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Volume 175, March 1939
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Volume 175, March 1939
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Henry Morgenthau, Jr. Papers
Diaries of Henry Morgenthau, Jr.
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DIARY
Book 175
Suggested Tax Adjustments Designed
to Reduce Deterrent Effects on Business: March 1939
Regraded Unclassified
SUGGESTED TAX ADJUSTMENTS DESIGNED TO REDUCE
DETERRENT EFFICTS ON BUSINESS
1. Not loss carry-over for individuals and corporations.
History. For a number of years prior to 1934 taxpayers ware allowed
to carry forward net losses incurred in trade or business and to use
them as deductions in later years. In the Revenue Act of 1928 such
losses were allowed to be carried forward for two years. The Revenue
Act of 1932 cut down the carry-over to 009 year and the National Industrial
Recovery Act of 1933 eliminated it entirely. It has not been in effect
since, except that in the 1938 Act a one-year net loss carry-over was
allowed to corporations but only as a credit for purposes of the 24 percent
undistributed profite tax.
Proposal. Allow net losses of business. both individual and corporate,
to be offset against the business income of the succeeding year. Any loss
not absorbed by the income of the succeeding year could be carried forward
to the following two years in the same manner.
2. Exemption of dividends from individual normal tax.
History. Prior to 1936 dividends received by individuals were subject
only to surtaxes. The 1936 Act subjected dividends to both normal tax and
surtax.
Proposal. Allow dividends that are received by individuals from
domestic corporations subject to Federal income taration to be credited
against net income in computing the normal tax. Such dividends would be
subject to surtax as at present.
3. Elimination of tax on intercorporate dividends.
History. Prior to 1936 the entire amount of dividands received by
corporations was deducted from gross income to avoid multiple taxation
of corporate earnings. Under the present law 85 percent of such
intercorporate dividends are deductible, the remaining 15 percent being
tarable.
Proposal. Allow all dividends received by a corporation from a
domestic corporation which is subject to Federal income taxation to be
deducted from gross income.
4. Restoration of consolidated returns.
History. Closely affiliated corporations were permi tted to file
consolidated returns prior to 1934. although beginning in 1932 an
increased rate was imposed for the privilage of filing such returns.
The permission was withdrawn by the Revenue Act of 1934 and consolidated
returns are now permitted only in the case of railroad corporations.
2
Proposal. Restore the privilege of filing consolidated returns
without penalty. This privilege would necessarily be accompanied
by the elimination of the tax on intercorporate dividends previously
mentioned. The privilege of consolidation would be limited to
closely (95 percent) affiliated corporations along the lines followed
in earlier laws.
5. Elimination of the limitation on deduction of corporate capital
losses.
History. Prior to 1934. corporations were permitted to deduct
capital lowses from ordinary income without limitation. The Revenue
Act of 1934 provided that any excess of capital losses over capital
gains could be deducted from ordinary income only up to $2,000.
Proposal. In the case of industrial corporations, permit capital
losses to be deducted in full from ordinary income. In the case of
other corporations, either (1) limit the deduction to $2,000 ordinary
income, or (2) permit a carry-forward of net capital losses against
capital gains of future years.
6. Repeal of capital stock and excess profits taxes.
History. The existing capital stock and excess profits taxes ware
placed in the law by the National Industrial Recovery Act of 1933. In
declarations of the value of capital stock were provided by the Revenue
Acts of 1934. 1935, as amended in 1936, and 1938.
Proposal. Repeal the capital stock and excess profits taxes. The
repeal of the capital stock tax would be effective for years beginning
after June 30, 1939. Repeal of the excess profits tax would be
effective for the first income year ending after June 30. 1940.
7. Repeal of undistributed profits tax and introduction of new rate
schedule.
Ristory. Prior to 1936 flat tax rates were applied in taxing the
income of corporations, the rate under the Revenue Act of 1934 being
138 percent. The Revenue Act of 1936 provided progressive rates ranging
up to 15 percent on income over $40,000 and imposed & separate tax of
7 to 27 percent on undistributed profits. The Revenue Act of 1938
provided graduated taxes for corporations with incomes under $25,000
and a basic rate of 161 percent plus an undistributed profits tax of
2) percent in the case of corporations with incomes of over $25,000.
Special classes of corporations are taxed at 16} percent.
Proposal. Replace the present corporate tax rate structure by a.
tax of 17 percent on the net income of corporations having incomes of
not more than $25,000 and 20 percent on the income of corporations
having net incomes of over $25,000. Special "notch" provisions would
Regraded Unclassified
- 3 -
be included applying to corporations with incomes of slightly over
$25,000 so that such corporations may not have less income after
taxes than corporations with incomes of under $25,000. Corporations
falling in the flat rate classes in the present law would either be
taxed at the 20 percent rate or treated as all other corporations.
Regraded Unclassified
Table 6
BOOK SHAREHOLDERS AND SHAREHOLDINGS IN 1,265 CORPORATIONS
ON OR ABOUT DECEMBER 31, 1937
Classified by Size of Corporation
a
E
I
Market valueiMarket value:
Holdings of 100 shares or less
Number
&
&
Number
I
& of shares
I
of
4
Holders
a
Shares
I
Market value 1/
Assets
of
Shares
1
I
of
1
;outstanding
:
average
4
:Percent:
:Percent:
: Percent
(8 million)
outstanding
Amount
corpon
4
shareholders:
4 (000
i
share-
:
Number
I
of
-
Number
5
of
I
4
of
rations
I
:
I
omitted) 1/
I
holding 1/
I
I total &
a total I
(000 omitted)
&
total
Under 1
197
201,968
99.070,393
$ 213,692
$ 1,058
143,222
70.9
6,606,518
6.7
$ 32,263
15.1
1 and under 5
399
610,302
140,666,974
788,180
1,291
476,603
78.1
18,903,583
13.4
136,379
17.3
5 and under 10
192
517,985
84,255,231
966,318
1,866
433,145
83.6
15,097,935
17.9
189,818
19.6
10 and under 20
173
702,323
117,027,796
1,679,848
2,392
590,114
84.0
19,942,149
17.0
284,104
16.9
20 and under 50
140
970,096
142,402,351
2,590,505
2,670
830,780
85.6
26,137,143
18.4
474,268
28.3
50 and under 100
62
758,131
107,359,021
2,886,175
3.807
629,218
83.0
18,946,283
17.6
456,421
15.8
100 and under 200
42
1,122,670
134,603,491
4,090,076
3.643
975,461
86.9
27,423,487
20.4
851,100
20.8
200 and under 500
32
1,038,741
123,536,774
3,133,490
3,017
904.447
87.1
25,465,708
20.6
629,506
20.1
500 and over
28
2,219,773
250.849.436
7.730,510
3.483
1,961,125
88.3
46,636,881
18.6
2,163,729
28.0
Total
1,265
8,141,989
1,199,771,467
24.078.794
2,957
6,944,115
85.3
205,159,687
17.1
5,217,588
21.7
Based upon last sale price on December 31, 1937, or upon the average of the bid and asked prices on that date if DO sales were
consumsated and if the bid and asked range was reasonable; otherwise, upon the male price nearest December 31, 1937.
Regraded Unclassified
Table 12
BOOK SHAREHOLDERS AND SHAREHOLDINGS IN 244 "CLOSELY HELD" CORPORATIONS
OF OR ABOUT DECEMBER 31, 1937
Classified by sixe of Corporation
:
4
1
I
a
1
Holdings of 100 Shares or Less
Market Value
Market Value
&
Number
a
Number
a
I
1
Holders
&
Shares
A
Market Value I/
Assets
Shares
of Shares
of
($ Millions)
a
of
1
of
a
a
à
:Percent:
:Percent:
:Percent
Corporations:
Outstanding
Outstanding
Average
Amount
Shareholders:
#
a
Number
&
of
a Number I
of
#
4
of
(000 omitted)
Shareholding
à
a
1
-
a
& total à
& total I
(000 onitted)
I total
Under 1
49
19,929
50,855,413
$
12,637
$
634
9,969
50.0
500,831
1.0
$
834
6.6
1 and under 5
74
54.442
48,990,780
126,469
2,323
40,510
74.4
1,664,366
3.4
10,644
8.4
5 and under 10
32
33,406
13,569,899
129,760
3.884
27,990
83.8
1,022,577
7-5
8,051
6.2
10 and under 20
25
33,037
13,926,012
126,736
3.836
28,250
85.5
911,509
6.5
9,804
7+7
20 and under 50
30
59.469
20.206,777
255,786
4,301
51,058
85.9
1,545,246
7.6
20,563
8.0
50 and under 100
12
106,154
10,195,585
197.343
1,859
103.371
97+4
896,293
8.8
14.246
7.2
100 and under 200
13
25,724
20,121,237
292,601
11,375
20,544
79.9
735,198
3-7
11,664
4.0
200 and under 500
7
49,436
23,514,230
696,487
14,089
44,071
89.1
1,100,902
4-7
54,196
7.8
500 and over
2
19,286
3,673.774
18.447
956
17,533
90.9
494,049
13.6
2,394
13.0
Total
244
400,883
205,053.707
1,856,266
4.630
343,296
85.6
8,875,971
4-3
132,396
7.1
Based upon last sale price on December 31, 1937, or upon the average of the bid and asked prices on that date if no sales vote
consumented and if the bid and asked range was reasonable: otherwise upon the sale price nearest December 31, 1937.
Regraded Unclassifie
Elimination of intercorporate dividend tax
1
Elimination of dividends received from
taxable income of corporations.
Repeal of undistributed profite tax
2
Exemption of dividends from individual normal tax
34
Net loss carry-over
Net loss carry-over for individuals and
corporations.
Corporate capital losses
5-
Elimination of limitation on allowances
of corporate capital losses ao that such
losses may be taken in full.
Capital stock and excess-profits tax repeal
6/
Consolidated returns
7
Restoration of consolidated returns
for all affiliated corporations.
Assumption of indebtedness
8
New provisions dealing with the effect
of assumptions of indebtedness in con-
nection with reorganizations and other
tax-free exchanges under section 112.
Cancellation of indebtedness
9
Revision of the law with respect to
cancellation of indebtedness.
Stock dividends
10
Provision establishing the treatment of
the basis of stock dividends both in the
future end retroactively to terminate the
confusion which has resulted from the
Koshland and Gowran cases.
Stock rights
11
Inventories--last-in first-out
12
Revision of section 22(d). which pro-
vides for the use of the last-in, first-
out method of veluing inventories.
Mortgage foreclosures
13
Express provision with respect to the
treatment of mortgages and other liens
and foreclosures.
Regraded Unclassified
- 11 -
Natual insurance companies
14
Revision of the provisions for taxation
of mutual life insurance companies other
than life.
Section 820 of the Revenue Act of 1938
15
Personal holding company deficits
16
Provision for some form of deficit
cushion to allow a credit against
undistributed personal holding com-
pany net income where corporation
has no earnings or profits.
Foreign tax credit
17
Amendment to the foreign tax credit
provision to give proper credit for
intercorporate dividends received
and Federal bond interest.
Deputy collectors--civil service
18
Legislation bringing deputy collectors
of internal revenue within the Civil
Service and extending to them the bene-
fits of the Retirement Act.
Donees' depreciation basis
19
Provision that basis of donees for
depreciation shall be the same as
basis for determination of loss.
Publicity of returns
20
Repeal of section 148(f) relating
to publicity of names and salaries
of corporate officers.
Copper tax elimination
21
Repeal of the 4 centa per pound tax
on imported copper.
Estate valuation option
22
Elimination or clarification of
estate valuation option (section 811(j))
with particular reference to interest,
rents and dividends received by the 08-
tate between the date of decedent's death
and the valuation date.
Regraded Unclassified
- 111 -
Insolvent banks
23
Amendment of an Act passed in 1879
(as amended in the Revenue Act of 1938)
relating to the remission of taxes due
from insolvent banks to eliminate any
hardship which may result from the pres-
ent provision which permits collection of
such taxes immediately after depositors
have been paid in full.
Control in reorganizations
24
Definition of control with respect to
tax-free reorganisations.
Final aettlement of judgments by Commissioner
25
Authority of the Commissioner to make
final settlement of judgments for over
payment\ of taxes.
Emberzlement loases
26
Provision for allowance of deductions
for losses from embezzlement in the
year of its discovery rather than the
year when it occurs when its existence
is often unknown.
Banks retirement of bonds
27
Amendment of section 117(d) to permit
banks to take full capital losses where
amounts are received on the retirement
of certain corporate securities.
Deficiency letters' address--estate tax
28
Address to which deficiency letters
under estate tax should be mailed in
certain instances.
Returns by Bureau--statute of limitations
29
Provision that preparation of a return
by the Commissioner or collector where
the taxpayer fails to file his own re-
turn shall not start the running of the
statute of limitations.
Philippine problems
30
Revision of the law concerning texa-
tion of citisens in the Philippines.
Regraded Unclassified
- 1v -
Patent companies--personal holding company tax
31
Exclusion of bona fide patent develop-
ment companies from Title IA.
Insurance commanies--personal holding company tax
33
Amendment to personal holding company
tax to exclude from its operation bone
fide insurance companies other than life
or mitual.
Collectors' suits
33
Elimination of refund suits against
collectors of internal revenus.
Holding periods (section 117(h))
3
Revision of the provisions of section
117(h) (requiring tacking of holding
periods for computation of capital gain
and losses in cases where substituted
basis applies) to prevent such tacking
in certain cases where the basis of the
property sold is not really that which
WBB applicable to the property exchanged
or transferred.
Refunds in B.T.A. proceedings
35
Authority of Commissioner to make re-
funds during pendency of proceedings
before the Board of Tax Appeals.
Cross-petitions for review of B.T.A.
36
Provision for cross-petition for re-
view of decisions of Board of Tax
Appeals, giving each party a limited
period within which to file a peti-
tion for review of such decisions in
case a similar petition is filed by
the other party.
State courts' custody-statute of limitations
37
Extension of the statute of limitations
where taxpayer's property is in the cue-
tody of State courte go that collection
of Federal tax is impossible, as in the
case of estates or receiverships.
Regraded Unclassified
B.T.A. rules of evidence
38
Clarification of the provisions concern-
ing the Board of Tax Appeals to specify
more clearly that the rules of evidence
now current in the District Court for the
District of Columbia shall be the rules
of evidence controlling in the Board of
Tax Appeals.
Statutory refunds--statute of limitations
39
Imposition of a statute of limitations
on refund claims where refunds are au-
thorized but do not result from erro-
neous and illegal assessment and col-
lection.
Earnings and profits ad justments (section 115(h))
40
Clarification of section 115(h) to make
provision for proper adjustments of earn-
ings and profits account in the case of
certain tax-free exchanges and liquida-
tions.
Collection in jeopardy
41
Elimination of the ten-day waiting period
for distraint where collection of taxes 1@
jeopardized.
Estate tax-gift tax credit
42
Credit under estate tax for gift tax
paid on property previously transferred
by gift but required to be included in
gross estate under estate tax.
Gifts in trust
43
Limited extension of the $4,000 exclu-
sion in the gift tax law to gifts in
trust.
Electrical energy tax
44
Reduction of rate of electrical energy
tax from 3 percent to 2 percent and an
extension of its application to energy
used for industrial purposes.
Cabaret tax
45
Legialation changing the structure of
the rates of the cabaret tax.
Regraded Unclassifie
- vi -
Club dues tax
46
Revision of the tax upon club dues to
impose a tax upon fees for certain serv-
ices which are now being billed by clubs
as fees rather than dues to avoid dues.
Trailer tax
47
Imposition of tax upon commercial trailers
and semi-trailers which are used in direct
competition with trucks, upon which there
is now a 2 percent tax.
Miscellaneous tax waivers
48
Waiver of the statute of limitations
by taxpayers with respect to miscellaneous
taxes.
Five percent miscellaneous tax penalty
49
Elimination of 5 percent penalty for
failure to pay miscellaneous taxes.
Unjust enrichment tax
50
Transfer of certain issues under un-
just enrichment tax from Board of Tax
Appeals and District Courts to Board
of Review.
Foreign aircraft exemption
51
Exemption from income tax of earn-
ings derived from operation of air-
craft of foreign countries which
grant 8. similar exemption to dones-
tic aircraft.
Regraded Unclassified
1
Elimination of dividends received from
taxable income of corporations.
Until 1936 the entire amount of dividends received by
corporations was deducted from gross income on the theory that
taxation of intercorporate dividends would result in multiple
taxation of one item of earnings. Under the present law, however,
only 85 percent of such intercorporate dividends may be received
tax free. The inclusion of 15 percent of intercorporate dividends
in adjusted net income under the 1936 and 1938 Acts resulted from
a desire to discourage the use of multiple holding companies. The
problem of multiple holding companies has to a large extent been
met by the Securities and Exchange Act and the Public Utility
Holding Company Act of 1935. The continuation of the policy of
the 1936 and 1938 Acts does result in multiple taxation. It would
therefore seem desirable to return to the plan of the 1934 and prior
acts and provide that the amount received by a corporation AS divi-
dends from a domestic corporation which is subject to Federal in-
come taxation shall be deducted from gross income.
Regraded Unclassified
2
Regraded Unclassified
Repeal of undistributed profits tax
The present income tax on corporations retains a 2-1/2
percent tax on the undistributed profits of the corporation.
It 19 proposed that this tax be eliminated. This removal of the
undistributed profits tax would greatly simplify the provisions
regarding corporate taxes inasuruch as it would make unnecessary
for the general mrporation tax, the present complicated provisions
dealing with the dividends vaid credit, the consent dividends credit,
etc., which appear in sections 26, 27 and 28.
It is proposed that corporations in the future be taxed at X
rate with respect to corporations having a net income of under
$25,000 and at Y rate with respect to corporations having a net in-
come over $25,000. It would, of course, be necessary that some sort
of "notch" be provided to prevent an abrupt increase in the taxes
of corporations having net incomes just over the $25,000 dividing
line. For example, if the smaller corporations are taxed at 17 per-
cent and the larger ones at 20 percent, the tax on a corporation
with a. $25,000 net income would be $4,250 but a corporation with
$1 larger income, or $25,001. would pay $5,000.20 taxes. In other
words an increase of $1 in income would result in an increase of
$750.20 in tax. The curpose of the "notch" provision 18 to prevent
increased income at this noint from increasing tax liability by
more than the amount of such increased income. However, this notch
would be far simpler than the present notch provision of section 13(d).
Regraded Unclassified
3
Regraded Unclassified
Elimination from individual normal tax of all
dividends received.
Until 1936 dividends received by individuals were sub-
ject only to surtaxes. It was thought that if a corporation
pays income tax on its earnings and the stockholders again
pay an income tax when such earnings are distributed to them
in the form of dividends, dividend income would be discrimi-
nated against in favor of other types of income, such as in-
terest, etc. However, the 1936 Act subjected dividends to
both normal tax and surtax as part of the undistributed profits
tax plan. It now seems desirable to return to the plan of the
1934 Act which allowed individuals a credit against normal tax
net income of the amount received as dividends from a domestic
corporation subject to Federal income taxation.
Regraded Unclassified
4
Net loss carry-over for individuals and
corporations.
For 8 number of years, up until 1934, taxpayers were
allowed as a deduction the amount of net loss (excess of de-
ductions over gross income) which they may have had for the
preceding year in their trade or business. In the Revenue
Act of 1928 such losses were allowed to be carried forward
for two years. In the Revenue Act of 1932 it was cut down
to a carry-over for just one year. In the 1934 Act this pro-
vision was eliminated completely and has not been in effect
since, except that in the 1938 Act a one-year net loss carry-
over was allowed to corporations, but only as a credit for
purposes of the 2-1/2 percent undistributed profite tax.
A provision of this type allowing a net loss carry-
over for one or more succeeding years seems entirely fair
and equitable. Its great advantage is that it tende to put
businesses with fluctuating incomes upon a basis more nearly
equal to that of businesses with more stable incomes.
Regraded Unclassified
5
MEN
Elimination of limitation on allowances of
corporate capital losses so that such losses
may be taken in full.
Section 117 (d)(1) of the Revenue Act of 1938, pro-
vides that capital losses of corporations are allowed against
capital gains and against ordinary income only up to $2,000.
This limitation was first placed in the law in 1934, at which
time it applied both to individuals and corporations and was
continued as a revenue-raising measure. Prior to that time
corporate capital losses were allowed in full, When the new
broader treatment was allowed individuals in the 1938 Act,
however, no change was made with respect to corporations.
The allowance of these losses to corporations seems equitable
and proper and it is therefore proposed to remove the limita-
tion with respect to corporations.
Regraded Unclassified
6
1
i
Reneal of the canital stock and excess-profits taxes
It is proposed that the present capital stock and excess-
profits taxes with respect to corporations be repealed. This
suggestion complements the proposal that the undistributed profits
tax be eliminated and the entire tax on corporations be confined
to a single tax, with X rate for corporations having net incomes
of less than $25,000 and Y rate for corporations having net in-
comes of more than $25,000. Such repeal of the capital stock tax
would not affect the tax for the year ending June 30, 1939 but
would apply only with respect to years commencing thereafter.
Similarly, as the excess-profits tax is linked to the capital
stock tax, the repeal would not extend to the excess profits tax
for the first income tax year ending after June 30, 1939.
Regraded Unclassified
7
Consolidated Returns.
All affiliated corporations were permitted to file con-
solidated returns previous to 1934. but this permission was
withdrawn by the Revenue Act of 1934. The Treasury Department
objected to the abolition of consolidated returns but its op-
position was unsuccessful. As & consequence, consolidated
returns are now permitted only in the case of railroad corpora-
tions. The suggestion that the privilege to file consolidated
returns be again extended to all affiliated corporations would
not entail many drafting difficulties inesmuch as it would
suffice in general to merely remove the present limitation
confining such privilege to railroad corporations. This change
would in effect restore the situation which existed previous to
1934. It should be pointed out that in the Revenue Act of 1932
(which was the last Act in which consolidated returns were per-
mitted for all corporations) a rate 3/4 of one percent higher
than the normal corporate rate was imposed for the privilege of
filing consolidated returns.
Regraded Unclassified
8
Assumption of Indebtedness
A considerable number of transfers of property, especially
in connection with corporate reorganizations, are tax free, so
that any gain on the transfer is not taxable at that time. A
typical case is that of a corporation which transfers all its as-
sets to another corporation in exchange for the stock of the latter.
In most transfers of this nature the corporation acquiring the 8.8-
sets also assumes any indebtedness of the corporation transferring
the assets. It had been thought by the Bureau and taxpayers alike
that such assumption of indebtedness did not result in taxable gain
to the transferring corporation. However, the Supreme Court in
United States V. Hendler, decided last year, held that such assumo-
tion of indebtedness was in reality equivalent to the receipt of
cash inasmuch as instead of the money passing from one corporation
to the other and then to the creditor it nasses directly from the
corporation assuming the debt to the creditor. As any direct transfer
of cash in such an exchange would have been clearly taxable under the
law, the assumption of indebtedness was likewise held to result in
taxable gain. While the correct result WAB reached on the facts of
this particular case, the implications of the decision have caused
considerable confusion. It is now difficult to forecast exactly what
will result in these cases in which one corporation assumes the debte
of another. The resulting uncertainty is disturbing both to the
Bureau and to taxpayers. In order to remove this uncertainty and
make it possible for corporations contemplating recorganization to be
Regraded Unclassified
- 2 -
sure in advance of the tax consequences of the reorganization, it
is desirable that the relevant provisions of the Revenue Act be
clarified. Such clarification should proceed on the basis that
the bona fide assumption of indebtedness should not result in
taxable gain and adequate provisions should be inserted to prevent
tax avoidance in these cases.
Regraded Unclassified
9
Regraded Unclassified
Revision of the law with respect
to cancellation of indebtedness.
Court decisions have held that where & perfectly solvent
company buys its own bonds at & elight discount (at 95 for ex-
ample), the difference between the purchase price and the face
amount of the bonds is taxable income. It seems proper to in-
pose tax in cases of this kind and other cases where solvent
taxpayers discharge & debt for less than the face amount, thus
freeing their assets for other purposes.
There is B. large class of cases, however, where the debtor
is financially embarrassed or insolvent, where it not only in-
poses a great hardship to impose tax upon the amount of debts
cancelled but where. sometimes, there is considerable doubt as
to whether any income really exists. The law in these situa-
tions is far from clear, but the following rules are now being
applied:
(1) The Board of Tax Appeals holds that where the taxpayer
is insolvent both before and after his debt is cancelled, there
10 no taxable income. But the Board holds that to the extent
the taxpayer is brought "into the black" by the cancellation,
taxable income is realized. The latter part of this rule seems
unnecessarily harsh.
(2) At Mr. Oliphant's suggestion, the Commissioner issued
a confidential mimeograph which is considerably broader than
the rule of the Board of Tax Appeals. It provides that no
Regraded Unclassified
- 2 -
taxable income is realized in any case where indebtedness
1s cancelled 6.9 a part of & bona fide plan to restore a
financially embarrassed or insolvent taxpayer to B. reason-
ably sound financial condition. This rule has been satis-
factorily applied by the Bureau, but there is not much legal
authority for it and taxpayers have never been informed that
they are entitled to it. In addition it does not apply in
cases like that of the Baltimore Transit Company where the
company simply buys its own bonds on the market at 15 or 20.
(3) In the Chandler Bankruptcy Act a new rule wes written
with respect to the various bankruptey procedures there estab-
lished (77B, creditor compositions, real property arrangements.
etc.) providing that in no case of a cancellation of indebted-
ness in one of these proceedings should any taxable income be
realized. At the instance of the Treasury, however, accompany-
ing these provisions, were enacted provisions that in any case
of cancellation of a debt in one of these proceedings, the basis
of all of the debtor's assets should be reduced by the amount of
the debts cancelled. This basis provision was intended as a
rough and ready compensation to the Treasury for the loss of
revenue from non-taxation of the cancellations of indebtedness;
it would increase the profit on future sales of the debtor's
property which might be made, and lowers depreciation deductions.
It will probably prove difficult to administer, however, and goes
Regraded Unclassified
- 3 -
further than 1s justifiable perhaps, since in many in-
stances under the Board rule or the Mimeograph, no income
would have resulted from the cancellation of indebtedness
even if the Bankruptcy Act had not said 80 . In any event,
there is a real discrimination between taxpayers in bank-
ruptcy and those who are not, since those having debta can-
celled in bankruptcy get their basis reduced while those who
have debts cancelled not in bankruptcy do not have their
basis reduced.
Amendments to the Bankruptcy Act will probably be urged
to lessen the effect of the reduction of basis provision. In
addition there will be agitation for legislation which will
permit financially embarrassed corporations (lixe the Baltimore
Transit Company) to buy in their own bonds at a discount with-
out paying tax. Some method must, therefore, be devised for
eliminating confusion in these various rules and for granting
such relief to financially embarrassed corporate and individual
taxpayers as seems proper.
Regraded Unclassified
10
Basis of stock dividends
The case of Eisner V. Macomber, decided in 1920 held that
a distribution to common stockholdere of common stock of the
distributing corporation did not constitute income under the
Constitution. The Court's reasoning was based on the theory
that the stockholders had nothing after the distribution that
they did not have before and that they merely had two pieces
of paper representing the same thing that one piece of paper
represented before. Until 1936 it was assumed by both Treasury
and taxpayers alike that any distribution consisting of stock
of the distributing corporation was not taxable 88 income, and
that the stockholders realized no gain until they sold their
shares. The regulations, therefore, provided that the basis of
the old stock in the shareholders hands was to be allocated
between the old stock and the new in proportion to their respec-
tive fair market value at the time of the distribution. For
example, if in 1922 an individual purchased 100 shares for
$1,000 and in 1924 he received a distribution consisting of
100 shares of the same corporation, the new shares having a
fair market value of $750 and the old shares having a. fair
market value of $750 after the distribution, the basie of the
old shares became $5 per share and the basis of the new shares
became $5 per share, making a total basis of $1,000.
In 1936 the Supreme Court decided the case of Koshland V.
Belvering (298 U. S. 441). This case involved the distribution
of common stock to preferred stockholders. The Court decided
Regraded Unclassified
- 2 -
that such a distribution vas taxable upon receipt under the
Constitution since the preferred stockholders received addi-
tional rights and property interests upon the receipt by them
of common stock. It therefore held that the common stock
should have been taxed as a dividend at the time of its receipt.
Consequently the basis to be used upon a later sale of the old
preferred stock should be the entire original cost of such
stock, since no part of such cost needed to be allocated to
the new common stock. In 1937 the Court decided the case of
Helvering V. Gowran (302 U. S. 238) involving a. comparable situa-
tion and held that upon a subsequent sale of the dividend stock
the basis of such stock should be sero since it had cost the tax-
payer nothing.
Considerable confusion and the possibility of great inequity
has resulted from these two cases. Suppose that in the example
given above, the taxpayer had sold his old stock before the
Koshland case and pursuant to the regulations had computed gain
upon a $500 basis. In 1938 he sold his new stock. Under the
Gowran case he must report gain upon a sero basis. The result
is that he will have recovered tax-free only $500 of his $1,000
cost. Conversely, suppose that prior to the Gowran case the tax-
payer had sold his new stock and pursuant to the regulations had
computed gain or loss upon 8 $500 basis. In 1938 he sold his old
stock. Under the Koshland case he is entitled to use a$1,000
basis and thus $500 of income will have escaped taxation entirely.
Regraded Unclassified
- 3 -
It therefore seems imperative that legislation be enacted
retroactively validating the regulations in force prior to
1936 so that the gain on account of distributions of stock
dividends will be computed on an allocated basis. This type
of retroactive legislation is demanded by both the Bureau and
taxpayers alike and will work no injustice since both parties
had consistently relied upon the Treasury interpretation.
The problem does not arise in the same form with respect
to stock dividends declared from 1936 on. The 1936 and 1938
Acts provided that there was to be taxed to the shareholders
as a dividend all distributions which might be so taxed under
the Constitution. Thus, when the taxpayer receives a different
class of stock from that which he already owns, he will pay a
tax upon receipt of the distribution, the basis of the old
stock will be its cost, and the basis of the new stock will be
its value at the time of distribution. However, distributions
of common stock to common stockholders are still immune from
taxation as dividends under the Sixteenth Amendment. There are
certain intimations in the Koshland case that the rule of allo-
cation applicable to such distributions may not be valid without
express statutory authority. It, therefore, seems wise to pro-
vide such authority in the next revenue legislation.
Regraded Unclassified
11
Stock rights
It has generally been assumed that the same provisions
of law and the same constitutional inhibitions which apply
to stock dividends also apply to distributions of stock
rights. While there have been no decisions comparable to
the Koshland and Gowran cases directly involving distribu-
tions of stock rights, it seems probable that these cases
may govern the problem and that the same confusion will be
produced with respect to stock rights as already exists with
respect to stock dividends. The legislation which is recom-
mended to cure the stock dividend situation should, there-
fore, probably also apply to stock rights.
Regraded Unclassified
12
Revision of section 22(d), which pro-
vides for the use of the last-in, first-
out method of valuing inventories.
The traditional method for determining the amount of in-
ventories on hand for income tax purposes in the case of sub-
stantially all taxpayers has been the first-in, first-out method.
Under that method goods sold are deemed to be from the earliest
goods purchased. Accordingly, goods on hand at the time in-
ventory 18 taken are deemed to be those most recently purchased.
The effect of this method of accounting is that in computing
costs in connection with the goods sold, the purchase prices
of such goods are often based on purchases made at a consider-
able time before the sales are made; in the case of businesses
where the sale prices are fixed more in relation to current
market prices of the raw materials than in relation to original
purchase prices, this results in distortion of operating income
because, for income tax purposes, the operating income is com-
puted on a basis different from that upon which the price policy
of the company is based. This produces the following results:
(1) In periods of rising prices, net income is unduly exaggerated,
(2) in periods of declining prices, excessive losses are allowed
and net income is unduly decreased.
Difficulties of the kind mentioned occur principally in
businesses where raw material prices are subject to considerable
fluctuation and where sales prices are fixed more on the basis
of current market price of raw materials than on cost prices.
Regraded Unclassified
- 2 -
Included among such businesses are metal refiners, manufac-
turers of copper and brass products, leather tanners and
probably the oil business. These enterprises have sought the
use of a different method of accounting for tax purposes;
namely, the last-in, first-out method. Under this method,
sales are deemed to be made from goods most recently pur-
chased and the cost in computing the profit is much nearer
current market prices at the time of the sale. This method
thus eliminates much of the distortion in income which, as
was stated, arises under first-in, first-out from the fluotu-
ations in market price of the inventoried goods. Therefore,
in periods of rising prices, net incomes of concerns using the
method will be less and in periods of declining prices, their
net incomes will be more.
Section 22(d) of the Revenue Act of 1938 permitted the
use of this method to a limited extent in the case of speci-
fied types of business; namely, amelters and refiners of non-
ferrous ores and metals, producers of copper and brass products
and tanners of hides or skine. Diseatisfaction exists with re-
spect to the limitations placed on the 1938 provision. For
this reason, the Treasury was requested by Senator Harrison
end Chairman Doughton to carefully consider the matter. This
was done with the help of outside experts and the staff of the
Joint Committee. It is now proposed to lessen the restrictions
and make the provision applicable more broadly without enumera-
tion of specific lines of business.
Regraded Unclassified
13
Mortgage foreclosures
There are no express provisions in the Revenue Act dealing
specifically with the question of mortgage foreclosures. As a
consequence, the administrative and judicial treatment of the tax
consequences of a mortgage foreclosure have changed from time to
time, thereby producing inconsistent and confusing results. At
the present time under the regulations when a mortgagee bide in
property at a price lower than the amount of the debt he obtains
a bad debt deduction for the difference between the bid price end
the amount of the debt. At the same time if the actual value of the
property is more than the amount of the bid he realizes a capital
gain to the extent of the difference between such value and the
amount of the bid. In view of the arbitrary figure at which the
bid is made in many cases, a mortgage foreclosure results in a
taxpayer getting a bad debt deduction and a capital gain on the
same transaction. Obviously this leads to ridiculous results be-
cause by reason of the taxpayer's control of the bid price he can
create bad debt deductions end capital gains almost at will. For
these and other reasons the present treatment of mortgage fore-
closures is unsatisfactory and should be remedied by adoption of
express statutory provisions governing the tax consequences of a
foreclosure.
Regraded Unclassified
14
Revision of the provisions for taxation
of mitual life insurance companies other
than life.
There is now B large group of mutual companies operating
in the field of fire and casualty insurance which pay practically
no income tax. Stock companies doing exactly the same type of
business, competing with these companies pay substantial amounts
of income tax. The reasons for the present non-taxation of the
mutual companies are, as follows:
(1) Section 101(11) grants an outright exemption from in-
come tax to "farmers, or other mutual hail, cyclone, casualty.
or fire insurance companies or associations." As this provision
has been interpreted by the courts, most of these mutual com-
panies receive an outright exemption from tax although some of
them operate on 8. nation-wide, comprehensive scale.
(2) Even though they do not receive the exemption, there
is 8. special provision in section 207 which provides these com-
panies with special deductions for reserves for payment of losses,
which are so liberal that they never report net income in excess
of a very few dollars. This 1s true even though their financial
statements show very substantial incomes, and their surplus ac-
counts are increased by large amounts each year.
In the Finance Committee hearings in 1938, Senator Herring
requested a study of this matter by the Treasury and this study
has been completed, suggesting B number of ways in which the tax
- 2 -
payable by these companies may be substantially increased to
amounts comparable to those payable by stock companies with
which they compete.
Regraded Unclassified
15
Regraded Unclassified
Section 820 of the Revenue Act of 1938
Prior to the adoption of Section 820 of the Revenue Act of
1938, (Section 3801, Internal Revenue Code) taxpayers were in some
cases required to pay tax twice on the same item of income. For
example, a taxpayer who included an item of income in his return
for 1935, although such action was erroneous, may later be re-
quired by the courts to pay tax on the same item for the year 1938.
If the statute of limitations had run so that the taxpayer was unable
to file a claim for refund for the first tax paid, he would thus be
forced to pay twice. In other instances taxpayers unfairly obtained
the benefit of the same deduction twice by taking it in two years
and the Commissioner was prevented by the statute of limitations
from correcting the erroneous allowance of the deduction in one of
the years. Section 820 remedies most situations of this nature. It
is a section which operates equally as affects the taxpayer and the
government and it will have the effect of eliminating EL large amount
of litigation and hardship.
This section should be extended, wherever possible, to other
classes of cases not presently covered in which the same problem
exists. In addition several clarifying amendments should be made
in this section to eliminate minor questions that have arisen since
ite enactment.
Regraded Unclassified
16
Provision for some form of deficit cushion to
allow a credit against undistributed personal
holding company net income where corporation
has no earnings or profits.
Under the present law a personal holding company is liable
for a surtax upon such part of its statutory income as is not
distributed in taxable dividends. Taxable dividends of course can
only be made where the corporation has earnings or profits. There-
fore if a personal holding company should by any circumstance have
a statutory income but have no earnings or profits, it will have to
pay the surtax even though it 16 impossible for it to pay any divi-
dends to avoid the surtax. Such a situation can happen and has hap-
pened in the Foley case. In that case a personal holding company
sustained B. large canital loss which in its entirety reduced earn-
ings and profits but reduced its statutory income only to the extent
of $2,000. The result was that the corporation had a large statu-
tory income which it was completely unable to distribute to avoid
the undistributed profits tax because it had no earnings or profits.
It seems imperative that this situation be remedied by some
type of provision which would reduce the income upon which personal
holding companies surtax is imposed by the amount of any deficit
in the earnings or profits account.
Regraded Unclassified
17
Amendment to the foreign tax credit provision
to give proper credit for intercorporate divi-
dends received and Federal bond interest.
Under the present law taxpayers are permitted a credit
against Federal income tax for income taxes paid to foreign
countries. This credit is subject, however, to certain limita-
tions. One of these limitations is that the Federal income tax
cannot be reduced more than an amount based upon the ratio between
domestic income and foreign income. The smaller the domestic in-
come the greater the foreign tax credit. Under the law prior to
1936 in determining the domestic income, intercorporate dividends
and Federal bond interest were excluded. In 1936, because of cer-
tain other technical changes in the law, intercorporate dividends
and such interest were included in net income. This change natur-
ally increased the domestic income and decreased the foreign tax
credit. The International Chamber of Commerce and other foreign
trade groups are extremely anxious for us to return to the pre-1936
system and determine domestic income by excluding dividends and
Federal bond interest. From our examination of the problem it would
seem desirable to amend the provisions of section 131 to 50 provide.
Regraded Unclassified
18
Legislation bringing Deputy Collectore of Internal
Revenue within the Civil Service and extending to
them the benefits of the Retirement Act.
By an express statutory provision passed in 1913. Deputy
Collectors of Internal Revenue are appointed by the Collectors
without reference to the Civil Service laws. There are over
8,000 of these deputies and the administrative people of the
Department feel that the administration of the revenue laws
would be made more efficient if the political character of
these jobs were eliminated and they were made fully subject to
the Civil Service laws, and the benefits of the Retirement Act
were extended to them.
It 18 proposed, therefore, to repeal the 1913 Act which
exempts Deputy Collectors from the Civil Service laws, and pro-
vide expressly that they shall be subject to the Civil Service
laws. The present personnel may continue in the service if they
pass suitable non-competitive examinations. This is the procedure
being applied in the case of the new employees being blanketed
into the Civil Service pursuant to the Presidential Order of
1938. This change will require some revision in the relations
of the collectors to the Treasury since heretofore they have
been held directly responsible for all the acts of their depu-
ties. If they are to have no power of appointment or removal
of their deputies. it seems necessary to provide that such depu-
ties shall be responsible directly to the United States as in
the case of nearly all other Government employees.
Regraded Unclassified
19
Depreciation of property acquired by gift
Under the present law the basis for computing gain
upon the sale of property acquired by gift is the cost of
the property to the donor. The basis for computing loss.
however, is the cost of the property to the donor or the
fair market value of the property at the time of the gift
whichever is lower.
The scheme of the Revenue Act with respect to deprecia-
tion is to provide the same basis for the computation of de-
preciation as is provided in the computation of gain or loss.
However, section 114 merely provides that the basis for depre-
ciation shall be the same as the basis for determining gain.
Thus in the case of property acquired by gift where the fair
market value at the time of the gift is less than the cost of
the property to the donor, the donee is permitted to recover
tax-free by way of annual deductions for depreciation the
amount of the donor's cost, although he is only allowed to re-
cover 8 amaller amount of market value at the time of the gift
in the event of a sale of the property. This situation seems
unreasonable. It therefore seems desirable that in the case of
property acquired by gift the basis for depreciation should be
the same as the basis for the computation of loss.
Regraded Unclassified
20
Regraded Unclassified
Publicity of returns.
Section 148(f) of the present law provides that
the Secretary shall publish a list containing the names
of, and the amount paid to, every corporate officer re-
ceiving & salary in excess of $75,000. This provision
first appeared in the Revenue Act of 1934 and then RD*
plied to all salaries in excess of $15,000. The present
limited effect of this provision makes it worthwhile to
consider whether the provision should not be eliminated
entirely. It is not in any sense a revenue measure and
does not strictly belong in revenue legislation.
Regraded Unclassified
21
Repeal of the 4-cents per pound tax
on imported copper.
In the Revenue Act of 1932 (section 601(c)(7)). a
4-cents per pound tax was imposed upon imported copper.
It has been asserted by the smaller domestic processors
and fabricators of copper products that the United States
is now on export basis with respect to copper, and that
domestic prices for domestic copper are fixed on an arti-
ficially high price level based upon the price charged to
foreign purchasers. They claim that if this tax on imported
copper were removed they would be better able to protect
themselves against this artificially high price level, which
depends on factors other than tariff protection. Mr. Blough
will report to you on this matter.
The customs authorities have stated that there 1e a
minor administrative difficulty, due to a present defect in
this taxing provision, which should be remedied unless this
tax is to be repealed.
Regraded Unclassified
22
Elimination or clarification of estate tax value-
tion option (section 811(j)) with particular refer-
once to interest, rents and dividends received by
the estate between the date of decedent's death
and the valuation date.
Section 811(j) of the present law provides that an execu-
tor may, at his option, value the estate for the purposes of
Federal estate tex as of one year after the date of decedent's
death rather than as of the date of decedent's death. The pur-
pose of this provision is apparently to insure that en estate
which greatly depreciates in value before tax 1s payable will
not be entirely eaten up by the Federal tax.
However, the Miscellaneous Tax Unit has encountered con-
siderable difficulty in the administration of section 811(j).
Problems arise with respect to the valuation of distributions
made by the estate before the expiration of the one year period
and with respect to the valuation of items includible in the
gross estate but not forming a physical part of the estate for
the purposes of administration (such as gifts made in contem-
plation of death).
Consideration might therefore be given to the elimination
of this provision if other safeguards which are in the Act for
the benefit of executors are deemed sufficient. In any event
it is essential that 811(j) be clarified with respect to its
most vexing problem. This problem is that of the proper treat-
ment to be accorded income earned by the estate during the one
year period. Little help in its solution is afforded by the
statute. It in important that such income be included in the
gross estate if the estate is valued as of one year after death,
Regraded Unclassified
- 2 -
since otherwise the estate might receive extraordinary
dividends which would materially reduce the subsequent
valuation of stock owned by the decedent at the time of
his death.
Regraded Unclassified
23
imendment of an Act passed in 1879 (as emended in the
Revenue Act of 1938) relating to the remission of taxes
due from insolvent banks to eliminate any hardship which
may result from the present provision which permite col-
lection of such taxes immediately after depositors have
been paid in full.
In 1938, at the request of representatives of certain banks
and of Senator Brown, a substantial amendment was made to an old
Act of 1879, which provided that where banks became insolvent and
were liquidated, no tax should be collected until depositors were
paid in full. The major purpose of the 1938 amendment was to pro-
vide B. similar exemption where, instead of liquidating the banks.
the modern procedure is applied under which the banks are reorgan-
ised and continued in business. It was, therefore. provided that
in such cases where assets are segregated to pay old depositors
or are held subject to a lien for such depositors. no Federal tax
should be collected out of such assets until depositors are paid
in full. In order to protect the Treasury, however, it was pro-
vided that after full payment of the depositors, the tax which had
been suspended might then be collected. since no reason appeared
why this very special exemption should be allowed to operate in
favor of the stockholders. Now. however, it has been asserted that
the effect may be that as soon as the bank begins to get on its
feet by paying off its depositors, the Treasury will knock it down
by the collection of these accumulated taxes. This assertion may
be exaggerated, however, and the matter requires further study in
conjunction with the Office of the Comptroller of the Currency.
Regraded Unclassified
24
Definition of control with 10-
spect to tax-free reorganizations
Under eristing law, one of the prerequisites to certain tax-
free reorganizations is the control of one corporation by another.
The test of control in these situations was, prior to the Revenue
Act of 1936, the ownership of (1) at least 80 percent of the vot-
ing stock and (2) at least 80 percent of the total number of shares
of all other classes of stock of another corporation. In an attempt
to remove the ambiguity respecting 80 percent of the voting stock,
that portion of the test was in one provision of the Revenue Act
of 1936 expressed in terms of the ownership of at least 80 percent
of the voting power. Through inadvertence, this change was not made
in another provision prescribing the same test. In both provisions
the requirement representing the non-voting stock, if taken literally,
is satisfied by the acquisition of 80 percent of the total number of
shares of non-voting classes of stock. However, it has been pointed
out that 80 percent of the total number of shares of the non-voting
stock may not correspond with 80 percent of the total value of the
non-voting stock. It has been felt that A test of 80 percent of the
value would more closely reflect control than 80 percent of the num-
ber of shares. To clarify the entire situation an amendment is sug
gested to make the test of control in all cases dependent upon the
acquisition of both (1) 80 percent of the voting power, and (2) 80
percent in value of all shares. Under this test it would not be neces-
sary to acquire 80 percent of each class of stock but rather 80 ner-
cent of all the shares both from the standpoint of voting power and
of value.
Regraded Unclassified
25
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE March 25, 1939
TO
Mr. Hanes
FROM
Mr. Tarlemi
A.
Re: Legislative Proposal #25
Reference is made to #25 in your list of legislative proposals,
which refers to the desirability of amending the statutes to provide
that the Commissioner may make final settlement of judgments rendered
against the United States. I have now been advised that by B reversal
of the decision of the Comptroller General on this matter the Commis-
sioner is making final settlement in these cases and the problem no
longer exists. Therefore this proposal may be eliminated from further
consideration.
JWE asked that this proposal
be taken out of list -
Regraded Unclassified
Authority of the Commissioner to make final
settlement of judgments for overpayment of
taxes
At the present time when a court decision establishes that
the taxpayer has overpaid his tax, the Commissioner may make final
settlement of the amount owing to the taxpayer only if the suit
was brought against a Collector of Internal Revenue. If the suit
WAB brought against the United States which is often the case,
the Commissioner may not make final settlement of the matter but
must refer it to the Comptroller General for final action.
There is no sound reason for a different method of treatment
in these two situations. Moreover, the reference to the Comptroller
General in the second situation is inconsistent with the general
policy that the Treasury has final authority to settle all tax
matters. It is desirable that the sopropriate statutes be amended
to provide that the Commissioner may make final settlement in all
of these instances.
Regraded Unclassified
26
Deduction of Emberslement Losses
Under the present law, losses from embezzlement are usually
deductible only in the year in which the embezzlement actually 00-
curred. However, as a practical matter in many cases the embezzle-
ment is discovered years after it actually occurred. As a con-
sequence, the taxpayer is often unable to obtain a deduction for
the loss resulting from the embezzlement because the statute of
limitations may have run with respect to refund claims for the
year in which the embezzlement actually occurred. In order to
oermit deduction of losses from embezzlement, it is therefore
desirable to amend the statute to provide generally that such
losses are deductible in the year of their discovery.
Regraded Unclassified
of
THE never
non me
to & provide -
9222 sh VIIIA S to
- to and n
That
27
- NT NW
23 191 2038 of
--- and / - X 1
- THE ruible class - MA 3/8 - Ex
50 - of - OF of YOU
--- 6 - -
it - MANAN -
Amendment of Section 117(d) to permit banks to
take full capital lesses where amounts are re-
ceived on the retirement of certain corporate
securities.
If the proposal to grant all corporations their capital
losses in full is adopted, this proposal is unncessary. Now,
however, banks have & special provision in Section 117(d) al-
lowing them their full capital losses (which are not allowed
other corporations) in the case of the sale of certain corporate
obligations. They assert that similar treatment is needed where,
instead of selling these obligations, they are retired by the
debtor corporation. No reason appears why the same treatment
should not be allowed whether these obligations are sold, re-
tired, or exchanged, and it is therefore proposed to amend the
statute to accomplish this result.
Regraded Unclassified
28
Address to which deficiency letters under
estate tax should be mailed in certain in-
stances.
Under the present law & deficiency letter may be mailed
to the last known address of the taxpayer if the deficiency
letter concerns the income tax or the gift tax. There is no
corresponding provision in the estate tax law to permit mail-
ing of the deficiency letter to the last known address of the
executor, who is the person responsible for payment of the
estate tax. For administrative reasons it is desirable that
the estate tax law be amended to permit mailing of a deficiency
letter to such address. Such amendment would also be accom-
panied by a provision that if notice is received from a person
to the effect that he is no longer acting as executor, it would
be proper for the Bureau to send a notice of deficiency to the
last known address of the decedent.
Regraded Unclassified
29
Regraded Unclassified
Effect of return prepared by Collector or Commissioner
where taxpayer has failed to file a return
Where the taxpayer fails to file a return there is no limita-
tion on the time in which the Commissioner may attempt to assess
and collect a tax for that year. Where the taxpayer does file a
return, there is a three-year limitation. In a case where a tax-
payer fails to file his return, the Collector or the Commissioner
is authorized to file a return for such taxpayer. This action on
the part of the Commissioner or Collector is necessary to start
the regular procedure of assessment and collection. Some courts
have stated that if a taxpayer fails to file a return, but the
Commissioner or Collector files one for him, such return makes
applicable the three-year statute of limitations. Inasmuch as the
return filed by the Commissioner or Collector is necessarily in-
complete because of his lack of knowledge of the actual facts and
1e a purely procedural matter, it is understandable that such re-
turn should have this effect. Consequently, the appropriate statute
may have to be emended to provide that in these situations the fil-
ing of a return by the Commissioner or Collector shall not result in
making applicable the three-year statute of limitations.
Regraded Unclassified
30
Revision of the less concerning taxation
of citizens in the Philippines.
There are a number of proposals which have been sug-
gested intended to improve the status of citizens of the United
States residing in the Philippines. In general it can be said
that these persons are now treated in a manner somewhat simi-
lar to the treatment of citizens of the United States residing
and deriving income in foreign countries. The argument in
behalf of the citizens in the Philippines is that they should
be treated more like citizens residing and earning income in
the various States. This involves a fundamental question of
policy regarding the relationship of the United States to the
Philippines which must be given further consideration in order
to solve the various problems which exist with respect to this
matter.
Regraded Unclassified
31
Exclusion of bone fide patent development
companies from Title IA,
The personal holding company tax is imposed at a very
high rate (75 percent) upon the undistributed income of com-
panies which come within the definition of personal holding
companies. The definition depends in part on the nature of
income derived by such companies and includes companies close-
ly held which derive all their income from investment sources,
such as rents, royalties, and capital gains. Attention has
been directed to & very few so-called patent development com-
panies which are firms of engineers engaged in developing new
patent processes and devices and which thus perform a very use-
ful service in our economy. The compensation of these companies
is derived either from royalties or from capital gains on the
sale of stock which they receive for their services. As a re-
sult, when closely owned, they are subject to the tax on personal
holding companies which is an undue hardship, since they are
operating concerns and not of the type intended to be caught by
that tax. An amendment seems necessary to grant some form of
exemption to these companies which will free them from the burden
of this tax.
Regraded Unclassified
32
Amendment to personal holding company tax
to exclude from its operation bona fide
insurance companies other than life or
mutual.
Under the present law a special tax is levied upon the
undistributed income of personal holding companies in order to
prevent tax avcidance through the use of such companies. One
of the tests in ascertaining whether a company in 8. personal
holding company is whether 80 percent of its gross income comes
from dividends, interest, royalties, or anmuities, The gross
income of insurance companies, other than life or sutual, is
expressly defined by the law to consist of investment income,
and underwriting income, which consists of the premiums earned
less losses and expenses incurred. Às a consequence of this
special definition of gross income, if such an insurance com-
pany has no underwriting income because its losses and expenses
exceed its premiums, but has investment income, 80 percent of
its gross income comes from the type of income necessary to
make it a personal holding company and it is taxed as such. It
was never intended that a bona fide operating insurance company
should be taxed as a personal holding company in such B. situation
and the difficulty arises merely from the technical definition
of gross income in this particular situation. It is. therefore,
desirable that the appropriate statute be amended to prevent
taxation of such insurance companies as personal holding com-
panies in the situation described above.
Regraded Unclassified
33
Regraded Unclassified
Elimination of refund suits against
Collectors of Internal Revenue
At the present time a taxpayer who claims that he has
overpaid his tax may file suit against the United States
or against the appropriate Collector of Internal Revenue as
an individual. If the taxpayer wins such suit against the
collector, provision 18 made for payment by the United States
of the emount claimed, Likewise, provision is made for the
United States District Attorney to defend the collector in
such case. As a consequence, the suit against the collector,
although in form a personal suit against him, is in reality
a suit against the United States. The present existence of
this personal suit against the Collector is an anachronism and
has been criticized by the Supreme Court because of its anti-
quated nature. Its existence creates difficulty and confusion
in tax litigation. There is no reason for the continuation of
such suits inasmuch as the opportunity to sue the United States
in B. District Court or the Court of Claims is thoroughly adequate.
Consequently the appropriate statutes should be amended to elim-
inate such suits against collectors. It should be noted that AB
B. jury trial in tax matters may be obtained only in a suit against
the collector, elimination of such suite would mean the elimination
of jury trials in tax cases, However, there are only two or three
such jury trials each year and it is recognized that the use of a
jury in tax matters 10 outmoded end unwise.
Regraded Unclassified
34
I
M
and
Revision of the provisions of section 117(h) (requiring
tacking of holding periods for computation of capital
gain and losses in cases where substituted basis applies)
to prevent such tacking in certain cases where the basis
of the property sold is not really that which was amplic-
able to the property exchanged or transferred.
Under the capital gain and loss provisions the length of time
property is held has en effect upon the determination of the amount
of gain or loss recognized to the seller upon the sale of property.
Where property is transferred in a non-taxable transaction end the
transferee takes the property over at the same cost basis as it had
in the hands of the transferor, the Revenue Act provides generally
that when the transferee sells the property he shall be deemed to
have held it not only for the period of hie own ownership, but also
for the period during which the transferor owned it.
There are certain cases, however, where this provision is too
broad in that it applies to situations where the basis of the prop-
erty sold is not really the same as its basis was in the hands of
the person whose holding period is "tacked". For example, for the
purpose of commuting loss on B. sale of property acquired by`gift, the
basis is the donor's basis or fair market value at the date of the
gift, whichever is lower. If fair market value is lower, the basis
has no reference to the basis in the hands of the donor and there
18 no reason why the donor's holding period should be tacked. In
the example just given, if the holding period of the donor is tacked
to the holding period of the donee the result will be that the amount
of loss allowed to the donee may be less than it would be if no
tacking took place.
Regraded Unclassified
- 2 -
There are other instances where holding periods are tacked
and such tacking seems unjustifiable. A study is being made with
a view to correcting these situations.
Regraded Unclassified
35
Authority of Commissioner to make refunds during
pendency of proceedings before the Board of Tax
Appeals
At the present time if the taxpayer is claiming before the
Board of Tax Appeals that he has overpaid his tax, the Commissioner
may not make any refund of such taxes until the Board of Tax AD-
neals has rendered a final decision in the matter. It often happens
that the Commissioner during the pendency of the proceedings before
the Board is willing to concede that the taxpayer is correct with
respect to part of hie claim and would be willing, consequently,
to refund to him a portion of the amount claimed. However, the
Commissioner is unable to make such refund under the present pro-
visions but must wait until the decision of the Board on the other
matters becomes final. As a result the Commissioner must Day interest
on the amount of such refund for this intervening period, whereas
if the refund could have been made during the pendency of the pro-
ceedings, the amount of interest could have been saved. Moreover,
in a case where the Commissioner contests the entire claim of the
taxpayer and the Board decides in favor of a taxpayer and the Gov-
arnment decides not to appeal, as a decision of the Board does not
become final until three months thereafter, the Commissioner cannot
make the refund until the three months has expired.
In order to enable the Commissioner promptly to make refund when
he concedes the claim of the taxmayer prior to decision or where the
Board decides in favor of the taxpayer, and to save the Government the
Regraded Unclassified
- 2 -
requirement of paying interest for any further time in such cases,
the appropriate statutes should be amended to enable the Commissioner
to make refunds during the pendency of Board of Tax Appeals proceed-
ings.
Regraded Unclassified
36
Regraded Unclassified
Cross-petitions from Board of Tax Annoals
At the present time the taxpayer and the Commissioner are each
given three months within which to file a petition appealing from
the decision of the Board of Tax Appeals, In many cases the Board
decides some of the issues in favor of the taxpayer and some in
favor of the Commissioner, BO that both parties would be satisfied
if neither appealed. However, if one party does not appeal and the
other party does appeal, the latter naturally 18 in an advantageous
position. He cannot be deprived of that part of the decision below
which was in his favor, and he is in a position to question that part
of the decision which he lost. To prevent the other party from 000
taining such an advantageous position by filing his petition just
before the three months period expires, both varties are forced to
neweal, although each would be satisfied with the decision of the
Board if the other party has not appealed. To avoid these unnecessary
anneals, the appropriate statutes should be amended to provide that
if one party files a petition for anneal, the other party is given
15 extra days after the expiration of the normal period in which he
may file his petition, This would eliminate the necessity of filing
B. oetition merely for protection in case the other party decides to
anneal. It will thus reduce the number of appeals from the Board of
Tax Anneals.
Regraded Unclassified
37
Extension of the statute of limitations
where taxpayer's property is in the cus-
tody of State courte so that collection
of Federal tax is impossible, as in the
case of estates or receiverships.
In cases where property of taxpayers is in the custody
of representatives of State courts, such as executors of et-
tates or receivers in court proceedings, the collectors cannot
distrain on the property which is BO held end thus in effect are
precluded from making collection of tax. The statute of limita-
tions on collection under Federal lews, however, continues to
run even though collection 10 thus made impossible. For example,
e tax may be due from an executor of an estate and due to the
pendency of probate proceedings the collector 18 prohibited from
collecting the tax but nevertheless the three-year statute of
limitations may run so that the tax cannot be collected when the
probate proceedings are terminated. This same thing may happen
in the case of a receivership. Therefore it in proposed that the
statute of limitations be suspended, or extended, in these cases,
50 that if the statute of limitations requires collection within
three years, for example, the three years will be added to the
time in which the taxpayer's property is in the custody of a
State court.
Regraded Unclassified
38
Rules of Evidence of the Board of Tax Appeals.
When the Board of Tax Appeals was created it TM provided
that the rules of evidence applicable in equity cases in the
courte of the District of Columbia should be the rules of evi-
dence applicable in proceedings before the Board of Tax Appeals.
At that time different rules of evidence were applicable in law
cases and in equity cases in the courts of the District of Columbia.
As a result of the Rules of Procedure for the Federal Courts re-
cently promulgated by the Supreme Court, the rules of evidence
applicable in the Courts of the District of Columbia are now the
same whether the case is one that was formerly termed a. law case
or an equity case. In view of the change thus effected. confusion
may result if the reference to equity cases is retained in the
provision fixing the rules of evidence for the Board of Tax Ap-
peals. It is, therefore, desirable that the appropriate statute
be amended to clarify this situation, the change being pursly
a technical one. Before this change is made the Board of Tax
Appeals will be consulted.
Regraded Unclassified
39
Imposition of a statute of limitations
on refund claims where refunds are an-
thorised but do not result from erro-
neous and illegal assessment and col-
lection.
It sometimes happens that due to an inequitable
situation Congress provides for the refund of taxes which
were quite properly collected under the authority of a
statute imposing them. The statute of limitations now
applies only with respect to claims for refund of taxes
improperly collected. Consequently there is no general
limitation provision applicable to the type of cases re-
ferred to in the first sentence. Sometimes these specific
refunding provisions state their own period of limitations
on claims. A study is being made however to ascertain
whether some refund statutes have been passed where this
was not done. If it appears that there are such statutes,
a general statute of limitations should be imposed with
respect to such claims.
Regraded Unclassified
40
I
Regraded Unclassified
Clarification of section 115(h) to make
provision for proper adjustments of earn-
ings and profits account in the case of
certain tax-free exchanges and liquidations.
Mvidends are not tarable as dividends to the shareholders
of a corporation unless such dividends are out of the earnings or
profits of the corporation. Consequently the earnings or profits
account becomes of great importance both to the corporation and to
the Treasury. To the extent that the earnings and profits account
is smaller it is to the advantage of the tamayer, since that means
less taxable distributions. To the extent that it is larger the
Treasury naturally benefits. Stock dividends and reorganization
distributions are non-taxable and are regarded as not reducing
earnings and profits, but are regarded as capital transactions, and
the purpose of section 115(h) is 80 to provide. However under the
language of existing law, section 115(h) is ambiguous and may result
in the non-reduction of earnings and profits in certain cases in
which the taxpayer may fairly claim that they should be reduced.
Consequently the section requires clarification to accomplish this
result.
Regraded Unclassified
41
Elimination of the ton-day waiting period for dis-
traint where collection of taxes is decpardized
Under present law if it has been established that a tax is
owing from the taxpayer he is given ten days within which to pay
such tax after notice and demand from the collector. If the tax
1s not paid within such ten days the collector is authorized to
distrain upon the property of the taxpayer, This authorization
to distrain means that the collector may attach the property of
the taxpayer, publish a notice that such property has been seized
and will be sold at e stated time, and then offer such property
for sale, the proceeds of the sale being used to pay the tax. In
some cases the requirement that the collector must wait ten days
before attaching the property of the delinquent taxpayer has per-
mitted the taxpayer to avoid payment by so disposing of his property
that the collector is unable to obtain it when the ten days has ex-
pired. In order to prevent such evasion of collection, the Bureau
states that it is desirable to amend the law so that in cases where
the Commissioner believes that collection of the tax would be jeop-
ardized if the collector waits until the ten-day period expires,
the collector ie authorised to attach the property at once upon ro-
fusal of the taxpayer to pay the tax, It should be noted that this
authority could only be exercised in cases where it has become
clearly established that the taxpayer owes the tax in question.
Moreover, after the property has been attached the collector would
then have to give the requisite notice of sale and proceed as in
Regraded
- 2 -
the ordinary case. The sale cannot be held until after the ten-
day period is up. The amendment would, therefore, simply author-
ize the collector to keep the property in his custody during this
ten-day period, as well as thereafter, in cases in which it is
believed that unless such property is so taken it will not be
available for payment of taxes when the ten-day period expires.
Regraded Unclassified
42
Credit under estate tar for eift
tax paid on property previously
transferred by gift but required
to be included in ETOBE estate
unde estate tar
Gifts made in contemplation of death are subject to a
gift tax when made and are also required to be included in
the gross estate for estate tax purposes when the donor dies.
However, to prevent double taxation a credit against the 86-
tate tax is allowed for the gift tax previously paid, As the
gift tax is a graduated and cumulative tax, any gift made will
not only bear a tax but will also affect the rate payable on
any other gifts made during that year or succeeding years. Con-
sequently, it is necessary to ascertain what amount of gift tax
18 traceable to the gift made in contemplation of death. The
present statute solves this problem by providing that the credit be
determined by taking the average rate of gift tax paid for the year
in question and applying that rate to the amount of the gift in
contemplation of death.
It has been suggested that the credit should be the differ-
ence between the gift tax actually paid on all gifts and the
amount of gift tax that would have been paid if the gift in con-
templation of death had not been made. This would have the ef-
fect of providing a credit based upon the highest rates of gift
tax paid by the donor. If the suggested method is found to be
without objection after examination, the appropriate statute
should be amended to substitute that method for the present averag-
ing method.
Regraded Unclassified
TO
of
ave
43
SM
Limited extension of the $4,000 exclusion
in the gift tax law to gifts in trust.
Prior to the Revenue Act of 1938, under the gift tax law the
first $5,000 of gifta to a person during a single year were BI-
cluded. It was found that this exclusion was being abused by some
taxpayers. Sometimes one trust is created with a number of bene-
ficiaries and the grantor urges that the number of beneficiaries
and not the number of trusts are to determine the number of exclu-
sions to which he is entitled. In another case, however, the ter-
payer forms a number of truste for one beneficiary and urges that
the number of the trusts and not the number of the beneficiaries is
to determine the number of exclusions to which he is entitled. The
courts have had great difficulty with these situations and the law
on this point was in confusion with the result that more exclusions
were being obtained than were proper. To eliminate these obvious
possibilities of tax avoidance, the gift tax WAB amended to de-
prive gifts in trust of any exemption whatsoever. (At the same
time the figure for gifts in general was reduced to $4,000.) While
this amendment effectively eliminates such tax avoidance, It prob-
ably operates with undue hardship in the case of bona fide gifts in
trust. It may be desirable to amend the statute to allow some ex-
emotion in the case of gifts in trust if that can be done without
at the same time permitting the tax avoidance which eristed prior
to the amendment.
Regraded Unclassified
44
Reduction of rate of electrical enorgy
tax from 3 percent to 2 percent and an
extension of its application to energy
used for industrial purposes.
The tax on electrical energy is imposed at the rate of
3 percent upon sales of such energy for domestic and commer-
cial uses. Great difficulty 1s experienced by the Bureau in
drawing the line between commercial uses, which are taxed, and
industrial uses which are not taxed. For example, the question
has arisen as to whether use by a laundry is a commercial use
or an industrial use, The burden is primarily upon the power
companies which must determine whether or not to collect this
tax with respect to each of their consumers. In order to
eliminate this severe burden on both the power companies and
the Bureau, it is proposed that the rate of tax be lowered from
3 percent to 2 percent and that the tax be imposed with respect
to all uses of electrical energy which would of course include
energy used for all industrial purposes.
Regraded Unclassified
45
1 of
1
D
Regraded IInclassified
Legislation changing the structure of
the rates of the cabaret tax.
The tax on cabarets has proved exceedingly difficult to
administer due entirely to its present structure. It must be
remembered that this tax 19 collected from relatively small
taxpayers, many of whom are relatively uneducated persons,
and it is almost impossible to instruct these persons in the
proper method of withholding and paying this tax. To aid in
understanding the difficulty which exists with respect to it
the taxing provision is quoted:
"A tax of 1-1/2 cents for each 10 cents or
fraction thereof of the amount paid for admission
to any public performance for profit at any roof
garden, cabaret, or other similar entertainment,
to which the charge for admission is wholly or in
part included in the price paid for refreshment,
service, or merchandise; the amount paid for such
admission to be deemed to be 20 per centum of the
amount paid for refreshment, service, and merchan-
dise. Where the amount paid for admission is
50 cents or less, no tax shall be imposed."
To eliminate these unnecessary difficulties it 18 pro-
yosed that the tax be changed to a. gross receipts tax at the
rate of 3 percent which could be easily computed and would
produce about the same revenue as the present tax.
Regraded Unclassified
46
Revision of the tax upon club dues to
impose 8. tax upon fees for certain ser-
vices which are now being billed by
clubs as fees rather than dues to avoid
dues.
The tradional method of financing country club opera-
tions has been through the charges for dues levied upon club
members, These dues entitle members to the use of all of the
athletic facilities of the clubs. In order to avoid payment
of the tax on club dues, however, certain clubs hit upon the
device of charging only a very small amount as dues and bill-
ing members for the balance of the necessary funds as annual
fees charged, for example, for the use of golf facilities.
The privileges and rights of members are the same eur they were
before and all members are expected to pay the golf fee, but
the courte have held that such fees are not dues and therefore
not taxable. If this device is allowed to continue in use the
tax on dues 18 virtually nullified, since clubs are rapidly
changing over their method of operation to avoid the tax To
eliminate the use of this device, it is proposed to include in
the definition of dues, fees charged on an annual, quarterly,
or monthly basis for the use of golf. tennis, and similar atb-
letic facilities. This should terminate the major weaknesses in
the tax which have developed and gain permit its proper enforce-
ment.
Regraded Unclassified
47
Imposition of tax upon commercial trailers
and semi-trailers which are used in direct
competition with trucks, upon which there
is now a 2 percent tax
Since 1932 there has been a tax at the rate of 2 per-
cent upon the sale of trucks by the manufacturer. In 1938
it appeared that there were being sold a large number of ve-
hicles known as tractors, consisting of & motor and four or
six wheels, the function of which was to support and pull &
four-wheeled trailer or two-wheeled semi-trailer. These
units were in direct competition with trucks, but prior to
1938 were not subject to tax. In the Revenue Act of 1938, a
provision was enacted to impose & tax upon tractors of this
type used for highway transportation in combination with
trailers or semi-trailers. No tax was imposed at that time.
however, on the trailer or semi-trailer portion of the unit.
To equalise the burden upon all vehicles used for highway
transportation it is now proposed to impose the tax also upon
these trailers or semi-trailers.
Regraded Unclassified
48
Waiver of the statute of limitations by taxpayers
with respect to miscellaneous taxes
Under the present income tax law, provision is made for
the taxpayer to waive the statute of limitations and thus pre-
vent such statute from running with respect to the assessment
and collection of the tax. If such waivers could not be made
the Commissioner would be forced to assess the tax which he
thought due even though he had not had ample time to ascertain
the correct amount, since to delay assessment would permit the
statute of limitations to run and thus prevent any assessment
whatsoever. The provision for waiver of the statute of limita-
tions thus makes it possible for the texpayer and the Commissioner
to reach an agreement on the correct amount of tax due by provid-
ing ample time within which all the aspects of the case may be
considered. There is no similar provision permitting waiver of
the statute of limitations as regards the miscellaneous taxes.
It has therefore been suggested that the appropriate statutes be
amended to permit the taxpayer to waive the statute of limitations
whenever he 60 desires. It must be noted that such waiver on the
part of the taxpayer is purely voluntary and entirely within his
control.
Regraded Unclassified
49
Elimination of 5 percent penalty for
failure to pay miscellaneous taxes.
At one time the revenue acts levied 8 5 percent penalty
for failure to pay the amount of tax due within ten days after
notice and domand. This penalty has been removed with respect
to income, estate and gift taxes, inasmuch as the present 6
percent interest on delinquent payments is entirely adequate
to insure prompt payment in most cases. However, the 5 per-
cent penalty still exists with respect to miscellaneous taxes.
so that & taxpayer who fails to pay a miscelleneous tax owing
by him is subject to both a penalty of 5 percent of the amount
of tax owing end to 6 percent interest on such amount from the
date it should have been paid. It has been suggested by the
Bureau that the 5 percent penalty in the case of miscellaneous
taxes should be eliminated in accordance with the previous action
with respect to income, estate and gift taxes, inasmuch as the
reason for such penalty no longer exists in view of the interest
that must be paid by delinquent taxpayers. This matter is being
studied but before & final decision is reached it 18 necessary
to ascertain whether there is objection from the Alcohol Tax
Unit which once voiced opposition to this proposal.
Regraded Unclassified
50
Transfer of certain issues under un-
just enrichment tax from Board of Tax
Appeals and District Courts to Board
of Review.
After the processing taxes in the Agricultural Adjustment
Act were held unconstitutional the problem arose as to what to
do with processors who had not paid the tax which was imposed
on the first domestic processors but had included the amount
of such tax in the purchase price charged and collected from
their customers. To meet these problems, the "unjust enrichment"
tax was enacted which imposed an income tax on income derived
from the sales of articles with respect to which a processing
tax was owing which the taxpayer had not paid, to the extent
that the burden of the tax had been previously shifted by him
to others. The Board of Tax Appeals has juriadiction over de-
ficiencies arising under this unjust enrichment tax. At the
same time, provisions were adopted whereby any taxpayer who had
actually paid a processing tax could obtain a refund only if he
could prove that he had not shifted the burden of the tax to
others. The Board of Review in the Treasury Department has
jurisdiction over questions relating to refunds of such proces-
sing taxes. This special Board of Review was created because
it was thought that the legal and economic problems involved in
ascertaining whether the tax burden of the processing tax had
been shifted to other persons were so complicated as to require
handling by a specialized tribunal. As these same complex legal
Regraded Unclassified
- 2 -
and sconomic issues are involved under the unjust enrichment
tax, it is suggested that the jurisdiction of the Board of Tax
Appeals under the unjust enrichment tax with respect to these
questions be transferred to the Board of Review. If this were
done, all of the difficult questions concerning processing taxes
would be decided by one tribunal.
Where 8. taxpayer pays an unjust enrichment tax and later
sues for a refund the District Courts of the United States and
the Court of Claims have jurisdiction over such suite for refund.
If the above suggestion that all questions involving the issues
arising with respect to the processing taxes be shifted to the
Board of Review is approved, it would therefore be necessary
to provide that such refund suite should also be heard by the
Board of Review.
This matter will be taken up with the Board of Tax Appeals
and the Board of Review.
Regraded Unclassified
51
Exemption from income tax of sara-
ingu derived from operation of air-
craft of foreign countries which
grant a similar exemption to domes-
tic aircraft.
Section 212(b) and 231(d) of the Internal Revenue Code
now grant an exemption from income tax in the case of earnings
derived from the operation of ships documented under the laws
of foreign countries if such foreign countries grant similar
privileges to ships registered under the laws of the United
States. These provisions have been thought to be desirable
to encourage international trade, though since more shipping
is done with the United States by foreign veggala than by
domestic vessols, the exemption has operated to the disadvan-
tage of the United States. It now appears that international
operation of aircraft on a substantial scale will be commenced
in the near future and it therefore seems desirable to grant an
exemption similar to that now provided for ships to apply in
the case of aircraft. Such A provision ia now provided for by
a treaty with France, and 8. number of other countries have 01-
pressed a desire for similar reciprocal exemptions. Since the
operations of American aircraft will probably exceed those of
foreign aircraft, the extension of this exemption to aircraft
should result in & net advantage to the United States.
Regraded
Unclassified