount or interest rate of such
"(1) IN GENERAL.-Except as provided in paragraphs (2) and
loan) is not considered non-binding on account of that condition.
(3), if the taxpayer disposes of property with respect to the
"(4) CERTIFICATION MUST BE ATTACHED TO RETURN.-This sec-
purchase of which a credit was allowed under subsection (a) at
tion shall not apply to any residence (other than a residence con-
any time within 36 months after the date on which he acquired it
structed by the taxpayer) unless there is attached to the return
(or, in the case of construction by the taxpayer, on the day on
of tax on which the credit is claimed a certification by the seller,
which he first occupied it) as his principal residence, then the tax
in accordance with regulations prescribed by the Secretary or his
imposed under this chapter for the taxable year in which termi-
delegate, that the purchase price is the lowest price at which the
residence was ever offered for sale."
89 STAT. 33
is
89 STAT. 34
GERALD
P.L. 94-12 75 2
Pub. Law 94-12
- 10 -
March 29, 1975
March 29, 1975
- 11 -
Pub. Law 94-12
(b) SUITS To RECOVER AMOUNTS OF PRICE INCREASES.-If-
TITLE III-CERTAIN CHANGES IN
(1) any person certifies under section 44(e) (4) of the Internal
BUSINESS TAXES
Ante, p. 32.
Revenue Code of 1954 that the price for which a residence was
sold is the lowest price at which the residence was ever offered for
SEC. 301. INCREASE IN INVESTMENT CREDIT,
sale, and
(2) the price for which the residence was sold exceeded the
(a) INCREASE OF INVESTMENT CREDIT.-Paragraph (1) of section 46
lowest price at which the residence was ever offered for sale,
(a) (determining the amount of the investment credit) is amended to 26 USC 46.
such person shall be liable to the purchaser of such residence in an
read as follows:
amount equal to three times the amount of such excess. The United
"(1) GENERAL RULE.-
States district courts shall have jurisdiction of suits to recover such
"(A) TEN PERCENT CREDIT.-Except as otherwise provided
amounts without regard to any other provision of law. In any suit
in this paragraph, in the case of a property described in sub-
brought under this subsection in which judgment is entered for the
paragraph (D), the amount of the credit allowed by section
purchaser, he shall also be entitled to recover a reasonable attorney's
38 for the taxable year shall be an amount equal to 10 percent
fee.
of the qualified investment (as determined under subsections
(c) DENIAL OF DEDUCTION.-Notwithstanding the provisions of sec-
(c) and (d)).
26 USC 162,
tion 162 or 212 of the Internal Revenue Code of 1954, no deduction
(B) ELEVEN PERCENT CREDIT.-Except as otherwise pro-
212.
shall be allowed in computing taxable income for two-thirds of any
vided in this paragraph, in the case of a corporation which
amount paid or incurred on a judgment entered against any person in
elects to have the provisions of this subparagraph apply, the
a suit brought under subsection (b).
amount of the credit allowed by section 38 for the taxable year 26 USC 38.
(d) TECHNICAL AND CLERICAL AMENDMENTS.-
with respect to property described in subparagraph (D) shall
(1) The table of sections for such subpart is amended by strik-
be an amount equal to 11 percent of the qualified investment
ing out the last item and inserting in lieu thereof the following:
(as determined under subsections (c) and (d)). An election
may not be made to have the provisions of this subparagraph
"Sec. 44. Credit for purchase of new principal residence.
apply for the taxable year unless the corporation meets the
"Sec. 45. Overpayments of tax."
requirements of section 301 (d) of the Tax Reduction Act of
26 USC 56.
(2) Section 56(a) (2) (relating to imposition of minimum tax)
1975. An election by a corporation to have the provisions of Supra.
is amended by striking out "and" at the end of clause (v), by
this subparagraph apply shall be made at such time, in such
striking out and" at the end of clause (vi) and inserting in lieu
form, and in such manner as the Secretary or his delegate
thereof and", and by inserting after clause (vi) the following
may prescribe.
new clause:
"(C) SEVEN PERCENT CREDIT.-Except as otherwise provided
(vii) section 44 (relating to credit for purchase of new
in this paragraph, the amount of credit allowed by section
principal residence) and".
38 for the taxable year shall be an amount equal to 7 percent
(3) Section 56(c) (1) (relating to tax carryovers) is amended
of the qualified investment (as determined under subsections
by striking out "and" at the end of subparagraph (E), by striking
(c) and (d)).
out "exceed" at the end of subparagraph (F) and inserting in lieu
(D) TRANSITIONAL RULES.-The provisions of subpara-
thereof "and", and by inserting after subparagraph (F) the fol-
graphs (A) and (B) shall apply only to-
lowing new subparagraph:
"(i) property to which subsection (d) does not apply,
(G) section 44 (relating to credit for purchase of new
the construction, reconstruction, or erection of which is
principal residence), exceed".
completed by the taxpayer after January 21, 1975, but
26 USC 6096.
(4) Section (b) (relating to designation of income tax pay-
only to the extent of the basis thereof attributable to the
ments to Presidential Election Campaign Fund) is amended by
construction, reconstruction, or erection after Janu-
striking out "and 42" and inserting in lieu thereof "42, and 44".
ary 21, 1975, and before January 1, 1977.
SEC, 209. EFFECTIVE DATES.
" (ii) property to which subsection (d) does not apply,
26 USC 42
(a) SECTIONS 201, AND 203.-The amendments made by sec-
acquired by the taxpayer after January 21, 1975, and
note.
tions 201, 202(a), and 203 shall apply to taxable years ending after
before January 1, 1977, and placed in service by the tax-
December 31, 1974. Such amendments shall cease to apply to taxable
payer before January 1, 1977, and
years ending after December 31, 1975.
(iii) property to which subsection (d) applies, but
26 USC 43
(b) SECTION 204.-The amendments made by section 204 shall
only to the extent of the qualified investment (as deter-
note.
apply to taxable years beginning after December 31, 1974, and before
mined under subsections (c) and (d)) with respect to
January 1, 1976.
qualified progress expenditures made after January 21,
26 USC 3402
(c) SECTIONS 202(b) AND 205.-The amendments made by sections
1975, and before January 1, 1977."
note.
202 (b) and 205 shall apply to wages paid after April 30, 1975, and
(b) PUBLIC UTILITY PROPERTY.-
before January 1, 1976.
(1) DETERMINATION OF QUALIFIED INVESTMENT.-Subparagraph
26 USC 214
(d) SECTION 206.-The amendments made by section 206 apply to
(A) of section 46(c) (3) (relating to determination of qualified 26 USC 46.
note.
taxable years beginning after the date of enactment of this Act.
investment in the case of public utility property) is amended to
(e) SECTION 207.-The amendments made by section 207 shall apply
read as follows:
26 USC 1034
to old residences (within the meaning of section 1034 of the Internal
"(A) To the extent that subsection (a) (1) (C) applies to
note.
26 USC 1034.
Revenue Code of 1954) sold or exchanged after December 31, 1974, in
property which is public utility property, the amount of the
taxable years ending after such date.
qualified investment shall be 4/7 of the amount determined
under paragraph (1).".
89 STAT. 35
89 STAT. 36
Pub. Law 94-12
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March 29, 1975
March 29, 1975
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Pub. Law 94-12
26 USC 46.
(2) INCREASE IN 50-PERCENT LIMITATION.-Section 46(a)
is applicable (without regard to this paragraph), paragraph (1)
shall apply unless the taxpayer elects (in such manner as the Sec-
(relating to determination of amount of credit) is amended by
retary or his delegate shall prescribe) within 90 days after the date
adding at the end thereof the following new paragraph:
"(6) ALTERNATIVE LIMITATION IN THE CASE OF CERTAIN UTILITIES.-
of the enactment of the Tax Reduction Act of 1975 to have the Ante, p. 26.
((A) IN GENERAL.-If, for a taxable year ending after
provisions of paragraph (2) apply. The provisions of this para-
graph shall not be applied disallow such excess credit before
calendar year 1974 and before calendar year 1981, the amount
the first final determination which is inconsistent with such
of the qualified investment of the taxpayer which is attribut-
able to public utility property is 25 percent or more of his
requirements is made, determined in the same manner as under
paragraph (4)."
aggregate qualified investment, then subparagraph (C) of
paragraph (2) of this subsection shall be applied by sub-
(4) EFFECTIVE DATES.-The amendment made by paragraph (1) 26 USC 46 note.
of this subsection shall apply to property placed in service after
stituting for 50 percent his applicable percentage for such
January 21, 1975, in taxable years ending after January 21, 1975.
year.
"(B) APPLICABLE PERCENTAGE.-The applicable percentage
The amendments made by paragraphs (2) and (3) shall apply to
taxable years ending after December 31, 1974.
of any taxpayer for any taxable year is-
(c) INCREASE FROM $50,000 TO $100,000 OF DOLLAR LIMITATION ON
(i) 50 percent, plus
USED PROPERTY.-
'(ii) that portion of the tentative percentage for the
taxable year which the taxpayer's amount of qualified
(1) IN GENERAL.-Paragraph (2) of subsection 48(c) (relating 26 USC 48.
investment which is public utility property bears to his
to dollar limitation in case of used section 38 property) is 26 USC 38.
amended-
aggregate qualified investment.
If the proportion referred to in clause (ii) is 75 percent or
(A) by striking out "$50,000" each place it appears and
inserting in lieu thereof "$100,000", and
more, the applicable percentage of the taxpayer for the year
shall be 50 percent plus the tentative percentage for such
(B) by striking out "$25,000" and inserting in lieu thereof
"$50,000".
year.
"(C) TENTATIVE PERCENTAGE.-For purposes of subpara-
(2) EFFECTIVE DATE.-The amendments made by paragraph (1) 26 USC 48 note.
graph (B), the tentative percentage shall be determined
shall apply only to taxable years beginning after December 31,
1974, and before January 1, 1977.
under the following table:
(d) PLAN REQUIREMENTS FOR TAXPAYERS ELECTING 11-PERCENT 26 USC 46 note.
"If the taxable year
The tentative
CREDIT.-In order to meet the requirements of this subsection-
ends in:
percentage is:
1975 or 1976
50
(1) A corporation (hereinafter in this subsection referred to as Employee
1977
40
the "employer") must establish an employee stock ownership plan stock own-
1978
30
(described in paragraph (2)) which is funded by transfers of ership plan.
1979
20
employer securities in accordance with the provisions of para-
1980
10
graph (6) and which meets all other requirements of this
"(D) PUBLIC UTILITY PROPERTY DEFINED.-For purposes of
subsection.
this paragraph, the term 'public utility property' has the
(2) The plan referred to in paragraph (1) must be a defined
meaning given to such term by the first sentence of subsec-
contribution plan established in writing which-
tion (c) (3) (B)."
(A) is a stock bonus plan, a stock bonus and a money pur-
(3) LIMITATION IN CASE OF CERTAIN REGULATED COMPANIES.-
chase pension plan, or a profit-sharing plan,
Post, p. 40.
Section 46(f), as redesignated by section 302 (a) of this Act (relat-
(B) is designed to invest primarily in employer securities,
ing to limitation in case certain regulated companies), is
and
amended by adding at the end thereof the following new
(C) meets such other requirements (similar to require-
paragraph:
ments applicable to employee stock ownership plans as defined
(8) PROHIBITION OF IMMEDIATE FLOWTHROUGH.-An election
in section 4975 (e) (7) of the Internal Revenue Code of 1954) 26 USC 4975.
made under paragraph (3) shall apply only to the amount of the
as the Secretary of the Treasury or his delegate may
26 USC 38.
credit allowable under section 38 with respect to public utility
prescribe.
property (within the meaning of subsection (a) (6) (D)) deter-
(3) The plan must provide for the allocation of all employer
mined as if the Tax Reduction Act of 1975 had not been enacted.
securities transferred to it or purchased by it (because of the
Any taxpayer who had timely made an election under paragraph
requirements of section 46(a) (1) (B) of the Internal Revenue
(3) may, at his own option and without regard to any requirement
Code of 1954) to the account of each participant (who was a par- 26 USC 46.
imposed by an agency described in subsection (c) (3) (B), elect
ticipant at any time during the plan year, whether or not he is a
within 90 days after the date of the enactment of the Tax Reduc-
participant at the close of the plan year) as of the close of each
Ante, p. 26.
tion Act of 1975 (in such manner as the Secretary or his delegate
plan year in an amount which bears substantially the same pro-
shall prescribe) to have the provisions of paragraph (3) apply
portion to the amount of all such securities allocated to all partici-
with respect to the amount of the credit allowable under section
pants in the plan for that plan year as the amount of compensation
38 with respect to such property which is in excess of the amount
paid to such participant (disregarding any compensation in excess
determined under the preceding sentence. If such taxpayer does
of the first $100,000 per year) bears to the compensation paid to all
not make such an election, paragraph (1) or (2) (whichever para-
such participants during that year (disregarding any compensa-
graph is applicable without regard to this paragraph) shall apply
tion in excess of the first $100,000 with respect to any participant).
to such excess credit, except that if neither paragraph (1) nor (2)
89 STAT. 38
89 STAT. 37
March 29, 1975
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Pub. Law 94-12
March 29, 1975
Pub. Law 94-12
- 14 -
Notwithstanding the first sentence of this paragraph, the alloca-
(B) "value" means the average of closing prices of the "Value.
"
tion to participants' accounts may be extended over whatever
employer's securities, as reported by a national exchange on
period may be necessary to comply with the requirements of sec-
which securities are listed, for the 20 consecutive trading days
26 USC 415.
tion 415 of the Internal Revenue Code of 1954.
immediately preceding the date of transfer or allocation of
(4) The plan must provide that each participant has a nonfor-
such securities or, in the case of securities not listed on a
feitable right to any stock allocated to his account under para-
national exchange, the fair market value as determined in
graph (3), and that no stock allocated to a participant's account
good faith and in accordance with regulations issued by the
may be distributed from that account before the end of the eighty-
Secretary of the Treasury or his delegate.
(10) The Secretary of the Treasury or his delegate shall pre-
Regulations
fourth month beginning after the month in which the stock is
scribe such regulations and require such reports as may be neces-
and reports.
allocated to the account except in the case of separation from
the service, death, or disability.
sary to carry out the provisions of this subsection.
(5) The plan must provide that each participant is entitled to
(11) If the employer fails to meet any requirement imposed
Penalty.
direct the plan as to the manner in which any employer securities
under this subsection or under any obligation undertaken to com-
allocated to the account of the participant are to be voted.
ply with the requirement of this subsection, he is liable to the
(6) On making a claim for credit, adjustment, or refund under
United States for a civil penalty of an amount equal to the amount
26 USC 38.
section 38 of the Internal Revenue Code of 1954, the employer
involved in such failure. The preceding sentence shall not apply
states in such claim that it agrees, as a condition of receiving any
if the taxpayer corrects such failure (as determined by the Secre-
such credit, adjustment, or refund, to transfer employer securities
tary of the Treasury or his delegate) within 90 days after notice
forthwith to the plan having an aggregate value at the time of the
thereof. For purposes of this paragraph, the term "amount "Amount
involved" means an amount determined by the Secretary or his
involved. "
claim of 1 percent of the amount of the qualified investment (as
Post, P. 40.
determined under section 46 (c) and (d) of such Code) of the tax-
delegate, but not in excess of 1 percent of the qualified investment
payer for the taxable year. For purposes of meeting the require-
of the taxpayer for the taxable year under section 46(a) (1) (B)
26 USC 46.
ments of this paragraph, a transfer of cash shall be treated as a
and not less than the product of one-half of one percent of such
transfer of employer securities if the cash is, under the plan, used
amount multiplied by the number of months (or parts thereof)
to purchase employer securities.
during which such failure continues. The amount of such pen-
(7) Notwithstanding any other provision of law to the contrary,
alty may be collected by the Secretary of the Treasury in the
if the plan does not meet the requirements of section 401 of the
same manner in which a deficiency in the payment of Federal
26 USC 401.
Internal Revenue Code of 1954-
income tax may be collected.
(A) stock transferred under paragraph (6) and allocated
(12) Notwithstanding any provision of the Internal Revenue
to the account of any participant under paragraph (3) and
Code of 1954 to the contrary, no deductions shall be allowed under
26 USC 1 et
dividends thereon shall not be considered income of the par-
section 162, 212, or 404 of such Code for amounts transferred to
seq.
ticipant or his beneficiary under the Internal Revenue Code
an employee stock ownership plan and taken into account under
26 USC 162,
26 USC 1 et
of 1954 until actually distributed or made available to the
this subsection.
212, 404.
seq.
participant or his beneficiary and, at such time, shall be
SEC. 302. ALLOWANCE OF INVESTMENT CREDIT WHERE CONSTRUC-
26 USC 72.
taxable under section 72 of such Code (treating the par-
TION OF PROPERTY WILL TAKE MORE THAN 2 YEARS.
ticipant or his beneficiary as having a basis of zero in the
(a) GENERAL RULE.-Section 46 (relating to amount of credit) is 26 USC 46.
contract),
amended by redesignating subsections (d) and (e) as subsections (e)
(B) no amount shall be allocated to any participant in
and (f), respectively, and by inserting after subsection (c) the follow-
excess of the amount which might be allocated if the plan met
ing new subsection:
the requirements of section 401 of such Code, and
" (d) QUALIFIED PROGRESS EXPENDITURES.-
(C) the plan must meet the requirements of sections 410
"(1) IN GENERAL.-In the case of any taxpayer who has made
26 USC 410,
and 415 of such Code.
an election under paragraph (6), the amount of his qualified
415.
(8) If the amount of the credit determined under section 46(a)
investment for the taxable year (determined under subsection (c)
26 USC 46.
(1) (B) of the Internal Revenue Code of 1954, is recaptured in
without regard to this subsection) shall be increased by an amount
accordance with the provisions of such Code, the amounts trans-
equal to his aggregate qualified progress expenditures for the
ferred to the plan under this subsection and allocated under the
taxable year with respect to progress expenditure property.
plan shall remain in the plan or in participant accounts, as the case
"(2) PROGRESS EXPENDITURE PROPERTY DEFINED.-
may be and continue to be allocated in accordance with the origi-
"(A) IN GENERAL-For purposes of this subsection, the
nal plan agreement.
term "progress expenditure property' means any property
(9) For purposes of this subsection, the term-
which is being constructed by or for the taxpayer and
"Employer
(A) "employer securities" means common stock issued by
which-
secutities.
"
the employer or a corporation which is in control of the
"(i) has a normal construction period of two years
employer (within the meaning of section 368 of the
or more, and
26 USC 368.
Internal Revenue Code of 1954) with voting power and
"(ii) it is reasonable to believe will be new section 38 26 USC 38.
dividend rights no less favorable than the voting power and
property having abseful life of 7 years or more in the
dividend rights of other common stock issued by the
hands of the taxpayer when it is placed in service.
employer or such controlling corporation, or securities issued
Clauses (i) and (ii) of the preceding sentence shall be
by the employer or such controlling corporation, convertible
applied on the basis of facts known at the close of the taxable
FORD
into such stock, and
89 STAT. 40
89 STAT. 39
GERALD
LIBRARY
Pub. Law 94-12
- 16 -
March 29, 1975
March 29, 1975
- 17 -
Pub. Law 94-12
year of the taxpayer in which construction begins (or, if
(3) (B), then the amount of such excess shall be taken
later, at the close of the first taxable year to which an election
into account under such clause (ii) for the succeeding
under this subsection applies).
taxable year.
"(B) NORMAL CONSTRUCTION PERIOD.-For purposes of sub-
"(D) DETERMINATION OF PERCENTAGE OF COMPLETION.-In
paragraph (A), the term 'normal construction period' means
the case of non-self-constructed property, the determination
the period reasonably expected to be required for the con-
under paragraph (3) (B) (ii) of the proportion of the overall
struction of the property-
cost to the taxpayer of the construction of any property
"(i) beginning with the date on which physical work
which is properly attributable to construction completed dur-
on the construction begins (or, if later, the first day of
ing any taxable year shall be made, under regulations pre-
the first taxable year to which an election under this
scribed by the Secretary or his delegate, on the basis of
subsection applies), and
engineering or architectural estimates or on the basis of cost
"(ii) ending on the date on which it is expected that
accounting records. Unless the taxpayer establishes otherwise
the property will be available for placing in service.
by clear and convincing evidence, the construction shall be
"(3) QUALIFIED PROGRESS EXPENDITURES DEFINED.-For purposes
deemed to be completed not more rapidly than ratably over
of this subsection-
the normal construction period.
"(A) SELF-CONSTRUCTED PROPERTY.-In the case of any
"(E) No QUALIFIED PROGRESS EXPENDITURES FOR CERTAIN
self-constructed property, the term 'qualified progress expend-
PRIOR PERIODS.-In the case of any property, no qualified
itures' means the amount which, for purposes of this sub-
progress expenditures shall be taken into account under this
part, is, properly chargeable (during such taxable year) to
subsection for any period before January 22, 1975 (or, if later,
capital account with respect to such property.
before the first day of the first taxable year to which an elec-
(B) NON-SELF-CONSTRUCTED PROPERTY.-In the case of
tion under this subsection applies).
non-self-constructed property, the term 'qualified progress
"(F) No QUALIFIED PROGRESS EXPENDITURES FOR PROPERTY
expenditures' means the lesser of-
FOR YEAR IT IS PLACED IN SERVICE, ETC.-In the case of any
"(i) the amount paid during the taxable year to
property, no qualified progress expenditures shall be taken
another person for the construction of such property, or
into account under this subsection for the earlier of-
"(ii) the amount which represents that proportion of
"(i) the taxable year in which the property is placed
the overall cost to the taxpayer of the construction by
in service, or
such other person which is properly attributable to that
'(ii) the first taxable year for which recapture is
portion of such construction which is completed during
required under section 47(a) (3) with respect to such Post, p. 43.
such taxable year.
property,
"(4) SPECIAL RULES FOR APPLYING PARAGRAPH (3).-For pur-
or for any taxable year thereafter.
poses of paragraph (3)-
"(5) OTHER DEFINITIONS.-For purposes of this subsection-
"(A) COMPONENT PARTS, ETC.-Property which is to be a
"(A) SELF-CONSTRUCTED PROPERTY.-The term 'self-con-
component part of, or is otherwise to be included in, any
structed property' means property more than half of the
progress expenditure property shall be taken into account-
construction expenditures for which it is reasonable to
"(i) at a time not earlier than the time at which it
believe will be made directly by the taxpayer.
becomes irrevocably devoted to use in the progress
((B) NON-SELF-CONSTRUCTED PROPERTY.-The term 'non-
expenditure property, and
self-constructed property' means property which is not self-
(ii) as if (at the time referred to in clause (i)) the
constructed property.
taxpayer had expended an amount equal to that portion
"(C) CONSTRUCTION, ETC.-The term 'construction' includes
of the cost to the taxpayer of such component or other
reconstruction and erection, and the term 'constructed'
property which, for purposes of this subpart, is properly
includes reconstructed and erected.
chargeable (during such taxable year) to capital account
"(D) ONLY CONSTRUCTION OF SECTION 38 PROPERTY TO BE
with respect to such property.
TAKEN INTO ACCOUNT.-Construction shall be taken into
"(B) CERTAIN BORROWINGS DISREGARDED.-Any amount bor-
account only if, for purposes of this subpart, expenditures
rowed directly or indirectly by the taxpayer from the person
therefor are properly chargeable to capital account with
constructing the property for him shall not be treated as an
respect to the property.
amount expended for such construction.
"(6) ELECTION.-A election under this subsection may be made
"(C) CERTAIN UNUSED EXPENDITURES CARRIED OVER.-In the
at such time and in such manner as the Secretary or his delegate
case of non-self-constructed property, if for the taxable
may by regulations prescribe. Such an election shall apply to the
year-
taxable year for which made and to all subsequent taxable years.
"(i) the amount under clause (i) of paragraph (3) (B)
Such an election, once made, may not be revoked except with the
exceeds the amount under clause (ii) of paragraph (3)
consent of the Secretary or his delegate.
(B), then the amount of such excess shall be taken into
"(7) TRANSITIONAL RULES.-The qualified investment taken into
account under such clause (i) for the succeeding taxable
account under this subsection for any taxable year beginning
year, or
before January 1, 1980, with respect to any property shall be (in
"(ii) the amount under clause (ii) of paragraph (3)
lieu of the full amount) an amount equal to the sum of-
(B) exceeds the amount under clause (i) of paragraph
89 STAT. 42
89 STAT. 41
P.L. 94-12 O 75 3
Pub. Law 94-12
- 18 -
March 29, 1975
March 29, 1975
- 19 -
Pub. Law 94-12
"(A) the applicable percentage of the full amount
leaseback to, a taxpayer who, when the property is placed in
determined under the following table:
service, will be a lessee to whom section 48(d) applies shall
26 USC 48.
"For a taxable year
The applicable
not be treated as a cessation described in subparagraph (A)
beginning in:
percentage is:
to the extent that the qualified investment which will be
1974 or 1975
20
passed through to the lessee under section 48(d) with respect
1976
40
to such property is not less than the qualified progress
1977
60
expenditures properly taken into account by the lessee with
1978
80
1979
100;
respect to such property.
(D) COORDINATION WITH PARAGRAPH (1).-If, after prop-
plus
erty is placed in service, there is a disposition or other cessa-
"(B) in the case of any property to which this subsection
tion described in paragraph (1), paragraph (1) shall be
applied for one or more preceding taxable years, 20 percent of
applied as if any credit which was allowable by reason of
the full amount for each such preceding taxable year.
"Full amount. "
section 46(d) and which has not been required to be recap-
Ante, p. 40.
For purposes of this paragraph, the term 'full amount', when used
tured before such cessation were allowable for the taxable
with respect to any property for any taxable year, means the
year the property was placed in service."
amount of the qualified investment for such property for such year
determined under this subsection without regard to this
(c) CLERICAL AMENDMENTS.-
(1) Paragraph (4) of section 47(a) (as redesignated by sub-
Ante, p. 43.
paragraph."
(b) CONFORMING AMENDMENTS.-
section (b) (2) (A) of this section) is amended by striking out
26 USC 46.
(1) AMENDMENT OF SECTION (c).-Section 46(c) (relating to
"paragraph (1)" and inserting in lieu thereof "paragraph (1) or
qualified investment) is amended by adding at the end thereof
(3)".
the following new paragraph:
(2) Paragraphs (5) and (6) (B) of section 47(a) are each
"(4) COORDINATION WITH SUBSECTION (d).-The amount which
amended by striking out "paragraph (3)" and inserting in lieu
would (but for this paragraph) be treated as qualified investment
thereof "paragraph (4)".
under this subsection with respect to any property shall be reduced
(3) Paragraphs (1) and (2) of section 48 (d) are each amended 26
USC 48.
(but not below zero) by any amount treated by the taxpayer or a
by striking out "section 46(d) (1)" and inserting in lieu thereof
predecessor of the taxpayer (or, in the case of a sale and leaseback
"section 46(e) (1)".
Infra.
described in section 47(a) (3) (C), by the lessee) as qualified
(4) Subsection (f) of section 50B is amended by striking out 26 USC 50B,
investment with respect to such property under subsection (d), to
"section 46(d)" and inserting in lieu thereof "section 46(e)".
Ante, P. 40.
the extent the amount SO treated has not been required to be recap-
SEC. 303. CHANGE IN CORPORATE TAX RATES AND INCREASE IN SUR-
tured by reason of section (a) (3)."
TAX EXEMPTION.
(2) DISPOSITION, ETC.-
(a) TAX RATES.-Section 11 (b) (relating to corporate normal tax) 26 USC 11.
(A) Subsection (a) of section 47 (relating to certain dis-
is amended to read as follows:
26 USC 38.
positions, etc., of section 38 property) is amended by redesig-
(b) NORMAL Tax.-The normal tax is equal to-
nating paragraph (3) as paragraph (4) and by inserting
"(1) in the case of a taxable year ending before January 1,
after paragraph (2) the following new paragraph:
1975, or after December 31, 1975, 22 percent of the taxable income,
"(3) PROPERTY CEASES TO BE PROGRESS EXPENDITURE PROPERTY.-
and
"(A) IN GENERAL.-If during any taxable year any prop-
"(2) in the case of a taxable year ending after December 31,
erty taken into account in determining qualified investment
1974, and before January 1, 1976, the sum of—
Ante, p. 40.
under section 46(d) ceases (by reason of sale or other disposi-
"(A) 20 percent of SO much of the taxable income as does
tion, cancellation or abandonment of contract, or otherwise)
not exceed $25,000, plus
to be, with respect to the taxpayer, property which, when
"(B) 22 percent of SO much of the taxable income as
placed in service, will be new section 38 property, then the
exceeds $25,000.".
tax under this chapter for such taxable year shall be increased
(b) SURTAX EXEMPTION.-Section 11(d) (relating to surtax exemp-
by an amount equal to the aggregate decrease in the credits
tion) is amended by striking out "$25,000" and inserting in lieu thereof
allowed under section 38 for all prior taxable years which
"$50,000".
would have resulted solely from reducing to zero the quali-
(c) TECHNICAL AND CONFORMING AMENDMENTS.-
fied investment taken into account with respect to such
(1) Paragraph (1) of section 1561 (a) (as in effect for taxable 26 USC
1561.
property.
years beginning after December 31, 1974) (relating to limitations
(B) CERTAIN EXCESS CREDIT RECAPTURED.-Any amount
on certain multiple tax benefits in the case of certain controlled
which would have been applied as a reduction of the qualified
corporations) is amended by striking out "$25,000" and inserting
investment in property by reason of paragraph (4) of sec-
in lieu thereof "$50,000". In applying subsection (b) (2) of sec-
26 USC 11 note.
tion 46(c) but for the fact that a reduction under such para-
tion 11, the first $25,000 of taxable income and the second $25,000
graph cannot reduce qualified investment below zero shall be
of taxable income shall each be allocated among the component
treated as an amount required to be recaptured under sub-
members of a controlled group of corporations in the same manner
paragraph (A) for the taxable year in which the property is
as the surtax exemption is allocated.
placed in service.
(2) Paragraph (7) of section 12 (relating to cross references 26 USC 12.
"(C) CERTAIN SALES AND LEASEBACKS.--Under regulations
for tax on corporations) is amended by striking out "$25,000"
prescribed by the Secretary or his delegate, a sale by, and
and inserting in lieu thereof "$50,000".
89 STAT. 43
89 STAT. 44
Pub. Law 94-12
- 20 -
March 29, 1975
March 29, 1975
- 21 -
Pub. Law 94-12
26 USC 962.
(3) Section 962(c) (relating to surtax exemption for indi-
(C) by inserting at the end thereof the following new
viduals electing to be subject to tax at corporate rates) is amended
clause:
by striking out "$25,000" and inserting in lieu thereof "$50,000".
"(iv) a termination of employment of an individual
SEC. 304. INCREASE IN MINIMUM ACCUMULATED EARNINGS CREDIT
with respect to whom Federal welfare recipient employ-
FROM $100,000 TO $150,000.
ment incentive expenses (as described in section 50B
26 USC 535.
(a) INCREASE.-Paragraphs (2) and (3) of section 535 (c) (relating
(a) (2)) are taken into account under subsection (a)." Infra.
to accumulated earnings credit) are each amended by striking out
(3) Section 50B (a) (relating to definitions; special rules) is 26 USC 50B.
"$100,000" and inserting in lieu thereof "$150,000".
amended to read as follows:
26 USC 243.
(b) CONFORMING AMENDMENTS.-Sections 243 (b) (3) (C) (i) (relat-
"(a) WORK INCENTIVE PROGRAM EXPENSES.-
ing to qualifying dividends for purposes of the dividends received
"(1) IN GENERAL-For purposes of this subpart, the term 'work
26 USC 1551.
deduction), 1551 (a) (relating to disallowance of surtax exemption and
incentive program expenses' means the sum of-
26 USC 1561.
accumulated earnings credit) and 1561 (a) (2) (relating to limitations
"(A) the amount of wages paid or incurred by the taxpayer
on certain multiple tax benefits in the case of certain controlled cor-
for services rendered during the first 12 months of employ-
porations) are each amended by striking out "$100,000" and inserting
ment (whether or not consecutive) of employees who are
in lieu thereof "$150,000".
certified by the Secretary of Labor as-
"(i) having been placed in employment under a work
SEC. 305. EFFECTIVE DATES.
incentive program established under section 432(b) (1)
26 USC 42
(a) SECTION 302.-The amendments made by section 302 shall apply
of the Social Security Act, and
42 USC 632.
note.
to taxable years ending after December 31, 1974.
'(ii) not having displaced any individual from
(b) SECTION 303.-
employment, plus
26 USC 11
(1) IN GENERAL-The amendments made by section 303 shall
'(B) the amount of Federal welfare recipient employment
note.
apply to taxable years ending after December 31, 1974. The amend-
incentive expenses paid or incurred by the taxpayer during
ments made by subsections (b) and (c) of such section shall cease
the taxable year.
to apply for taxable years ending after December 31, 1975.
"(2) DEFINITION.-For purposes of this section, the term 'Fed-
26 USC 21.
(2) CHANGES TREATED AS CHANGES IN TAX RATE.-Section 21
eral welfare recipient employment incentive expenses' means the
(relating to change in rates during taxable year) is amended by
amount of wages paid or incurred by the taxpayer for services
adding at the end thereof the following new subsection:
rendered to the taxpayer before July 1, 1976, by an eligible
"(f) INCREASE IN SURTAX EXEMPTION.-In applying subsection (a)
employee.
to a taxable year of a taxpayer which is not a calendar year, the change
(3) EXCLUSION.-No item taken into account under paragraph
made by section 303 (b) of the Tax Reduction Act of 1975 in section
(1) (A) shall be taken into account under paragraph (1) (B). No
Ante, p. 44.
11 (d) (relating to corporate surtax exemption) shall be treated as a
item taken into account under paragraph (1) (B) shall be taken
change in a rate of tax."
into account under paragraph 1(A).'
26 USC 535
(c) SECTION 304.-The amendments made by section 304 apply to
(4) Section 50B (c) is amended—
note.
taxable years beginning after December 31, 1974.
(A) by striking out "subsection (a)" in paragraph (1) and
inserting in lieu thereof "subsection (a) (1) (A)", and
TITLE IV-CHANGES AFFECTING INDI-
(B) by striking out "subsection (a) in paragraph (4) and
inserting in lieu thereof "subsection (a) (1) (A)".
VIDUALS AND BUSINESSES
(5) Section 50B is amended by redesignating subsection (g)
as (h) and by inserting immediately after subsection (f) the
SEC. 401. FEDERAL WELFARE RECIPIENT EMPLOYMENT INCENTIVE
following new subsection:
TAX CREDIT.
"(g) ELIGIBLE EMPLOYEE.-
(a) IN GENERAL.-
"(1) ELIGIBLE EMPLOYEE.-For purposes of subsection (a) (1)
26 USC 50A.
(1) Section 50A (a) (relating to determination of amount of
(B), the term 'eligible employee' means an individual-
credit) is amended by adding at the end thereof the following new
"(A) who has been certified by the appropriate agency of
paragraph:
State or local government as being eligible for financial
"(6) LIMITATION WITH RESPECT TO NONBUSINESS ELIGIBLE
assistance under part A of title IV of the Social Security Act 42 USC 601.
EMPLOYEES.-Notwithstanding paragraph (1), the credit allowed
and as having continuously received such financial assistance
26 USC 40.
by section 40 with respect to Federal welfare recipient employment
during the 90 day period which immediately precedes the date
incentive expenses paid or incurred by the taxpayer during the
on which such individual is hired by the taxpayer,
taxable year to an eligible employee whose services are not per-
"(B) who has been employed by the taxpayer for a period
formed in connection with a trade or business of the taxpayer
in excess of 30 consecutive days on a substantially full-time
shall not exceed $1,000."
basis,
(2) Section 50A (c) (2) (A) (relating to amount of credit) is
"(C) who has not displaced any other individual from
amended—
employment by the taxpayer, and
(A) by striking out "or" at the end of clause (ii),
"(D) who is not a migrant worker.
(B) by striking out the period at the end of clause (iii)
The term 'eligible employee' includes an employee of the taxpayer
and inserting in lieu thereof a comma and "or", and
whose services are not performed in connection with a trade or
business of the taxpayer.
89 STAT. 45
89 STAT. 46
Pub. Law 94-12
- 22 -
March 29, 1975
March 29, 1975
- 23 -
Pub. Law 94-12
"(2) MIGRANT WORKER.-For purposes of paragraph (1), the
"(2) DEFINITIONS.-For purposes of this subsection-
term 'migrant worker' means an individual who is employed for
"(A) NATURAL GAS SOLD UNDER A FIXED CONTRACT.-The
services for which the customary period of employment by one
term 'natural gas sold under a fixed contract' means domestic
employer is less than 30 days if the nature of such services requires
natural gas sold by the producer under a contract, in effect
that such individual travel from place to place over a short period
on February 1, 1975, and at all times thereafter before such
of time."
sale, under which the price for such gas cannot be adjusted
26 USC 50A
(b) EFFECTIVE DATE.-The amendments made by this section with
to reflect to any extent the increase in liabilities of the seller
note.
respect to federal welfare recipient employment incentive expenses
for tax under this chapter by reason of the repeal of percent-
shall apply to such expenses paid or incurred by a taxpayer to an
age depletion for gas. Price increases after February 1, 1975,
eligible employee whom such taxpayer hires after the date of the
shall be presumed to take increases in tax liabilities into
enactment of this Act.
account unless the taxpayer demonstrates to the contrary by
SEC. 402. TIME WHEN CONTRIBUTIONS DEEMED MADE TO CERTAIN
clear and convincing evidence.
PENSION PLANS.
(B) REGULATED NATURAL GAS.-The term 'regulated natu-
Section 1017 of the Employee Retirement Income Security Act of
ral gas' means domestic natural gas produced and sold by
1974 (relating to effective dates for funding, etc., provisions of that
the producer, before July 1, 1976, subject to the jurisdiction
26 USC 410
of the Federal Power Commission, the price for which has
note.
Act) is amended-
(1) in subsection (b) by striking out "(c) through (h)," and
not been adjusted to reflect to any extent the increase in
inserting in lieu thereof (c) through (i),"; and
liability of the seller for tax under this chapter by reason of
(2) by adding at the end thereof the following new subsection:
the repeal of percentage depletion for gas. Price increases
"(i) CONTRIBUTIONS TO H.R. 10 PLANS.-Notwithstanding subsec-
after February 1, 1975, shall be presumed to take increases
in tax liabilities into account unless the taxpayer demon-
tions (b) and (c) (2), in the case of a plan in existence on January 1,
88 Stat. 914.
1974, the amendment made by section 1013 (2) of this Act shall
strates the contrary by clear and convincing evidence.
"(c) EXEMPTION FOR INDEPENDENT PRODUCERS AND ROYALTY
26 USC 412.
apply, with respect to a plan which provides contributions or benefits
OWNERS.-
for employees some or all of whom are employees within the meaning
(1) IN GENERAL.-Except as provided in subsection (d), the
26 USC 401.
of section 401 (c) (1) of the Internal Revenue Code of 1954, for plan
years beginning after December 31, 1974, but only if the employer
allowance for depletion under section 611 shall be computed in
26 USC 611.
accordance with section 613 with respect to-
26 USC 613.
(within the meaning of section 401 (c) (4) of such Code) elects in such
manner and at such time as the Secretary of the Treasury or his dele-
((A) SO much of the taxpayer's average daily production
gate shall by regulations prescribe, to have such amendment SO apply.
of domestic crude oil as does not exceed the taxpayer's deplet-
Any election made under this subsection, once made, shall be
able oil quantity; and
(B) SO much of the taxpayer's average daily production
irrevocable."
of domestic natural gas as does not exceed the taxpayer's
depletable natural gas quantity;
TITLE V-PERCENTAGE DEPLETION
and the applicable percentage (determined in accordance with
the table contained in paragraph (5)) shall be deemed to be
SEC. 501. LIMITATIONS ON PERCENTAGE DEPLETION FOR OIL AND
specified in subsection (b) of section 613 for purposes of sub-
GAS.
section (a) of that section.
(a) IN GENERAL.-Part I of subchapter I of chapter 1 (relating to
(2) AVERAGE DAILY PRODUCTION.-For purposes of paragraph
natural resources) is amended by inserting after section 613 the follow-
(1)-
ing new section:
(A) the taxpayer's average daily production of domestic
crude oil or natural gas for any taxable year, shall be deter-
26 USC 613A.
"SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF
mined by dividing his aggregate production of domestic
OIL AND GAS WELLS.
crude oil or natural gas, as the case may be, during the tax-
"(a) GENERAL RULE.-Except as otherwise provided in this sec-
able year by the number of days in such taxable year, and
26 USC 611.
tion, the allowance for depletion under section 611 with respect to any
"(B) in the case of a taxpayer holding a partial interest
26 USC 613.
oil or gas well shall be computed without regard to section 613.
in the production from any property (including an interest
"(b) EXEMPTION FOR CERTAIN DOMESTIC GAS WELLS.-
held in a partnership) such taxpayer's production shall be
(1) IN GENERAL-The allowance for depletion under section
considered to be that amount of such production determined
611 shall be computed in accordance with section 613 with respect
by multiplying the total production of such property by the
to-
taxpayer's percentage participation in the revenues from such
'(A) regulated natural gas,
property.
((B) natural gas sold under a fixed contract, and
In applying this paragraph, there shall not be taken into account
(C) any geothermal deposit in the United States or in a
any production of crude oil or natural gas resulting from second-
possession of the United States which is determined to be a
ary or tertiary processes (as defined in regulations prescribed by
gas well within the meaning of section 613(b) (1) (A),
the Secretary or his delegate).
and 22 percent shall be deemed to be specified in subsection (b)
" (3) DEPLETABLE OIL QUANTITY.-
of section 613 for purposes of subsection (a) of that section.
'(A) IN GENERAL.-For purposes of paragraph (1), the
taxpayer's depletable oil quantity shall be equal to-
89 STAT. 47
89 STAT. 48
Pub. Law 94-12
- 24 -
March 29, 1975
March 29, 1975
- 25 -
Pub. Law 94-12
"(i) the tentative quantity determined under the table
the case may be, resulting from secondary or tertiary
contained in subparagraph (B), reduced (but not below
processes during the taxable year by the number of days
zero) by
in such taxable year, and
(ii) the taxpayer's average daily secondary or tertiary
"(ii) in the case of a taxpayer holding a partial inter-
production for the taxable year.
est in the production from any property (including any
(B) PHASE-OUT TABLE.-For purposes of subparagraph
interest held in any partnership) such taxpayer's pro-
(A)-
duction shall be considered to be that amount of such
"In the case of production
The tentative quantity
production determined by multiplying the total produc-
during the calendar year:
in barrels is:
tion of such property by the taxpayer's percentage par-
1975
2,000
ticipation in the revenues from such property.
1976
800
(C) TERMINATION.-This paragraph shall not apply after
1977
1,600
1978
400
December 31, 1983.
1979
200
"(7) SPECIAL RULES.-
1980 and thereafter
1,000
(A) PRODUCTION OF CRUDE OIL IN EXCESS OF DEPLETABLE
"(4) DAILY DEPLETABLE NATURAL GAS QUANTITY.-For purposes
OIL QUANTITY.-If the taxpayer's average daily production
of paragraph (1), the depletable natural gas quantity of any
of domestic crude oil exceeds his depletable oil quantity, the
taxpayer for any taxable year shall be equal to 6,000 cubic feet
allowance under paragraph (1) (A) with respect to oil pro-
multiplied by the number of barrels of the taxpayer's depletable
duced during the taxable year from each property in the
oil quantity to which the taxpayer elects to have this paragraph
United States shall be that amount which bears the same ratio
apply. The taxpayer's depletable oil quantity for any taxable
to the amount of depletion which would have been allowable
year shall be reduced by the number of barrels with respect to
under section (a) for all of the taxpayer's oil produced 26 USC 613.
which an election under this paragraph applies. Such election
from such property during the taxable year (computed as if
shall be made at such time and in such manner as the Secretary
section 613 applied to all of such production at the rate
or his delegate shall by regulations prescribe.
specified in paragraph (5) or (6), as the case may be) as his
'(5) APPLICABLE PERCENTAGE.-For purposes of paragraph
depletable oil quantity bears to the aggregate number of
(1)-
barrels representing the average daily production of domestic
"In the case of production
The applicable
crude oil of the taxpayer for such year.
during the calendar year:
percentage is:
"(B) PRODUCTION OF NATURAL GAS IN EXCESS OF DEPLETABLE
1975
22
NATURAL GAS QUANTITY.-If the taxpayer's average daily pro-
1976
22
duction of domestic natural gas exceeds his depletable natural
1977
22
gas quantity, the allowance under paragraph (1) (B) with
1978
22
1979
22
respect to natural gas produced during the taxable year from
1980
22
each property in the United States shall be that amount
1981
20
which bears the same ratio to the amount of depletion which
1982
18
would have been allowable under section 613 (a) for all of the
1983
16
1984 and thereafter
15
taxpayers natural gas produced from such property during
the taxable year (computed as if section 613 applied to all of
"(6) OIL AND NATURAL GAS RESULTING FROM SECONDARY OR TER-
such production at the rate specified in paragraph (5) or
TIARY PROCESSES.-
(6), as the case may be) as the amount of his depletable
"(A) IN GENERAL-Except as provided in subsection (d),
natural gas quantity in cubic feet bears to the aggregate
26 USC 611.
the allowance for depletion under section 611 shall be com-
number of cubic feet representing the average daily produc-
26 USC 613.
puted in accordance with section 613 with respect to-
tion of domestic natural gas of the taxpayer for such year.
(i) SO much of the taxpayer's average daily secondary
"(C) TAXABLE INCOME FROM THE PROPERTY.-If both oil
or tertiary production of domestic crude oil as does not
and gas are produced from the property during the taxable
exceed the taxpayer's depletable oil quantity (deter-
year, for purposes of subparagraphs (A) and (B) the tax-
mined with regard to paragraph (3) (A) (ii) and
able income from the property, in applying the 50-percent
(ii) SO much of the taxpayer's average daily second-
limitation in section (a), shall be allocated between the
ary or tertiary production of domestic natural gas as does
oil production and the gas production in proportion to the
not exceed the taxpayer's depletable natural gas quantity
gross income during the taxable year from each.
(determined without regard to paragraph (3) (A) (ii) ;
"(D) PARTNERSHIPS.-In the case of a partnership, the
and 22 percent shall be deemed to be specified in subsection
depletion allowance in the case of oil and gas wells to which
(b) of section 613 for purposes of subsection (a) of that
this subsection applies shall be computed separately by the
section.
partners and not by the partnership.
"(B) AVERAGE DAILY SECONDARY OR TERTIARY PRODUCTION.-
"(E) SECONDARY OR TERTIARY PRODUCTION.-If the taxpayer
For purposes of this subsection-
has production from secondary or tertiary recovery processes
'(i) the taxpayer's average daily secondary or tertiary
during the taxable year, this paragraph (under regulations
production of domestic crude oil or natural gas for any
prescribed by the Secretary or his delegate) shall be applied
taxable year shall be determined by dividing his aggre-
separately with respect to such production.
gate production of domestic crude oil or natural gas, as
89 STAT. 50
89 STAT. 49
Pub. Law 94-12
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March 29, 1975
March 29, 1975
- 27 -
Pub. Law 94-12
(8) BUSINESSES UNDER COMMON CONTROL; MEMBERS OF THE SAME
determined under the table contained in paragraph (3)
FAMILY.-
(B) is allocated under paragraph (8) between the trans-
'(A) COMPONENT MEMBERS OF CONTROLLED GROUP TREATED AS
feror and transferee.
ONE TAXPAYER.-For purposes of this subsection, persons who
"(10) SPECIAL RULE FOR FISCAL YEAR TAXPAYERS.-In applying
are members of the same controlled group of corporations
this subsection to a taxable year which is not a calendar year, each
shall be treated as one taxpayer.
portion of such taxable year which occurs during a single calendar
"(B) AGGREGATION OF BUSINESS ENTITIES UNDER COMMON
year shall be treated as if it were a short taxable year.
CONTROL.-If 50 percent or more of the beneficial interest in
"(11) CERTAIN PRODUCTION NOT TAKEN INTO ACCOUNT.-In
two or more corporations, trusts, or estates is owned by the
applying this subsection, there shall not be taken into account
same or related persons (taking into account only persons
the production of natural gas with respect to which subsection
who own at least 5 percent of such beneficial interest), the
(b) applies.
tentative quantity determined under the table in paragraph
"(d) LIMITATIONS ON APPLICATION OF SUBSECTION (c).-
(3) (B) shall be allocated among all such entities in propor-
(1) LIMITATION BASED ON TAXABLE INCOME.-The deduction
tion to the respective production of domestic crude oil during
for the taxable year attributable to the application of subsection
the period in question by such entities.
(c) shall not exceed 65 percent of the taxpayer's taxable income
"(C) ALLOCATION AMONG MEMBERS OF THE SAME FAMILY.-
for the year computed without regard to—
In the case of individuals who are members of the same
(A) depletion with respect to production of oil and gas
family, the tentative quantity determined under the table in
subject to the provisions of subsection (c),
paragraph (3) (B) shall be allocated among such individuals
(B) any net operating loss carryback to the taxable year
in proportion to the respective production of domestic crude
under section 172, and
26 USC 172.
oil during the period in question by such individuals.
"(C) any capital loss carryback to the taxable year under
"(D) DEFINITION AND SPECIAL RULES.-For purposes of this
section 1212.
26 USC 1212.
paragraph-
If an amount is disallowed as a deduction for the taxable year by
(i) the term 'controlled group of corporations' has
reason of application of the preceding sentence, the disallowed
26 USC 1563.
the meaning given to such term by section 1563 (a), except
amount shall be treated as an amount allowable as a deduction
that section 1563 (b) (2) shall not apply and except that
under subsection (c) for the following taxable year, subject to the
'more than 50 percent' shall be substituted for 'at least 80
application of the preceding sentence to such taxable year. For
percent' each place it appears in section 1563(a),
purposes of basis adjustments and determining whether cost
"(ii) a person is a related person to another person if
depletion exceeds percentage depletion with respect to the produc-
such persons are members of the same controlled group
tion from a property, any amount disallowed as a deduction on
of corporations or if the relationship between such per-
the application of this paragraph shall be allocated to the
sons would result in a disallowance of losses under section
respective properties from which the oil or gas was produced in
26 USC 267,
267 or 707 (b), except that for this purpose the family of
proportion to the percentage depletion otherwise allowable to such
707.
an individual includes only his spouse and minor chil-
properties under subsection (c).
dren,
(2) RETAILERS EXCLUDED.-Subsection (c) shall not apply in
(iii) the family of an individual includes only his
the case of any taxpayer who directly, or through a related person,
spouse and minor children, and
sells oil or natural gas, or any product derived from oil or natural
(iv) each 6,000 cubic feet of domestic natural gas shall
gas-
be treated as 1 barrel of domestic crude oil.
"(A) through any retail outlet operated by the taxpayer
"(9) TRANSFER OF OIL OR GAS PROPERTY.-
or a related person, or
"(A) In the case of a transfer (including the subleasing of
"(B) to any person-
a lease) after December 31, 1974 of an interest (including an
(i) obligated under an agreement or contract with
interest in a partnership or trust) in any proven oil or gas
the taxpayer or a related person to use a trademark, trade
property, paragraph (1) shall not apply to the transferee (or
name, or service mark or name owned by such taxpayer or
sublessee) with respect to production of crude oil or natural
a related person, in marketing or distributing oil or natu-
gas attributable to such interest, and such production shall
ral gas or any product derived from oil or natural gas, or
not be taken into account for any computation by the trans-
(ii) given authority, pursuant to an agreement or con-
feree (or sublessee) under this subsection. A property shall
tract with the taxpayer or a related person, to occupy any
be treated as a proven oil or gas property if at the time of
retail outlet owned, leased, or in any way controlled by
the transfer the principal value of the property has been
the taxpayer or a related person.
demonstrated by prospecting or exploration or discovery
"(3) RELATED PERSON.-For purposes of this subsection, a per-
work.
son is a related person with respect to the taxpayer if a significant
(B) Subparagraph (A) shall not apply in the case of-
ownership interest in either the taxpayer or such person is held
(i) a transfer of property at death, or
by the other, or if a third person has a significant ownership
26 USC 351.
(ii) the transfer in an exchange to which section 351
interest in both the taxpayer and such person. For purposes of the
applies if following the exchange the tentative quantity
89 STAT. 52
89 STAT. 51
Pub. Law 94-12
- 28 -
March 29, 1975
March 29, 1975
- 29 -
Pub. Law 94-12
"Significant
preceding sentence, the term 'significant ownership interest'
TITLE VI-TAXATION OF FOREIGN OIL
ownership
means—
interest.
"(A) with respect to any corporation, 5 percent or more in
AND GAS AND OTHER FOREIGN
value of the outstanding stock of such corporation,
INCOME
"(B) with respect to a partnership, 5 percent or more
interest in the profits or capital of such partnership, and
SEC. 601. LIMITATIONS ON FOREIGN TAX CREDIT FOR TAXES PAID IN
"(C) with respect to an estate or trust, 5 percent or more of
CONNECTION WITH FOREIGN OIL AND GAS INCOME.
the beneficial interests in such estate or trust.
"(4) CERTAIN REFINERS EXCLUDED.-If the taxpayer or a related
(a) IN GENERAL-Subpart A of part III of subchapter N of chap-
person engages in the refining of crude oil, subsection (c) shall
ter 1 (relating to foreign tax credit) is amended by adding at the end
not apply to such taxpayer if on any day during the taxable year
thereof the following new section:
the refinery runs of the taxpayer and such person exceed 50,000
"SEC. 907. SPECIAL RULES IN CASE OF FOREIGN OIL AND GAS INCOME. 26 USC 907.
barrels.
"(a) REDUCTION IN AMOUNT ALLOWED AS FOREIGN TAX UNDER SEC-
(e) DEFINITIONS.-For purposes of this section-
TION 901.-In applying section 901, the amount of any income, war
26 USC 901.
"(1) CRUDE on.-The term 'crude oil' includes a natural gas
profits, and excess profits taxes paid or accrued (or deemed to have
liquid recovered from a gas well in lease separators or field
been paid) during the taxable year with respect to foreign oil and gas
facilities.
extraction income which would (but for this subsection) be taken into
"(2) NATURAL GAS.-The term 'natural gas' means any product
account for purposes of section 901 shall be reduced by the amount
(other than crude oil) of an oil or gas well if a deduction for
(if any) by which the amount of such taxes exceeds the product of-
26 USC 611.
depletion is allowable under section 611 with respect to such
"(1) the amount of the foreign oil and gas extraction income
product.
for the taxable year, multiplied by
"(3) DOMESTIC.-The term 'domestic' refers to production from
"(2) the percentage which is-
an oil or gas well located in the United States or in a possession
(A) in taxable years ending in 1975, 110 percent of,
of the United States.
(B) in taxable years ending in 1976, 105 percent of, and
"(4) BARREL-The term 'barrel' means 42 United States
'(C) in taxable years ending after 1976, 2 percentage
gallons."
points above,
(b) TECHNICAL AMENDMENTS.-
the sum of the normal tax rate and the surtax rate for the taxable year
26 USC 613.
(1) Section 613(d) (relating to percentage depletion) is
specified in section 11.
26 USC 11.
amended to read as follows:
"(b) APPLICATION OF SECTION 904 LIMITATION.-The provisions
26 USC 904.
(d) DENIAL OF PERCENTAGE DEPLETION IN CASE OF OIL AND GAS
of section 904 shall be applied separately with respect to-
Ante, p. 47.
WELLS.-Except as provided in section 613A, in the case of any oil or
"(1) foreign oil related income, and
gas well, the allowance for depletion shall be computed without refer-
"(2) other taxable income.
ence to this section."
With respect to foreign oil related income, the overall limitation pro-
(2) Section (b) is amended-
vided by section 904 (a) (2) shall apply and the per-country limita-
(A) by striking out subparagraph (A) of paragraph (1)
tion provided by section 904(a)(1) shall not apply.
and redesignating subparagraphs (B) and (C) as subpara-
"(c) FOREIGN INCOME DEFINITIONS AND SPECIAL RULES.-For pur-
graphs (A) and (B), respectively,
poses of this section-
(B) by striking out (1) (C)" each place it appears in
"(1) FOREIGN OIL AND GAS EXTRACTION INCOME.-The term 'for-
paragraphs (3), (4), and (7) and inserting in lieu thereof
eign oil and gas extraction income' means the taxable income
(1) (B)", and
derived from sources without the United States and its possessions
(C) by amending the last sentence of paragraph (7)-
from-
(i) by striking out "or" at the end of clause (A),
(A) the extraction (by the taxpayer or any other person)
(ii) by striking out the period at the end of clause
of minerals from oil or gas wells, or
(B) and inserting in lieu thereof or", and
"(B) the sale or exchange of assets used by the taxpayer
(iii) by adding at the end thereof the following new
in the trade or business described in subparagraph (A).
clause:
"(2) FOREIGN OIL RELATED INCOME.-The term 'foreign oil
"(C) oil and gas wells."
related income' means the taxable income derived from sources
26 USC 703.
(3) Section 703 (a) (2) (relating to deductions not allowable
outside the United States and its possessions from—
to a partnership) is amended by striking out "and" at the end
"(A) the extraction (by the taxpayer or any other person)
of subparagraph (E), by striking out the period at the end of
of minerals from oil or gas wells,
subparagraph (F) and inserting in lieu ", and", and by adding
"(B) the processing of such minerals into their primary
at the end thereof the following new subparagraph:
products,
"(G) the deduction for depletion under section 611 with
(C) the transportation of such minerals or primary
respect to oil and gas production subject to the provisions of
products,
section 613A (c).
"(D) the distribution or sale of such minerals or primary
26 USC 613A
(c) EFFECTIVE DATES.-The amendments made by this section shall
products, or
note.
take effect on January 1, 1975, and shall apply to taxable years ending
(E) the sale or exchange of assets used by the taxpayer
after December 31, 1974.
in the trade or business described in subparagraph (A),
(B), (C), or (D).
89 STAT. 53
89 STAT. 54
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"(3) DIVIDENDS, INTEREST, PARTNERSHIP DISTRIBUTION, ETC.-
able year ending before January 1, 1976, to any taxable year end-
The term 'foreign oil and gas extraction income' and the term
ing after December 31, 1975, if the per-country limitation provided
'foreign oil related income' include-
by section 904(a) (1) applied to such prior taxable year and to 26 USC 904.
(A) dividends and interest from a foreign corporation
the taxpayer's last taxable year ending before January 1, 1976,
in respect of which taxes are deemed paid by the taxpayer
then in the case of any foreign oil related carryover-
26 USC 902.
under section 902,
"(A) the first sentence of section (2) shall not
((B) dividends from a domestic corporation which are
apply, but
26 USC 861.
treated under section 861 (a) (2) (A) as income from sources
(B) such amount may not exceed the amount which could
without the United States,
have been used in such succeeding taxable year if the per-
"(C) amounts with respect to which taxes are deemed paid
country limitation continued to apply.
26 USC 960.
under section 960(a), and
"(f) RECAPTURE OF FOREIGN OIL RELATED Loss.—
"(D) the taxpayer's distributive share of the income of
"(1) GENERAL RULE.-For purposes of this subpart, in the case
to the partnerships. extent such dividends, interest, amounts, or distributive
of any taxpayer who sustains a foreign oil related loss for any
taxable year-
share is attributable to foreign oil and gas extraction income, or
"(A) that portion of the foreign oil related income for each
to foreign oil related income, as the case may be; except that
succeeding taxable year which is equal to the lesser of-
interest described in subparagraph (A) and dividends described
"(i) the amount of such loss (to the extent not used
in subparagraph (B) shall not be taken into account in computing
under this paragraph in prior years), or
foreign oil and gas extraction income but shall be taken into
(ii) 50 percent of the foreign oil related income for
account in computing foreign oil-related income.
such succeeding taxable year,
"(4) CERTAIN LOSSES.-If for any foreign country for any tax-
shall be treated as income from sources within the United
able year the taxpayer would have a net operating loss if only
States (and not as income from sources without the United
items from sources within such country (including deductions
States), and
properly apportioned or allocated thereto) which relate to the
"(B) the amount of the income, war profits, and excess
extraction of minerals from oil or gas wells were taken into
profits taxes paid or accrued (or deemed to have been paid)
account, such items-
to a foreign country for such succeeding taxable year with
"(A) shall not be taken into account in computing foreign
respect to foreign oil related income shall be reduced by an
oil and gas extraction income for such year, but
amount which bears the same proportion to the total amount
(B) shall be taken into account in computing foreign oil
of such foreign taxes as the amount treated as income from
related income for such year.
sources within the United States under subparagraph (A).
"(d) DISREGARD OF CERTAIN POSTED PRICES, ETc.-For purposes
bears to the total foreign oil related income for such succeed-
of this chapter, in determining the amount of taxable income in the
ing taxable year.
case of foreign oil and gas extraction income, if the oil or gas is dis-
For purposes of this chapter, the amount of any foreign taxes for
posed of, or is acquired other than from the government of a foreign
which credit is denied under subparagraph (B) of the preceding
country, at a posted price (or other pricing arrangement) which
sentence shall not be allowed as a deduction for any taxable year.
differs from the fair market value for such oil or gas, such fair mar-
For purposes of this subsection, foreign oil related income shall
ket value shall be used in lieu of such posted price (or other pricing
be determined without regard to this subsection.
arrangement).
"(2) FOREIGN OIL RELATED LOSS DEFINED.-For purposes of this
"(e) TRANSITIONAL RULES.-
subsection, the term 'foreign oil related loss' means the amount
"(1) TAXABLE YEARS ENDING AFTER DECEMBER 31, 1974.-In
by which the gross income for the taxable year from sources
26 USC 904.
applying subsections (d) and (e) of section 904 for purposes of
without the United States and its possessions (whether or not
determining the amount which may be carried over from a tax-
the taxpayer chooses the benefits of this subpart for such taxable
able year ending before January 1, 1975, to any taxable year
year) taken into account in determining the foreign oil related
ending after December 31, 1974-
"(A) subsection (a) of this section shall be deemed to have
income for such year is exceeded by the sum of the deductions
been in effect for such prior taxable year and for all taxable
properly apportioned or allocated thereto, except that there shall
not be taken into account-
years thereafter, and
"(B) the carryover from such prior year shall be divided
"(A) any net operating loss deduction allowable for such
(effective as of the first day of the first taxable year ending
year under section 172(a) or any capital loss carrybacks and 26 USC 172.
after December 31, 1974) into--
carryovers to such year under section 1212, and
26 USC 1212.
"(B) any-
(i) a foreign oil related carryover, and
'(ii) another carryover,
"(i) foreign expropriation loss for such year, as
defined in section 172(k) (1), or
on the basis of the proportionate share of the foreign oil
related income, or the other taxable income, as the case may
(ii) loss for such year which arises from fire, storm,
be, of the total taxable income taken into account in comput-
shipwreck, or other casualty, or from theft,
ing the amount of such carryover.
to the extent such loss is not compensated for by insurance
or otherwise.
(2) TAXABLE YEARS ENDING AFTER DECEMBER 31, 1975.-In
"(3) DISPOSITIONS.-
applying subsections (d) and (e) of section 904 for purposes of
determining the amount which may be carried over from a tax-
"(A) IN GENERAL-For purposes of this chapter, if prop-
erty used in a trade or business described in subparagraph
89 STAT. 55
89 STAT. 56
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Pub. Law 94-12
(A), (B), (C), or (D) of subsection (c) (2) is-disposed of
(d) EFFECTIVE DATES.-The amendments made by this section shall 26 USC 907
during any taxable year-
apply to taxable years ending after December 31, 1974; except that- note.
(i) the taxpayer notwithstanding any other provision
(1) the second sentence of section 907 (b) shall apply to taxable
of this chapter (other than paragraph (1)) shall be
years ending after December 31, 1975, and
deemed to have received and recognized foreign oil
related income in the taxable year of the disposition,
(2) the provisions of section 907 (f) shall apply to losses Ante, p. 54.
sustained in taxable years ending after December 31, 1975.
by reason of such disposition, in an amount equal to the
lesser of the excess of the fair market value of such
SEC. 602. TAXATION OF EARNINGS AND PROFITS OF CONTROLLED
property over the taxpayer's adjusted basis in such
FOREIGN CORPORATIONS AND THEIR SHAREHOLDERS.
property or the remaining amount of the foreign oil
(a) REPEAL OF MINIMUM DISTRIBUTION EXCEPTION TO REQUIRE-
related losses which were not used under paragraph
MENT OF CURRENT TAXATION OF SUBPART F INCOME-
(1) for such taxable year or any prior taxable year, and
(1) REPEAL OF MINIMUM DISTRIBUTION PROVISIONS.-Section 963 26 USC 963.
(ii) paragraph (1) shall be applied with respect to
(relating to receipt of minimum distributions by domestic corpo-
such income by substituting '100 percent' for '50 percent'.
rations) is hereby repealed.
'(B) DISPOSITION DEFINED.-For purposes of this subsec-
(2) CERTAIN DISTRIBUTIONS BY CONTROLLED FOREIGN CORPORA-
tion, the term 'disposition' includes a sale, exchange, distri-
TIONS TO REGULATED INVESTMENT COMPANIES.TREATED A8 DIVIDENDS.-
bution, or gift of property, whether or not gain or loss is
Subsection (b) of section 851 (relating to limitations on definition 26 USC 851.
récognized on the transfer.
of regulated investment company) is amended by adding at the
(C) EXCEPTIONS-Notwithstanding subparagraph (B),
end thereof the following new sentence:
the term 'disposition' does not include-
"For purposes of paragraph (2), there shall be treated as dividends
"(i) a disposition of property which is not a material
amounts included in gross income under section 951(a) (1) (A) (i) for 26 USC 951.
factor in the realization of income by the taxpayer, or
the taxable year to the extent that, under section 959 (a) (1), there is a 26 USC 959.
"(ii) a disposition of property to a domestic corpora-
distribution of the earnings and profits of the taxable year which
tion in a distribution or transfer described in section
are attributable to the amounts SO included."
26 USC 381.
(a).
(3) CONFORMING AMENDMENTS.-
"(g) WESTERN HEMISPHERE TRADE CORPORATIONS WHICH ARE MEM-
(A) The table of sections for subpart F of part III of sub-
BERS OF AN AFFILIATED GROUP.-If a Western Hemisphere trade cor-
chapter N of chapter 1 is amended by striking out the item
poration is a member of an affiliated group for the taxable year, then
relating to section 963.
26 USC 901.
in applying section 901, the amount of any income, war profits, and
(B) Subparagraph (A) (i) of section 951 (a) (1) (relating
excess profits taxes paid or accrued (or deemed to have been paid)
to general rule for amounts included in gross income of
during the taxable year with respect to foreign oil and gas extraction
United States shareholders) is amended by striking out
26 USC 1503.
income which would (but for this section and section 1503 (b)) be
"except as provided in section 963.".
taken into account for purposes of section 901 shall be reduced by the
(b) LIMITATION ON DEFINITION OF FOREIGN BASE COMPANY SALES
greater of-
INCOME-Paragraph (1) of section 954(d) (relating to definition of 26 USC 954.
"(1) the reduction with respect to such taxes provided by sub-
foreign base company sales income) is amended by adding at the end
section (a) of this section, or
thereof the following new sentence: "For purposes of this subsection,
"(2) the reduction determined under section 1503 (b) by
personal property does not include agricultural commodities which are
applying section 1503 (b) separately with respect to such taxes,
but not by both such reductions."
quantities." not grown in the United States in commercially marketable
(b) CERTAIN PAYMENTS NOT To BE CONSIDERED AS TAXES.-Section
(c) REPEAL OF EXCEPTION TO REQUIREMENT OF CURRENT TAXATION
901 is amended by redesignating subsection (f) as subsection (g), and
OF SUBPART F INCOME FOR REINVESTMENT IN LESS DEVELOPED COUN-
by adding after subsection (e) the following new subsection:
TRIES.-
"(f) CERTAIN PAYMENTS FOR OIL OR GAS Nor CONSIDERED AS
(1) REPEAL OF SECTION 954 (b) (1).-Paragraph (1) of subsec-
26 USC 902,
TAXEs.-Notwithstanding subsection (b) and sections 902 and 960, the
tion (b) of section 954 (relating to exclusions and special rules
960.
amount of any income, or profits, and excess profits taxes paid or
regarding foreign base company income) is hereby repealed.
accrued during the taxable year to any foreign country in connection
(2) REPEAL OF SECTION 954 (f).Subsection (f) of section 954
with the purchase and sale of oil or gas extracted in such country is not
(relating to increase in qualified investments in less developed
26 USC 275.
to be considered as tax for purposes of section and this section
countries) is hereby repealed.
if-
(3) AMENDMENT OF SECTION 951 (a) (1) (A) (ii).-Clause (ii)
"(1) the taxpayer has no economic interest in the oil or gas to
of section 951 (a) (1) (A) is amended by striking out "(deter-
26 USC 611.
which section 611 (a) applies, and
mined under section 955 (a) (3)) and inserting in lieu thereof 26 USC 955.
"(2) either such purchase or sale is at a price which differs from
(determined under section 955 (a) (3) as in effect before the enact-
the fair market value for such oil or gas at the time of such pur-
ment of the Tax Reduction Act of 1975)".
chase or sale."
(4) REPEAL OF SECTION 951 (a) ).-Paragraph (3) of section
(c) CLERICAL AMENDMENT.-The table of sections for subpart A of
951 (a) (relating to limitation on pro rata share of previously
part III of subchapter N of chapter 1 is amended by adding at the end
excluded subpart F income withdrawn from investment) is
thereof the following new item:
hereby repealed.
"Sec. 907. Special rules in case of foreign oil and gas income."
89 STAT. 58
89 STAT. 57
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March 29, 1975
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Pub. Law 94-12
26 USC 955.
(5) REPEAL OF SECTION 955.-Section 955 (relating to with-
such aircraft or vessels, or from the sale or exchange of
drawal of previously excluded subpart F income from qualified
such aircraft or vessels, and
investment) is hereby repealed.
"(ii) dividends and interest received from foreign cor-
(6) LESS DEVELOPED COUNTRY CORPORATION DEFINED.-Subsec-
porations which are less developed country corporations
26 USC 902.
tion (d) of section 902 is amended to read as follows:
within the meaning of this paragraph and 10 percent or
(d) LESS DEVELOPED COUNTRY CORPORATION DEFINED.-For pur-
more of the total combined voting power of all classes of
poses of this section, the term 'less developed country corporation'
stock of which are owned by the foreign corporation, and
means—
gain from the sale or exchange of stock or obligations of
"(1) a foreign corporation which, for its taxable year, is a less
foreign corporations which are such less developed coun-
developed country corporation within the meaning of paragraph
try corporations, and
(3) or (4), and
"(B) 80 percent or more of the assets of which on each day
(2) a foreign corporation which owns 10 percent or more of
of the taxable year consists of (i) assets used, or held for
the total combined voting power of all classes of stock entitled to
use, for or in connection with the production of income
vote of a foreign corporation which is a less developed country
described in subparagraph (A), and (ii) property described
corporation within the meaning of paragraph (3), and-
in section 956 (b) (2).
26 USC 956.
"(A) 80 percent or more of the gross income of which for
(5) The term 'less developed country' means (in respect to any
"Less devel-
its taxable year meets the requirement of paragraph (3) (A),
foreign corporation) any foreign country (other than an area
oped country. "
and
within the Sino-Soviet bloc) or any possession of the United
(B) 80 percent or more in value of the assets of which on
States with respect to which, on the first day of the taxable year,
each day of such year consists of property described in para-
there is in effect an Executive order by the President of the United
graph (3) (B).
States designating such country or possession as an economically
A foreign corporation which is a less developed country corporation
less developed country for purposes of this section. For purposes
for its first taxable year beginning after December 31, 1962, shall, for
of the preceding sentence, an overseas territory, department, prov-
purposes of this section, be treated as having been a less developed
ince, or possession may be treated as a separate country. No
country corporation for each of its taxable years beginning before
designation shall be made under this paragraph with respect to—
January 1, 1963.
(3) The term 'less developed country corporation' means a
Australia
Luxembourg
foreign corporation which during the taxable year is engaged in
Austria
Monaco
the active conduct of one or more trades or businesses and-
Belgium
Netherlands
"(A) 80 percent or more of the gross income of which for
Canada
New Zealand
the taxable year is derived from sources within less developed
Denmark
Norway
countries; and
France
Union of South Africa
"(B) 80 percent or more in value of the assets of which on
Germany (Federal Re-
San Marino
each day of the taxable year consists of-
public)
Sweden
(i) property used in such trades or businesses and
Hong Kong
Switzerland
located in less developed countries,
Italy
United Kingdom
(ii) money, and deposits with persons carrying on
Japan
the banking business,
Liechtenstein
(iii) stock, and obligations which, at the time of their
After the President has designated any foreign country or any pos-
acquisition, have a maturity of one year or more, of any
session of the United States as an economically less developed country
other less developed country corporation,
for purposes of this section, he shall not terminate such designation
"(iv) an obligation of a less developed country,
(either by issuing an Executive order for that purpose or by issuing an
(v) an investment which is required because of
Executive order under the first sentence of this paragraph which has
restrictions imposed by a less developed country, and
the effect of terminating such designation) unless, at least 30 days
26 USC 956.
"(vi) property described in section 956 (b) (2).
prior to such termination, he has notified the Senate and the House of
For purposes of subparagraph (A), the determination as to
Representatives of his intention to terminate such designation. Any
whether income is derived from sources within less developed
designation in effect on March 26, 1975, under section 955 (c) (3) (as
countries shall be made under regulations prescribed by the Secre-
in effect before the enactment of the Tax Reduction Act of 1975) shall
tary or his delegate.
be treated as made under this paragraph."
"(4) The term 'less developed country corporation' also means
(7) CLERICAL AMENDMENT.-The table of sections for subpart
a foreign corporation-
F of part III of subchapter N of chapter 1 is amended by striking
(A) 80 percent or more of the gross income of which for
out the item relating to section 955.
the taxable year consists of-
(d) SHIPPING PROFITS OF CONTROLLED FOREIGN CORPORATION To BE
"(i) gross income derived from, or in connection with,
TAXED CURRENTLY EXCEPT TO EXTENT REINVESTED IN SHIPPING
the using (or hiring or leasing for use) in foreign com-
OPERATIONS—
merce of aircraft or vessels registered under the laws of
(1) SHIPPING PROFITS INCLUDED IN GROSS INCOME OF UNITED
a less developed country, or from, or in connection with,
STATES SHAREHOLDERS.
the performance of services directly related to use of
(A) Section 954(a) (relating to foreign base company 26 USC 954.
income) is amended by striking out "and" at the end of para-
89 STAT. 59
89 STAT. 60
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Pub. Law 94-12
graph (2), by striking out the period at the end of paragraph
"(g) INCREASE IN QUALIFIED INVESTMENTS IN FOREIGN BASE Com-
(3) and inserting in lieu thereof and", and by adding at the
PANY SHIPPING OPERATIONS.-For purposes of subsection (b) (2), the
end thereof the following new paragraph:
increase for any taxable year in qualified investments in foreign base
(4) the foreign base company shipping income for the taxable
company shipping operations of any controlled foreign corporation is
year (determined under subsection (f) and reduced as provided
the amount by which-
in subsection (b) (5))
"(1) the qualified investments in foreign base company ship-
26 USC 954.
(B) Paragraph (2) of section 954(b) is amended to read
ping operations (as defined in section of the controlled Infra.
as follows:
foreign corporation at the close of the taxable year, exceed
"(2) EXCLUSION FOR REINVESTED SHIPPING INCOME-For pur-
"(2) the qualified investments in foreign base company ship-
poses of subsection (a), foreign base company income does not
ping operations (as SO defined) of the controlled foreign corpora-
include foreign base company shipping income to the extent that
tion at the close of the preceding taxable year."
the amount of such income does not exceed the increase for the
(2) AMOUNTS INCLUDED IN GROSS INCOME OF UNITED STATES
taxable year in qualified investments in foreign base company
SHAREHOLDERS.--
shipping operations of the controlled foreign corporation (as
(A) Subparagraph (A) of section 951 (a) (1) is amended Ante, p. 58.
determined under subsection (g))."
by striking out "and" at the end of clause (i), by striking out
(C). Subparagraphs (A) and (B) of section (b) (3)
the semicolon at the end of clause (ii) and inserting in lieu
are each amended by striking out "paragraphs (1) and (5)
thereof a comma, and by adding at the end thereof the follow-
and inserting in lieu thereof "paragraphs (2) and (5)
ing new clause:
(D) Subparagraph (B) of section 954(b) (3) is amended
"(iii) his pro rata share (determined under section
by striking out "paragraphs (1), (2)," and inserting in lieu
955 (a) (3)) of the corporation's previously excluded sub-
thereof "paragraph (2),"
part F income withdrawn from foreign base company
(E) Paragraph (5) of section 954 (b) is amended by strik-
shipping operations for such year; and".
ing out "and the foreign base company services income" and
(B) Section 951 (a) is amended by inserting after para-
inserting in lieu thereof "the foreign base company services
graph (2) the following new paragraph:
income, and the foreign base company shipping income".
(3) LIMITATION ON PRO RATA SHARE OF PREVIOUSLY EXCLUDED
(F) Section 954 (b) is amended by adding at the end thereof
SUBPART F INCOME WITHDRAWN FROM INVESTMENT.-For purposes
the following new paragraph:
of paragraph (1) (A) (iii), the pro rata share of any United
'(6) SPECIAL RULES FOR FOREIGN BASE COMPANY SHIPPING IN-
States shareholder of the previously excluded subpart F income
COME-Income of a corporation which is foreign base company
of a controlled foreign corporation withdrawn from investment
shipping income under paragraph (4) of subsection (a) (deter-
in foreign base company shipping operations shall not exceed an
amount-
mined without regard to the exclusion under paragraph (2) of
this subsection)-
"(A) which bears the same ratio to his pro rata share of
"(A) shall not be considered foreign base company income
such income withdrawn (as determined under section 955 (a)
of such corporation under any other paragraph of subsection
(3)) for the taxable year, as
(a) and
(B) the part of such year during which the corporation is
(B) if distributed through a chain of ownership described
a controlled foreign corporation bears to the entire year."
26 USC 958.
under section 958(a), shall not be included in foreign base
(3) WITHDRAWAL OF PREVIOUSLY EXCLUDED SUBPART F INCOME
company income of another controlled foreign corporation in
FROM QUALIFIED INVESTMENT.-
such chain."
(A) Subpart F of part III of subchapter N of chapter 1
(G) Section 954 is amended by adding at the end thereof
section: is amended by inserting after section 954 the following new
the following new subsections:
"(f) FOREIGN BASE COMPANY SHIPPING INCOME.-For purposes of
"SEC. 955. WITHDRAWAL OF PREVIOUSLY EXCLUDED SUBPART F 26 USC 955.
subsection (a) (4), the term 'foreign base company shipping income'
INCOME FROM QUALIFIED INVESTMENT.
means income derived from, or in connection with, the use (or hiring
"(a) GENERAL RULES.-
or leasing for use) of any aircraft or vessel in foreign commerce, or
(1) AMOUNT WITHDRAWN.-For purposes of this subpart, the
from, or in connection with, the performance of services directly
amount of previously excluded subpart F income of any controlled
related to the use of any such aircraft, or vessel, or from the sale,
foreign corporation withdrawn from investment in foreign base
exchange, or other disposition of any such aircraft or vessel. Such term
company shipping operations for any taxable year is an amount
includes, but is not limited to-
equal to the decrease in the amount of qualified investments in
"(1) dividends and interest received from a foreign corporation
foreign base company shipping operations of the controlled for-
26 USC 902.
in respect of which taxes are deemed paid under section 902, and
eign corporation for such year, but only to the extent that the
gain from the sale, exchange, or other disposition of stock or obli-
amount of such decrease does not exceed an amount equal to-
gations of such a foreign corporation to the extent that such divi-
"(A) the sum of the amounts excluded under section 954
dends, interest, and gains are attributable to foreign base
(b) (2) from the foreign base company income of such cor- Ante, p. 61.
company shipping income, and
poration for all prior taxable years, reduced by
'(2) that portion of the distributive share of the income of a
"(B) the sum of the amounts of previously excluded sub-
partnership attributable to foreign base company shipping
part F income withdrawn from investment in foreign base
income.
89 STAT. 62
89 STAT. 61
Pub. Law 94-12
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March 29, 1975
March 29, 1975
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Pub. Law 94-12
company shipping operations of such corporation determined
in section 954 (3)) with respect to the corporation actually 26 USC 954.
under this subsection for all prior taxable years.
making or withdrawing the investment.
(2) DECREASE IN QUALIFIED INVESTMENTS.-For purposes of
(3) SPECIAL RULE.-For purposes of this subpart, a United
paragraph (1), the amount of the decrease in qualified investments
States shareholder of a controlled foreign corporation may, under
in foreign base company shipping operations of any controlled
regulations prescribed by the Secretary or his delegate, elect to
foreign corporation for any taxable year is the amount by which—
make the determinations under subsection (a) (2) of this section
"(A) the amount of qualified investments in foreign base
and under subsection (g) of section 954 as of the close of the years
Ante, p. 62.
company shipping operations of the controlled foreign corpo-
following the years referred to in such subsections, or as of the
ration at the close of the preceding taxable year, exceeds
close of such longer period of time as such regulations may permit,
(B) the amount of qualified investments in foreign base
in lieu of on the last day of such years. Any election under this
company shipping operations of the controlled foreign corpo-
paragraph made with respect to any taxable year shall apply to
ration at the close of the taxable year,
such year and to all succeeding taxable years unless the Secretary
to the extent that the amount of such decrease does not exceed
or his delegate consents to the revocation of such election.
the sum of the earnings and profits for the taxable year and the
"(4) AMOUNT ATTRIBUTABLE TO PROPERTY.-The amount taken
earnings and profits accumulated for prior taxable years begin-
into account under this subpart with respect to any property
ning after December 31, 1975, and the amount of previously
described in paragraph (1) shall be its adjusted basis, reduced by
excluded subpart F income invested in less developed country
any liability to which such property is subject.
corporations described in section 955 (c) (2) (as in effect before the
"
(5) INCOME EXCLUDED /UNDER PRIOR LAW.-Amounts invested
Ante, p. 59.
enactment of the Tax Reduction Act of 1975) to the extent attrib-
in less developed country corporations described in section 955
utable to earnings and profits accumulated for taxable years
(c) (2) (as in effect before the enactment of the Tax Reduction
beginning after December 31, 1962. For purposes of this para-
Act of 1975) shall be treated as qualified investments in foreign
26 USC 955.
graph, if qualified investments in foreign base company shipping
base company shipping operations and shall not be treated as
operations are disposed of by the controlled foreign corporation
investments in less developed countries for purposes of section 951
during the taxable year, the amount of the decrease in qualified
(a) (1) (A) (ii).
investments in foreign base company shipping operations of such
Ante, p. 58.
(B) The table of sections of subpart F of part III of sub-
controlled foreign corporation for such year shall be reduced by
chapter N of chapter 1 is amended by inserting after the item
an amount equal to the amount (if any) by which the losses on
relating to section 954 the following new item:
such dispositions during such year exceed the gains on such dis-
positions during such year.
"Sec. 955. Withdrawal of previously excluded subpart F income from
"(3) PRO RATA SHARE OF AMOUNT WITHDRAWN.-In the case of
qualified investment."
any United States shareholder, the pro rata share of the amount
(e) EXCLUSION FROM FOREIGN BASE COMPANY INCOME WHERE FOR-
of previously excluded subpart F income of any controlled for-
EIGN BASE COMPANY INCOME Is LESS THAN 10 PERCENT OF GROSS
eign corporation withdrawn from investment in foreign base
INCOME.-Paragraph (3) of section 954(b) is amended by striking out
company shipping operations for any taxable year is his pro rata
"30 percent" each place it appears and inserting in lieu thereof "10
share of the amount determined under paragraph (1).
percent".
(b) QUALIFIED INVESTMENTS IN FOREIGN BASE COMPANY SHIPPING
(f) EFFECTIVE DATE.-The amendments made by this section shall
26 USC 955
OPERATIONS.-
apply to taxable years of foreign corporations beginning after Decem-
note.
"(1) IN GENERAL-For purposes of this subpart, the term
ber 31, 1975, and to taxable years of United States shareholders
'qualified investments in foreign base company shipping opera-
(within the meaning of 951 (b) of the Internal Revenue Code of 1954)
tions' means investments in-
within which or with which such taxable years of such foreign corpo-
"(A) any aircraft or vessel used in foreign commerce, and
rations end.
(B) other assets which are used in connection with the
SEC. 603. DENIAL OF DISC BENEFITS WITH RESPECT TO ENERGY
performance of services directly related to the use of any
RESOURCES AND OTHER PRODUCTS.
such aircraft or vessel.
(a) AMENDMENT OF SECTION 993 .-Section 993 (c) (2) (relat-
26 USC 993.
Such term includes, but is not limited to, investments by a con-
ing to property excluded from export property) is amended by strik-
trolled foreign corporation in stock or obligations of another
ing out "or" at the end of subparagraph (A), by striking out the
controlled foreign corporation which is a related person (within
period at the end of subparagraph (B) and inserting in lieu thereof
26 USC 954.
the meaning of section (3)) and which holds assets
or", and by adding at the end thereof the following:
described in the preceding sentence, but only to the extent that
"(C) products of a character with respect to which a deduc-
such assets are SO used.
tion for depletion is allowable (including oil, gas, coal, or
"(2) QUALIFIED INVESTMENTS BY RELATED PERSONS.-For pur-
uranium products) under section 611, or
26 USC 611.
poses of determining the amount of qualified investments in
"(D) products the export of which is prohibited or cur-
foreign base company shipping operations, an investment (or
tailed under section 4(b) of the Export Administration Act
a decrease in investment) in such operations by one or more con-
of 1969 (50 U.S.C. App. 2403(b)) to effectuate the policy set
trolled foreign corporations may, under regulations prescribed
forth in paragraph (2) (A) of section 3 of such Act (relating
50 USC app.
by the Secretary or his delegate, be treated as an investment (or
to the protection of the domestic economy).
2402.
a decrease in investment) by another corporation- which is a con-
Subparagraph (C) shall not apply to any commodity or product at
trolled foreign corporation and is a related person (as defined
least 50 percent of the fair market value of which is attributable to
manufacturing or processing, except that subparagraph (C) shall
is
FORD
89 STAT. 63
89 STAT. 64
GERALD
LIBRAR
Pub. Law 94-12
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March 29, 1975
March 29, 1975
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Pub. Law 94-12
apply to any primary product from oil, gas, coal, or uranium. For
(2) by adding at the end thereof the following new paragraph:
purposes of the preceding sentence, the term 'processing' does not
(3) Effective only with respect to benefits for weeks of unem-
include extracting or handling, packing, packaging, grading, storing,
ployment ending before July 1, 1975, the amount established in
or transporting."
such account for any individual shall be equal to the lesser of-
26 USC 993
(b) EFFECTIVE DATE.-The amendments made by subsection (a)
"(A) 100 per centum of the total amount of regular com-
note.
shall apply to sales, exchanges, and other dispositions made after
pensation (including dependents' allowances) payable to him
March 18, 1975, in taxable years ending after such date.
with respect to the :benefit year (as determined under the
SEC. 604. TREATMENT FOR PURPOSES OF THE INVESTMENT CREDIT
State law) on the basis of which he most recently received
OF CERTAIN PROPERTY USED IN INTERNATIONAL OR
regular compensation; or
TERRITORIAL WATERS.
76 (B) twenty-six times his average weekly benefit amount
(a) AMENDMENT TO 1954 CODE.-
(as determined for purposes of section 202 (b) (1) (C) of the
26 USC 1
(1) IN GENERAL-Clause (x) of section 48(a) (2) (B) (relating
Federal-State Extended Unemployment Compensation Act
et seq.
26 USC 48.
to property used outside the United States) is amended by strik-
of 1970) for his benefit year."
26 USC 3304
ing out "territorial waters" and inserting in lieu thereof "terri-
(b) MODIFICATION OF AGREEMENTS.-The Secretary of Labor shall, note.
torial waters within the northern portion of the Western
at the earliest practicable date after the enactment of this Act, pro- 26 USC 3304
pose to each State with which he has in effect an agreement entered note.
Hemisphere".
(2) DEFINITION.-Subparagraph (B) of section 48 (a) (2) is
into pursuant to section 102 of the Emergency Unemployment Com-
amended by adding at the end thereof the following new sentence:
pensation Act of 1974 a modification of such agreement designed to 26 USC 3304
"For purposes of clause (x), the term 'northern portion of the
cause payments of emergency compensation thereunder to be made note.
Western Hemisphere' means the area lying west of the 30th merid-
in the manner prescribed by such Act, as amended by subsection (a)
ian west of Greenwich, east of the international dateline, and
of this section. Notwithstanding any provision of the Emergency
north of the Equator, but not including any foreign country which
Unemployment Compensation Act of 1974, if any such State shall fail 26 USC 3304
or refuse, within a reasonable time after the date of the enactment of note.
is a country of South America.".
this Act, to enter into such a modification of such agreement, the Sec-
26 USC 48 note.
(b) EFFECTIVE DATE.—
(1) IN GENERAL-The amendments made by subsection (a)
retary of Labor shall terminate such agreement.
shall apply to property, the construction, reconstruction, or erec-
SEC. 702. SPECIAL PAYMENT TO RECIPIENTS OF BENEFITS UNDER 42 USC 402
tion of which was completed after March 18, 1975, or the acquisi-
CERTAIN RETIREMENT AND SURVIVOR BENEFIT PRO- note.
tion of which by the taxpayer occurred after such date.
GRAMS.
(2) BINDING CONTRACT.-The amendments made by subsection
(a) PAYMENT.-The Secretary of the Treasury shall, at the earliest
(a) shall not apply to property constructed, reconstructed,
practicable date after the enactment of this Act, make a $50 payment
erected, or acquired pursuant to a contract which was on April 1,
to each individual, who for the month of March, 1975, was entitled
1974, and at all times thereafter, binding on the taxpayer.
(without regard to sections 202(j) (1) and 223 (b) of title II of the
(3) CERTAIN LEASE-BACK TRANSACTIONS, ETC.-Where a person
Social Security Act and without the application of section 5 (a) (ii) 42 USC 402,
who is a party to a binding contract described in paragraph (2)
of the Railroad Retirement Act of 1974) to-
423.
transfers rights in such contract (or in the property to which
(1) a monthly insurance benefit payable under title II of the 45 USC 231d,
such contract relates) to another person but a party to such con-
Social Security Act,
42 USC 401.
tract retains a right to use the property under a lease with such
(2) a monthly annuity or pension payment under the Rail-
other person, then to the extent of the transferred rights such
road Retirement Act of 1935, the Railroad Retirement Act of 45 USC 215
other person shall, for purposes of paragraph (2), succeed to the
1937, or the Railroad Retirement Act of 1974, or
note.
position of the transferor with respect to such binding contract
(3) a benefit under the supplemental security income benefits 45 USC 228a,
and such property. The preceding sentence shall apply, in any
program established by title XVI of the Social Security Act; 231.
case in which the lessor does not make an election under section
except that, (A) such $50 payment shall be made only to individuals 42 USC 1381.
48(d) of the Internal Revenue Code of 1954, only if a party to
who were paid a benefit for March 1975 in a check issued no later
such contract retains a right to use the property under a long-
than August 31, 1975; (B) no such $50 payment shall be made to any
term lease.
individual who is not a resident of the United States (as defined in
section 210(i) of the Social Security Act); and (C) if an individual 42 USC 410.
TITLE VII-MISCELLANEOUS
is entitled under two or more of the programs referred to in clauses
(1), (2), and (3), such individual shall be entitled to receive only one
PROVISIONS
such $50 payment. For purposes of this subsection, the term "resident" "Resident.
"
means an individual whose address of record for check payment
SEC. 701. CERTAIN UNEMPLOYMENT COMPENSATION.
purposes is located within the United States.
(a) AMENDMENT OF EMERGENCY UNEMPLOYMENT COMPENSATION
(b) RECIPIENT IDENTIFICATION.-The Secretary of Health, Educa-
26 USC 3304
ACT OF 1974.-Section 102(e) of the Emergency Unemployment Com-
tion, and Welfare and the Railroad Retirement Board shall provide
note.
pensation Act of 1974 is amended—
the Secretary of the Treasury with such information and data as may
(1) in paragraph (2) thereof, by striking out "The amount"
be needed to enable the Secretary of the Treasury to ascertain which
and inserting in lieu thereof "Except as provided in paragraph
individuals are entitled to the payment authorized under subsection
(3), the amount"; and
(a).
89 STAT. 66
89 STAT. 65
Pub. Law 94-12
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March 29, 1975
(c) COORDINATION WITH OTHER FEDERAL PROGRAMS.-Any payment
made by the Secretary of the Treasury under this section to any indi-
vidual shall not be regarded as income (or, in the calendar year 1975,
as a resource) of such individual (or of the family of which he is a
member) for purposes of any Federal or State program which under-
takes to furnish aid or assistance to individuals or families, where
eligibility to receive such aid or assistance (or the amount of such aid
or assistance) under such program is based on the need therefor of the
individual or family involved. The requirement imposed by the pre-
ceding sentence shall be treated as a condition for Federal financial
participation in any State (or local) welfare program for any calen-
dar quarter commencing after the date of enactment of this Act.
(d) APPROPRIATIONS AUTHORIZATION.-There are hereby authorized
to be appropriated, out of any funds in the Treasury not otherwise
appropriated, such sums as may be necessary to carry out the provi-
sions of this section.
(e) PAYMENT NOT To BE CONSIDERED INCOME.-Payments made
under this section shall not be considered as gross income for purposes
26 USC 1
of the Internal Revenue Code of 1954.
et seq.
Approved March 29, 1975.
LEGISLATIVE HISTORY:
HOUSE REPORT No. 94-19 (Comm, on Ways and Means).
SENATE REPORT No. 94-36 (Comm.. on Finance).
CONGRESSIONAL RECORD, Vol. 121 (1975):
Feb. 27, considered and passed House.
Mar. 18-21, considered and passed Senate, amended.
Mar. 26, House and Senate agreed to conference report.
WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 11, No. 14:
Mar. 29, Presidential statement,
89 STAT. 67
3
March 27, 1975
Dear Mr. Director:
The following bills were received at the White
House on March 27th:
H.R. 2166
H.R. 2783
H.R. 3260
H.R. 4075
Please let the President have reports and
recommendations as to the approval of these bills
as soon as possible.
Sincerely,
Robert D. Linder
Chief Executive Clerk
The Honorable James T. Lynn
Director
Office of Management and Budget
Washington, D. C.
FORD is LIBRARY