PAGENO="0001" LEGISLATIVE HISTORY OF H.R. 13103 89th Congress FOREIGN INVESTORS TAX ACT OF 1966 PUBLIC LAW 89-809 COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES NINETIETH CONGRESS FIRST SESSION PART 2 w G:~ ~) ~ I ~ I Prepared by the Staff of the Committee on Way's and Means for the use of the `Committee on Ways and Means U.S. GOVERNMENT PRINTING OFFICE 71-297 0 WASHINGTON : 1967 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 Price $3 PAGENO="0002" COMMITTEE ON WAYS AND MEANS CECIL R. KIN G, California IIALE BOGUS, Louisiana FRANK M. KARSTEN, Missouri A. S. HERLONG, JR., Florida JOHN C. WATTS, Kentucky AL ULLMAN, Oregon JAMES A. BURKE, Massachusetts MARTHA W. GRIFFITHS, Michigan GEORGE M. RHODES, Pennsylvania DAN ROSTENKOWSKI, Illinois PHIL M. LAN DRUM, Georgia CHARLES A. VANIK, Ohio RICHARD II. FULTON, Tennessee JACOB II. GILBERT, New York LEO H. IRwIN, Chief Counsel JOHN W. MARTIN, Jr., Assistant Chief Counsel JOHN P. BAKER, Professional Staff RAYMOND A. DRI5c0LL, Professional Staff hAROLD T. LAMAR, Professional Staff JAMES W. KELLEY, Professional Staff WILBUR D. MILLS, Arkansas, Chairman JOHN W. BYRNES, Wisconsin THOMAS B. CURTIS, Missouri JAMES B. UTT, California JACKSON E. BETTS, Ohio hERMAN T. SCHNEEBELI, Pennsylvania HAROLD R. COLLIER, Illinois JOEL T. BROYHILL, Virginia JAMES F. BATTIN, Montana BARBER B. CONABLE, JR., New York GEORGE BUSh, Texas WILLIAM II. QUEALY, Minority Counsel 11 PAGENO="0003" INTRODUCTION The legislative history of H.R. 13103 is a compilation of legislative history materials relating to the enactment of Public Law 89-809. The purpose of this history is to make readily available all of the public documents containing pertinent information relative to the enactment of the law. This document sets forth in chronological order the action taken by Congress with respect to this law. For example, section 1 sets forth the public law; section 2, H.R. 5916 as introduced in the House of Representatives; section 3, an explanation by the Treasury Depart- ment of the act to remove tax barriers to foreign investment in the United States, which was inserted in the Congressional Record on March 8, 1965, by Chairman Wilbur D. Mills, and so. on. This document contains: (a) the hearings on H.R. 5916 before the Committee on Ways and Means on June 30 and July 1, 1965 (which include: H.R. 5916 as introduced in the House of Representatives; press release of the Committee on Ways and Means, dated June 18, 1965, announcing invitation for interested persons to submit written statements on H.R. 5916; and press release of the Committee on Ways and Means, dated June 24, 1965, announcing public hearings on H.R. 5916); (b) written statements by interested individuals and organizations on H.R. 11297 submitted to the Committee on Ways and Means (which include: H.R. 11297 as introduced in the House of Representatives on September 28, 1965, together with summary of principal provisions and comparative print showing changes which would be made in existing law); and (c) hearings on H.R. 13103 before the Committee on Ways and Means on March. 7, 1966 (which include: press release of the Committee on Ways and Means, dated February 24, 1966, announcing the hearings on H.R. 13103 and H.R. 13103 as introduced in the House of Representatives). The hearings held by the Senate Committee on Finance on H.R. 13103 are also contained in this document. Included in these hearings is H.R. 13103 as passed by the House of Representatives and referred to the Senate Committee on Finance. Documents incorporated in the hearings and written statements mentioned above are not set out separately in this document; however, appropriate cross-references are made. The material contained, herein has been inserted in toto; therefore, the original pagination appears in all cases. In order to facilitate the utilization of the House and Senate floor debates on H.R. 13103, this document contains an alphabetical listing of Members of Congress with cross-references to their remarks on the floor of the House or the Senate, as the case may be. In this connec- tion, however, the page numbers refer to the pages of this document. The floor debates are taken from the Congressional Record for the 111 PAGENO="0004" date indicated. The page numbers of the daily Congressional Record are bracketed. During the course of its consideration of H.R. 13103, the Senate Committee on Finance added amendments to the bill, some of which were the substance of bills that were reported by the Committee on Ways and Means and in some cases, had been passed by the House of Representatives. One situation involves a Senate-passed bill that was reported by the Committee on Ways and Means. These bills appear in the appendix to this document along with the appropriate committee reports and House and Senate floor debates where appropriate. iv PAGENO="0005" CONTENTS TABLE SHOWING CONTENTS OF EACH PART Pags Part 1: Sections 1 through 21 1-1162 Part 2: Sections 22 through appendix 1163-2189 Introduction Chronological history of the legislation vii Alphabetical listing of Members of Congress with cross-references to floor debates: A. House floor debate on bill ix B. Senate floor debate on bill ix C. House floor debate on conference report x D. Senate floor debate on conference report x Section 1. Public law 1 2. H. R. 5916 as introduced in the House of Representatives 57 3. Explanation by the Department of the Treasury of the act to remove tax barriers to foreign investment in the United States, inserted in the Congressional Record on March 8, 1965, by Chairman Wilbur D. Mills 4. Press release of the Committee on Ways and Means dated June 18, 1965, announcing invitation for interested persons to submit written statements on H.R. 5916 the act to remove tax barriers to foreign investment in the United States 67 5. Press release of the Committee on Ways and Means dated June 24, 1965, announcing public hearings on H.R. 5916 69 6. Report to the President of the United States from the Task Force on Promoting Increased Foreign Investment in U.S. Corporate Securi- ties and Increased Foreign Financing for U.S. Corporations Operating Abroad (Fowler Task Force) 71 7. Public hearings before the Committee on Ways and Means on H. R. 5916 117 8. Summary of recommendations for revisions given in statements pre- sented to the Committee on Ways and Means - 287 9. H.R. 11297 as introduced in the House of Representatives 303 10. H.R. 11297 the Foreign Investors Tax Act of 1965 as introduced in the House of Representatives on September 28, 1965, together with summary of principal provisions and comparative print showing changes which would be made in existing law 305 11. Written statements by interested individuals and organizations on H. R. 11297 submitted to the Committee on Ways and Means 307 12. Press release of the Committee on Ways and Means, dated February 24, 1966, announcing 1-day public hearing on new features of Foreign Investors Tax Act of 1965 (H.R. 11297) which will be introduced as a clean bill on Monday, February 28, 1966 517 13. H. R. 13103 as introduced in the House of Representatives 519 14. Public hearings before the Committee on Ways and Means on H. R. 13103 521 15. Press release of the Committee on Ways and Means, dated March 17, 1966, announcing that the committee ordered favorably reported to the House, with amendments, H.R. 13103, the Foreign Investors Tax Act of 1966 16. Bill as reported by the Committee on Ways and Means 577 V PAGENO="0006" / Section Page 17. Committee report - 661 18. House floor debate 847 19. Bill as passed by the House and referred to the Senate Committee on Finance 873 20. Press release of the Senate Committee on Finance, dated July 29, 1966, announcing hearings on Foreign Investors Tax Act of 1966 875 21. Hearings before the Senate Committee on Finance 879 22. Press release of the Senate Committee on Finance, dated October 4, 1966, announcing that the Committee orders foreign investors tax bill reported 1163 23. Bill as reported by Senate Committee on Finance 1171 24. Committee report 1405 25. Senate floor debate 1493 26. Bill as passed by the Senate with amendments of the Senate 1603 27. Summary of Senate amendments 1841 28. Conference report 1865 29. House floor debate on conference report 1883 30. Senate floor debate on conference report 1913 31. Senate Committee on Finance summary of Presidential Election Cam- paign Fund Act of 1966 (title III of Public Law 89-809) 1977 32. Summnry of the Foreign Investors Tax Act of 1966; Presidential Election Campaign Fund Act; and other amendments 1987 33. Press release, office of the White House press secretary (Fredericks- burg, Tex.) dated November 13, 1966, statement by the President upon signing the Foreign Investors Tax Act of 1966-H.R. 13103 - 2051 APPENDIX I. H.R. 10, a bill to amend the Internal Revenue Code of 1954 to permit pension and profit-sharing plans to provide contributions or benefits on a non-discriminatory basis for certain self-employed individuals without special limitations on the amount of contributions (sec. 204 of Public Law 89-809) 2057 II. H.R. 11765, income tax treatment of certain straddle transactions (sec. 210 of Public Law 89-809) 2121 III. S. 1013, to clarify the components of, and to assist in the management of, the national debt and the tax structure (sec. 402 of Public Law 89-809) 2151 IV. H.R. 18230, to amend the Internal Revenue Code of 1954 to provide that the term "purchase" for purposes of section 334(b)(2) is to include certain indirect purchases of stock through the purchase of the stock of another corporation (sec. 202 of Public Law 89-809) - - 2179 vi PAGENO="0007" CHRONOLOGICAL HISTORY OF THE LEGISLATION Date Fowler task force report presented to the President_ - House bill number Date bill introduced in House of Representatives Dates of public hearings before the House Committee on Ways and Means (on H.R. 5916). house bill number (superseding H.R. 5916) Date bill introduced in House of Representatives House bill number. (superseding H.R. 11297) Date bill introduced in House of Representatives Date of public hearings before the House Committee on Ways and Means (on H.R. 13103) Date bill reported by Committee on Ways and Means - - House report number Date rule obtained-H. Res. 880, providing for a closed rule, waiving points of order against, 3 hours of debate, committee amendments, and one motion to recOmmit.... Date of House floor debate and final passage Rule: H. Res. 880 adopted by voice vote. Final passage: Passed by a voice vote. Dates of public hearings before the Senate Committee on Finance Date bill reported by Senate Committee on Finance Senate report number Dates of Senate floor debate Date bill passed the Senate Final passage: Passed by a record vote-58 yeas, 18 nays, 24 not voting. Date conference report filed Conference report number Date conference report presented to House of Repre- sentatives Date conference report adopted by House of Representa- tives Vote: 171 yeas, 46 nays, 221 not voting. Date conference report presented to and adopted by the Senate Date signed by the President Public law number Apr. 27, 1964. H.R. 5916. Mar. 8, 1965. June 30 and July 1, 1965. H.R. 11297. Sept. 28, 1965. H.R. 13103. Feb. 28, 1966. Mar. 7, 1966. Apr. 26, 1966. H. Rept. No. 1450. June 7, 1966. June 15, 1966. Aug. 8,9, and 10, 1966. Oct. 11, 1966. S. Rept. No. 1707. Oct. 12 and 13, 1966. Oct. 13, 1966. Oct. 19, 1966. Rept. No. 2327. Oct. 19, 1966. Oct. 20, 1966. Oct. 22, 1966. Nov. 13, 1966. Public Law 89-809. vi' PAGENO="0008" PAGENO="0009" ALPHABETICAL LISTING OF MEMBERS OF CONGRESS WITH CROSS-REFERENCES TO FLOOR DEBATES A. HOUSE FLOOR DEBATE ON BILL Page numbers (of this Members of the House document) Battin, James F. (Montana) 853 Byrnes, John W. (Wisconsin)~~ 854, 855 Curtis, Thomas B. (Missouri) 853-855 de la Garza, Eligio (Texas) 853-854 Gross, H. R. (Iowa) 852 Madden, Ray J. (Indiana 849 Mills, Wilbur D. (Arkansas) 849-854, 855, 869 Smith, H. Allen (California) 849 B. SENATE FLOOR DEBATE ON BILL Members of the Senate Aiken, George D. (Vermont) 1552-1554, 1557-1558, 1564, 1595 Bayh, Birch E. (Indiana) 1577-1578 Bennett, Wallace F. (Utah) 1582 Carlson, Frank (Kansas) 1568, 1573-1574, 1594 Cotton, Norris (New Hampshire) 1546-1547, 1555-1557, 1560, 1569-1571, 1595 Dirksen, Everett McKinley (Illinois) 1582 1594, 1595 Dominick, Peter H. (Colorado) 1569 Ervin, Samuel J., Jr. (North Carolina) 1583 Fong, Hiram L. (Hawaii) 1588-1590 Gore, Albert (Tennessee) 1538, 1540-1541, 1560-1562, 1566, 1569-1570, 1574, 1577-1582 Griffin, Robert P. (Michigan) 1598 Hartke, Vance (Indiana) 1568-1569, 1571-1573, 1575, 1577-1578, 1583 Holland, Spessard L. (Florida) 1599 Javits, Jacob K. (New York) 1587-1588 Jordan, B. Everett (North Carolina) 1568 Lausche, Frank J. (Ohio) 1525-1526, 1528, 1532-1537, 1542-1544, 1547, 1549-1550, 1561, 1563-1565, 1569, 1583, 1593, 1595-1596 Long, Edward V. (Missouri) 1569 Long, Russell B. (Louisiana) 1523-1540, 1542-1543, 1547-1551, 1552-1566, 1569-1570, 1571, 1574-1578, 1583-1584, 1588, 1590, 1592-1593, 1594, 1596-1598, 1599-1600 McCarthy, Eugene J. (Minnesota) 1539-1540, 1564-1565, 1577 Magnuson, Warren G. (Washington) 1557 Mansfield, Mike (Montana) 1495, 1567, 1575-1576, 1583, 1588, 1594, 1600-1601 Morton, Thruston B. (Kentucky) 1537, 1598 Murphy, George (California) 1549, 1558-1560, 1576 Nelson, Gaylord (Wisconsin) 1548 Pastore, John 0. (Rhode Island) 1551, 1552, 1553-1554, 1596-1598 Robertson, A. Willis (Virginia) 1592 Russell, Donald S. (South Carolina) 1569 Russell, Richard B. (Georgia) 1575 Scott, Hugh (Pennsylvania) 1546 Simpson, Milward L. (Wyoming) 1582, 1597 Smathers, George A. (Florida) 1599 Sparkman, John (Alabama) 1569 Stennis, John (Mississippi) 1569 Symington, Stuart (Missouri) 1554-1556 Talmadge, Herman E. (Georgia) 1537- 1538, 1542, 1568, 1590-1592, 1594, 1600 Thurmond, Strom (South Carolina) 1554, 1557-1558 Williams, John J. (Delaware) 1534, 1538, 1540, 1542-1547, 1550-1552, 1556, 1561-1564, 1566, 1574, 1582, 1592-1594, 1595-1597, 1599 Yarborough, Ralph W. (Texas) 1584-1587, 1590, 1592-1594, 1595 Young, Stephen M. (Ohio) 1552 ix PAGENO="0010" C. Hous~ FLOOR DEBATE ON CONFERENCE REPORT Page numbers Members of the House (of this document) Battin, James F. (Montana) 1900 Bingham, Jonathan B. (New York) 1906 Byrnes, John W. (Wisconsin) 1905 Curtis, ThomasB. (Missouri) 1893, 1902-1904, 1907, 1908 Dingell, John D. (Michigan) 1902, 1904-1905 Fraser, Donald M. (Minnesota) 1907 Fulton, James G. (Pennsylvania) 1906-1907 Griffiths, Martha W. (Michigan) 1901 Harsha, William H. (Ohio) 1901 Joelson, Charles S. (New Jersey) 1905-1906 Keogh, Eugene J. (New York). 1899-1900, 1902 Long, Clarence D. (Maryland) 1902, 1904 MacGregor, Clark (Minnesota) 1899 Mills, Wilbur D. (Arkansas) 1885, 1892-1908 Rumsfeld, Donald (Illinois) 1903 Smith, Howard W. (Virginia) 1892-1894 Vivian, Weston E. (Michigan) 1907 Watson, Albert W. (South Carolina) 1900-1901 D. SENATE FLOOR DEBATE ON CONFERENCE REPORT Members of the Senate Byrd, Robert C. (West Virginia) 1967 Clark, Joseph S. (Pennsylvania) 1954-1955 Gore, Albert (Tennessee) 1918-1919, 1923, 1927, 1930, 1933-1935, 1937, 1943, 1952-1961, 1963-1964 Hickenlooper, Bourke B. (Iowa) 1959-1960 Holland, Spessard L. (Florida) 1917 Kuchel, Thomas H. (California) 1922 Lausche, Frank J. (Ohio) 1916, 1920-1922, 1932-1936, 1941-1942, 1944-1947, 1956-1961 Long, Russel B. (Louisiana) 1915, 1917-1918, 1920, 1922, 1923-1931, 1933-1934, 1936, 1941, 1943, 1946-1952, 1962-1965, 1968-1976. McCarthy, EugeneJ. (Minnesota) 1931, 1935 Mansfield, Michael J. (Montana) 1915-1923, 1955, 1959, 1961, 1962, 1964 Monroney, A. S. Mike (Oklahoma) 1955 Morse, Wayne (Oregon) 1917 Murphy, George (California) 1926-1928, 1965-1966 Pastore, John 0. (Rhode Island) 1916-1917 Randolph, Jennings (West Virginia) 1967-1968 Smathers, George A. (Florida) 1920-1921, 1947-1954, 1957, 1966 Williams, John J. (Delaware) 1919-1920, 1930-1947, 1965 x PAGENO="0011" SECTION 22 PRESS RELEASE OF THE SENATE COMMITTEE ON FINANCE DATED OCTOBER 4, 1966, ANNOUNCING THAT THE COMMITTEE ORDERS FOREIGN INVESTORS TAX BILL REPORTED 1163 PAGENO="0012" PAGENO="0013" PRESS RELEASE FOR IMMEDIATE RELEASE COMMITTEE ON FINANCE OCTOBER 4, 1966 UNITED STATES SENATE 2227 New Senate Office Bldg. FINANCE COMMITTEE ORDERS FOREIGN INVESTORS TAX BILL REPORTED Senator Russell B. Long, Chairman of the Senate Committee on Finance, today announced that the Committee has ordered favorably reported, with amendments, H.R. 13103, the Foreign Investors TaxAct of 1966, a bill to revise the tax treatn~ent of nonresident aliens and foreign corporations who invest in the United States. The Committee an-ended the provisions of the House-passed bill in several respects and added a number of other amendments to it. Amendm~nts to Provisions of the House Bill: (1) Estate Tax. - Bank deposits of nonresident aliens and foreign corporations would not become subject to the United St!~tes estate tax until 1972, rather than upon the date of enactment of the bill (conforming to the effective date in the bill for the income tax on the interest derived. from these bank deposits). (2) Foreign Income. - The "effectively connected" rule with regard to foreign source income is amended so as to exclude (a) income derived from a transaction in which the U.S. office was not a material factor, (b) income not derived from the usual business a ctivities of the U. S. office (c) income not properly allocable to the U.S. office. Office would be defined as excluding certain agents. Additionally, the foreign tax credit provision was expanded to include domiciliary taxes attributable to the foreign source effectively connected income. (3) Possessions-Banks. - Interest from U.S. Treasury obligations received by a bank located iiia U.S. possession would be treated as ef- fectively connected to a U.S. trade or business in order that they might deduct expenses incident to such income. (4) Personal Holding Company~. - The personal holding company pro- visions of the House bill exempting foreign corporations of all the stock of which is owned by non-resident aliens is amended. Under the amentment, in the case of foreign corporations with 10 percent or less U.S. ownership, the personal holding company tax would be assessed only on the corporation's income attributable to the U.S. shareholders interest. 1165 PAGENO="0014" (5) Foreign Tax Credit. - The exception provided by the bill with respect to the limitation on the allowable foreign tax credit applicable to interest income is amended to apply to a taxpayer directly or indirectly owning 10 percent (rather than 50 percent) of the corporation from which the interest is derived. (6) Dividend Received Deduction. The 100 percent dividend received deduction would be allowed a U. S. corporation whose wholly-owned foreign subsidiary is subject to U.S. tax on all of its income which is foreign source income effectively connected with the foreign subsidiary's U.S. business. (7) Expatriation. - The special income tax rules of the bill referring to expatriates would apply for 10 years rather than 5 years as in the House bill. (8) Technical Amendments. The technical amendments to provisions in the House bill referred to in the Secretary of the Treasury's statement, together with certain other technical and conforming amendments were adopted. Other Amendments: (1) Interest Equalization. Three amendments to the Interest Equali- zation Tax were approved: (a) Euro-dollars. - The President would be given the authority to exempt from the interest equalization tax, U.S. dollar loans of more than one year made by the foreign branches of U. S. banks. (b) Raw Material Source Loans, - Subsequent transfers of loans to assure raw material sources would be exempt from the interest equalization tax where the indebtedness is acquired without an intent on the part of the purchaser to sell it to other U.S. persons. (c) Insurance Companies - Developed Countries. - The present exemption for reserve asset pools of U.S. insurance companies would also allow the establishment of reserve asset pools where a U.S. in- surance company commences activities in a developed country or where, a less-developed country is designated as a developed country. (2) Participation Certificates. - Central Banks. The tax exemption on income from investment in Treasury obligations held by foreign central banks is extended to obligations of other Federal agencies. 1166 PAGENO="0015" .3 (3) Foreign Currency Denominated Securities. The debt management authority of the Secretary of the Treasury is expanded to allow the issuance of foreign currency denominated securities in the same range of maturities and interest rates as is authorized for regular dollar issues. (4) Contingent Liabilities and Assets. The text of S. 1013 was adopted requiring an annual report to Congress showing the contingent li abilities of the Federal Government, and assets of the Federal Government which are available to liquidate such liabilities. (5) Cooperative Per..Unit Retains. An amendment was adopted which provides that cooperatives and their patrons are to treat per-.unit retain certificates in a manner similar to the treatment presently provided for patronage dividends. This in effect codifies the present Treasury regula.. tions on this issue. (6) Alumina Cl~y. - A depletion allowance of 23 percent is permitted for laterites, nepheline syerite, and clay to the extent that alumina and aluminum compounds are extracted therefrom and the cut-off point for de- termining the limitation on the depletion allowance for these minerals is fixed at the alumina stage. These changes apDly only to domestic minerals. (7) MedIcal Expenses. Taxpayers 65 and over would be able to con- tinue to deduct medical expenses without regard to the 3 percent and the one percent limitations presently scheduled to apply to such taxpayers beginning January 1, 1967. The provisions in the medicare law which would restrict the medical and drug expense deduction would be repealed. (8) Prescribed Drugs - Medicare. Prescribed drugs coverage would be added to Part B of Medicare. Estimated monthly cost of $1 per beneficiary would be shared equally by government and beneficiary. Reimbursement would be made under schedule of allowances based upon generic drug prices. (9) Straddles. - Writer of a straddle (a combination of an option to buy and an option to sell a certain number of shares of stock at a fixed price for a stated period of time) would have his income derived from the straddle premium attributable to the portion of the option which lapses taxed as a short-term capital gain, enabling him to offset the capital loss on the portion which is exercised. (10) Excise Tax - Hearses. - The 7 percent automobile tax rather than the 10 percent truck excise tax would apply to hearses as it presently applies to ambulances and combination ambulance-hearses. 1167 PAGENO="0016" -4- (11) Corporate Acquisition of Assets of Another Corporation. - A corporate acquisition would be tax-free where the assets of the acquired corporation were received through a combination out-right purchase of 40 percent of the corporation's stock and indirect purchase by the acquired corporation of 80 percent of the stock of a holding company which owns 40 percent of the stock of the acquired corporation. (12) Clam and Oyster Shells. ~rhe depletion allowance for clam shells and oyster shells is increased from 5 to 15 percent when used for their calcium carbonate content. When used for road ballast or rip rap the 5 percent rate would continue to apply. (13) Presidential Campaign Financip~g~ - Provides for reimbursement of major political parties equally for expenses they incur in financing a Presidential campaign. Payments would be made from a fund made up of -- $1 amounts designated by taxpayers on their tax returns. The amount avail.' able for reimbursement would be limited to $1 for each vote cast for the major party candidates at the last Presidential election. Provision would also be made for reimbursing certain splinter parties. (14) Sy~p Funds. - An amendment was approved, setting aside certain Treasury regulations proposing to tax exchanges of appreciated securities (or other property) for shares in a mutual fund. (15) Shale, Clay and Slate as Lightweight Concrete Aggregates. - The text of S. 2745 was adopted, treating sintering or burning as a mining proc- ess for depletion allowance purposes in the case of shale, clay and slate used or sold for use as lightweight concrete aggregates. (16) Rental Income in the Case of Personal Holding Company Tax. - This amendment would exclude from the category of rental income for pur- poses of the personal holding company tax income derived by a manufacturing concern from the leasing of products manufactured by it. (17) Self-Employed - Earned Income. - The first $6, 600 of net profit from a trade or business in which both capital and personal services are material income-producing factors would be treated as earned income for purposes of measuring contributions to retirement plans by self-employed persons. Under present law, only the first $2, 500 is so treated. (18) Self-Employed - Authors and Inventors. - The text of S. 1242 was approved as an amendment. Under it, royalty income of authors and inventor would be considered as earned income for purposes of measuring contribu- tions by self-employed persons to retirement plans. 1168 PAGENO="0017" -5.. (19) Investn~ent Credit - Possessions. - The invest. ent credit would be~ permitted with respect to property used in the insular possessions, if neither the lessor or lessee with respect to such property claims exemption from U.S. income tax under Section 931 (income from sources within pos- sessions of the United States). 71-297 0-67-pt. 2-2 1169 PAGENO="0018" PAGENO="0019" SECTION 23 BILL AS REPORTED BY SENATE COMMITTEE ON FINANCE 1171 PAGENO="0020" PAGENO="0021" Calendar No. 1675 89TH CONGRESS 2D SESSION . . 1 31 03 [Report No. 1707] IN THE SENATE OF THE UNITED STATES JUNE 16,1966 Read twice and referred to the Committee on Finance OoToBnn 11,1966 Reported, under authority of th~ order of the Senate of October 11, 1966, by Mr. LONG of Louisiana, with amendments [Strike out all after the enacting clause and insert the part printed in italic] AN ACT To amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign investment in the United States. 1. Be it enacted by the Senate and House of Represent a- 2 tives of the United States of America in Congress assembled, 3 &ECTIUN 1- SHORT TITLE, E~G 4 -fa~3- S1IoT~ T~LE. This Ae~ may be e~e4 as ~he ~1~e~- 5 e~g~ Investors ~4~ax A~4 ef ~9643~'. 1173 PAGENO="0022" -f 1*)- T-~B~1~ OP Q8N~PENTS. ~ 4- ~1+0f4- t4e, eto +a+ ~41f~t t÷t4~ fh-)- ~+i4~-1-o 04 o~÷n1entn end ~ei~ 04 44)4;4 4e4o ~ 04 ~ -fb+ Divide~i4~ -fe-)- Pei-~onn1 ~enM4e~ *4-)- Pitiens~ *4)- FAI~eet4-w~ 4*tes ~ ~e~pes+dei÷t +d4e~+ 4d*i+4t~ *4-)- ~ ~ 0fflThC5~4~+t ft4f*9+ ~4diiii4~-~ ~See 8~4~ ~ e-i+ ftOlIlesideflt ft4-f9~ ui~-dna4u ~-fo)- 4-e-ee~e-e ~+04 connected 04t4+ United S~fftes bnsiiwss - pe~ee~t t~o £ifIft Incorno eonnee1ed w~t4~ U-i÷ite4 Stt4~es b+~ui~+e~e-geo4+~- Med ~Me e$ t+~?o ~-(-e+ P ei-pa-i#s 4~+ ee-i~t-a4+~ exchange e~ tn~4~4~+g pi-ogi-urns ~-f4+ E4eet4on to t~eM i~e~4 -pvopevty i-oeeine e-~ 4~eo+e-e eo+~- ~e4e4 wit4~ United SA*te-s hw4nes~ Q±~ess rcferenees~ *4+ G~oss 4~ee~1e7 -fe)- De4uetiom~ -(4)- A44-ewenee 04 deductions a+i4 credit~ *0* ~ -tie-n to a-~o tone £iS~e SZ7~. EnpMniM4en to two44 ton geneoab ~-f1~f)- Altcrnative ta~o £~~fe+ S-peei-t4 ~+4es e4 sec-i i-ee ~-f4+ I4neeption 4~w 4oae 04 eit-k~enship 4fw eectmin eo+ioes. a-fe-)- -Burden o4 ~o~ee42' *~-)- Thwtio4 e-x4w4en e4 4ividends~ *4-)- With-hol4ing 04 ton en nonresident a-I-one -fI÷)- bio4~ili-ty 4oo i~4t4the~4 ton fi-)- PeeIa-iation 04 ea-t4notted income too to inTivid-unk. -(--f)- Gain 4oe~n dispositions e4 eertnin deprcci044e realty. -(-Ii-)- eMion e4 income tan at source en wa-ges~ -(1-)- Definition 04 4eceign estate no -fm)- Confeimin-g amendment. -(n)- Effective eTa-tee See. 4. Foreign corporatione -fe)- ~Pan en ineeme net connected wi43 P-id-ted 54-a-tea business: ~Si-ie 884-: Income 04 4ereign e -a4iens eat eonneete4 4d+ P-nited States busi-ness. ~-fa-)- Imposition 04 tam ~-fb)- Doubling e4 tand~ 1174 PAGENO="0023" SuQ~ 4: ~Ew~4g+~ eo~porations -?`øn4~h+fle4 ei+ income eom~ected ~4t4+ ti~ted St~es bi+si+ies~: S8~ Income of foreign ecopiwatiow con-neetefi ~444÷ 1~nite4 S1~ 5-ftt+ N~or+*m4 *~* ~o~4 ~uwt~ £~+)- G~*~o H~ £~~fe+ A11 waneo of 4e4~tetie~+s o~i4 orc4its. ~-f4)- 444ee~4o~ to teet~t r~4 ~ropcrty ~eome oo ~eo+i+e eoi+- ~eete4 w4t4: Tj-i$ted States business; £~.fe)- I~etmns of to~ by ~gei+b ~-(4-)- I1ereign eor-poiati&ns~" *e-)- Withhold-mg of tf~ O~} foreign eQrI)O1atiOll± -(4)- 4i44e+i4~~ received $roi~÷ eerlstin $fwe+g++ eo-IpOlfltioft4. *4* T~~1~d- b~iiieeo to~otbl~ *4* Corporations su-bjcct to personal hokling company ta-~e -fg-)- Amendments wi-tA+ respect to foreign eor-l)OratfOnS ea-}'ry eg e~ &U4~fU1CC in+so~eoe H+ lTmteI States -(1+)- Subpart I~ income~ -(i-)- G~h~ $re~ ee~toh~ ~1e~ or exchanges of otoek i+~ ee~4-ain foreign corporations. -f~3-)- Declaration of eatimated i÷ieome tt~by eorporation~ -(k)- Technical amendments. *4)- E41~eetire datee Sre~ ~ Speeial to~ provisions. *4)- Income affected- by tees4y -(by kpplienti-en of pre4Pt~ income t-a~ pi-o~4sie~ aSee. 89g. App44ea4ieft of pre4~G ineoi~e t-a* pre~4alon~. £~.(a)- Imposition of on~re biwdensome te~e~ by foreign eoni~- ~-fb)- Allevintiei÷ of o~oee burdensome to~e&. £~-fe)- ~otAffeatbon of ~ongress require4~ £i~f4)- Implementu-tioft by regulntieee.~ -(4 Clerical o~4~eftts *4* ~ th Icoreign to~ credit -(4 Allowance of ere4it to certain nourceidret ~4iew~ on4 foreign eer- porations. *4)- Ahe~÷resitlents of the Uftited- Staler or Puerto Ttiee. 51*3. Z A~eft1heeftt to ~et~ie stmg hew Oft d4Uet*3ftB ee4ee section -(a)- Dcductioris~ *4)- ~ffeeti~e date. See. 8. 4~ktMeo of nenresiden~ *ot -(-by Gredito against taN-: -(4 Property within the T.nited Statue. -(4)- Property witho~ the T~inite4 Statee. -(4 Definition of tona4de eetate~ 1175 PAGENO="0024" 4 -i~** & Estates 4 nonresidents ~iet citizens Continued .(ft Special methods 4 computing t~a~-~ aS~e7 ~4-OZ Expatriation te wei4 te~ ~-(4 4~ete 4 5-fl÷)- G~ess estate. £~~fe)~ Credits. £~~(4)~ Exception 4ei~ less e$ citizenship 4ei~ eestei~i causes. a-fe)- Burden 4 proof. ~SBe~ 54O& Application 4 pi~e-44~ estate ta~ ~ovisiens~ ~-Ea-)- Imposition 4 mere hiwdcnsome ta~4~y ~foreign ee~nt~y ~-(-h)- Alleviation 4 more burdensome ta~ ~-fe~- Notification 4 Congress iequireb ~-f4)- -Implementation by regulations~" -fg-)- Estate *~e~ returns. .fh)- Clerical amendmcnt 4+ Effective d-07te7 ~ en gi4ts 4 nonresidents net citizcnu -(4 Imposition 4 .f13~)- Transfers in general. -(4 Effective dMe Sie~ 4O~ Treat-y obligations. 1 -(4 AMENDMENT eP ~$~54 ~ODE. Exee~ as other 2 wise expressly provided, whcne~er in this Ae~ an amend- 3 ment or repeal is expressed in terms of an amendment to~ 4 or repeal of~ a seetion or other prov4sion~ the referenee is to a 5 section or other provisi-on of the Internal Re-venue Code of 6 19547 7 SE~ ~ SOURCE O~ INCOME~ 8 -(a-)- TNTEItESL- 9 -(4-)- (A-)- Subparagraph -(-4)- of section 864-(a) -(4-)- 10 (relating to interest from sources within the United 11 States) is amended to read as foUows-~ 12 "(A-)- interest on amounts described in sub- 13 section -fe- received by a nonresident a4ien in-d4- 14 ~4dual or a foreign eorper4ion~ if such interest is 1176 PAGENO="0025" 5 1 ne~ e~ee~wely eonnccted with the eendiie~ o~ e 2 trade oi~ business within the TJnited States~ 3 -(44)- Section 8434. is amended by add4ng et the end 4 the~eo~ the following new subscction4 5 1~-fe)- TNTEIIE&P e?~ f)-EPOSiTS~ E~re. For purposes o~ 6 subsection -(4~1) (A~ the umounts desei4bed in this sub- 7 seetendlre- 8 ~-l~)- deposits with persons earrying on the banJ~ 9 ing business7 10 ~-(2-)- deposits or withdrawable eeeounts with - 11 i~gs rnstitutions chartered end supewised es sa~4ngs 12 and lean or shuil-ar associations under F-edcrf4 or State 13 laiw7 but only to the extent tha~t amounts paid or credited 14 on seeh deposits or accounts are deductible under seetion 15 &94. in eompating the tenable ineome of snob institu 16 tions7end 17 1~~f3~)~ amounts held by an insurance eompany under 18 an agreement to pay interest thereon7 19 Effective with respeet to amounts paid or er-edited after 20 Dccember ~ 1974, subsection -(-a) (1) (A-)- end this sub- 21 seetion shedi eeese to ap-ply~-~ 22 -f2~- geetion 8(31 (a) (-1-)- is amended by striking out 23 ~!andi~ at the end of snbparagraph -(-}4)-~ by striking out 24 the period at the end of si±bparagra~ph -fG)- and inserting 1177 PAGENO="0026" (~) 1 ~÷i 14e'~ thei~ef ~-~- tiii4~ a+~4 1~c~ ti44ii+±~ t4 the ei~4 thei~ee~ 2 the ~o#owieg ~ew 3 "-~-D) ii+~e~e~ o+i 4epe~s with t~ ~egi± bmeeb 4 ~ ~temes~ie p44en~ ~ i~4i bi~&i~4i ~ i~gage4 5 i+~ the e e~eift4 banking blls~ness~' 6 -(-3) (A* Se~4ien ~5 fi~e1e4~g ~e w*3me 4efwe4 7 by ~ fofegil ee~a4 bti~ak ~f ~e from iga~iom~ of 8 the 4e4 ~4~te~- L~ -f~* by sti41~ing ~ not be i~4e4e4~ ae4 10 ~se#ing in I4en thefeef ~ oi~ from ei~es~ on 4e- ii ~~osi~s with ~*e~sons eai~ying on the ban4thig bnsi- 12 ness~ sbal4 nnt be ine1iided~j 13 -f~-~+ by &triki~ng on~ 1~sn4i ob4ga~ions~ ff114 in- 1-I se#ing in `ien thereof ~-~s~ch ob a4ons o~ 15 -fi4i3- by &d4ii-ig a~ the en4 thereof the I~ewiOg 16 new sciitcnce-~ ~Uoi~ puipos~ of the peoee4ng sen- 17 ~eneeT the sank fer 3~44erin44one4 ~et14eniei4s sbM4 18 be ~rea~e4 ~s n foreign een~ra1 bank of ionie with 19 r-es~pee~a ~ ii#eres~ on with persons eorryiog 2u en the banking hn nei~s~-t an-I 1178 PAGENO="0027" 1 -(4~- by sti4kii+g ofit the 1+ea~I4iig and insei~thig 2 ii~ I4en thereof the followiiig-~ 3 ~SI~ 89~ INCOMI~ 1)ERPJ4P B~ A FOREIGN CENTR4L 4 BANK OF ISSIJ-E FROM OBLIGATIONS OF TIlE 5 IJNITED STATES OR FROM BANK PFZPOSIT~S!2 6 -f 43)- ~4+e tohie of seetions for subpai~t ~ of pnrt II 7 of si±hehapter ~ of ehaj~fer 4 is an~ended by striking out 8 the item relating to seetion &9~ and inserting in lieu 9 thereof the following: ~ee 8D~ 4~+e&~+e 4e+4-~e4 1w ~ 4*w*4gt* ccnti~d ~ft~+l~ *4 ~ &$i4e+~s *4 4~e Tiuite4 SO#e~ O+~ ~+e~ 1ft~÷k 4e-posit~." 10 -f~3- ~ns- ii -f~ Scetion 8~a) (2)--(B)- ~fre1ating to 44~4deu4s 12 from sourees within the Thrited Statee)- is amended to 13 rend as follows4 i 1~~fJ3)~ from a foreign corporation unless less 1 :~ than 84~ percent of the gross ineome from all soiwees of sueh foreign corporfttiou for the 3-year period 17 ending with the elose of i~s ta~ub1e year preeeding 18 the ~rat~on of sueh di~ideri4s -for for auth pert 1179 PAGENO="0028" 8 of snob peried as the corporation bas been in exist 2 ence)- was effectively esimeeted with the conduct of 3 a ~ra4e or business within the. Uned Statesj but 4 on4y in an amount which bears the same ratio to 5 snob dividends as the gross income of the eorpora- 6 tion for snob pei~od which is effectively connected 7 with the conduct of a trade or business within the 8 United States bears to its gross inc~inc from all 9 sources; but dividends from a foreign eorporation 10 shall~ for purposes of subpart A of part P4 (relating 11 to foreign ta~ eredit-)-~ be treated as income from 12 sources without the United States to the extent -(and 13 only to the extent)- exceeding the amount whieh is 14 4ø0/8~ths of the amount of the deduction allowable 15 under section 24~ in respect of snob dividends1 or~ 16 -f~-)- Seetion 864-fa)--(4)- is amended by adding after 17 swbparagraph -(G)- the following: 18 ii:j~ purposes of subparagraph +B*1 the gross ineome 19 of the foreign corporation for any period before the 4lrst 20 taxable year beginning after December &t-~ I9fiG, which 21 ~ effeeti~vcly connected with the conduct of a trade or 22 business within the United States is an amount e~ini4 23 to the gross income for snob period from sourees 24 the United Stat&~ 1180 PAGENO="0029" q .1 -fe* Pi~se-N~d~ SEIWiQE~S~-Seet-ien 8---f(~-)- 2 -f~ -(1~e4f~ing ~e ~neeme horn pei~en~a1 ~~eee)- ~s amei~4e4 3 ~) 1~ft4 frS ~fOI4t3W&~ 4 i~~(4~fr a~ who ~ a e~ea e~ 5 re~4ei+~ o~f the UnP~ed ~$es~ a 4eme~e pfw4~- 6 i~rship~ oi~ a ~Ieme~ie &~iee~ i4 sath 7 I~be~ oi~ sewiees are ~ei4errncd ~or a~ 8 or ~laee af usines~ main~aiae4 in a for4gn 9 eountry or in a possession of the 4Jni~ted S~ates 10 by sueh indk4dw4- rship~ or orpor~t- 11 12 -(-4)- Tf~Ffe~e~-See~ion 84~4 -fre4athfg ~e de44ni- 13 ~iens~- is amended- 14 by s1~ril~ing ou~ ~-~F~Or purposes of this pa-r+~-~ 15 in l4eu thereof 16 ~-fa)- S2~ E'rc. For purposes of this pur-t~'-~ and 17 ~f2-)- by adding a~ the end thereof the f4lewing 18 19 £L(43)- TItAr~n eI~ -F~S~T~uee~ -WiT1IIN ~Pf}~ TTNIT~ED 20 S TES-4or purposes of this pm4~ part f[~ and ehap~er -3~ 21 the term %~ade or business within the [ini~ed S~a~es~ in- 22 eh+des the performanee of personal ser~4ees within the Un4~ed 23 ~ any thue within the 1~on&de ~ear~ bu~ does oo~ in- 24 ~_ 1181 PAGENO="0030" 1 () !±~(4+ E~h~-~ff~ W H~I*~ONM~ $E1~Vi~ FØf+ 2 FOB~E1ffN E 1~Q~ER-~P1ie j~e14efrnanee ef personal 3 ser-viees-- 4 ~ (A}- ~ ft nonres1dent ftl4en in4i~4dnah fon4gn 5 pnee~b4~ Of ~fofeign eeion~ flot eegaged in 6 trade or siness ~4thin the Ueited States~ or 7 "(B) ~or ~n o44lee or piftee of hnsrness n+a+n- 8 tamed in ft fere~gn eountry or in a possession of the 9 T4e4te4 states by an individual whø is a eitk~en or 10 resident of the ~nise4 States or by ft domestic 11 partnership or ft demes14e esrporation-~ 12 by ft neoresicknt alien iwli~'c44ual temporarily present in 13 the T4nited States for ~ period or periods not e~eeeding 14 ft tOttd Of ~tO ~ 4~fH~1j~ the ta~Of4e ~~ftf and whose 15 eo~pensa44on for sn4i f;ef~ ees does net e~eeed in the 16 aggregate ~OO~ 17 ~1-f2-3- 1~*~-G +?~ f4ECTJIIITEES E)ri eeM-MOIITTIES. "-(-A)- ~$~ee~e ~ &EC-URITIES~-- 19 ~ 4~eept in the ease of a dealer in 20 stocks or seeari~es~ trading in stoeks or seen- 21 rtes for the ta~payer~s o-wn fteeonnt~ whether 22 by the ta~pftyer or his employees or throng4i ft 2;~ resident brekerT eommissien ageot~ eftsto{lfffl~ 24 Of f4~f ft~ afid ~4Wth+ef or not any snehi 25 h~ 4u~eretn3nftry authority to make tIe- 1182 PAGENO="0031" 11 1 111 e 4ii±g the ion~ Thei (4ftflSO 2 &I+ft41 .ftO~ t~4y isi ~l+e ~e e~ if 3 fothei~ ~l~H+ ft (~Ofpftf~{Ofi WIHCIl W~ Of Tln~ fof ~ee~oi~ -~~f~+ weul4 ~e1 ~ pe~sooa4 h~44- 5 HIg eompa+iy3- ~e ~ of w1m~ is ~ro44eg ~o of 5OeflfF~1HS fof ~s ~we 7 aeeoei~ i4 i~s p~eii~a4 e~ke is i~ the Th~e4 S ~4a1~e& 9 the eose øf ~ jIOfSOII Wile 15 0 10 1eofe~ i~ s~oeI~s ~ seeurities~ ~a44ng hi 11 øf seeurities for 1+~s own ftf~&W+~ thren~h ~ 12 ~44cj~ brokci~ eommesion ifgelft~ es~o4k~ I ~ of other in4epen1en1~ agen~ 14 £~~fTA)- Qoiorn~q~n~&- -fF)-l~-xeentheeesee4ft4ef~fleoH4~ n+o4i~Aes~ ~afTiHg in eomiee4i~4es for the tax- 17 payer~s own aereirn~ -whether ~ the ~peyef 18 Of his oyees of throogh ii resi~Tei~ heoher~ (~OHlffliSSien ogen~ lis~O4}ftl+~ or other ege±4-~ 20 and whether or no~ any swll ogee4 has ~iisere- 21 ~ioii~ry antherity ~o i~-ial~e doeisions in e~+in~ 22 the ~ransaetioris~ 23 !~4ii+ ~[n the ense of a person who is 24 fkaler in eorninodi4es~ ~ra44+~ in 25 for I+is OW~l tiOeOl1H~ thfoil~1l ft re5l4eH~ ~td~ei~ 1183 PAGENO="0032" 12 1 coOn agent~ easto4ianT or other indcpcnd 2 3 ~ (iii~ Q1auf~es -fi* and -(-143- apply only i4 4 the eeremodities are of a kind enstomarily dealt 5 in on an organi~e4 commodity exchange and 14 6 the transaetion is of a kind euetomarily eon- 7 ~iimmate4 at sneh ploee~ 8 "(G)- ~ *q~ie~.-~-Snbparagraphs (~) (ii) 9 and -(-B)--(-ii)- shall apply only i4~ at no time during 10 the taxable year~ the taxpayer has an office or plaee 11 of hnsinese in the T~uited States through which or 12 by the direction of which the transactions in stocks 13 or seern4ties~ or in eommoditiesT as the ease now be~ 14 are affccte& 15 ~-fe-)- E~o~e~'n~ Qo-N e~I. INCOME~ ETC. 16 ~43- ~Ef~ ImLE. For pnrposes of this title- "(A)- ~n the ease of a nonresident alien mdi- 18 vidwi4 or a foreign corporation engaged in trade or 19 hasiness wi-thin the T4nited States during the taxable 20 the ru4es set forth in paragr-aphs -f2-)-~. -(-3~-~ 21 and -(-4)- shall apply in determining the incomc 22 gain, or lose which shall he treated as effectively eon- 23 neeted with the conduct of a trade or business within 24 ~ U~ffltO4 States~ * 25 ~-(4~3- Except as provitled in section g74-(-d)- or 1184 PAGENO="0033" 13 I section 882 (d)~ in the ease of a nonrcsi4ent al4ee 2 individual or a foreign corporation not engaged in 3 trade or business within the United States 4-uring the 4 ta~aMc year, no ineeme~ gains or less shall be treated 5 as e1~ectivcIy eanneeted with the eonduet of a trade 6 or business within the United States~ 7 1Lf2)~ F~uienIe~+~sT n~c., i~co~n~ rito~ se+~uei~e 8 TJT-m~ rrni STATES rAe~ons. In drmining 9 whether income from sources within the United States 10 of the types described in scet4on 874-(-a)-(4)- or scetion 11 881 (a), or whether gain or lose from so-urees within 12 the United States from the sale or exchange of eapital 13 assets~ i-s effeetively eonneeted with the conduct of a 14 trade or business within the United StatesT the faetors 15 taken into account shall inelude whether- 16 ~(A)-theincorne~gai-n~-orloesi-sd-erive4from 17 assetsusedinorheldforuseintheeonduetofsuel+ 18 trade or business; or 19 ~-f-(-B-)- the aeth4ties of saeh trade or business 20 were a material faetor in the rea44z~ation of the i-n- 21 come, gain7 or 1-0557 22 ~n determining whether an asset i-s used in or held for 23 o-~ in the eondaet of such trade or business or whether 24 the aetivities of such trade or business were a material 71-297 O-67-pt. 2-3 1185 PAGENO="0034" 14 1 m LIft {~ffl ~ Ø1~ 1f~S~S~ fI±Ie 2 f~gtif4 ~1ial4 ~e g-~+i-t ~-` whe11ie~ e~ w4 &ii*4~ a~se1~ e~ 3 ~4t-1{4} iwe+rw~ g~iti~ ~-i~ n~ e~e*~in-i4e4 fel! 4~1~FeHgh 4 ~r~le e~ h~If~1+e~f~ ~I÷~ apply~ig ~I+f4 pa~egr~p~ aft4 ) pff}*gFfFJ4f -(4-)-~ i~efe~ i~f4e~e4 ~e iw ~ 84~4-(4 +1-*-+A+ ~1+~4l be ~i4e-~e4 i-i-werne ~em th4ft 7 the 4~4te4 ~ta~ea~ "-(-3) O~F+w~ +N~eeME F+~OM so+~fteEf~ W+~H-H~ +~IPI~B &P4TE~. All ~ee~e~ ga4~ oi~ lesa ~ seui~ees Jo w~thit~ the T~e4 ~A~ea -fethei~ than ~eeee~e~ gfri+F~ ei~ ii less ~e wb4el g~p~ -(-2-)- a~plies3- sbel4 be ~ea~e4 12 as e i-w4y eeeeeet~e4 ~4th the eoe4u4 e4 a ~a4e w 13 leth~eas withh+ the 4~e4 ~esT 14 ~` (4) I~e~w ~ ee*t+~÷~e w~me+~ ~ 15 16 ~ (A) F~eepi~ as pi~e~44e4 i~+ 17 -(-B-)- aed -(-G)-~ no ineeme~ gth÷~ e~ lose kno sou~ees 18 wjthon1~ the T~nite4 S~a~es sl+all be ~ea~e4 fF5 e41~e- 19 1~i~'el-y ee~nee~e4 ~4th the eowbiet o~ a ~a4e oi~ 20 hw4ness ~4thin the 4 ~atee~ 21. "(--B)- I~neome~ ga~ oi~ lose fro~n setwees with- 22 the ~Tni~e4 S~a1~es shall he ~ea1~e4 as e~eeth~4-~ 23 ~4~4 with the (~Of}4fl(4 Of ft 4~fa~1e Of 1186 PAGENO="0035" 13 w:th4n the T-Tei4~4 ~#es 4~y a es~ee4~ aBeH 2 H~f1}V1~4HftI cc ~ ~~weiga 0 1~10H 14~ sf141 ~ee~cn 3 has at c4I4ee Of othei~ 14xe4 plaee of is~ness 444i~ii 4 the 4e~e4 St~es ~e ~4$eh suth ~oeem~~ gain~ Of 5 ~s a~ i-n~t4*Ie ae4 s~41 ~&cme~ ga fW less- 6 -~-fF~- eO~Hf+H45 ff fO141~4 Of f 4~ies f)f 4w 7 ff50 of Of fef the p~~v4ege of a~o-ig ~e1~+~l~le ~ 4eseribetl i~+ se4~e~+ 862+i+44* -(-ifi- f4w140g aey ga~~ øf loss i~ea1iiw4 an the sale of snah pfope~)- 4ei4~e4 ~n the aeth~e efmfhn4 11 of sn4 ~a4e e~ i3nsieess~ 12 1±~(4i~ eai+si~4s of 4i~:i4en4s oi~ e1e~eat- ~ 13 of less fi~on~i the sale Of e~ehaoge of a~oek 14 Of ne~es- l~oi÷4s- oi~ othei~ e~44enees of hnleh~e4- 15 ness~ an4 eithef is 4ai4~ed in the aef4~e ean4u4 of a }~~~mkh~ ~eg~ of simikw l*if$ness 17 with4n the ~-eise4 ~R~S of ie feeewed hy ft 1 ~ eoej~ofa4on the pi~in+4pwi bnsieess of ~4iieh is ~fa4iw~ i+i ~4oek Of s~em4ties f~w iss Own ae- 2i~ of 21 1~~(4ii3~ is dei4se4 ffem the sale -(-withou4 22 the Th44e4 SMIe&3- 4we+ig4+ snel+ office of f~ed place of healness of pefSOffal pfope~4y ~4ese~4hed 1187 PAGENO="0036" 16 1 in seet4on 42-t-(~ exee~ ~ fi÷li~ elaase 2 $~all no~ a~pIy if ~he j~ropei~ty is sold for uses 3 eonsun~ion~ or os±~±on o~si4e ~he I4n~e4 4 States arid an ofi4ee or other fixed pleee of busi- 5 ness of the ~rixpayer oirEsile the ~ni~ed S1~ri~es 6 pai44eii~~a~ed materially in sa4~ s4e~ 7 I~n the ease of a sale desei4~ed in elanse -fii4-)-~ the 8 ine+irne wbith sbe44 be ~ren~ed as a bi4sble ~o the 9 othee or other fixed pleee of iw~siness within the 10 4~nifed ~a~es sbel4 no~ exeeed the ineorrie width 11 won4d be der4~ed feom sorirees within the T~nised 12 S~es if the sale were made in the TJthed S~a~es~ 13 i~-fg~)~ in the ease of a foreign corporation tax- 14 able under part ~ of subeimpter ~ any income from 1~ sources without the united States wlde1~ is attrib utable to its Tnited States business sl+all be treated 17 as effecth~e1y conneeted with the eon4uet of a tra4~ 18 or business within the TTnited States7 19 ~o ineome~ gains- or loss from sorirees 20 withoattheT~dSsshu4lbetreatedase~fee- 21 ti~'ely eonneeted with the eon4uat of a trade or 22 business within the T4nited States if it either- 23 i~.{4-)- eonsists of d44enls~ interest~ or 1188 PAGENO="0037" 17 1 ryaltiers paid by a foreign corporation in whireh 2 the taxpayer owns -(-within the meaning of 3 section 958-(-a)), or is eonsi4ered as owning 4 -(-by applying the ownership reles of section 5 95b)-)-~ mere than ~44 pereent of the tend 6 eonthined voting power of a14 classes of atìock 7 entitled to ~ote~ or 8 "(ii)- is subpart F~ income within the mean 9 ing of section 952-ia)-." 10 -(e)- EFFEOTIVE DATES. 11 -(43- ~Phe amendments made by subsections -fa~)--~ 12 -fe-)-~ and -(-4)- 4i±d4 apply with respect to taxable years 13 begiiming after December &1-~ ~96i3; except that in .14 applying section 864 (c) (4) (B) (iii.)- of the Internal 15 ~enne~odeof4-9-54-fasa4dedbysubscction (d-)) .16 with respect to a binding contract entered into on or 17 before February 24~ ~l9~6~ activities in the United 18 Stators on or before such date in negotiating or carrying 19 oct such contract shul4 not be taken into account~ 20 -(-2-)- The amendments made by subsection -(-b-)- shall 21 apply with respect to amountrs received after Decem 22 her ~ ~966-. 1189 PAGENO="0038" 18 1 SE~& NONRESIDENT ALIEN INDIVIDUALS. 2 -Ear)- !f*X ON ~ONRESIBf~NP AI~I~N INDIVIDUALS. 3 -f13- Section 8-7-1 -(rthiting to ta~ on nonresident 4 aiien individuals) is amended to read as ~ollows-~ 5 ~SEC. 874 TAX ON NONRESIDENT ALIEN INDIVIDUALS. 6 ±.Lfa3~ 1-NeOME NOP GONNECTED WIP}T UNITED SThTES 7 Bus~Ess-3Q PERCENT TAX. 8 "-(1) INcoME OTHER THAN PI~P~ 0-AINS. There is hereby imposed for oath t~xnb1e year a ta~ of ~Qp~- 10 eent of the amount received from sources within the 11 United States by a nom~esident d4en individ~i1 on- 12 "-(-A)- intercst~ 4ividends~ rents~~ salarics~ wages. 13 premiums, annuities, eompensations~ rcmunerations 14 eo1uments~ and other fi~ed or determina~hle an- 15 nuid or periodiea4 gains~ ef!~ts~ and incomc~ 16 ~B~- gains 4eseri4~ed in section 402 (ai) ~(4)-, 17 40~3 (a) -(23-~ or 4334 -(43.)- or -(-4~ ~nd gains on 18 transfers descri43ed in section 1235, and 19 "-{G)- amounts wh-ieh under section ~44-~ or 20 wider section 1-232 -(-in the ease of bonds or other 21 evidences of indebtedness issued o$ter September 2-Si 22 ~965), are treated as gains from the ss4e or on- 23 eh-an-ge of property which is not a cnpita4 asset~ 24 but on1~ ~o the e~ent the amount so received is not e4~ee- 1190 PAGENO="0039" :i ~) 1 tively connected with the eondnet of ~ tr&le or businc~s 2 within the T~nited States~ 3 "-(-2-)- Q*PIT-M~ G*f~S OP *f~f~S PI~ESE~T TN ~i+E 4 ~ wp*q~e i-~-~3- D*~S er~ M(WE.-4r1 the ease of a 5 nonresident allen individual present in the TJnited Sta4es 6 for a period or periods aggregEthng 4&~ deys or mere 7 during the taxable yea~ there is hereby imposed for saeh 8 year a ten of &) percent of the amount by whieli his 9 gains, tleri~e4 from sources within the T~nited States-, 10 from the sale or exthaiige at any time during sash year 11 of capital assets eKeeed his losses~ allocable to seurees 12 within the United States~ from the sale or enehange at 13 any thne dnriog saeh year of eapital a.ssets~ For par- 14 poses of this paragraph~ gains and losses shal4 be taken 15 into aeeount only if~ and to the extent that-i they would 16 be reeegnized and taken into aeeoim-t if sash gains and 17 losses were effectively connected with the conduet of a 18 trade or business within the Thu-ted States, e~eept that 19 sash gains and losses shall be determined without regard 20 to seetion 124)2 (relating to ded~etion for eapital gains) 21 and sash lesses shn4l be determined withont the benefits 22 of the capital less carry-over provided in section 1242-~ 23 Any gain or loss whish is taken in-to aeount in deter- 24 mining the ta~ under paragraph -(-4-)- or subsection -(-h3- 1191 PAGENO="0040" 20 1 s1rn14 n~ be tak-en into aeeount in detennining the ta~ 2 under this paragraph7 4~or purp&ses o~ the 48~-day re- guirernent o~ this paragraph, a nonresident alien individ 4 ua4 not engaged in trade or business within the United States who has not e b14thed a taxable year ~er any prior period sl~a14 be treated as having a taxable year 7 which is the ealendar year~ 8 `~(1)) IXCOMI~ QO~NECTED WITh UNITED ~TA1~E-S 9 ~sfNEss-GnADTJATEn EJATI~ en 10 "(1) IMPOSITIen en ~*x. A nonresIdent alien 11 individual engaged in trade or business within the 12 United States during the taxable year shall be taxable 13 as pr-ovided in section 4~ or -1201--fb) on 14s taxable 14 income which is eficetively connected with the conduct 15 of a trade or business within the United States~ 11) ~ (2) PETERMIN~ThON en T*XABLT~ iNCOME. In 17 determining taxable ineome for purposes of paragraph .18 -(4-)-~ gross income includes only gross ineome whieh is 19 eð~ely connected with the conduct of a trade or 20 business within the United States~ 21 ~ PARTIeIPANTS iN QERTAIN Excr~&i~ en .22 ~ PROoRAMS~-i~or purposes of this seetion~ a non- 23 resident alien individual who (without regard to this sub- 24 seetien)- is not engaged in trade or business within the 1192 PAGENO="0041" 21 1 Th$ted States and ~4~o is temporarily present in the United 2 States as a nen4nm4grant under subpai'agra~ph -fU)- or 3 of seetion 101~ (a) (15~)- of the Immigration and Nationality 4 Ae~ as amended -(8 U~SA~ 1101 (a) (15)~ ~(41)~ or (J)-)_ 5 slial4 be treated as a nonresident alien individual engaged in 6 trade or business within the United States~ and any income 7 deseribed in section 1-441 (h)- -(1-)- or -(2* which is received 8 by sneh individual shall, to the extent dcrFved from sources 9 within the United Statcs~ be treated as effectively eonacctod 10 with the condifet of a trade or business within the United ll~cj4~s~ 12 ~ (di- ELECTION ~O ~PfH~*P REAL PBOPEf~TP~ LNCOME 13 *s ~eo~n~s Qe~ Wn~ UNITED STATES Busi 14 NESS~- 15 ~-(4-)- I~ ~nNE~RAL. A nnresi~nt alien individ 16 nal who during the taxable year derives any income 17 ~(A~ from real property held for the produe 18 tion of ineome and bested in the United Statcs~ 19 or from any interest in such real propcrty~ ineluA- 20 ing -fir)- gains from the sole or exchange of sueh 21 rea4 property or an interest thercin~ -(-ii)- rents or 22 royalties from mines~ wells~ or other natural deposits~ 2~ and -fi4i.)- gains described in section ~33i (h)- or 24 and 1193 PAGENO="0042" 22 1 ~B) which, b~ Lor this su~scction would ±~o~ 2 he treated a~ ineome which is effectively eonnceted 3 with the conduct of a trade or business within the 4 ~ni~e4 SLtatcs~ 5 may elect for euth taxable year to treat all s~eh ineome 6 ee income which is effectively eonnceted with the eon- 7 duet of a trade or bi+si~ueos within the TJ-nited State&~ 8 3~ ~+i~45 easei such income sha~4 be tax~b1e as provided 9 in subscetion -(-b~(4')- whether or not such individual 10 is engaged in trade or business within the Thiltcd States 11 4i~ing the t~iaa1ile year~ An election under this ~ara- 12 graph for any taxable year shcd4 remain in effect for 13 all subsequent taxable years, exeept that it may be re- 14 yoked with the eomscn-t of the Secretary or `his delegate wi4 respect to any taxable year~ 16 " (2) E~nctrIoN ~T1~ ~ an dee- 17 tion has been made under paragraph -(4~)- and such elee- 18 tion has been re~oked~ a new election may not be made 19 under such paragraph for any tenable year before the 20 ~th taxable year which begins after the first taxable 21 year for which' such re-vocation is effective, unless the 22 Secretary or his delegate oonscnts to such new election. 23 "(3)- FOnM ~!txB ~EfMn OF ~EOP~O~ kNn 24 ~ An election under paragraph -(4)-~ and any 25 ~ (4 f~+ election may be made ~nly in 1194 PAGENO="0043" 23 I sash maimer aa4 at sueh time as the Seeretary ei his 2 delegate may by regitiations pmsei4bc. 3 a-fe-)- CRoss ~FEREN0ES. ~(44 For tax treatment of certain amounts dicstri huted by the United States to nonresident eiien in- dividuals, see section 402(a)f43. 1~4~2) for taxation of nonresident alien indiviclual.s who are expatriate United States citizens, see section 877w 1~> For doubling of tax on citizens of certain for- eign eeun-ti4es3 see section 89b ~(4> For reinstatement of pre-1967 income tax provi sions in the ease of residents of certain foreign ceun- tcies-, see section 896: ~(&~Fer withholding of tax at source on nonresident alien in viiluals, see section 444L ±1(6) For the requirement of making a declaration of estimated tax by certain nonresident alien individuals, see section 6015(i). ±±-(-73 For taxation of gains realized upon certain transfers to domestic corporations, see section ~25O 4 -(-2-)- Section ~ -(-relating te ta~e ea individuals)- is 5 amended by ~edesignating subsection -(4)- as subsection -fe)-7 and by hiserting after subsection -f~* the follow- 7 in-g new subsection: 8 ~-f4)- No ~u~nms ALIENS. In the ease of a non- 9 resident alien ind 44ua-1-~- the ten imposed by subsection -(-a)- 10 shall apply only as pro~4ded by seetien 8-74 or 877." 11 -fb-)- Gnoss Ieo~n~- 12 -(-4-)- Subscetien -(a-)- of section S7-~ -(relating to 1195 PAGENO="0044" 24 1. gr-oss irieome of n resI4eft~ a44eft inclivi4uals)- is ftmeftded 2 ~erea4asfollews-~ 3 1~-fa~- G i~i~*i~ EULE. In the ease of ft nonresident 4 of4en individuab gross income ineindes only 5 ~-(4) gross income which is ka4~e4 from sour-ees 6 wi-thin the United States and which is not effective1~ 7 connected with the e duet of a trade or business within 8 the T4~nited Stetes~ and 9 ~L-(~2-)- gross income which is e~eetioe1y eooneeted 10 with the duet of a trade or business within the 11 United a~es~ 12 ~(4)- thparagraph -fB* of section 87-2-(b)---( 3)- -(fe- 13 leting to compensation of participants in certain e~- 14 change or training programs3- is amended by striking 15 out 1~by a domestie eorpomtien~ and insei4~g in lieu 16 thereof fLby a demestie c ora4~ien~ a domesMe partner- 17 ships or an ind4~4dua4 who is a eiti~en or resident of the 18 TJnited State&~ 19 -(-~+ Subsection -~ of section ~7-~ -(-rd-sting to 20 ~~siens from gross ineome3- ic amended by ftfld+ng at 21 the end thereof the following new paragraph-s 22 ~` (4-) cj~ ~n~sqp p~ fHSSfBENLPS ~ r~p~ 23 ~ I&LANDS O1~ ~Ff+15 T~R{~&T T~ T&RY EW !~H5 24 p~~i~re ~ -4neome derieed by a nonresident 25 alien in44~44ual from a series ~ or series 14 United States 1196 PAGENO="0045" 25 1 sa~h~gs bon4T ~f sasl+ ~n4i-v4thm1 aequired ~eh teed ~ile 2 a resident of the P~yukyu Islands or the ~Ponst ~Pen4tory 3 of the I2aei4ie ~sid+~ 4 -f~* J~31~-T~eTIONS. 5 ~f1-)-. Section 8-7-s -frdaf4ng to deduetiolTis allowed to 6 noriresidcn-t atien 444~ino4s~)- is t~mende4 to read as 7 fol1ows~ 8 ~S~G 87& DEDUCTIONS~ 9 1~-f a-)- GENERAL ~RUiE. I-n the ease of a nonresident 10 On ~ 4 nab the dehietions shall be all~wcd only for 11 purposes of section 8-7-1-fb3- and (except as pro~4dc4 by sub- 12 section -fb-)-)- only it and to the extent that they are eon- 13 ncetcd with income which is effectively eonneeted with the 14 conduct of a trade or bmsiness WIIEUII the Unite4 Statesj and 15 the proper a ei'iionrnent and allocation of the deductions 16 for th4s purpose shall be detenwined as provided in- regula 17 t4ons prescribed by the Secretary or his delegate. 18 `~ fb) E~CEPTI0N$. The following deductions shall be 19 all-owed whether or not they are connected with income 20 which is effeetiwiy connected with the con-duet of a trade 21 or business within the T~nitcd States-s 22 "-(1) LoesEs. The dedueti-on~. for ksses of prop- 23 er-ty not connected with the trade or business if arising 24 from certain casual-ties or theft, allowed by section 1197 PAGENO="0046" 26 I 165(c~only~thelossisofpropcrtyI-oeated 2 within the ~nitc4 States. 3 "(2) OllAm~*B~B CONTRIBUTIONS. The dcdiie 4 thai for eharit*ble eantribations ond gi4ts allowed by 5 section 4-7-G 6 1' (3~) ~ EXEMPTION. The deduction for 7 personal exemptions allowed by section 4~51-~ except thet S in the ease of a nonresident aIien i dMdunl who is not a 9 resident of a contiguous country only one e-x-emption 10 shall be allowed under section 4~54-. 11 "-fe)- CROSS ~EFEItENOES~- ~1(I3 For disallowance of standaed deduction, see see- tien l42~b~(1). f~-(2~ For i~wIe that eerain foreig~n taxes ore net to be taken in-to account in detorn4ning deduetion or credit, see section 9O6(b3~l}~ 12 42-)- Section t54 (3)- (relating to eroes references 13 in respect of dedueti-ons for personal exemptions) is 14 amended to read as follows-i ~(3~ For exemptions of nonresident aMen-s see section 8~3~b~(3)~ 15 -(4)- ALLOWANGE OF PEDU~IOFS ~ CREDITS. 16 Subscetion-(-a)- of section ~7-4 -(relating to filing of returns)- 17 is amended to read as follows: 18 if-fe)- ~x~se~ux EIFE~+usuTE ~pe ~a~LOWANeE~-4 19 nonresident eli-en inElii4du-d sb-all reeeit~e the benefit of the 20 deductions end eredls allowed to him in this subtitle only 1198 PAGENO="0047" 27 1 by filing or causing to he 414e4 with the Secretary or his 2 delegate a true and accurate return~ in the manner prescribed 3 in suhtitlc F -fsee7 0001 thud following~ relating to procedure 4 and administratiom)-~ including therein all the information 5 which the Secretary or his delegate may deem necessary 6 for the calculation of such deductions and eredits~ This sub- 7 section shall not be construed to deny the credits provided 8 by sections ~4 and ~t2~ for ten withheld at source or the credit 9 provided by section ~34~ for certain uses of gasoline and 10 lubricating eib~ 11 -fe)- EXrATRIATION ~PE) Avom TAx~- 12 -(4-)- Subpart A of part II of subchapter ~ of chap 13 tar 4 -(relating to nonresident alien individuals)- is 14 amended by redesignating seétion 8~7-~ as section 8-7-8~ 15 and by inserting after section 8-74 the following new 16 scction-~ 17 "SEC~ 8Th EXPATRIATION ~fO AVOID TAXI 18 !~-fa3- ~ &nNER*L. -Every nonresident alien individ 19 oni who at any time after March 8~ 1~ti5~ and within the ~- 20 year period immcdiate~y preceding the close of the taxable 21 year lost Thiited States eitizenship~ unless such loss 444 not 22 have for one of its principal purposes the avoidance of taxes 23 under this subtitle or subtitle B~ shall be taxable for such 24 tenable year in the manner provided in subsection -(Is)- if the 25 ten imposed pursucot to such sithsection exceeds the ten 1199 PAGENO="0048" 28 I wh4eh~ w4th01143 regard ~o ~I4s seetion~ is imposed pursuant to 2 section ~74~ 3 ~" (~) ALTERNATP~E T~x~-~A a esident al4en individ 4 nal described in subsection -fa-)- shal4 be tanab4e ~oi~ the tax- 5 able year as pro~ide4 in seetion 1~ or section 4-2.Q4--fb-)-~ 6 except that- 7 "-(-4-)- the gross ineorne slnil4 inelnde only the gross 8 ioeeme described in seetion 874-fa~- -(-as inodi44ed by subseetion -fe* &f this seetion)-~ and 10 ~`(2)-the4ensthal4beal4owedi4andtethe e~etent thet they are eonneeted with the grass ineome 12 this seetion~ aneept that the eapital loss 13 ean~yo~er pro~Med by seetion 4-~4-2-(~- shall not be allowe4~ and the proper alloeatien and ~pportionment of tha dednetiens for th4s purpase shall be de~&rmine4 as 16 pro~4ded und~ regulations presei4hed by the Seeretary 17 or his delegate- 18 4for p rposes of para~gfaph -f24-~ the dednetions allowed by 19 seetion 87-&-(b-)- shall be ai4owedj and the dednetien -(4er 20 losses net eonneeted with the trade or basiness if ineurred in 21 transactions enteeed into for profi4~3- allowed by seetion 22 ~ shall be allo-we4~ bat only if the proflt~ if sash 23 tran~aetion had resulted in a profi~tT would be included in 24 gross income ander this seetioe- 25 ~ or s~-~ ~ of 1200 PAGENO="0049" 29 I sabseetion -fb*~ the ~ello-wing iterns e~ g~ess ineome shall 2 he ~ceated as income ffom ou~ees within the [Jnited States: ei~ ~ Gnins on the sale o~ 4 e~ehange af ~ropcrty -fothef than stoek e~ deht obliga 5 ~oes3- leea~e4 in the Tnitd States~ (; ~f2~ SrI~ee~ en ei~ e e*~oxs. Gains en the 7 sale o~ ex~hange of stock issned by a domestic eo~po~&- 8 tion ar debt ebi a~ions of United States persons or of 9 the United Statcs~ a State or politiesl subdivision thereof~ 10 or the Pistriet of Ck)klmbi+i~ ~-fd* OEf~I8~ ~en ~hees ei~ s~rn' r~en Q~i~- 12 ~ 4~s~s. SuJ~seetion -(4 shall not apply to a non- 13 resident alien individual whose less of United States eiti~en- 14 ship resulted from the appliention of seetion 3~M (bh ~ or 15 ~ of ~he fl~g~t}ofi and inali-ty Aet~ as amended 16 -f8U~S.C. 4401 (b-)-~1482~or4487). 17 i~-fefr J~i~x en ~nee~-If the Seeretary his dele- 18 gate establishes that it is reasonable to believe that an 19 vidual~-s less of United States eitinenship weul4~ bet for this 20 seetion, result in a substantial reduetion for the taxable year 21 in the taxes on his probable income for sueh year~ the burden 22 of pros4i~g for sueh taxable year that suek loss of eitizen 23 ship did not have for one of its principal purposes the 24 avoidance of taxes under this subtitle or subtitle ~ shall he 25 on sueh individual." 7 1-297 0-67-pt. 2-4 1201 PAGENO="0050" 30 1 -f2~)- The ~abIe of seetie~s for snbpart A of part f1 2 of subchapter N of cha~tcr ~ ~reiating to nonresident 3 a4iea individuaisf is amended by striking eat the iten~ 4 relating to section &7-~ and inserting in lien thereof the 5 following: aSee 8~ Expatriation te e~ei4 ta~ ~ee 8-~& Foreign educational, charitable, ~d certain ethei~ exempt organizationG~" 6 -(4* PAItTI~u~ EXCLUSION 8~ DIVIDENDS. &bsection 7 -(1-)- of section 446 -(relating to certain nonresident aliens in- 8 eligible for exclusion)- is amended to read as follows-i 9 ~-(-4)- GERTAIN NONRESIDENT ALIENS INELIOIBLE eon 10 EXCLUSION. 4n the ease of a nonresident alien i4vkkmI~ 11 subsection -(57)- shall apply only 12 ~-(4)- in determining the tax imposed for the tax- 13 able year pursuant to section 8~4-(-b) (1)- and only in 14 respect of dividends which are effectively connected with 15 the conduct of a trade or business within the Tnited 16 States~ or 17 ~-(2* in determining the tax imposed for the tax- 18 able year pursuant to section 877-~b)-~ 19 -fg-)- WITIIIIOLDIxG oP Ef*x on NOMLESIDBNT 20 ALIENS. Section 1441 -(relating to withholding of tax on 21 nonresident aliena)- is amended 22 -(4* by striking out ~ (except interest on deposits 23 wi-tb persons carrying on the banking business paid to 1202 PAGENO="0051" 1 persons not erFgaged in business in the T~n4ted States) ~ 2 in subsection -fb.)-1 3 -f~-)- striking oat 1~an4 amounts described in see- 4 tion 4O~ (a)~ (2)" an4 all that follows in th~ 4~wst sentenee 5 of subsection -(-b* and inserting in ]4en thereof ~ 6 gaiI~s described in section 402-(a~) -(2), 40~ (a) (2~), or 7 6~34. -(-b* or -(e~-~ and gains on transfers described in see- 8 _____ 9 -f3)- by striliing ont paragraph -(4)- of subsection 10 -fe* and inserting in l4eu thereof the following new i1perthgrap~ 12 "(4)-INCOME CONNLEE~PEn wiq~'+i Nf~FED &TATES 13 B~SfNESS~-No dednetien or withholding under sulisec 14 tion -(-a)- shall be req+th'ed in the ease of any item of 15 income -(-other than eornpcnsation for personal scr-vices* 16 which is effectively eonneeted with the conduct of a 17 trade or bi±siness within the United States and on whioh 18 a tan is imposed for the tanarble year porsuant to section 19 871(b) (1)."; 20 -(-4)- by amending p ag'.ph -(4)- of subsection -(4 21 to read as follo~ww~ 22 "(4)- Q~~r-ie~ oi~ 8i~*TN ~ENS. Un- 23 der regulations prese~4be4 by the Secretary or his dele- 24 gate-i compensation for personal seri4ees n-my be cx- 1203 PAGENO="0052" 32 1 emptcd from dod-notion and withholding under subsection 2 3 -f&-)- by striking oat "amounts described in section 4 4O(-(~2-)-~ section 403 (tu) (2}-~ section ~34r fb* ~d 5 -(-4-i and seetion ~t2~5~ which are considered to be gains (; from the sale or exchange of capital assets," in pant- 7 gra~ph -(4w- of subsection -(4 and inserting in lien there- 8 of 1~gains described in sections 4O2-(a)~(2), 4O3-~(a) ~2)-~ 9 or ~M -fh3- or -(-e)-~ and gains on transfers described in 10 section ~ and by striking out 1~roeeeds from seth 11 sale or exehnnge~ in seth paragraph and inserting in 12 lieu thereof ~arnount pab1e~ 13 -(--Ia-)- ~ FOli WITIIIIELD TAX. Section 14G~1 14 (relating to retorn and paymeut of withheld tan)- is amended 15 toreadasfollows: 16 ~SEC~ 14&b LIABILITY FOR WI-T-IIHEL]) TAL 17 "Every person required to deduct and withhold any tan 18 under this chapter is hereby made liable for sueh tan and is 19 hereby indemnified against the claims and demands of any 20 person for the amount of any payments made in accordance 21 with the provisions of this chapter." 1204 PAGENO="0053" 33 I ~ DEGLABATION 81~ ESTIMATED INCOME ~ 2 1 WIDUALF3. Section 4)~5 -(-relating to delaration of esti- 3 mated income tan by individuals) is amended- 4 -(44- by striking out that portion of eubseetien 4a4- 5 wIdth precedes paragraph -~ and inserting in lieu 6 thereof the following: 7 ~-fa-)- ~UTItEMENT ef~ PECLA1IATION. Except as 8 otherwise provided in subsection -(4)-i every ind4~'i4ual sMI4 9 make a deelaration of his estimated tan for the taxable year 10 if "; 11 -(-24- by redesignating eubseetion -(4-)- as subseetion 12 13 -(-34- by inserting uf~er subsection -(-1÷)- the follow- 14 ~ng new si±hseetion-~ 15 1~~-fi~)~ ~ONHESfDE~P Af~TE~ I IV~IBT~AII&~-N-O doe- 16 laration shall be required to be made nuder this section by a 17 nonresident alien individual unless- 18 ~ (1) withh4ding under ehapter ~4 io made appli 19 cable to the wages~ as defined in seetion ~40 -fa4-~ of 20 such individual~ 1205 PAGENO="0054" 34 I !~~(~2* such iudiiddual has income -(-other than corn- 2 pdnsation for perconal services subject to deduction and 3 withholding under section 4-441-)- which is ef~eeti~w4y 4 connected with the conduct of a trade or business within 5 the United States~ or 6 ~(-3-)- such indi'c4dual is a resident of Puerto ~4eo 7 during the entire taxable year~-~ 8 -(3)- (Lw~ FRoM DISPoSITIoNS or~ CEILTAD~ DEPRE 9 e+*nE~ REAL~P~-The second sentence of paragraph -(-3-)- 10 of section 4-2-50 (ci)- (relating to certain tax-free transaction$ ~ is amended to read as follows-: ~This paragraph shall not 12 apply t 13 `-` (A) a disposition to an organization -(-other 14 than a cooperative described in section 521) which 15 is exempt frorn the tan imposed by this ehaptcr~ or 16 ~-(-B)- a transfer of property by a nonresident 17 alien indllviduad~ a foreign estate or tras#~ or a for- 18 alga partnership~ to a domestic corporation in cx- 19 change for stock or securities in such corporation 20 in a transaction to which section ~54- appli&' 21 -(4~3- QOLLE~TION OF INcOME ~1~9~* ~? Sotiten en 22 W2~ens. Subsection -(a-)- of section 3401 -(relating to defini- 23 ti~ of wages for purposes of eollcetion of income tax at 1206 PAGENO="0055" 35 1 source)- is amended by striking out paragraphs -(4)- and -(-7-)- 2 and ei4ing in hen thereof the following-: 3 "-(~6-)- for sn-oh servioes~ performed by a nonresident 4 a4en- ndivi4eal-~ as may be designoted by regulations 5 prescribed by the Secretary or his dekgate~ or~ 6 -(4-)- Dn ~P{8~ OF ~F~OR~Ef n-F OF 7 Section 7701-(a)--f34)- -(ilefining foreign- estate or trust)- is 8 amended by striking out ~`from sources without the TJnited 9 Statc&-~ and inserting in hen thereof ~ from sources without 10 the 4-inited States which is n-at effectively connected with 11 the conduct of a trade or business within the TJnited Statcs~ 12 -(-in)- CONFOHiWIFE+ AMnNDMEFT. The first sentence 13 of section W34~-(4 -(relating to citizens of possessions of the 14 TJnitod States)- is amended to read as follows- 1~4ny in- 15 dividual who is a eititen- of any possession of the TJnited 16 States -(-but not otherwise a eitizen of the 4-ituited States)- 17 and who is not a resident of the TJnited States shall be sn-b- 18 feet to taration under this sabti4e in the same manner and 19 sn-4}jeet to the same conditions as in the ease of a nonresident 20 allen- individuab~ 21 -fn-)- EFFEC~TIVE DATES. 22 -(4)- The amendments made by this section -(-other 23 than- the amendments made by su-bsections -(-h-)- and 1207 PAGENO="0056" 36 1 -~-kfl shall apply with respect te taxable years hegin- 2 ning a4ter December ~ 1966. 3 -(-2-)- The amendments made by s~±bseetien -(-k)- shall 4 appl-y with respect te payments occurring alter Decem 5 her ~-1-~ 1966. 6 -(-3-)- The amendments made by snbseetien -(4~- shall 7 apply with respect ~o remuneration pai4 alter December 8 ~ 19&6. 9 SE4~ 4 FOREIGN ORPORATIONS. 10 -fa3-~I~x O~ INCOME ~N4P QO NEc-TBB W-Frf T~N~PEn 11 S~n~s s---Seefion 8& (-relating to tax en ~ereign 12 corporatione net engaged in business in the ilnited States 13 is amended to read es t~ollews-i 14 ~SEC~ 88b INCOME OF FOREIGN GORPOIWI4ONS NOT CON- 15 NECTED WITH UNITED STATES BUSINFSS 16 -(-a-)- IMPOSmON OF ~ There is hereby imposed 17 kr each taxable year a tax o~ ~lO percent o~ the amount 18 reeeivcd ~rem soorees within the United States by a ~ore4gn 19 corporation as- 20 "~( 1) intercst~ ~l4s~44en4s~ rents~ salar4es~ wages~ pres 21 mi-iuns~ annuities~ eompensations~ remunerations~ emolu 22 ~~ents~ and ether fixed or deterrninaTble annual or pen- 23 edi-eal gaiiis, proflts~ and ineeme~ 24 if~)- gains described in section 43~?4 -fb-)- or -fe)-T and 25 "(3) amounts which under section 3-44-~ or under 1208 PAGENO="0057" 37 1 seetionl232-heeaeofbondorpthcre44eneesef 2 indebtedness issued after September 2-8~. 45-i are 3 treated as gains from the sale or exchange of property 4 which is not a capital asset~ 5 but only to the extent the amount so reech'ed is net e4~ee- 6 tively connected with the eo h~et of a trade or business 7 within the Tleited States~ 8 ~b~) PØUBTJING ei~ T~x- ~ doubling of ~a* on corporatk~s of ecrtain fo~- eign eenn~4es~ see seet4on 8~b!~ 9 -fh)- ~P*x ex TNco~n CONNECTED WIPf} UNITED 10 STATES BUsT~NESS. 11 -(4-)- Section 882 (relating to tax on re~sident for- 12 4gn corporations)- is amended to read as follews-~ 13 i~i~Q 55~ T4J0M1J O~E FOREIGN (~ORPORATIONS GON- 14 NE!T!E1) WITH UNITED STATES BUSINESS. 15 ~ ~en~ ~xn S1ImTAHx- 16 £f~f1)~ IMrosrnox er~ TAX. A foreign corporation 17 engaged in trade or business within the United States 18 during the taxable year shall be taxable as provided in 19 section ~4 or 1904-fa)- on its taxable income which is 20 ecfeetively connected wi-th the conduct of a trade or busi- 21 ne~ within the United States~ 22 Lf.~f~ ~ x*~iex or~ ~*x*~mn ~xeei~n-4n 23 determining taxable inèome for purposes of paragraph 1209 PAGENO="0058" 38 1 -(43-i- gross income incl&ules on4y gross income which is 2 effectively connected with the conduct of a trade en 3 business witl4n the United States~ 4 "(b) ~r~oss ~co~n~ In the ease of a foreign corpora- 5 tion~ gross income includes oniy 6 ~ gross income wh4eh is derived from sources 7 within the United States and which is not effectively 8 connected with the eondnet of a trade or business with- 9 in the United States~ and 10 11-f2-)- gross income which is effectively connected 11 with the conduct of a trade or business within the 12 United Statec 13 !f.(4 ~ OF ~ *N~ ~E1MTS. - 14 ~±-(44- ALJ~oe*PfeN e~ ~eNf~- 15 "(A* ~ n~n-4n the ease of a for- 16 eign co orat4o~ the dedeetiens sha44 be allowed 17 only for porposes of subsection -f&)- and (cxoept as 18 pno~4ded by suhparagraph (B~- only if and to the 19 extent that they are connected with income which 20 is effectively connected with the conduct of a trade 21 or business within the United Statesj and the proper 22 appoctionment cod al4oeatico of the deductions for 2:~ this piwpose shall be determined as pre~ided in 1210 PAGENO="0059" 39 -- 1 rcgalatie~s prescribed by the Secretary Of 2 deICgnt~e7 3 if~fB~~ Qf~ITABLE ee ~IONS. The do- 4 duetion foi' ehafitoble oontributions aed gifts pro- 5 ~4de4 by section 14-9 she-il be allowed whcther or 6 not connected with income which is effectively eon- 7 nected with the conduct of a trade or bnsiness 8 within the Ufl4ted States. 9 ~-(-2-)- Pisn+~e~Ho~s ~*F} 3IIEDITS ALLOWE]) ONLY 10 ie ms~rum~ eiLLn. A foreign eorporatiori shel4 receive 11 the benefit of the deductions end credits allowed to it 12 in this subtitle only by filing or cau-sing to be filed with 13 the Secretary or his delegate a true end accurate return, 14 in the maimer presei4bed in subtitle F~ including therein 15 all the information which the Secretary or his delegate 16 may deem a eessary for the ealenintion of sueh dedtie- 17 tions and credits. This paragraph shall not be construed 18 to deny the credit provided by section ~ for ten with- 19 held at source or the credit provided by section 3~ for 20 certain uses of gasoline and lubricating oil~ 21 ~-~-f3)- FOEEIGN ~ eThEDIT. Except as provided 22 by section f~O~ foreign corporations she-il not be allowed 23 the cr-edit against the ten for tenes of forcign countries 1211 PAGENO="0060" 40 1. and possessions et the United States allowed by soction 2 3 if44)~ ORJsS REFERENCE. f~Fei~ i~*4e that certain foreign taxes a~e not to he taken into account in determining deduction o~ crcdit~ see section 906(b3(13. 4 1f44) ELECTION T*) TREAT F~EAL PROPEI~Y INCOME 5 *S INCOME ~O~NEC-ThD WITII TJNITED S-TATES Busi 6 NI~SS.~- 7 !L(4)- ~ I~*L~-A foreign eorporation which 8 during the tanable year derives any ineome- "(A) from real property located in the United 10 States~ or from any interest in sueh real property, 11 inehiding -(4)- gains from the sale or exchange o~ 12 real property or an interest therein~ -(-ii)- rents or 13 royalties from mines7 weI4s7 or other natural de- 14 posits7 and -(-iii)- gains deseribed in section 4~4 -(-b-)- :15 or-fe)-and 16 "(B)- which5 but for this subsection7 would not 17 be treated as income effeetively eonncçtcd with the 18 conduct of a trade or business within the United 19 States7 20 may eleet for sueh taxable year to treat all such ineome 21 as income which is effectively connected with the eon- 22 duet of a trade or business within the United Statcs~ [n 1212 PAGENO="0061" 41 1 sueh easer sash ineome shall be taxable as pro~4ded in 2 suhscetien -ia) (1-)- whether ~or not sueh corpora is 3 engaged in trade or basiness within the ~nite4 States 4 during the taxable year~ 4n election under this pam- 5 graph for any taxable year shall remain in effect for all 6 sithsegucnt taxahie years, except that it may be re-yoked 7 with the consent of the Secretary or his delegate with 8 respect to any taxable year 9 ~-f2-)- E es~ie~ ~wq~nn n ee.q~'ne~ n~e~-iPara- 10 graphs -f2* and -(-3-)- of section 8~4 (-4)- shall apply in 11 respect of elections under this snthseetion in the same 12 manner and to the same exteiit as they apply in respect 13 of elections under section 871 (d)-~ 14 IL(4 ~n~+~n~a ~ n ~-4f any foreign 15 eorporationhaseoeorplaeeofbusinessintheTjnited 16 States but has an agent in the TJnitcd States.~ the return 17 required under section 1301-2 shall be made by the agent~ 1. -(-2)--(A) Subsection -fe)- of section 44 -(-relating to 19 exceptions from tan on eorporation&)- is amended by in- 20 sorting 1~or~ at the end of paragraph 2-)-~ by attiking 21 out 1~ or~ at the end of paragraph -(-3-)- and inserting 22 aperiodinlieuthereofj.andbystnikingou-tparagraph 23 1213 PAGENO="0062" 42 1 4143- Section i4 (relating to ta~x on 00 ationfi)- i~ 2 amended by a4thng at the end thereof the following 3 new subsection-: 4 !Lff~)~ FOIRER~ Qenee feNS~-4n the ease of a foreign 5 oorporatien~ the ten imposed by subsection -fa3- shall apply 6 only as provided by seetion 882.'~ 7 -f3-)-The talde of sections fei' subpen~ 14 of pent II 8 of stthehapter N of ehapter 4 is amended by striking out 9 the items relating to sections 8~4- and 88~ and inserting 10 in ]4eu thereof the following: b-See 884w Income of foreign corporations ~iet eonnccted w4t4~ Uiiited States business. 5See~ 885~ Income of foreign corporations connected with T~nitcd States business." ii (4 ~ ei~ ~PA~ ON FOREIGN CoRPORA- 12 ~ioNs~-~ See~ion 444~ -(-relating to withholding of ten on 13 foreign corporations) is amended to read as follows 14 ~SE~C~ 1442~ WITHHOLDING O~ ~AX ON I~OREIGN CORPO 15 RATIONS~ 16 ~-f-(-a.)- GENERAL RULE. In the ease of foreign corpora 17 ti-ens subjoet to taxation under this subtitle, there shall be 18 deducted and withheld at the source in the same manner and 19 on the same items of income as is pro~4ded in section 1441 20 oi' section 1451 a ten equal to ~Q percent therco; exeept 21 that7 in the es-se of interest described in section 4454 -(relat- 1214 PAGENO="0063" 43 1 ing to tax free covenant bonds), the deduction and with- 2 holding shal4 be at the rate specified therein. ~For purposes 3 of the preceding sentence, the reference in section 444 1~-(-e-)- 4 -(4-)- to section 87~b) (1)- shal4 be treat-cd as referring to 5 section 84~ or section 88~-(-a)-~ as the ease may be7 6 £~.(1J* Exi~IpTIpN. Stibj~eet to suel÷ terms and eondi- 7 tious as may he provided by regulations prescribed by the 8 Secretary or hio 4elegate~- subsection -fa- shn44 not apply in 9 the ease of a foreign eerporation engaged in trade or business 10 within the United States if the Secretary or Itis dekgatc do- 11 terrnincs that the requirements of subsection -(-a* i pesos an 12 11~J~j~ ~ burden and tha4 the collection of the 13 ta~ imposed by section 8~4 on s++eh eerpora~t4on will net he 14 jeopardized by the excmption~ 15 -f4)- DTVIDENDS REeEIVED F~oM Q~s+~*+~ e~n+o~ 16 CORP&RA'HONS-- -&ihseetion -far)- of section 24~ -frelating to 17 the frl4owanee of a deduction in res-peet of d4vidends received 18 from a foreign eorporation* is amended- 19 -(4)- by striking out ~and bee deii~vc4 ~`O percent 20 or more of its gross ioeeroe from sourees within the 21 United States~ in that portion of su-hseetieu -far)- whieh 22 preeefks ~u~gi~aph -(4-)- and by inserting in ~4eu thereof 23 ~an4 if ~ø percent or mere of the grass income of sm4~ 121s PAGENO="0064" 44 1 eo~poratin~i from all seurees for such period is ef~eeth~t4y 2 esnnee~e4 with the eendfle~ of a ~ra4e or business wi14th± 3 ~TnitedS1atcs,"; 4 ~f 2-)- by striking ou~ 1~from seurees within the TJnited 5 States~ in paragraph -(4)- and inserting in lieu thereof 6 i~whieh is effeethely eonnccted with the eeaduet~ of a 7 trade or business within the Uni~e4 Se&~j 8 -(3-)- by striking ou~ 1~from sources within the 4~uised 9 States~ in paragraph -(2-)- and inserting in lieu thereof 10 ; which is effeetwely connected with the conduct of a 11 trade or business within the united ~ates~ and 12 -(4-)- by add4ug after paragraph -(2-)- the following 13 new sentcnee-~ 14 ~-~or purposes of this suhseetion~ the gross income of the 15 foreign corporation for any period before the first tana434e 16 year beginning after December ~ ~$~43~ which is efTee- 17 th~eJ~y connected with the conduct of a trade or business 18 within the United States is an amount equal to the gross 19 income for such period from sources within the United 20 Stat&~ 21 ~(e* UNRELATED BusIN~s TAXABLE INCOME. The 22 last sentence of section 54~2-(~a* -(relating to deflnitien~)- is 23 amended to read as follows: ~ the ease of an organiza 24 tion described in section 514 which is a foreign erganiza 25 tion~ the unrelated business tanable income shall be its un- 1216 PAGENO="0065" 45 1 related business taxable income wl34eh is effectively connected 2 ~4th the eonduet of a trade or business within the Tnitcd 3 State&~ 4 -(~* Qen~on~io~ SUB~rE&P `P0 t~EBOO~L IOIIBfNO 5 a~n*~ x~-I~aragraph -(-7-)- of section 542~c) -(fe- 6 lating to sorporations not subject to the personal holding 7 eem~pany t- is amended to read as follews-~ 8 "-(7) aforeigneorporationifal4ofitssteekout- 9 standing during the last half of the taxable year is owned 10 hy nonresideut alien inthvidua1s~ whether directly or in- 11 direetly through foreign cstates~ foreign trusts, foreign 12 partncrships~ or other foreign corporations ;~- 13 4g)- AMENDMENTS WEFI I~ESPEOT s~e FoItEIGN Cow 14 PORATIONS i~nx~i~o e~ I~euIt~oE BUSmESS ~ 15 UNITEr) STATES~- 16 ~-(43- Section 84~ (relating to computation of gross 17 income)- is amended to read as follows 18 ~SEC. 842 FOREIGN CORPORATIONS CARRYING ON INSUR 19 ANCE BUSINESS. 20 a foreign corporation carrying en an insurance busi- 21 ness within the United States would qualify under part ~ 22 II~ or m of this subchapter for the taxable year if -(without 23 regard to income not effeeti~ely connected with the conduct 24 of any trnde or business within the United States)- it were 25 a domestic corporation-i sueh corporation shall be taxable 7l-297O-67-pt.2-5 1217 PAGENO="0066" 4G 1 under such ps~t on its income effectively connected with its 2 conduct of say trade o~ business within the United States~ 3 Withrcspccttethercmainderofitsieowhiubisfona 4 sources within the U'nitcd State~s~ sueh a foreign corpora 5 tion shall be tanable as provided in section 881~ 6 -(2.)- The toNe of sections fe~ pss~tfV of subchapter 7 I~ of ehapter ~ is amended by striking out the item ~e- 8 lating to section 842W and inserting in lieu thereof the 9 following-~ ~See~ 84~ Foreign corporations carrying e~ inGuranco 4~uei- 10 -(-3.)- Section &1$1 -(relating to fereign life insurance 11 companies)- is amended 12 -(-4)- by striking out subsections -(-a)- and 4)- 13 and by redcsignating subsections -(-Is)- and -(-e3- as 14 subseetiens -(-a)- and -(-b3-~. 15 -fB~-)- by striking out ~4n the ease of any corn- 16 puny described in subseetien -fa)-~ in subsection 17 -(a) -(4-)- -(-as redesignated by sulpiiragraph -(TA)-) 18 and inserting in lieu thereof ~4[n the ease of any 19 foreign corporation taxable under this part~ 20 -(0)- by striking out ~¼u~bseetion ~(~4i~ in the 21 last sentence of subsection -(-a-)--(-2-)- -(as redesignated 22 by subparagra~ph -(-A-)-)- and inserting in lieu thereof 23 ~subsection -~-b)-~ 1218 PAGENO="0067" 47 -(-P3- by a4ding at. the end af su-bseetion -(a) 2 -(as nedesignated by subparagraph -(-A)-)- the fd- 3 lowing new paragraph-f 4 "(3) RJ~~jcr~jØ~ er~ ei~e~rio~ e-8-i~ `TAX. In the 5 ease of any foreign corporation taxable under this ~as4~ 6 there sha4l be determined 7 `-`-(A-)- the amount which would be subject to 8 ~ under acetion ~81~ if the amount taxable wider 9 such section were determined without regard to see- e44)~ou48945 and 11 ~-(B3- the amount of the redaction provided 12 . by ~aph -f13- 13 ~Phe tax under section 88-1~ (determined without regard 14 to this paragraph)- shall be reduced -(but net below 15 ~ero3- by ax amount which is the same proportion of 16 sneh tax as the amount referred to in subparagraph -(-B3- 17 is of the amount referred to in subp~ragraph -(A-)-; bat 18 sne1~ reduction in tax shall not exceed the increase in 19 tax wider this pert by reason of the redaction provided 20 by paragraph (1.) .`~ 21 by striking out ~4or purposes of subeec 22 tion ~(4?~ each place it appears in &bion -(-h)- 23 ~ redesignutcd by. ~bpamgraph (A)+ ead insert- 1219 PAGENO="0068" 48 1 ing in lieu thereof 1~with respeet to a foreign 2 eorporation~ 3 -(F-)- by striJc~ing out "foreign life insuranee 4 eompaiiy?'eaehplaceisappearhsubseetien 5 -(b3- an4 inserting in lieu thereof "foreign corpora- 6 tion~ 7 -fG)- by etriking eat ~subscction 2)--(A)-~ 8 cash pinee it appears in such subsection -(133- and 9 inserting in lieu thereof "subsection -(a) (2) (A)-"~ 10 411-)- by striking oat ~subseetieu -(b3- (9) (By" ii in paragraph -(2) (B) (ii) of such subsection -(-133- 12 and inserting in lieu thereof ~subscction -(a-)- (2) 13 (B)", and 14 413- by adding at the end thereof the following 15 ne-w subsection: 16 ~-~-fe3- Gitos~ REFEILENOE~- i~ee taxation of foreign corporations carrying oa life insurance business wiThin the United States, see section 842?~ 17 -(43- Section 824 -(relating to tan on mutual insur 18 once companies to which part 11 applies) is amended- 19 -fA3- by striking out subsection -fe)- and by 20 redesignating subsections -(43- and -(g3- as sub- 21 sections -fe- and -($3-i and 22 -fB3- by adding at the end of subsection -(43- 1220 PAGENO="0069" 49 11 -~ redesignated by anbparagraph +A*)- tl~e gel- 2 lowing: f~(3) ~or taxation of foreign corporations carrying en an insurance busincst~ within the United States~ see see- tten 842~ 3 -(-5-)- Seetien 82~ -(-relating te determination ef tan- 4 able investment income)- is amended by striking ent S subsection -(4 and by redesignating subsection -(4)- as 6 subsection -fe)- 7 -(63- Section ggi~ (relating to tan on certain ether 8 insurance companies)- is amended- 9 -(-A-)- by striking eat subsection -(-b3- and by re- 10 designating subsection -(.e)- as subsection -fb)-~ and 11 +B3- by amending subsection -(-4)- to read as 12 follows-i 13 ~-fe3- Cuoss REFERENCES. ~(1~ ~ alternative tan in ease of capital gains see section 12O1(a)~ !~(2~ ~Of taxation of foreign eerporations carrying on an insurance business within the United States, see see- tinn 84~ 14 47-)- Section 8~-~ -(relating to insurance company 15 * taxable income)- is amended by striking out subsection 16 -(43- and by redesignating subsection -(.e3- as subsection 17 18 -(-83- ~Phe second sentence o~ section 841~ -(relating 1221 PAGENO="0070" So I to credit for foreign taxes) is amended by striking out 2 "sentence," and inserting in lieu thereof "sentence -(-and 3 for purposes of applying section 94~6 with respect to a 4 foreign corporation sub~jcet to tan under this sub- 5 chapter),". 6 -(h)- SUBPAIL~P ~ INCOME~ Section 952 (b) (relating 7 to exelasion of United States ineonie) is amended to read as 8 follows: 9 "(-b) ExcrusIoN er~ U~s~nn S~rA~?E~ eoi~iE.-1n 10 the ease of a eontsellcd foreign eorporation7 subpart ~ in- 11 eornc does not include any item of income from sourees 12 within the United States wbieh is effectively connected 13 with the conduet by sash eorporation of a trade or business 14 within the United States unless sash item is exempt from 15 taxation -(-or is subjeet to a reduced rate of tan)- pursuant 16 to a treaty obligation of the United Stat&~ 17 -Ei* *w FROM ~~R~?*IN S~~S en EXeIJANGEe ei~ 18 Ss~ee~ ~ Qnn~ Fenn+e~ Go~on*s~o~e. ~Paragraph 19 -f4~- of section 1248-(-d)- (relating to exclusions from earn 20 ings and ~rofita) is amended to road as followss 21 ~f (4) U~i~snn S~zpus i~coi~m~ Any item in- 22 ~hidiblc in gross income of the foreign corporation under 23 tb4s chapter 1222 PAGENO="0071" 51 .1 ~ (A) ~er any to~abIe year begirming before 2 January 47 1967-i as ineome derived from sources 2 within the United States of a foreign corporation 4 eagaged in trade or hasianss within the United 5 States~or 6 ~ (B)- for any taxable year beginning after 7 December .347 19(l(3~ as income effeetheiy eon- 8 ~ieeted with the conduct by sueh corporation of a 9 trade or business within the Unitcd States~ 10 This pai~graph shall not aj~p1y with respect to any 11 item which is exempt from taxation -for is subject to 12 a reduced rate of tan)- pursuant to a treaty obligation 13 of the United Statcs~ 14 -fj3- DECLARA'rIeN 0~ ES-TIMA~I?E1) INCOMD ~ B~ 15 QOnPOkA~TIONs. Section ~3c4-6 -(rc~1ating to declarations of 16 estimated ineome tan by corporations)- is amended by rcdc& 17 ignating subsection -ff3- as subsection -fg3- and by inscrting 18 after subsection -fe)- the folio-wing new subsection: 19 ~Lff3~ ~ F~xa~sue~ CoRron*PioNs. For pm'- 20 poses of this section and section 6~5~ in the ease of a foreign 21 corporation subject to taxation under section ~14 or 22 or under subchapter I~ of chapter 47 the tan imposed by 23 section 88~ shadi he treated as a tan imposed by section 4-4-p 1223 PAGENO="0072" 52 i -(4k)- TECIINICAL AMENDMENTE. 2 -(4-)- Section 884 i~ amended to read as follows: "SEC 884; CROSS REFERENCES. f~(13 For special provisions relating to unrelated bus- mess income of foreign educational, charitable, and ocr- tam other exempt organFzations, see section 512(a). ~(2* For special provisions relating to foreign eorpo rations carrying on an insurance business within the United States~ see section 842; ~(8* For ruies applicable in determining whether any foreign eorporation is engaged in trade or business within the United States, see section 864(b). ~(4* For reinstatement of pre-1967 income tax provi sions in the ease of eorperations of certain foreign countr-ics~ see section 896; ~ff8.~ For allowance of er-edit against the tax in ease of a foreign corporation having income effectively een neeted with the conduct of a trade or business within the United States, see section 906; ~~(6) For withholding at source of tax on income of foreign corporations, see section 4442?~ 3 -(23- Section b3433-(-F-)- is amended by strik 4 ing eat ~832 ~b) -(5)--" and inserting in lien thereof 5 6 -(33- Section .k2494a3- is amended by sti4l4ag eat 7 ~Except as pras4ded in snhseetien -fe)-~ gain~ and in- 8 sorting in lien thereof ~Gain~ 9 413- EFFECTIVE DATES~ The amendments made by 10 this section -(other than subsection -(43-)- shall app1y with ii respect to taxable years beginning a4ter Peceniber ~4-~ 19136~ 12 4~he amendment made by saisseetion -(43- shal4 apply with 1224 PAGENO="0073" 53 1 rc~pcct ~o sales Of exehanges oeeurring aftef December ~ 2 ~ 3 SE~ 5; SPECIAL TAX PROVISIONS. 4 -(a)- I~coi~+~ AFFECTED B-~ Tmwpy. Section 894 -(-fe- 5 lating to income exempt under treaties)- is amended to read 6 as fellows-~ 7 ~SEC, 894 INCoME AFFECTED B~ TREAT~ 8 ~L~4 J~eo~r~ Exn~wp UNDER J~-4ncomo of 9 anyk4nd,tetheexlcntreqedbyaztrcatyobligatieaof 10 the United States~ shall net be iRe1U4e4 in gross income and 11 shall be exempt from taxation uiider this sabtitle~ 12 ~ ~ Es LISflME~~ f~ I~jLf]~J 13 STATE&-F~or purposes of applying any exemption from~ or 14 re4~etine ef~ say tax provided by any treaty to which the 15 United States is a pasty wish rezpect to income whieh is not 16 effectively connected with the conduct of a trade Of business 17 wishin the United~ Stntes~ a nonresident aliee individual or a. 18 foreign corporation shall be deemed not to hwe a permanent 19 establishment in the Tjnitcd States at ~y. time during the 20 taxable year This subsection shall net apply in respect of 21 the tan computed nader seetien 87-7~(b) ~ 22 -(-Is)- A PEJC*pjax ei~ PRE 1-94~ ~NC0ME ~P*~ 23 &oN&~Subpart 0 of part II of subchapter N- of ehapter ~ 1225 PAGENO="0074" 54 ~ (relating to miscellaneous pr-ovisions applicable to nonresi- 2 dent aliens and foreign corporations)- is amended by adding ~ at the end thereof the following new seetion: 4 ~SEC~ 896; APPLICATION 4W PRE-1967 INCOME TAX PRO- 5 VISIONS. 6 ~1-fa~3- IMPOSITION 4W Monn BURDENSOME TAxIEs ~ 7 FOREIGN COUNTRY. Whenever the President finds that~ 8 ~~-(-1)- under the laws of any foreign country, eon- 9 sidering the tax system of such foreign country, citizens of the United States net residents of such foreign eoun try or domestie corporations are being subjected to more 12 burdensome taxes~ on any item of income received by 13 such citizens or corporations from sources within such 14 foreign country~ than taxes imposed by the provisions of j5 this subtitle on similar income derived from sources 16 within the United States by residents or corporations of 17 such foreign eeuntry 18.. ~-(~2-)- such foreign countryj when requested by the 19 United States to do so~ has not acted to revise or reduce 20 such taxes so that they are no more burdensome than 21 taxes imposed by the provisions of this subtitle on similar 22 income derived from sources within the United States by 23 . residents or. corporations of such foreign . country, and 24 ~-(-33- it is in the public interest to apply pr~ 196~ 25 ~ provisions ~ft tbeeoMSIIcO with the provisions of this 1226 PAGENO="0075" 55 1 ~ee4o~ ~o re~iden~s or o poraioro of ~eh f~eign 2 country~ 3 the President ehal4 proclaim that the tax o~ oueb ~ind4ar in- 4 come derived from sourcee within the Thiitod States by resi- 5 dents or corporations of sueb foreign eeuntry shall7 for tax- 6 able years beginning after sneb preelamation~ be detemiined 7 under this subtitle without regard to amendments made to 8 this subehapter and ehapter ~ on or after the date of onset- 9 eritoftl4sscetion~ 10 "-(b~ VT~PJO~ 8~ MORE Th3RBriNSE)ME TAXES- 11 Whenever the President firido that the laws of any foreign 12 country with res~peet to whieb the President has made a pree- 13 lamation Under subsection -fa3- haxe been medffied so that 14 citizens of the :United States riot residents of snob foreign 15 couiitry or domestie corporations are no longer snh~jeet to 16 more burdensome taxes on snob item of income derived 1w 17 snob citizens or corporations from sources within snob foreign 18 eountry~ he shall proclaim that the tax on such similar in- 19 come derived from sources within the ~nite4 States by 20 residents or corporations of snob foreign country shall~ for 21 any taxable year beginning aft~r snob procIamation~ be do- 22 terrnined under this subtitle without regard to subsection 23 24 !~~~fe,)- N-oTIrIeA~TIOR er~ CONGRESS REQUIRED. No 25 proclamation shall be issued by the President pursuant to 1227 PAGENO="0076" 56 1. this section unless at least ~ø days ~i48f to sueh procin 2 mation~ he has notified the Senate and the House of Rcprc 3 scntatives ef his intention to issne each proclamation. 4 ~{4)- IMPLEMENTATION B~ F~EOIJLATIONS. The See- 5 rotary Of his delegate eh&A prescribe each regulations as he 6 deems necessary Of appropriate to implement this &~etion~" 7 -fe)- Q imo*i~ A NnMEN~5S~The taMe of sections 8 for subpart G of part II of subchapter ~ of chapter 1~ is 9 amended 10 -(~* by striking eat the item relating to section S94 ii and inserting in lieu thereof aSee 894: Income &~eet~ed by treaty."; 12 ~-f2-)- by adding at the end of such table the following: ~$ee 89& Application e4 p~e-44)6 ineomc #a* provioion3." 13 -(-4)- Er'FEOTIVE DATE. The amendments made by this 14 section -(-other than subsection -(-e)4- eha~l4 apply with respect 15 to taxable years beginning after December &I-~ 4~13& 16 4e3- E1~EcTIoNs B-~ ~ONRESI1~BN~ UNITED STATES 17 CITIZENs Wiio ARf~ S~UBJECT ~e FonEIo~w COMMUNITY 18 J~ppj~~py LAWS. 19 -(4-)- Part T41 of subchapter ~ of chapter .1. (relnt 20 ing to income from sources without the United States)- 1228 PAGENO="0077" 57 1 is amended by adding at the end thcrcof the following 2 new subpart: 3 "Subpart H-Income of Certain Nonresident United States 4 Citizens Subject to Foreign Community Property Laws ~See ~84~ Etcetion3 as te treatment ef income rnibj~ct t~e foreign oommunity property 4ewe~ 5 "SEC. 981~ ~LEGTION AS !~O TR~ATMEN-T OF INCOME SUB- 6 JECT ~O FOREIGN COMMUNITY PROPERTY 7 LAWS. 8 ~1~(4 (~ENEn*L RULE. In the ease of any tanable year 9 beginning after December ~ 19(?~6, if- 10 an imli~,4~ial is -f4)- a citizcn of the United 11 States, -fB3- a hens 444e resident of a foreign country 12 or countries during the entire taxable year~ and -fG)- 13 married at the close of the taxable ~ea~ to a spouse who is 14 a nonresideut alien during the entire taxable year~ and 15 sach i li~4~lua4 and his spouse cleet to l÷a~e 16 SchSOetiOI~ +l~4- apply to their co +aniey income under 17 f4~fclg~ community property lo-ws~ 18 then snbseetion -fb3- shall apply to sash income of aFleb mdi- 19 ~44aa4 and sash spouse for the taxable year and for all sab- 20 sequent taxable years for which the requirements of pare- 1229 PAGENO="0078" 58 1 graph -(4+ are mety mi4ess the Seeretary or hio delegate 2 0atenilllatonoftheeleCtIOft 3 ~-(~b~ 1~ME~ 8~ QOMMUN~IP~ ~COME. -F-or any 4 taxable year to which an eleetion made under subseetion -(-a3- 5 apphes~ the eemmunity ineorue under foreign eommunity 6 property laws, of the husband and ~4fe making the election 7 ~ha~14 be treated as fellows-f 8 ~(4-)- Earned ineeme -(-within the meaning of the 9 4irs~ seetence of section ~44-(~)-3-~ ether than trade or 10 businefis income and a wtner~s 4ietri-briti~e share of 11 partnership ineome~ shall be treated as the income of the 12 spouse who rendered the personal seri4ees~ 13 "(2~ ~½ade or business ineornej' and a partner~s 14 distributhe share of partnership ineome~ shall be treated 15 as pro~4ded in seetion 4402 -(a~--(-5)-~ 16 1~~(~3)~ ~eminrmity income net described in pam 17 graph -(4-)- or -(-2+ which is deri~ed from the separate 18 property -(-as determined under the applicable foreign 19 community property law-)- of one spouse shall he treated 20 as 4ie income of such spouse7 21 ~ (4-)- All other such eommunit~ income shall be 22 treated as pro~4ded in the npplietthle foreign cenununity 23 property 1aw~ 1230 PAGENO="0079" 59 I n-fe-)- Ei~seTIoN i~en PilE 1~(3-~ ~EAItS.- 2 "-(-1) Ei~cno~-If an individual meets the re- 3 guirements of subsection -(-a)--(4-)- 44)- and 4G3- for any 4 taxable year beginning before January ~ 44)67~ and if 5 sash individual and the spouse ref-erred to in subsection 6 -fa-)--(4)-fG)- eleet under this su~bseetien~ then paragraph 7 -(-2-)- of this subsection shall apply to their community in- 8 eon+e under foreign community property la~s for all 9 open taxable years beginning before January 4-~ ~ 10 -(~whcther under this ehapter~ the corresponding pro~c4- sions of the Internal &venue Gode of 14)B$)~ or the sor- 12 responding pro-visions of prior r-evcnue laws-)-- for whieh the requirement-s of subsection 4a3-f4-)- -(-4)- and -(-0)- 14 1 ~ ~-(-2-)- EFFEe~s ei~ EI~r~eTION. For any taxable 16 year to whish an election made under this subsection 17 applics~ the community income under for-cign sommunit~r 18 property laws of the husband and wife inaidag the 19 election shall be treated as provided by subsection -fb-)- 20 except that the other cenununity~inaome deseri-bed in 21 paragraph -(4)- of subsection -(-b-)- shall be treated us the 22 income of the spouse whey for sueli taxable year~ had 2~ gr'aas income under paragraphs -f1~)-~ -(-2-)-~- and -(-3.)- of 1231 PAGENO="0080" 60 1 eubsection -fb~-~ j4~s ~cparate gross income, greater than 2 tha~t of the other 5~OUSO7 3 "(4) ~~{Mf~ f1ê+~ MKI~ E eq~Ie~fs-~ PERiEH~ o1~ 4 LIMIT*TION-Sj ET(i- 5 "(i)- ~ An election under subsection -fa* of 6 -fe)- for a taxable year may be made at any time while 7 such year is atill open, and shall be made in such man 8 nor as the Secretary or his delegate shall by regulations 9 preserThe. 10 "(2) Es~eN OP PEO}OP FOP AS8EBS1~O PB- 11 PI~IENCIES *NP MAKING IEF-UNDS---41 any taxable 12 year to whieh an election under cubsection -(4 of -(4 13 a~pplies is open at the time such election is made~ the 14 period for accessing a lcfleicriey against and the period 15 for fl-brig claim for fefl4t Of refund of any overpa~mient 16 by~ the husband and wife for such taxable year~ to the extent suel* deficiency or overpayment is attributable to 18 ~unh an election- shall not expire before ~ year alter 19 the dote of such e]ectioii 20 ~ ALIEN $POUSE NFJED N-OP J-E)}N IN SUBSEC 21 ~ nr~nesuec~ ~ ~n~i~- (~SE& If the Secre- 22 tarv Of his delegate determines- 23 ~-~-(A)- that an election under cubseetion -(4 24 would not a4l~eet the liobility for Federal income 1232 PAGENO="0081" 61 1 tan of the spouse referred to in subsection (a) (1+ 2 -fG)- for any taxable yea~ or 3 ~4B3- that the effect on sueh liabil4ty for tan 4 eannot he aseertained and that to deny the election 5 to the eitizen of the Uithed States would be inequita- 6 Ide and cause undue hardship~ * 7 sash spouse shall not be reqe4ced to ~ein in such election, S and paragraph ~f2~)- of this subsection shall net apply 9 with respeet to such spou~se~ 10 "(4) I inr~or. To the extent that any o-vcrpay 11 ment or deficiency for a taxable year is attributable to 12 e*~~ election made under this seetiea~ no interest shall be 13 allowed or pa14 for any period before the day which is 4 14 year after the date of such election. 15 p~ 16 fl~ 17 "(1) I)EDUC!rIO~B. Deductions shall be treated in 18 a manner consistent with the manner provided by this 19 section for the income to which they re4ate~ 20 ~-~) Orr~x ~ A ta*ahie year of a citizen 21 of the United States and his spouse ohnl4 be treated as 22 `open' if the period for assessing a deficiency against 23 such citizen for such year has not expired before the 1233 PAGENO="0082" 1 date of the clccti&n under subsection -(-a)- or -fe)-~ as the 2 easemaybe7 3 1~~f3~)~ ELECTIONS +N GASE OP DECEDENTS. If a 4 husband or wi$e is deceased his election under this see- 5 tion may be made by his exeeutor administrator~ or 6 other person charged with Ms property. 7 ~ (4) DEATh OP SPOUSE DURING TAXABLE 8 ~ In applying subsection -(-tu) -(4-)--(-O)-~ and in do- 9 termining under subsection -fe)--f 2-)- which spouse hays 10 the greater income for a taxable yearj 14 a husband or 11 wi4e dies the taxable year of the surviving spouse shall 12 be treated as ending on the date of such dentin" 13 -(-2-)- The table of subparts for such part 141 is 14 amended by adding at the end thereof the following-~ Subpart ~ income of eertitin nonresident United States citizens subject to foreign community rep- eoty laws." 15 -(-3* Section ~)44-(4)- -(-relating to earned income 16 from sources without the TJnited States-)- is amended 17 -(4)- by striking out ~For administrative" and 18 inserting in lieu thereof the following-i ~(i~ ~oi' ad- 19 ininistrative~ and 20 -f133- by adding at the end thereof the fellewing-~ ~1(2)~ For elections as to treatment of income subject to foreign community property 4aws~ see section 981?! 1234 PAGENO="0083" C3 1 SE~ 6; FOREIGN TAN CREDIT. 2 -(-a)- AIJLOWANOB 85~ ~REDIP ~EO C~IITAIN NONRESI 3 DENT ALIENS AM) FOREIGN CORPORATIONS.- 4 -(4)-SubpartAofpaetmefsubehapterNof chap 5 tar 4- -(relating to foreign tax credit) is amended by 6 adding at the end thereof the following new section: 7 ~±SE~ 906; NONRESIDENT ALIEN INDIVIDUALS AND FOR- 8 EIGN CORPORATION-S 9 ~-fa)- ALLOWANCE O1~ CREDIT. A nonresident alien 10 individual or a foreign eerporatien engaged in trade or 11 business within the United States during the taxable year 12 ohal4 be allowed a credit nailer section ~O4- for the amount 13 of any incoine war profits, and excess profits taxes paid or 14 accrued ~Juring the taxable year -(-or deemed; under section 15 P027 paid or neerued during the taxable year)- to any foreign 16 country or possession of the United States with respect to 17 income effectively eenneeted with the conduct of a trade or 18 business within the United States. 19 `-`-(by S~ei~i1 1~LES.- 20 "(1)- for. purposes of subsection -(-a)- and for par- 21 poses of determining the deductions ad]~owablo under 22 sections 87S (a)- and 882 (c), in determining the amount 23 of any tax paid or accrued to any foreign eoantry or 1235 PAGENO="0084" 64 1 possession there she44 not be taken into account any 2 amount of ta~ to the extent the tan so pa44 or accrued is 3 imposed with respect to income which would not be 4 t~c4 by soeh foreign country or possession bat for the 5 foot that- 6 ~-(-A)- in the ease of a nonresident alien mdi- 7 vidual, sash individual is a eitk~en or resident of 8 sash foreign country or possession or 9 ~-(~B)- in the ease of a foreign oorporation~ sash 10 corporation was created or organized under the 11 law of sash foreign country or possession or is 12 d~micilcd for tan purposes in sash country or 13 possession~ 14 "(2) ~or purposes of subsection -fa3-~. in apply- 15 ing section ~)f)4 the taxpayer's taxal~de income oha44 be 16 treated as consisting only of the taxable income effee 17 tivcly oonnceted with the taxpaycr?~s conduot of a trade 18 E~ business within the United States. 19 ~ The credit allowed pursuant to subsection -(a)- 20 shall not be allowed against any tan imposed by seetien 21 8-71~(a)- -(relating to ineome of nonresident alien individ 22 ~ connected with United States business)- or 884 23 -(relating to income of foreign corporations not eon- 24 neeted with United States busincss)-~ 25 ~f (4)- ~jp purpø~ of seetious f10~ (a)- and ~ a 1236 PAGENO="0085" 65 1 fei~eign corporation ehensing the bcnefi~s ef this snb- 2 part wlneh +~eeei~es tlividends ehaII~ with respee~ ~e 3 sneI~ 4dewl~s be ~ea~e4 as a domestic corporation.'~ 4 -f2~- The table of ~ee~iens fo~ eneI~ snbpart A is 5 asnended by tuklieg as the end thcrcof the following: ~&e7 ~)Ø~ Nonrc~i4en-t &1ie~ inclivichrn1s a~4 foreign eet~- poration~." 6 -f~* Section 8~4-(e* is amended by striking oat 7 1~~(4 FORE~H1N !f~ ~nEDIT NE*P AliL~oWED. A non- 8 res~1~i~ and inserting in lien thereof the fGllowing-~ 9 i-fe)- Founii~ ~I~* CREDIT. E~eep1~ as provided in 10 section ~)ø6~ a orn'esideet~ ii -(4)- Subsection -(1*)- of section QO4~ -(relating to 12 amount allowed) is amended by r signating porn- 13 graph -(4)- as pafagraph -f53~ and by inserting after 14 paragraph -(3)- the following new paragraph-: 15 ±~~(~4}~ NONRESIJIENT ALIEN INDIVIDUALS ~Nf~ F*~W 16 EIfN OORPORATIONS.-In the ease of any nonresidcnt~ 17 alien iiiclivid+mI not dcsei4hed in section 57-( and in the 18 ease of any foreign corporation, the amount determined 19 pursuant to sect-ion 906j 20 -(5)- Paragraph -(53- -(as redesignated)- of section 21 9O~-(b)- is amended by striking oat 1~or (3)-~ and in- 22 serting in lien thereof `~-(-3)-~ or -(-4-) ,`~ 1237 PAGENO="0086" 6(3 1 -f6* ~e amcndment~ made by tIIiO ai*bscetion skal4 2 t~pply with respeot to tn:xa~Me years beginning aftei~ 3 December ~ 1966. In applyng section 94)4 of the 4 Internal Revenue 1ode of 1~954 with respect to section 5 906 of snob Gode~ no amount mary be earned froari or to 6 any taxable year beginuing before January 4~ 1967, and 7 no snob year shall he taken into account. 8 -(-b.)- ALn~ RESmEN~e OF ~PI+E T4NrPEF Scu*~ne on ~ ~P+~nnpe Rico. 10 -(4-)- Paragraph -(-3-)- of section ~01-(b)- -(relating 11 toamountofforeignta~ereditallowedineaseofa4ien 12 resident of the Unified States or Puerto Rico) is amended 13 by striking oct if the foreign: country of which fmeb 14 al4en resident is a eiti~cn or eubjcet~ in imposing snob 15 taxcs~ allows a sim4ar credit to eith~en:s of the United 16 States residing in each eountry~ 17 -(-2-)- Section 901~ is amended by redesignatuiig snb- 18 sections -(a)- and -(-4)- as snbseotions -(4)- and -(e*T and 19 by inserting after enbscetion -(-by the following new 20 subscetion~ 21 ~ SDIILAR CnE-m~P REQUIRED FOF CERTAIN ALrnN 22 j~j~q~j. Whene~er the I2resi4ent find-s that 23 "(1)- a foreign eountry, in imposing income~ war 24 proflts and excess profits ta~es~ does not allow to 1238 PAGENO="0087" 67 I citizens of the United States residing in saeh forcign 2 eountry a ercdit for aay oath taxes paid or accmed to 3 the Uititcd States or any foreign country, as the ease 4 may be7 similar to the credit allowed under subsection 5 -fh)--(-3-~ 6 ~-~-f2-)- such foreign eountry~ when requested by the 7 United States to do SOy has not acted to provide such a 8 similar credit to citizens of the United States residing 9 in such foreign country, and 10 £f~(~3)~ it is in the publie interest to allow the credit 11 under sa-hseetion -(h) -(3) to citizens or subjects of su~h 12 foreign eonotry only if it allows such a similar credit to 13 eitizens of the United States residing in such foreign 14 country, 15 the President sl+a14 proclaim that7 for taxable years begin- 16 ning while the proclamation remains in efiect7 the credit 17 under subsection (b) (3-)- sl+a14 be allowed to citizens or 18 subjects of ouch foreign country only if such foreign eountry~ 19 in imposing income, war profits, and e*eess profits taxes; 20 allows to citizens of the United States residing in such foreign 21 country sueh a similar credit~ 22 -(s)- Section 2014 -(-relating to credit for foreign 23 death taxes)- is amended by striking out the second ecu- 1239 PAGENO="0088" 68 I ~è~ee of s±~eetie+i -f a~ and by adding at the end of 2 aneh seet4on the f owing new stthseetion-~ 3 ~-(4+-)- SIMILAn CREDIT REQUIRED i~ei~ CEiip*i?~ A-HEN 4 REsii~ENm. WhdneveF the President finds that 5 "(-1)~ a foreign e int~y~ in imposing estate; inherit- 6 anee, legaey. or sneeeasion ta~ea~ does not allow to eiti- 7 ~ens of the United States reshleat in sneh foreign ~oui~- 8 try at the time of death a eredt similar to the eredit 9 allowed +mder eetion -fa)-~. 10 !~-f2~)~ sm4i foreign eoimtry, when reqnested by the 11 United States to do so~ baa ne1~ acted to pro~4de suel÷ a 12 similar credit in the ease of *4tinens of the United States 13 reddent in sneh foreign eoni4ry at the time of tleath and 14 ~*33-it the iateresttoallewtheeredit 15 under subsection -fa3- in the ease of citisens or 16 of sash foreign country only if it allows sael+ a similar 17 eredit.in the ease of eititens of the United States resident 18 in saeh foreign country at the time of doath~ 19 thePres~sro4aimthat~intheenseofeitizenaor 20 sahjeets of sneli foreign country dying while the proclamation 21 remains in effect; the credit under subsection -fa3- shall be of- 22 lowed only if such foreign country allows saeh a similar 23 ~44t in the ease of eim~ens of the United States resident in 24 such foreign country at the time of death~ 25 -(-4)- The amendments made by this subsection 1240 PAGENO="0089" 69 I -fo~her tha~+ paragraph -(-3-~-)- sh4l apply with ~espef4 2 te t~xabIc years gi~3g a4te~ Dc~em~bc~ ~ 1~966. 3 . The amendment made by paragraph -(-33- shall apply .4 with rcspeet te estates of deeeden#s dyiog after the date 5 of the emetmeat of this 4et. 6 -(4 Fem~o~ ~ 01~E~DI~P A~ ~*S1~ O+~ ~B~P*I~ 7 ~VE11SE~S OPER~TIE)Ne I~UNDING Sfm~T~IEs. 8 -(44- Seetisa 904 (f)-(-23- ~eIating to tijpliet4ien of 9 limitations on foreign t~s~ credit in ease of eertain inter- 10 eat ineome3- is amended- 11 +A* by Stri4deg out ~1er~ at the end of sub- 12 paragraph -(03-v 13 -(B-)- by stril4iig oat the period at the end of 14 subparagraph -(4)3- and inserting in lien thereof 15 L1~or~an4 16 -(0)- by adding at the end thereof the following 17 new subparagraph: 18 ~i-(E)~ reecived by an overseas operations fim4- 19 ing subsidiary on obligations of a related foreign 20 eooration~. 21 -(2-)- Section ~O4-(43- is amended by adding at the 22 end thereof the following new paragrapiH 23 !L(-~)- DEFT I~NO i~E)1~ PtRPOFIEO 8i~ FA1~A- 24 ~~n~ir (1)- (E). For purposes of paragraph -(-14- 25 (E). 1241 PAGENO="0090" 70 1 ~-~{A-) the term ~o-versetis operations funding 2 subsidiary' means a domestic corporation which -(4)- 3 is a member of an affiliated group -(within the 4 meaning of section 45043- and is net the common 5 parent eorperation, and -(44)- was formed and is 6 availed of for the principal purpose of raising funds 7 outside the united States through public offerings to 8 foreign persons and of using sash funds to finance 9 the operations in foreign eounti4es of one or mere 10 related foreign corporationa~ and 11 "(II) a foreign corporation is~ with respect to 12 an overseas operations funding subsidiary, a related 13 foreign corporation if the affiliated group of which 14 sash subsidiary it a member ewtis ~0 percent or 15 more of the voting stock of sash foreign corporation 16 either directly or through ownership of the voting 17 stock of another foreign eorporation." 18 *~-)- The amendments made by paragraphs -(43- and 19 -(-2-)- shall apply to interest received after December ~34~ 20 1965, in ta~ai4e years ending after sash 4ate~ 1242 PAGENO="0091" 71 1 SEG ~ AMENDMENT ~O PRESERVE EXISTING LAW ON 2 DEDUCTIONS UNDER S~GTION 93b 3 -(a)- PEDUCTIONS. Subsection -(43- of seetion ~4M -fi~e- 4 lating to deductions) is arncnded to ~ea4 as follows: 5 "(di- DEDuCTIoNi~.- 6 "-(-1-)- Q~ENERAL RULE. Except as otherwise ~fO- 7 ~44e4 in this subsection and subseetion -(e3-~ in the ease 8 of tersolis eotFt4ed to the benefits of this seetion the 9 deductions sht4l be allowed oi4-y if and to the extent 10 that they a~e eonnectcd with ineeme from aem~ees within 11 the TJnited States; and the pi~opei~ apportionment and 12 allocation of the deductions with respect to sources of 13 income within and without the TJnited States shall be 14 determined as provided in pa~4 [~ un4ie~ regulations 15 prescribed by the Secretary o~ his delegate. 16 ~-f2) ExcEPTIoNS. The following deductions shall 17 be allowed whether o~ not thei ese eonneetcd with in- 18 come from sources within the Tinited States: 19 "(A' ~he de4uetion~ foi~ lasses not eonneeted 20 with the trade or business if incurred in transactions 1243 PAGENO="0092" 72 entered into fe~ fW0I4t~ allowed ~w section 4~6&(c3- 2 -f2~ bnt e~y if the pro41t~ if soeh s~etien bad 3 resulted in a proflt~ would be taxable under th4s 4 awbt4tIe 5 ~-(-B)- The deduction, for losses of propcrty not 6 eonneetcd with the trade or business if a~4sing from 7 eertain easualties or theft~ allowed bi~ section 145 8 -(-e)~3h but only if the loss is of property within 9 the United Statee~ 10 ~-fG)- The deduction for charitable contribu 11 s ond gifts allowed by section 1:70w 12 "-(S) DEDUCTION DISALLOWED- f~or disallowance et standard dethietion5 see seeti* I4~b~(2~ 13 -fi*)- 4~PnC~I?IvE D~n. The aroendment made by this 14 section shall apply with respect to tt~able years beginning 15 after December ~ 4f)6& 16 S~G & ESTATES O~ NONRESIDENTS NOT CITIZENS. 17 -fa3- P~*~~n e~ TAX. Subsection -f~* of section 2401: 18 i~reiating to ts~ imposed in ease of estates of nonresidents 19 net citizens)- is amended to read as follows: 20 "(a) R*~sE er~ TAX. Except as provided in section 21 2107, a ta~ computed in accordance with the following table 22 is hereby imposed on the transfer of the tonable estate~ de- 1244 PAGENO="0093" 1 termined as provided i~ section 2 1O6~ of every decedent no~ 2 ~esk1ent not ~ citizen of the T~riited Statcs-~ ~4f the taxable cetate tax is÷ The tax shalt bea we~ $-l-0O,000 et the taxable csfate~ ()et~e ~44)O~OOO het ~~et ~OO4~ ~ -i-Q~ ~$ ~ eye~ Ow~ $~0O~0OO he4~ ~i~et ei~ei~ O~ei* ~1,OOO,O00 ht+~ ~et ~OOO~O0O $4-aO~OOO, j4tt~ ~ et ~eess e~e~ ~oo,. O~ee $~3OOO~9OO $3~G,OOO~ a eeeess ei~e~' $~ooo~. 3 -fIt3- 1~1MLPS AOAINWP ~1~.1n ~4Ø~ -(-i~e4athig 4 to eredith allowed against estate tan)- is amended to i~ea4 as 5 folluws-~ 6 ~S~Q 2102 CREDITS AGA4NS~ TAXT 7 ~ th~r~n~&i~. The ta~ imposed by section 2~1O1 8 shall he credited with the amounts determined in eeeordanee 9 with sections 20fl to 2O13~ inekisive -(~`e1ating to State death 10 tanes~ gift ta~ and tan on ptiof transfers), subject to the 11 ~peeia1 limitation provided in sshscction -fb-)- 12 ~-fb)- SPEQn~n7 LIM P~Em-T4ie manimum el2edit 13 allowed nadef section 2(111 against the tan impoced by see- 14 tion 2101 fsa' State death ta'es paid she3l be on amount 15 which bears the same mtio to the credit computed as pro- i~ i4ded in section 2011 (b)- as the ~akne of the properW~ as 1245 PAGENO="0094" 74 1 determined for purposes of this chaptcr~ upon whiek State 2 death taxes were paid and which is included in the gross 3 estate under section 24-4)3 beers. to the valne of the total gross 4 estate under section 2403w For purposes of this bscction-~ 5 the term ~Statc death ta~es~ means the tu~es described in 6 section 2011 (a) ." 7 * ~ Wirrffi~ ~?f+n J-Nf~Fnn SP*~rEs. See- 8 tin 24-04 ~(relating to property within the United States) is 9 amended by adding at the end thereof the following new 10 subsection: 11 if-fe)- Thnn~ 0n~io ø.-For purposes of this sub- 12 chapter, debt obligations of- 13 ~(4-)- a United States person or 14 ~f2~)- the United States~ a State or any political 15 subdivision thereof, or the District of Columbia~ 16 owned by a nonresident not a citisen of the United States 17 shall be deemed property within the United States7 This 18 subsection shall not apply to a debt obligation of a domestic 19 corporation if any interest on such ob1i~ation~ were such in- 20 terest received by the decedent at the time of his death, 21 would be treated by reason of section 364 (a) (1) (B)~ as 22 income from sources without the United States." 1246 PAGENO="0095" 75 I -(-4)- 4~nopj~ip~ WiPH&~T mi~ T4~fT~n i~s~-&ib- 2 seet4on -fb.)- of see~ion 2405 -~reIathig ~o bank *ie~esi~o3- is 3 amended to i~ead as ollows-~ 4 ~` (b-)-- I)j~posips i~ QR~*~ ~Ik)nEf&?~ BnANell~s- 5 3~ei~ j~~afpeses of th4s sube rpte~ d~pooits with a foFeign 6 branth of a domestic eoi~pn~ation~ if sueh bnuwh is engaged 7 in the commercial banking basiness~ shall not be deemed 8 pro~erty within the 44al4e4 States~ 9 -f e)- ~ ei~ i~i7n E~~-Ikn~agni-ph 10 -f3)- of section 2Of~-fa3- -(-relating to dethietion of exemption 11 from grOSS estate)- is amended to read as follows4 12 ~i{3~)~ Exni~1rTIO~- 13 ~-(A-)- ~nn~ iri~mn. An exemption of 14 $3O,000~ 15 ~ (B)- ~RESIDENTS 8f~ POSSESSIONS O1~ ~ii~ 16 u~i~nn s~*~a~-Tn the ease of a decedent who is 17 considered to be a ~nollrcsident net a citizcii of the 18 4~n4ted States' uialcr the provisions of seetion 22.09~ 19 theexcmptionshallbethegi'eaterof-fi)-$3O,oO0~ 20 or -(443- that propoetion of the exemption aut4iorised 21 by section 2052 which the value of that part of the 22 decedcnt~s gross estate which at the time of his 1247 PAGENO="0096" 76 1 death is sittrnted ii the TJnted states bears te the 2 ~a4ue of his enth~e gi~oss estate whcre~c~ sitnate4~ * ~ ei~ ~s~i~e T~x. Sub- 4 eha~ei~ 14 of ehaptef 44 -fi~ehitisg to e&tat-es of nonresiden~s 5 net eiti~ens)- is on+e+ided by ttd4hig at the end theseof the 6 followin-g new scetiens-~ 7 ~ 2107 E~XPATRIA-T~ON ~ AVOID ~MX 8 i~~fa4- R~im~ 8i~ TAX. A ta~ computed in accor&uiee 9 with the toMe eoetained in section ~l43O4 is hereby imposed 10 on the t~ sf' of the taxable estate~ dctemiine4 as pro4ded 11 in section 21Of~ of orery decedent nonresident net a eiti~eu 12 of the United States dying after the date of enactment of this 13 seetion~ if after March 8~ 1~943ñ, and within the -10-year ~period 14 ending with the date of death such deeedent lost United 15 States eitizeuship~ unless sue4+ loss did not l+a~e for one of its 16 principal purposes the a~zoidance of taxes under this subtitle 17 ~ 18 1~~(1~)~ GROSS 1~eT~TE. For pneposes of the tax imposed 19 by subsection -fa3-~ the ~ohie of the gross estate of every 20 decedent to whom subseetien -(-a)- applies shall he determined 21. as providcd in section 211)3, except that- 22 `~-(-4~)- if such decedent owned -(-within the meaning 23 of ~ S-(II)~ at the time of his death 4-0 percent 24 or more of the total combined ~ot4ng power of all 1248 PAGENO="0097" 77 1 classes of stork eetitled to ~ete of a foreign eorperation~ 2 said 3 ~-~(-2-)- if aneb deeedent owned -(within the mean- 4 ing of section Q~8-fa~-~ or is considered to have owned 5 -(-by applying the ownership rofes of section ~8-fb3-3-~ 6 a~ the time of his dcatb~ more than ~ø percent of the 7 total combined voting power of all classes of stock en- 8 titled to vote of such foreign eorporation~ 9 then that p oportion of the fair market value of the stock of 10 such foreign corporation owned -(-within the meaning of see- 11 tien ~58-(a))- by such decedent at the time of his doath~ 12 which the fair market value of any assets owned by such for- 13 eign corporation and sitnated in the Tnited &ates, at the time 14 of his death, bears to the tend fair market value of all assets 15 owned by such foreign corporation at the time of his death~ 16 shall be included in the gross estate of such deeedent 3~-er 17 pmposes of the preceding sentenee~ a decedent shall be 18 treated as owning stock of a foreign corporation at the time 19 of his death i4~ at the time of a transfer~ by trust or otherwise, 20 within the meaning of sections 2035 to 2~3S; inclusi-ve~ he 21 owned such stock7 22 1L(.c3~ ~JLEDITS.-The ton imposed by subsection -(-a-)- 23 shall be credited with the amounts determined in accordance 24 with section 24Q2~ 1249 71-297 0-67-pt. 2-7 PAGENO="0098" 78 1 ~{d)- EXQ~E1E'TION ~ LO~ OI~ OI~IzEN~llIr ~ei~ Cnn 2 ~p*i~ C&u~n~. Subsection -fa)- tha44 not apply to the trans 3 for of the estate of a decedent whose less of United States 4 citizenship resiil~ted from the application of section 301~ ~b)~ 5 ~50~ or ~&5 of the Immigration on4 ~atior~ality 4et~ as 6 amended -(-8 U.s.c. 1401 (b), 4482, or 7 1~4e3- BURDEN o~ Pnooi~ 4f the Secretary or his dole- 8 gate cstabhshes that itlO i~e&sonable to believe that an ind4- 9 vidual's loss of United States eitizcnship would, but for this 10 seetion~ result it~ a substantial reduction in the estate~ in- 11 heritanee~ legaey~ and succession tssEee in respect of the 12 transfer of his estate, the burden of proving that sueh loss of 13 citizenship did not lowe for one of its principal purposes the 14 avoidance of taxes under this subtitle or subtitle A shall be 15 on the executor of sueh individuai½~ estate~ 16 "SEC 240& APPLICATION O~ PRE-1967 ESTATE TAX PRO- 17 VISIONS. 18 %~3.. J~~osITI~ or~ Monn BURDENSOME !I!*~ 19 Fonnie~ Qou~wv. Whenever the President finds that 20 "(1) under the lawe of any foreign country, eon- 21 sidering the tax system of snob foreign country, a more 22 burdensome tax is irn~osed by snob foreign country on 23 ~ transfer of estates of decedents who were citizens of 24 the United States and net residents of sushi foreign 25 eountry than the tax in~pose4 by this subchapter en the 1250 PAGENO="0099" 79 j. transfer of estates of deccdcnts who were residents of 2 sneh foreign country, 3 ~-(-~2-)- sueh foreign eotmtry~ when requested by the 4 Tnited States to filE) so~ boo riot aeted to revise or reduce 5 sneh tan so that it is no mere burdensome than the tan 6 imposed by this subchapter on the transfer of estates 7 of deecdents who were residents of srieh foreign eountry~ 8 and 9 ~-E~* it is in the puldie interest to apply pre 19(37 10 tan pro-visions in accordaEnee with this section to the 11 transfer of estates of decedents who were residents of 12 sueh foreign country, 13 the President shall proclaim that the tan on the transfer of 14 the estate of every decedent who was a resident of sueh for- 15 eign country at the time of his death shall, in the ease of 16 decedents dying after the date of sash proclamation, be 17 determined under this euhehapter without regard to amend- 18 mcnte made to sections ~4{4 -(~reIatinig to tan imposed), 19 21-02 -(-relating to eredit~ against tan-)-~ 24~6 -(-relating to 20 tenable estate)-~ and 6018 -(relating to estate tan returns) 21 on or after the date of enactment of this section; 22 "-fb3- ALLEVIATJ0~ ei~ Monn BunDENeo1~m 23 Whenever the President i4nflo that the laws of any foreign 24 eountr~' with respect to whieh the President has made a proc 1251 PAGENO="0100" 80 .1 4amatien OH4er S ~eet±on ~a~)- have been modified so that 2 the ta~ on the transfer of estates of decedents who were 3 eitisens of the T4nited States and not residents of suel+ 4 foreign eoontry is no longer mere burdensome than the 5 ta~ ira-posed by this subehapter on the transfer of estates 6 of `~deeedcnts who were residents of such foreign country, 7 lie sht4l proehiim that the ta~ on the transfer of the estate 8 of every decedent who was a resident of such foreign coon- 9 try at the time of his death shall, h~ the ease of deeedee4a 10 dying after the date of such proelamation~ be determined 11 under this subchapter without regard to subseetien -fa)- 12 1~4~ ~ eja Co~REss REQ[TIREB-No 13 preelamati:on shall be issued by the 4~resident pursuant to 14 this section unkss~ at least ~Q days prier to such proelanra 15 tion~ he has notified the Senate and the House of ~Repre 16 scntati~es of his intention to issue such proclamation. 17 1Lfd)~ IMPLEMENTATI&N B-~ L~HGULATJO~S. The See- 18 retary or his delegate shall prescribe such regulations as may 19 be necessary or appropriate to implcmen1~ this seetiora~!. 20 ~fg)- ESTATE T~* ~E~uiu~s.-Iktragraph -(-2-)- of see- 21 than 43018 (a) elating to estates of nonresidents not eiti- 22 ~ens)- is amended by striking out ~$2~000~ and inserting in 23 lieu thereof ~-$30,000~ 24 ~fh-)- CLERIc~ i~u~p&-The table of sections for 25 subchapter B of ehapter 14 -(relating to estates of nonresi- 1252 PAGENO="0101" 81 1 dents ~et eitizcna) is amcnckd by adding at the ~n4 thoreo~ 2 thefollowing: ~IO~T Expat~riation ~e e~e44 4~* ~.See 5~O& Application e4 p~e49~ e~e ~* provi3iono~ a -(43- EFFECTIVE PATE. The amendments mack by this 4 section shall apply wish respect to estates of dccedents dying 5 after the d~te of the enactment of this 4et 6 S~GS 9 ~AX ON GIFTS O~ NONRESIDENTS NO~ CITIZENS. 7 -(a)- IMPOSITION OF T~x~ Subsection -(a)- of section 8 2~5Oi -(-relating to general ru4e for imposition of ta4 is 9 amended to read as follows-~ 10 ~-(a)- TAXABLE TRANSFERS. ii. ~-(-1) OENERAL f~ULE-For the calendar year 12 1955 and eaeh calendar year thereafter a ta~ computed 13 as pro~4ded in section 25O2-~ is hereby imposed on the 14 transfer of property by gift during snek ealcndar year by 15 any individual~ resident or nonresident. 16 "(2) TRANSFERS OF INTANGIBLE PROPERTY.- 17 Except as provided in paragmph -f&)-~ paragraph -(43- 18 shall net apply to the transfer of intangible property by 19 a nonresident not a citizen of `the United States. 20 "-(3) ExcEPTIo~s~-~Paragraph -f23- shall nt 21 apply in the ease of a donor who at any time afte~ 22 March 8 1985~ and within the 10 year period ending 1253 PAGENO="0102" 82 1 with the date of transfer lest United States citizcnship 2 un1ess-~ 3 "(A) sueh 4onor~s Ists of United States eiti- 4 s~enship resulted from the application of section 5 301 (h)-~ ~5O~ or ~ of the Immigration ead Na- 6 tionulity Aet~ as amended .f8 U.S.C. 1401 (1))-~ 7 1482, ~ 148:7) ~ 8 "(B)- saeh loss 444 aet ha~e for one of its pm- 9 eipa~l purposes the avoidance of taxes under this 10 subtitle or sithtitle A~ 11 "(4) Buni~ o~ +~neo~-If the Seerctary or his 12 delegate establishes that it is reasonable to believe that 13 e~ individuaI~s loss of United States citizenship wouid~ 14 but for paragraph -(-33-y result in a substantial reduction 15 for the ealendor year in the taxes on the transfer of 16 property by g44t~ the burden of proving that sash loss 17 of citizenship 444 not have for one of its principal par- 18 peacs the avoidanec of taxes under this su43t1itle em subtitle 19 A shag be on snob individuaI.'~ 20 i?~ 0~Ei~2. Subsection -fb3- of see- 21 tien 2M I -(relating to sitas mule for stock in a eorporaticrn) 22 is amended to read as followe 23 "(b)- J~rANo~nu~r~ rno~r~ns~-For purposes of this 24 thapter~intheeaseofanonrcsidcntnotacjtizcnefthe 1254 PAGENO="0103" 83 1 United States who is exeepted ffeffl the application of section 2 25OF(~a) (2)- 3 ~-~-(-1)- shares of stock issued by a~ domcstic corpora 4 tion~ and 5 ~-f2)- debt obligations of- 6 a United States person, Of 7 B)ThUuitcdSStatcofanypolitical 8 anbd4~4sioa thereof~ ~ the District of Columbia, 9 which are owned by sueh nonresident shall be deemed to be 10 property situated within the -United States." 11 -(4 EFFECTIVE PATE. The amendments made by this 12 section shall apply with respect to the calendar year 11367 13 and a44 calendar years thereafter. 14 SECT 10. TREATY OBLIGATIONS. 15 ~o amendment made by this Act shal4 apply in any ease 16 where its applieation would be contrary to any treaty obilga 17 tien of the United States~ For purposes of the preceding 18 sentence, the extension of a benefit pre~44e4 by any amend- 19 meat made by this Act shall not he deemed to be contrary 20 to a treaty obligation of the United States. 21 SECTION 1. TABLE OF CONTENTS, ETC. 22 (a) TABLE OF CONTENTS.- Sec. 1. Table of contents, etc. (a) Table of contents. (b) Amendment of 1954 Code. 1255 PAGENO="0104" 84 TITLE I-FOREIGN INVESTORS TAX ACT Sec. 10L~. Source of income. (a) Interest. (b) Dividends. (c) Personal services. (d) Definitions. (e) Effective dates. Sec. 103. Nonresident alien individuals. (a) Tax on nonresident alien individuals. (b) Gross income. (c) Deductions. (d) Allowance of deductions and credits. (e) Beneficiaries of estates and trusts. (f) Expatriation to avoid tax. (g) Partial exclusion of dividends. (It) Withholding of tax on nonresident aliens. (i) Liability for withheld tax. (j) Declaration of estimated income tax by individuals. (k) Collection of income tax at sovrce on wages. (1) Definitions of foreign estate or trust. (vi) Conforming amendment. (n) Effective dates. Sec. 104. Foreign corporations. (a) Tax on income not connected with United States business. (b) Tax on income connected with United States business. (c) Withholding of tax on foreign corporations. (d) Dividends received from certain foreign corporations. (e) Dividends received from certain wholly-owned foreign subsid- iaries. (f) Distributions of certain foreign corporations. (g) Unrelated business taxable income. (It) Corporations subject to personal holding company tax. (i) Amendments with respect to foreign corporations carrying on in- surance business in United States. (j) Subpart F income. (k) Gain from certain sales or exchanges of stock in certain foreign corporations. (1) Declaration of estimated income tax by corporations. (vi) Technical amendments. (ii) Effective dates. Sec. 105. Special tax provisions. (a) Income affected by treaty. (b) Adjustment of tax because of burdensome or discriminatory for- eign taxes. (c) Clerical amendments. (d) Effective date. (e) Elections by nonresident United States citizens who are subject to foreign community property laws. (f) Presumptive date of payment for tax withheld under chapter 3. 1256 PAGENO="0105" 85 TITLE I-FOREIGN INVESTORS TAX ACT-Contiivued Sec. 706. Foreign taco credit. (a) Allowance of credit to certain nonresident aliens and foreign cor- porat one. (b) Alien residents of the United States or Puerto Rico. (c) Foreign taco credit in respect of interest received from foreign subsidiaries. Sec. 707. Amendments to preserve existing law on deductions vnder section 931. (a) Deductions. (b) Effective date. Sec. 108. Estates of nonresidents not citizens. (a) Rate of taco. (b) Credits against taco. (c) Property within the United States. (d) Property without the United States. (e) Definition of taxable estate. (f) Special methods of computing tax. (g) Estate taco returns. (h) Clerical amendment. (i) Effective date. Sec. 109. Taco on gifts of nonresidents not citizens. (a) Imposition of tax. (b) Transfers in general. (c) Effecti've date. Sec. 110. Treaty obligations. TITLE H-OTHER AMENDMENTS TO INTERNAL REVENUE CODE Sec. 201. Application of Investment Credit to Property Used in Posses- sions of the United States. (a) Property ttsed by domestic corporations, etc. (b) Effective date. Sec. 2012. Deduction of medical expenses of individuals age 65 or over. (a) Repeal of amendments made by social security amendments of 1965. (B) Cost of medical insurance. (c) Effective date. Sec. 203. Basis of property received on liquidation of sub8idiary. (a) Definition of purchase. (b) Period of acquisition. (c) Distribution of installment obligations. (d) Effective dates. Sec. 204. Transfers of stock and securities to corporations controlled by transferors. (a) Transfers to investment companies. (b) Effective date. 1257 PAGENO="0106" 86 TiTLE Il-OTHER AMENDMENTS TO INTERNAL REVENUE CODE-Continued Sec. 205. Minimuzm amount treated as earned income for retirement plans of certain self -employed individuals. (a) Increase to $6fJOO. (b) Effective date. Sec. 206. Treatment of certain income of authors, inventors, etc., as earned income for retirement plan purposes. (a) Income from disposition of property created by taxpayer. (b) Effective date. Sec. 207. Exclusion of certain rents from personal holding company in- come. (a) Rents from leases of certain tangible personal property. (b) Technical amendments. (c) Effective date. Sec. 208. Percentage depletion rate for certain clay bearing alumina. (a) 23 percent rate. (b) Treatment processes. (e) Effective date. Sec. 209. Percentage depletion rate for clam and oyster shells. (a) 15 percent rate. (b) Effective date. Sec. 210. Sintering and burning of shale, clay, and slate used as light- weight aggregates. (a) Treatment processes. (b) Effective date. Sec. 211. Straddles. (a) Treatment as slwrt-ter,m capital gain. (b) Effective date. Sec. 212. Tax treatment of per-unit retain allocations. (a) Tax treatment of cooperatives. (b) Tax treatment by patrons. (c) Definitions. (d) Information reporting. (e) Effective dates. (f) Transition ru/c. Sec. 213. Excise tax rate on ambulances and hearses. (a) Classification as automobiles. (b) Effective date. Sec. 214. Applicability of exclusion from interest equalization tax of cer- tain loans to assure raw materials sources. (a) Exception to exclusion. (b) Technical amendments. (c) Effective date. Sec. 215. Exclusion from interest equalization tax for certain acquisitions by insurance companies. (a) New companies and companies operating in former less developed countries. (b) Effective date. 1258 PAGENO="0107" 87 TITLE lb-OTHER AMENDMENTS TO INTERNAL REVENUE CODE-Continued Sec. 216. Exclusion from interest equalization tax of certain acquisitions by foreign branches of domestic banks. (a) Authority for modification of executive orders. (b) Effective date. TITLE Ill-PRESIDENTIAL ELECTION C~AMPAIGN FUND ACT Sec. 301. Short title. Sec. 302. Authority for designation of $1 of income tax payments to presi- dential election campaign fund. Sec. 303. Presidential election campaign fund. (a) Establishment. (b) Transfers to the fund. (c) Payments from fund. (d) Transfers to general fund. Sec. 304. Establishment of advisory board. Sec. 305. Appropriations authorized. TiTLE IV-MISCELLANEO 175 PROVISiONS Sec. 401. J'reasu'ry notes payable in foreign currency. Sec. 402. Reports to clarify to natwnal debt and tax structure. Sec. 403. Coverage of expenses of certain drugs under aupplementary medical insurance benefits. 1 (b) AMENDMENT OF 1954 C0DE.-Except as otherwise 2 expressly provided, wherever in titles I, II, and III, of this 3 Act an amendment or repeal is expressed in terms of an 4 amendment to, or repeal of, a section or other provision, the 5 reference is to a section or other provision of the Internal 6 Revenue (lode of 1954. 7 TITLE I-FOREIGN INVESTORS 8 TAX ACT 9 SEC. 101. SHORT TITLE. 10 This title may be cited as the "Foreign Investors Tax Act ii of 1966". 12 SEC. 102. SOURCE OF INCOME. 13 (a) INTEREST.- 14 (1) (A) Subparagraph (A) of section 861(a) (1) PAGENO="0108" 88 1 (relating to interest from sources within the United 2 States) is amended to read as follows: 3 "(A) interest on amounts described in sub- 4 section (c) received by a nonresident alien mdi- 5 vidual or a foreign corporation, if such interest is 6 not effectively connected with the conduct of a trade 7 or business within the United States,". 8 (B) Section 861 is amended by adding at the end 9 thereof the following new subsection: 10 "(c) INTEREST ON DEPOSITS, ETC.-For purposes of 11 subsection (a) (1) (A), the amounts described in this sub- 12 section are- 13 "(1) deposits with persons carrying on the bank- 14 ing business, - 15 "(2) deposits or withdrawable accounts with say- 16 ings institutions chartered and supervised as savings 17 and loan or similar associations under Federal or State 18 law, but only to the extent that amounts paid or credited 19 on such deposits or accounts are deductible under section 20 591 (determined without regard to section 265) in corn- 21 puting the taxable income of such institutions, and 22 "(3) amounts held by an insurance company under 23 an agreement to pay interest thereon. 24 Effective with respect to amounts paid or credited after 1260 PAGENO="0109" 89 1 December 31, 1971, subsection (a) (1) (A) and this sub- 2 section shall cease to apply." 3 (2) Section 861 (a) (1) is amended by striking out 4 subparagraphs (B) and (C) and inserting in lieu 5 thereof the following: 6 "(B) intere.ct received from a resident alien 7 individual or a domestic corporation, when it is 8 shown to the satisfaction of the Secretary or his dele- 9 gate that less than 20 percent of the gross income 10 from all sources of such individual or such corpora- 11 tion has been derived from sources within the United 12 States, as determined under the provisions of this 13 part, for the 3-year period ending with the close of 14 the taxable year of such individual or such corpora- 15 tion preceding the payment of such interest, or far 16 such part of such period as may be applicable, 17 "(C) interest received from a foreign corpo- 18 ration `(other than interest paid or credited after 19 December 31, 1971, by a domestic branch of a 20 foreign corporation, if such branch is engaged in 21 the commercial banking business), when it is shown 22 to the satisfaction of the Secretary or his delegate that 23 less than 50 percent of the gross income from all 24 sources of such foreign corporation for the 3-year 1261 PAGENO="0110" 90 1 period ending with the close of its taxable year pre- 2 ceding the payment of such interest (or for such part 3 of such period as the corporation has been in exist- 4 ence) was effectively connected with the conduct of 5 a trade or business within the United States, 6 "(D) in the case of interest received from a 7 foreign corporation (other than interest paid or 8 credited after December 31, 1971, by a domestic 9 branch of a foreign corporation, if such branch 10 is engaged in the commercial banking business) ~O 11 percent or more of the gross income of which from 12 all sources for the 3-year period ending with the 13 close of its taxable year preceding the payment of 14 such interest (or for such part of such period as 15 the corporation has been in existence) was effectively 16 connected with the conduct of a trade or business 17 within the United States, an amount of such interest 18 which bears the same ratio to such interest as the 19 gross income of such foreign corporation for such 20 period which was not effectively connected with the 21 conduct of a trade or business within the United 22 States bears to its gross income from all sources, 23 "(E) income derived by a foreign central bank 24 of issue from bankers' acceptances, and 1262 PAGENO="0111" 91 I "(F) interest on deposits with a foreign branch 2 of a domestic corporation or a domestic partnership. 3 if such branch is engaged in the commercial banking 4 business." 5 (3) Section 861 (relating to income from sources 6 within the United States) is amended by adding after 7 subsection (c) (as added by paragraph (1) (B)) the 8 following new subsection: 9 "(d) SPECIAL RULES FOR APPLICATION OF PARA- 10 GRAPHS (1) (B), (1) (C), (1j(D), AND (~2) (B) OF 11 SUBSECTION (a).- 12 "(1) NEW ENTITIES.-For purposes of paragraphs 13 (1) (B), (1) (C), (1) (D), and (2) (B) of subsection 14 (a), if the resident alien individual, domestic corpora- 15 tion, or foreign corporation, as the case may be, has no 16 gross income from any source for the 3-year period 17 (or part thereof) specified, the 20 percent test or the .50 18 percent test, as the case may be, shall be applied with 19 respect to the tc&'cable year of the payor in which payment 20 of the interest or dividends, as the case may be, is made. 21 "(2) TRANSITION RULE.-For purposes of para- 22 graphs (1) (C), (1) (D), and (2) (B) of subsection 23 (a), the gross income of the foreign corporation for 24 any period before the first taxable year beginning after 1263 PAGENO="0112" 92 1 December 31, 1966, which is effectively connected with 2 the conduct of a trade or business within the United 3 States is an amount equal to the gross income for such 4 period from sources within the United States." 5 (4) (A) Section 895 (relating to income derived 6 by a foreign central bank of issue from obligations of 7 the United States) is amended to read as follows: 8 "SEC. 895. INCOME DERIVED BY A FOREIGN CENTRAL 9 BANK OF ISSUE FROM OBLIGATIONS OF 10 THE UNITED STATES OR FROM BANK DE. 11 POSITS. 12 "Income derived by a foreign central bank of issue from 13 obligations of the United States or of any agency or in- 14 strumentality thereof (including beneficial interests, participa- 15 tions, and other instruments issued under section .302(c) of 16. the Federal National Mortgage AsAociation Charter Act 17 (12 U.S.C. 1717)) which are owned by such foreign central 18 bank of issue, or derived from interest on deposits with persons 19 carrying on the banking business, shall not be included in gross 20 income and shall be exempt from taxation under this subtitle 21 unless such obligations or deposits are held for, or used in con- 22 nection with, the conduct of commercial banking functions or 23 other commercial activities. For purposes of the preceding 24 sentence the Bank for International Settlements shall be 25 treated as a foreign central bank of issue." 1264 PAGENO="0113" 93 1 (B) The table of sections for subpart C of part 11 2 of subchapter N of chapter 1 is amended by striking out 3 the item relating to section 895 and inserting in lieu 4 thereof the following: "Sec. 895. Income derived by a foreign central bank of issue from obligations of the United States or from bank deposits." 5 (b) DIvIDENDS.-Section 861 (a) (2) (B) (relating to 6 dividends from sources within the United States) is' amended 7 to read as follows: 8 "(B) from a foreign corporation unless less 9 than 50 percent of the gross income from all 10 sources of such foreign corporation for the 3-year 11 period ending with the close of its taxable year pre- 12 ceding the declaration of such dividends (or for such 13 part of such period as the corporation has been in 14 existenëe) was effectively connected with the con- 15 duct of a trade or business within the United States; 16 but only in an amount which bears the same ratio to 17 such dividends as the gross income of the corpora- 18 tion for such period which was effectively con- 19 nected with the conduct of a trade or business within 20 the United States bears to its gross income from all 21 sources; but dividends (other than dividends for 22 which a deduction is alloevable under section 23 245(b)) from a foreign corporation shall, for pur- 1265 71-297 0-67-pt. 2-8 PAGENO="0114" 94 1 poses of subpart A of part III (relating to foreign 2 tax credit), be treated as inconie from sources with- 3 out the United States to the extent (and only to the 4 extent) exceeding the amount which is 100/85ths 5 of the amount of the deduction allowable under sec- 6 tion 245 in respect of such dividend$, or". 7 (c) PERSONAL SERVWES -Section 861 (a) (3) (C) 8 (ii) (relating to income from personal services) is amended 9 to read as follows: 10 "(ii) an individual who is a citizen or 11 resident of the United States, a domestic part-' 12 nership, or a domestic corporation, if such 13 labor or services are performed for an office 14 or place of business maintained in a foreign 15 country or in a possession of the United States 16 by such individual, partnership, or corpora- 17 tion." 18 (d) DEFINITIONS-Section 864 (relating to defini- 19 tions) is amended- 20 (1) by striking out "For purposes of this part," 21 and inserting in lieu thereof 22 "(a) SALE, ETC.-For purposes of this part,"; and 1266 PAGENO="0115" 95 1 (2) by adding at the end thereof the following 2 new subsections: 3 "(b) TRADE OR BUSINE&S WITHIN THE UNiTED 4 STATES.-FOr purposes of this part, part II, and chapter 3, 5 the term `trade or business within the United States' in- 6 cludes the performance of personal services within the United 7 States at any time within the taxable year, but does not 8 include- 9 "(1) PERFORMANCE OF PERSONAL SERVICES FOR 10 FOREIGN EMPLOYER .-T he performance of personal 11 services- 12 "(A) for a nonresident alien individual, 13 foreign partnership, or foreign corporation, not en- 14 gaged in trade or bwsiness within the United States, 15 or 16 "(B) for an office or place of business main- 17 tamed in a foreign country or in a possession of the 18 United States by an i'ndividuai who is a citizen or 19 resident of the United States or by a domestic 20 partnership or a domestic corporation, 21 by a nonresident alien individual temporarily present in 22 the United States for a period or periods not exceeding 1267 PAGENO="0116" 96 1 a total of 90 days during the taxable year and whose 2 compensation for such services does not exceed in the 3 aggregate $3,000. 4 "(2) TRADING IN SECURITIES OR COMMODITIES.- 5 "(A) STOCKS AND SECURITIES.- 6 "(i) IN GENERAL.-Trading in stocks or 7 securities through a resident broker, cominiesion 8 agent, custodian, or other independent agent. 9 "(ii) TRADING FOR TAXPAYER'S OWN 10 ACCOUNT.-Trading in stocks or securities for 11 the taxpayer's own account, whether by the tax- 12 payer or his employees or through a resident 13 broker, commi$sion agent, custodian, or other 14 agent, and whether or not any such employee or 15 agent has discretionary authority to make deci- sions in effecting the transactions. This clav~e 17 shall not apply in the case of a dealer in stocks 18 or securities, or in the case of a corporation 19 (other than a corporation which is, or but for 20 section 542(c) (7) or 543(b) (1) (C) would be, 21 a personal hioldiçng company) the principal busi- 22 ness of which is trading in stocks or securities 23 for its own account, if its principal office is in 24 the United States. 1268 PAGENO="0117" 97 1 "(B) COMMoDITIES.- 2 "(i) IN GENERAL.-Trading in commodi- 3 ties through a resident broker, commission agent, 4 custodian, or other independent agent. 5 "(ii) TRADiNG FOR TAXPAYER'S OWN 6 ACCOUNT.-~Trading in commodities for the~ 7 taxpayer's own account, whether by the tax- 8 payer or his employees or through a resident 9 broker, commission agent, custodian, or other 10 agent, and whether or not any such employee 11 or agent has discretionary authority to make 12 decisions in effecting the transactipus. This 13 clause shall not apply in the case of a dealer in 14 commodities. 15 "(iii) LIMITAT10N.-Clauses (i) and (ii) 16 shall apply only if the commodities are of a kind 17 customarily dealt in on an organized commodity 18 exchange and if the transaction is of a kind 19 customarily consummated at such place. 20 "(C) LIMITATION.-Subparagraphs (A) (i) 21 and (B) (i) shall apply only if, at no time during the 22 taxable year, the taxpayer has an office or other fixed 23 place of business in the United States through which 1269 PAGENO="0118" 98 1 or by the direction of which the transactions in 2 stocks or securities, or in commodities, as the case 3 may be, are effected. 4 "(c) EFFECTiVELY CONNECTED INCoME, ETC.- 5 "(1) GENERAL RULE.-For purposes of this title- 6 "(A) In the case of a nonresident alien mdi- 7 vidual or a foreign corporation engaged in trade or 8 business within the United States during the taxable 9 year, the rules set forth in paragraphs (2), (3), 10 and (4) shall apply in determining the income, 11 gain, or loss which shall be treated as effectively con- 12 nected with the conduct of a trade or business within 13 the United States. 14 "(B) Except as provided in section 871(d) or 15 sections 882(d) and (e), in the case of a nonresi- 16 dent alien individual or a foreign corporaiion not 17 engaged in trade or business within the United States 18 during the taxable year, no income, gain, or loss shall 19 be treated as effectively connected with the conduct 20 of a trade or business within the United States. 21. "(2) PERIODICAL, ETC., INCOME FROM SOURCES 22 WITHIN UNITED STATES-FACTORS..-In determining 23 whether income from sources within the United States 24 of the types described in section 871 (a) (1) or section 25 881(a), or whether gain or loss from sources within 1270 PAGENO="0119" 99 1 the United States from the sale or exchange of capital 2 assets, is effectively connected with the conduct of a 3 trade or business within the United States, the factors 4 taken into account shall, include whether- 5 "(A) the income, gain, or loss is derived from 6 assets used in or held for use in the conduct of such 7 trade or business, or 8 "(B) the activities of such trade or business 9 were a material factor in the realization of the in- 10 come, gain, or loss. 11 In determining whether an asset is used in or held for 12 use in the conduct of such trade or business or whether 13 the activities of such trade or business were a material 14 factor in realizing an item of income, gain, or loss, due 15 regard shall be given to whether or not such asset or 16 such income, gain, or loss was accounted for through 17 such trade or business. In applying this paragraph and 18 paragraph (4), interest referred to in section 861 (a) 19 (1) (A) shall be considered income from sources within 20 the United States. 21 "(3) OTHER INCOME FROM SOURCES WITHIN 22 UNITED STATES.-A11 income, gain, or loss from sources 23 within the United States (other than income, gain, or 24 loss to which paragraph (2) applies) shall be treated 1271 PAGENO="0120" 100 1 as effectively connected with the conduct of a trade or 2 business within the United States. 3 "(4) INCOME FROM SOURCES WiTHOUT UNITED 4 STATES.- 5 "(A) Except as provided in subparagraphs 6 (B) and (C), no income, gain, or loss from sources 7 without the United States shall be treated as effec- 8 tively connected with the conduct of a trade or 9 business within the United States. 10 "(B) Income, gain, or loss from sources with- 11 out the United States shall be treated as effectively 12 connected with the conduct of a trade or business 13 within the United States by a nonresident alien 14 individual or a foreign corporation if such person 15 has an office or other fixed place of business within 16 the United States to which such income, gain, or 17 loss is attributable and such income, gain, or loss- 18 "(i) consists of rents or royalties for the 19 use of or for the privilege of using intangible 20 property described in section 862(a) (4) (in- 21. eluding any gain or loss realized on the sale of 22 such property) derived in the active conduct 23 of svch trade or business; 24 "(ii) consists of dividends or interest, or 1272 PAGENO="0121" 101 1 gain or loss from the sale or exchange of stock 2 or notes, bonds, or other evidences of indebted- 3 ness, and either is derived in the active conduct 4 of a banking, financing, or similar business 5 within the United States or is received bq a 6 corporation the principal business of which is 7 trading in stocks or securities for its own ac- 8 count; or 9 "(iii) is derived from the sale (without 10 the United States) through such of/ice o~ other 11 fixed place of business of personal property de- 12 scribed in section 1221(1), except that this 13 clause shall not apply if the property is sold for 14 use, consumption, or disposition outside the 15 United States and an of/ice or other fixed place of 16 business of the taxpayer outside the United States 17 participated materially in such sale. 18 "(C) In the case of a foreign corporation tax- 1. able under part I of subchapter L, any income from 20 sources without the United States which is attrib- 21 utable to its United States business shall be treated 22 as effectively connected with the conduct of a trade 23 or business within the United States. 24 "(D) No income from sources without the 1273 PAGENO="0122" 102 1 United States shall be treated as effectively connected 2 with the conduct of a trade or business within the 3 United States if it either- 4 "(i) consists of dividends, interest, or 5 royalties paid by a foreign corporation in which 6 the taxpayer owns (within the meaning of 7 section 958(a)), or is considered as owning 8 (by applying the ownership rules of section 9 958(b)), more than 50 percent of the total 10 combined voting power of all classes of stock 11 entitled to vote, or 12 "(ii) is subpart F income within the mean- 13 ing of section 952(a). 14 "(5) RULES FOR APPLICATION OF PARAGRAPh 15 (4) (B) .-For purposes of subparagraph (B) of para- 16 graph (4)- 17 "(A) in determining whether a nonresident 18 alien individual or a foreign corporation has an of- 19 flee or other fixed place of business, an of/ice or other 20 fixed place of business of an agent shall b2 disre- 21 garded unless such agent (i) has the authority to ne- 22 gotiate and conclude contracts in the name of the 23 nonresident alien individual or foreign corporation 24 and regularly exercises that authority or has a stock 25 of merchandise from which he regularly fills orders 1274 PAGENO="0123" 103 1 on behalf of such individual or foreign corporation, 2 and (ii) is not a general commission agent, broker, 3 or other agent of independent status acting in the 4 ordinary course of his business, 5 "(B) income, gain, or loss shall not be con- 6 sidered as attributable to an office or other fixed 7 place of business within the United States unless such 8 office or fixed place of business is a material factor 9 in the production of such income, gain, or loss and 10 such of/ice or fixed place of business regularly carries on activities of the type from which such income, 12 gain, or loss is derived, and 13 "(C) the income, gain, or loss which shall be 14 attributable to an of/ice oi~ other fixed place of busi- 15 ness within the United States shall be the income, 16 gain, or loss properly allocable thereto, but, in the 17 case of a sale described in clause (iii) of such sub- 18 paragraph, the income which shall be treated as at- 19 tributable to an office or other fixed place of business 20 within the United States shall not exceed the income 21 which would be derived from sources within the 22 United States if the sale were made in the United 23 States." 24 (e) EFFECTIVE DATES.- 25 (1) The amendments made by subsections (a), 1275 PAGENO="0124" 104 1 (c), and (d) shall apply with respect to taxable years 2 beginning after December 31, 1966; except that in 3 applying section 864(c) (4) (B) (iii) of the Internal 4 Revenue Code of 1954 (as added by subsection (d)) 5 with respect to a binding contract entered into on or 6 before February 24, 1966, activities in the United 7 States on or before such date in negotiating or carrying 8 out such contract shall not be taken into account. 9 (2) The amendments made by subsection (b) 10 shall apply with respect to amounts received after Dc- 11 cember3l, 1966. 12 SEC. 103. NONRESIDENT ALIEN INDIVIDUALS. 13 (a) TAX ON NONRESIDENT ALIEN INDIVIDUALS.- 14 (1) Section 871 (relating to tax on nonresident 15 alien individuals) is amended to read as follows: 16 "SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS. 17 "(a) INCoME NOT CONNECTED TVITH UNITED 18 STATES BUSINESS-30 PERCENT TAX.- 19 "(1) INCOME OTHER THAN CAPITAL GAINS.- 20 There is hereby imposed for each taxable year a tax of 21 30 percent of the amount received from sources within 22 the United States by a nonresident alien individual as- 23 "(A) interest, dividends, rents, salaries, wages, 24 premiums, annuities, compensations, remunerations, 1276 PAGENO="0125" 105 emoluments, and other fixed or determinable annual 2 or periodical gains, profits, and income, 3 "(B) gains described in section 402(a) (2),. 4 403(a) (2), or 631 (b) or (c), and gains on transfers described in section 123~ made on or 6 before October 4, 1966, 7 "(0) in the case of bonds or other evidences of 8 indebtedness issued after September 28, 1965, 9 amounts which under section 1232 are considered as 10 gains from the sale or exchange of property which 11 is not a capital asset, and 12 "(D) gains from the sale or exchange after 13 October 4, 1966, of patents, copyrights, secret proc- 14 esses and formulas, good will, trademarks, trade 15 brands, franchises, and other like property, or of 16 any interest in any such property, to the extent sue/i 17 gains are from payments which are contingent on 18 the productivity, use, or disposition of the property 19 or interest sold or exchanged, or from paynu'nts 20 which are treated as being so contingent under sub- 21 section (e), 22 but only to the extent the amou~nt so received is not effec- 23 tively connected with the conduct of a trade or business 24 within the United States. 1277 PAGENO="0126" 106 1 "(2) GAPITAL GAINS OF ALIENS PRESENT IN THE 2 UNITED STATES 183 DAYS OR MORE.-In the case of a 3 nonresident alien individual present in the United States 4 for a period or periods aggregating 183 days or more 5 during the taxable year, there is hereby imposed for such 6 year a tax of 30 percc~nt of the amount by which his 7 gains, derived from sources within the United States, 8 from the sale or exchange at any time during such year 9 of capital assets exceed his losses, allocable to sources 10 within the United States, from the sale or exchange. at 11 any time during such year of capital assets. For pur- 12 poses of this paragraph, gains and losses shall be taken 13 into account only if, and to the extent that, they would 14 be recognized and taken into account if such gains and 15 losses were effectively connected with the conduct of a 16 trade or business within the United States, except that 17 such gains and losses s/tall be determined without regard 18 to section 1202 (relating to deduction for capital gains) 19 and such losses shall be determined without the benefits 20 of the capital loss carryover provided in section 1212. 21 Any gain or loss which is taken into account in deter- 22 mining the tax under paragraph (1) or subsection (b) 23 shall not be taken into account in determining the tax 24 under this paragraph. For purposes of the 183-day re- 25 quirement of this paragraph, a nonresident alien individ- 1278 PAGENO="0127" 107 1 ual not engaged in trade or business within the United 2 States who ha~ not established a taxable year for any 3 prior period shall be treated as having a taxable year 4 which is the calendar year. 5 "(b) INCOME CONNEC~PED WITH UNITED STATES 6 BUSiNESS-GRADUATED RATE OF TAX.- 7 "(1) iMPOSITION OF TAXi-A nonresident alien 8 individual engaged in trade or business within the 9 United States during the taxable year shall be taxable 10 as provided in section 1 or 1201(b) on his taxable income 11 which is effectively connected with the conduct of a trade 12 or business within the United States. 13 "(2) DETERMiNATION OF TAXABLE INCOME.-In 14 determining taxable income for purposes of paragraph 15 (1), gross income includes only gross income which is 16 effectively connected with the conduct of a trade or 17 business within the United States. 18 "(c) PARTiciPANTS 1N CERTAiN EXCHANGE OR 19 TRAINING PROGRAMS.-For purposes of this section, a non- 20 resident alien individual who (without regard to this sub- 21 section) is not engaged in trade or business within the 22 United States and who is temporarily present in the United 23 States as a nonimmigrant under subparagraph (F) or (J) 24 of section 101 (a) (15) of the Immigration and Nationality 25 Act, as amended (8 U.S.C. 1101(a) (15) (F) or* (J)), 1279 PAGENO="0128" 108 1 shall be treated as a nonresident alien individual engaged in 2 trade or business within the United States, and any income 3 described in section 1441 (b) (1) or (2) which is received 4 by such individual shall, to the extent derived from sources 5 within the United States, be treated as effectively connected 6 with the conduct of a trade or business within the United 7 States. 8 "(d) ELECTION TO TREAT REAL PROPERTY INCOME 9 AS INCOME CONNECTED WITH UNITED STATES Busi- 10 NESS.- 11 "(1) IN GENERAL.-A nonresident alien individ- 12 ual who during the taxable year derives any income- 13 "(A) from real property held for the produc- 14 tion of income and located ~n the United States, 15 or from any interest in such real property, in- 16 eluding (i) gains from the sale or exchange of such 17 real property or an interest therein, (ii) rents or 18 royalties from mines, wells, or other natural deposits, 19 and (iii) gains described in section 631 (b) or (c), 20 and 21 "(B) which, but for this subsection, would not 22 be treated as income which is effectively connected 23 with the conduct of a trade or business within the 24 United States, 25 may elect for such taxable year to treat all such incom 1280 PAGENO="0129" 109 I as income which `is effectively connected with the con- 2 duct of a trade or business within the United States. 3 In such case, such income shall be taxable as provided 4 in subsection (b) (1) whether or not such individual 5 is engaged in trade or business within the United States 6 during the taxable year. An election under this para- 7 graph for any taxable year shall remain in effect for 8 all subsequent taxable years, except that it may be re- 9 yoked with the consent of the Secretary or his delegate 10 with respect to any taxable year. 11 "(2) ELECTION AFTER REVOCATION.-If an elec- 12 tion has been made under paragraph (1) and such dee- 13 tion has been revoked, a new election may not be made 14 under such paragraph for any taxable year before the 15 5th taxable year u,hich begins after the first taxable 16 year for which such revocation is effective, unless the 17 Secretary or his delegate consents to such new election. 18 "(3) FOR1~I AND TIME OF ELECTION AND REVO- 19 CA TJON.-An (leetwn under JKtra,qraJ)li (1), and any 20 revocation of such an election, may be made only in 21 such manner and at such. time as the Secretary or his 22 delegate may by regulations prescribe. 23 "(e) GAINS FRmI SMILE OR EXCHANGE OF CERTAiN 24 INTANGIBLE PROPERTY.-F'Or purposes of subsection (a) 1281 71-297 O-67-pt. 2-9 PAGENO="0130" 110 1 (1) (D), and for purposes of sections 881 (a) (4), 1441(b), 2 and 1442(a)- 3 "(`1) PAYMENTS TREATED AS CONTINGENT ON 4 USE, ETC.-lf more than 50 percent of the gain for 5 any taxable year from the sale or exchange of any patent, 6 copyright, secret process or formula, good will, trade- 7 mark, trade brand, franchise, or other like property, or 8 of any interest in any such property, is from payments 9 which are contingent on the productivity, use, or dis- 10 * position of such property or interest, all of the gain for 11 the taxable year from the sale or exchange of such prop- 12 erty or interest shall be treated as being from payments 13 which are contingent on the productivity, use, or dispo- 14 sition of such property or interest. 15 "(2) SOURCE RULE.-In determining whether 16 gains described in subsection (a) (1) (D) and section 17 881(a) (4) are received from sources within the United 18 States, such gains shall be treated as rentals or royalties 19 for the use of, or privilege of using, property or an 20 interest in property. 21 "(f) CERTAIN ANNUITIES RECEIVED UNDER QUALI- 22 FlED PLANS.-For purposes of this section, gross income does 23 not include any amount received as an annuity under a quali- 24 fled annuity plan described in sectiin 403(a) (1), or from 1282 PAGENO="0131" 111 1 a qualified trust described in section 401(a) which. is exempt 2 from tax under section 501 (a), if- 3 "(1) all of the personal services by reason of which 4 such annuity is payable were either (A) personal serv- 5 ices performed outside the United States by an individual 6 who, at the time of performance of such personal serv- 7 ices, was a nonresident alien, or (B) personal services 8 described in section 864(b) (1) performed within the 9 United States by such individual, and 10 "(2) at the time the first amount is paid as such 11 annuity under such annuity plan, or by such trust, 90 12 percent. or more of the employees for whom contributions 13 or benefits are provided under such annuity plan, or t4 under the plan or plans of which such trust is a part, 15 are citizens or residents of the United States." 16 "(g) CRoss REFERENCES.- "(1) For tax treatment of certain amounts distributed by the United States to nonresident alien individuals, see section 402(a) (4). "(2) For taxation of nonresident alien individuals who are expatriate United States citizens, see section 877. "(3) For doubling of tax on citizens of certain foreign countries, see section 891. "(4) For adjustment of tax in case of nationals or resi- dents of certain foreign countries, see section 896. "(5) For withholding of tax at source on nonresident alien individuals, see section 1441. "(6) For the requirement of making a declaration of estimated tax by certain nonresident alien individuals, see section 6015(i)." 17 (2) Section 1 (relating to tax on individuals) is 1283 PAGENO="0132" 112 1 amended by redesignating subsection (d) as subsection 2 (e), and by inserting after subsection (c) the follow- 3 in9 new subsection: 4 "(d) NONRESIDENT ALIENS.-In the case of a non- 5 resident alien individual, the tax imposed by subsection (a.) 6 shall apply only as provided by section 871 or 877." 7 (b) GROSS iNCOME.- 8 (1) Subsection~ (a) of~ section 872 (relating to 9 gross income of nonresident alien individuals) is 10 amended to read as follows: 11 "(a) GENERAL RULE.-In th~ case of a nonresident 12 alien individnal, gross income includes only- 13 "(1) gross income which is derived from sources 14 within the United States and which is not effectively 15 connected with the conduct of a trade or business within 16 the United States, and 17 "(2) gross income which is effectively connected 18 with the conduct of a trade or business within the 19 United States." 20 (2) Subparagraph (B) of section 872 (b) (3) (re- 21 lating to compensation. . of participants m certain ex- 22 change or training programs) is amended by striking 23 out "byj a domestic corporation" and inserting in lieu 24 thereof "lnj a domestic corporation, a domestic partner-. 1284 PAGENO="0133" 113 1 ship, or an individual who is a citizen or resident of the 2 United States". 3 (3) Subsection (b) of section 872 (relating to 4 exclusions from gross income) is amended by adding at 5 the end thereof the following new paragraph: 6 "(4) CERTAIN BOND INCOME OF RESIDENTS OF 7 THE RYUKYU ISLANDS OR THE TRUST TERRITORY OF 8 THE PACIFIC ISLANDS.-Income derived by a nonresi- 9 dent alien individual from a series E or series H United 10 States savings bond, if such individual acquired such 11 bond while a resident of the Ryukyu Islands or the Trust 12 Territory of the Pacific Islands." 13 (c) DEDUCTIONS.- 14 (1) Section 873 (relating to deductions allowed to 15 nonresident alien individuals) is amended to read as 16 follows: 17 "SEC. 873. DEDUCTIONS. * 18 "(a) GENERAL RULE.-In the case of a nonresident 19 alien individual, the deductions shall be allowed only for 20 purposes of section 871 (b) and (except as provided by sub- 21 section (b)) only if and to the extent that they are con- 22 nected with income which is effectively connected with the 23 conduct of a trade or business within the United States; and 1285 PAGENO="0134" 1.14 1 the proper apportionment and allocation of the deductions 2 for this purpose shall be determined as provided in regula- 3 tion.s prescribed by the Secretary or his delegate. 4 . "(b) ExCEPTIONS.-The following deductions shall be 5 allowed whether or not they are connected with income 6 which is effectively connected with the conduct of a trade 7 or business within the United States: 8 "(1) LOSSES.-The deduction, for losses of prop- 9 erty not connected with the trade or business if arising 10 from certain casualties or theft, allowed by section 11 165(c) (3), but only if the loss is of property located 12 within the United States. 13 "(2) CHARITABLE CONTRIBUTIONS.-The deduc- 14 tion for charitable contributions and gifts allowed by 15 section 170. 16 "(3) PERSONAL EXEMIPTION.-The deduction for 17 personal exemptions allowed by section 151, except that 18 in the case of a nonresident alien individual who is not a 19 resident of a contiguous country only one exemption 20 shall be allowed under section 151. 1286 PAGENO="0135" 1~1b 1 "(c) CROSS REFERENCES.- "(1) For disallowance of standard deduction, see sec~ tion 142(b) (1). "(2) For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b) (1)." 2 (2) Section 154(3) (relating to cross references 3 in respect of deductions for personal exemptions) is 4 amended to read as follows: "(3) For exemptions of nonresident aliens, see section 873(b) (3)." 5 (d) ALLOWANCE OF DEDUCTIONS AND CREDITS.- 6 Subsection (a) of section 874 (relating to filing of returns) is amended to read as follows: 8 "(a) RETURN PREREQUISITE TO ALLOWANCE.-A 9 nonresident alien individual shall receive the benefit of the 10 deductions and credits allowed to him in this subtitle only i~ by filing or causing to be filed with the Secretary or his 12 delegate a true and accurate return, in the manner prescribed 13 in subtitle F (sec. 6001 and following, relating to procedure 14 and administration), including therein all the information 15 which the Secretary or his delegate may deem necessary 16 for the calculation of such deductions and credits. This sub- 1287 PAGENO="0136" 116 1 section shall not be construed to deny the credits provided 2 by sections 31 and 32 for tax withheld at source or the credit 3 provided by section 39 for certain uses of gasoline and 4 lubricating oil." 5 (e) BENEFICIARIES OF ESTATES AND TRUSTS.- 6 (1) Section 875 (relating to partnerships) is 7 amended to read as follows: 8 "SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES 9 AND TRUSTS. 10 "For purposes of this subtitle- 11 "(1) a nonresident alien individual or foreign. cor- 12 poration shall be considered as being engaged in a trade 13 or business within the United States if the partnership 14 of which such individual or corporation is a member is 15 80 engaged, and 16 "(2) a nonresident alien individual or foreign cor- 17 poration which is a beneficiary of an estate or trust which 18 is engaged in any trade or business within the United 19 States shall be treated as being engaged in such trade or 20 business within the United States." 21 (2) The table of sections for subpart A of part II 22 of subchapter N of chapter 1 is amended by striking out 23 the item relating to section 875 and inserting in lieu 24 thereof the following: "Sec. 875. Partnerships; beneficiaries of estates and trusts." 1288 PAGENO="0137" 117 1 (f) EXPATRIATION To A VOID TAX.- 2 (1) Subpart A of part II of subchapter N of chap- 3 ter 1 (relating to nonresident alien individuals) is 4 amended by redesignating section 877 as section 878, 5 and by inserting after section 876 the following new 6 section: 7 "SEC. 877. EXPATRIATION TO AVOID TAX. 8 "(a) IN GENERAL.-E very nonresident alien individual 9 who at any time after March 8, 1965, and within the 10- 10 year pericfd immediately preceding the close of the taxable 11 year lost United States citizenship, unless such loss did not 12 have for one of its principal purposes the avoidance of taxes 13 under this subtitle or subtitle B, shall be taxable for such 14 taxable year in the manner provided in subsection (b) if the 15 tax imposed pursuant to such subsection exceeds the tax 16 which, without regard to this section, is imposed pursuant to 17 section 871. 18 "(b) ALTERNATIVE TAx.-A nonresident alien individ- 19 ual described in subsection (a) shall be taxable for the tax- 20 able year as provided in section 1 or section 1201 (b), 21 except that- 22 "(1) the gross income shall include only the gross 23 income described in section 872(a) (as modified by 24 subsection (c) of this section), and 25 "(2) the deductions shall be allowed if and to the 1289 PAGENO="0138" 118 1 extent that they are connected with the gross income 2 included under this section, except that the capital loss 3 carryover provided by section 1212(b) shall not be 4 allowed; and the proper allOcation and apportionment of 5 the deductions for this purpose shall be determined as 6 provided under regulations prescribed by the Secretary 7 or his delegate. 8 For purposes of paragraph (2), the deductions allowed by 9 section 873(b) shall be allowed; and the deduction (for 10 losses not connected with the trade or business if incurred in 11 transactions entered into for profit) allowed l~y section 12 165(c) (2) shall be allowed, but only if the profit, if such 13 transaction had resulted in a profit, would be included in 14 gross income under this section. 15 "(c) SPECIAL RULES OF SOURCE.-FOr purposes of 16 subsection (b), the following items of gross income shall 17 be treated as income from sources within the United States: 18 "(1) SALE OF PROPERTY.-Gaifls on the sale or 19 exchange of property (other than stock or debt obliga- 20 tions) located in. the United States. 21 "(2) STOCK OR DEBT OBLIGATIONS.-GainS on the 22 sale or exchange of stock issued by a domestic corpora- 23 tion or debt obligations of United States persons or of 1290 PAGENO="0139" 119 * 1 the United States, a State or political subdivision thereof, 2 or the District of Columbia. 3 "(d) EXCEPTION FOR LOSS OF CiTIZENSHIP FOR CER- 4 TAIN CAUSES.-Subsection (a) shall not apply to a non- 5 resident alien individual whose loss of United States citizen~- 6 ship resulted from the application of section 301(b), 350, or 7 355 of the Immigration and Nationality Act, as amended 8 (8 U.S.C. 1401 (b), 1482, or 1487). 9 "(e) BURDEN OF PRO0F.-If the Secretary or his dele- 10 gate establishes that it is reasonable to believe that an mdi- 11 vidual's loss of United States citizenship would, but for this 12 section, result in a substantial reduction for the taxable year 13 in the taxes on his probable income for such year, the burden 14 of proving for such taxable year that such loss of citizen- 15 ship did not have for one of its principal purposes the 16 avoidance of taxes under this subtitle or subtitle B shall be 17 on such individual." 18 (2) The table of sections for subpart A of part II 19 of subchapter N of chapter 1 is amended by striking out 20 the item relating to section 877 and inserting in hew 21 thereof the following: "Bee. 877. Expatriation to avoid tax. "Sec. 878. Foi'eign educational, charitable, a~'w1 certain other exe~mpt organiaatione." 1291 PAGENO="0140" 120 1 (g) PARTIAL EXCLUSION OF DIVIDENDS.-Subsection 2 (d) of section 116 (relating to certain nonresident aliens 3 ineligible for exclusion) is amended to read as follows: 4 "(d) CERTAIN NONRESIDENT ALIENS INELIGIBLE 5 FOR EXCLUSION.-In the case of a nonresident alien mdi- 6 vidual, subsection (a) shall apply only- 7 "(1) in determining the tax imposed for the tax- 8 able year pursuant to section 871 (b) (1) and only in 9 respect of dividends which are effectively connected with 10 the conduct of a trade or business within the United 11 States, or 12 "(2) in determining the tax imposed for the tax- 13 able year pursuant to section 877(b)." 14 (h) WITHHOLDING OF TAX ON NONRESiDENT 15 ALIENS.-Section 1441 (relating to withholding of tax on 16 nonresident aliens) is amended- 17 (1) by striking out ", or of any partnership not 18 engaged in trade or business within the United States and 19 composed in whole or in part of nonresident aliens," in 20 subsection (a) and inserting in lieu thereof "or of any 21 foreign partnership"; 22 (2) by striking out "(except interest on deposits 23 with persons carrying on the banking business paid to 24 persons not engaged in business in the United States)" 25 in subsection (b); 1292 PAGENO="0141" 121 1 (3) by striking out "and amounts described in see- 2 tjon. 402(a) (2)" and all that follows in the first sentence 3 of subsection (b) and inserting in lieu thereof "gains 4 described in section 402 (a) (2), 403(a) (2), or 631 5 (b) or (c), amounts subject to tax under section 871 6 (a) (1) (0), gains subject to tax under section 871 7 (a) (1) (D), and gains on transfers described in section 8 1235 made on or before October 4, 1966."; 9 (4) by adding at the end of subsection (b) the foi~ 10 lowing new sentence: 11 "In the case of a nonresident alien individual who is a mem- 12 ber of a domestic partnership, the items of income referred 13 to in subsection (a) shall be treated as referring to items 14 specified in this subsection included in his distributive share 15 of the income of such partnership."; 16 (5) by striking out paragraph (1) of subsection 17 (c) and inserting in lieu thereof the following new 18 paragraph: 19 "(1) INCOME CONNECTED WITh UNiTED STATES 20 BUSINESS.-No deduction or withholding under subsec- 21 tion (a) shall be required in the case of any item of 22 income (other than compensation for personal services) 23 which is effectively connected with the conduct of a 24 trade or business within the United States and which 1293 PAGENO="0142" 122 1 i~ included in the gross income of the recipient under 2 section 871 (b) (2) for the taxable year."; 3 (6) by amending paragraph (4) of subsection (c) 4 to read as follows: 5 "(4) COMPENSATiON OF CERTAIN AL1ENS.-Ufl- 6 der regulations prescribed by the Secretary or his dele- 7 gate, compensation for personal services may be ex- 8 empted from deduction and withholding under subsection 9 (a)."; 10 (7) by striking out "amounts described in section 11 402 (a) (2), section 403(a) (2), section 631 (b) and 12 (c), and section 1235, which are considered to be gains 13 from the sale or exchange of capital assets," in para- 14 graph (5) of subsection (c) and inserting in lieu thereof 15 "gains described in section 402(a) (2), 403 (a) (2), or 16 631 (b) or (c), gains subject to tax under section 871 17 (a) (1) (D), and gains on transfers described in section 18 1235 made on or before October 4, 1966,", and by 19 striking out "proceeds from such sale or exchange," in 20 such paragraph and inserting in lieu thereof "amount 21 payable,"; 22 (8) by adding at the end of subsection (c) the fol- 23 lowing new paragraph: 24 "(7) GEE TAIN ANNUITIES RECEIVED UNDER 25 QUALIFIED PLANS.-NO deduction or withholding under 1294 PAGENO="0143" 123: 1 subsection (a) shall be required in the case of any amount 2 received as an annuity if such amount is, under section 3 871(f), exempt from the tax imposed by section 87Z 4 (a)."; and 5 (9) by redesignating subsection (d) as (e), and 6 by inserting after subsection (c) the following new 7 subsection: 8 "(d) EXEMPTION OF CERTAIN FOREIGN PARTNER~ 9 SHIPS.-Subject to such terms and conditions as may be 10 provided by regulations prescribed by the Secretary or his 11 delegate, subsection (a) shall not apply in the case of a 12 foreign partnership engaged in trade or business within the 13 United States if the Secretary or his delegate determines 14 that the requirements of subsection (a) impose an undue 15 administrative burden and that the collection of the tax 16 imposed by section 871(a) on the members of such partner- 17 ship who are nonresident alien individuals will not be jeop- 18 ardized by the exemption." 19 (i) LIABILITY FOR WITHHELD TAX.-Section 1461 20 (relating to return and payment of withheld tax) is amended 21 to read as follows: 22 "SEC. 1461. LIABILITY FOR WITHHELD TAX. 23 "Every person required to deduct and withhold any tax 24 under this chapter is hereby made liable for such tax and is 25 hereby indemnified against the claims and demands of any 1295 PAGENO="0144" 124 1 person for the amount of any payments made in accordance 2 with the provisions of this chapter." 3 (j) DECLARATION OF ESTIMATED INCOME TAX BY 4 1NDIvIDUALS.-Section 6015 (relating to declaration of esti- 5 mated income tax by individuals) is amended- 6 (1) by striking out that portion of subsection (a) 7 which precedes paragraph (1) and inserting in lieu 8 thereof the following: 9 "(a) REQUIREAIENT OF DECLARATION.-EXCept as 10 otherwise provided in subsection (i), every individual shall 11 make a declaration of his estimated tax for the taxable year 12 if-"; 13 (2) by redesignating subsection (i) as subsection 14 (,j); and 15 (3) by inserting after subsection (h) the follow- 16 ing new subsection: 17 "(i) NONRESIDENT ALIEN INDIVIDUALS.-No dec- 18 laration shall be required to be made under this section by a 19 nonresident alien individual unless- 20 "(1) withholding under chapter 24 is made appli- 21 cable to the wages, as defined in section 3401 (a), of 22 such individual, 23 "(2) such individual has income (other than corn- 24 pensation for personal services subject to deduction and 25 withholding under section 1441) which is effectively 1296 PAGENO="0145" 125 1 connected with the conduct of a trade or business within 2 the United States, or 3 "(3) such individual is a resident of Puerto Rico 4 during the entire taxable year." 5 (k) COLLECTION OF INCOME TAX AT SOURCE ON 6 WA GES.-Subsection (a) of section 3401 (relating to defini- 7 tion of wages for purposes of collection of income tax at 8 source) is amended by striking out paragraphs (6) and (7) 9 and inserting in lieu thereof the following: 10 "(6) for such services, performed by a nonresident 11 alien individual, as may be designated by regulations 12 prescribed by the Secretary or his delegate; or". 13 (1) DEFINITIONS OF FOREIGN ESTATE OR TRUST.- 14 (1) Section 7701 (a) (31) (defining foreign estate 15 or trust) is amended by striking out "from sources with- 16 out the United States" and inserting in lieu thereof 17 ", from sources without the United States which is not 18 effectively connected with the conduct of a trade or busi- 19 ness within the United States,". 20 (2) Section 1493 (defining foreign trust for pur- 21 poses of chapter 5) is repealed. 22 (m) CONFORMING AMENDMENT.-The first sentence 23 of section 932(a) (relating to citizens of possessions of the 24 United States) is amended to read as follows: "Any in- 1297 .71-297 0-67-pt. 2-10 PAGENO="0146" 126 1 dividual who is a citizen of any possession of the United 2 States (but not otherwise a citizen of the United States) 3 and who is not a resident of the United States shall be sub- 4 ject to taxation under this subtitle in the same manner and 5 subject to the same conditions as in the case of a nonresident 6 alien individual." 7 (n) EFFECTIVE DATES.- 8 (1) The amendments made by this section (other 9 than the amendments made by subsections (h), (i), and 10 (k)) shall apply with respect to taxable years beginning 11 after December 31, 1966. 12 (2) The amendments made by subsection (h) shall 13 apply with respect to payments made in taxable years 14 of recipients beginning after December 31, 1966. 15 (3) The amendments made by subsection (i) shall 16 apply with respect to payments occurring after Decem- 17 ber 31, 1966. 18 (4) The amendments made by subsection (k) shall 19 apply with respect to remuneration paid after Decem- 20 ber 31, 1966. 21 SEC. 104. FOREIGN CORPORATIONS. 22 (a) TAX ON INCOME NOT CONNECTED WITH 23 UNITED STATES BUSINESS.-Section 881 (relating to tax 24 on foreign corporations not engaged in business in the United 25 States) is amended to read as follows: 1298 PAGENO="0147" 127 1 "SEC~ 881. TAX ON INCOME OF FOREIGN CORPORATIONS 2 NOT CONNECTED WITH UNITED STATES 3 BUSINESS. 4 "(a) IMPOSITION OF TAx.-There is hereby imposed 5 for each taxable year a tax of 30 percent of the amount 6 received from sources within the United States by a foreign 7 corporation as- 8 "(1) interest, dividends, rents, salaries, wages, pre- 9 miums, annuities, compensations, remunerations, emolu- 10 ments, and other fixed or determinable annual or 11 periodical gains, profits, and income, 12 "(2) gains described in section 631 (b) or (c), 13 "(3) in the case of bonds or other evidences of 14 indebtedness issued after September 28, 1965, amounts 15 which under section 1232 are considered as gains from 16 the sale or exchange of property which is not a capital 17 asset, and 18 "(4) gains from the sale or exchange after October 19 4, 1966, of patents, copyrights, secret processes and 20. formulas, good will, trademarks, trade brands, fran- 21 chises, and other like property, or of any interest in 22 any such property, to the extent such gains are from 23 payments which are contingent on the productivity, use, 24 or disposition of the property or interest sold or ex- 1299 PAGENO="0148" 128 1 changed, or from payments which are treated as being 2 so contingent under section 871 (e), 3 but only to the extent the amount so received is not effec- 4 tivély connected with the conduct of a trade or business 5 within the United States. 6 "(b) DOUBLING OF TAx.- "For doubling of tax on corporations of certain foreign countries, see section 891." 7 (b) TAX ON INCOME CONNECTED WITH UNITED 8 STATES BUSINESS.- 9 (1) Section 882 (relating to tax on resident for- 10 eign corporations) is amended to read as follows: 11 "SEC. 882. TAX ON INCOME OF FOREIGN CORPORATIONS 12 CONNECTED WITH UN1TED STATES BUSI- 13 NESS. 14 "(a) NORMAL TAX AND SURTAX.- 15 "(1) IMPOSITION OF TAX.-A foreign corporation 16 engaged in trade or business within the United States 17 during the taxable year shall be taxable as provided in 18 section 11 or 1201 (a) on its taxable income which is 19 effectively connected with the conduct of a trade or busi- 20 ness within the United States. 21 "(2) DETERMINATION OF TAXABLE INCOME.-Ifl 22 determining taxable income for purposes of paragraph 23 (1), gross income includes only gross income which is 1300 PAGENO="0149" 129 1 effectively connected with the conduct of a trade or busi- 2 ness within the United States. 3 "(b) G1?oss iNCOJIE.~-1n the ease of a foreign corpora- 4 tion, gross income includes only- 5 "(1) gross income which is derived from sources 6 within the United States and which is not effectively 7 connected with the conduct of a trade or business with- 8 in the United States, and 9 "(2) gross income which is e~ectively connected 10 with the conduct of a trade or business within the United 11 States. 12 "(c) ALLOWANCE OF' DEDUCTIONS AND CREDITS.- 13 "(1) ALLOCATION OF DEDUCTIONS.'- 14 "(A) GENERAL RULE~-Ifl the case of a for- 15 eign corporation, the deductions shall be allowed 16 only for purposes of subsection (a) and (except as 17 provided by subparagraph (B)) only if and to the 18 extent that they are connected with income which 19 is effectively connected with the conduct of a trade 20 or business within the United States; and the proper 21 apportionment and allocation of the deductions for 22 this purpose shall be determined as provided in 23 regulations prescribed by the Secretary or his 24 delegate. 1301 PAGENO="0150" 1') 10 1 "(B) CHARITABLE CONTRIBUTIONS.-The de- 2 duction for charitable contributio~'ns and gifts pro- 3 vided by section 170 shall be allowed whether or 4 not connected with income which is effectively con- 5 nected with the conduct of a trade or business 6 within the United States. 7 "(2) DEDUCTIONS AND CREDITS ALLOWED ONLY 8 IF RETURN FILED.-A foreign corporation shall receive 9 the benefit of the deductions and credits allowed to it 10 in this subtitle only by filing or causing to be filed with 11 the Secretary or his delegate a true and accurate return, 12 in the manner prescribed in subtitle F, including therein 13 *all the information which the Secretary or his delegate 14 may. deem necessary for the calculation of such deduc- 15 tions and credits. The preceding sentence shall not 16 apply for purposes of the tax imposed by section 541 ~ 7 (relating to personal holding company tax), and shall 18 not be construed to deny the credit provided by section 19 32 for tax withheld at source or the credit provided by 20 section 39 for certain uses of gasoline and lubricating oil. 21 "(3) FOREIGN TAX CREDIT.-Except as provided 22 by section 906, foreign corporations shall not be allowed 23 the credit against the tax for taxes of foreign countries 24 and possessions of the United States allowed by section 25 901. 1302 PAGENO="0151" 131 1 "(4) CROSS REFERENCE.- "For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see sec- tion 906(b) (1). 2 "(d) ELECTION To TREAT REAL PROPERTY INCOME 3 AS INCOME CONNECTED WITH UNITED STATES BUSI-. 4 NESS.- 5 "(1) IN GENERAL.-A foreign corporation which 6 during the taxable year derives any income- 7 "(A) from real property located in the United 8 States, or from any interest in such real property, 9 including (i) gains from the sale or exchange of 10 real property or an interest therein, (ii) rents or 11 royalties from mines, wells, or other natural de- 12 posits, and (iii) gains described in section 631 (b) 13 or (c), and 14 "(B) which, but for this gubsection, would not 15 be treated as income effectively connected with the 16 conduct of a trade or business within the United 17 States, 18 may elect for such taxable year to treat all such income 19 as income which is effectively connected with the con- 20 duct of a trade or business within the United States. In 21 such case, such income shall be taxable as provided in 22 subsection (a) (1) whether or not such corporation is 23 engaged in trade or business within the United States 1303 PAGENO="0152" 132 1 during the taxable year. An election under this para- 2 qraph for any taxable year shall remain in effect for all 3 subsequent taxable years, except that it may be revoked 4 with the consent of the Secretary or his delegate with 5 respect to any taxable year. 6 "(2) ELECTION AFTER REVOCATION, ETC.-Par- 7 agraphs (2) and (3) of section 871(d) shall apply in 8 respect of elections under this subsection in the same 9 manner and to the same extent as they apply in respect 10 of elections under section 871 (d). 11 "(e) INTEREST ON UNITED STATES OBLiGATIONS 12 RECEIVED BY BANKS ORGANIZED IN POSSESSIONS.-In the 13 case of a corporation created or organized in, or under the 14 law of, a possession of the United States which is carrying 15 on the banking business in a possession of the United States, 16 interest on obligations of the United States shall- 17 "(1) for purposes of this subpart, be treated as 18 income which is effectively connected with the conduct of 19 a trade or business within the United States, and 20 "(2) shall be taxable as provided in subsection 21 (a) (1) whether or not such corporation is engaged in, 22 trade or business wit/tin the United States during the 23 taxable year. 1304 PAGENO="0153" 133 1 "(f) RETURNS OF TAX BY AGENT.-Jf aiiy foreign 2 corporation has no of/Ice or place of business in the United 3 States but has an agent in the United States, the return 4 required under section 6012 shall be made by the agent." 5 (2) (A) Subsection (e) of section 11 (relating to 6 exceptions from tax on corporations) is amended by in- 7 serting "or" at the end of paragraph (2), by striking 8 out ", or" at the end of paragraph (3) and inserting 9 a period in lieu thereof, and by striking out paragraph 10 (4). 11 (B) Section 11 (relating to tax on corporations) is 12 amended by adding at the end thereof the following 13 new subsection: 14 "(f) FOREiGN CORPORATIONS.-In the case of a foreign 15 corporation, the tax imposed by subsection (a) shall apply 16 only as provided by section 882." 17 (3) The table of sections for subpart B of part 11 18 of subchapter N of chapter 1 is amended by striking out 19 the items relating to sections 881 and 882 and inserting 20 in lieu thereof the following: "Sec. 881. Tax on income of foreign corporations not con- nected `with United ,States business. "Sec. 882. 7'a~n on income of foreign corporations connected with United States business." 1305 PAGENO="0154" 134 1 (c) WITHHOLDiNG OF TAX ON FOREiGN CORPORA- 2 TIONS.-Section 1442 (relating to withholding of tax on 3 foreign corporations) is amended to read as follows: 4 "SEC. 1442. WITHHOLDING OF TAX ON FOREIGN CORPO. 5 RATiONS. 6 "(a) GENERAL RULE.-In the case of foreign corpora- 7 tions subject to taxation under this subtitle, there shall be 8 deducted and withheld at the source in the same manner and 9 on the same items of income as is provided in section 1441 10 or section 1451 a tax equal to 30 percent thereof; except 11 that, in the case of interest described in section 1451 (relat- 12 ing to tax-free covenant bonds), the deduction and with- 13 holding shall be at the rate specified therein. For purposes 14 of the preceding sentence, the ref erences in section 1441 (b) 15 to sections 871(a) (1) (C) and (D) shall be treated as re- 16 ferring to sections 881 (a) (3) and (4), the reference in 17 section 1441 (c) (1) to section 871 (b) (1) shall be treated 18 as referring to section 842 or section 882(a), as the case 19 may be, and the reference in section 1441 (c) (5) to section 20 871(a) (1) (D) shall be treated as referring to section 21 881(a) (4). 22 "(b) ExEMPTI0N.-Subject to such terms and condi- 23 tions as may be provided by regulations prescribed by the 24 Secretary or his delegate, subsection (a) shall not apply in 25 the case of a foreign corporation engaged in trade or business 1306 PAGENO="0155" 135 1 within the United States if the Secretary or his delegate de~ 2 termines that the requirements of subsection (a) impose an 3 vndue administrative burden and that the collection of the 4 tax imposed by section 881 on such corporation will not be 5 jeopardized by the exemption." 6 (d) DivIDENDs RECEIVED FROM CERTAIN FOREIGN 7 C0RP0RATION5.-Slibsection (a) of section 245 (relating to 8 the allowance of a deduction in respect of dividends received 9 from a foreign corporation) is amended- 10 (1) by striking out "and has derived 50 percent 11 or more of its gross income from sources within the 12 United States," in that portion of subsection (a) which 13 precedes paragraph (1) and by inserting in lieu thereof 14 "and if 50 percent or more of the gross income of such: 15 corporation from all sources for such period is effectively* 16 connected with the conduct of a trade or business within 17 the United States,";. 18 (2) by striking out "from sources within the Unit'~d 19 States" in paragraph (1) and inserting in lieu thereof 20 "which is effectively connected with the conduct of a 21 trade or business within the United States"; . 22 (3) by striking out "from sources within the United 23 States" in paragraph (2) and inserting in lieu thereof* 24 ", which is effectively connected with the conduct of a 25 trade or business within the United States,"; and 1307 PAGENO="0156" 136 1 (4) by adding after paragraph (2) the following 2 new sentence: 3 "For purposes of th.is subsection, the gross income of the 4 foreign corporation for any period before the first taxable 5 year beginning after December 31, 1966, which is eff cc- 6 tively connected with the conduct of a trade or business 7 within the United States is an amount equal to the gross 8 income for such period from sources within the United 9 States." 10 (e) DIVIDENDS RECEiVED FROM CERTAiN WhOLLY- 11 0 JJ'NED FOREIGN SuBSJDJA RJES.- 12 (1) Section 245 (relating to dividends `received 13 from certain foreign corporations) is amended by re- 14 designating subsection (b) as (c), and by inserting after 15 subsection (a) the following new subsection: 16 "(b) CERTAIN DIViDENDS RECEIVED FROM TVHOLLY 17 OIVNED FOREIGN SUBSIDIARIES.- 18 "(1) IN GENERAL.-In the case of (Ilvidends dc- 19 scribed in paragraph (2) `received from a foreign cor- 20 poration by a domestic corporation which, for its taaable 21 year in which such dividends are received, owns (di- 22 rectly or indirectly) all of the outstanding stock of sue/i 23 foreign corpoi~ation, there shall be allowed as a deduction 24 (in lieu of the deduction provided by subsection (a)) an 25 amount equal to 100 percent of such dividends. 1308 PAGENO="0157" 137 1 "(2) ELIGIBLE 1)11 11)ENI)&-Paragraph (1) shall 2 (JpJ)iy only to (liVi(lends which are paid out of the earn- 3 ings and profits of a forei~ju corporation for a taxable 4 year (luring which-~ 5 "(A) all of its outstanding stock is owned (di- 6 rectly or indirectly) by the domestic corporation to 7 which such dividends are paid; and 8 "(B) all of~ its gross income from all sources 9 is effecticely connected with the conduct of a trade or 10 business within the United States. 11 "(3) ExCEPTION.-Para graph (1) shall not apply 12 to any dividends if an election under section 1562 is 13 effective for either- 14 "(A) the taxable ycar of the domestic corpora- 15 tion in which such dividends are received, or 16 "(B) the taxable year of the foreign corpora- 17 tion out of the earnings and profits of which such 18 dividends are paid." 19 (2) Subsection (a) of such section 245 is amcnded 20 by adding at the eil(l thereof (after the sentence added 21 by subsection (d) (4)) the following new sentence: "For 22 purposes of paragraph (2), there shall not be taken into 23 account any taxable year evithin such uninterrupted j;e- 24 nod if, with respect to divulends paid out of the earnings 1309 PAGENO="0158" 138 1 and profits of such year, the deduction provided by 2 subsection (b) would be allowable." 3 (3) Subsection (c) of such section 245 (as rede~ig- 4 nated by paragraph (1)) is amended by striking out 5 "subsection (a)" and inserting in lieu thereof "subsections 6 (a) and (b)". 7 (f) DISTRIBUTIONS OF CERTAiN FOREIGN CORPORA- 8 TIONS.-Section 301(b) (1) (C) (relating to certain cor- 9 porate distributees of foreign corporations) is amended- 10 (1) by striking out "gross income from sources 11 within the United States" in clause (i) and inserting in 12 lieu thereof "gross income which is effectively connected 13 with the conduct of a trade or business within the United 14 States"; 15 (2) by striking out "gross income from sources with- 16 out the United States" in clause (ii) and inserting in 17 lieu thereof "gross income which is not effectively con- 18 nected with the conduct of a trade or business within 19 the United States"; and 20 (3) by adding at the end thereof the following new 21 sentences: "For purposes of clause (i), the gross income 22 of a foreign corporation for any period before its first 23 taxable year beginning after December 31, 1966, which 24 is effectively connected with the conduct of a trade or 25 business within the United States is an amount equal 1310 PAGENO="0159" i') .L~) 1 to the gross income for such period from sources within 2 the United States. For purposes of clause (ii), the 3 gross income of a foreign corporation for any period 4 before its first taxable year beginning after December 5 31, 1966, which is not effectively connected with th~ 6 conduct of a trade or business within the United States 7 is an amount equal to the gross income for such period 8 from sources without the United States." 9 (g) UNRELATED BUSINESS TAXABLE 1NCOME.-The 10 last sentence of section 512(a) (relating to definition) is 11 amended to read as follows: "In the case of an organiza- 12 tion described in section 511 which is a foreign organiza- 13 tion, the unrelated business taxable income shall be its 14 unrelated business taxable income which is effectively con- 15 nected with the conduct of a trade or business within the 16 United States." 17 (h) CORPORATIONS SUBJECT TO PERSONAL HOLD- 18 ING COMPANY TAX.- 19 (1) Paragraph (7) of section 542(c) (relating 20 to corporations not subject to personal holding company 21 tax) is amended to read as follows: 22 "(7) a foreign corporation (other than a corpora- 23 tion which has income to which section 543(a) (7) ap- 24 plies for the taxable year), if all of its stock outstanding 1311 PAGENO="0160" 140 1 during the last half of the taxable year is owned by 2 nonresident alien individuals, whether directly or mdi- 3 rectly through foreign estates, foreign trusts, foreign 4 partnerships, or other foreign corporations;". 5 (2) Section 543(b) (1) (relating to definition of 6 ordinary gross income) is amended- 7 (A) by striking out "and" at the end of sub- 8 paragraph (A), 9 (B) by striking out the period at the end of 10 subparagraph (B) and inserting in lieu thereof ", 11 and", and 12 (0) by inserting after subparagraph (B) the 13 following new subparagraph: 14 "(0) in the case of a foreign corporation all of 15 the outstanding stock of which dnring the last half 16 of the taxable year is owned by nonresident alien in- 17 dividuals (whether directly or indirectly through 18 foreign estates, foreign trusts, foreign partnerships, 19 or other foreign corporations), all items of income 20 which would, but for this subparagraph, constitute 21 personal holding company income under any para- 22 graph of subsection (a) other than paragraph (7) 23 thereof." 24 (3) Section 545 (relating to definition of undis- 25 tributed personal holding company incomç) is amended- 1312 PAGENO="0161" 141 1. (A) by striking out subsection (a) and insert- 2 in lieu thereof the following: 3 "(a.) DI~lNITION.-For purposes of this part, the term 4 `undistributed personal holding company income' means the 5 taxable income of a personal holding company adjusted in 6 the manner provided in subsections (b), (c), and (ci), minus 7 the dividends paid deduction as defined in section 561. in 8 the case of a personal holding company which is a foreign 9 corporation, not more than 10 percent in valve of the out- 10 standing stock of which is owned (within the meaning of 11 section 958(a)) during the last half of the taxable year by 12 United States persons, the term `undistributed personal hold- 13 ing company income' means the amount determined by multi- 14 plying the undistributed personal holding. company income 15 (determined without regard to this sentence) by the percent- 16 age in value of its outstanding stock which is the greatest per- 17 centage in value of its outstanding stock so owned by United 18 States persons on any one day. during such period."; and 19 (B) by adding at the end thereof the following 20 new subsection: 21 "(d) CERTAIN FOREiGN CORPORATJONS.-In the case 22 of a foreign corporation all of the outstanding stock of which 23 during the last half of the taxable year is owned by nonresi- 24 dent alien individuals (whether directly or indirectly through 1313 71-297 0-67-pt. 2-il PAGENO="0162" 142 1 foreign estates, foreign trusts, foreign partnerships, or other 2 foreign corporations), the taxable income for purposes of 3 subsection (a) shall be the income which constitutes personal 4 holding company income under section 543(a) (7), reduced 5 by the deductions attributable to such income, and adjusted, 6 with respect to such income, in the manner provided in sub-' 7 section (b)." 8 (4) (A) Subchapter B of chapter 68 (relating to 9 assessable penalties) is amended by adding at the end 10 thereof the following new section: 11 `SEC. 6683. FAILURE OF FOREIGN CORPORATION TO FiLE 12 RETURN OF PERSONAL HOLDING COMPANY 13 TAX. 14 "Any foreign corporation which- 15 "(1) is a personal holding company for any tax- 16 able year, and 17 "(2) fails to file or to cause to be filed with the 18 Secretary or his delegate a true and accurate return of 19 the tax imposed by section 541, 20 shall, in addition to other penalties provided by law, pay a 21 penalty equal to 10 percent of the taxes imposed by chapter 1 22 (including the tax imposed by section 541) on such foreign 23 corporation for such taxable year." 1314 PAGENO="0163" 143 1 (B) The table of sections for such subchapter B is 2 amended by adding at the end thereof the following neu' 3 item: "See. 6683. Failure of foreign corporation to file retvrn of personal holding coni pany tax." 4 (i) AMENDMENTS WITH RESPECT TO FOREiGN 5 CORPORATIONS CARRYING ON INSURANCE BUSINESS IN 6 UNITED STATES.- 7 (1) Section 842 (relating to computation of gross 8 income) is amended to read as follows: 9 "SEC. 842. FOREIGN CORPORATIONS CARRYING ON IN- 10 SURANCE BUSINESS. 11 "If a foreign corporation carrying on an insurance busi- 12 ness within the United States would qualify under part I, 13 11, or III of this `subchapter for the taxable year if (without 14 regard to income not effectively connected with the conduct 15 of any trade or business within the United States) it were 16 a domestic corporation., such corporation shall be taxable 17 under such part on its income effectively connected with its 18 conduct of any trade or business within the United States. 19 With respect to~ the remainder of its income, which is from 20 sources within the United States, such a foreign corpora- 21 tion shall be taxable as provided in section 881." 22 (2) The table of sections for part IV of subchapter 1315 PAGENO="0164" 144 L of chapter 1 is amended by striking out the item re- 2 lating to section 842 and inserting in lieu thereof the following: "Sec. 84g. Foreign corporatio~is carrying on insurance busi- ness." 4 (3) Section 819 (relating to foreign life insurance 5 companies) is amended- 6 (A) by striking out subsections *(a) and (d) 7 and by redesignating subsections (b) and (c) as 8 subsections (a) and (b), 9 (B) by striking out "In the case of any corn- 10 pany described in subsection (a) ," in subsection 11 (a) (1) (as redesignated by subparagraph (A)) 12 and inserting in lieu thereof "In the case of any 13 foreign corporation taxable under this part,", 14 (C) by striking out "subsection (c)" in the 15 last sentence of subsection (a) (2) (as redesignated 16 by subpargraph (A)) and inserting in lieu thereof 17 "subsection (b) ", 18 (D) by adding at the end of subsection (a) 19 (as redesignated by subparagraph (A)) the fol- 20 lowing new paragraph: 21 "(3) REDucTIoN OF SECTION 881 TAX.-In the 22 case of any foreign corporation taxable under this part, 2:~ there shall be determined- 1316 PAGENO="0165" 145 1 "(A) the amount which would be subject to 2 tax under section 881 if the amount taxable under 3 such section were determined without regard to see- 4 tions 103 and 894, and 5 "(B) the amount of the reduction provi&'d 6 by paragraph (1). 7 The tax under section 881 (determined without regard 8 to this paragraph) shall be reduced (but not below 9 zero) by an amount which is the same proportion of 10 such tax as the amount referred to in subparagraph (B) U is of the amount referred to in subparagraph (A); but 12 such reduction in tax shall not exceed the increase in 13 tax under this part by reason of the reduction provided 14 by paragraph (1).", 15 (E) by striking out "for purposes of subsec- 16 lion. (a)" each place it appears in subsection (b) 17 (as redesignated by subparagraph (A)) and insert- 18 ing in lieu thereof "with respect to a foreign 19 corporation", 20 (F) by striking out "foreign life insurance 21 company" each place it appears in such subsection 22 (b) and inserting in lieu thereof "foreign corpora- 2~ tion,", 1317 PAGENO="0166" 146 1 (G) by striking out "subsection (b) (2) (A)" 2 each place it appears in such subsection (b) and 3 inserting in lieu thereof "subsection (a) (2) (A)", 4 (H) by striking out "subsection (b) (2) (B)" 5 in paragraph (2) (B) (ii) of such subsection (b) 6 and inserting in lieu thereof "subsection. (a) (2) 7 ... (B)", and 8 (I) by adding at the end thereof the following 9 new subsection: 10. "(c) (Jnoss REFERENCE.- "For taxation of foreign corporations carrying on life insurance business within the United States, see section 842." ii . (4) Section 821 (relating to tax on mutual insur- 12 ance companies to which part II applies) is amended- 13 (A) by striking out subsection (e) and by 14 redesignating subsections (f) and (g) as sub-. 15 sections (e) and (f), and 16 (B) by adding at the end of subsection (f) 17 (as redesignated by subparagraph (A)) the fol- 18. lowing: "(3) For taxation of foreign corporations carrying on an insurance business within the United States, see sec- tion 842." 19 (5) Section 822 (relating to determination of tax- 20 able investment income) is amended by striking out 1318 PAGENO="0167" 147 1 subsection (e) and by redesignating subsection (f) as 2 subsection (e). 3 (6) Section 831 (relating to tax on certain other 4 insurance companies) i~s amended- 5 (A) by striking out subsection (b) and by re- 6 designating subsection (c) as subsection (b), and 7 (B) by amending subsection (d) to read as 8 follows: 9 "(c) CROSS REFERENCES.- "(1) For alternative tax in case of capital gains, see section 1201 (a). "(2) For taxation of foreign corporations carrying on an insurance business within the United States, see sec- tion 842." 10 (7) Section 832 (relating to insurance company 11 taxable income) is amended by striking out subsection 12 (d) and by redesignating subsection (e) as subsection 13 (d). 14 (8) The second sentence of section 841 (relating 15 to credit for foreign taxes) is amended by striking out 16 "sentence," and inserting in lieu thereof "sentence (and 17 for purposes of applying section 906. with respect to a 18 foreign corporation subject to tax under this sub- 19 chapter),". 20 (j) SUBPART F INCOME.-Section 952(b) (relating 1319 PAGENO="0168" 148 1 to exclusion of United Slates income) is amended to read 2 as follows: 3 "(b) EXCLUSION OF UNITED STATES JNCOME.-In 4 the case of a controlled foreign corporation, subpart F in- 5 come does not include any item of income from sources 6 within i/ic United States which is effectively connected 7 with the conduct by such. corporation of a trade or business 8 within the Unit('d Slates unless ~uch item is exempt from 9 tax ation (or is subject to a reduced rate of tax) pursuant 10 to a treaty obligation of the United States." 11 (k) GAIN FROM CERTAIN S~!i~Es OR EXCHANGES 12 OF STOCK iN CERTAIN FOREIGN CORPORA TJONS.-Para- 13 graph (4) of section 1248(d) (relating to exclusions frcm 14 earnings and profits) is amended to read as follows: 15 "(4) UNITED STATES INCOME.~-Any item in- 16 ciuthble in gross income of the foreign corporation under 17 this chapter- 18 "(A) for any taxable year beginning before 19 Januarij 1, 1967, as income derived from sources 20 within the United States of a foreign corporation 21 engaged in trade or business within the United 22 States, or 23 "(B) for any taxable year beginning after 24 December 31, 1966, as income effectively con- 1320 PAGENO="0169" 149 1 nected with the conduct by sue/i corporation of a 2 trade or business within the United States. 3 This paragraph shall not apply with respect to any 4 item which is exempt from taxation (or is subject to 5 a reduced rate of tax) pursuant to a treaty obligation 6 of the United States." 7 (1) DECLARATION OF E~sTnIA TED iNCOME T~x BY 8 CoRPoRA~rJONs.-Section 6016 (relating to declarations of 9 estimated income tax by corporations) is amended by recics- 10 ignating subsection (f) as subsection (g) and by inserting 11 after subsection (e) the following new subsection: 12 "(f) CERTAiN FOREiGN CORPORAT1ONS.-For pur- 13 poses of this section and section 6655, in the case of a foreign 14 corporation subject to taxation under section 11 or 1201 (a), 15 or under subchapter L of chapter 1, the tax imposed by 16 section 881 shall be treated as a tax imposed by section 11." 17 (m) TECHNICAL AMENDMENTS.- 18 (1) Section 884 is amended to read as follows: 19 "SEC. 884. CROSS REFERENCES. "(1) For special provisions relating to unrelated busi- ness income of foreign educational, charitable, and cer- tain other exempt organizations, see section 512(a). "(2) For special provisions relating to foreign corpo- rations carrying on an insurance business within the United States, see section 842. "(3) For rules applicable in determining whether any foreign corporation is engaged in trade or business within the United States, see section 864(b). "(4) For adjustment of tax in case of corporations of certain foreign countries, see section 896. 1321 PAGENO="0170" 15() "(5) For allowance of credit against the tax in case of a foreign corporation having income effectively con- nected with the conduct of a trade or business within the United States, see section 906. "(6) For withholding at source of tax on income of for. eign corporations, see section 1442." 1 (2) Section 953(b) (3) (F) is amended by strik- 2 ing out "832(b) (5)" and inserting in lieu thereof 3 "832(c)(5)". 4 (3) Section 1249(a) is amended by striking out 5 "Except as provided in subsection (c), gain" and in- 6 serting in lieu thereof "Gain". 7 (n) EFFECTIVE DATES.-The amendments made by 8 this section (other than subsection (k)) shall apply with 9 respect to ta~zable years beginning after December 31, 1966. 10 The amendment made by subsection (k) shall apply with 11 respect to sales or exchanges occurring after December 31, 12 1966. 13 SEC. 105. SPECIAL TAX PROVISIONS. 14 (a) INCOME AFFECTED BY TREATY.-Section 894 (re- 15 lating to income exempt under treaties) is amended to read 16 as follows: 17 "SEC. 894. INCOME AFFECTED BY TREATY. 18 "(a) INCOME EXEMPT UNDER TREATY.-InCOme of 19 any kind, to the extent required by any treaty obligation of 20 the United States, shall not be included in gross income and 21 shall be exempt from taxation under this subtitle. 1322 PAGENO="0171" 151 1 "(b) PERMANENT~ ESTABLISHMENT IN UNITED 2 STATES.-For purposes of applying any exemptionl. from, Or 3 reduction of, any tax provided by any treaty to which the 4 United States is a party with respect to income which is not 5 effectively connected with the conduct of a trade or business 6 within the United States, a nonresident alien individual or a 7 foreign corporation shall be deemed not to have a permanent 8 establishment in the United States at any time during the 9 taxable year. This subsection shall not apply in respect of 10 the tax computed under sectüin 877(b)." 11 (b) ADJUSTMENT OF TAX BECAUSE OF BURDENSOME 12 OR DISCRIMINATORY FOREIGN TAXES.-Subpart C of part 13 II of subchapter N of chapter 1 (relating.. to miscellaneous 14 provisions applicable to nonresident aliens and foreign corpo~- 15 rations) is amended by adding at the end thereof the follow.. 16 ing new section: 17 "SEC. 896. ADJUSTMENT OF TAX ON NATIONALS, RESI. 18 DENTS, AND CORPORATIONS OF CERTAIN 19 FOREIGN COUNTRIES. 20 "(a) IMPOSITION OF MORE BURDENSOME TAXES BY 21 FOREIGN COUNTRY.-Whenever the President finds that- 22 "(1) under the laws of any foreign country, con- 23 sidering the tax system of such foreign country, citizens 24 of the United States not residents of such foreign coun- 1323 PAGENO="0172" 152 1 try or domestic corporations are being subjected to more 2 burdensome taxes, on any item of income received by 3 such citizens or corporations from son rces within such 4 foreign country, than taxes imposed by the provisions of 5 this subtitle on similar income derived from sources 6 within the United States by residents or corporations of 7 such foreign country, 8 "(2) such foreign country, when requested by the 9 United States to do so, has not acted to revise or reduce 10 such taxes so that they are no more burdensome than 11 taxes imposed by the provisions of this subtitle on similar 12 income derived from sources within the United States by 13 residents or corporations of such foreign country, and 14 "(3) it is in the public interest to apply pre-1967 15 tax provisions in accordance with the provisions of this 16 subsection to residents or corporations of such foreign 17 country, 18 the President shall prOclaim, that the tax on such similar in- 19 come derived from sources within the United States by resi- 20 dents or corporations of such foreign country shall, for tax- 21 able years beginning after such proclamation, be determined 22 under this subtitle without regard to amendments made to 23 this subchapter and chapter 3 on or after the date of enact- 24 ment of this section. 1324 PAGENO="0173" 153 1 "(b) IJIP0SITI0N OF DISCRIMINATORY TAXES BY 2 FOREIGN COUNTRY.-Whenever the President finds that- 3 "(1) under the laws of any foreign country, citizens 4 of the United States or domestic corporations (or any 5 class of such citizens or corporations) are, with respect to 6 any item of income, being subjected to a higher effective 7 rate of tax than are nationals, residents, or corporations 8 of such foreign country (or a similar class of such na- 9 tionals, `residents, or corporations) under similar civ- 10 curn stances; 11 "(2) such foreign coantry, when requested by the 12 United Slates to do so, has not acted to eliminate such 13 higher effective rate of tax; and 14 "(3) it is in the public interest to adjust, in accord- 15 ance with the provisions of this subsection, the effective 16 rate of tax imposed by this subtitle on similar income of 17 nationals, residents, or corporations of such foreign 18 country (or sac/i similar class of sue/i. nationals, resi- 19 dents, or corporations), 20 the President shall proclaim that the tax on similar income 21 of nationals, residents, or corporations of such foreign country 22 (or such similar class of such nationals, residents, or corpo- 23 rations) shall, for taxable years begimiing after such proc- 24 lamation, be adjusted so as to cause the effectice rate of tax 1325 PAGENO="0174" 154 1 imposed by this subtitle on such similar income to be sub- 2 stantially equal to the effective rate of tax imposed. by such 3 foreign country on such item of income of citizens of the 4 United States or domestic corporations (or such class of 5 citizens or corporations). In implementing a proclamation 6 made under this subsection, the effective rate of tax imposed by 7 this subtitle on an item of income may be adjusted by the dis- 8 allowance, in whole or in part, of any deduction, credit, or 9 exemption which would otherwise be allowed with respect to 10 that item of income or by increasing the rate of ~ax otherwise 11 applicable to that item of income. 12 "(c) ALLEVIATION OF MORE BURDENSOME OR Dis- 13 CRIMINATORY TAXES.-Whenever the President finds that- 14 "(1) the laws of any foreign country with respect 15. . to which the President has made a proclamation under 16 subsection (a) have been modified so that citizens of the 17 United States not residents of such foreign' country or 18 domestic corporations are no longer subject to more bur- 19 densome taxes on the item of income derived by such 20 citizens or corporations from sources within such foreign 21 country, or 22 "(2) the laws of any foreign country with respect 23 to which the President has made a proclamation under 24 subsection (b) have been modified so that citizens of the 25 United States or domestic corporations (or any class of 1326 PAGENO="0175" I 1~5 1 such citizens or corporations) are no longer subject to 2 a higher effective rate of tax on the item of income. 3 he shall proclaim that the tax imposed by this subtitle on the 4 similar income of nationals, residents, or corporations of 5 such foreign country shall, for any taxable year beginning 6 after such proclamation, be determined under this subtitle 7 without regard to such subsection. 8 "(d) NOTIFICATION OF CONGRESS REQUIRED.-NO 9 proclamation shall be issued by the President pursuant to 10 this section unless, at least 30 days prior to such procla- 11 mation, he has notified the Senate and the House of Repre- 12 st~ntatives of his intention to issue such proclamation. 13 "(e) IMPLEMENTATION BY REGULATIONS.-The Sec- 14 retary or his delegate shall prescribe such regulations as he 15 deems necessary or appropriate to implement this section." 16 (c) CLERICAL AMENDMENTS.-The table of sections 17 for subpart C of part II of subchapter N of chapter 1 is 18 amendedi-. 19 (1) by striking out the item relating to section 894 20 and inserting in lieu thereof "Sec. 894. Income affected by treaty."; 21 (2) by adding at the end of such table the following: C5~~ 896. Adjustment of tax on nationals, residents, and corporations of certain foreign countries." 22 .(d) EFFECTIVE DATE.-The amendments made by this 1327 PAGENO="0176" I 56 1 section (other than subsections (e) and (f)) shall apply 2 with respect to taxable years beginning after December 31, 3 1966. 4 (e) ELECTIONS BY NONRESIDENT UNITED STATES 5 CITIZENS WHO ARE SUBJECT TO FOREiGN COMMUNITY 6 PROPERTY LAWS.- 7 (1) Part Ill of subchapter N of chapter 1 (relat- 8 ing to income from sources without the United States) 9 is amended by adding at the end thereof the following 10 new subpart: 11 "Subpart H-Income of Certain Nonresident United States 12 Citizens Subject to Foreign Community Property Laws "Sec. 981. Elections as to treatment of income subject to foreign community property laws. 13 "SEC. 981. ELECTION AS TO TREATMENT OF INCOME SUB. 14 JECT TO FOREIGN COMMUNITY PROPERTY 15 LAWS. 16 "(a) GENERAL RULE.-In the case of any taxable year 17 beginning after December 31, 1966, if- 18 "(1) an individual is (A) a citizen of the United 19 States, (B) a bona fide resident of a foreign country 20 or countries during the entire taxable year, and (C) 21 married at the close of the taxable year to a spouse who is 22 a nonresident alien during the entire taxable year, and 23 "(2) such individual and his spouse elect to have 1328 PAGENO="0177" L37 1 subsection (b) apply to their cOmmunit// income uniler 2 foreign coinntunitij property Ia irs, 3 then subsection (b) s/tall (1/)J)lI/ to sue/i income of such mdi- 4 vidual and such spouse for the taxable year and for all sub- 5 sequent taxable years for which the requirements of para- 6 graph (1) are nut, unless the Secretary or his delegate 7 consents to a termination of the election. 8 "(b) TREATMENT OF COMMUNITY INCOME.-For any 9 taxable year to which an election made under subsection (a) 10 applies, the community income under foreign community 11 prGperty laws of the husband and wife making the election 12 shall be treated as follows: 13 "(1) Earned income (within the meaning of the 14 first sentence of section 911 (b)), other than trade or 15 business income and a partner's distributive share of 16 partnership income, shall be treated as the income of the 17 spouse who rendered the personal services. 18 "(2) Trade or business income, and a partner's 19 distributive share of partners/tip ~income, shall be treated 20 as prGvided in section 1402(a) (5). 21 "(3) Community income not described in para- 22 ,qraph (1) or (2) which is derived from the separate 23 property (as determined under the applicable foreign 24 community property lair) of one S~OUSC shall be treated as the income of such. 5/)OlIse. 1329 7 1-297 0-67-pt. 2-12 PAGENO="0178" 158 1 "(4) All other such community income shall be 2 treated as provided in the applicable foreign community 3 property law. 4 "(c,) ELECTION FOR PRE-1967 YEARS.- 5 "(1) ELECTI0N.-If an individual meets the re- 6 quirements of subsections (a) (1) (A) and (C) for any 7 taxable year beginning before January 1, 1967, and if 8 such individual and the spowse referred to in subsection 9 (a) (1) (C) elect under this subsection, then paragraph 10 (2) of this subsection shall apply to their community in- 11 come under foreign con~munity property laws for alt 12 open taxable years beginning before January 1, 1967 13 (whether under this chapter, the corresponding provi- 14 sions of tlie Internal Revenue Code of 1939, or the cor- 15 responding provisions of prior revenue laws), for which 16 the requirements of subsection (a) (1) (A) and (C) 17 are met. 18 "(2) EFFECT OF ELECTION.-For any taxable 19 year to which an election made under this subsection 20 applies, the community income under foreign community 21 property laws of the husband and wife making the 22 election shall be treated as provided by subsection (b), 23 except that the other community income described in 24 paragraph (4) of subsection (b) shall be treated as the 25 income of the spouse who, for such taxable year, had 1330 PAGENO="0179" 159 1 gross income under paragraphs (1), (2), and (3) of 2 subsection (b), plus separate gross income, greater than 3 that of the other spouse. 4 "(d) TIME FOR MAKING ELECTIONS; PERIOD OF 5 LIMITATIONS; ETC.- 6 "(1) TI~1IE.-An election under subsection (a) or 7 (c) for a taxable year may be made at any time while 8 such year is still open, and shall be made in such man- 9 ner as the Secretary or his delegate shall by regulations 10 prescribe. 11 "(2) EXTENSION OF PERIOD FOR ASSESSING DE- 12 FICIENCIES AND MAKING REFUNDS.-If any taxable 13 year to which an election under subsection (a) or (c) 14 applies is open at the time such election is made, the 15 period for assessing a deficiency against, and the period 16 for filing claim for credit or refund of any overpayment 17 by, the husband and wife for such taxable year, to the 18 extent such deficiency or overpayment is attributable to 19 such an election, shall not expire before 1 year after 20 the date of such election. 21 "(3) ALIEN SPOUSE NEED NOT JOIN IN SUBSEC- 22 TION (C) ELECTION IN CERTAIN CASES.-If the Secre- 23 tary or his delegate determines- 24 "(A) that an election under subsection (c) 25 would not affect the liability for Federal inco;ne 1331 PAGENO="0180" 160 1 tax of the spouse referred to in subsection (a) (1) 2 (C) for any taxable year, or 3 "(B) that the effect on such li~bilit'j for tax 4 cannot be ascertained and that to deny the election 5 to the citizen of the United States would be inequita- 6 ble and cause undue hardship, 7 such spouse shall not be required to join in such election, 8 and paragraph (2) of this subsection shall not apply 9 with respect to such spouse. 10 "(4) INTEREST.-TO the extent that any overpay- 11 ment or deficiency for a taxable year is attributable to 12 an election made under this section, no interest shall be 13 allowed or paid for any period before the day which is I 14 year after the date of such election. "(e) DEFINiTiONS JND SPEc1;!r~ RULES.-For pur- 16 poses of this sectionr- 17 "(1) DEDuTIONS.-Deductions shall be treated in 18 a manner consistent with the manner provided by this 19 section for the income to which they relate. 20 "(2) OPEN YEARS.-A taxable year of a citizen 21 of the United States and his spouse shall be treated as 22 `open' if the period for assessing a deficiency against 23 such citizen for such year has not expired before the 24 ~Jate of the election under subsection (a) or (c), as the 25 case way be. 1332 PAGENO="0181" 161 1 "(3) ELECTIONS IN CASE OF DECEDENTS.-If a 2 husband or wife is deceased his election under this see- 3 tion may be made by his executor, adiministrator, or 4 other person charged with his property. 5 "(4) DEATH OF SPOUSE DURING TAXABLE 6 YEAR.-In applying subsection (a) (1) (C), and in de- 7 termining under subsection (c) (2) which spouse has 8 the greater income for a taxable year, if a husband or 9 wife dies the taxable year of the surviving spouse shall 10 be treated as ending on the date of such death." 11 (2) The table of subparts for such part III is 12 amended by adding at the end thereof the following: "Sub part H. Income of certain nonresident United States citizens subject to foreign community prop- erty laws." 13 (3) Section 911 (d) (relating to earned income 14 from sources without the United States) is amended- 15 (A) by striking out "For administrative" and 16 inserting in lieu thereof the following: "(1) For ad- 17 ininistrative"; and 18 (B) by adding at the end thereof the following: "(2) For elections as to treatment of income subject to foreign community property laws, see section 981." 19 (f) PRESUMPTIVE DATE OF PAYMENT FOR TAX 20 WITHHELD UNDER CHAPTER 3.- 21 (1) Section ~Th13(h) (`relating to time tax is consid- 1333 PAGENO="0182" 162 1 ered paid in the case of prepaid income tax) is amended 2 to read as follows: 3 "(b) PREPAID INCOME TAx.-For purposes of section 4 6511 or 6512- 5 "(1) Any tax actually deducted and withheld at 6 the source durin.g any calendar year under chapter 24 7 shall, in respect of the recipient of the income, be deemed 8 to have been paid by him on the 15th day of the fourth 9 month following the close of his taxable year with respect 10 to which such tax is allowable as a credit under section 11 31. 12 "(2) 4ny amount paid as estimated income tax for 13 any taxable year shall be deemed to have been paid on 14 the last day prescribed for filing the return under sec- 15 tion 6012 for such taxable year (determined without 16 regard to any extension of time for filing such return). 17 "(3) Any tax withheld at the source under chapter 18 3 shall, in respect of the recipient of the income, be 19 deemed to have been paid by such recipient on the last 20 day prescribed for filing the return under section 6012 21 for the taxable year (determined without regard to any 22 extension of time for filing) with respect to which such 23 tax is allowable as a credit under section 1462. For 24 this purpose, any exemption granted under section 6012 1334 PAGENO="0183" 163 1 from the requirement of filing a return shall be disre~ 2 garded." 3 (2) Section 6513(c) (relating to return and pay- 4 ment of Social Security taxes and income tax withhold- 5 ing) is amended- 6 (A) by striking out "chapter 21 or 24" and 7 inserting in lieu thereof "chapter 3, 21, or 24"; and 8 (B) by striking out "remuneration" in para- 9 graph (2) and inserting in lieu thereof "remunera- 10 tion or other amount". 11 (3) Section 6501 (b) (relating to time returns 12 deemed filed) is amended- 13 (A) by striking out "chapter 21 or 24" in par&. 14 graphs (1) and (2) and inserting in lieu thereof 15 "chapter 3, 21, or 24"; and 16 (B) by inserting after "taxes" in the heading 17 of paragraph (2) "and tax imposed by chapter 3". 18 (4) The amendments made by this subsection shall 19 take effect on the date of the enactment of this ,dct. 20 SEC. 106. FOREIGN TAX CREDIT. 21 (a) ALLOWANCE OF CREDiT TO CERTAiN NONRESI- 22 DENT ALIENS AND FOREIGN CORPORATIONS.- 23 (1) Subpart A of part III of subchapter N of 24 chapter 1 (relating to foreign tax credit) is amended 1335 PAGENO="0184" 164 1 by adding at the end thereof the following new section: 2 "SEC. 906. NONRESIDENT ALIEN INDIVIDUALS AND FOR- 3 EIGN CORPORATIONS. 4 "(a) ALLOJVANCE OF GREDJT.-A nonresident alien 5 individual or a foreign corporation engaged in trade or 6 business within the United States during the taxable year 7 shall be allowed a credit under section 901 for the amount 8 of an~~ income, war profits, and excess profits taxes paid or 9 accrued during the taxable year (or deemed, under section 10 902, paid or accrued during the taxable year) to any foreign 11 country or possession of the United States with respect to 12 income effectively connected with the conduct of a trade or 13 business within the United States. 14 "(h) SPECIAL RULES.- 15 "(1) For purposes of subsection (a) and for pur- 16 poses of determininq the deductions allowable under see- 17 tions 873(a) and 882(c), in determining the amount of 18 any tax pajd or accrued to any foreign country or posses- sion. there shall not be taken `into ~iccount any amount of 20 tax to the extent the tax so paid or accrued is im])oscd 21 with respect to income from sources u~ithin the United 22 Slates which would not be taxed by such foreign country or possession but for the fact that- 1336 PAGENO="0185" 165 1 "(A) in the case of a nonresident alien mdi- 2 vidual, such individual is a citizen or resident of such 3 foreign country or possession, or 4 "(B) in the case of a foreign corporation, such 5 corporation was created or organized nuder the law 6 of sucit foreign country or possession or is domiciled 7 for tax purposes in such country or possession. 8 "(2) For purposes of subsection (a), in applying 9 section 904 the taxpayer's taxable income shall be treated 10 as consisting only of the taxable income effectively eon- - 11 nected with the tax/)ayer's conduct of a trade or business 12 within the United States. 13 "(3) The credit allowed pursuant to subsection (a) 14 shall not be allowed against any tax imposed by section 15 871 (a) (relating to income of nonresident alien individ- 16 ual not connected with United States business) or 881 17 (relating to income of foreign corporations not connected 18 with United States business). 19 "(4) For purposes of sections 902(a) and 78, a 20 foreign corporation choosing the benefits of this subpart 21 which receives dividends shall, with respect to such divi- 22 dends, be treated as a domestic corporation." 1337 PAGENO="0186" 166 1 (2) The table of sections for such subpart A is 2 amended by adding at the end thereof the following:. "Bee. 906. Nonreeident alien individual8 and foreign cor~ poratione." 3 (3) Section 874(c) is amended by striking out 4 "(c) FOREIGN TAX CREDIT NOT ALLOWED.-A non- 5 resident" and inserting in lieu thereof the following: 6 "(c) FOREIGN TAX CREDIT.-Except as provided in 7 section 906, a nonresident". 8 (4) Subsection (b) of section 901 (relating to 9 amount allowed) is amended by redesignating para- 10 graph (4) as paragraph (5), and by inserting after 11 paragraph (3) the following new paragraph: 12 "(4) NONRESIDENT ALlEN INDIVIDUALS AND FOR- 13 EIGN CORPORATIONS.-In the case of any nonresident 14 alien individual no~ described in section 876 and in the 15 case of any foreign corporation, the amount determincd 16 pursuant to section 906; and ". 17 (5) Paragraph (5) (as redesignated) of section 18 901 (b) is amended by striking out "or (3)," and in- 19 serting in lieu thereof "(3), or (4),". 20 (6) The amendments made by this subsection shall 21 apply with respect to taxable years beginning after 22 December 31, 1966. In applying section 904 of the 23 Internal Revenue Code of 1954 with respect to section 1338 PAGENO="0187" 167 1 906 of such Code, no amount may be carried from or to 2 any taxable year beginning before January 1, 1967, and 3 no such year shall be taken into account. 4 (b) ALlEN RESIDENTS OF THE UNITED STATES OR 5 PUERTO Rico.- 6 (1) Paragraph (3) of section 901(b) (relating 7 to amount of foreign tax credit allowed in case of alien 8 resident of the United States or Puerto Rico) i~ amended 9 by striking out ", if the foreign country of which such 10 alien resident iá a citizen or subject, in imposing such 11 taxes, allows a similar credit to citizens of the United 12 States residing in such country". 13 (2) Section 901 i3 amended by redesignating sub- 14 sections (c) and (d) as subsections (d) and (e), and 15 by inserting after subsection (b) the following new 16 subsection: 17 "(c) SIMILAR CREDIT REQUIRED FOR C~ERTAiN ALIEN 18 RES1DENTS.-Whenever the President finds that- 19 "(1) a foreign country, in imposing income, war 20 profits, and excess profits taxes, does not allow to 21 citizens of the United States residing in such foreign 22 country a credit for any such taxes paid or accrued to 23 the United States or any foreign country, a~ the case 1339 PAGENO="0188" 1(38 1 may be, similar to the credit allowed under subsection 2 (b)(3), 3 "(2) such foreign country, when requested by the 4 United States to do so, has not acted to provide such a 5 similar credit to citizens of the United States residing 6 in such foreign country, and 7 "(3) it is in the public interest to allow the credit 8 under subsection (b) (3) to citizens or subjects of such 9 foreign country only if it allows such a similar credit to 10 citizens of the United States residing in such foreign 11 country, 12 the Presidont shall proclaim that,, for taxable years begin- 13 fling while the proclamation remains in effect, the credit 14 under subsection (b) (3) shall be allowed to citizens or 15 subjects of such forei,qn country only if such foreign country, 16 in imposing income, war profits, and excess profits taxes, 17 allows to citizens of the United States residing in such foreign 18 country such a similar credit." 19 (3) Section 2014 (relating to credit for foreign 20 death taxes) is amended by striking out the second sen- 21 tence of subsection (a), and by adding at the end of 22 such section the following new subsection: 23 "(h) SIMILAR CREDIT REQUIRED FOR CERTAiN 24 ALIEN RESIDENTS.-T'Vhenever the President finds that- "(1) a foreign country, in imposing estate, inherit- 1340 PAGENO="0189" 169 1 ance, legacy, or succession taxes, does not allow to citi- 2 zens of the United States resident in such foreign coun- 3 try at the time of death a credit similar to the credit 4 allowed under subsection (a), 5 "(2) such foreign country, when requested by the 6 United States to do so ha~ not acted to provide such a 7 similar credit in the case of citizens of the United States 8 resident in such foreign country at the time of death, and 9 "(3) it is in the public interest to allow the credit 10 under subsection (a) in the case of citizens or subjects 11 of such foreign country only if it allows such a similar 12 credit in the case of citizens of the United States resident 13 in such foreign country at the time of death, 14 the President shall proclaim that, in the case of citizens or 15 subjects of such foreign country dying while the proclamation 16 remains in effect, the credit under subsection (a) shall be al- 17 lowed only if such foreign country allows such a similar 18 credit in the case of citizens of the United States resident in 19 such foreign country at the time of death." 20 (4) The amendments made by this subsection 21 (other than paragraph (3)) shall apply with respect 22 to taxable years beginning after December 31, 1966. 23 The amendment made by paragraph (3) shall apply 24 with respect to estates of decedents dying after the date 25 of the enactment of this Act. 1341 PAGENO="0190" 170 1 (c,) FOREIGN TAX CREDIT IN RESPECT OF INTEREST 2 RECEIVED FROM FOREIGN SUBSIDIARIES.- 3 (1) Section 904(f) (2) (relating to application of `4 limitations on foreign tax credit in case of certain interest 5 income) is amended- 6 (A) by striking out subparagraph (C) and 7 inserting in lieu thereof the following: 8 "(C) received from a corporation in which 11w 9 taxpayer (or one or more includible corporations in 10 an affiliated group, as defined in section 1504, of 11 which the taxpayer is a member) owns, directly or 12 indirectly, at least 10 percent of the voting stock,". 13 (B) by adding at the end thereof the following 14 new sentence: 15 "For purposes of subparagraph (C); stock owned, di- 16 rectly or indirectly, by or for a foreign corporation 17 shall be considered as being proportionately owned by 18 its shareholders." 19 (2) The amendments made by paragraph (1) shall 20 apply to interest received after December 31, 1965, 21 in taxable years ending after ,such date. 1342 PAGENO="0191" 171 1 SEC. 107. AMENDMENT TO PRESERVE EXISTING LAW ON 2 DEDUCTIONS UNDER SECTION 931. 3 (a) DEDUCTJONS.-Subsectjon (d) of section 931 (re- 4 lating to deductions) is amended to read as follows: 5 "(d) DEDucTioNs.- 6 "(1) GENERAL RULE.-Except as otherwise pro- 7 vided in this subsection and subsection (e), in the case 8 of persons entitled to the benefits of this section the 9 deductions shall be allowed only if and to the extent 10 that they are connected with income from sources within 11 the United States; and the proper apportionment and 12 allocation of the deductions with respect to sources of 13 income within and without the United States shall be 14 determined as provided in part I, under regulations 15 prescribed by the Secretary or his delegate. 16 "(2) EXCEPTIONS.-T/Le following deductions shall 17 be allowed whether or not they are connected with in- 18 come from sources within the United States: 19 - "(A) The deduction, for losses not connected 20 with the trade or business if incurred in transactions 21 entered into for profit, allowed by section 165(c) 1343 PAGENO="0192" 172 1 (2), but only if the profit, if such transaction had 2 resulted in a profit, would be taxable under this 3 subtitle. 4 "(B) The deduction, for losses of property not 5 connected with the trade or business if arising from 6 certain casualties or theft, allowed by section 165 7 (c) (3), but only if the loss is of property within 8 the United States. 9 "(0) The deduction for charitable contribu- 10 tions and gifts allowed by section 170. 11 "(3) DEDUCTION DISALLOTVED.- "For disallowance of standard deduction, see section 142(b) (2)." 12 (b) EFFECTiVE DATE.-The amendment made by this 13 section shall apply with respect to taxable years beginning 14 after December 31, 1966. 15 SEC. 108. ESTATES OF NONRESIDE1VTS NOT CITIZENS. 16 (a) RATE OF TAx.-Subsection (a) of section 2101 17 (relating to tax imposed in case of estates of nonresidents 18 not citizens) is amended to read as follows: 19 "(a) RATE OF TAX.-Except as provided in section 20 2107, a tax computed in accordance with the following table 21 is hereby imposed on the transfer of the taxable estate, de- 1344 PAGENO="0193" 17~ 1 termined as provided in section 2106, of every decedent non- 2 resident not a citizen of the United States: "If the taxable estate is: The tax shall be: Not over $100,000 5% of the taxable estate. Over $100,000 but not over $500,000 $5,000, plus 10% of excess over Over $500,000 but not over $100~000. $1,000,000 $45,000, pins 15% of excess over Over $1,000,000 but not over $500,000. $2,000,000 $120,000, plus 20% of excess over $1,000,000. Over $2,000,000 $320,000, plus 25% of excess over $2,000,000." 3 (b) CREDITS AGAINST TAX.-Section 2102 (relating 4 to credits allowed against estate tax) is amended to read as 5 follows: 6 "SEC. 2102. CREDITS AGAINST TAX. 7 "(a) IN GENERAL.-TIie tax imposed by section 2101 8 shall be credited with the amounts determined in accordance 9 with sections 2011 to 2013, inclusive (relating to State death 10 taxes, gift tax, and tax on prior transfers), subject to the 11 special limitation provided in subsection (b). 12 "(b) SPECIAL, LIJIJTATION..-The maximum. credit 13 allowed under section 2011 against the tax imposed by see- 14 tion 2101 for State death taxes paid shall be an amount 115 which. bears the same ratio to the credit computed as pro- 11 () vi(ied in section 2011 (14 as the value of the property, as 17 determined for purposes of this chapter, upon. which State 71-297 0-67-pt. 2-13 1345 PAGENO="0194" 174 1 death taxes were paid and which is included in the gross 2 estate under section 2103 bears to the value of the total gross 3 estate under section 2103. For purposes of this subsection, 4 the term `State death taxes' means the taxes described in 5 section 2011 (a) ." 6 (c) PROPERTY WITHIN THE UNiTED STATES.-Sec- 7 tion 2104 (relating to property within the United States) is 8 amended by adding at the end thereof the following new 9 subsection: 10 "(c) DEBT OBLIGATIONS.-FOr purposes of this sub- 11 chapter, debt obligations of- 12 "(1) a United States person, or 13 ~c(2) the United States, a State or any political 14 subdivision thereof, or the District of Columbia. 15 owned and held by a nonresident not a citizen of the United 16 States shall be deemed property within the United States. 17 With respect to estates of decedents dying after December 31, 18 1971, deposits with a domestic branch of a foreign corpora- 19 tion, if such branch is engaged in the commercial banking 20 business, shall, for purposes of this subchapter, be deemed 21 property within the United States. This subsection shall not 22 apply to a debt obligation to which section 2105(b) applies or 23 to a debt obligation of a (lomestic corporation if any interest on 24 such obligation, were such interest received by the decedent 25 at the time of his death, would be treated by reason of see- 1346 PAGENO="0195" 175 1 tion 861 (a) (1) (B) as income from sources without the 2 United States." 3 (d) PROPERTY WiTHOUT THE UNITED STATE&-SUb- 4 section (b) of section 2105 (relating to bank deposits) is 5 amended to read as follows: 6 "(b) CERTAIN BANK DEPosITs, ETc'.-For purposes 7 of this subchapter- 8 "(1) amounts described in section 861 (c) if any 9 interest thereon, were such interest received by the dece- 10 dent at the time of his death, would be treated by reason of 11 section 861 (a) (1) (A) as income from sources without 12 the United States, and 13 "(2) deposits with a foreign branch of a domestic 14 corporation or domestic partnership, if such branch is 15 engaged in the commercial banking business, 16 shall not be deemed property within the United States." 17 (e) DEFINITION OF TAXABLE E5TATE.?-Paragraph 18 (3) section 2106(a) (relating to deduction of exemption 19 from gross estate) is amended to read as follows: 20 "(3) EXEMPTION.- 21 "(A) GENERAL RULE.-An exemption of 22 $30,000. 23 "(B) RES1DENTS OF POSSESSIONS OF THE 24 UNITED STATES.-In the case of a decedent who is 1347 PAGENO="0196" 17; I considered to be a `i1O)Ireside),t not a citizen of the 2 United States' under the provisions of section 2209, 3 the exemption shall be the greater of (i) $30,000, 4 or (ii) that proportion of the exemption authorized 5 by section 205~2 ~ehieh the value of that part of the 6 decedent's gross (`slate whi ic/i at the time of his 7 deal/i is situated `in the United States bears to the 8 value of his entire gross estate wherever situated." 9 (f) SPECIAL METhODS oi1 COMPUTING T1ix.-Sub- 10 chapter B of chapter 11 (relating to estates of nonresidents 11 not citizens) is amended by adding at the end thereof the fol- 12 lowing new sections: 13 "SEC. 2107. EXPATRIATION TO AVOID TAX. 14 "(a) RATE 0111 Tiix.-A tax computed `in accordance 15 with the table contained in section 2001 is hereby imposed 16 on the transfer of 1/ic 1a~able estate, determined as provided 17 in section 2106, of every decedent nonrestdent not a citizen 18 of the United States (lying after (lie (late of enactment of this 19 section, if after March 8, 196~, and within the 10-year pe- 20 rio(l ending wit/i f/ic (late of death sue/i decedent lost United 21 States citizenship, unless sue/i loss' (lid `not hare for one of its 22 principal purposes f/ic aroi(lancc of taxes under this subtitle 23 ~ subtitle A. 24 "(b) Gnoss EsTATE.-_Il1or purposes of 1/ic t((X imposed 1348 PAGENO="0197" 177 1. by subsection (a), the valve of the gross estate of every 2 decedent to whom subsection (a) applies shall be determined 3 as provided in section 2103, except that- 4 "(1) if such decedent owned (within the meaning 5 of section 958(a)) at the time of his death 10 percent 6 or more of the total combined voting power of all classes 7 of stock entitled to vote of a foreign corporation, and 8 "(2) if such decedent owned (within the meaning 9 of section 958(a)), or is considered to have owned 10 (by applying the ownership rules of section 958(b)), 11 at the time of his death, more than 50 percent of the 12 total combined voting power of all classes of stock en- 13 titled to vote of such foreign corporation, 14 (lien that proportion of the fair market value of the stock of 15 such foreign corporation owned (within the meaning of sec- 16 tion 958(a)) by such decedent at the time of his death, 17 which the fair market value of any assets owned by such for- 18 eign corporation and situated in the United States, at the time 19 of his death., bears to the total fair market value of all assets 20 owned by such foreign corporation at the time of his death, 21 shall be included in the gross estate of such decedent. For 22 purposes of the preceding sentence, a decedent shall be 23 treated as owning stock of a foreign corporation at the time 1349 PAGENO="0198" 178 1 of his death if, at the time of a transfer, by trust or otherwise, 2 within the meaning of sections 2035 to 2038, inclusive, lie 3 owned such stock; 4 "(c) CREDITS.-The tax imposed by subsection (a) shall 5 be credited with the amounts determined in accordance with 6 section 2102. 7 "(d) EXCEPTION FOR Loss OF CITIZENSHIP FOR CER- 8 TAIN CAUSES.-Subsection (a) shall not apply to the trans- 9 fer of the estate of a decedent whose loss of United States 10 citizenship resulted from the application of section 301 (b), 11 350, or 355 of the Immigration and Nationality Act, as 12 amended (8 U.S.C. 1401 (b), 1482, or 1487). 13 "(e) BURDEN OF PRO0F.-If the Secretary or his dde- 14 gate establishes that it is reasonable to believe that an mdi- 15 vidual's loss of United States citizenship would, but for this 16 section, result in a substantial reduction in the estate, in- 17 heritance, legacy, and succession taxes in respect of the 18 transfer of his estate, the burden of proving that such loss of 19 citizenship did not have for one of its principal purposes the 20 avoidance of taxes under this subtitle or subtitle A shall be 21 on the executor of such individual's estate. 22 "SEC. 2108. APPLICATION OF PRE-1967 ESTATE TAX PRO. 23 VISIONS. 24 "(a) IMPOSITION OF MORE BURDENSOME TAX BY 25 FOREIGN C0UNTRY.-.Whenever the President finds that- 1350 PAGENO="0199" 179 "(1) under the laws of any foreign country, con- 2 sidering the tax system~ of such foreign country, a more 3 burdensome tax is imposed by such foreign country on 4 the transfer of estates of decedents who were citizens of 5 the United States and not residents of such foreign 6 country than the tax imposed by this subchapter on the 7 transfer of estates of decedents who were residents of 8 such foreign country, 9 "(2) such foreign country, when requested by the 10 United States to do so, has not acted to revise or reduce 11 such tax so that it is no more burdensome than the tax 12 imposed by this subchapter on the transfer of estates 13 of decedents who were residents of such foreign country, 14 and 15 "(3) it is in the public interest to apply pre-1967 16 tax provisions in accordance with this section to the 17 transfer of estates of decedents who were residents of 18 such foreign country, 19 the President shall proclaim that the tax on the transfer of 20 the estate of every decedent who was a resident of such for- 21 eign country at the time of his death shall, in the case of 22 decedents dying after the date of such proclamation, be 23 determined under this subchapter without regard to amend- 24 ments made to sections 2101 (relating to tax imposed), 25 2102 (relating to credits against tax), 2106 (relating to 1351 PAGENO="0200" 180 1 taxable estate), and 6018 (relating to estate tax returns) 2 on or after the date of enactment of this section. 3 "(b) ALLEVIATION OF MORE BURDENSOME TAX.- 4 Whenever the President finds that the laws of any foreign 5 country with respect to which the President has made a proc- 6 lamation under subsection (a) have been modified so that 7 the tax on the transfer of estates of decedents who were 8 citizens of the United States and not residents of such 9 foreign country is no longer more burdensome than the 10 tax imposed by this subchapter on the transfer. of estates 11 of decedents who were residents of such foreign country, 12 he shall proclaim that the tax on the transfer of the 13 estate of every decedent who was a resident of such 14 foreign country at the time of his death shall, in the case 15 of deeedents dying after the date of such proclamation, be 16 determined under this subchapter without regard to sub- 17 section (a). 18 "(c) NOTIFICATION OF CONGRESS REQUIRED.-No 19 proclamation, shall be issued by the President pursuant to 20 this section unless, at least 30 days prior to such proclaina- 21 tion, he has notified the Senate and the house of Repre- 22 sentatives of his intention to issue such proclamation. 23 "(d) IMPLEMENTATION BY REGULATIONS.-TIie See- 24 retary or his delegate shall prescribe such regulations as may 25 be necessary or appropriate to implement this section." 1352 PAGENO="0201" 181 1 (g) ESTATE TAX RETuRNS.-Paragraph (2) of see- 2 tion 6018(a) (relating to estates of nonresidents not ciii- 3 zens) is amended by striking out "$2,000" and inserting in 4 lieu thereof "$30,000". 5 (h) CLERICAL AiIENDJIENT.-The table of sections for 6 subchapter B of chapter 11 (relating to estates of nonresi- 7 dents not citizens) is amended by adding at the end thereof 8 the following: "Sec. 2107. Expatriation to avoid tax. "Sec. 2108. Application of pre-1967 estate tax provisions." 9 (i) EFFECTIVE DATE.-The amendments made by this 10 section shall apply with respect to estates of decedents dying 11 after the date of the enactment of this Act. 12 SEC. 109. TAX ON GiFTS OF NONRESIDEIVTS NOT CIT!. 13 ZENS. 14 (a) IMPOSITION OF TAx.-Subsection (a) of section 15 2501 (relating to general rule for imposition of tax) is 16 amended to read as follows: 17 "(a) TAXABLE TRANSFERS.- 18 "(1) GENERAL RULE.-For the calendar year 19 1955 and each calendar year thereafter a tax, computed 20 as provided in section 2502, is hereby imposed on the 21 transfer of pvoperty by gift during such calendar year by 22 any individual, resident or nonresident. 23 "(2) TRANSFERS OF INTANGIBLE PROPERTY.- 24 Except as provided in paragraph (3), paragraph (1) 1353 PAGENO="0202" 182 shall not apply to the transfer of intangible property by 2 a nonresident not a citizen of the United States. 3 "(3) ExCEPTI0NS.-Paragraph (2) shall not apply in the case of a donor who at any time after March 8, 1965, and within the 10-year period ending 6 with the date of transfer lost United States citizenship unless- 8 "(A) such donor's loss of United States citi- 9 zenship resulted from the application of section 301 (b), 350, or 355 of the Immigration and Na- ii tionality Act, as amended (8 U.S.C. 1401 (b), 12 1482, or 1487), or 13 "(B) such loss did not have for one of its prin- 14 cipal purposes the avoidance of taxes under this is subtitle or subtitle A. 16 "(4) BURDEN OF PROOF.-If the Secretary or his 17 delegate establishes that it is reasonable to believe that 18 an individual's loss of United States citizenship would, 19 but for paragraph (3), result in a substantial reduction 20 for the calendar year in the taxes on the transfer of 21 property by gift, the burden of proving that such loss 22 of citizenship did not have for one of its principal pur- 23 poses the avoidance of taxes under this subtitle or snbtitle 24 A shall be on such individual." 25 (b) TRANSFERS IN GENERAL.-Subsectiom (b) of sec- 1354 PAGENO="0203" 183 1 tion 2511 (relating to situs rule, for stock in a corporation) 2 is amended to read as follows: 3 "(b) INTANGIBLE PROPERTY.-For purposes of this 4 chapter, in the case of a nonresident not a citizen of the 5 United States who is excepted from the application of section 6 2501(a)(2)- 7 "(1) shares of stock issued by a domestic corpora- 8 tion, and 9 "(2) debt obligations of- 10 "(A) a United States person, or 11 "(B) the United States, a State or any political 12 subdivision thereof, or the District of Columbia, 13 which are owned by such nonresident shall be deemed to be 14 property situated within the United States." 15 (c) EFFECTIVE DATE.-The amendments made by this 16 section shall apply with respect to the calender year 1967 17 and all calendar years thereafter. 18 SEC. 110. TREATY OBLIGATIONS. 19 No amendment made by this title shall apply in any case 20 where its application would be contrary to any treaty obliga- 21 tion of the United States. For purposes of the preceding 22 sentence, the extension of a benefit provided by any amend- 23 ment made by this title shall not be deemed to be contrary 24 to a treaty obligation of the United States. 1355 PAGENO="0204" 184 1 TITLE Il-OTHER AMENDMENTS 2 TO INTERNAL RE VENUE CODE 3 SEC. 201. APPLICATION OF INVESTMENT CREDIT TO 4 PROPERTY USED IN POSSESSIONS OF THE 5 UNITED STATES. 6 (a) PROPERTY USED BY DOMESTiC CORPORATIONS, 7 ETC.-Section 48(a) (2) (B) (relating to property used out- 8 side the United States) is amended- 9 (1) by striking out "and" at the end of clause (v); 10 (2) by striking out the period at the end of clause 11 (vi) and inserting in lieu thereof "; and"; and 12 (3) by adding at the end thereof the following new 13 clause: 14 "(vii) any property which is owned by a 15 domestic corporation (other than a corporation 16 entitled to the benefits of section 931 or 934(b)) 17 or by a United States citizen (other tha'n a citi- 18 zen entitled to the benefits of section 931, 932, 19 933, or 934(b)) and which is used predomi- 20 nantly in a possession of the United States by 21 such a corporation or such a citizen, or by a 22 corporation created or organized in, or under 23 the law of, a possession of the United States." 24 (b) EFFECTiVE DATE.-The amendments made by sub- 1356 PAGENO="0205" 18~ 1 section (a) shall apply to taxable years ending after Decem- 2 ber 31, 1965, but only with respect to property placed in 3 service after such date. In applying section 46(b) of the 4 Internal Revenue Code of 1954 (relating to carryback and 5 carryover of unused credits), the amount of any investment 6 credit carryback to any taxable year ending on or before 7 December 31, 1965, shall be determined without regard to the 8 amendments made by this section. 9 SEC. 202. DEDUCTION OF MEDICAL EXPENSES OF INDJ- 10 VIDUALS AGE 65 OR OVER. 11 (a) REPEAL OF AMENDMENTS MADE BY SOCIAL SE- 12 CURJTY AMENDMENTS OF 1965.-Subsections (a) and (b) 13 of section 106 of the Social Security Amendments of 1965 14 are repealed. 15 (b) COST OF MEDICAL INSURANCE,-Sectjon, 213(a) 16 (relating to allowance of deduction for medical, dental, etc., 17 expenses) is amended- 18 (1) by striking out "and" at the end of paragraph 19 (1)(A); 20 (2) by inserting after "such expenses" in paragraph 21 (1) (B) "(reduced by any amount deductible under sub- 22 paragraph (C))"; 23 (3) by striking out the period at the end of para- 24 graph (1) (B) and inserting in lieu thereof ", and"; 1357 PAGENO="0206" 186 1 (4) by adding at the end of paragraph (1) the fol- 2 lowing new subparagraph: 3 "(C) an amount (not in excess of $150) equal 4 to one-half of the expenses paid during the ta~cable 5 year for insurance which constitutes medical care 6 for the taxpayer, his spouse, and dependents (other 7 than any dependent described in subparagraph 8 (A))."; 9 (5) by striking out "and" at the end of paragraph 10 (2)(B); 11 (6) by inserting after "such expenses" in para- 12 graph (2) (C) "(reduced by any amount deductible 13 under subparagraph (D))"; 14 (7,) by striking out the period at the end of para- 15 graph (2) (C) and inserting in lieu thereof ", and"; 16 and 17 (8) by adding at the end of paragraph (2) the 18 following new subparagraph: 19 "(D) an amount (not in excess of $150) equal 20 to one-half of the expenses paid during the taxable 21 year for insurance which constitutes medical care 22 for such dependents (other than any dependent de- 23 scribed in paragraph (1) (4))." 24 (c) EFFECTIVE DATE.-The repeal and amendments 1358 PAGENO="0207" 187 1 made by this section shall apply to taxable years beginning 2 after December 31, 1966. 3 SEC. 203. BASIS OF PROPERTY RECEIVED ON LJQUIDA- 4 TION OF SUBSIDIARY. 5 (a) DEFINITION OF PURCHA,sE.-Section 334(b) (3) 6 (relating to definition of purchase) is amended by adding at 7 the end thereof the following new sentence: 8 "Notwithstanding subparagraph (C) of this para- 9 graph, for purposes of paragraph (2) (B), the term 10 `purchase' also means an acquisition of stock from a cor- 11 poration when ownership of such stock would be attributed 12 under section 318(a) to the person acquiring such 13 stock, if the stock of such corporation by reason of which 14 such ownership would be attributed was acquired by 15 purchase (within the meaning of the preceding sen- 16 tence)." 17 (b) PERIOD OF ACQUISITION.-Section 334(b) (2) 18 (B) (relating to exception) is amended by striking out "dur- 19 ing a period of not more than 12 months," and inserting in 20 lieu thereof "during a 12-month period beginning with the 21 earlier of- 22 "(i) the date of the first acquisition by pur- 23 chase of such stock, or 24 "(ii) if any of such stock was acquired in 1359 PAGENO="0208" 188 1 an. acquisition which is a purchase within the 2 meaning of the second sentence of paragraph 3 (3), the date on which the distributee is first 4 considered under section 318(a) as owning 5 stock owned by the corporation from which such 6 acquisition was made,". .7 (c) DIsTRIBuTIoN OF INSTALLMENT OBLIGATIONS.- 8 Section 453(d) (4) (A) (relating to distribution of install- 9 ment obligations in certain liquidations) is amended to read 10 as follows: 11 "(A) LIQUIDATIONS TO WHICH SECTION 339~ 12 APPLIES.-If- 13 "(i) an installment obligation is distributed 14 in a liquidation to which section 332 (relating 15 to complete liquidations of subsidiaries) applies, 16 and 17 "(ii) the basis of such obligation in the 18 hands of the distributee is determined under 19 section 334(b) (1), 20 then no gain or loss with respect to the distribution 21 of such obligation shall be recognized by the dis- 22 tributing corporation." 23 (d) EFFECTIVE DATES.-The amendment made by sub- 24 section (a) shall apply only with respect to acquisitions of 25 stock after December 31, 1965. The amendments made by 1360 PAGENO="0209" 189 1 s~thsections (b) and (c) shall apply only with respect to dis- 2 trib~itions made after the date of the enactment of this Act. 3 SEC. 204. TRANSFERS OF STOCK AND SECURITIES TO 4 CORPORATIONS CONTROLLED BY TRANS- 5 FERORS. 6 (a) TRANSFERS TO INVESTMENT COMPANIES.-The 7 first sentence of section 351 (a) (relating to transfers to cor- 8 porations controlled by transferor) is amended by striking out 9 "to a corporation" and inserting in lieu thereof "to a co~rpora- 10 lion (including an investment company)". 11 (b) EFFECTIVE DATE.-The amendment made by sub- 12 section (a) shall apply wit/i respect to transfers of property 13 whether made before, on, or after the date of the enactment 14 of this Act. ~ SEC. 205. MINIMUM AMOUNT TREATED AS EARNED IN. 16 COME FOR RETIREMENT PLANS OF CERTAIN 17 SELF-EMPLOYED INDIVIDUALS. 18 (a) INCREASE TO $6,600.-Section 401 (c) (2) (B) (re- 19 lating to earned income when both personal services and capi- 20 tal are material income-producing factors) is amended by 21 striking out "$2,500" each place it appears therein and in- 22 serting in lieu thereof "$6,600". 23 (b) EFFECTIVE DATE.-The amendment made by sub- 24 section (a) shall apply to taxable years beginning after De- 25 cember 31, 1965. 71-297 0-67-pt. 2-14 1361 PAGENO="0210" 190 1 SEC. 206. TREATMENT OF CERTAIN INCOME OF AU 2 THORS, INVENTORS, ETC., AS EARNED IN- 3 COME FOR RETIREMENT PLAN PURPOSES. 4 (a) INCOME FRO~1I DISPoSITIoN OF PROPERTY ORE- 5 ATED BY TAXPAYER.-SectiOn 401 (c) (2) (relating to defi- 6 nition of earned income) is amended by adding at the end 7 thereof the following new subparagraph: 8 "(0) INCOME FROM DISPOSITiON OF CER- 9 TAIN PROPERTY.-For purposes of this section, the 10 term `earned income' includes gains (other than any 11 gain which is treated under any provision of this 12 chapter as gain from the sale or exchange of a 13 capital asset) and net earnings derived from the 14 sale or other disposition of, the transfer of any in- 15 terest in, or the licensing of the use of property 16 (other than good will) by an individual whose per- 17 sonal efforts created such property." 18 (b) EPFECTIVE DATE.-The amendment made by sub- 19 section (a) shall apply to ta~cabie years ending after the date 20 of the enactment of this Act. 1362 PAGENO="0211" 191 1 SEC. 207. EXCLUSION OF CERTAIN RENTS FROM PER- 2 SONAL HOLDING COMPANY INCOME. 3 (a) RENTS FROM LEASES OF CERTAIN TANGIBLE 4 PERSONAL PR0PERTY.-Section 543 (b) (3) (relating to 5 adjusted income from rents) is amended by striking out "but 6 does not include amounts constituting personal holding corn- 7 pany income under subsection (a) (6), nor copyright roy~il- 8 ties (as defined in subsection (a) (4) nor produced film rents 9 (as defined in subsection (a) (5) (B)) ." and inserting in 10 lieu thereof the following: "but such term does not include- 11 "(A) amounts constituting personal holding 12 company income under subsection (a) (6), 13 "(B) copyright royalties (as defined in sub- 14 section (a)(4)), 15 "(C) produced film rents (as defined in sub- 16 section (a) (5) (B)), or 17 "(D) compensation, however designated, for the 18 use of, or the right to use, any tangible personal 19 property manufactured or produced by the taxpayer, 20 if during the taxable year the taxpayer is engaged 1363 PAGENO="0212" 192 1 in substantial manufacturing or production of 2 tangible personal property of the same type." 3 (b) TECHNICAL AMENDMENTS.- 4 (1) Sect inn 543(a) (2) (relating to adjusted in- 5 come from rents included in personal holding company 6 income) is amended by striking out the last sentence 7 thereof. 8 (2) Section 543(b) (2) (relatin.g to definition of 9 adjusted ordinary gross income) is amended by adding 10 at the end thereof the following new subparagraph: 11 "(D) CERTAIN EXCLUDED RENTS.-From the 12 gross income consisting of compensation described 13 in subparagraph (D) of paragraph (3) subtract 14 the amount allowable as deductions for the items 15 described in clauses (i), (ii), (iii), and (iv) of 16 subparagraph (A) to the extent allocable, under 17 regulations prescribed by the Secretary or his dele- 18 gate, to such gross income. The amount subtracted 19 under this subparagraph shall not exceed such gross 20 income." 21 (c) EFFECTIVE DATE .-T he amendments made by 22 subsections (a) and (b) shall apply to taxable years begin- 23 ning after the date of the enactment of this Act. Such 24 amendments slicili also apply, cit the election of the taxpayer 1364 PAGENO="0213" 193 1 (made at such time and in such;manner as the Secretary or 2 his delegate may prescribe), to taxable years beginning on 3 or before such date and ending after December 31, 1965. 4 SEC. 208. PERCENTAGE DEPLETION RATE FOR CERTAIN 5 CLAY BEARING ALUMINA. 6 (a) 23 PERCENT RATE.-Section 613(b) (relating to 7 percentage depletion rates) is amended- 8 (1) by inserting "clay, laterite, and nephelite sye- 9 nite" after "anorthosite" in paragraph (2) (B); and 10 (2) by striking out "if paragraph (5) (B) does not 11 apply" in paragraph (3) (B) and inserting in lieu 12 thereof "if neither paragraph (2) (B) nor (5) (B) ap- 13 plies". 14 (b) TREATMENT PROCESSES.-Section 613(c) (4) 15 (relating to treatment processes considered as mining) is 16 amended- 17 (1) by striking out "and" at the end of subpara- 18 graph (0), 19 (2) by redesignating subparagraph (H) as (I), 20 and by inserting after subparagraph (G) the following 21 new subparagraph: 22 "(H) in the case of clay, laterite, and nephelite 23 syenite from deposits in the United States (to the 1365 PAGENO="0214" T194 1 extent that alumina and aluminum compounds are 2 extracted therefrom)-all processes applied to derive 3 alumina or aluminum compounds therefrom; and". 4 (c) EFFECTIVE DATE.-The amendments made by sub- 5 sections (a) and (b) shall apply to taxable years beginning 6 after the date of the enactment of this Act. 7 SEC. 209. PERCENTAGE DEPLETION RATE FOR CLAM 8 AND OYSTER SHELLS. 9 (a) 15 PERCENT RATE.-Section 613(b) (relating 10 to percentage depletion rates) is amended- 11 (1) by striking out "mollusk shells (including clam 12 shells and oyster shells)," in paragraph (5) (A), and 13 (2) by inserting "mollusk shells (including clam 14 shells and oyster shells)," after "marble," in~ paragraph 15 (6). 16 (b) EFFECTIVE DATE.-The amendments made by sub- 17 section (a) shall apply to taxable yecirs. beginning after the 18 date of the enactment of this Act. 19 SEC. 210. SINTERING AND BURNING OF SHALE, CLAY, 20 AND SLATE USED AS LIGHTWEIGHT AGGRE. 21 GATES. 22 (a) TREATMENT PROCESSES.-Sectjon 613(c) (4) 23 (relating to treatment pröcesies considered as mining) is 24 amended by striking out "and the furnacing of quicksilver 25 ores" in subparagraph (E) and inserting in lieu thereof 1366 PAGENO="0215" 19b 1 "the furnacing of quicksilver ores, and the sintering or bur',i- 2 ing of shale, clay, and slate used or sold for use as lightweight 3 aggregates". 4 (b) EFFECTiVE DATE.-The amendment made by sub- 5 section (a) shall apply to taxable years beginning after the 6 date of the enactment of this Act. * 7 SEC. 211. STRADDLES. 8 (a) TREATMENT AS SHORT-TERM CAPITAL GAIN.- * 9 Section 1234 (relating to options) is amended *by redesig- 10 nating subsection (c) as subsection (d) and by inserting after 11 subsection (b) the following new subsection: 12 "(c) SPECIAL RULE FOR GRANTORS OF STRADDLES.- 13 "(1) GAIN ON LAPSE.-In the case of gain on lapse 14 of an option granted by the taxpayer as part of a strad- 15 dle, the gain shall be deemed to be gain from the sale or 16 exchange of a capital asset held for not more than 6 17 months on the day that the option expired. 18 "(2) EXCEPTION.-This subsection shall not apply 19 to any person who hOlds securities for sale to customers 20 in the ordinary course of his trade or business. 21 "(3) DEFINITIONS.-FOr purposes *of this subsec- *22 tionr- 23 "(A) The term `straddle' means a simultane- 24 ously granted combinatio~n of an option to buy, and 1367 PAGENO="0216" 196 1 an option to sell, the same quantity of a security at 2 the same price during the same period of time. 3 "(B) The term `security' has the meaning as- 4 signed to such term by section 1236(c) ." 5 (b) EFFECTIVE DATE.-The amendments made by sub- 6 section (a) shall apply to straddle transactions entered into 7 after January 25, 1965, in taxable years ending after such 8 date. 9 SEC. 212. TAX TREATMENT OF PER.UNIT RETAIN ALLO. 10 CATIONS. 11 (a) TAX TREATMENT OF COOPERATIVES.- 12 (1) Section 1382(a) (relating to gross income of 13 cooperatives) is amended by striking out the period at 14 the~ end thereof and inserting "or by reason of any amount 15 paid to a patron as a per-unit retain allocation (as de- 16 fined in section 1388(f))." 17 (2) Section 1382(b) is amended-- 18 (A) by striking out "(b) PATRONAGE Div- 19 IDENDS.-" and inserting in lieu thereof "(b) PA- 20 TRONAGE DIVIDENDS AND PER-UNIT RETAIN 21 ALLOCATIONS.-", 22 (B) by striking out "or" at the end of para- 23 graph (1), 24 (0) by striking out the period at the end of 1368 PAGENO="0217" 197 1 paragraph (2) and inserting a sem~icoton in lieu 2 thereof, 3 (D) by striking out the sentence following para- 4 graph (2) and inserting in lieu thereof the following: 5 "(3) as per-unit retain allocations, to the extent paid 6 in qualified per-unit retain certificates (as defined in sec- 7 tion 1388(h)) with respect to marketing occurring dur- 8 ing such taxable year; or 9 "(4) in money or other property (except per-unit 10 retain certificates) in redemption of a non qualified per- 11 unit retain certificate which was paid as a per-unit retain 12 allocation during the payment period for the taxahie year 13~ during which the marketing occurred." 14 "For purposes of this title, any amount not taken into ac- 15 count under the preceding sentence shall, in the case of an 16 amount described in paragraph (1) or (2), be treated in 17 the same manner as an item of gross income and as a deduc- 18 tion therefrom, and in the case of an amount described in 19 paragraph (3) or (4), be treated as a deduction in arriving 20 at gross income." 21 (3) Section 1382(e) is amended to read as fol- 22 lows: 23 "(e) PRODUCTS MARKETED UNDER POOLING AR- 24 RANGEMENTS.-For pu rposes of subsection (b), in the case 1369 PAGENO="0218" 198 1 of a pooling arrangement for the marketing of products- 2 "(1) the patronage shall (to the extent provided 3 in regulations prescribed by the Secretary or his dele- 4 gate) be treated as patronage occurring during the tax- 5 able year in which the pool closes, and 6 "(2) the marketing of products shall be treated as 7 occurring during any of the taxable years in which the 8 pool is open." 9 (4) Section 1382(f) is amended by striking out 10 "subsection (b)" and inserting in lieu thereof "para- 11 graphs (1) and (2) of subsection (b) ~`. 12. (5) The heading for section 1383 is amended by 13 striking out the period at the end thereof and inserting 14 "OR NON QUALiFIED PER-UNiT RETAIN CERTIFI. 15 GATES." 16 (6) Sectwn 1383 (a) is amended- 17 (A) by striking out "section 1382(b) (2)" and 18 inserting in lieu t1ici~eof "section .1382(b) (2) or 19 (4),", 20 (B) by striking out "non qualified written no- 21 tices of allocation" each place it appears and in- 22 serting in lieu thereof "non qualified written notices~ 23 of allocation or non qualified per-unit retain certifi- 24 cates", and 25 (0) by striking out "qualified written notices 1370 PAGENO="0219" 199 1 of allocation" and inserting in lieu thereof "qual- 2 ified written notices of allocation or qualified per-unit 3. retain certificates (as the case may be)". 4 (7) Section 1383 (b) (2) is amended- 5 (A) by striking out "nonqualified written no- 6 tice of allocation" and inserting in lieu thereof "non- 7 qualified written notice of allocation or non qualified 8 per-unit retain certificate", 9 (B) by striking out "qualified written notice of 10 allocation" and inserting in lieu thereof "qualified 11 written notice of allocation or qualified per-unit re- 12 tam certificate (as the case may be)", 13 . (C) by striking out "such written notice of 14 allocation." ((.fld inserting in lieu thereof "such writ- 15 ten notice of allocation, or per-unit retain certificate", 16 and 17 (D) by striking out "section 1382(b) (2)" and 18 inserting in lieu thereof "section 1382(b) (2) or 19 (4),". 20 (8) The table of sections for part 1 of subchapter 21 T of chapter 1 is amended by .`~triking out- "See. 1383. Computation of tax where cooperative redeems `non qualified written notices of allocation." 22 and inserting in lieu thereof- "Sec. 1383. Computation of tax where cooperative redeems non qualified written notices of allocation or noiIqucslified per-unit retain certificates." 1371 PAGENO="0220" 200 1 (b) TAX TREATMENT BY PATRONS.- 2 (1) Section 1385(a) is amended by striking out 3 "and" at the end of paragraph (1), by striking out the 4 period at the end of paragraph (2) and inserting in lieu 5 thereof ", and", and by adding at the end the~'eof the fol- 6 lowing new paragraph: 7 "(3) the amount of any per-unit retain allocation 8 which is paid `in qualified per-unit retain certificates and 9 which is received by him during the taxable year from an 10 organization described in section 1381 (a)." 11 (2) The heading for section 1385(c) is amended by 12 striking out "ALLoCATIoN" and inserting in lieu thereof 13 "ALLOCATION AND CERTAIN NONQUALIFIED PER- 14 UNIT RETAIN CERTiFICATES". 15 (3) Section 1385(c) (1) is amended to read as fol- 16 lows: 17 "(1) APPLICATION OF SUBSECTION.-This subsec- 18 tion shall apply to- 19 "(A) any non qualified written notice of alloca- 20 tion which- 21 "(i) was paid as a patronage dividend, or 22 "(ii) was paid by an organization described 23 in section. 1381(a) (1) on a patronage basis 24 with respect to earnings derived from business 1372 PAGENO="0221" 201 1 or sources described in section l382(c) (2) (A), 2 and 3 "(B) any non qualified per-unit retain certif- 4 icate which was paid as a per-unit retain alloca- 5 tion." 6 (4) Section 1385(c) (2) is amended~- 7 (A) by striking out "non qualified written notice 8 of allocation" and inserting in lieu thereof "non- 9 qualified written notice of allocation or non qualified 10 per-unit retain certificate", and 11 (B) by striking out "such written notice of al- 12 location" each place it appears and inserting in lieu 13 thereof "such written, notice of allocation, or per-unit 14 retain certificate". 15 (5) The table of parts for subchapter T of chapter 16 1 is amended by striking out- "Part IL Tax treatment by patrons of patronage dividends." 17 and inserting in lieu thereof- "Part II. Tax treatment by patrons of patronage dividends and per-unit retain allocations." 18 (c) DEFINITIONS.- 19 71) (A) Section 1388(e) (1) is amended by strik- 20 ing out "allocation)" and inserting in lieu thereof "allo- 21 cation or a per-unit retain certificate)". 22 (B) Section 1388(e) (2) is amended by striking 1373 PAGENO="0222" 202 1 out "allocation" and inserting `in lieu thereof "ailoca- 2 tion or qualified per-unit retain certificate". 3 (2) Section 1388 is amended by adding at the end 4 thereof the following new subsections: 5 "(f) PER-UNIT RETAIN ALLOCATION.-FOr purposes 6 of this subchapter, the term `per-unit retain allocation' means 7 any allocation, by an organization to which part I of this sub- 8. chapter applies, other than by payment in money or other 9 property (~xcept per-unit retain certificates) to a patron with 10 respect to products marketed for him, the amount of which' ~ is fixed without reference to the net earnings of the organiza-. 12 tion pursuant to an agreement between the organization arni 13 the patron. 14 "(g) PER-UNIT RETAIN CEI?TJFICATE.--For purposes 15 of this subchapter, the term `per-unit retain certificate' means 16 any written notice which discloses to the receipient the stated 17 dollar amount of a per-unit retain allocation to him by the 18 organization. 19 "(h) QUALIFIED PER-UNIT RETAIN CERTIFIcATE.- 20 "(1) DEFINED .-For purposes. of .this subchapter,: 21 the term `qualified per-unit retain certificate' means any 22 p~u.nit retain certificate which the distributee has agreed, 23 in the manner provided in paragraph (2), to take into 24. account at its stated dollar amount as provided in section 25 1385(a). 1374 PAGENO="0223" 203 1 "(2) MANNER OF. OBTAINING AGREEMENT.-A 2 distributee shall agree to take. a per-unit retain certificate 3 into account as provided in paragraph (1) only by- 4 "(A) making such agreement in writing, or 5. "(B) obtaining or retaining membership in the 6 organ izatiort after- 7 "(i) such organization has adopted (after 8 the date . of the enactment of this subsection) a 9 bylaw providing that membership in the organi- 10 zation constitutes such agreement, and 11 "(ii) he has received a written notification~ 12 and copy of such bylaw. 13 "(3) PERIOD FOR WHICH AGREEMENT IS EFFECTIVE.- 14 "(A) GENERAL RULE.-Except as provided in 15 subparagraph (B)- 16 "(i) an agreement described in paragraph 17 (2) (A) shall be an agreement with respect to 18 all products delivered by the distributee to the 19 organization during the taxable year of the orga- 20 nization during which such agreement is made 21 and all subsequent taxable years of the organiza- 22 tion; and 23 "(ii) an agreement described in paragraph 24 (2) (B) shall be an agreement with respect to 25 all products delivered by the distributee to the 1375 PAGENO="0224" 204 1 organization after he received the notification 2 and copy described in paragraph (2) (B) (ii). 3 "(B) REvoCATIoN, ETC.- 4 "(i) Any agreement described in para- 5 graph (2) (A) may be revoked (in writing) 6 by the distributee at any time. Any such revo- 7 cation s/i all be effective wi/h respect to product~s 8 delivered by the distributee on or after the first 9 day of the first taxable ye~i'i' of the organization 10 beginning after the revocation is filed with the 11 organization; except that in the case of a pool- 12 ing arrangement described in section 1382(e) a revocation made by a distributee shall not be 14 effective as to any products which were delivered 15 to the organization, by the distributee before such 16 revocation. 17 "(ii) Any agreement described in para- 18 graph (2) (B) shall not be effective with re- 19 spect to any products delivered after the dis- 20 tributee ceases to be a member of the organiza- 21 tion or after the bylaws of the organization 22 cease to contain the provision described in para- 23 graph (2) (B) (i). 24 "(i) NONQUALIFIED PER-UNiT RETAIN GERTIFI- 25 CATE.-For purposes of this subchapter, the term `non quali- 1376 PAGENO="0225" 205 1. fled per-unit retain certificate' means a per-unit retain cer- 2 tificate which is not described in~ subsection (h) ." 3 (d) INFORMATION REPORTING.- 4 (1) AMOUNTS SUBJECT TO REPORTING.-Section 5 6044(b) (1) is amended by striking out "and" at the 6 end of subparagraph (B), by striking out the period at 7 the end of subparagraph (C) and inserting in. lieu 8 thereof ", and", and by adding after subparagraph (C) 9 the following new subparagraphs: 10 "(D) the amount of any per-unit retain al- 11 location (as defined in section 1388(f)) which 12 is paid in. qualified per-unit retain certificates (as 13 defined in section 1388(h)), and 14 "(E) any amount described in section 1382 15 (b) (4) (relating to redemption of non qualified per- 16 unit retain certificates)." 17 (2) DETERMINATION OF AMOUNT PAID.- 18 (A) Section 6044(d) (1) is amended by strik- 19 ing out "allocation)" and inserting in lieu thereof 20 "allocation or a qualified per-unit retain certifi- 21 cate)". 22 (B) Section 6044(d) (2) is amended by strik- 23 ing out "allocation" and inserting in lieu thereof 24 "allocation or a qualified per-unit retain certificate". 71-297 0-67-pt. 2-15 1377 PAGENO="0226" 206 1 (e) EFFECTIVE DATES.- 2 (1) The amendments made by subsections (a), (b), 3 and (c) shall apply to per-unit retain allocations made 4 during taxable years of an organization described in sec- 5 tion 1381 (a) (relating to organizations to which part I 6 of subchapter T of chapter 1 applies) beginning after 7 April 30, 1966, with respect to products delivered dur- 8 ing such years. 9 (2) The amendments made by subsection (d) shall 10 apply with respect to calendar years after 1966. 11 (f) TRANSITION RULE.- 12 (1) Except as provided in paragraph (2), a writ- 13 ten agreement between a patron and a cooperative a~- 14 .sociation- `15 (A) which clearly provides that the pat ~6n 16 agrees to treat the stated dollar amounts of all peer- 17 unit retain certificates issued to him by the associa- 18 tion as representing cash distributions which he has, 19 of his own choice, reinvested in the cooperative 20 association, 21 (B) which is revocable by the patron at any 22 time after the close of the taxable year in which it 23 was made, 24 ` (C) which was entered into after October 14, 1378 PAGENO="0227" ~2O7 * .1 1965, and before the date of the enactment of this 2... Act,and 3 .(D) which is in effect on the date of the enact- 4 ment of this Act, and with respect to which a written 5 . notice of revocation has. not been furnished to the 6 cooperative association, * 7 : shall be effective (for the period prescribed in the agree- 8 . . ment) for purposes of section 1388(h) of the Internal 9 Revenue Code of 1954 as if entered into, pursuant to 10 *. such section., after the date of the enactment of this Adt. 11 . (2) An agreement described in paragraphs (1) (A) 12 .. and (C) which was included in a by-law of the coopera- 13 tive association and which is in effect on the date of the 14. enactment of this Act shall be effective for purposes of sec- 15 tion 1388(h) of such Code only for taxable years of the * 16. association beginning before May 1, 1967. 17 SEC. 213. EXCISE TAX RATE ON AMBULANCES AND .18 . HEARSES. 19 (a) CLASSIFICATION AS AUTOMOBILES.-Section 4062 20 (relating to definitions applicable to the tax on motor vehicles) 21 is . amended by adding at the end thereof the following new 22 subsection: 23 "(b) AMBULANCES, HEARSES, ETC.-For purposes of 24 section 4061 (a), a sale of an ambulance, hearse, or combina- 1379 PAGENO="0228" 208 1 tion ambulance-hearse shall be considered to be a sale of an 2 automobile chassis and an automobile body enumerated in 3 subparagraph (B) of section 4061 (a) (2) ." 4 (b) EFFECTIVE DATE.-The amendment made by sub- 5 section (a) shall apply with respect to articles sold after the 6 date of the enactment of this Act. 7 SEC. 214. APPLiCABILITY OF EXCLUSION FROM INTEREST 8 EQUALIZATION TAX OF CERTAIN LOANS TO 9 ASSURE RAW MATERIALS SOURCES. 10 (a) EXCEPTION TO ExCLUSION.-Section 4914(d) 11 (relating to loans to assure raw materials sources) is amended 12 by adding at the end thereof the following new paragraph: 13 "(3) EXCEPTION.-The exclusion from tax pro- 14 vided by paragraph (1) shall not apply in any case where the acquisition of the debt obligation of the foreign corpo- 16 ration is made with a~n intent to sell, or to offer to sell, any 17 part of such debt obligation to United States persons." 18 (b) TECHNICAL AMENDMENTS..-(1) Section 4914 19 (j) (1) (relating to loss of entitlement to exclusion in case of 20 certain subsequent transfers) is amended- 21 (A) by striking out in subparagraph (A) ", or 22 the exclusion provided by subsection (d),", and 23 (B) by striking out "subsection. (d) or (f)" in 24 subparagraph (D) and inserting in lieu thereof 25 "subsection (f)". 26 (2) Section 4918 (relating to exemption for prior PAGENO="0229" 209 American ownership) is amended by adding at the end thereof the following new subsection: "(g) CERTAIN DEBT OBLIGATIONS ARiSING OUT OF LOANS To ASSURE RAW MATERIAL SOUR CES.-Under regulations prescribed by the Secretary or his delegate, sub- section (a) shall not apply to the acquisition by a United States person of any debt obligation to which section 4914(d) applied where the acquisition of the debt obligation by such person is made with an intent to sell, or to offer to sell, any part of such debt obligation to United States persons. The preceding sentence shall not apply if the tax imposed by section 4911 has applied to any prior acquisition of such debt obligation." (c) EFFECTIVE DATE.-The amendments made by sub- sections (a) and (b) shall apply with respect to acquisitions of debt obligations made after the date of the enactment of this Act. SEC. 215. EXCLUSION FROM INTEREST EQUALIZATION TAX FOR CERTAIN ACQUISIT1ONS BY INSUR- ANCE COMPANIES. (a) NEW COMPANIES AND COMPANIES OPERATING IN FORMER LESS DEVELOPED COUNTRIES.-Section 4914 (e) (relating to acquisitions by insurance companies doing business in foreign countries) is amended- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 1381 PAGENO="0230" 210 1 (1) by striking out "at the time of the initial desig- 2 nation" in the last sentence of paragraph (2); 3 (2) by striking out "An" in the first sentence of 4 paragraph (3) (A) (i) and inserting in lieu thereof "Ex- 5 cept as provided in clause (iii), an"; 6 (3) by striking out "under this subparagraph" in 7 paragraph (3) (A) (ii) and inserting in lieu thereof 8 "under clause (i)"; 9 (4) by adding after clause (ii) of paragraph (3) 10 (A) the following new clauses: 11 "(iii) INITIAL DESIGNATION AFTER 12 OCTOBER 2, 1964.-An insurance company 13 which was not in existence on October 2, 14 1964, or was otherwise ineligible to establish a 15 fund (or funds) of assets described in para- 16 graph (2) by making an initial designation un- 17 der clanse (i) on or before such date, may estab- 18 lish (and thereafter currently maintain) such 19 fund (or funds) of assets at any time after the 20 enactment of this clause by designating stock of 21 a foreign issuer or a debt obligation of a foreign 22 obligor as a part of such fund in accordance 23 with the provisions of clause (iv) (if applicable) 24 and subparagraph (B) (i). 1382 PAGENO="0231" 211 1 "(iv) FUNDS iNVOLVING CURRENCIES OF 2 FORMER LESS DEVELOPED COUNTRIES.-An 3 insurance com~pany desiring to establish a fund 4 under clause (iii) with respect to insurance 5 contracts payable in the currency of a country 6 designated as a less devekped country on Octo- 7 ber 2, 1964, which thereafter has such designa- 8 tion terminated by an Executive order issued 9 under section 4916(b), shall designate as assets 10 of such fund, to the extent permitted by sub- 11 paragraph (E), the stock of foreign issuers or 12 debt obligations of foreign obligors as follows: 13 First, stock and debt obligations having a period 14 remaining to maturity of at least 1 year (other 15 than stock or a debt obligation described in sec- 16 tion 4916(a)) acquired before July 19, 1963, 17 and owned by the company on the date which 18 the President, in accordance with section 4916 19 (b), communicates to Congress his intention to 20 terminate the status of such country as a less de- 21 veloped country; second, stock and debt obliga- 22 tions having a period remaining to maturity of 23 at least 1 year described in section 4916(a) 24 (and owned by the company on the date of such 1383 PAGENO="0232" 212 1 termination) which, at the time of acquisition, 2 qualified for the exclusion provided in such see- 3 tion because of the status of such country as a 4 less developed country; and third, such stock or 5 debt obligations as the company may elect to des- 6 ignate under subparagraph (B) (i). The pe- 7 nod remaining to maturity referred to in the 8 preceding sentence shall be determined a~ of the 9 date of the President's communication to 10 Congress."; (5) by striking out "TO MAINTAIN FUND" in the 12 heading of paragraph (3) (B),* 13 (6) by striking out "as provided in subparagraph 14 (A) (ii)" in paragraph (3) (B) (i) and inserting in lieu 15 thereof "under subparagraphs (A) (i) and (ii)"; 16 (7) by inserting before the period at the end of the 17 first sentence of paragraph (3) (C) the following: "; 18 except that, with respect to a fund established nnder sub- 19 paragraph (A) (iii), stock or debt obligations acquired 20 before the establühment of such fund may not be desig- 21 nated as part of such fund under this subparagraph"; 22 (8) by striking out "subparagraph (B)," in para- 1384 PAGENO="0233" 213 1 graph (3) (E) (i) and inserting in lieu thereof "sub- 2 paragraph (A)(iv), (B),"; 3 (9) by striking out "subparagraph (A)" in para- 4 graph (4) (B) (i) and inserting in lieu thereof "sub- 5 paragraph (A) (i)"; 6 (10) by striking out "paragraph (3) (A)" in para- 7 graph (4) (B) (ii) and inserting in lieu thereof "para- 8 graph (3) (A) (i)"; and 9 (11) by adding at the end of paragraph (4) the 10 following new paragraph: 11 "(C)SPECIAL RULE.-For purposes of sub- 12 paragraph (A), if a country designated as a less 13 developed country on September 2, 1964, thereafter 14 has such designation terminated by an Executive 15 order issued under section 4916(b), all insurance 16 contracts payable in the currency of such country 17 which were entered into before such designation was 18 terminated shall be treated as insurance contracts 1.9 payable in the currency of a country other than a less 20 developed country." 21 (b) EFFECTIVE DATE.-The amendments made by sub- 1385 PAGENO="0234" 214 1 section (a) shall take effect on the day after the date of the 2 enactment of this Act. 3 SEC. 216. EXCLUSION FROM INTEREST EQUALIZATION 4 TAX OF CERTAIN ACQUISITIONS BY FOREIGN 5 BRANCHES OF DOMESTIC BANKS. 6 (a) AUTHORITY FOR MODIFICATION OF EXECUTIVE 7 ORDERS.-Section 4931 (a) (relating to commercial bank 8 loans) is amended by adding at the end thereof the following 9 new sentence: "Clause (A) of the preceding sentence shall 10 not prevent a modification of such Executive order (or any 11 modification thereof) to exclude from the application of sub- 12 section (b) acquisitions by commercial banks, through 13 branches located outside the United States, of debt obligations 14 of foreign obligors payable in currency of the United States." 15 (b) EFFECTIVE DATE.-The amendment made by sub-. 16 section (a) shall apply with respect to acquisitions of debt 17 obligations made after the date of the enactment of this Act. 18 TITLE Ill-PRESIDENTIAL ELEC- 19 TION CAMPAIGN FUND ACT 20 SEC. 301. SHORT TITLE. 21 This title may be cited as the "Presidential Election Cam- 22 paign Fund Act of 1966". 1386 PAGENO="0235" 215 1 SEC. 302. AUTHORITY FOR DESIGNATION OF $1 OF IN- 2 COME TAX PAYMENTS TO PRESIDENTIAL 3 ELECTION CAMPAIGN FUND. 4 (a) Subchapter A of chapter 61 of the Internal Rev- 5 ènue Code of 1954 (relating to returns and records) is 6 amended by adding at the end thereof the following new 7 part: 8 "PART Vill-DESIGNATION OF INCOME TAX PAY- 9 MENTS TO PRESIDENTIAL ELECTION CAMPAIGN 10 FUND "Sec. 6096. Designation by individuals. ii. "SEC. 6096. DESIGNATION BY INDIVIDUALS. 12 "(a) IN~ GENERAL.-E Very individual (other than a 13 nonresident alien) whose income tax liability for any taxable 14 year is $1 or more may designate that $1 shall be paid into 15 the Presidential Election Campaign Fund established by see- 16 tion 303 of the Presidential Election Campaign Fund Act 17 of 1966. 18 "(b) INCOME TAX LIABILITY.-For purposes of sub- 19 section (a), the income tax liability of an individual for any 20 taxable year is the amount of the tax imposed by chapter 1 21 on such individual for such taxable year (as shown on his 1387 PAGENO="0236" 216 1 return), reduced by the sum of the credits (as shown in his 2 return) allowable under sections 32(2), 33, 35, 37, and 38. 3 "(c) MANNER AND TIME OF DESIGNATION.-A desig- 4 nation under subsection (a) may be made with respect to any 5 taxable year, in such manner as the Secretary or his delegate 6 may prescribe by regulations- 7 "(1) at the time of filing the return of the tax im- 8 posed by chapter 1 for such taxable year, or 9 "(2) at any other time (after the time of filing the 10 return of the tax imposed by chapter 1 for such taxable 11 year) specified in regulations prescribed by the Secre- 12 tary or his delegate." 13 (b) The table of parts for subchapter A of chapter 61 14 of such Code is amended by adding at the end thereof the fol- 15 lowing new item: "Part VIII. Designation of income tacii payments to Presi- dential Election Campaign Fund." 16 (c) The amendments made by this section shall apply 17 with respect to income tax liability for taxable years begin- 18 ning after December 31, 1966. 19 SEC. 303. PRESIDENTIAL ELECTION CAMPAIGN FUND. 20 (a) ESTABLISHIIIENT.-Tliere is hereby established on 21 the books of the Treasury of the United States a special fund 22 to be known as the "Presidential Election Campaign Fund" 23 (hereafter in this section referred to as the "Fund"). The' 1388 PAGENO="0237" 217 1 Fund shall consist of amounts transferred to it as provided in 2 this section. 3 (b) TRANSFERS TO THE FuND.-The Secretary of the 4 Treasury shall, from time to time, tran4er to the Fund an 5 amount equal to the sum of the amount$ designated by mdi- 6 viduals under section 6096 of the Internal Revenue Code of 7 1954 for payment into the Fund. 8 (c) PAYMENTS FROM FUND.- 9 (1) IN GENERAL.-The Secretary of the Treasury 10 shall, with respect to each presidential campaign, pay 11 out of the Fund, as authorized by appropriation Acts, 12 into the treasury of each political party which has corn- 13 plied with the provisions of paragraph (3) an amount 14 (subject to the limitation in paragraph (3) (B)) de- 15 termined under paragraph (2). 16 (2) DETERMINATION OF AMOUNTS.- 17 (A) Each political party whose candidate for 18 President at the preceding presidential election re- 19 ceived 10,000,000 or more popular votes as the 20 candidate of such political party shall be entitled 21 to payments under paragraph (1) with respect to 22 a presidential campaign equal to- 23 (i) $1 multiplied by the total number of 24 popular votes cast in the preceding presidential 1389 PAGENO="0238" 218 election for candidates of political parties whose 2 candidates received 10,000,000 or more popu- 3 lar votes as the candidates of such political par- 4 ties, divided by 5 (ii) the number of political parties whose 6 candidates in the preceding presidential election 7 received 10,000,000 or more popular votes as 8 the candidates of such political parties. 9 . (B) Each political party whose candidate for 10 President at the preceding presidential election re- 11 ceived more than 1,500,000, but less than 10,- 12 000,000, popular votes as the candidate of such 13 political party shall be entitled to payments under 14 paragraph (1) with respect to a presidential cam- 15 paign equal to $1 multiplied by the number of popu- 16 lar votes in excess of 1,500,000 received by such 17 candidate as the candidate of such political party in 18 the preceding presidential election. 19 (0) Payments under paragraph (1) shall be 20 made with respect to each presidential campaign at 21 such times as the Secretary of the Treasury may 22 prescribe by regulations, except that no payment with 23 respect to any presidential campaign shall be made 24 * before September 1 of the year of the presidential 25 election with respect to which such campaign is con- 1390 PAGENO="0239" 219 I ducted. if at the time so prescribed for any such 2 payments, the moneys in the Fund are insufficient 3 for the Secretary to pay into the treasury of each 4 political party which is entitled to a payment under 5 paragraph (1) the amount to which such party is 6 entitled, the payment to all such parties at such time 7 shall be reduced pro rata, and the amounts not paid 8 at such time shall be paid when there are sufficient 9 moneys in the Fund. 10 (3) LIMITATIONs.- 11 (A) No payment shall be made under para- 12 graph (1) into the treasury of a political party with 13 respect to any presidential campaign unless the treas- 14 urer of such party has certified to the Comptroller 15 General the total amount spent or incurred (prior to 16 the date of the certification) by such party in carry- 17 ing on such presidential campaign, and has furnished 18 such records and other information as may be re- 19 quested by the Comptroller General. 20 (B) No payment shall be made under para- 21 graph (1) into the treasury of a political party with 22 respect to any presidential campaign in an amount 23 which, when added to previous payments made to 24 such party, exceeds the amount spent or incurred by 1391 PAGENO="0240" 220 1 such party in carrying on such presidential cam- 2 paign. 3 (4) The Comptroller General shall certify to the 4 Secretary of the Treasury the amounts payable to any 5 political party under paragraph (1). The Comptroller 6 General's determination as to the popular vote received 7 by any candidate of any political party shall be final 8 and not subject to review. The Comptroller General 9 is authorized to prescribe such rules and regulations, 10 and to conduct such examinations and investigations, 11 as he determines necessary to carry out his duties and 12 functions under this subsection. 13 (5) DEFINITIONS.-For purposes of this sub- 14 section- 15 (A) The term "political party" means any 16 political party which presents a candidate for election 17 to the office of President of the United States. 18 (B) The term "presidential campaign" means 19 the political campaign held every fourth year fo~r the 20 election of presidential and vice presidential electors. 21 (0) The term "presidential election" means the 22 election of presidential electors. 23 (d) TRANSFERS TO GENERAL FuND.-If, after any 24 presidential campaign and after all political parties which 25 are entitled to payments under subsection (c) with respect 1392 PAGENO="0241" 221 1 to such presidential campaign have been paid the amounts 2 to which they are entitled under subsection (c), there are 3 moneys remaining in the Fund, the Secretary of the Treas- 4 ury shall transfer the moneys so remaining to the general 5 fund of the Treasury. 6 SEC. 304. ESTABLISHMENT OF ADVISORY BOARD. 7 (a) There is hereby established an advisory board to be 8 known as the Presidential Election Campaign Fund Advisory 9 Board (hereafter in this section referred to as the "Board"). 10 It shall be the duty and function of the Board to counsel and 11 assist the Comptroller General in the performance of the 12 duties imposed on him under section 303 of this Act. 13 (b) The Board shall be composed of two members rep- 14 resenting each political party whose candidate for President 15 at the last presidential election received 10,000,000 or more 16 popular votes as the candidate of such political party, which 17 members shall be appointed by the Comptroller General from 18 recommendations submitted by each such political party, and 19 of three additional members selected by the members so ap- 20 pointed by the Comptroller General. The term of the first 21 members of the Board shall expire on the 60th day after the 22 date of the first presidential election following the date of 23 the enactment of this Act and the term of subsequent members 24 of the Board shall begin on the 61st day after the date of a 7 1-297 0-67-pt. 2-16 1393 PAGENO="0242" 222 1 presidential election and expire on the 60th day following 2 the date of the subsequent presidential election. The Board 3 shall select a Chairman from among its members. 4 (c) Members of the Board shall receive compensation at 5 ~the rate of $75 a day for each day they are engaged in per- 6 forming duties and function$ as such members, including 7 travel time, and, while away from their homes or regular 8 places of business, shall be allowed travel expenses, including 9 per diem in lieu of subsistence, as authorized by law for per- 10 sons in the Government service employed intermittently. 11 (d) Service by an individual as a member of the Board 12 shall not, for purposes of any other law of the United States, 13 be considered as service as an officer or employee of the United 14 States. 15 SEC. 305. APPROPRIATIONS AUTHORIZED. 16 There are authorized to be appropriated, out of the Presi- 17 dential Elections Campaign Fund, such sums as may be neces- 18 sary to enable the Secretary of the Treasury to make payments 19 under section 303 of this Act. 20. TITLE IV---MISCELLANEO US 21 PROVISIONS 22 SEC. 401. TREASURY NOTES PAYABLE IN FOREIGN CUR- 23 RENCY. 24 Section 16 of the Second Liberty Bond Act, as amended 25 (31 U.S.C. 766), is amended by striking out "bonds" wher- 1394 PAGENO="0243" 223 1 ever it appears therein and inserting in lieu thereof "bonds, 2 notes,". 3 SEC. 402. REPORTS TO CLARIFY TO NATIONAL DEBT 4 AND TAX STRUCTURE. 5 The Secretary of the Treasury shall, on or before 6 March 31 of each year (beginning with 1967), submit to the 7 Senate and the House of Representatives a report setting 8 forth, as of the close of December 31 of the preceding year, 9 the aggregate and individual amounts of the contingent liabili- 10 ties and the unfunded liabilities of the Government, and of 11 each department, agency, and instrumentality thereof, in- 12 eluding, without limitation, trust fund liabilities, Govern- 13 ?nent-sponsored corporations' liabilities, indirect liabilities not 14 included as a part of the public debt, and liabilities of insur- 15 ance and annuity programs, including their actuarial status 16 on both a balance sheet and projected source and application 17 of funds basis. The report shall also set forth the collateral 18 pledged, or the assets available (or to be realized), as secu- 19 rity for such liabilities (Government seeui~ties to be sepa- 20 rately noted), and an analysis of their ~significance in terms 21 of past experience and probable risk, and shall also set forth 22 all other assets available to liquidate liabilities of the Govern- 23 ment. The report shall set forth the required data in a 24 concise form, with such explanatory material as the Seere- 25 tary may dete~inine to be necessary or desirable, and shall 1395 PAGENO="0244" 224 1 include total amounts of each category according to the de- 2 partmcnt, agency, or instrumentality involved. 3 SEC. 403. COVERAGE OF EXPENSES OF CERTAIN DRUGS 4 UNDER SUPPLEMENTARY MEDICAL INSUR- 5 ANCE BENEFITS. 6 (a) Section 1832 (a) of the Social Security Act is 7 amended (1) by striking out "and" at the end of paragraph 8 (1), (2) by striking out the period at the end of paragraph 9 (2) and inserting in lieu thereof "; and", and (3) by adding 10 at the end thereof the following new paragraph: 11 "(3) entitlement to be paid for allowable expenses 12 (as defined in section 1 845(a) (2)), or, if lower, act~tal 13 expenses, incurred by him for the purchase of qualified 14 drugs (as defined in subsection (a) (1) of such 15 section) ." 16 (b) Section 1833 (a) of such Act is amended (1) by 17 inserting "or qualified drugs" after "incurs expenses for 18 services", (2) by striking out the period at the end of para- 19 graph (2) and inserting in lieu thereof "; and", and (3) 20 by adding at the end thereof the following new paragraph: 21 "(3) in the case of expemses covered under section 22 1832 (a) (3)-100 per centum of such expenses." 23 (c) Section 1833(b) of such Act is amended by adding 24 at the end thereof the following new sentence: "For pur- 25 poses of determining amounts to be counted toward meeting 1396 PAGENO="0245" 225 1 the $50 deductible imposed by the preceding sentence, there 2 shall not be included any expenses incurred for any drug or 3 biological which is in excess of the allowable expenses (as 4 defined in section 1845(a) (2)) of such drug or biological." 5 (d) Part B of title XVIII of such Act is amended by 6 adding at the end thereof the following new sections: 7 "ALLOWABLE EXPENSES FOR QUALIFIED DRUGS 8 "SEC. 1845. (a) For purposes of this part- 9 "(1) The term `qualified drug' means a drug or 10 biological which is included among the items approved 11 by the Formulary Committee (established pursuant to 12 section 1846(a)). 13 "(2) The term `allowable expense', when used in 14 connection with any quantity of a qualified drug, means 15 the amount established with regard to such quantity of 16 such drug by the Forinulary Committee and approved 17 by the Secretary. 18 "(b) Amounts to which an individual is entitled by 19 reason of the provisions of section 1832(a) (3) shall be paid 20 directly to such individual or, if such individual has assigned 21 his right to receive any such amount to another person, the 22 amount so assigned shall be paid to such other person. No 23 individual shall be paid~ any amount by reason of the pro- 24 visions of section 1832(a) (3) prior to the presentation by 1397 PAGENO="0246" 226 1 him (or by another on his behalf) of documentary or other 2 proof satisfactory to the Secretary establishing his entitle- S ment thereto. 4 "(c) The benefits provided by reason of section 1832 5 (a) (3) may be paid by the Secretary or the Secretary 6 may utilize the service of carriers for the administration of ~.7. such benefits under contracts entered into between the Secre- 8 tary and such carriers for such purpose. To the extent deter- 9 mined by the Secretary to be appropriate, the provisions 10 relating to contracts entered into pursuant to section 1842 11 shall be applicable to contracts entered into pursuant to this 12 subsection. 13 "FO1?MULARY COMMITTEE 14 "SEC. 1846. (a) There is hereby established a Formu- 15 lary Committee to consist of the Surgeon General of the 16 Public Health Service, the Commissioner of the Food and 17 Drug Administration, and the Director of the National In- 18 stitutes of Health. 19 "(b) (1) It shall be the duty of the Formulary Corn- 20 mittee, with the advice and assistance of the Formulary Ad- 21 visory Group (established pursuant to section 1847) to- 22 "(A) determine which drugs and biologicals shall 23 constitute qualified drugs 4f or purposes of the benefits 24 provided under section 1832(a); and 25 "(B) determine, with the approval of the Secre- 1398 PAGENO="0247" 227 1 tary, the allowable expense, for purposes of such bene- 2 fits, of the variow~ quantities of any drug determined by 3 the Committee to constitute a qualified drug; and 4 "(C) publish and disseminate at least once each 5 calendar year among individuals insured under this 6 part, physicians, pharmacists, and other interested per- 7 sons, in accordance with directives of the Secretary, an 8 alphabetic list naming each drug or biological (by its 9 generic name and by each other name by which it is 10 known) which is a qualified drug together with the al- 11 lowable expense of various quantities thereof, and if 12 any such drug or biological is known by a trade name, 13 the generic name shall also appear with such trade name. 14 "(2) (A) Until the Formulary Coimmittee determines 15 to the contrary, any drug or biological which is included 16 in the United States Public Health Service Formulary 17 shall be regarded as a qualified drug for purposes of the 18 benefits provided under section 1832(a) (3). Drugs or 19 biologicals not included in such Formulary shall be re- 20 garded as qualified drugs for such purposes upon determina- 21 tion of the Formulary Committee that such drugs or bio- 22 logicals should be so regarded. Any drug or biological 23 included on the list of qualified drugs shall, if listed by 24 generic name, also be listed by its trade name or names, 25 if any. 1399 PAGENO="0248" 228 1 "(B) Drugs and biologicals shall be determined to 2 be qualified drugs only if they can legally be obtained by 3 the user pursuant to a prescription of a physician; except 4 that the Formulary Committee may include certain drugs 5 and biologicals not requiring such a prescription if it de- 6 termines such drugs or biologicals to be of a lifesaving nature. 7 "(C) In the interest of orderly, economical, and cqui- 8 table administration of the benefits provided under section 9 1832(a) (3), the Formulary Committee may, by regula- 10 tion, provide that a drug or biological otherwise regarded 11 as being a qualified drug shall not be so regarded when 12 prescribed below certain minimum quantities. 13 "(3) In determining the allowable expense for any 14 quantity of any qualified drug, the Formulary Committee 15 shall give due consideration to recognized pricing guides for 16 drugs, and of other pertinent factors, with a view to deter- 17 mining with respect to each qualified drug a schedule of 18 prices for various quantities thereof which reflects the cost 19 thereof to the ultimate dispensor of the drug plus a reason- 20 able fee for the preparation, handling, and distribution 21 thereof to the consumer thereof. In any case in which a 22 drug or biological is available by generic name and one or 23 more trade names any one of which is different from such 24 generic name the cost of such drug or biological, for pur- 1400 PAGENO="0249" 229 1 poses of the preceding sentence, shall be deemed to be the 2 lowest cost of such drug, however named." 3 "ADVISORY GROUP TO FORMULARY COMMITTEE 4 "SEc. 1847. (a) For the purpose of assisting the Formu- 5 lary Committee to carry out its duties and functions, the 6 Secretary shall appoint an Advisory Group to the Formulary 7 Committee (hereinafter in this section referred to as the 8 `Advisory Group'). The Advisory Group shall consist of 9 seven members to be appointed by the Secretary. From 10 time to time, the Secretary shall designate one of the mem- 11 bers of the Advisory Group to serve as Chairm~an thereof. 12 The members shall be so selected that each represents one or 13 n-wre of the following national organizations: an organiza- 14 tion of physicians, an organization of manufacturers of drugs, 15 an organization of pharmacists, an organization of persons 16 concerned with public health, an organization of hospital 17 pharmacists, an organization of colleges of medicine, an orga- 18 nization of colleges of pharmacy, and an organization of con- 19 suniers. Each member shall hold office for a term of three 20 years, except that any menther appointed to fill a vacancy 21 occurring prior to the expiration of the term for which his 22 predecessor was appointed shall be appointed for the renviin- 23 der of such term, and except that the terms of office of six 24 of the members first taking of/ice shall expire, as designated 1401 PAGENO="0250" 230 1 by the Secretary at the time of appointment, two at the end 2 of the first year, two at the end of the second year, and two 3 at the end of the third year, after the date of appointment. 4 A member shall not be eligible to serve continuowsly for more 5 than two terms. 6 "(b) Members of the Advisory Group, while attending 7 meetings or conferences thereof or otherwise serving on 8 business of the Advisory Group, shall be entitled to receive 9 compensation at rates to be fixed by the Secretary, but not 10 exceeding $75 per day, including traveltinw, and while so 11 serving away from their homes or regular places of business 12 they may be allowed travel expenses, including per diem in 13 lieu of subsistence, as authorized by section 3109 of title 5, 14 United States Code, for persons in the Government service 15 employed intermittently. 16 "(c) The Advisory Group is authorized to engage such 17 technical assistance as may be required to carry out its 18 functions, and the Secretary shall, in addition, make available 19 to the Advisory Group such secretarial, clerical, and other 20 assistance and such pertinent data obtained and prepared 21 by the Department of Health, Education, and Welfare as the 22 Advisory Group may require to carry out its function$." 23 (e) The amendments made by this section shall become 24 effective on whichever of the following first occurs: (1) the 25 first day of the first month with respect to which the rate of 1402 PAGENO="0251" 231 1 the monthly premium for participation is raised, pursuant 2 to section 1839(b) of the Social Security Act, after the date 3 of enactment of this Act, or (2) July 1, 1968. Amend the title so as to read: "An Act to provide equi- table tax treatment for foreign investment in the United States, ~o establish a Presidential Election Campaign Fund to assist in financing the costs of presidential election cam- paigns, and for other purposes." Passed the House of Representatives June 15, 1966. Attest: RALPH IL ROBERTS, Clerk. 1403 PAGENO="0252" PAGENO="0253" SECTION 24 COMMITTEE REPORT 1405 PAGENO="0254" PAGENO="0255" Calendar No. 1615 89TH CONGRESS ~ SENATE f REPORT 2d Session J S ~ No. 1707 FOREIGN INVESTORS TAX ACT OF 1966; S PRESIDENTIAL ELECTION CAMPAIGN FUND ACT; AND OTHER AMENDMENTS REPORT OF THE COMMITTEE ON FINANCE UNITED STATES SENATE TO ACCOMPANY H.R. 13103 5 5 A BILL TO PROVIDE EQUITABLE TAX TREATMENT FOR FOREIGN INVESTMENT IN THE UNITED STATES OCToBER 11, 1966.-Ordered to be printed Filed under authority of the order of the Senate of October 11, 1966 ILS. GOVERNMENT PRINTING OFFICE WASHINGTON: 1966 1407 PAGENO="0256" PAGENO="0257" CONTENTS Page I. Summary 1 II. Purpose and background of Foreign Investors Tax Act 9 III. Revenue estimates 9 IV. General explanation 10 A. Foreign Investors Tax Act 10 1. Income tax source rules 10 a. Rules for determining source of certain interest payments (sec. 102(a) (1) of the bill and secs. 861 (a) and (c) of the code) 10 b. Interest on deposits in foreign branch banks of domestic corporations (see. 102(a)(2) of the bill, see. 861(a)(1)(D) of the code) 12 c. Foreign central banks and the Bank for Inter- national* Settlements (see. 102(a)(3)(A) of the bill and sec. 895 of the code) 12 d. Rules for determining the sources of dividends and interest from foreign corporations (sec. 102(a) (2), (a)(3~, and (b) of the bill and secs. 861(a) (1) (B), (C), and (D) and (2)(B) and (C) of the code) 13 e. Compensation for personal services (secs. 102 (c) and (d) of the bill and secs. 861(a) (3) (C)(ii) and 864(b)(1) of the code) 15 2. Definitions used in determining taxable status of income 16 a. Trading in stocks or securities or in commodi- ties (sec. 102(d) of the bill and sec. 864(b) (2) of the code) 16 b. Income effectively connected with the conduct of a trade or business in the United States (sec. 102(d) of the bill and sec. 864(c) of the code) 17 3. Taxation of nonresident aliens 22 a. Income tax on nonresident alien individuals (see. 103(a) of the bill and sec. 871 of the code) 22 b. Deductions (sec. 103(c) of the bill and sec. 873 of the code) 27 c. Expat:riation to avoid tax (sec. 103(f) of the bill and new sec. 877 of the code) 28 d. Partial exclusion of dividends from gross in- come (sec. 103(g) of the bill and sec. 116(d) of thecode) 29 e. Withholding of tax on nonresident alien mdi- * viduals (sees. 103 (h) and (k) of the bill and sees. 1441 and 3401 of the code) 29 * f. Withheld taxes and declarations of estimated income tax (sees. 103 (i) and (j) of the bill and sees. 1461 and 6015 of the code) 31 g. Foreign estates or trusts (sees. 103 (e) and (1) of the bill and sees. 875 and 7701(a)(31) of the code) 31 h. Citizens of possessions of the United States (see. 103(m) of the bill and sec. 932(a) of the code) 32 i. Gain from disposition of certain depreciable realty (sec. 3(j) of the House bill and sec. 1250(d) of the code) 32 `U 71-297 0-67-pt. 2-17 1409 PAGENO="0258" IV CONTENTS IV. General explanation-Continued A. Foreign Investors Tax Act-Continued Page 4. Taxation of foreign corporations 32 a. Income tax on foreign corporations (secs. 104 (a) and (b) of the bill and sees. $81 and 882 of the code) 32 b. Withholding of tax on foreign corporations (sec~ 104(c) of the bill and sec. 1442 of the code) 35 c. Deduction for dividends received from foreign corporations (sees. 104' (d) and (e) of the bill and secs. 245 (a) and (b) of the code) d. Unrelated business taxable income of certain foreign charitable organizations (sec. 104(g) of the bill and sec. 512(a) of the code) e. Corporations subject to personal holding com- pany tax (sec. 104(h) of the bill and sees. * . 542(c), 543(b), and 545 (a) and (d) of the - * code) 36 f. Foreign corporations carrying on insurance * business in the United States (sec. 104(i) of the bill and sees. 819, 821, 822, 831, 832, 841, and 842 of the code) 37 g. Subpart F income (sec. 104(j) of the bill and sec. 952(b) of the code) 39 h. Gain from certain sales or exchanges of stock in certain foreign corporations (sec. 104(k) of the bill and sec. 1248(d). of the code) - - - - 40 5. Miscellaneous income tax provisions, etc 40 a. Income affected by treaty (sec. 105(a) of the bill and sec. 894 of the code) 40 b. Adjustment of tax on nationals, residents, and corporations of certain foreign countries (sec. 105(b) of the bill and new sec. 896 of the code) 41 c. Foreign community. property income (sec. 105(e) of the bill and .new sec. 981 of the code) 42 d. Foreign tax credit-foreign corporations and nonresident aliens (sec. 106(a) of the bill and sees. 874,901, and new sec. 906 of the code)_ 44 e. Similar credit requirement (sees. 106(b) (2) and (3) of the bill and sees. 901(c) and 2014(b) of the code) 45 f. Separate foreign tax credit limitation (sec. 106(c) of the bill and sec. 904(f) of the code) - 46 g. Amendment to preserve existing law on de- ductions under section 931 (sec. 107 of the bill and sec. 931(d) of the code) 48 6. Estate tax provisions 49 a. Estate tax rates (sec. 108(a) of the bill and sec. 2101(a) of the code) 49 b. Limitation on credit for State death taxes (sec. 108(b) of the bill and sec. 2102 of the code).. 50 c. Bond situs rule (sec. 108(c) of the bill and sec. 2104 of the code) 51 d. Deposits in U.S. banks or.foreign branch banks of U.S. corporations (sec. 108(d) of the bill and seô. 2105 of the code) 52 e.~ Definition of taxable estate (sec. 108(e) of the bill and sec. 2106(a)(3) of the code) 53 f. Expatriation to avoid tax (sec. 108(f) of the bill and new sec. 2107 of the code) 54 g. Application of pre-196~ estate tax provisions (sec. 108(f) of the bill and new sec. 2108 of the code) 56 h. Estate tax returns (sec. 108(g) of the bill and sec. 6018 of the code) 56 1410 PAGENO="0259" CONTENTS V IV. General explanation-Continued A. Foreign Investors Tax Act-Continued 7. Gift tax provisions 57 a. Tax on gifts of nonresidents not citizens (sec. 109(a) of the bill and sec. 2501 of the code)._ 57 b. Situs of bonds given by expatriates (sec. 109(b) of the bill and sec. 2511 of the code) 57 8. Treaty obligation 58 B. Other amendments to the Internal Revenue Code 58 1. Application of investment credit to property used in U.S. possessions (sec. 201 of the bifi and sees. 48(a)(2), 48(a)(5), and 48(d) of the code) 58 2. Medical expenses deductions of individuals age 65 or over (sec. 202 of the bill and sec. 213 of the code)_ 58 3. Basis of property received in the liquidation of sub- sidiary (sec. 203 of the bill and sec. 334(b) (2) and (3) and sec. 453(d) of the code) 60 4. "Swap funds" (sec. 204 of the bill and se.c. 351 of the code) 61 5. Minimum amount treated as earned income for retire- ment plans of self-employed persons (sec. 205 of the bill and sec. 401(c) (2) (B) .of the code) 61 6. Treatment of certain income of authors, inventors, etc., as earned income for retirement plan purposes (sec. 206 of the bill and sec. 401(c) (2) of the code) - 62 7. Exclusion of certain rents from personal holding com- pany income (sec. 207 of the bill and sec. 543 of the code) 63 8. Percentage depletion rate for certain clay bearing alumina (sec. 208 of the bill and sec. 613 of the code) 64 9. Percentage depletion rate for clam and oyster shells (sec. 209 of the bill and sec. 613 of the code) 64 10. Sintering and burning of shale, clay, and slate used as lightweight aggregates (sec. 210 of the bill and sec. 613 of the code) 65 11. Income from lapsing of straddle options (sec. 211 of the bill and sec. 1234(c) of the code) 65 12. Tax treatment of per-unit retain allocations (sec. 212 of the bill and secs. 1382, 1383, 1385, 1388, and 6044 of the code) 69 13. Excise tax rate on hearses (sec. 213 of the bill and sec. 4062 of the code) `71 14. Interest equalization tax; loans to insure raw material sources (sec. 214 of the bill and sec. 4914 of the code) 72 15. Interest equalization tax; insurance company reserve funds (sec. 215 of the bill and sec. 4914(e) of the code) 16. Interest equalization tax; dollar loans of foreign branches of U.S. banks (sec. 216 of the bill and sec. 4931(a) of the code) 73 C. Presidential Election Campaign Fund Act 73 1. Background 73 2. Designation of income tax payments to Presidential Election Campaign Fund (sec. 302 of the bill and sec. 6096 of the code) 75 3. The Presidential Election Campaign Fund and pay- ments therefrom (sec. 303 of the bill) 75 4. The Advisory Board (sec. 304 of the bifi) 76 1411 PAGENO="0260" VI CONTENTS IV. General explanation-Con~inued Page D. Miscellaneous provisions 76 1. Treasury nOtes payable in foreign currency (sec. 401 of the bifi) 76 2. Reports on Government contingent liabilities and assets (sec. 402 of the bill) 77 3. Coverage of drug expenses under supplementary medi- cal insurance benefits (sec. 403 of the bill and sees. 1832, 1833, 1845, - 1846, and 1847 of the Social Security Act) 78 V. Technical explanation of Foreign Investors Tax Act 80 VI. Changes in existing law 80 1412 PAGENO="0261" Calendar No. 1675 89TH CONGRESS SENATE 5 REPORT &1 Se~ion j No. 1707 FOREIGN INVESTORS TAX ACT OF 1966; PRESIDEN- TIAL ELECTION CAMPAIGN FUND ACT; AND OTHER AMENDMENTS OcTonun 11, 1966.-Ordered to be printed Filed under authority of the order of the Senate of October 11,1966 Mr. LONG of Louisiana, from the Committee on Finance, submitted the following REPORT [To accompany H.R. 131031 The Committee on Finance, to which was referred the bill (H.R. 13103) to amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign investment in the United States, having considered the same, reports favorably thereon with amend- ments and recommends that the bill as amended do pass. I. SUMMARY Your committee has accepted the House bill, the Foreign Investors Tax Act of 1966, with certain changes indicated below. In the bill as amended by your committee the Foreign Investors Tax Act pro- visions are referred to as title I. In addition, your committee has added to the bill certain other amendments which appear as titles II, III, and IV. These titles relate to other Internal Revenue Oöde amendments, the Presidential Elec.tioii Campaign Fund Act., and other amendments, respectively. A summary of the principal changes made by this bill-with your committee's amendments indicated-for the most part presented in the order in which they appear in the bill follows: A. Tue Foreign Investors Tax Act 1. Interest on deposits in foreign branch banks of domestic corpora- tions.-Interest on deposits with foreign branch banks of U.S. corpo- rations or partnerships is to be treated as foreign source income, and 1 1413 PAGENO="0262" 2 FOREIGN INVESTORS TAX ACT OF 1966 thus free of U.S. income tax when paid to nonresident aliens and foreign corporations.. 2. Source rules for bank deposit interest and similar income.- After December 31, 1971, all interest on U.S. bank deposits (other than those described in No. 1 above), whether or not effectively con- nected with a U.S. business, is to be treated as U.S. source income (and subject to U.S. income tax) in the case of nonresident aliens and for- eign corporations. Until then, this interest on bank deposits, interest paid on accounts with mutual savings banks, domestic building and loan associations, etc., and interest on amounts held by insurance companies on deposit also are to be treated as foreign source income (unless effectively connected with a U.S. business) and thereby free of U.S. income tax. 3. Rules for determining the source of dividends from foreign cor- porations.-The source rule with respect to dividends paid by foreign corporations is amended to provide that. dividends received from a foreign corporation are to be considered as having a U.S. source only if 50 percent (House bill provided an 80-percent rule) of the cor- poration's gross income for the prior 3 years was effectively connected with the conduct of a trade or business in the United States. 4. Compe~sation for personal services.-The special source rule, providing that certain payments of compensation for services perU formed in the United States by a nonresident alien are treated as for- eign source income (and therefore free of U.S. tax) if the services are performed for certain foreign persons or a foreign office of a U.S. corporation, is extended to services performed for a foreign office of a proprietor who is a citizen or resident of the United States or for the foreign office of a domestic partnership. 5. Trading.in stocks or securities or in commodities.-Except in the case of dealers and certain investment companies, trading in stocks or securities in the United States for one's own account, whether by a foreign investor physically present in the United States, through an employee located here, or through a resident agent (whether or not the agent has discretionary authority) is not to constitute a trade or business in the United States for income tax purposes. A parallel rule is provided for those trading in commodities. 6. Income effectively connected with the conduct of a trade or bw9i- ness in the United States.-The benchmark to be used in determining whether income is to be subject to a flat 30-percent rate or taxed sub- stantially the same as income earned here by a U.S. citizen or domestic corporation is whether or not the income is effectively connected with a U.S. business. In the case of investment and other fixed or determin- able income and capital gains from U.S. sources the income is to be treated as effectively connected with a U.S. business if the income is derived from assets used or held for use in the conduct of a U.S. busi- ness or if the activities of the U.S. business are a material factor in the realization of the income. All other types of U.S. source income are to be considered to be effectively connected if there is a U.S. busi- ness. Income from sources without. the United States will not be treated as effectively connected with a U.S. business unless the nonresi- dent alien or foreign corporation has a fixed place of business in the United States and the income is attributable to that place of busi- ness. Moreover, in general only rents and royalties from licensing, 1414 PAGENO="0263" FOREIGN INVESTORS TAX ACT OF 1966 3 certain income from banking and so forth, and sales income are to be taken into account for this purpose. and only to the extent the income is not "subpart F" income or income derived from a foreign corpora- tion 50 percent owned by the nonresident alien or foreign corporation * receiving the income~ Your committee modified the provision of the House bill dealing with "effectively connect~ed" foreign source income to exclude (a) income derived from a transaction in which the U.S. office was not a material factor, (b) income not derived from the usual business activities of the U.S. office, and (c) income not properly allocable to the U.S. office. Additionally, the definition of a U.S. office was redefined to exclude the office of certain agents. In another modification, the foreign tax credit provision was expanded to include domiciliary taxes attributable to the foreign source effectively con- nected income. 7. Income tax on nonresident alien individuals.-The income of nonresident aliens which is effectively connected with a U.S. business is to be taxed at the regular graduated rates applicable to indivhluals and all income not so connected is to be taxed at a flat 30-percent rate (or lower applicable treaty rate). U.S. source capital gains of a non- resident alien not engaged in business in the United States are to be taxed only if the alien was in the United States for 183 days or more during the year. Deductions are allowable only to the extent allocable to income which is effectively connected to a U.S. business. Also, an election is provided which allows an alien* to treat income from real property as U.S. business income in order to take deductions allocable to it. 8. Expatriation to avoid income tax.-U.S. source income and t.he effectively connected income of a citizen received for 10 years after expatriation is, in most cases, to be taxed at the regular U.S. tax rates if a principal purpose of the expatriation was the avoidance of U.S. income, estate, or gift taxes. The House bill would have provided a 5-year rule for income taxes. 9. Withheld taxes and declarations of estimated income tax.-The Treasury Department is authorized to require payment of amounts withheld from nonresident aliens and foreign corporations on a more current basis, rather than the annual basis presently provided. Non- resident aliens who receive income which is effectively connected with the conduct of a U.S. business are to be required to file declarations of estimated tax. 10. Income tax on foreign corporatiow~.-The regular corporate in- come tax is to apply to income of foreign corporations which is effec- tively connected with a U.S. business. U.S. source income which is not so connected is taxable at a ~fiat 30-percent rate (or at a lower treaty rate). Foreign corporations are given an election to treat real prop- erty income as business income similar to that afforded nonresident aliens. 11. Foreign corporations carrying on insvrance bw~iness in the United States.-A foreign corporation carrying on a life insurance business within the United States is to be taxed under the present special insurance company provisions on its income effectively con- nected with a U.S. business. The remainder of the income of this type of corporation from sources within the United States is to be taxed in the same manner as income of other corporations which is not 1415 PAGENO="0264" 4 FOREIGN INVESTORS TAX ACT OF 1966 effectively connected; that is, at a flat 30-percent rate. An adjustment also is made to `avoid double taxation which might result from the interaction of the minimum surplus provision for life insurance com- panies under present law and the new method of taxing foreign life msurance companies. 1~3. Discrimination a~v1 nwi'e burden~onze taxes by foreign Ooun- tries.-The House bill authorizes the President to reinstate the income, estate, or gift tax provisions in effect prior tO the enactment of this bill in the case of foreigners upon a determination that the foreign country in which they are residents or were incorporated is imposing more burdensome taxes on U.S. citizens or domestic corporations on in-* come from sources within the foreign country than the U.S. tax on similar U.S. source income of foreigners. Your committee added an amendment which provides, the President with authority in the case of discrimination by a foreign government against U.S. persons, to take such action as is necessary to raise the effective rate of U.S. tax on income received by nationals or corporations of that other country to substantially the same effective rates as are applied in the other country on income of U.S. citizens or corporations. 13. Foreiqn community property incom,e.-A U.S. citizen who is married to a nonresident alien and resident in foreign country * with community property laws, is to have an election for post-1966 years to treat the community income of the husband `and wife. as income of the person who earns it or, in the case of trade or business income, as income of the husband unless the wife manages the business. Income from separate property is to be treated as income of the person owning the property. All other community income is to be governed by the applicable foreign community property law. For open pre- 1967 years, an election may also be made and the rules set forth above govern except that the other community incOme is to be treated as the income of the person who had the greater income from the other community income categories plus separate income. 14. Foreign tax credit.-A foreign tax credit is to be allowed non- resident aliens `and foreign corporations with respect to foreign taxes on foreign source income which is effectively connected to the conduct of a U.S. business. Your committee extended this provision to include income taxes paid to the foreigner's home country on grounds other than that the income was derived from sources within that country. 15. Similar income tax credit requirement.-Under present law a. * foreign tax credit is denied to citizens of a foreign country who are resident in the United~ States if the foreign country does not allow a similar credit to U.S. citizens who are resident in the foreign coun- try. In the future the credit is to be denied only where the President finds that this is in the public interest and the foreign country refuses to grant U.S. citizens such a credit when requested to do so. .75. Separate foreign tax credit Zimitation.-The 10-percent excep- tion to the separate application of the limitation on the foreign tax credit for interest income was amended by your committee so as to apply to a U.S. corporation which directly or indirectly owns 10 per- cent of the foreign corporation from which the interest is derived, or is a member of an affiliated group of corporations which has such ownership. The House bill contained a more limited exception which 1416 PAGENO="0265" FOREIGN INVESTORS TAX ACT OF 1966 5 would have provided that the separate limitation is not to apply to a domestic funding subsidiary which is formed and availed of for the principal purpose of (1) raising funds outside the United States through foreign public offerings, and (2) using these funds to finance the foreign operations of related foreign corporations. 17. Estate tax rates, exemptiort~, and retv~rn8.-A separate sched- ule of estate tax rates is made applicable to estates of nonresident aliens. The rates are graduated from 5 percent on the first $100,000 of a taxable estate to 25 percent on the portion which exceeds $2 mil- lion. The exemption also is raised from $2,000 to $30,000. These two measures are designed to accord approximately the same tax treat- ment in the case of the estate of a nonresident alien as is accorded a similar-sized estate of a citizen eligible for a marital deduction. The filing requirement for returns for the estates of these nonresi- dent aliens also is raised from $2,000 to $30,000. 18. Situs rule for bonds.-For purposes of the tax imposed on the estates of nonresident aliens, bonds of a U.S. person, the United States, a State, or political subdivision owned by a nonresident not a citi- zen of the United States, are to be considered property within the United States and therefore subject to U.S. estate tax. This rule al- ready applies in the case of other forms of debt obligations. 19. &`tv~ rule for bank deposits.-U.S. bank deposits of nonresident aliens are to be treated as property within the United States and there- fore subject to U.S. estate tax after 1971. The provisions of the House bill would have been effective immediately. ~O. Situs rule for deposits in foreign branch .banks.-Deposits in a foreign branch bank of a U.S. corporation or partnership are to be treated as property without the United States and therefore not includible in a foreigner's U.S. estate tax base. ~4. Expatriation to avoid estate tax.-The estate of a nonresident alien is to be taxed at the regular U.S. estate tax rates if, within 10 years of his death, the alien had expatriated from the United States with a principal purpose of avoiding U.S. taxes. ~. Tacz~ on gifts of nonresident alien&-Transfers of intangible property by nonresident aliens are not to be subject to gift tax whether or not they are engaged in business in the United States. However, gifts of intangibles made by citizens who become expatriates within 10 years of making the gift are to be subjeót to gift tax if the avoidance of income, estate or gift taxes was a principal purpose for their becom- ing an expatriate. In the case of a person who expatriated for tax avoidance reasons, debt obligations of a U.S. person, or of the United States or a State or political subdivision, are to be treated as having a situs in the United States. ~3. Treaty obligation&-No amendment made by this bill is to apply in any case where its application would be contrary to any treaty obli- * gation of the United States. However, the granting of a benefit pro- vided by an amendment made by this bill is not to be considered to be contrary to a treaty obligation. Thus, even though a nonresident alien or foreign corporation has a permanent establishment in the United States, income which is not effectively connected with this busi- ness is to be taxed at the applicable treaty rate rather than at the regular individual or corporate rate. 1417 PAGENO="0266" 6 FOREIGN INVESTORS TAX ACT OF 1966 B. Other amendin.ents to the Internal Revenue Code (added by your comm~ittee) L Application of the investment credit to certain property in (1.5. po8sessons.-The investment credit is extended to property located in U.S. possessions provided the property is owned by a U.S. com- pany or citizen, subject to U.S. tax on its income from possessions, would otherwise have qualified for the investment credit, and is not owned or used by U.S. persons who are presently exempt from U.S. tax. This amendment is effective with respect to property placed in service after December 31, 1965.- ~. Medical expense deductions of persons 65 and over.-rThe amend- ment repeals the provisions with respect to a taxpayer age 65 or over, his spouse age 65 or over, and dependent mothers or fathers who are age 65 or over, which, beginning in 1967, would limit their medical deductions to medical care expenses in excess of 3 percent of ad- justed gross income and define their medical care expenses to include only those medicine and drug expenses in excess of 1 percent of adjusted gross income. 3. Corporate acquisition of assets of another corporation.-(a) Pur- chase of stoclc.-TJnder present `law, the purchase from an unrelated party by one corporation of at least 80 percent of the stock of another corporation followed by the liquidation of the acquired corporation within 2 years is treated as a purchase of the assets of the acquired corporation. These amendments expand the definition of "purchase" to include the purchase of stock from a 50-percent owned subsidiary if stock in the 50-percent owned subsidiary was also acquired by purchase. The change is to be effective with respect to acquisitions of stock made after December 31, 1965. (b) Installment notes.-This ~endment'provides that when in- stalhnent notes are transferred in the type of purchase and liquidation described above, gain is to be recognized to the distributing corporation in the same manner as if it had sold the notes. This amendment is to be effective with respect to distributions made after the date of enact- ment of this act. 4. Swap funds.-The amendment sets aside certain Treasury regu- lations proposing to tax the exchange of appreciated securities for shares in a mutual investment fund. 5. Self-employed persons retirement plans: m.ininwiim anw/u~t treated as earned income.-This amendment raises from $2,500 to $6,600 the minimum amount.of.earnings from a trade or business, in which both personal services and capital are material income-produc- ing factors, which a self-employed person may treat as earned income regardless of the general rule that only 30 percent of the net profits of the trade or business may be treated as a self-employed person's earned income. This amendment applies to taxable years begii~ining after De- cember 31, 1965. 6. Self-employed persons retirement plans: certain income of au- thors, inventors, and so forth.-The bill amends present law relatmg to self-employed individuals' retirement plans to permit authors, in- ventors, and so forth, to include gains (other than capithi gains) from sales and other transfers of their works in their earned income base for 1418 PAGENO="0267" FOREIGN INVESTORS TAX ACT OF 1966 7 the; purpose of computing deductions for contributions to such plans. This change will be effective for taxable years endmg after the date of* enactment of this act. 7. Exclusion of certain rents from personal holding company in- come.-This amendment provides, for taxable years beginning after the date of enactment of the act (and certain earlier years at the elec- tion of the taxpayer), that rent received from the lease of tangible personal property manufactured by a taxpayer is not to be treated as personal holding company income. 8. Percentage depletion in the case of certain clay-bearing ala- mina.-This amendment provides, with respect to taxable years begin- fling after the date of enactment, a percentage depletion rate of 23 percent for alumina and aluminum compounds extracted from domes- tic deposits of clay, laterite, and nephelite syenite. It further provides that in computing gross income from mining all processes applied to derive alumina or aluminum compounds from such clay, laterite, and nephelite syenite are to be .treated as mining processes. 9. Percentage depletion rate for clam and oyster shelle.-This amendment provides that mollusk shells (including clam and oyster shells) are to be allowed percentage depletion at the same rate (15 per- cent) as is applicable in the case of limestone and other calcium car- bonates. This change is applicable to taxable years beginning after the date of enactment. 10. Sintering and burning of shale, clay, and slate.-This amend- ment provides that for purposes of percentage depletion, the sintering or burning of shale, clay, and slate used or sold for use as lightweight aggregates is to be treated as a mining process. This amendment is applicable to taxable years beginning after the date of enactment. 11. Straddles.-This amendment provides that, with respect to strad- dle transactions entered into after January 25, 1965, the income from the lapse of an option which originated as part of a straddle is to be treated as a short-term capital gain (instead of ordinary income). This permits it to be netted against any capital loss which may result from the exercise of the other option in the straddle while retaining what in most respects is ordinary income treatment for any excess of net short- term capital gain over net long-term capital loss. 193. The taxatic)n of per-unit retain a&)eation$ of cooperatives.- The bill clarifies present law dealing with the taxation of cooperatives and patrons to insure that a current single tax is paid, at either the cooperwtive or patron level, with respect to per-unit retain certificates. In so doing, the amendment makes the treatment of these certificates generally comparable to the treatment of. patronage dividends under present law. 18. The excise tax on hearses.-This bill provides that the sale of an ambulance, hearse, or combination ambulance-hearse vehicle is to be considered to be the sale of an automobile chassis or automobile body (rather than a truck chassis or body) for purposes of determining the manufacturers' excise tax on motor vehicles. This change applies with respect to articles sold after the date of enactment of this bill. 14. Interest equalization tax: raw material sc'urce loane.-Subse- quent transfers of debt obligations to assure raw material sources are 1419 PAGENO="0268" .8 FOREIGN INVESTORS TAX ACT OF 1966 to be exempt from the interest equalization tax where the indebt&lness is acquired without an intent on the part of the purchaser to sell it to other U.S. persons. This change is to be effective with respect to acquisitions of debt obligations made after the date of enactment. 15. Interest equalization tax: certain acquisitions by insurance eoni- panies in developed cowntrie8.-The' present exemption for reserve asset pools of U.S. insurance companies is extended to allow the estab- lishment of reserve asset pools where a U.S. insurance company commences activities in a developed country or where a less-developed country is designated as a developed country. This amendment is to take effect on the day after the date of enactment. 16. Interest equalization tax: Euro-dollars.-The President is given the authority to exempt from the interest equalization tax U.S. dollar loans of more than 1 year made by the foreign branches of U.S. banks. * This change is to .apply to acquisitions of debt obligations made after the date of enactment. C. Presidential Election Carn~paign Fund Act This title provides for public support of presidential election campaign financing. Individual taxpayers are to be able to desig- nate on their annual tax returns that $1 of their income tax liability is to be placed in a presidential election campaign fund. The amounts in the fund are to be made available to defray the expenses incurred by political parties in presenting candidates for President and Vice President. Amounts will only be paid to those political parties whose candidates received at least 1,500,000 votes in the preceding presidential election. A major political party (one whose candidate polled 10 million votes or more in the preceding presidential election) is to be eligible to re- ceive a payment from the fund equal to $1 times the number of votes cast for the presidential candidates of the major political parties in the preceding presidential election divided by the number of such major political parties. A minor party (one whose candidate polled more than 1,500,000 but less than 10 million votes) is to be eligible to receive a payment from the fund equal to $1 for each vote in excess of 1,500,000 votes that its candidate received in the preceding presiden- * tial election. The payment received by any political party is to be limited, however, to reimbursement of presidential campaign expenses actually incurred by the party in connection with the current presiden- tial election. The Comptroller General is authorized to determine the campaign * expenses of the political parties and to determine the amounts which may be paid to such parties. An advisory board is established to advise and assist the Comptroller General with his duties under this act. D. Mi3ceUaneous provisions 1. Treasury bonds or certificates payable in. foreign onrrew~y.- This amendment expands the debt management authority of the Secre- tary of the Treasury to permit the issuance of U.S. notes denominated in foreign currencies. This authority alr~ady exists in the case of bonds and certificates of indebtedness. 1420 PAGENO="0269" FOREIGN INVESTORS TAX ACT OF 1966 9 2. Report8 on Federal contingent liabilities and assets.-This amend- ment requires the Secretary of the Treasury to submit a report; to the Congress each year indicating the full contingent liabilities of the Federal Government and the assets of the Federal Government which might be made available to liquidate such liabilities. The first such report is to be submitted on or before March 31, 1967. 3. Medicare: Coverage of expenses for prescribed drwgs.-This amendment authorizes payments for prescribed drugs under the Medicare Act. The estimated monthly cost of $1 per beneficiary will be shared equally by the Government and the beneficiary. Reimburse- ments will be made under a schedule of allowances based upon generic drug prices. II. PURPOSE AND BACKGROUND OF FOREIGN INVESTORS TAX ACT On October 2, 1963, the President appointed a task force on "Pro- moting Increased Foreign Investment in U.S. Corporate Securi- ties and Increased Foreign Financing for U.S. Corporations Operat- ing Abroad." On April .27, 1964, a report of this task force was released. Among the recommendations of the task force were a series of proposals designed to modify the U.S. taxation of foreign investors. The Treasury Department studied the recommendations of the task force and on March 8, 1965, submitted to the Congress proposed tax legislation designed to increase foreign investment in the United States. At the request of the administration a bill was introduced at that time designed to carry out the recommendations of the Treasury Depart- ment. Subsequently, after holding hearings on this topic, the House passed a somewhat different version of this earlier bill; namely, H.R. 13103. Your committee has held hearings on this bill and modified it somewhat. Basically, however, the objectives remain the same as in the bill as passed by the House; that is, the two objectives of. improv- ing equity in the tax treatment of nonresident aliens and foreign corporations and providing, to the extent consistent with the first objective, increased incentives for investments by these persons and corporations in the United States. This bill represents a substantial revision of the tax treatment of foreign corporations and nonresident aliens, an area which has not been substantially revised for some 30 years. III. REVENUE ESTIMATES It is expected that the Foreign Investors Tax Act, as presented here, will result in a revenue gain at current income and investment levels of slightly over $1 million a year. In addition, the provision calling for quarterly payments of withheld taxes, instead of annual pay- ments, is expected to increase collections in the fiscal year 1967 alone by $22.5 million. Table 1 shows the revenue gain or loss attributable to the various Foreign Investors Tax Act provisions in the bill to the extent this can be quantified. 1421 PAGENO="0270" 10 FOREIGN INVESTORS TAX ACT OF 1966 TABLE 1.-Estimated revenue changes resulting from the foreign investors taa' bill Tax proposals Revenue gain or loss (-) Gain Loss Net A. Elimination of progressive taxation of U.S. source income of nonresident alien individuals not engaged in trade or business in the United States B. Estate tax at top rate of 25 percent on intangibles and tangibles with $30,000 exemption 1. Tax on excluded bank deposits. C. Taxation of foreign life insurance company income from nontrusteed investments in the United States D. Saving in interest cost to U.S. Government resulting from quarterly payment of withheld taxes E. Tax on capital gains -$748, 000 -3,000,000 -50,000 -$748, 000 -3,000,000 300,000 3,000,000 1,593,000 -50,000 $300, 000 3,000,000 1,593,000 Total 4,893,000 -3,798,000 1,095.000 NoTE-Based on the most recently available withholding tax information, quarterly payment of with- held taxes will result in a revenue gain of $22,500,000 in the fiscal year 1967. Taxes will be collected for 5 quarters in the fiscal year 1967. All 1966 withholding, estimated at $90,000,000, will be collected on March 15, 1967, plus tax of $22,500,000 for the 1st quarter of 1967 on April 15, 1967. The amendments added to the bill by your committee, other than those relating to the Foreign Investors Tax Act, are expected to result in an annual revenue loss (or expenditure increase) of slightly over $400 million. Two hundred million dollars of this is attributable to the medicare amendment making provision for drugs under the sup- plementary benefit program. The provision making medical ex- penses deductible in full with respect to most persons over age 65 is expected to result in an annual revenue loss of $180 million. An expenditure of approximately $70 million every 4 years also is ex- pected from the Presidential Election Campaign Fund Act. The re- maining provisions added by your committee are expected to result in a further revenue loss of approximately $10 million a year. IV. GENERAL EXPLANATION A. FOREIGN INVESTORS TAX ACT L INCOME TAX SOURCE RULES a. Rules for deter'inining source of certain interest pa?/ments (see. 102(a) (1) of the bill and secs. 861 (a) and (c) of the code) Present law.-Present law provides that nonresident alien individ- uals and foreign corporations are subjeèt to U.S. tax only on the income they derive from sources within the United States. For pur- poses of determining whether the income is from within or without the United `States, the code specifically enumerates types of income treated as income from sources within and as income from sources without the United States. One of the rules under present law provides that interest on deposits paid to foreign persons not engaged in trade or business in the United States is to be treated as income from sources without the United States if the interest is paid by a bank. The Internal Revenue Service in interpreting this rule has held that, in addition to banks, the provision applies to certain deposits with some types of State-chartered savings and loan associations. However, the service has not interpreted this provision as extending to interest paid on deposits with all savings 1422 PAGENO="0271" FOREIGN INVESTORS TAX ACT OF 1966 11 and loan associations or all types of deposits. Additionally, interest on similar deposits with insurance companies has not been accorded the benefits of this special rule; Reason~s for provi$ion.-Your committee agrees with the House that it is questionable whether interest income of this type which is so clearly derived from U.S. sources, should be treated as though derived from sources without the United States and thereby escape U.S. tax- ation. At the same time, however, your committee realizes that an immediate alteration of the present source rule might have a substan- tial adverse effect on our balance of payments. To meet these two' quite different problems your committee has adopted the provisions of the House bill which repeal this special foreign-source rule (exclu- sion from taxable U.S. income) but also postpone the effective date of the repeal until after 1971. At that time the Congress will have an opportunity to reconsider the balance-of-payments situation. In t.he interval your committee will have an opportunity to study the desirability of continuing the present exemption as well as considering the impact that the removal of this exemption would have on the balance-of-payments. Your committee also agrees with the House that, as long as `bank deposit interest is to be treated as foreign source income, there is no justification for denying similar treatment for interest paid by savings *and loan institutions generally as well as interest earned on the pro-' ceeds of an insurance policy which are left on deposit with an insur~ ance company. These all represent interest income received on de- posits and, therefore, it is believed that the competing businesses should be treated in the same manner for tax purposes. Explanatioii of p~vi~ion.-For the above reasons the bill amends present law to provide that after December 31, 1971, interest on de- posits with U.S. banks paid to nonresident alien individuals or for- eign corporations is to be treated as income from sources within the United States. Your committee added a provision which subjects in- terest on deposits with U.S. branch banks of foreign corporations to these provisions. Therefore, until 1972 only bank interest received by nonresident aliens or foreign corporations which is effectively con- nected with the conduct of a trade or business in the United States will be subject to, U.S. tax.1 In addition, during the intervening 5-year period the bill extends the application of the foreign source rule of present law to interest (or so-called dividends) paid on de- posits (or withdrawable accounts) with all chartered and supervised savings and loan associations or similar institutions, to the extent these amounts are deductible (determined without regard to section 265) in computing the taxable income of these institutions. Simi- lar institutions for this purpose include mutual savings banks, cc- operative banks, and domestic building and loan associations. Also, during this 5-year period, this special foreign source rule is to be ap- plicable to interest on amounts held by insurance companies under an agreement to pay interest. The amounts paid by insurance companies to which this rule, is extended include: (1) interest paid on policy- holder dividends left with the company' to accumulate; (2) interest paid on prepaid insurance premiums; (3) interest paid on proceeds 1 term "effectively connected" is explained subsequently in No. 2(b) below under sec. 102 (d) of the bill. 1423 PAGENO="0272" 12 FOREIGN INVESTORS TAX ACT OF 1966 of policies left on deposit; and (4) interest paid on overcharges of premiums. Effective date.-Except for the provision repealing the~ special for- eign source rule for certain interest as of December 31, 1971, these amendments are effective with respect to taxable years beginning after December 31, 1966. b. Interest on deposits in forei~qn braiwh banks of domestic corpora- tion~ (sec. 1O2)(a)(~) of the bill, sec. 861 (a)(1)(F) of the code) Present law.-P resent law provides that interest paid to nonresident alien individuals or foreign corporations on deposits with foreign branch banks of U.S. corporations, although paid by the foreign branch situated abro~'ad, is treated as from sources within the tTnited States if the recipient of the interest is engaged in a trade or busi- ness in the United States. This is true whether the deposits are pay- able in dollars or in the currency of the foreign country where the branch is located. Reasons for provi~ion.-As a result of the rule described above nonresident aliens and foreign corporations often are reluctant to deposit funds with foreign branch banks of U.S. corporations since, if (for other reasons) they are considered to be engaged in a trade or business in the United States, the interest paid on their deposits in these foreign branches is subject to U.S. tax. Their reluctance is increased by the fact that foreign persons engaged in business in the United States can avoid U.S. tax on the interest their bank deposits earn by keeping their funds in a bank chartered in their own country or any other country other than the United States, rather than in the foreign branch bank of a U.S. corporation. As a result, foreign branch banks of U.S. corporations are at a serious competitive disadvantage with the banks chartered in the country where they are doing business. Explanation of provision.-To place foreign branch banks of U.S. corporations in a competitive position with the other banks in the for- eign countries where they are doing business, the bill provides that the interest on deposits paid by these branches is to be treated as foreign source income. Thus, nonresident aliens and foreign corpora- tions will not be subject to U.S. tax on this type of interest income. Your committee has added an amendment to the House bill -which would extend this provision to foreign branch banks of U.S. partnerships. Effective date.-This amendment is effective with respect to taxable years beginning after Decermber 31, 1966. c. Foreign central banks and the Bank for International Settlements (sec. 10P2(a) (4) (A) of the bill and sec. 895 of the code) Present law.-Under present law interest received by a foreign cen- tral bank of issue from obligations of the U.S. Government is exempt from U.S. tax unless the obligations are used by the central bank in commercial transactions. In addition foreign central banks of issue and the Bank for International Settlements are not subject to tax on interest income from their U.S. bank deposits since bank-deposit inter- est received by nonresident aliens and foreign corporations not en- gaged in a trade or business within the United States is deemed to be from sources without the United States. 1424 PAGENO="0273" FOREIGN INVESTORS TAX ACT OF 1966 13 The central banks of issue are generally the custodians of the bank- ing reserves of their countries and usually carry on most of the mone- tary functions of their countries in much the same way as our Federal Reserve Board. The Bank for International Settlements is an inter- national organization, in practice used primarily to aid European cen- tral banks of issue in their international financial operations, to promote cooperation among these central banks and to act as trustee in regard. t.o certain international financial settlements. At present, all the central banks of Europe, except that of the Soviet Union, be- long to the Bank for International Settlements and over 90 percent of the Bank's deposits are owned by these central banks. Reasons for provision.-By reason of the present exemption of bank- deposit interest p&d to certain foreigners and the exemption of interest income on their holdings of U.S. Government bonds, foreign central banks of issue have been effectively exempt from practically all U.S. tax. Presumably this was done on the grounds that these foreign central banks of issue, through their monetary activities, were ;for the most part carrying on essential governmental activities for their for- eign governments. However, with the termination in 1971 (as pro- vided elsewhere in this bill) of the foreign source rule for bank-deposit interest, the United States would begin taxing bank-deposit interest income of these foreign. central banks and the Bank for International Settlements. Your committee agrees with the House that in the case of these foreign governmental institutions this income should continue to be exempt from U.S. tax because of the nature of the activities these banks perform for foreign governments. Explanation of provision.-In view of the considerations set forth above, the bill amends the code to exempt from U.S. tax interest re- ceived by foreign central banks of issue and the Bank for International Settlements from U.S. bank deposits unless the deposits are held in connection with commercial transactions of these banks. After 1971, this will distinguish their tax treatment for interest on bank deposits from that accorded other foreign persons. Your committee added amendments which would exempt interest received by the Bank for International Settlements from U.S. Government obligations. In ad- dition, your committee adopted an amendment extending the govern- mental obligation rule to include obligations of agencies or instru- mentalities of the United States (including beneficial interests, participations, and other instruments issued under sec. 302(c) of the Federal National Mortgage Association Charter Act). Effective date.-These amendments are effective with respect to tax- able years beginning after December 31, 1966. d. Rules for deterimininq the sourees of dividends and interest frcnn foreign corporations (sees. 1O~d(a)(~3), (a)('3)~ and (b) of the bill and sees. 861(a)('l) (B), (C), and (D), arid (ed) (B) of the code) Present Zaw.-Present law provides that all, or a portion, of divi- dends paid by a foreign corporation to nonresident aliens or foreign corporations is considered to be from U.S. sources and therefore sub- ject to U.S. tax, but only if 50 percent or more of the income of the foreign corporation making the distribution is derived from sources within the United States during the preceding 3-year period. A simi- lar rule provides that all the interest paid by a foreign corporation engaged in trade or business in the United States is considered to be 71-297 0-67-pt. 2-18 1425 PAGENO="0274" 14 FOREIGN INVESTORS TAX ACT OF 1966 U.S. source income and therefore subject to U.S. tax if 20 percent or more of the income of the foreign corporation paying the interest is from U.S. sources during the preceding 3-year period. he portion of the dividend treated as being from U.S. sources, where the 50-percent test referred to above is met, is the same propor- tion of the dividend which the gross income of the foreign corporation during the immediately prior 3-year period, from U.S. sources, is of its gross income from all sources for that period. However, in the case of this type of interest income there is no apportionment provision and therefore all of the interest paid by a foreign corporation meeting the 20 percent rule is treated as being from U.S. sources notwithstand- ing the proportion of the corporation's income which is from U.S. sources. Rea~o'iu~ for the provi8ion.-Your committee agrees with the House that the application of the dividend rule described above should be restricted. In addition, your committee believes that a correspond- ing restriction should nlso be applied in the case of interest income since the investment nature of both interest and dividend incOme is similar. Moreover, your committee was of the opinion that the amount of interest subjected to U.S. tax (as U.S. source income) should be in proportion to the amount of the corporation's income which is effec- tiyely connected to its conduct of. a trade or business in the United States. In the past, these provisions have given rise to little revenue. On the other hand, the elimination of these provisions would give an unfair advantage to foreign corporations substantially all of whose business is conducted in the United States. Consequently, your com- mittee's bill restricts the scope of these provisions by modifying the applicable rules. The House bill, in the case of dividends, raised the 50-percent re- quirement to 80 percent. Your committee has set both the dividend and interest percentage requirement at 50 percent. It is believed that this percentage when combined with the effectively connected limita- tion gives assurance that this second tax on investment income of for- eign corporations will only be imposed where U.S. operations account for the major portion of the income being paid out. The limitation to income which is effectively connected with the conduct of a U.S. trade or business is in accord with the general concept, explained subse- quently, of treating U.S. source investment income essentially the same with respect to foreign corporations whether or not they have a trade or business in the United States. As is explained further subsequently, different treatment with respect to this investment income does not appear appropriate merely on the grounds of the presence or absence in the United States of an unassociated trade or business of the foreign corporation. Explanation of provision.-To achieve the objective set forth above your committee's bill amends the source rule with respect to dividends and interest paid by corporations to provide that no portion of the dividend or interest received from `a foreign corporation is to be con- sidered to be from U.S. sources unless 50 percent or more of the cor- poration's gross income for the 3-year period preceding `the year in which the dividends or interest is paid, was effectively connected with the conduct of a trade or business in the United States. Also, the portion of the dividend or interest treated as being from U.S. sources 1426 PAGENO="0275" FOREIGN INVESTORS TAX ACT OF 1966 15 is to be the same proportion of the dividend or interest which the effectively connected income of the foreign corporation during the immediately prior 3-year period is of its gross income from all sources for that period. Thus, when compared to present law, the effect of these amendments is to decrease the amount of dividends and interest likely to remain subject to U.S. tax. The bill also contains a transitional rule providing that, in applying the new 50-percent test, any gross income of the foreign corporation from U.S. sources,. for any period before the first taxable year begin- fling after December 31, 1966, is treated as effectively connected income. Your committee also amended the House bill to provide a special rule for determining the source of interest or dividends paid by newly In- corporated corporations. Effective date.-These amendments are effective with respect to dividends received after December 31, 1966. e. Compensation for personal serviees (secs. 102(c) and (d) of the bill and secs. 861(a) (3) (C) (ii) and 864(b) (1) of the code) Present law.-Present law provides that payments of compensation for services performed in the United States generally are treated as U.S. source income. An exception to this rule is provided for com- pensation received by a nonresident alien where certain conditions are met. Thus, payments for personal services received by a nonresident alien are treated as foreign source income if (1) he was temporarily present in the United States for not over 90 days during the year; (2) the compensation does not exceed $3,000; and (3) the services are per- formed for a foreign employer not engaged in a trade or business in the United States or for a domestic corporation if the services are performed for an office or place of business it maintains in a foreign country or . U.S. possession. Also, present law provides that the rendering of personal services in the cases described above is not to constitute engaging in a trade or business in the United States. Reasons for provision.-Temporary personal services of the type described above on occasion may be rendered not only for a domestic corporation having an office or place of business abroad but also for a U.S. citizen, resident or for a domestic partnership where t.he citizen, resident or partnership has an office abroad. Your committee agrees with the House that the performance of temporary services in the United States subject to the same conditions as described above should be exempt from tax where the business abroad is that of a U.S. citizen, resident or partnership, just as it is in the case of a domestic corpora- tion. Explanation of provision.-For. the reasons given above, the bill amends the source rule of present law relating to personal service in- come to provide that income from services performed by a nonresident alien temporarily present in the United States for not over 90 days in a year, if not in excess of $3,000, is to be treated as foreign source income (and not subject to U.S. tax) not only in cases where the em- ployer is a foreign person or a domestic corporation but also where the employer is a U.S. citizen or resident or a domestic partnership. Similar changes are also made in the definition of. a "trade or business within the United States" to provide, that this term does not include personal services performed for employers who are U.S. citizens or 1427 PAGENO="0276" 16 FOREIGN INVESTORS TAX ACT OF 1966 residents or for domestic partnerships where the conditions set forth above are met. Effective date.-These amendments are applicable with respect to taxable years beginning after December 31, 1966. 2. DEFINITIONS USED IN DETERMINING TAXABLE STATUS OF INCOME a. Trading in stocks or securities or in com'iiwdities (sec. 102(d) of the bill and sec. 864(b)(2) of the code) Present law.-Present law specifically excludes from the activities which constitute engaging in a trade or business within the United States the trading activities conducted by a nonresident alien in stocks, securities, or commodities in the United States through a resident broker, commission agent, or custodian. This rule also applies with respect to foreign corporations. How- ever, a question has arisen as to whether a nonresident alien or foreign corporation is to be treated as carrying on a trade or business within the United States if the foreign person grants discretionary authority to a U.S. broker or other agent to carry out transactions in the United States with respect to his stocks, securities, or commodities. Under present law, the granting of this discretionary authority may prevent a nonresident alien or foreign corporation from qualifying for this exclusion, with the result that income arising from these trans- actions and all other U.S. source income is subject to U.S. tax at the regular individual or corporate rates (based on a determination that such activities constitute carrying on a trade or business in the United States). Reasons for provision.-The granting of discretionary authority to a U.S. broker or agent is thought by many foreign investors to be a desirable protective device in the event they are not in a position to give buy or sell orders at any time and, in any event, such an ai- rangement is frequently the most convenient method of effecting stock, security, or commodity transactions. The mere grant of this discre- tionary authority to a U.S. broker or agent would not appear to be significant enough to warrant treating the foreign person acting for his own account as engaging in a trade or business here. Moreover, in- dividuals who trade in U.S. stocks and commodities are not treated as thereby being engaged in the business of buying and selling stocks and commodities, whether or not the volume of their activity is large. Also, the confusion regarding the status of a foreign investor who has granted discretionary authority to a U.S. agent may have acted to deter some foreign investment in the United States. Ewplanati~n of provision.-For the above reasons your committee agrees with the House and has amended present law to specifically provide that the trading in stocks, securities, or commodities in the United States, for one's own account, whether by a foreign person physically present in the United States, through an employee located here, or through a resident broker, commission agent, custodian, or other agent-whether or not that agent has discretionary authority- does not constitute a trade or business in the United States. This treatment, however, does not apply to dealers in stocks, securities, or commodities or to a foreign investment corporation if it has its prin- cipal office here. 1428 PAGENO="0277" FOREIGN INVESTORS TAX ACT OF 1966 17 It is not intended that as a result of this provision a foreign invest- ment company (other than a corporation which is, or but for section 542(c) (7) or 543(b) (1) (C) would be, a personal holding company) is to be permitted to locate its generalbusiness activities in the Umted States and avoid taxation at the regular corporate rates on its income and gains effectively connected with its business in this country. How- ever, a foreign investment company conducting its general business activities in a foreign country (i.e., having its principal office there) can conduct trading activities in the United States through an agent with discretionary authority, without this giving rise to its bemg con- sidered as conducting a trade or business in the United States. Whether a corporation's principal office is in the United States is to be determined by comparing the activities (other than trading in se- curities) which the corporation conducts from an office located in the United States with the activities it conducts from offices located out- side the United States. For example, a corporation which carries on most or all of its stock and securities transactions through an agent with discretionary authority in the United States but maintains a gen- eral business office outside the United States in which its management is located and from which it communicates with its shareholders and the general public, solicits sales of its own stock, and maintains its cor- porate records and books of account, would not be considered as having its principal office in the United States. Although, under this provision, a dealer is specifically excluded from t.hose who may grant discretionary authority and not be deemed to be conducting a business in the United States~ he may trade in securities or commodities, for his own account, through an independent U.S. agent without being considered to be conducting a business in the United States. However, this rule does not apply if at any time dur- ing the year lie has an office or place of business in the United States through which, or by the direction of which, transactions in stocks, securities, or commodities are effected. Even though this provision does not free some dealers in stocks, se- curities, or commodities, and investment companies from the possi- bility that they may be considered as engaged in a trade or business in the United States, this does not mean that all such dealers or invest- ment companies are so engaged. In such a situation, the question of whether a dealer or investment company is conducting a trade or business in the United States remains a question of fact to be deter- mined under the rules of present law. Your committee has redrafted the. House provision but no substantive change was intended. Effective date.-These amendments apply with respect to taxable years begmning after December 31, 1966. b. Income effectively connected with the conduct of a trade or business in the United States (sec. 1O~(d) of the bill and eec. 864(c) of the code) Present la'th.-Under present law nonresident alien~ and foreign corporations are generally taxable at the regular individual or corpo- rate rates on all their U.S. source income if they are engaged in trade or business in the United States and are taxable at a flat 30-percent rate (or lower treaty rate) on all fixed or determinable income if not so engaged. This difference in treatment applies whether or. not there 1429 PAGENO="0278" 18 FOREIGN INVESTORS TAX ACT OF 1966 is any relationship between the different types of incomes (business and investment) from the United States. Rea.9ons for provi~ion.-TTnder the rule described above, one for- eigner may be taxed on investment income at the reguhir i!ldividual or corporate rates while another, with an identical portfolio invest- ment, is taxed on his investment income at the flat 30-percent (or lower treaty) rate. The difference in treatment arise~ from the fact that one is engaged in business in the United S' ;ttes and the other is not, even though the investment portfolio of the former is wholly unrelated to his U.S. business. Your committee agrees with the House that it is neither equitable nor logical for, this substantial difference in tax treatment of investment income to depend on the presence or absence of an unrelated business. In addition, the Presi- dential Task Force on Promoting Increased Foreign Investment in U.S. Corporate Securities has pointed out that the present scheme deters foreign businessmen operating in the United States from invest- ing in the United States, and also deters foreigners already investing in the United States from commencing a trade or business here. The present scheme for taxing foreigners engaged in business in the United States also is defective in another respect. The interplay between the tax rules of certain foreign countries and the United States has in some cases permitted the use of the United States as a tax haven. The tax avoidance in such a case can be illustrated by a foreign corporation which is organized in a country which does not tax its domestic corporations on income derived from the conduct of a business outside the country. If such a corporation desires to sell products into countries, other than the United States or the country of its incorporation, it can, in many instances, avoid all or most taxa- tion on t.he income from these sales by establishing a sales office in the United States. The income from the sales in such cases is not taxed by the United States because (under the title passage rule) it is not derived from sources within the United States. The income may not be taxed by countries where the products are sold because the corpora- tion does not have a permanent establishment there, and the income is not taxed by the country of incorporation because the business is not conducted there. Moreover, a similar tax avoidance scheme can be utilized with respect to sales arranged in the United States concerning goods destined for use in this country. In addition, U.S. tax may be avoided in the case of rents,and royalties from a licensing business and income from banking, financing or investment company busi- nesses carried on in the United States. Your committee agrees with the House that foreign corporations carrying on substantial activi- ties in the United States, in such cases, should not be able to cast their transactions in such a form as to avoid both all U.S. tax and most foreign taxes. Also, it is believed that foreign corporations should pay a U.S. tax on the income generated from U.S. busi- ness activities. There appears to be no national policy to ba served by allowing foreign persons to operate in this country without paying their share of our governmental expenses. To meet both types of problems described above the bill provides for the taxation of nonresident aliens* and foreign corporations at the regular U.S. graduated individual rates or corporate rates on their income which is effectively connected with the conduct of a 1430 PAGENO="0279" FOREIGN INVESTORS TAX ACT OF 1966 19 trade or business within the United States. This effectively con- nected rule applies to all their income from sources within the United States and to three limited categories of foreign source income in certain situations where definite U.S. economic connections are present. The U.S. source income of nonresident aliens and foreign corpora- tions which is not effectively connected with the conduct of a trade or business in the United States is taxed at a flat 30-percent rate (or lower treaty rate). E~-iiplanati~n of provi~ion.-As a general rule, the bill provides that income of a nonresident alien or foreign corporation will be subject to the flat 30-percent (or lower treaty) rate if it is not effectively connected with the conduct of a trade or business within the United States. The regular individual or corporate rates apply to income which is effectively connected to the conduct of a U.S. trade or business. However, the foreigner may elect to treat ,real property income as if it were income effectively connected with a U.S. business. This is to permit the deductions attributable to this real property income to be deducted from it. The application of the effectively connected concept to different types of income is set forth below. (i) Income froim U.S. sonrces treated ae "effectively connected."- In determining whether periodical income such as interest, dividends, rents, wages, and capital gains is effectively cormected with the con~ duct of a trade or business within the United States two principal fac- tors are to be taken into account. First, is the income derived from assets used or held for use in the conduct of the trade or business in the United States? Thus, for example, are the assets being held for future, or remittant, use in the business? In this regard, particular attention will be given to the relationship between the asset and the needs of the business. Second, were the activities of the trade or business a material factor in the realization of the incon'~e? Thus, in the case of this second factor, is there an immediate relationship be- tween the income in question and the U.S. business activities of the foreign corporation? Also to be taken into account in weighing the relationship of the investment income to the trade or business, but not to be a controlling factor by itself, is whether or not the assets or income are accounted for through the U.S. trade or business. All other income from sources within the United States (that is, other than the periodical income and capital gains described above) is to be treated as "effectively connected" with the conduct of any trade or business within the United States. (ii) Income from sources without the United States.-(A) Gen- eral Rules.-Income from sources without the United States is not to be treated as "effectively connected" with the conduct of a trade or business within the United States unless the nonresident alien or for- eign corporation has a fixed place of business in the United States and the income, gain or loss is attributable to that place of business. Also, this provision applies to only three types of income from sources with- out the United States. A foreign corporation which to a minimal extent, or occasionally, uses the U.S. office of a related corporation will not thereby be treated as having a fixed place of business here. Moreover, the fact that. top management decisions are made in the United States will not of itself mean that the foreign corporation has an office or fixed place of business here. For example, a foreign sales 1431 PAGENO="0280" 20 FOREIGN INVESTORS TAX ACT OF 1966 corporation which is a wbolly owned subsidiary of a domestic corpora- tion will nct be considered to have a U.S. office because of the presence here of the officers of its domestic parent who are generally responsible only for its policy decisions, provided the foreign sales corporation has a managing director that conducts its day-to-day business from a foreign office. This person may or may not be an officer of the U.S. corporation. Also, in such a case, the managing director could regu- larly confer with the officers of the domestic parent and if necessary occasionally visit the U.S. offices of the domestic parent and, during such visits, temporarily conduct the business of the foreign subsidiary out of the domestic parent's office without thereby establishing a U.S. office. As indicated above, this provision applies only to three specific types of income from without the United States and in no event applies with respect to income which is "subpart F" income or to dividend, interest or royalty income derived from a foreign corporation more than 50 percent owned by a nonresident alien or foreign corporation receiving the income. Of course, the subpart F income exception extends to income which is subpart F income but is excepted from its taxing provisions by the minimum distribution and export trade exceptions. The three types of income with respect to which this provision applies are: (i) Rents and royalties derived from the active conduct of a licensing business; (ii) Dividends, interest, or gain from stock or bond or debt obligations derived in the active conduct of a banking, financing or similar business; and (iii) Certain sales income attributable to a U.S. sales office. The sales income referred to above is not to `be considered as "effec- tively connected" to a U.S. trade or business if the property is sold for use outside the United States and an office of the foreign person out.- side the United States contributes materially to the sale. In the case of foreign source income where the products are destined for the United States, the income will be treated as effectively connected with a U.S. business to the extent the sales activity is carried on by the U.S. office. (B) Determining Faetors.-Although your committee agrees with the general rules of the House bill, it has added certain clarifying amendments regarding what is to be considered a~ sufficient nexus for assertion of U.S. tax jurisdiction as well as the foreign source income to be subject to U.S. tax. In~ general, for purposes of determining whether a foreign corporation or nonresident alien has an office, the office or other fixed place of business of an agent is to be disregarded unless the agent is other than an independent agent operating in the ordinary course of his trade or business and either has authority (regu- larly exercised) to negotiate binding contracts or has a stock of mer- chandise from which he regularly fills orders. This agency con- cept regarding the degree of economic activities which will subject a foreign corporation or nonresident alien to U.S. taxation on foreign sourc.e income is substantially similar to the permanent establishment concept present in many of our existing income tax treaties. However, the interpretation of this provision is, of course, not to be limited by the judicial decisions of foreign governments regarding treaty pro- visions. With respect to the determination of the income to be sub- 1432 PAGENO="0281" FOREIGN INVESTORS TAX ACT OF 1966 21 ject to U.S. tax, the rules added by your committee provide that for- eign source income will not `be considered to be effectively connected with a U.S. business of a foreign corporation or nonresident alien if (a) a U.S. office of that business was not a material factor in the production of the income, (b) the income was not derived from the usual business activities of the U.S. business or (c) the mcome was not properly allocable to the activities of the U.S. business. It is the opinion of your committee that these added rules will de- limit the application of the general rules of this provision, thereby subjecting to U.S. tax only income which has its economic genesis in the United States. For purposes of this provision, `the activities of the U.S. office will not be considered to constitute a "material factor" un- less it provides a significant contribution to the production of the m- come. Thus, the activities of the U.S. office must be an essential eco- nomic element in the production of the income. Therefore, the fact that the board of directors of the foreign corporation meets in the U.S. office will not subject the worldwide sales income of that foreign corporation to U.S. taxation. Contrarily, the activities of the U.S. office need not necessarily be a major factor in the production of the income. The requirement that the income must be derived from the usual business activities of the U.S. office, in effect, provides a de minimus exception. It is intended that this `rule will exclude from U.S. tax jurisdiction all foreign income derived from casual sales. Thus, if the foreign corporation is engaged solely in a manufacturing business in the United States, the income derived by the U.S. plant as a result of an occasional foreign sale will not, come within the ambit of the for- eign source effectively connected rule where the sales operations for the products of the U.S. plant are located outside the United States. On the other hand, if a foreign corporation establishes a U.S. sales office to sell goods produced in Africa into the Western Hemisphere, occasional sales income derived from parts of the world other than the .Western Hemisphere would not be excluded under this casual. sales rule. In other words, the nature of the U.S. business would be the primary determinative factor for purposes of this exception. The committee received considerable testimony requesting that the general foreign source effectively connected rules be.modified so as to insure in all cases that only income generated in the United States would be subject to U.S. tax. It is your committee's understanding that this was the intention of the House bill and, therefore, the addi- tion of the. "properly allocable" test is considered to constitute a clarifying amendment. (C) Country of Re~k1ence 7'a~ve8.-Your co~i~'s,bill extends~ the foreign tax credit provision of the House bill which applies with respect to foreign source effectively connected income (sec. 906). The House bill would not have extended the foreign tax credit provision to taxes imposed by a foreign country solely on the basis that it has jurisdiction to tax because the taxpayer is a citizen or resident of that country or a corporation created, incorporated, or domiciled in that country. Your committee's amendment extends this foreign tax credit provision to the resident country taxes on foreign source income specifically excepted by the House bill. A further discussion of this 1433 PAGENO="0282" 22 FOREIGN INVESTORS TAX ACT OF 1966 amendment is provided in the foreign tax credit portion of this repOrt (A-5(d)). (D) Foreign In.s~urance Com~panies.- In the case of a foreign cor- poration having a life insurance business in the United States, the bill provides that income from sources without the United States will be treated as effectively connected with the conduct of the business within the United States if the income is attributable to its U.S. life insurance business. This rule merely continues the treatment which applies under existitng law which provides that income of a foreign corporation from its U~S. life insurance business is subject to tax whether the income is from sources within or without the United States. Effective date.-This amendment applies with respect to taxable years beginning after December 31, 1966. For purposes of determin~ ing whether foreign source sales income from a binding contract, entered into on or before February 24, 1966, is attributable to a U.S~ office, all the activities in the United States on or before that date, which were related to the negotiation or effectuation of the binding contract are not to be taken into account. As a result in many cases the sales income from foreign sources under binding contracts entered into before February 25, 1966, will not come within the ambit. of this provision. 3. TAXATION OF' NONRESIDENT ALIENS a. Incoime taz~ on nonresu.~1ent alien individuals (sec. 103(a) of the bill and sec. 871 of the code) Present law.-Present law provides different tax treatment for non- resident alien individuals according to whether they are, or are not, engaged in a trade or business in the United States. Also, those not engaged in a trade or business in the United States are provided dif- ferent treatment according to whether .their income is under or over $21200. Nonresident alien individuals not engaged in trade or business in the United States whose annual U~S. source income of the types specified below is $21,200 or less are taxed at a flat rate of 30 percent (or lower applicable treaty rate), on certain specified items of U.S. source income. This tax is in lieu of the regular U.S. graduated rates applicable to individuals. The items of income included are interest, dividends, rents, salaries, wages, and other fixed or determinable an- nual or periodical gains, profits, and income.. .Also specifically in- cluded in the income taxable at the flat 30-percent rate are certain amounts otherwise treated in the same manner as. capital gains; namely. lump-sum distributions from exempt employees' trusts (sec. 402(a) (2)); amounts paid to beneficiaries under qualified annuity plans (sec. 403(a)'(2)); timber, coal, and iron ore royalties (sec. 631 (b) and (c)) ; and amounts received on transfers of patent rights (sec. 1235). Nonresident alien individuals not engaged in trade or business in the United States but with an annual U.S. source income of the types indicated above, of more than $21,200, are taxed under present law (in the absence of an applicable treaty provision) at; whichever of the following produces `the higher total tax: the regular U.S. rates appli- cable to individuals, or the flat 30-percent rate. In computing the 1434 PAGENO="0283" FOREIGN INVESTORS TAX ACT OF 1966 23 tax at the regular graduated rates, such a nonresident alien is allowed deductions to the extent they are properly allocable to the income on which he is taxable. Nonresident aliens not engaged in a trade or business in the United States-whether their income is over or under $21,200-are subject to tax on regular capital gains oniy if one of two conditions exist: (1) if they are physically present in the United States at the time the capital gain is realized or (2) if they are present in the United States for a period or periods totaling 90 days or more during the year. These capital gains are taxed at the flat 30-percent rate, if the individ- ual's income from U.S. sources is $21,200 or less. If his rncome from U.S. sources exceeds this amount, the regular capital gams tax rate will apply if the regular individual income tax rates (mclud- in.g the capital gains tax) on all the taxpayer's U.S. source income~ results in a higher tax than the flat 30-percent tax. Nonresident alien individuals engaged in trade or business in the United States are taxable at the regular U.S. graduated (and capital o.ains) rates on their income derived from sources within the United ~tates. In computing the tax, an alien in this category is allowed deductions to the extent Tattributable to his U.S. source income. Reasons for provision.-Your committee agrees with the House that the present tax treatment of nonresident aliens is unnecessarily com- plicated and also makes arbitrary distinctions based upon the size of the individual's income and whether or not the individual has a trade or business in the United States which may be wholly unrelated to the specific income in question. The bill has retained the rule of present law which provides that U.S. trade or business income of nonresident aliens is subject to the regular individual income tax rates. However, other income is to be subject to the regular rates only if it is effectively connected with the U.S. trade or business. U.S.-source fixed or deter- minable income of nonresident aliens which is not so connected is to be subject to a flat 30-percent rate (or lower treaty rate). This removes the arbitrary rule of* present law which would vary the treatment of investment income depending upon whether the individual has an unrelated trade or business in the United States. The flat 30-percent rate of tax in the case of certain nonresident aliens has been applied under present law, and is continued under the bill, because the United States does not have jurisdiction over all of such an individual's income. These taxpayers are not, allowed the de- ductions that. are available to U.S. citizens and the 30-percent rate is considered an appropriate effective rate in such cases. In addition, it has been found in practice that only a small amount of tax has been collected as a result of imposing the graduated rates. It is also thought that applymg the uniform flat rate with respect to income not effec- tively connected with a trade or business in the United States would tend to encourage investment here by foreigners. To the extent this occurs, there will, of course, be an improvement in our balance of payments. In the case of capital gain, it was the opinion of your committee and the House that the present rule that taxes a nonresident alien if present in the United `States when the gain is realized is an arbitrary rule which constitutes only a trap for the unwary. Also, your committee agrees wjth the House view `that the exclusion for nonresident aliens 1435 PAGENO="0284" 24 FOREIGN INVESTORS TAX ACT OF 1966 not present in the United States for 90 days during a year should be extended to a period of 183 days. The 183-day period more closely parallels the general rule applied by most of the industrialized coun- tries of the world. ExpZanation of provision.-For the reasons indicated above the bill substantially revises the income tax treatment of nonresident alien individuals, dividing their income, for tax purposes, into two basic groups according to whether or not the income is effectively connected with a U.S. trade or business. (A) Income not effectively connected with the conduct of a U.S. bu~iiness.-Income of a nonresident alien individual which is fixed or determinable (substantially the samecategories referred to under pres- ent law) and which is.not effectively connected with the conduct of a trade or business in the United States is to be taxed at a flat 30-percent rate (or lower treaty rate). Generally, the fixed or determinable income referred to here, as under present law, includes such income as interest, dividends, rents, salaries, annuities, and certain income accorded capital gain treatment. The House bill added two items not included in the list contained in present law and has slightly modified the language of present law so as to clarify this provision as it relates to certain amounts received from pensions or annuity plans, certain timber, iron ore. and coal royalties, and gains on certain, transfers of patent rights. The two new items added to the list by the House bill are (1) gains .with respect to the sale of stock of a collapsible corporation and (2) amounts received on retirement or exchange of bonds and other evidences of indebtedness issued after September 28, 19~5, which are treated as gains from the sale of property which is not a capital asset. Your committee has retained this latter House provision regarding the income received on the retirement or exchange of bonds. However, your committee has deleted the collapsible corporation provision. Additionally, there was some question as to the scope of the provision in the House bill dealing with original issue discount. The reference in the bill to section 1232 refers only to original issue discount on evidences of indebtedness held by a taxpayer for more than 6 months. Also, in.- come constituting original issue discount received on the retirement or sale or exchange of bonds is to be considered as having the same source as interest paid by the corporation issuing the bonds. As a result, if the corporation with respect to whose bonds the original issue discount arises is a domestic corporation which in the prior 3 years derives more than 80 percent of its income from foreign sources, then the original issue discount (interest) at the time of the retirement or sale or exchange of the bonds also will be considei~ed as foreign source income. Your committee has amended the provision of the House bill regard-. ing gains realized on the sale of a patent or otherintangible property. As amended it provides that gains realized on the sale of a patent or other intangible property, where the income from the sale is derived as a result of the use of such property in the United States, is not to be subject to U.S. tax as "fixed and determinable, income". (taxed at 30 percent or lower treaty rate) unless a part of the income derived from the sale is contingent. If part of the profits from such sale are contingent, the amOunt subject to U.S~ tax in any year would be the 1436 PAGENO="0285" FOREIGN INVESTORS TAX ACT OF 1966 25 contingent amount, or if this contingent amount exceeds 50 percent of the total amount paid in any 1 year, the total amount will be taxed to the extent this amount represented gain realized on the sale of the property. For or other intangible property is used. This provision is to apply to gains derived from sales made after October 4, 1966. The provisions of existing law will continue to apply to transfers of patents made prior to that date. In the case of a nonresident alien's net U.S. source capital gains (other than those specifically included in the list as taxable at the 30-percent rate) which are not effectively connected with the conduct of a trade or business within the United States, the bill provides that no U.S. tax is to be imposed unless the nonresident alien has been present in the United States for at least 183 days during the taxable year. Present law provides a 90-day test. For purposes of applying the 18~-day test an alien will be treated as being on a calendar year basis unless he has previously established a different taxable year. The requirement of present law which taxes capital gains when the alien is physically present in the United States at the time of realiza- tion is dropped entirely. (B) Income effectively connected with the conduct of U.S. busi- ness.-Income of a nonresident alien individual that is effectively connected with the conduct of a trade or business in the United States, under your committee's bill is taxable at the regular U.S. graduated rates applicable to individuals. Thus, this income will be taxed the same as under existing law although the category itself is more limited since it only applies to income which is effectively connected to a U.S. trade or business instead of including all U.S. source income of an alien with such a trade or business. For purposes of determining whether or not income is effectively connected with the conduct of a trade or business in the United States, the rules discussed above in connection with the definition of effectively connected income (No. A-2 pt. b, above) apply. (C) Miscellaneous types of income receiving special treatment.- Under present law certain types of income are provided special treat- ment. The bill as approved by your committee and the House re- vises and extends these categories as indicated below. (i) Participants in exchange programe.-The bill retains the rule in present law which treats nonresident aliens temporarily in the United States as part of a cultural exchange or training program as engaged in a trade or business in the United States even though they are actually not so engaged. The provision is modified to pro- vide in such cases that this type of income is effectively connected to a U.S. trade or business. The effect of treating these categories of income as effectively áonnected to a U.S. trade or business (or un- der present law as derived from a U.S. trade or business) is to im- pose the regular U.S. income tax on these aliens on the taxable por- tion of their *scholarship or fellowship grants and certain other amounts incident to these grants. In this computation one exemption (except in the case of residents of contiguous countries) and the deductions allocable to this. income are allowed. In the absence of this special provision, these aliens would be taxed on these grants (and amounts incident thereto) at the flat 30 percent rate. In most 1437 PAGENO="0286" 26 FOREIGN INVESTORS TAX ACT OF 1966 cases the 30 percent tax would substantially exceed the regular tax on this income. The types of income referred to under present law as scholarship. or fellowship grants received by a nonresident alien individual tern- * porarily present in the United States as anonimmigrant (under sub- par. (F) or (J~ of sec. 101 (a) (15) of the Immigration and Na- tionality Act) or received by a citizen or resident, are, subject to a dollar limitation, exempt from U.S. tax. Present law (sec. 872(b) (3)) also excludes from gross income com- pensation paid by a foreign employer to a nonresident alien for the period he is temporarily present in the United States as a nonimmi- grant for the purposes of participating in a cultural or training pro- gram. Under present law this is availwble where the "foreign employer" is a foreign person or a domestic corporation having an office in a foreign country or U.S. possession. The bill extends this to' also cover a domestic partnership or a U.S. citizen or resident with such a foreign office. (ii) Income froim real property.-Under present law, it is not clear as to what situations or arrangements for the ownership by a non- resident alien of real property located in the United States will cause the nonresident alien to be considered as engaging in a trade or busi- ness within this country. This, of course, is important since the ques- tion of whether or not the alien is engaging in a trade or business in the United States determines whether his U.S. source capital gains are subject to U.S. tax and whether his other U.S. source income is taxable at the regular individual income rates, with allocable deduc- tions, or at the flat 30~percent rate on the gross amount. Taxing income on real property at a flat 30-percent rate without the allowance of allocable deductions-which in the case of this type of income may be relatively large-may result in quite heavy. tax burdens on this type of income. Your committee agrees with the House that the law in this area should be clarified and doubts whether the disallowance of deductions in such cases is appropriate. Moreover, the disallow- ance of deductions in such cases would tend to discourage foreign investment in U.S. realty. The bill deals with the problem described above by providing that nonresident aliens deriving income from real property held for the production of income and located in this country, or from an interest in this type of real property located in this country, may elect to treat all the income as effectively connected to the conduct of a U.S. trade~ or business. This permits the nonresident alien to utilize the deduc- tions attributable to this real estate income with the result that he is taxed on only his net income from these sources. The election is applicable with respect to gains from the sale or exchange of real property held for the production of income (or an interest therein) and rents or royalties from mines, wells, or other natural deposits, as well as certain timber, iron ore, and coal royalties. The election is not applicable to income not specifically covered by these provisions, such as distributions by real estate investment trusts. If the election is made, it applies to all of the alien's income from IJ.S. real property for the taxable year which is not otherwise "ef- fectively connected" with the conduct of a trade or business in this country. The. election applies for all subseque~it taxable years until 1438 PAGENO="0287" FOREIGN INVESTORS TAX ACT OF 1966 27 revoked and can be revoked only with the consent Of the Secretary o~ the Treasury or his delegate. If the election is revoked, a new election may not be made for 5 years unless the Secretary of the Treasury or his delegate consents to an earlier reelection. (iii) Certain pen~iion income.-Under present law a nonresident alien receiving pension or annuity income from a plan located in the United States is subject to U.S. tax (flat 30 percent or lower treaty rate) on the interest portion of the pension income not withstanding the fact that the services qualifying the nonresident alien ~for the pen- sion were entirely rendered outside the United States. Your commit- tee has added an amendment to this provision o~f the bill which would exempt from U.S. tax the type of pension income described above if 90 percent of the persons under the plan were U.S. citizens. It is the understanding of your committee that in general the regulations will provide that the plan paying the pension will be entitled to rely upon information presented by the annuitant or employer regarding the in- formation as to whether or not the annuitant qualifies under this pro- vision. (iv) Bond income of residents of the Ryukyu hiands, etc.-At the present time the Ryukyu Islands (including Okinawa) are governed by the United States and large numbers of the individuals of these islands are in the employ of the U.S. Military Establishment. As such, their savings have frequently been invested in series E or H U.S. savings bonds. Interest income on U.S. savings bonds is, of course, U.S. source income. As a result, under present law the resi- dents of the Ryukyu Islands, as well as the Trust Territory of the Pacific Islands are subject to a flat 30-percent tax on the income from these bonds. ~ince investment in U.S. savings bonds in their case is merely a convenient way for these individuals to save a portion of their income, it is difficult for them to see why a tax should be imposed any more than would be true if they were to invest their income, in the islands, in some other type of investment. Because of this, the bill excludes from gross income subject to U.S. tax, income derived by nonresident aliens from U.S. savings bonds (series E or H) if the alien at the time of acquiring the bonds was a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands. Effective date.-These amendments apply with respect to taxable years beginning after December 31, 1966. b. Deductions (sec. 103(c) of the bill and sec. 873 of the code) Present law.-In the case of a nonresident alien individual, present law generally allows deductions to the extent they are properly al- locable to income from sources within the United States but only if the alien's U.S. income is subject to the regular income tax. However, where the regular income tax applies, the deduction of losses is allowed even though they are not connected with a U.S. trade or business if they are incurred in transactions entered into for profit provided that the transaction, had it resulted in a profit, would have been sub- ject to U.S. tax. Also allowed are property losses not connected with a trade or business arising from, certain casualties or thefts if the loss is of property located within the United States. Ea~planation of provi#ion.-The bill amends present law generally to limit the allowance of deductior~s in case of a nonresident alien in- 1439 PAGENO="0288" 28 FOREIGN INVESTORS TAX ACT OF 1966 dividual to deductions allocable to income which is effectively con- nected with the conduct of a trade or business in the United States. The allowance of deductions is limited in- this manner, since it is oniy effectively connected income which under the bill is subject to the regular income tax. In addition, the bill deletes the provision relating to the deduction of losses not connected with a trade Or business but incurred in trans- actions entered into for profit since the criteria for the allowance of deductions under the bill is whether or not they are effectively con- nected with the conduct of a trade or business in the United States. However, the casualty loss deduction is to be available even if the property which gives rise to the loss is not effectively connected with the conduct of a trade or business in the United States if the property is located in this country. Also, the charitable contribution deduc- tion is available even though not related to the trade or business. Effective date.-These amendments apply with respect to taxable years beginning after December 31, 1966. c. Expatriation to avoid tax (sec 103(f) -of the bill and new sec. 877 of the code) - - Present law.-The U.S. individual income tax applies to U.S. citi- zens, U.S. residents, and to nonresident aliens, but in this latter case, generally only with respect to income derived from sources within the United States. Under present law, if an individual who has been a U.S. citizen gives up this citizenship and becomes a nonresi.dent, no tax is then imposed with respect to income he derives from sources without the United States. Moreover, under present law the regular graduated rates applicable to a citizen apply in the case of an expa- triate, only if he is en~a~ed in a tradeor business in the United States or his income exceeds $21,200. Reaeone for the provision.-The bill, by the elimination of progres- sive taxation with respect to the income of nonresident aliens which is not effectively connected with the conduct of a trade or business withm the United States (as well as the reduction of the estate tax rates-de- scribed subsequently-applicable to the estates of nonresident aliens), may encourage some individuals to surrender their U.S. citizenship - and move abroad. As indicated above, by doing so an expatriate would avoid the graduated tax rates on his U.S. investment income (and in certain cases, avoid some estate taxes). Explanation of provi~ion.-For the reasons stated above, the House bill adds a new section to the code which, in general, taxes both effec- tively connected income and any other U.S. source income of a-n ex- patriate at regular income tax rates, if he lost his citizenship within 5 years of the taxable year in question (and after March 8, 1965) and if one of the principal purposes of the expatriation was the avoid- ance of U.S. income, estate, or gift taxes. This treatment is not to apply if it results in a smaller U.S. income tax than would otherwise be imposed. Your commjttee's bill adopts the general rules provided in the House bill but extends the effective period during which the provi- sions can apply from 5 years, as provided by the House bill, to 10 years. - In addition to imposing this tax on both the expatriate's U.S. source income not effectively connected with the conduct of a U.S. trade or business and his income that is "effectively connected", regardless of its source, the new section contains special source rules to be used in de- 1440 PAGENO="0289" FOREIGN INVESTORS TAX ACT OF 1966 29 termining his U.S. source income. These rules provide that gains from the sale or exchange of property (other than stock or debt obligations) located in the United States, and gains on the sale or exchange of stock of a domestic corporation or debt obligations of U.S. persons or of the United States, a State or political subdivision, or the District of Co- lumbia are to be treated as income from sources within the United States regardless of where the sale or exchange occurs or title is trans- ferred. Deductions are to be allowed only to the extent they are prop- erly allocable to the gross income of the expatriate, determined under the above described provisions (except that the capital loss carryover provision is not to apply). The new section contains a special rule with respect to the burden of proving the existence or nonexistence of U.S. `tax avoidance as one of the principal purposes of the expatriation. Under this provision, the Secretary of the Treasury or his delegate must first establish that it is reasonable to believe that the expatriate's loss of U.S. citizenship would (`but for the application of these special provisions) result in a substantial reduction in his taxes based on the expatriate's probable income for the taxable year. If this is established, then the expatriate must carry the burden of proving that the loss of citizenship did not have,, for one of its prin- cipal purposes, the avoidance of U.$. income, estate, or gift taxes. However, the new section excepts persons whose loss of citizenship occurs under circumstances where it is unlikely that tax avoidance was. a principal purpose. For example, this provision does not apply where the person acquired dual citizenship at birth and loses his U.S. citizenship by residing, for a certain period, in the foreign country of which he is also a citizen by birth. Effective date.-T his amendment applies for taxable years beginning after December 31, 1966. d. Partial exclusion of dividends from gross income (sec. 103(g) of the bill and sec. 116(d) of the code) Present law allows nonresident aliens the $100 dividends received exclusion only if the individual is taxable on U.S. source dividends at the regular graduated rates applicable to individuals. The bill amends this provision, effective for taxable years beginning after December 31, 1966, to conform to the effectively connected income concept by limit- ing the availability of the exclusion to dividends which are effectively connected with the conduct of a trade or business in the United States. The exclusion is also allowed in the case of an expatriate subject to tax under new section 87'T. e. Withholding of tax on nonresident alien individuals (sees. 103(h) and (Ic) of the bill and secs. 1441 and 3401 of the code) Present law.-Present `law generally requires the withholding of tax in the case of a nonresident alien on U.S. source fixed or determi- nable income from U.S. sources (of the types previously described). The withholding is at a 30-percent rate (except in the case of certain treaty rates) and applies whether or not the fiat 30-percent tax applies to the individual.2 Thus it applies not only in the case of a non- resident alien with a gross income of $21,200 or less who is not engaged ~ a limited catégery of scholarship and fellowship income and related income the withholding rate is 14 percent. 71-297 0-67-pt. 2-19 1441 PAGENO="0290" 30 FOREIGN INVESTORS TAX ACT OF 1966 in a trade or business in the United States but also in the case of a nonresident alien with a larger gross income and also to one who is engaged in a trade or business in the United States. Reason for provision.-Your committee agrees with the House that withholding at the 30-percent rate should only be required in the case of income which is taxed at that rate. Therefore, income which is effectively connected with the conduct of a U.S. trade or business should not be subject to withholding tax at a 30-percent rate. This is particularly important in the case of compensation paid a nonresident alien: Unlike domestic wage withholding, this -30-percent withhold- ing does not., in most cases, take into account the personal exemptions to which the worker would be entitled if he were a U.S. citizen. Also, since the regular graduated rates on small incomes are less than 30 percent, this rate may result in substantial overwithholding in many cases where regular income tax rates apply. Although an alien may obtain a refund of the excess withholding when he files his return at the end of the year, overwithholding in these circumstances can create - a substantial hardship for the alien. Eceplanation of provisions.-To meet the problem outlined above, the bill adds a new provision to the existing nonresident alien with- holding provisions. Under the new provision, withholding is not required on payments to nonresident alien individuals with respect to any item of income (other than compensation for services) which is effectively connected with the conduct"of a trade or business within. the United States. It is the understanding of your committee that the person required to withhold will be relieved of any liability for failure to withhold if the failure was in reliance upon information as to whether or not the income was effectively connected, furnished (in accordance with regulations to be issued) by the person entitled to the receipt of the income. Your committee amended the House bill so as to specifically provide for withholding on the following types of in- come: (1) the contingent income derived from the sale of patents and other intangibles (see A-3(a) (A)); (2) a foreign partner's share .of the U.S. income of a domestic partnership which is not effeotively con- nected with the partnership's business; and (3) amounts received on re- tirement or exchange of bonds issued after September 28, 19&5, which are treated as gains from the sale of property which is not a capital asset (sec. 1232). In the case of salary and,wage income, the bill also correlates the 30-percent-withholding rate applicable to nonresident aliens with the domestic graduated withholding rates. Thus, the bill amends present law to provide that the Secretary of the Treasury or his delegate may, by regulations, exempt compensation for services performed by non- resident aliens from the- 30-percent withholding. Also, to permit withholding at the domestic graduated withholding rates where an exemption is granted from the 30-percent-withholding provision, the bill amends the domestic wage withholding provisions to, in effect, permit the Secretary of the Treasury or his delegate to require with- holding under those provisions. The bill also makes amendments of a technical nature to conform the language of the withholding provisions to the language used in the other taxing provisions. 1442 PAGENO="0291" FOREIGN INVESTORS TAX ACT OF 1966 31 Effective date.-The amendment relating to the 30-percent with- holding rule applies with respect to payments made in taxable years beginning after December 31, 1966. The amendment relating to domestic wage withholding applies with respect to remuneration paid after December 31, 1966. /. Withheld taxes and declarations of estimated incorn~e tax (sees. 103 (i) and (j) of the bill and sees. 1461 and 6015 of the code) Under present law, persons who are required to withold on amounts paid to nonresident aliens and foreign corporations are required to file a return and remit the taxes withheld during any calendar yeni by March 15 of the following year. This procedure is unusual since all other withheld taxes, such as the employees' social security taxes and domestic wage withholding, are required to be remitted (to- gether with the return) at least quarterly. As a result of the delay in the remittance of these 30-percent-withholding taxes, the withold- ing agents are given the use of these revenues for periods of time which are, in some cases, more than 1 year. Your committee agrees with the House that there is no reason for not requiring the remittance of these tax revenues at a time period approximating that applicable in the case of domestic withholding. Therefore, your committee's bill amends present law to provide the Treasury Department with the authority to require more current re- mittance of the taxes withheld on nonresident aliens and foreign corpo- rations. This amendment is effective with respect to payments made after December 31, 1966. The bill also amends the provisions of present law which require individuals to file declarations of estimated tax. The amendment continues present law which includes nonresident aliens within the category of individuals required to file these declarations. However, the application of this provision to nonresident aliens ~`s limited to those who receive incOme which is effectively connect.ed with the conduct of a trade or business within the United States. These amendments are effective with respect to taxable years begin- ning after December 31,1966. g. Foreign estates or trusts (sec. 103 (e) and(l) of the bill and sees. 875 and 7701a(a) (31) o/the code) Present law defines the terms "foreign trust" and "foreign estate" to mean a trust or estate, whose income from sources without the United States is not included in gross income for U.S. income tax purposes. Your committee's and the House bill amends this definition to conform it to the effectively connected concept. As amended, the terms mean an estate or trust the income from which from sources without the United States, which is not effectively connected with the conduct of a trade or business within the United States, is not included in gross income for U.S. income tax purposes. This amendment applies for taxable years beginning after I)ecember31, 1966. Your committee added an amendment which imputes the business activities of a trust or estates to its beneficiaries. In other words, if a trust, whether a foreign or a domestic trust, is engaged in a trade or business in the United States, its beneficiaries are deemed to also be en- gaged in that trade or business. 1443 PAGENO="0292" 32 FOREftN INVESTORS TAX ACT OF 1966 h. Citizens of pOs8e8sions of the (Jnited States (see. 103(m) of the bill and 8ec. 9383(a) of the code) Under present law, individuals who are citizens of possessions of the Umted States but not otherwise citizens of the United States, are taxed as nonresident aliens on their U.S. source income. This provision is amended by your committee's and the House bill, effective for taxable years beginning after December 31, 1966, to conform to the changes made to the taxation of nonresident aliens generally. i. Gain from disposition of certain.depreciable realty (sec. 8(j) of the Hov~se bill and sec. 18350(d) of the code) Your committee's bill strikes the House provision which provides that the recapture rule applicable to depreciable realty is to apply to the transfer of depreciable reai estate by a foreigner to. a domestic cor- poration in a tax-free exchange for stock or securities of a domestic corporation. Your committee took this action after being advised that the relationship between the House provision and the corresponding provisions of present law affecting U.S. persons make `the provision discriminatory. 4. TAXATION OF FOREIGN CORPORATIONS a. Income tace on foreign corporations (secs. 104 (a) and (b) of the bill and sees. 881 and 8883 of the code) Present law.-Present law taxes foreign corporations not engaged in a trade or business in the United States at a flat rate of 30 percent on flxed'or determinable income from sources within the United States. These items are (with a .few exceptions) the same as those presently taxed at the 30-percent rate to nonresident alien individuals-not en- gaged in a trade or business in the United States. They are interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable annual or periodical gains, profits, and income (including certain timber, coal, and iron ore royalties). The U.S. source income of a foreign corporation engaged in business in the United States is. taxed, under -present law, at the regular cor- porate rates. In computing the tax, deductions generally are allowed to the extent that they are properly allocable to the U.S. source income if a true and accurate return is filed by the corporation. Reasons for provision.-Your committee's and the House bill, both in the case of nonresident aliens and in the case of foreign corpora- tions, provides a consistent pattern of taxation. Nonresident aliens~ and foreign corporations will be taxed at' the regular income tax rates in the case of income which is effectively connected with a U.S. trade or business. In the case of nonresident alien individuals and foreign corporations with U.S. source fixed or determinable income whk~h is not effectively connected with a U.S. trade or business a flat 30-percent rate is applied. The reasons for differentiating the tax treatment on this basis have already been explained to a substantial extent in connection with the definition of effectively connected (No.' 2(b), above) and in connection with the explanation of the taxation - of nonresident' aliens (No. 3(a), above). 1444 PAGENO="0293" FOREIGN INVESTORS TAX ACT OF 1966 33 One of the principal changes resulting from this new classification in the case of foreign corporations is that investment income which is not related to a trade or business carried on in the United States* will be taxed at the flat 30-percent rate (or lower treaty rate) rather than at the regular corporate rate. This does away with the arbitrary distinction which exists under present law which makes the rate of tax, a flat 30 percent or regular rate, turn on the presence or absence of a trade or business in the United States which may be wholly unrelated to the investment income. Under the bill all U.S. source investment income (fixed or deter- minable income) of foreign corporations w1~ich is not effeetively con- nected with a trade or business in the United States will be taxed at a flat rate. However, all investment income effectively connected with a U.S. trade or business will be taxed in the same manner as other income of that trade or business, and in the same manner as similar income of a domestic corporation. As indicated in connection with the definition of effectively con- nected t.he new rule for the taxation for foreign corporations will also prevent the use of the United States as a "tax haven" in the case of limited categories of foreign source income. However~ these limited types of income do not, in any event, include "subpart F income" or, generally, income received from a foreign subsidiary. This -new rule for the taxation for foreign corporations should also tend to encourage foreign investment in the United States and thus is likely to have a favorable effect on the U.S. balance of payments. Explai~ation of provision.-The bill substantially revises the income tax treatment of foreign corporations. Under the 1)111 the income of a foreign corporation is divided into two classifications. (A) Income not effective7y connected.-Fixed or determinable in- come of a foreign corporation from sources within the United States which is not effectively connected with the conduct of a trade or busi- ness within the United States, under your committee's and the House bill, is taxable at a flat 30-percent rate (or lower treaty rate). Under your committee's bill, the types of fixed or determinable income spe- cified are the same as under present law with the same two additions provided in the case of nonresident aliens: (1) contingent income re- ceived from the sale of patents and other intangibles, and (2) amounts of original issue discount which are treated as ordinary income re- ceived on retirement or sale or exchange of bonds or other evidences of indebtedness issued after September 28, 1965. A corresponding amendment to the House bill deleting the tax on income realized with. respect to stock of a collapsible corporation was made in this provision. As indicated in the case of the taxation of nonresident aliens, the source of this original issue discount is to be determined by the same rules as those applicable to interest income. As a result, if the corporation with respect to whose bonds the original issue discount arises is a domestic corporation which for the 3-year period preceding the year of redemption derives 80 percent or more of its income from foreign sources, then the original issue discount (interest), at the time of the retirement or sale or exchange of the bonds also, will be considered as foreign source income. Moreover, the language in the nonresident alien section of this report clarifying the scope of the references in the bill tosection 1232 is equally applicable with respeèt to this provision. 1445 PAGENO="0294" 34 - FOREIGN INVESTORS TAX ACT OF 1966 The bill has also clarified the language of present law which includes certain timber, coal, and iron ore royalties in the 30-percent list. (B) Income effectively connected.-Tncome of a foreign corpora- tionwhich is effectively connected with the conduct of a trade or busi- ness wit.hin the United States is taxable, under the bill, at the regular corporate income tax rates. In determining "taxable income" for this purpose, gross income includes only gross income which is "effectively connected" with the conduct of the trade or business within the United States. (C) Income from real property.-Under present law (as explained with respect to nonresident alien individuals) it is not clear as to what situations or arrangements for the ownership by a. foreign corporation of real property located in the United States will cause the foreign corporation to be considered as engaging in a trade or business within the United States. This is important to know because if a foreign corporation not engaged in a trade or business in the United States receives rents from U.S., real property, this rental income is taxable at the flat 30-percent rate (or applicable treaty rate) on the gross amount of such rents, without the allowance of any deductions attribut- able to the rental income. Consequently, the tax liability generated by this rental income may exceed the net rental income the corporation receives. Your committee agrees with the House that the law in this area should be clarified and doubts whether it is appropriate to tax the gross amount of this type of income. Since the provisions of this amendment parallell the amendment pro- vided in the case of real estate income of nonresident alien individuals, the explanation is not repeated here (see No. 3(a) (C) (ii)). (D) Certain interest received by baths in U.S. possessions.-The ap- plication of the flat 30-percent rate to U.S. source income which is not effectively connected with a U.S. trade or business results in a high ef- fective rate of tax on interest received by banks located in U.S. posses- sions with respect to U.S. Government obligations which they must necessarily hold to meet reserve requirements. This result is due to the fact that these banks must pay interest on the amounts invested in the U.S. Government obligations. Therefore, the net profit margin on the interest received from these U.S. Government obligations is small rela- tive to the gross amount of interest received. It was also brought to the attention of your committee that the usual method of effecting a mitigation of the flat 30-percent rate in the case of interest-an income tax treaty providing a lower rate (0, 5, or 15)-is, of course, not pos- sible in the case of a possession. In view of the facts set forth above your committee has added an amendment to the House bill which provides that interest received by banks located in a U.S. possession from U.S. government ol)hgations will be treated as effectively connected with a U.S. trade or business whether or not the bank has such a `business. Consequently, the in- terest received by a bank in a possession from U.S. Government obliga- tions will be taxed on a net `basis-gross interest income less allocable expenses. (E) Deductions.-Under the bill, deductions are allowed in comput- ing the tax imposed at the regular corporate rates only to the extent that they are properly attributable to income which is effectively con- nected with the conduct of a trade or business within the United 1446 PAGENO="0295" FOREIGN INVESTORS TAX ACT OF 1966 35 States. The deduction for charitable contributions, however, is allowed whether or not attributable to income which is effectively connected. Generally, as under present law, deduótions are permitted only if a true and accurate income tax return is filed. Effective date.-These amendments apply with respect to taxable years beginning after December 31, 1966. b. Withholding of tax on foreign corporatioi~s (sec. 104(c) of the bill and see. 14492 of the code) Tinder present law, the fixed or determinable TJ.S. source income of a foreign corporation not engaged in trade or business in the United States, like that of a nonresident alien not engaged in a trade or busi- ness in the United States, is subject to a withholding tax of 30 percent. However, foreign corporations engaged in trade or business in the United States are not subject to the withholding tax. The bill amends the withholding provisions of present law to con- form to the effectively connected concept in the bill. Thus, under the bill a withholding tax at the 30-percent rate will apply in the case of a foreign corporation to items of fixed or determinable U.S. source income which are not effectively connected with the conduct of a trade or business in the United States. It is the understanding of your corn- mittee that the person required to withhold will be relieved of any liability for failure to withhold if the failure was in reliance upon information (as to whether or not the income was effectively con- nected) furnished (in accordance with regulations to be issued) by the foreign corporation entitled to the receipt of the income. The House bill provides that this 30-percent withholding provision is not applied if the Secretary of the Treasury determines that the with- holding requirements impose an undue administrative burden and that the collection of the tax will not be jeopardized by an exemption. In cases like this, if the Treasury concludes that revenue will not be jeopardized (or delayed) by foregoing withholding, your com- mittee concluded it would be desirable to do so. This amendment is applicable to taxable years beginning after December 31, 1966. c. De,duetion for dividends received froirt foreign corporations. (see. 104 (d) and (e) of the bill and sec. 9245 (a) and (b.) of the code) Present law.-In general, present law allows corporations an 85-per- cent dividend-received deduction for dividends received from domestic corporations. In order for this deduction to be available in the case of dividends from a foreign corporation, it must be engaged in a trade or business in the United States for an uninterrupted period of at least 3 years and 50 percent of its gross income must be from U.S. sources during that period. Where these conditions exist, an 85-percent divi- dend-received deduction is available for the same proportion of the dividend as the corporation's gross income, which is from U.S. sources, is of its total gross income. Explanation of the provision..-The House bill substantially con- forms the dividends-received deduction to the effectively connected concept appearing elsewhere in the bill. Under the House bill 50 percent or more of the foreign corporation's gross income for the un- interrupted period must be from income effectively connected with the conduct of a trade or business within the United States for the deduc- 1447 PAGENO="0296" 36 FOREIGN INVESTORS TAX ACT OF 1966 tion to be available. Also, the deduction is limited to 85 percent of the same proportion of the dividend as the foreign corporation's gross income, which is effectively connected with a U.S. trade or business, is of that corporation's total gross income from all sources. Your committee added an amendment to the House bill which in certain situations provides a 100 percent dividends-received deduc- tion to a domestic corporation for dividends received from a wholly owned foreign subsidiary which has a 100 percent effectively connected income. In such a situation a foreign corporation is subject to U~S. tax on all of its income, just as is a domestic corporation. The bill also contains a transitional rule which makes it unnecessary to apply the effectively connected income concept when any of the years which is taken into account for the 50-percent test is a pre-1967 year. This rule provides that, for purposes of computing this deduc- tion, all of a foreign corporation's U.S. source income, for any period before its first. taxable year beginning after December 31, 1966, is to be considered to be effectively connected income. Effective date.-These amendments apply for taxable years be-* ginning after December 31, 1966. d. Unrelated business taxable income of certain foreiqn charitable organizations (sec. 104(g) of the bill and sec. .512(a) of the code) Under present law the unrelated business taxable income of foreign charities is subject to tax if it is derived from sources within the United States~ The bill conforms this provision to the effectively connected con- cept by providing that the unrelated business taxable income of a for- eign charity is to be subject to tax only if it is effectively connected with the conduct of a trade or business in the United States. This amendment applies for taxable years beginning after Decem- ber 31, 1966. e. Foreiqn corporatio'im' ~ubject to personal holding con~any tax (see. - 104(h) of the bill and see. 543(c), 543(b); and 545 (a) and (d) of the code) Present lau'.-Under present law any foreign corporation with U.S. investment income, whether or not doing business here, may be taxed as a personal holding company unless all its outstanding stock is owned (directly and indirectly) by nonresident alien individuals and its U.S. source gross income is less than 50 percent of its total gross income for that year. If taxable as a personal holding company the foreign corporation is subject to a special 70-percent tax on its undistributed U.S. source personal holding company income in addition to the flat rate 30-percent tax (or possibly the regular corporate tax). Also, if a foreign corporation is determined to constitute a personal holding company and the foreign corporation has not filed a return or that which was filed was not a true and accurate return, the 70-percent personal holding company tax is assessed without allowance of the dividend paid deduction. In such cases, the combination of the regular 30-percent tax and the 70-percent personal holding company tax can constitute a tax of about 80 percent. of the income of the foreign corporation. Reason for provision.-The primary reason for applying the U.S. personal holding company tax to foreign corporations owned by non- 1448 PAGENO="0297" FOREIGN INVESTORS TAX ACT OF 1966 37 resident aliens has been to prevent the avoidance of the graduated rates of U.S. tax applicable to certain nonresident alien individuals by utilizing foreign holding companies as the recipients of their U.S. source investment income. Generally the graduated rates presently apply when a nonresident alien's U.S. gross income exceeds $91,200 or when he is engaged in a trade or business in the United States. How- ever, under your committee's and the House bill nonresident aliens are not to be subject to the graduated rates of tax unless their income is effectively connected with a trade or business in the United States. In view of this the retention of the personal holding company tax would appear to serve no purpose where all of the shareholders are nonresident aliens. Explanation of provision.-The House bill modifies the provision in present law excluding from the personal holding company definition only those foreign corporations which meet two tests; namely, where their U.S. source gross income is less than 50 percent of their total gross income and all of their stock is held directly or indirectly by nonresident aliens. In place of this the House bill substitutes a broader exemption which applies to any foreign corporation all of whose outstanding stock during the last half of its taxable year is owned by nonresident alien individuals (directly or indirectly through foreign estates, trusts, partnerships, or other foreign corporations). Your committee has adopted three amendments in this area.. The first amendment provides that the general exclusion from the per- sonal holding company provision provided~ in the House bill is not. to be available to a foreign corporation which is a personal holding company if it has income from personal s~rvices which is personal holding company income described in section 543 (a) (7). In such a case the personal holding company tax is to be assessed on that per- sonal service income. The second amendment provides a deminimus rule, in addition to the general exception provision provided in the House bill. Under the amendment, in the case of foreign corporations with only 10 percent or less U.S. ownership the personal holding com- pany tax is to be assessed only on the corporation's undistributed per- sonal holding company income attributable to the U.S. shareholders' interest. The final amendment adopted by your committee provides that a foreign corporation can claim all appropriate deductions in computing its personal holding coh~pany tax notwithstanding the general rule disallowing deductions where no return is filed. How- ever, a 10-percent. addition to taxes otherwise due is to be assessed. Effective date.-This amendment applies with respect to taxable years beginning after December 31, 1966. f. Fareiqn corporations carrying on insuranee bu$iness in the United States (sec. 104(i) of the bill and sees. 819. 82L 822, 831. 832, 841 and 842 of the code) Present law.-Present law taxes a foreign life insurance company carrying on a life insurance business in the United States on all its income attributable to that. business in substantially the same man- ner as a domestic life insurance company.3 Foreign. insurance com- panies carrying on life insurance businesses in the United States gen- `A foreign life insurance company that Is not carrying on a life insurance business In the United States Is taxable under the provisions applicable to foreign corporations generally. 1449 PAGENO="0298" 38 FOREIGN INVESTORS TAX ACT OF 1966 erally have interpreted this as~providing they were not taxable on TJ.S. source income which is not income of the U.S.. life insurance business of the company. As is indicated above, with respect to their life insurance company business, foreign life insurance companies are taxed, under present law, in substantially the same manner as domestic life insurance companies. However, a special rule is provided where the surplus of a foreign life insurance company held in the United States is less than a specified minimum figure. This figure is expressed as the same percent of the foreign life insurance company's liabilities on U.S. business as the average surplus of domestic corporations is of their total liabilities. The Secretary of the Treasury determines this ratio each year. If the foreign insurance company's surplus held in the United States is less than this proportion of the taxpayer's total insurance liabilities on U.S. business, then the policy and other contract liability requirements, and the required interest for computing gain from operations, are re- duced by this deficiency multiplied by the rate of earnings on invest- ments. This provision is designed to prevent foreign insurance com- panies doing business in the United States from avoiding tax that they would otherwise have to pay to the United States merely by not hold- ing a sufficient amount of surplus attributable to the U.S. business. Reason for, and ea~pZanation of p~rovisions.-Your committee agrees with the House that foreign insurance companies-life insurance companies and other insurance companies, including both mutual and stock companies-should, in general, be taxed on their investment in- come in the same manner as other foreign corporations. For this rea- son, the bill provides that a foreign corporation carrying on an insur-. ance business within the United States is to be taxable in the same manner as domestic companies carrying on a similar business with respect to its income which is effectively connected with the conduct of a trade or business within the United States. The remainder of the U.S. source income of this type of a corporation is to be taxed in the same manner as income of other foreign corporations which is not effectively connected with a U.S. trade or business; that is, at a flat 30 percent (or lower treaty) rate. The determination of whether a for- eign insurance company qualifies for the special domestic insurance treatment is to be made by considering only the income of the corpora- tion which is effectively connected with the conduct of its insurance business carried on in the United States. In making this change your committee intends no inferences as to the requirements of existing / law with respect to investment income of foreign insurance companies. For purposes of determining whether or not income of a foreign life insurance company is effectively connected with the conduct of its U.S. life insurance business, the annual statement of its U.S. busi- ness on the form approved by the National Association of Insurance Commissioners will usually be followed. It has been brought to the attention of your committee that certain foreign casualty insurance companies also use this form to indicate their U.S. business connected investment income. The committee does not intend to imply by nega- tive inference that these companies will be precluded from using this form in the future. It is noted that all the income effectively connected with the foreign life insurance company's U.S. life insurance business, from whatever source derived, comes within the ambit of this nro- vision. This a continuation of present law which subjects to U.S. 1450 PAGENO="0299" FOREIGN INVESTORS TAX ACT OF 1966 39 tax all the income attributable to the U.S. life insurance business from whatever source derived. In the case of insurance companies other than life-both mutual and stock-present law provides that if these companies have income from U.S. sources but are not engaged in an insurance business here, they are taxed in the same manner as other foreign corporations. Where mutual insurance companies (other than life or marine) are carrying on an insurance company business in the United States, they are taxable on their income derived from sources within the United States in the same manner as similar domestic mutual companies. Stock casualty, fire, flood, and so forth, insurance companies carrying on an insurance business in the United States, also are taxed in the same manner as domestic stock insurance companies with respect to the portion of their taxable income from sources within the United States. it has been pointed out that the special rule in present law referred to above with respect to foreign life insurance companies-where these companies hold a lower ratio of surplus for their U.S. business than that held by the average domestic companies-may lead to what in effect is a double tax. This results from the interaction of this pro- vision with the effectively connected rule. Thus for example, a com- pany may find its deductions reduced (because of the minimum surplus requirement) while, at the same time, it is taxed at a flat 30 percent (or lower treaty rate) on investment income in this country not effectively connected with the U.S. business which, in effect, also includes the in- come subject to the minimum surplus adjustment. To meet the problem referred to above, your committee's and the House bill adds a paragraph to the provision described above which has the effect of reducing the income subject to the flat 30-percent tax (or~lower treaty rate) by the amount by which the deductions under this special provision are reduced as the result of the application of the Secretary's ratio. This is accomplished by allowing a credit against the 30-percent tax (or loweF treaty rate) for the tax levied on the hypo- thetical income attributed to the U.S. life insurance company business. Effective date.-These amendments apply with respect to taxable years beginning after December 31, 1966. g. Subpart F income (sec. 104(j) of the bill and see. 95f~(b) of the code) Present law.-Under present law certain portions of the undistrib- uted income of a controlled foreign ~orporation are taxed currently to its U.S. shareholders having a 10 percent or greater voting in- - terest. This undistributed income so taxed is termed "subpart F in- come." In determining "subpart F income," there is excluded in- come of a foreign corporation from U.S. sources which already is taxed by. the United States because the corporation is engaged in trade or business in the United States. Present law is interpreted in the income tax regulations as not excluding from "subpart F" income, income exempt from U.S. tax, or subject to a reduced rate of tax, in accordance with a treaty. The bill modifies existing ~law to conform this provision with the effectively connected concept and to clarify the language of existing law with respect to income affected by treaties. Explanation of provision.-The bill amends present law to provide tha.t in determining "subpart F income" there is to be excluded only 1451 PAGENO="0300" 40 FOREIGN INVESTORS TAX ACT OF 1966 those items of income effectively connected with the conduct by the foreign corporation of a trade or business within the United States. It also makes it clear that "subpart F" income includes items exempt from U.S. tax or subject to a reduced rate of tax pursuant to a treaty. Effective date.-This amendment applies with respect to taxable years beginning after December 3~, 1966. Ii. Gain from certain sales or ethchanqes of stock in certain foreiqn corporations (sec. 104(k) of the bill and sec. 11d48(d) of the code) Present law.-Present law treats the gain realized by a 10-percent U.S. shareholder from the sale or exchange of stock of certain for- eign corporations as a dividend, to the extent the post-1962 earnings and profits of the corporation are attributable to the shares being sold or exchanged. In determining the earnings and profits to be taken into account in determining this gain, present law excludes U.S. source income of a foreign corporation engaged in a U.S. trade or business. Consistent with the interpretation of similar language ap- plicaible to the determination of "subpart F income" explained above, these earnings and profits h~ve been construed by the regulations as including income exempt from U.S. tax or subject to a reduced rate by treaty. Explanation of provision.-The amendment provides that for tax- able years beginning on or after January 1, 196'?', the earnings and profits of the foreign corpora~tioi~ (for purposes of sec. 1248) is not to include income effectively coimected with the conduct of a trade or business within the United States. In addition, the amendment makes it clear that the exclusion does r~ot apply to income which is exempt from tax, or subject to a reducec~ rate of tax, pursuant to a treaty. Effective date.-This amendment applies to sales or exchanges oc- curring after December 31, 1966. 5. MISCELLANE0Uq INCOME TAX PROVISIONS, ETC. a. Income affected by treat?,~t (sec. 105(a) of the bill and sec. 894 of the code) Present law.-Existing income tax treaties generally provide that the exemptions from tax, or the reduction in rates of tax, provided for in its provisions apply only to persons who do not have a permanent establishment in the United States. The "permanent establishment" concept of the treaties serves a purpose similar to the "engaged in a trade or business in the United States" concept of U.S. tax law. The effect of such a provision in a treaty, therefore, is to deny the benefits of a treaty exemption or reduced rate to a nonresident alien individual, or a foreign corporation, engaged in a trade or business in the United States through a permanent establishment. Explanation of provision.-Under the tax treatment provided for such persons by the bill, the "engaged in trade or business in the United States" criterion is no longer the sole determinant of the method of taxing particular items of a nonresident alien individual's, or a foreign corporation's, U.S. source income. The bill seeks to tax all such persons alike on their noneffectively connected U.S. source in- come whether or not they also are engaged in a trade or business in the United States. This result would not be achieved under treaty pro- visions if some aliens or foreign corporations because of having a 1452 PAGENO="0301" FOREIGN INVESTORS TAX ACT OF 1966 41 permanent establishment in the United States, are denied the benefits of treaty rates or exemptions. The bill adds to the code- a new subsection providing that for purposes of applying any exemption from, or any redueed rate of; tax granted by a treaty to which the United States is a p~rty, with respect to income which is not effectively connected with the conduct of a trade or business within the United States, -a nonresident alien individual or foreign corporation shall be deemed not to have a permanent establishment in the United States at any time during the taxable year. In other words, with respect to investment income not effectively connected with a trade or business, a nonresident alien or foreign corporation will be taxed at the lower treaty rate if one is pro- vided. This provision does not apply in computing the special tax applicable to U.S. citizens who become expatriates with a primary purpose of avoiding tax. Effective date.-This new provision is effective for taxable years beginning after December 31, 1966. b. Adjnstment of tax on nationals, residents, and co'rpo'rations of cer- tain foreign countries (sec. 108(b) of the bill and new sec. 8~9Y3 of the code) Imposition of more burdensome taxes.-Unilaterally revising the statutory pattern of taxation of nonresident aliens and foreign corpo- rations and granting favorable tax treatment to such persons may have the effect of making it more difficult to negotiate satisfactory tax treaties. At the same time, your committee agrees with the House that a systematic modernization of the U.S. income tax treatment of non- resident aliens and foreign corporations requires a modernization of the basic statutory provisions. To prevent a. deterioration in our position in negotiating treaties while at the same time modernizing these statutory provisions, the bill has added a provision to the tax laws which generally grants to the President the authority to apply the income, tax law without regard to the amendments `which this or later acts make to the provisions re- lating to the taxation of foreigners (including corporations) in the case of any country which imposes more burdensome texes on U.S. citizens and corporations than the United States does on nonresident aliens and foreign corporations. The new section gives special authority to the President where he finds that- (1) under the laws of any foreign country, citizens of the -United States (not residents of the foreign country) or U.S. cor- porations are being subject to more burdensome 4axes on any item of income from sources within the foreign country, than those im- posed by the United States on similar U.S. source income of resi- dents or corporations of the foreign country; (2) when asked so to do the foreign country has not acted to revise or, reduce its taxes to eliminate this condition; and (3) it is in the public interest to reimpose the pre-1967 income tax provisions. Where these condit.ions exist, the President may proclaim that the tax on similar income derived from U.S. sources by residents or corpora- tions of the foreign country for taxable years beginning after the proc- 1453 PAGENO="0302" 42 FOREIGN INVESTORS TAX ACT OF 1966 lamation is to be determined by disregarding the amendments to the income tax law, as it relates to nonresident aliens and foreign corpora- tions, made by this bill or by subsequent acts. If after such a proclamation, the foreign country modifies the offending provisions of its tax law so that the President finds they are no longer more burdensome, he may proclaim that the TJ.S. tax on similar items of income derived from U.S. sources by residents or corporations of the foreign country, for taxable years beginning after such proclamation, is to be determined by taking into account the amendments made to the income tax provisions of the code relating to nonresident aliens and foreign corporations by this bill and later acts. Before the President makes a proclamation under this new pro- vision, he is to give the Congress 30 days notice of his intention so to do. Imposition of discriminatory ta~res by foreiqn country.-It was brought to the attention of your committee that there are some foreign countries which discriminate against 11.5. persons either generally or with regard to specific classes of ilLS, persons. Since the present pro- visions of the code do not provide the President with authority to counteract discrimination by effecting substantially the same tax on the persons of the discriminating country (the present provision pro- vides only for a doubling of the tax) it was the opinion of your com- mittee that the abilit.y to counteract all degrees of discrimination should be provided the President. Your committee is aware that. at the present time the United Kingdom taxes dividends received by a United Kingdom permanent establishment of U.S. corporations at a higher rate than that at which it taxes its own corporations on inter- corporate dividends. It is the understanding of your committee that it is situations such as this which may require action under this section. In view of the foregoing facts your committee added a provision to the House bill granting the Pre~ident the authority to take such action as is necessary to raise the effective rate of U.S. tax on income reeived by nationals, residents, or corporations of a discriminating country to substantially the same rates as are applied in the other country. Effective date.-These provisions are effective for taxable years be- ginning after December 31~ 1966. c. Foreign community property income (sec. 105(e) of the bill and new sec. 981 of the code) Present law.-The general income tax provisions provide, in effect, that the worldwide income of a U.S. citizen is subject to tax from whatever source derived. In a recent case,4 it was held that an Ameri- can citizen who acquired residence in a foreign country with com- munity property laws, and who married a nonresident alien, had a sufficient interest in one~-half of the marital partnership income- even though earned by the husband foreigner-to render her subject to U.S. taxation on that income. Reasons for provision.-Your committee agrees with the House that it is undesirable to require a U.S. citizen to pay U.S. tax on income earned by a spouse who is a foreigner merely because of the attribution of one-half of the income to the U.S. citizen through the community property laws of the foreign country of residence. Although the tax is levied on the spouse who is a TLS. citizen, it is regarded by most `Ka~ruaMca J. Parsons v. Commiuioner, 48 T.C. 881 (1964). 1454 PAGENO="0303" FOREIGN INVESTORS TAX ACT OF 1966 43 foreigners as a U.S. tax on the income from the labor and property of the foreigner's spouse.. In practice it appears that the revenue re- ceived from the application of this rule is limited because of the likeli- hood that persons subject to it are unaware of its existence. However, when a case is discovered, the tax liabilities are likely to be large because returns have not been filed. An additional factor to be considered is that community property laws of foreign countries frequently make no difference in the source of taxable income since they often require joint returns by husbands and wives. Moreover, in many such countries it appears doubtful whether a U.S. wife under the law of that country could legally com- pel her foreigner husband to pay over to her amounts necessary to remit her U.S. tax liability on her community property income. For the reasons given above, the bill provides a U.S. spouse with an election which would substantially negate the operation of the com- munity property laws of the foreign country of residence~ Eceplanation of provisions.-The bill provides elections to U.S. citi- zens who arc, during the periods involved, married t.o nonresident aliens. If an election is made for post-1966 years, the community in- come of husband and wife are to be treated as follows: (1) Earned income (sec. 911(b)) is to be treated as income of the spouse who rendered the personal services. (2) Trade or business income is to be treated as income of the husband unless the wife exercises substantially all the manage- ment and control over the business. Also, a partner's distributive share of income is to be wholly attributed to him (same as self- employment rules under section 1402(a) (5)). (3) Other community income which is derived from separate property of one spouse is to be treated as income of that spouse. What is "separate property" for this purpose is to be determined under the applicable foreign community property law. (4) All other community income is to be treated as provided in applicable foreign community property law. Due to the uncertainty in the tax treatment of this type of commu- nity property income in prior years, the election provided for pre- 1967 years, to an even greater extent, ignores community property laws of the foreign countries. For pre-1967 years the treatment of income of the types set forth in categories (1), (2), and (3) above is to be the same as described above, but the income described in category (4) above is to be treated as income of the spouse whO, for the year in- volved, had the greater amount of income described in (1), (2), and (3) plus separate income. Thus, category (4) income is attributed to the marital partner whose earnings or property were most likely to have given rise to this income. For purposes of this provision, the treatment of deductions is to be compatible with that accorded the income to which the deductions are attributable. In other words deductions are to follow the income they generate. This provision provides qualified taxpayers with two elections, one for pre-1967 years and one for future years. Either election can be made for any year, at any time, so long as the year is still open. How- ever, these elections are binding-if the election is exercised for any post-1967 year the treatment provided by this provision applies not 1455 PAGENO="0304" 44 FOREIGN I~1TE~TORS TAX ACT OF 19 66 only to the year of electi~n but also to all years subsequent which are open and, if made for pre-1967 years, this provision applies for all open years prior to that date. It should be noted that either election can be made separately. Generally, the election must be made by both spouses. However, with respect to the pre-1967 election, the foreigner spouse need not join if the Secretary of the Treasury determines that (1) an election would not affect the U.S. tax liability of the foreigner spouse for any taxable year, or (2) that the foreigner spouse's U.S. tax liability for pre-1967 years cannot be ascertained and that to deny the election to the U.S. citizen would be inequitable and cause undue hardship. If either election is made, a period of 1 year is provided with respect to all open years for the making of assessments and the claiming of re- funds. However, this 1-year period applies only if the deficiency or refund is attributable to the election. Also, no interest is due on a deficiency or refund resulting from the election for any period up to 1 year after the filing of the election. d. Foreign tax credit-f o'reign carporation~ and nonresident aliens (sec. 106(a) of the bill and secs. 874, 901, and new sec. 906 of the code) Present law.-Present law does not grant a foreign tax credit to foreign corporations or nonresident aliens since presently such per- sons are subject to U.S. tax only on their U.S. source income. How- ever, the code does provide a tax credit to U.S. persons with re- spect to foreign taxes on foreign income subject to U.S. tax. Reasons for provision.-As a result of the rule provided elsewhere in this bill nonresident aliens and foreign corporations, in certain types of cases, are taxable on foreign source income which is effectively connected with the conduct of a trade or business within the United States (see item 2(6) (ii) above). The country which is the source of the income may also impose a tax on this same income. Moreover, the country in which the alien is a citizen or where the foreign corpora- tion is domiciled for tax purposes may also assert tax jurisdiction with respect to this income. In view of the fact that one of the primary reasons the foreign source income effectively connected concept is being adopted is to prevent the United States from being availed of as a "tax haven" it is the opinion of your committee that the United States should not assert tax jurisdiction in a manner which might lead to double taxation to the extent that the countries of source or residence subject the income to their tax. Therefore, your committee concluded that the policy preventing the United States from being availed as a "tax haven" would not be frustrated by providing a foreign tax credit for all foreign income taxes assessed with respect to effectively con- nected foreign source income. Explanation of provision.-For the reasons indicated above the bill adds a new section to the code (sec. 906) to allow a foreign tax credit to nonresident aliens and foreign corporations with respect to foreign source income which is subject to tax in the United States because it is effectively connected with the conduct of a trade or business in the United States. However, this provision of your committee's bill dif- fers from that provided in the House bill. Under the House bill this foreign tax credit for nonresident aliens and foreign corporations is 1456 PAGENO="0305" FOREIGN INVESTORS TAX ACT OF 1966 45 not to be available for taxes imposed by a country solely on the basis that it has jurisdiction to tax the individual on his worldwide income because he is a citizen or resident of that country or a corporation on its worldwide income because it is created, incorporated, or domiciled there. As indicated above it is the opinion of your committee that it is not necessary to the effectuation of the purposes.. of the bill that the foreign tax credit provision be limited in the manner provided in the House bill. The credit is allowed under the existing foreign tax credit provision and is subject to the existing "per country" or "overall" limitation. The "per country" limitation restricts the credit to the proportion of the U.S. tax which the taxpayer's taxable income from sources within the particular country bears to his entire taxable income for the year. Similarly the "overall" limitation restricts the credit to the proportion of the U.S. tax which the taxpayer's taxable income, from sources without the United States, bears, to his entire taxable income for the year; In determining the credit allowable to a nonresident alien indi- vidual or a foreign corporation under these limitations, the individ- ual's or corporation's taxable income is to include only the taxable income effectively connected with the taxpayer's conduct of a trade or business within the United States. Moreover, the credit is not allows able against U.S. taxes imposed at the flat 30-percent rate on income not effectively connected with the conduct of a trade or business in the United States. Under some circumstances, present law treats a portion of the for- eign taxes raid by certain foreign subsidiaries of a domestic corpora- tion as having been paid by the domestic corporation for purposes of computing its foreign tax credit. The bill accords this same treat- ment to foreign corporations, but its application is limited to income effectively connected with the conduct of a trade or b~usiness within the United States. Effective date.-These amendments apply for taxable years begin- ning after December 31, 1966. In applying the foreign tax credit carryback and carryover provisions of present law to nonresident aliens and foreign corporations no amount may be carried to or from a taxable year beginning before January 1, 1967. e. Similar credit requirement (8cc. 106(b) (~) and (3) of the bill and seas. 901(c) and 9~104(a) and new (h) of the code) Pi'esent law.-Under present law, the foreign tax credit for in- come, etc., or death taxes are allowable to an alien who is a resident of the United States (or Puerto Rico) only if the foreign country in which the alien is a citizen or subject, in imposing its income, etc., or death taxes, allows a similar credit to citizens of the United States residing in such country. Reason for prori4on.-The present law acts -to deny the credit to alien residents of the United States who are citizens of countries which may be following foreign policies which are adverse to the United States. Such countries may be unconcerned as to our tax treatment of refugees from their country who become residents of the United States. The fact that the United States may deny a credit to refugees from their country, in fact, might encourage them not to provide a foreign tax credit or exemption in their laws for any residents of their country who may be U.S. citizens. Your committee agrees with the House that. 7 1-297 0-67-pt. 2-20 1457 PAGENO="0306" 46 FOREIGN INVESTORS TAX ACT OF 1966 the denial of the credit to such persons under these circumstances is unjustified and, therefore, has amended present law so as to allow these persons the foreign tax credit unless the President finds that so doing is not in the public interest. Explainatio~n of provision.-The bill modifies the provision of present law which in all cases denies a credit for citizens of a foreign country if it does not provide reciprocity for U.S. citizens residing there. Under the bill the President is given some discretion as to the disallowance of the credits in such cases. The bill provides that the President is to deny a foreign tax credit to residents who are sub- jects of a foreign country if he finds: (1) That a foreign country, in imposing income, war profits, and excess profits taxes or death taxes does not allow U.S~ citizens residing in that country a credit for any taxes paid or accrued to the United States or any foreign country, similar to the foreign tax credit allowed by the United States to sub- jects of that foreign country residing in the United States; (2) that the foreign country, when requested to do so, has not acted to provide a similar credit to U.S. citizens residing in that foreign country; and (3) that it is in the public interest to allow the U.S. foreign tax credit to citizens or subjects of the foreign country who reside in the United States only if the foreign country allows such a similar credit to citi- zens of the United States residing in the foreign country. The disallowance of the credit in any such case is to apply for tax- able years beginning while a Presidential proclamation denying the credit is in effect. f. Separate foreign tax credit limitation (sec. 106(c) of the bill and see. 904(f) of the code) Present law.-Generally, under present law the limitation on the al- lowable foreign tax credit, must be computed separately for all interest income and on a "per country" basis. The exceptions to this general rule are for: (1) Interest derived from any transactions directly related to the active conduct of a trade or business in a foreign country or U.S. possession; (2) Interest derived in the conduct of a banking, financing, or similar business (such as an insurance company business); (3) Interest received from a corporation in which the taxpayer owns at least 10 percent of the voting stock; and (4) Interest received on obligations acquired as the result of the disposition of a trade or business actively conducted by a taxpayer in a foreign country or as a result of a disposition of stock or. obli- gations of a corporation in which the taxpayer owned at least 10 percent of the voting stock. This provision was added to the code by the Revenue Act of 1962 so as to foreclose the transfer outside the United States (primarily to Canada) of short.term funds, such as bank deposits, in order to make it possible to use foreign tax credits, which otherwise could not be used, to reduce the U.S. tax on a domestic corporation's worldwide income. Interest income previously could be used in this manner because typically the foreign tax on such income was below the reg- ular corporate tax which would apply to interest income received by a domestic corporation. Thus, if the overall limitation were used there 1458 PAGENO="0307" FOREIGN INVESTORS TAX AC'~ OF 1966 47 was foreign income which was available against which could be applied excess foreign tax credits. In general, the excepted categories, described above, present situa- tions in which the receipt of the. foreign-source interest is likely to re- flect legitimate business transactions. The. 10-percent exception, ((3) above) was added by the Congress in the belief that if a lender owned at least 10 percent of the voting stock of a borrowing corporation an interest-bearing loan to that corporation is not likely to be a mere tax- savings device. The Congress thereby recognized that, in practice, business reasons may often require a shareholder to provide funds to a foreign corporation in the form of loans rather than in the form of additional equlty capital. However, since the Congress was at that time closing a tax avoidance device the 10-percent exception was limited to situations where the U.S. corporation directly owned at least 10 per- cent of the foreign debtor corporation. Reasons for provi~ion.-TJ.S. corporations, in cooperating with the President's voluntary program to aid our balance of payments by limit- ing the outflow of capital investment funds, have been requested to obtam a portion of their fOnds necessary to finance their foreign operations from the foreign capital markets rather than from sources within the United States. In this manner, the flow of dollars abroad has been curtailed and our balance-of-payments position aided. Some corporations have established. subsidiaries in this country for the specific purpose of handling these foreign funding transactions. How-. ever, the use of such a subsidiary to finance these foreign operations may result in the special separate interest income limitation (de- scribed above) being applied, for purposes of computing the foreign tax credit, with respect to interest income the subsidiary derives from loaning funds to the related companies.. As indicated previously an exception is provided in those cases where the U.S. taxpayer receiving the interest directly owns 10 per- cent of the foreign subsidiary paying the interest. However, where the U.S. parent establishes a wholly owned domestic subsidiary to borrow the foreign funds to finance the operation of its foreign sub- sidiary this exception of present law may not apply. This is because the funding subsidiary does not directly own a 10-percent interest in the foreign operating subsidiary. This is true even where the domestic funding subsidiary is a wholly owned subsidiary of a corporation which, in turn, owns more than 10 percent of the foreign operating subsidiary to whom the funds are loaned. In these circumstances your committee does not see why the limitation on the foreign tax credit should not apply in the same manner whether the foreign financing is done through the parent or a domestic subsidiary of the parent. A precedent for liberalization of this provision is found in the in- terest equalization tax (a provision enacted to improve our balance of payments) which provides an exemption for acquisition of stock and debt obligations of a foreign corporation in which the tax- payer owns at least 10-percent interest regardless of whether the 10- percent stock ownership belongs to the lender or another related cor- pOration belonging to the same affiliated group. Since the interest equalization tax and this special foreign tax credit provision will have mutual application in many situations it is the opinion of your com- mittee that, to the extent possible, these provisions should have~ 1459 PAGENO="0308" 48 FOREIGN INVESTORS TAX ACT OF 1966 parallel application. Moreover, the application of the regular limita- tions, rather than the separate limitation on interest, in the case of these funding subsidiaries is particularly important now in view of their favorable impact on the balance of payments and the fact that they represent compliance with the administration's voluntary program for restraint on foreign investments. The House bill proposes to liberalize the 10-percent ownership ex- ception but its amendment has only limited application. Specifically, it would leave unchanged the present 10-percent rule and add a new section to make the separate limitation on interest income inapplicable to interest "received by an overseas operating funding subsidiary on obligations of a related foreign corporation." For purposes of this provision the domestic funding subsidiary is defined so as to, in effect, require that the domestic lender or its affiliated group own at least 50 percent of the voting stock of the borrowing foreign corpora- tion. Your committee does not believe that it is necessary to the fore- closure of the tax avoidance practices at which the special limitation provision is aimed that the liberalization be limited to that pro- vided by the House bill. Moreover, the restrictiveness of the present law and the House provision handicap the domestic corporation wishing to comply with the President's voluntary program. There- fore, your committee has amended the House bill by revising the 10-percent exception adopted in 1~62. Your committee's amendment provides that the special limitation on interest from foreign corpora- tions is not to apply with respect to interest income received by a U.S. lending corporation which directly or indirectly owns at least 10 percent of the foreign corporation from which the interest is derived. For purposes of this provision stock owned directly or indirectly by or for a foreign corporation is to be considered as owned proportionately by its shareholders. Effective date.-The amendments made by this provision apply to interest received after December 31, 1965, in taxable years end- ing after that date. g. Amendment to pveserve existing law on deductions under section 931 (sec. 107 of the bill and sec. 931(d) of the code) Under present law, U.S. citizens or domestic corporations earning income in possessions of the United States generally are taxable only on their U.S. source income (plus amounts received in the United States) if they meet certain requirements.5 In general, these require- ments are that the citizen or corporation derive 80 percent of its gross income from sources within such a possession and 50 percent of its gross income from the active conduct of a trade or business within such a possession (both of these tests being applied with respect to income received in the prior 3 years). A U.S. citizen or `domestic corporation which qualifies for this treat- ment may exclude from its U.S. `tax base gross income from sources without the United States (in the same way as nonresident aliens and foreign corporations not engaged in trade or business within the United States). The deductions allowed a U.S. person who qualifies for this exclusion are those which are ,allowable under jresent law to nonresi- dent aliens and foreign corporations engaged in trade or business in 3Possession' for purpoees of this provision does not include the Virgin Islands or, In the case of U.S. citizens does not Include Puerto Rico. 1460 PAGENO="0309" FOREIGN INVESTORS TAX ACT OF 1966 49 the United States. In general, these deductions are: (1) Those con- nected with U.S. source income, (2) those allocated or apportioned under regulations with respect to deductions related to income which: is partially from within and without the United States, (3) losses not connected with the trade or business but incurred in transactions entered into for profit (if the profit, had the transaction resulted in a profit, would have been taxable by the United States), (4) casualt losses (if the loss is of property within the United States), and (5 the charitable contribution deduction. The bill does not change the tax treatment of income qualifying for the exclusion relating to income from U.S. possessions but because it allows deductions to nonresident aliens and foreign corporations engaged in a trade or business in the United States only where the deductions are allocable to income effectively connected with this trade or business, it is now necessary in this provision to specify the deduc- tions which may be taken. The bill therefore makes applicable to U.S. citizens and domestic corporations engaged in trade or business in possessions, who qualify for the special tax treatment under existing law, the provisions of present law which allow deductions to nonresi- dent aliens or foreign corporations engaged in trade or business in the United States. This amendment is effective for taxable years beginning after De- cember 31, 1966. - 6. ESTATE TAX PROVISIONS a. Estate tax rates (sec. 108(a) of the bill and see. f~1O1 (a) of the code) * Present law.-The estate of a nonresident alien is taxed only on the transfer of property situated or deemed to be situated in the United States at the time of his death. While the tax rates are the* same as for citizens and residents of the United States, the deductions, credits, and exemptions are different: No marital deduction is al- lowed with respect to the estate of a nonresident alien; the specific exemption in determining the taxable estate is $2,000 instead of the $60,000 applicable in the case of U.S. citizens; no credit is allowed for fOreign death taxes paid; and the expenses, losses, etc., are generally limited to the same proportion of these expenses which the alien's gross estate situated within the United States is of his entire gross estate. Reason for provision.-The fact that a marital deduction of up to 50 percent of the adjusted gross estate is not allowed in the case of the estate tax liability of a nonresident alien, in effect nearly doubles the size of the taxable estate of many aliens over that of similarly situ- ated citizens. The $2~000 exemption, instead of the $60,000 exemption applying to citizens, also leads to a higher estate tax base. This, of course, means that the estate of a nonresident alien is likely to pay heavier taxes on its U.S. assets than would be true in the case of the estate of a U.S. citizen of similar size. Your committee agrees with the House that this is not appropriate. In addition it has been sag- gested that the high U.S. estate tax on the U.S. assets of a nonresident alien tends to discourage foreign persons from investing in the United States. Any increase in foreign investment in this country which may be brought about by this change will, of course, have a favorable effect on this country's balance of payments. 1461 PAGENO="0310" 50 FOREIGN INVESTORS TAX ACT OF 1966 In view of the considerations set forth above, your committee be- lieves that the taxation of the U.S. estates of nonresident aliens should be reduced to more closely equate with the taxation of the estates of U.S. citizens. The bill therefore establishes a new schedule of graduated estate tax rates applicable to estate of nonresident aliens which will impose a tax on the U.S. estates of these persons in an amount which is generally equivalent to the tax imposed on an estate of similar value of a U.S. citizen with the maximum marital deduc- tion.. (As is explained subsequently the bill also increases the specific exemption available with respect to estates of nonresident aliens.) Explanation of provisio'n~.-The new schedule of rates applicable to estates of nonresidents not citizens is as follows: If the taxable estate is: The tax shaH be: Not over $100,000 5 percent of the taxable estate. Over $100,000 but not over $500,000__ $5,000 plus 10 percent of excess over $100,000. Over $500,000 but not over $1,000,000~_ $45,000, plus 15 percent of excess over $500,000. Over $1,000,000 but not over $2,000,00(L. $120,000, plus 20 percent of excess over $1,000,000. Over $2,000,000 $320,000, plus 25 percent of excess over $2,000,000. Table 2 shows a comparison of the effective rates for estates of non- resident aliens provided by this new schedule with the effective rates under present law for nonresident aliens and U.S. citizens with and without a marital deduction. It will be noted that the effective rates resulting from the new schedule closely approximate those appli- cable in the case of the estate of a U.S. citizen with a marital deduction. TABLE 2.-Effective rates of U.S. taa on U.S. estates of nonresident aliens under present law and under the bill and on U.S. citizens under present law U.S. gross estate' Effective rate of tax Present treatment of nonresident alien Tax treatment of nonresident alien provided by bill 2 U.S. citizen With marital deduction Without marital deduction $2,000 $10,000 $30,000 $60,000 $100,000 $500,000 $1,000,000 $5,000,000 $10,000,000 2.9 7.7 12.5 17.3 2.5.8 28.8 43.0 53.3 2.0 3.0 7.4 10. 1 17.8 20.6 8.0 11. 1 16.9 21.2 3.0 22.1 26.7 42.3 52.8 `For purposes of these computations It is assumed 10 percent of gross estate is deducted for funeral and other expenses both in the case of U.S. citizens and nonresident aliens. 2 Takes into account the increase In the exemption from $2,000 to $30,000. b. Limitation on credit for State death taxes (sec. 108(b) of the bill and sec. ~102 of the code) Present law.-Under present law, the estate of a nonresident alien is allowed a credit against its U.S. estate tax for death taxes it pays to any of the States of the United States. The only death tax some of the States impose is a so-called pickup tax, that is, a tax equal to the maximum credit for State death taxes allowable against the Federal 1462 PAGENO="0311" FOREIGN INVESTORS TAX ACT OF 1968 51 estate tax.. Other States impose a pickup tax in addition to their regular death taxes. . Reasons for provisioii.-The credit for State death taxes in the Fed- eral statute is based on the taxes actually paid to any State. At the same time the so-called pickup taxes 6 are designed to impose a suffi- ciently heavy tax on property `within their jurisdiction to absorb any Federal tax with respect to which credit may be obtained. A problem arises from the interrelationship of these Federal and State rules where property, such as stocks, has a situs in the United States but for State death tax purposes is not considered to have a situs in any particular Sta~~~~since the nonresident alien has no residence in any btate. In such cases the effect of a~ State pickup tax may be to impose a dispro- portionately heavy State death tax on what may be the mmor portiOn of the nonresident alien decedent's gross estate located there, in order to absorb the full Federal credit which may be available with respect to property, such as stocks, `which have a U.S. situs but no situs in any particular State. - Since the credit for death taxes was intended to be available with respect to death taxes, imposed at a level up to the Fed- eral credit level, by States on property within their jurisdiction, it seems inappropriate to allow a credit for a State death tax at a rate above `the Federal rate on the property merely on the grounds that there is other property subject to the Federal, tax. outside the jurisdic- tion of the State. Explanation of provisions.-The bill ame~nds present law to provide that the maximum credit for State death taxes allowable a~'amst the' Federal estate tax imposed on estates of nonresidents not citizens is to be an amount which bears the same ratio to the credit (computed with- out regard to this limitation) as the value of .the property upon which the State death taxes are paid (and which is includible in the gross ~state) bears, to the total gross estate for Federal tax purposes. Effective date.-This amendment applies with respect to estates of decedents dying after the date of the enactment of this bill. c. Bond situs rule (sec. 108(c) of the bill and sec. ~31O4 of the code) Present law.-tTnder present, law,' a nonresident alien is subject to the U.S. estate tax only with respect to property which is situated in the United States at the time of his death. The code provides so-called situs rules for determining under what conditions various types of property are to be considered as having a U.S. situs and therefore includible in the estate tax base of a decedent~ Under these rules stock of a domestic corporation owned by a nonresident alien is considered to be property within the United `States regardless of the location of the share certificates. In the case of bonds issued.. by' U.S. corporations, no such `statutory situs rule exists. Instead, for Federal estate tax purposes, the debt represented by a bond of a domestic corporation is considered to be situated at the location where the certificate is held. Other intangible debt obligations of U.S. obligors are treated as being situated within the United States. Reasons for provision.-The difference in treatment ,for bonds is based upon the view that bonds constitute the debt itself and hence the debt is situated with the bonds, but with respect to other obliga- em addition to State pickup taxes, the problem here described may also arise where the State death tax with respect to the property located within its jurisdiction Is heavier thaa the Federal estate tax with respect to such property. 1463 PAGENO="0312" 52 FOREIGN INVESTORS TAX ACT OF 1966 tions the written statement of the obligation is only evidence of the existence of the debt. and hence the debt is situated with the debtor. Your committee agrees with the House that this distinction is an unsat- isfactory basis for exempting these bonds from the U.S. estate tax. Moreover, it sees no reason for treating bonds, and stock differently in this respect. Explanation of' provision.-Fór the reasons given above the bill adds a new provision to the law .providing that for purposes of the tax imposed on the estates of nonresidents not~ citizens, all debt .obh- gations (including bonds) of a U.S. person, the United States, a State or political subdivision of `a State, or of the District of Columbia owned and held by a nonresident not a citizen of the United States are to be deemed to be property situated within the United States. An ex- ception to this rule is provided for debt obligations of U.S. corpora- tions which have derived less than 20 percent of their ,gross income from U.S. sources for; the 3 years prior to the nonresident's death. In such cases these debt obligations are to be considered as having, a for- eign sit.us. For purposes of this provision U.S. currency is not to be considered ,a debt obligation of the United States. * Additionally, a conforming change was also made by your com- mittee with respect to the U.S. estate tax on foreigners' deposits in U.S. branch banks of foreign corporations. Effective date.-This amendment applies with respect to estates of decedents dying after the date of enactment of this bill. d. Deposits in U.S. banks or foreign branch banks of U.S. corpora- tions (sec. 108(d) of the bill and sec. 9d105 of the code) Present law.-Present law provides that, for purposes of estate tax, the deposits of. nonresident aliens with U.S. `persons carrying on the `banking business will not be considered ,to have a situs within the United States if the decedent was not engaged in a trade or business in the United States at the time of his death and a situs within the United States if the decedent was so engaged. This rules applies to deposits in foreign branch banks of U.S. `corporations as well as to deposits in domestic branches. Reasons for provision.-As explained above with respect to `the rules for determining the source of interest payments on bank deposits with U.S. banks (see No. 1(a), above), your committee agrees with the House tha.t it is questionable whether deposits of this type which are clearly situated in the United States should be treated as though situated without the United States and thereby allowed to escape U.S. estate taxation. On the other hand, deposits in foreign branch `banks of U.S. corporations are, in fact.,'situated in `a foreign country. Addi- tionally, with respect to deposits in foreign bran'ch banks of U.S. corporations, it is understood that foreign persons often have been uncertain as to whether they would be `held to be "engaged in `busi- ness in the United States" and that as a result they have been reluctant to deposit their funds in foreign branch banks of U.S. corporations `for fear this might subject their estate to U.S. tax. As a result they are likely to place their deposits in competing foreign banks. Thus the present treatment clearly discriminates against the U.S. `branches and `adversely affects their ability to compete in `foreign countries. Explanation of provision.-The House bill would have immediately deleted the provision of present law which treats U.S. bank deposits' 1464 PAGENO="0313" FOREIGN INVESTORS TAX ACT OF 1966 53 of a nonresident alien as situated without the United States. In order to conform this estate tax provision to the effective date of the mcome tax provision which taxes the interest derived from these deposits, your committee has amended the House bill to postpone the effective date of this provision until 1972. Your committee did not alter the pro- visions in the bill which also adds to the code a new provision which deems the situs of deposits by foreigners in foreign branch banks of U.S. corporations to be without the United States except to extend the same rule to foreign branch banks of U.S. partnerships. The new situs rule provides that for purposes of the U.S. estate tax on estates of nonresident aliens, deposits in a foreign branch bank of a U.S. cor~ poration or partnership, if the branch is engaged in the commercial banking business, are not to be deemed to be property within the United States. Therefore these deposits will not be included in the foreign- er's taxable U.S. estate. Effective date.-This amendment is applicable to the estates of decedents dying after the effective date of this act. e. Definition of taxable estate (sec. 108(e) of the bill and sec. ~106 (a) (3) of the code) Present law.-Under present estate tax law, the estate of a citizen of the United States is entitled to a $60,000 exemption. In the case of the estate of a non~resident alien, however, present law allows only a $2,000 exemption. In the case of decedents who were residents of U.S. possessions at the time of death and are citizens of the United States solely by reason of being a citizen of the possession, or by reason of birth or residence in the possession, the exemption is the greater of $2,000, or the proportion of the $60,000 exemption granted to U.S. citizens which the value of that part of the decedent's gross estate which is situated in the United States bears to the value of his entire gross estate. Reason for proviaion.-Presumably the basis for having a lower exemption for nonresident aliens than citizens and residents is that they typically have only a portion of their estate in the United States and therefore should have only a portion of the exemption allowed ,citizens and residents. Your committee agrees with the House that this justifies a lesser exemption for nonresident aliens but the minimal estate tax exemption presently allowed is so low as to place an unreason- able and inequitable tax burden on the estates of nonresident aliens. The exemption level your committee concluded was reasonable for non- resident aliens was $30,000, or half that allowed in the case of citizens. This is high enough to make filing of returns~ unnecessary in the case of relatively small investments here. This level of exemption was also selected in conjunction with the rates made applicable to nonresident aliens (see No. (a) above) to assure approximately the same level of tax burdens for a nonresident alien as in the case. of citizens of the United States eligible for the marital deduction. Explanation of provision.-The bill amends the code to provide that the estate of a nonresident not a citizen is allowed to deduct a $30,000 exemption in computing the taxable estate. The exemptio~i which the estate of a resident of a U.S. possession to which the special. rule applies is allowed, under the bill, is to be the greater of $30,000 or the proportion of the $60,000 exemption allowable under present law. 1465 PAGENO="0314" 54 FOREIGN INVESTORS TAX ACT OF 1966 Effective date.-These amendments apply to estates of decedents dying after the effective date of this act. f. Expatriation to avoid tax (sec. 108(f) of the bill and new sec. 2107 of the code) Present law.-The U.S. estate tax applies to U.S~ citizens. and U.S. residents with respect to their estate no matter where situated. How- ever, a foreign estate tax credit is allowable with respect to foreign death taxes paid in the case of property having a situs outside of the United States. In the case of nonresident aliens, a U.S. estate tax also applies but oniy with respect to property having a U.S. situs. Under present law, if an individual who has been a U.S. citizen gives up this citizenship and becomes a nonresident alien, no tax is imposed with respect to his estate to the extent the property is situated outside of the United~ States. Reason for provision.-As discussed above with respect to the in- come tax provision of this bill, your committee and the House are con- cerned that the elimination of the progressive income tax rates on in- come of nonresident aliens which is not effectively connected with a U.S. trade or business may encourage some U.S. citizens to surrender their U.S. citizenship and move abroad. Accordingly, the bill con- tains a provision which generally has the effect of retaining the pro- gressive income tax rates for a period of 10 years in case of persons who become expatriates where it appears likely that they did so for tax avoidance purposes. The same problem exists as a result of the reduction of the estate tax rates applicable to nonresident aliens. Al- though it is doubtful that many citizens would expatriate for this reason, your committee agrees with the House that the removal of any such incentive is desirable. In these cases the wealth of the ex- patriate generally would have been accumulated in the United States and therefore is properly subject to the regular U.S. estate tax rates. Explanation of provisio~n.-For this reason, the bill adds a new sec- tion to the code which imposes the regular U.S. estate tax rates on the U.S. estate of a nonresident alien dying within 10 years after losing U.S. citizenship if one of the principal purposes of the loss of. citizenship was the avoidance of U.S. income, estate, or gift, taxes. This provision is not to apply to those who lost their citizenship on or before March 8, 1965 (the date of introduction of a predecessor bill, H.R. 5916, on this topic). It also does not apply in the case of deced- ents dying on or before the date of enactment of this bill. In determining the value of the gross estate of such an expatriate (as in the case of nonresident aliens generally) only property situated in the United States that was owned by him at the time of his death is included. However, the U.S. estate tax bnse of these expatriate dececlents is expanded in certain respects to prevent him from avoiding U.S. tax on his estate by transferring assets with a U.S. situs to a foreign corporation in exchange for its stock. Such a transfer by a nonresident alien would reduce the portion of his gross estate hav- ing a U.S. situs, since the stock of a foreign corporation has a foreign situs even though the assets of the foreign corporation are situated in the United States. The new pirovision specifies, if certain stock ownership tests are met, that the value of the expatriate's gross U.S. estate is to include the same proportion of the value of the stock- 1466 PAGENO="0315" FOREIGN INVESTORS TAX ACT OF 1966 55 holdings of the expatriate in the foreign corporation as its property having a U.S. situs bears to all property. The ownership tests that must be met for this special provision to apply are: (i) The decedent must have owned at the time of his death 10 percent or more of the voting power of all classes of stock of the foreign corporation. Ownership for this test includes direct ownership and indirect, ownership through another foreign corporation or through a foreign partnership, trust, or estate. (ii) The decedent must have owned, at the time of his death, more than 50 percent of the total voting power of all classes of stock of the foreign corporation. Ownership for purposes of this test is ownership as described in (i) above plus ownership attributed to the expatriate under certain attribution rules of existing law (sec. 318 of the code). In general, these rules attribute to an individual ownership of stock held by members of his family, as well as by partnerships, trusts, estates, or corpo- rations in which the individual has certain interests. In addition, in determining whether the ownership tests are met, and in determining the portion of the U.S. situs property owned by the foreign corporation that must be included in computing the value of his gross estate, the expatriate is treated as owning the stock of a foreign corporation (at t,he time of his death) which he transferred during his life but which under U.S.. estate tax law generally is not effective in excluding property from a gross estate. There transfers are: i) Transfers in contemplation of death (sec. 2035). ii) Transfers with retained life estate (sec. 2036). iii) Transfers taking effect at death (sec. 2037). (iv) Revocable transfers (see 2038). In computing the estate tax under this new provision the expatriate's estate is allowed the credit for State death taxes, the credit for gift tax, and the credit for tax on prior transfers. The new section excepts from its application certain expatriates whose loss of U.S. citizenship occurs under circumstances which would make the application of the special taxing provisions inappropriate. These are the same exceptions provided with respect to the incometax expatriation provision (see No. 3(c) above). The new provision, like the comparable income tax provision, con~ tains a special, rule dealing with the burden of prOving the existence or nonexistence of U.S. tax avoidance as one of the principal purposes of the expatriation. Under this provision, the Secretary of the Treasury or his delegate must establish that it is reasonable to believe that the expatriate's loss of U.S. citizenship would (but for the appli-~. cation of this new provision) result in a substantial' reduction in the estate, inheritance, legacy, and sucèession taxes. If this is established, then the administrator of the expatriate's estate must carry the burden of proving that the loss of citizensl4p did not have as one of its principal purposes the avoidance of U.S. income, estate, Or gift taxes. Effective da.te.-This new provision is effective with respect to `estates of decedents dying. after the date of enactment of this bill. 1467 PAGENO="0316" 56 FOREIGN INVESTORS TAX ACT OF 1966 It does not, in any event, apply, however, to expatriates who lost their citizenship on or before March 8, 1965. g. Application of pre-1967 estate tax provisio~is (sec. 108(f) of the bill and new sec. ~108 of the code) The unilateral reduction of estate tax rates applicable to nonresident aliens by statute may have the effect of making it more difficult to negotiate estate tax treaties. This is comparable to the similar problem arising from the revision of the income tax provisions applicable to nonresident aliens. As in the case of the income tax provisions there- fore, `the bill ha~ added a new provision which gives authority to the President to apply certain provisions of the estate tax law relating to estates of nonresidents not citizens, without regard to the amendments made to these provisions by this, or any subsequent, act in the case of estates of residents of any country which imposes more burdensome death taxes with respect to estates of U.S. citizen deced.ents, not resi- dents of that country, `than does the United States on estates of resi- dents of such a country, not citizens of the United States. The new provision gives special authority to the President where hefindsthat: (1) Under the laws of a foreign country a more burdensome tax is imposed on the estates of U.S. citizens, not residents of the country, than is imposed on the estates of residents of that country by the United States; (2) The foreign country, when requested so to do, has not re- vised its taxes to eliminate this extraburden; and (3) It is in the public interest to reimpose the pre-1967 estate tax provisions. Where these conditions exist the President may proclaim that the U.S. tax on estates of residents of the foreign country is to be determined under certain provisions of U.S. estate tax laws (sees. 2101,2102,2106, and 6018) as in effect prior to amendment by this or any subsequent act. Such a proclamation is to apply to the estates of decedents dying after the date of the proclamation. If after making such a p~oclamation the President finds that the laws of the foreign country have been revised to alleviate the excess burden on the estates of U.S. citizens he may proclaim that the tax on the estates of residents of the country is to be determined by taking mto account the amendments made by this bill, and any subsequent act. Such a proclamation is to be effective with respect to estates of de- cedeetts dying after its date. Before issuing a proclamation under the new provision, the President is required to give 30 days notice of his intent so to do to the Senate and the House of Representatives. This new section is applicable with respect to estates of decedents dying after the date of the enactment of this bill. h. Estates tax returns (sec. 108(g) of the bill and sec. 6018 of the code) Under present law the executor of the estate of a nonresident alien is required to file a U.S. estate tax return if the U.S. estate exceeds $2,000. The filing of returns with respect to these estates of over $2,000 is required because only a $2,000 exemption is granted to the estates of nonresident aliens under present law. Since the bill has in- 1468 PAGENO="0317" FOREIGN INVESTORS TAX ACT OF 1966 57' creased the $2,000 exemption to $30,000, the return filing requirement is likewise increased by the bill from $2,000 to $30,000. This amend- ment applies with respect to estates of decedents dymg after the enact- ment of this bill. 7. GIF1~ TAX PROVISIONS a. Tax on gifts of `non?esidents not citizens (sec. 109(a) of the bill and sec. 2501 of the code) Under present law a gift of intangible property having a U.S. situs by a nonresident alien who is engaged in trade or business in the United State,s is subject to U.S. gift tax. In practice this rule has proved to be impossible to enforce, smce there is no practical way for th~ Internal Revenue Service to find out when these gifts are made. Moreover, it does not occur to many non- resident aliens that these transfers are subject to U.S. gift tax. Thus the revenue significance of this provision is minimaL For the above reason~ the bill amends present law to provide that gifts of intangible property by nonresident `aliens are not to be subject to the U.S. gift tax; To prevent this new rule from becoming a means of tax avoidance by U.S. citizens, the bill also provides that the rule is not to apply to gifts by donors who within the 10 years immediately before the gifi became expatriates of the United States with a principal purpose of avoiding U.S. income, estate, or gift taxes. As in the case of similar amendments made by your co~umittee with respect to the income and estate `taxes, the new provision provides a special rule relating to the burden of proof. Under this rule if the Secretary of the Treasury or his delegate establishes that it is reason- able to `believe that the individual's loss of U.S. citizenship' will result in a substan1~ial reduction in the gift tax payable by the donor, the burden of proving that tax avoidance was not one of the principal purposes rests with the donor. Certain types of losses of citizenship, *as in the `case of similar income and estate tax provisions, are not to rqsult in the application of this provision (see No. 3(c) above). This amendment applies with respect to the calendar year 1967 and all calendar years thereafter. b. Situs of bonds given by expatriates (~sec. 109(b) of the bill and sec. 2511 of the code) Under present law bonds issued by U.S. persons, unlike other debt obligations, are considered to be situated where the instrument is lo- cated for purposes of the gift tax applicable to nonresident aliens. Under this rule (and in the absence of the provision added here) a citizen who becomes an expatriate with a principal purpose of avoid- ing U.S. taxes would continue to escape U.S. gift taxation (even under the `special gift tax rules this bill makes applicable to them.) on the transfer of a debt obligation of~ a U.S. person. To-prevent this result, the bill amends the present gift tax laws to provide that debt obligations of a U.S. person, or of the United States, a State or political subdivision thereof, or the District of Columbia which are. owned by such ex~patriates are deemed to be situated in the United States. This amendment applies with respect to the calendar year 1967 and all calendar years thereafter.. 1469 PAGENO="0318" 58 FOREIGN INVESTORS TAX ACT OF 1966 8. TREATY 0BLIGA~flONS The bill provides that no amendment made by this bill is to apply in any case where its application would be contrary to any treaty obligation of the United States. However, for purposes of this pro- vision, the granting of a `benefit provided by any amendment made by this bill will not be considered to be contrary to a treaty obligation. B. OTHER AMENDMENTS TO THE INTERNAL REVENTJE CODE 1. Application of investment credit to property wsed in U.S. posses- sions (sec. 201 of the bill and sec. 48(a) (2) of the code) In general, present law provides the investment credit provisions are not available for property located outside the United States. There- fore, with limited exceptions property used in a possession is not eli- gible for the investment credit. )Although the investment credit provision as enacted in 19&2 was in- tended to encourage increased investment in new plant and equipment located in the United States, there appears to be no reason to deny the benefits of this provision to U.S. possessions. It is~ the opinion of your committee that in view of the unique and close relationships. that exist between the United States and its possessions, the economic de- velopment of these possessions should be stimulated by the same in- centives that are offered ,to, U.S. investment. However, your com- mittee does not believe that the benefits of `the investment credit should. be extended to U.S. persons who already efijoy a special tax treatment sometimes accorded investment.in the possessions; namely, the exemp- tion from U.S. tax which applies to U.S. persons who derive sub- stantially all their income from a U.S. possession. Your committee's amendment extends the application of the in- vestment credit provision to property used in a possession by a U.S. person or by a corporation organized in a possession provided the property would otherwise have qualified for' the investment credit. This rule is not extended if the property is owned or used in the pos- session by U.S. persons who are presently exem.pt from U.S. tax due to the application of the special provisions of the code which exempt U.S. persons who derive substantially all their income from a U.S. possession (secs. 931; 932,933, or 934(b)). This amendment is effective with respect to taxable years ending after December 31, 1965, but only with respect to property placed in service after that date. Additionally, for purposes of computing a carryback of investment credit, the amount of any investment credit generated by this provision is to be disregarded. 2. Medical expense deductions of individuals age 65 or over (sec. 202 of the bill and sec. 213 of the code) For taxable years beginning before January 1, 1967, existing law provides that a taxpayer age 65 or over can deduct-without regard to the 3-percent floor applicable to taxpayers under 65 years of age~- all medical expenses he incurs for himself and his spouse. In addition, all amounts spent for medicines and drugs for himself and his spouse are deductible-without regard to the rule `applicable to taxpayers under age 65 that amounts paid for medicines and drugs are taken into account only to the extent they exceed 1 percent of adjusted gross income. 1470 PAGENO="0319" FOREIGN INVESTORS TAX ACT OF 1966 59 For taxable years which begin after 1966, present law provides that a taxpayer over age 65 is subject to the same rules applicable toa tax- payer under age 65, so far as the 3-percent and 1-percent floors are concerned. That is, medical expenses will be deductible only to the extent they exceed 3 percent of adjusted gross income, and medicines and drugs will be taken into account only to the extent they exceed 1 percent of adjusted gross income. Your committee's amendment provides that the rules applicable for 1966 to taxpayers 65 years or older shall continue to apply, and not the rules added last year by the Social Security Amendments of 1965 (Public Law 89-97) which were to take effect in 1967. The amendment also restores for future years the existing right of any taxpayer to de- duct medical expenses and medicines and drugs for his dependent mother or father if age 65 or over without regard to the 3 percent and 1 percent floors otherwise applicable. The new rules for 1967 were added last year at the insistence of the House which maintained that unlimited deductions were no longer necessary after enactment of the medicare program. The Senate disagreed, and deleted the limita- tions on deductions for those over age 65 in its version of the medicare bill. The House insisted upon its provision in the conference, and the Senate conferees receded. In acting to remove the limitation, the committee reaffirms its un- willingness to increase the income taxes on the aged taxpayer by plac~ ing a limitation upon the deductibility of his medical expenses or those of his spouse. It believes that the limitation is unfair to the aged tax- payer who provides for his own medical protection and to the taxpayer, even: though covered under medicare, who must meet the expenses not covered under the program. For example, the medicare beneficiary has to pay a $40 deductible toward his hospital expenses, a $50 deduct- ible toward his medical expenses, and the uncovered 20 percent of med- ical expenses in excess of $50. Furthermore, if he is hospitalized for more than 60 days, medicare requires. that he pay $10 daily from the 61st through 90th days. If he goes to an extended care facility under medicare, he must pay $5 daily from the 21st through 100th day. And many elderly persons who are hospitalized will not receive medicare payments for their care because of a situation over which they have no control whatsoever; namely, the fact that their local hospital or hospitals may not be participating institutions under the program. In this case, -these people have to come up with the cash themselves or call upon some other third-party resources. Apart from the above reductions, limitations, and exclusions in * medicare there are a number of other types of significant health ex- penses incurred by older citizens which must, in large part, be met out- of -pocket. Such expenses include necessary dental care, drugs, and long-term hospital or nursing home stays. It has been estimated that medicare will cover 40 to 45 percent of the health. care costs of those eligible for and who can secure its benefits. The remaining 55 to 60 percent of health costs has a serious negative impact upon those elderly struggling to maintain their independence on limited incomes. As we have in the past, it is appropriate that through sympathetic and proper tax treatment we continue to rec- ognize the unusual and heavy health expenses incurred by our older population. 1471 PAGENO="0320" 60 FOREIGN INVESTORS TAX ACT OF 1966 The amendment also will simplify the tax returns of the aged, be- cause the amendment will reduce one additional calculation that they would have to make and which the Internal Revenue Service would be required to verify. The repeal and amendments made by this section shall apply to taxable years beginning after December 31, 1966. 3. Basis of property received in the liquidation of subsidiary (sec. 203 of the bill and sec. 334 (b) (2) and (3) and sec. 453(d) of the code) (a) Purchase of stock.-Under present law, if one corporation pur- chases 80 percent or more of the stock of another within a 12-month period and then causes the corporation.acquired td be liquidated within 2 years of the last purchase, the basis of all the assets received is the amount paid for the stock. However, in order to prevent manipula- tion,stock purchased from a person.related to the buyer by the attribu- tion rules (under section 318) is not treated as stock "purchased." Cases have been called to your committee's attention where it is nec- essary to acquire contrpl of one corporation in order to obtain an. 80 percent or greater stock interest in another corporation. For example, assuine that one corporation desires to purchase the stock of a second corporation and does in fact purchase 45 percent of its stock directly. However, 40 percent of the stock of the second corporation is owned by a third corporation, and the third corporation does not wish to sell the stock of the second corporation. In order to acquire the stock of the second corporation, therefore, the first corporation purchases over 50 percent of the third corporation's stock and then causes this corporation to sell to it the 40 percent of the stock of second corpora- tion owned by the third. However, since at the time of the sa1e~ the first corporation owns more than 50 percent of the stock of the third corporation, the two corporations are classified as related under the attribution rules (sec. 318). Accordingly, under present law, the first corporation is not treated as the purchaser of more than 80 per- cent of the stock of the second although it acquired directly or in- directly all of this stock for cash within a 12-month period. The amendment made by your committee eliminates the result described. It amends present law to provide that stock purchased from a related corporation (after it acquires control of it) is to be treated as purchased, if the stock of the related corporation (representing a controlling interest) was purchased within the specified period. The amendment provides that the 12-month period within which the de- sired stock must be acquired begins with the date of the first direct acquisition by purchase of such stock, or the date on which 50 percent of the stock of the corporation holding such stock was acquired, whichever is earlier. The new definition of purchase applies with respect to acquisitions of stock after December 31, 1965. The provision for measuring the time period o~' stock acquisition applies with respect to distributions made after the date of enactment of the bill. (b) lv~tallnwnt notes.-When one corporation buys more than 80 percent of the stock of another within 12 months and causes the cor- poration acquired to be liquidated within 2 years of the last acquisition of stock, the basis of the assets acquired is the amount paid for the stock (properly allocated). In such a case, generally no gain is recog- nized to the distributing corporation (unless it is a corporation which 1472 PAGENO="0321" FOREIGN INVESTORS TAX ACT OF 1166 61 elected 341 (f) treatment to avoid danger of being treated as a collapsi- ble corporation, or unless the sections dealing with the recapture of depreciation apply). If the property received on a liquidation of the type described above (to which sec. 334(b) (2) applies) consists of installment notes, then the gain which would normally be taxed on the sale or collection of such notes may, in part or in whole2 permanently escape income taxa- tion. This would result if the basis of such notes were raised to the amount paid for them by the acquiring corporation even though no gain were recognized to the distributing corporation. Although existing law may be adequate to deal with certain types of situations, your committee believes that gain should generally be reôog- nized by the distributing corporation in all cases in w1~ich the acquir- ing corporation receives a new basis in the installment notes. The amendment provides that installment notes transferred in a liquida- tion of the type described above are to be treated as "disposed c~f" for purposes of the installment sale provision (sec. 453(d)). As a result, gain is to be recognized to the distributing corporation, in the same manner as if it had sold the notes. This amendment is effective with respect to distributions made after the date of enactment. 4. "Swap fu'rtds" (sec. 204 of the bill and sec. 351 of the code) Under section 351 of the Internal Revenue Code, the transfer of property t.o a corporation by one or more persons in exchange for stock in the corporation is not to result in gain or loss if immediately after the exchange, the person or persons in question are in control of the corporation. In 1960 the Internal Revenue Service issued a limited number of rulings to the effect that no tax resulted from the exchange of appreci- ated stock for shares in an investment fund where immediately after the exchange, the persons who transferred the stock to the corporation are in control of the corporation. Investments funds organized in this way have become known as "swap funds." It stopped issuing these rulings in 1961, however, and subsequently (in Rev. Proc. 62-32) the Service announced that this was an area in which it would not rule. Notwithstanding this change in position, new swap funds continued to be formed, relying .on the advice of private tax counsel that the ex- change of stock for stock in these cases was nontaxable. On July 14, 1966, the Treasury issued a proposed regulation to the effect that this type of exchange would be taxable. At the same time it offered to enter into closing agreements with existing swap funds which would provide that section 351 would be applied to past trans- fers for all purposes under the code, including the determination of basis. The effect of the amendment added to the bill by the committee is to provide that section 351 applies to corporate investment funds. This amendment is effective to transfers whenever made. 5. Mininwm amount treated a~ earned income for retirement plane of self-employed persons (sec. 205 of the bill and sec. 401(c) (2) (B) of the code) At present, a self-employed individual may contribute to a qualified pension or profit-sharing plan up to 10 percent of his "earned income" but not more than $2~5O0 in a given year. He receives an income tax 71-297 0-67-pt. 2-21 1473 PAGENO="0322" 62 FOREIGN INVESTORS TAX ACT OF 1966 deduction for one-half of his contribution up to this amount. In the case of a person in a trade or business where both personal services and capital are material income-producing factors, not more than 30 per- `cent of that person's share of the net profits of his trade or business may be treated as "earned income" for this purpose. However, if the person renders personal services on a full-time, or substantially full- time basis, a minimum of $2,500 of net profits from such trade or busi- ness will qualify as earned income, notwithstanding the 30-percent limitation. S This amendment permits a minimum $6,600 of earnings from a trade or business in which both personal services and capital are material income-producing factors and the taxpayer renders personal services on a full-time (or substantially full-time) basis, to be treated as "earned income." The 30-percent limitation will continue to apply as under present law, where the 30-percent rule gives rise to a greater amount of earned income than the minimum of $6,600. This amendment permits self-employed individuals in small busi- nesses to make more significant contributions to pension plans. This is the same amount presently treated as the maximum tax base for social security purposes. The greatest increases in deductible pension contributions resulting from this change will be available to those persons whose net profits range between $6,600 and $8,333. Lesser additional deductions will be available to those with net profits between $2,500 and $6,600 and between $8,333 and $22,000. It is estimated that the revenue loss from this amendment in a full fiscal year would amount to less than $1 million. This change applies to taxable years beginning after December 31, 1965. 6. Treatment of certain income of avthors, inventors, and so forth, cu earned ineomne for retirement plan purposes (sec. 206 of the bill and sec.401(c) (2) of the code) Present law contains provisions designed to encourage self-employed persons. to establish voluntary retirement plans. Under these pro- visions, self-employed persons are permitted to deduct contributions (within specified limits) made to pension or profit-sharing plans for the benefit of themselves and other employees covered by the plan. Coverage under these provisions depends on "earned income," and such income is the basis for computing deductible contributions. This term includes professional fees and other compensation for personal services from a trade or business (but does not include amounts which constitute a return on capital invested in the trade or business). With respect to authors, the Internal Revenue Service takes the position that if an author contracts to write articles.for a given period or a book for a publisher who copyrights the literary material and pays the author a stipulated amount of cash, plus a percentage of the income derived from the material, the consideration is for the author's personal services and constitutes earned income. However, where the consideration received by an author is derived either from the sale. leasing, or renting of the author's writing, the consideratiOn is paid for the use or sale of property and is held not to constitute earned income. A similar position is taken by the Service with respect to inventors and others who create property through the application of their personal efforts. 1474 PAGENO="0323" FOREIGN INVESTORS TAX ACT OF 1966 63 The effect of these positions of the Internal Revenue Service is to curtail, or possibly deny entirely, the tax adantages of the self-em- ployed individuals retirement plan provisions if the taxpayer is an author, inventor, and so forth. The intent of the Congress in adopt- ing the "earned income" concept was to limit the applicability of these provisions to the portion of a self-employed person's income winch was a result of his individual efforts as distinguished from a return on capital. Your committee does not believe that for this purpose the classification of income from an author's writing (or an inventor's in- vention), which is so clearly a result of his individual efforts, as "earned" or not "earned" should depend upon the terms of the con- tract under which the author (or inventor) is to be compensated. For the above reasons, the bill amends the self-employed individ- uals retirement plan provisions to provide that "earned income" in- ciudes gains (other than capital gains) and net earnings derived from the sale or other disposition of, the transfer of any interest in, pr the licensing of the use of property (other than good will) by an individ- ual whose personal efforts created the property. This amendment applies to taxable years ending after the date of enactment of the act. 7. Exclusion of certain `tents froim personal holding co'ln.pany income (sec. 207 of the bill and seo.443 of the code) Under existing law, if a company manufactures property and leases it to customers, the rents are treated as personal holding company income (unless the adjusted income from rents from all sources con- stitutes 50 percent or more of the adjusted ordinary gross income and unless the sum of the dividends paid during the year has reduced the other personal holding company income below 10 percent of the ordi- nary' gross income). However, where the property manufactured by the taxpayer is sold instead of leased, the income from the sale is not treated as personal holding company income. Your committee believes that ordinarily rental income arising from property manufactured by the taxpayers should be treated as ordinary business income rather than passive personal holding company income. It `takes this position because it believes that rental income arising `from property manufactured by the taxpayer, in reality, is no more passive than sales income derived from property manufactured `by the taxpayer. Accordingly, the amendment provides that compensation for the use of any tangible personal property manufactured, or produced by the taxpayer is not to be treated as rental income under the personal holding company provisions if the taxpayer during the taxable year is engaged in manufacturing the same type of property from which he is receiving the rents. The effect of this is to treat this income (after it is reduced by applicable depreciation, taxes, rent, and interest paid) as ordinary business income in determining whether or not the corporation is a personal holding company. It is intended, in order for the provision to be applicable, that the manufacturing or pro- duction activity be substantial and more than minor assembly proc- esses. (Tangible personal property here has the~ same meaning as in the case of the investment credit provision.) The amendments apply to taxable years beginning after date of enactment, but taxpayers may elect to have the amendments apply to 1475 PAGENO="0324" 64 FOREIGN INVESTORS TAX ACT OF 1966 years beginning on or before that date if ending after December 31, 1965. 8. Percentage depletion rate for certain clay bearing alumina (8ec. ~O8 of the bill and sec. 613 of the code) - At the present time, practically all alumina-the raw material used for the production of, aluminum-is obtained from bauxite. Most of the bauxite is obtained from foreign deposits, since less than 1 percent of the known world bauxite reserves are in the United States. There are, however, large deposits of clay containing alumina in the United States from which alumina can be extracted under newly de- veloped processes, but at a greater cost than producing alumina from bauxite. In order to spur the development of these domestic deposits and build the facilities needed to extract the alumina from them, your committee has made two changes in the existing percentage depletion provisions applicable to clay, laterite, and nephelite syenite to the extent alumina and aluminum compounds are extracted from them. (These provisions do not apply to bauxite having an aluminum oxide content of 40 percent or more.) First, the percentage depletion rate is raised from 15 to 23 percent in the case of domestic deposits of clay, laterite, and nephelite syenite (to the extent alumina or aluminum compounds are extracted there- fMm). This is the same rate of percentage depletion which is now allowed to domestic deposits of bauxite. Second, your committee provides that in the case of domestic de- posits of clay, laterite, and nephelite syenite, all processes applied to derive alumina or aluminum compounds from them are to be treated as mining processes in computing gross income from mining for de- pletion purposes. It is not intended to treat as mining any of the processes in the electrolytic refining of the alumina or aluminum compounds. The amendments are applicable only to taxable years beginning after the date of the enactment of this act. 9. Percentage depletion rate for clam and oyster shells (see. £09 of the bill and sec. 613 of the code) Under present law, clam shells and oyster shells are allowed a per- centage depletion rate of 5 percent. This rate applies even though the shells are used because of their chemical content-calcium carbonate- in the production of cement or lime. On the other hand, when other minerals, such as limestone, are used as a source of calcium carbonate, percentage depletion at the rate of 15 percent is allowed under existing law. Clam and oyster shells are composed almost entirely of calcium car- bonate and in fact, contain a much higher percentage of calcium car- bonate than do limestone and marble. Your committee believes that when clam and oyster shells are used for their calcium carbonate con- tent-such as in the making of cement or lime-they should have the same percentage depletion rate as limestone and other calcium car- bonates. Accordingly, the committee amendment provides that in the case of clam shells and oyster shells (as well `as other mollusk shells), a per- centage depletion rate of 15 percent generally is to apply. However, as is true under existing law in the case of limestone and other calcium 1476 PAGENO="0325" FOREIGN INVESTORS TAX ACT OF 1966 65 carbonates, a 5-percent rate is applicable if the shells are used, or sold for use, as riprap, ballast, road material5 rubble, concrete aggregates, or for similar purposes. The amendment is applicable to taxable years beginning after the date of enactment of the act. 10. Sintering and burning of shale, clay and slate used as lightweight aggregates (sec. 210 of the bill and sec. 613 of the code) The courts have recently held that in computing gross income from mining for percentage depletion purposes the sintering or burning of shale, clay, or slate is not a mining process. The heat is applied for the purpose of causing the mineral to. expand, or bloat, so that it can be used as a lightweight aggregate in concrete or in making building units such as cinder blocks. Your committee believes that it is appropriate to allow the appli- cation of heat to shale, clay and slate to produce lightweight aggre- gates as a mining process for percentage depletion purposes. The committee amendment so provides. The amendment is applicable to. taxable years beginning after the date of enactment of the act. 11. Income from lapsing of 8traddle opticnu' (sec. 211 of the bill and sec. 1234(c) of the code) a. Nature of straddles.1-Straddles are one forni of an option; namely, an offer both to purchase and to sell a specified amount of property at a stated price for a limited period of time. Options to sell securities are known as "puts"-i.e., the purchaser of the option can "put" his shares to the writer or issuer of the option at the stated price. Options to purchase are known as "calls"-i.e., the purchaser of the option can "call" the shares from the writer at the stated price. A "straddle" is a combination of a put and call, with respect to the same security, for t.he same quantity, at the same purchase or sale price and available for the same period of time. Straddles are likely, to be written by persons with holdings of a security who believe that in the long run, the price of the stock will not vary greatly from its present price. Their inducement for writing the straddle is the receipt of a premium. Straddles generally are granted to brokers or dealers who, in turn, customarily sell the put and call components to different purchasers. The majority of puts and calls originate in straddles. While the use of puts and calls is not a new development in the securities markets, their significance in the securities markets is relatively limited; for example, the total number of shares covered by options sold in recent years on the New York Stock Exchange has rarely exceeded 1 percent of the total shares sold. Normally either (not both) the put* or the call component of the straddle is exercised by the purchaser shortly before the end of the term for which the straddle is written. Frequently this is 6 months and 10 days after the straddle is issued. Which component of the straddle is exercised depends upon the market conditions at the time of exercise vis-a-vis market conditions at the time the straddle was written. If the market in that security has risen, the securities are likely to be "called" from the writer; if the market has fallen, the stock 1 of the material prerented in this part was derived from the "Report on Put and Call Options," a report publl'thed In August 1.901 b~r the Securities and Exchange Com- mission, on the basis of an extensive study by the SEC s Division of Trading and Exchanges. 1477 PAGENO="0326" 66 FOREIGN INVESTORS TAX ACT OF 1966 is likely to be "put" to the writer. `While in the great majority of the cases, one component of the straddle is exercised and the other is allowed to lapse, occasionally (perhaps 10 to 15 percent of the time) neither option is exercised and in a few other cases (less than 1 percent of the cases) both components of the straddle are exercised. Although options are purchased for hedging and other similar purposes by some investors, their primary use probably is as a method of investing by individuals with small amounts of money. b. Present law.-T3nder the 1939 code, premium income received from the writing of an option which had lapsed was treated as a short-term capital gain (sec. 117(g) (2) of the 1939 code). However, until the issuance of a revenue ruling in 1965 (Revenue Ruling 65-31) straddle writers generally allocated the entire straddle premium to the com- ponent option which was exercised, and this practice apparently was not challenged by the Internal Revenue Service prior to the issuance of the ruling. Since one component or the other of a straddle is~ exer- cised in the bulk of the cases, the fact that the premium in the case of the lapse of an option was treated as short-term capital gain was of relatively little significance. The important aspect was the treatment of the premium in connection with the portion of the straddle which was exercised. If all of the premium is allocated to the component which is exer- cised and this is the "put," the premium decreases the cost or basis of the stock put to the writer of the straddle. As a result, it would increase his capital gain only when he disposed of the stock put to him. Gen- erally, this would result in a long-term capital gain (unless he held the stock for less than 6 months). Where the call component is exer- cised and all of the straddle premium is allocated to it, the premium would increase the income received by the writer at the time the stock is called from (i~e., sold by) him. As a result in this case also, the total premium increases the writer's capital gain (or decreases his capital loss) and if the writer had held the stock for more than 6 months, the gain (or loss) would be long term. The 1939 code provision treating income from the lapse of an option as a short-term capital gain was not included in the 1954 code. As a result, where both options are permitted to lapse, the total straddle premium is now reported as ordinary income. However, in the usual case where one option lapsed and the- other was exercised, the treat- ment of allocating the straddle premium income to the side exercised in practice remained unchanged. In the ruling (Revenue Ruling 65-31) issued on January 22, 1965, the Internal Revenue Service held that the premium for a straddle must be allocated between its put and call components on the basis of the relative market values of each. In a later technical informa- tion release; the Service aiinounced that it would accept. allocations of 55 percent of each straddle premium to the call component and 45 percent to the put component.2 2 Rev. Proc. 65-29. issued on Nov. 15. 1965. This 55-45 ratio was se'ected because it represented a rounded apnroximatinn of relative market nrices of separately written "puts" and "calls" of the same length for securities of approximately equal price. The revenue procedure concluded with the statement that "If a taxpayers does not use this method for - a taxable year. then the allocation based on relative market vaines required by Revenue Ruling 65-31 must be used." 1478 PAGENO="0327" - FOREIGN INVESTORS TAX ACT 0F 1966 67 Under the ruling, part of the premium arising from the writing of a single straddle can result in ordmary mcome (the portion of the premium allocated to the lapsed component) while the remaining portion of the premium may result in either a capital gain or a capital loss, which in the usual case will be a long-term gain or loss. c. Reason8 for the changes.-The difficulty with the present tax treat- ment of premium income from the writing of straddles lies in the fact that by dividing the premium income into two parts, one part may be reported as ordinary income (the portion allocated to the lapsed option) while the other portion may merely decrease a capital loss. Your committee believes that it is hard to justify treating part of the transaction as resulting in ordinary income, while the other portion may give rise to a capital loss which cannot be offset (apart from the $1,000 per year deduction of net capital losses against ordinary income) against ordinary income. The problem can be illustrated by the following example. Assume that a straddle writer issues a straddle for a stock when its price is $100 a share and this is the option price. Assume that the straddle premium is $8 per share; Assume further that the put component of the straddle is exercised by the purchaser when the price of the stock is $80 per share. As a result, the writer of the straddle must buy stock at a price of $100 per share when its market value is $80 per share. If the straddle premium allocable to the put component is $3.60 per share, the short-term capital loss for the writer of the straddle will be $16.40 per share if he disposes of the stock shortly after receipt, when the market price is still $80 per share. At the same time, the remainder of the straddle premium, $4.40 a share, is allo- cated to the call component, which in such a case presumably was allowed to lapse. The $4.40 per share would be ordinary income while the capital loss of $16.40 a share attributable to the put side of the option would result in a short-term capital loss, which, except to the extent of the $1,000 a year, could not be netted with theordinary income attributable to the premium income of the other side of the straddle. The writer of the straddle in these cases is, of course, entering the transaction in the hope of obtaining a profit; he naturally views the transaction as a single one and cannot see why he must pay ordinary income tax on a portion of the transaction while being denied full use of his capital loss attributable to the other component of the transaction (in those cases where he does not have capital gains sufficient to offset his capital losses and his losses exceed the $1,000 which may be offset against ordinary income). Moreover, the marketplace treats the straddle as a single transaction in that a smaller premium is pajd for a straddle than for a separate put and call on the same stock, since the combined risk involved is less. Additionally, the writer of the straddle knows that in almost all cases, only one of the two options in the straddle will be exercised. He views this as the side for which he is being paid the premium. Your committee agrees that it is desirable to provide for this netting of a gain or loss arising from the two components of a straddle option. Nevertheless, it appears appropriate where the transaction on a. net basis results in a gain, that the premium income result in ordinary income. The netting of the two components in a straddle can be 1479 PAGENO="0328" 68 FOREIGN INVESTORS TAX ACT OF 1966 achieved and still have any net premium gain result~in what is essen- tially ordinary income, by treating the premium income allocated to the lapsed option as a short-term capital gain. Where this is done, any capital loss from the straddle transactioii attributable to the side exercised (where the stock is disposed of in the same year in which the lapse of the option occurs) can be offset against the short-term capital gain attributable to the premium income from the side of the option which lapsed. Should the short-term capital gain in such a case exceed the capital loss, it will still be treated in essentially the same manner as ordinary income. As a result, your committee's amendment provides that any gain on the lapse of an option granted by a taxpayer as a part of the straddle is to be treated as a short-term capital gain. This treatment is not to be available, however, in the case of persons who hold securities for sale to customers in the ordinary course of their trades or busi- nesses. This treatment is made inapplicable in the case of such per- sons because their security transactions in any event are generally * required to be treated as resulting in ordinary income. This treat- ment is applied to securities and not to commodity futures since there is no evidence that a problem has been created in this latter area. The change made by your committee's amendment applies to all straddle transactions entered into after January 25, 1965, the effective date of the ruling which first required the allocation of the straddle * premium between the put and the call components. d. Changes made by the bili.-The amendment inserts a new sub- section (c) to section 1234 of the code. The first paragraph of t,his new subsection provides that gain derived from the lapse of an option written as a part of a straddle (as defined in new section 1234(c) (3)) is, in effect., to be short-term capital gain, as defined in section 1222(1) of existing law. Thus, such gains will be added to any other short- term capital gains, to be netted against short-term capital losses, with the excess to be netted against any net long-term capital losses. Any remaining short-term capital gains. will generally be taxed as ordinary income. * Paragraph (2) of the new section 1234(c) provides that this provi- sion d~s not apply to a person who holds securities (including options to acquire or sell securities) for sale to customers in the ordinary course of his trade or business. Paragraph (3) of the new subsection defines a "straddle" as a simultaneously granted combination of an option to buy (a "call") and an option to sell (a "put") the same quantity of a security at the same price during the same period of time. If a person grants a multiple option (a put plus a call plus one or more additional puts or calls) it is intended t.hat the grantor of the multiple option must identify in his records which two of the compo- nent options constitute the straddle, if it is not clear from the options themselves. It is contemplated that the method of identification will be specified in regulations issued by the Secretary of the Treasury or his delegate. If there is no identification by the writer, this provision relating to straddles is not to apply. As a result, in such a case the gain on the lapsed option (or options) would result in ordinary income. A corporate security for purposes of the definition of a straddle is the same as defined in section 1236(c) of the code-i.e., stocks, bonds, 1480 PAGENO="0329" FOREIGN INVESTORS TAX ACT OF 1966 69 notes, etc. Accordingly, the term securities does not include com- modity futures. The amendments described above are to apply to straddles written after January 25, 1965, in taxable years ending after such date. This bill is substantially identical to H.R. 11765, which was ap- proved unanimously by the Committee on Ways and Means of the House of Representatives. 12. Tcg~, treatm~ent of per-wnit retain allocations (eec. 212 of the bill and cecs. 1382, 1383, 1385, 1388, and 6044 of the code) Although the practices of cooperatives are not uniform in this re- gard, generally a per-unit retain certificate is issued by a cooperative to a patron to reflect the retention by the cooperative of a portion of the pjoceeds from the marketing of products for the patron. These amounts are retained pursuant to an authorization (usually in the bylaws of the cooperative) and are computed on the basis of units of products marketed. Prior to the amendment in 1962, the Internal Revenue Code per- mitted cooperatives to deduct amounts paid to pat.rons as patronage dividends. Patronage dividends are limited by definition to amounts which are "determined with reference to the net earnings" of the cooperative. The treatment of per-unit retains, however, was not spe- cifically dealt with in the code. The Revenue Act of 1962 substantially revised the income tax treatment of cooperatives and their patrons but the new provisions by their terms were applicable only to "patron- age dividends." Because per-unit retain allocations are determined on the basis of units of products marketed for the patrons rather than with reference to net earnings, the new provisions are generally con- sidered as not being applicable to them. By regulations issued on October 14, 1965, the Treasury Department provided for the income. tax treatment of per-unit retain certificates in a manner that is sub- stantially parallel to the treatment prescribed in the Revenue Act of 1962 with respect to patronage dividends. * The per-unit retains may be considered as contributions to capital by patrons. For this ~ be true they first must have been considered as paid out by the cooperative. However, because the per-unit retain certificates issued by cooperatives may have a fair market value con- siderably less than their face amount, and in some cases have only a negligible fair market value, some have raised questions as to whether they may be considered as paid out by the cooperatives and whether the patrons can be required to include them in their gross income. This situation bears certain similarities to the situation that caused the enactment of the provisions of the Revenue Act of 1962 dealing with patronage dividends, in that some believe that a tax may not neces- sarily be imposed at either level. The patronage dividend provisions of the Revenue Act of 1962 were designed to assure that the amounts received by cooperatives in the course of their business activities with their patrons are included in computing the income tax of either the cooperative or the patron, thus subjecting these amounts to a single current tax. To accomplish this, the 1962 act provided detailed rules which specified the treat- ment which patronage dividends are to receive from the standpoint of both cooperatives and their patrons. It was hoped that these pro- visions would bring to an end the uncertainty that existed in the area 1481 PAGENO="0330" 70 FOREIGN INVESTORS TAX ACT O~ 1966 of cooperative-patron inóome taxation and consequently bring to a halt the litigation that the uncertainty engendered. In this regard, the Revenue Act. of 1962 has not been completely successful because of the uncertainty which continues to exist with respect to per-unit * retain certificates. To remove this remaining uncertainty, the bill amends the provisions of present law dealing with patronage dividends to make them applicable, generally, with respect to per-unit retain certificates. By adopting this amendment, your committee does not intend to reflect on the validity of the regulations recently issued by the Treasury Department with respect to per-unit retain certificates, itor does your committee intend to reflect on the deductibility in the mist of per-unit retain certificates to cooperatives or the includability in the past of such certificates in the income of patrons. The bill amends present law to provide tax treatment with respect to per-unit retain certificates which parallels, in general, the tax treat- ment applicable with respect. to patronage dividends. Providing essentially the same treatment for per-unit retain certificates means, generally, t.hat they are to be treated as income to the patron in the year in which the certificates are issued, if the patrons give their con- sent in writing to t.he inclusion of the face amount. of these certificates in their income or if there is a provision in the bylaws or charter of the cooperative indicating that membership in the cooperative represents consent to such treatment. Under the amendment, the cooperative is permitted to take a deduction in arriving at gross income for a per-unit retain certificate when issued, only when the certificate qualifies for the treatment specified above at that time in the hands of the patron. Otherwise, the amount involved is deductible by the cooperat.ive only :it the time the certificate is redeemed. Treatment of . per-unit retai~ by coo perath~es.-The amendment. provides that. no decrease is to be made in the gross income of a co- operative because of per-unit retain allocations to patrons except for amounts paid in "qualified per-unit retain certificates" or in redemp- tion of "nonqualified per-unit retain certificates." (Both of these terms are explained subsequently.)1 If a cooperative has no taxable income for the year in which it redeems nonqualifed per-unit retain certificates, the cooperativewould, in effect., be permitted to carry back the deduction or exclusion to the year in which the certificate was issued. Treatment of perunit retains by patron~.-Under the amendment, a patron is required to include in his gross income the amount paid to him in qualified per-unit retain certificates and the amount received by him on the redemption, sale, or other disposition of nonqualified per- unit retain certificates. Deftnitiom~ and speckz2 provi~on-s.-The amendment provides defini- tions of the terms used in providing for the treatment: of per-unit re- tains. Under the first of these, the amount considered paid by a co- operative and received by a patron as a result. of the issuance of a qualified, per-unit retain certificate is to be the certificate's stated dol- `lar amount. The term "per-unit retain allocation" is defined, in gen- eral, as an amount paid (except amounts paid in money or other prop- I A special rule permits cooperatives to continue their existing practices with respect to the timing of the issuance of per.unit retain certificates for products marketed under a pooling arrangement and to take the tax deduction at the time the certificates are issued. 1482 PAGENO="0331" FOREIGN INVESTORS TAX ACT OF 1966 71' erty) to patrons with respect to products marketed for them which is fixed without regard to the net earnings of the cooperative. The term "per-unit retain certificate" is defined to mean: any written notice which discloses to the recipient the stated dollar amount of a per-unit retain allocation. The term "qualified per-unit retain certificate" is defined to mean a per-unit retain certificate which the patron has agreed to include in his income at. the stated dollar amount. For this purpose2 a cooperative may enter into individual agreements with each of its patrons, or the agreement may be contained in a bylaw, a written notice and copy of which is given to each of the members. In general, agree- ments once made are effective for all subsequent years until revoked. A "nonqualified per-unit retain certificate" is defined to be any per- unit retain certificate other than one which is "qualified." The amendment also requires the reporting by the cooperative of information with respectS to per-unit retain allocations comparable to the reporting requirements with respect to patronage dividends under present law. Effective dates and transition rwle.-The amendments which relate to the substantive tax treatment of per-unit retains are to apply, gen- erally, for taxable years of cooperatives beginning after April 30, 1966, and the information reporting provisions are to apply for cal- endar years after 1966. If a cooperative has entered into individual agreements with its Patrons with respect to per-unit retain allocations in compliance with the existing income tax regulations, new agreements would not be required under the amendment. Existing bylaw agreements with re- spect to per-unit retain allocations adopted under the Treasury regu- lations are to be effective for taxable years beginning before May. 1, 1967. After that date a bylaw agreement which conforms to the new statutory provisions is required. 13. Excise tax rate on hearses (sec. 213 of the bill and sec. 4062 of the code) Present law imposes a 10 percent excise tax on the sale by the manu- facturer, importer, or producer of bodies and chassis of trucks, while a rate of 7 percent is imposed on automobiles.1 There is no statutory classification of hearses, ambulances, or combi- nation ambulance-hearse vehicles for purposes of this excise tax. How- ever, since 1921 the Internal Revenue Service, by administrative rn- terpretation has classified hearses as trucks while treating ambulances and combination ambulance-hearse vehicles, as automobiles for the purpose of determining the appropriate excise tax rate. Your committee sees no reason why hearses should not be accorded the same tax treatment as ambulances-especially since the vehicles are often combined into the same unit. Moreover, ambulance and hearse manufacturers use the same basic chassis for hearses, ainbu-' lances, and combination vehicles and, `further, the tax~ on the chassis, which is paid by the chassis manufacturer, is computed at the i'ate provided for automobile chassis. In addition, it is understood that the same basic body is added to the chassis by the ambulance and 1Phis 7-percent rate is scheduled for reduction to 2 percent effective Apr. 1 1~68, and to 1 percent effective Jan. 1, 1969. The 10-percent tax on trucks and hearses is a perma- nent rate. 1483 PAGENO="0332" 72 FOREIGN INVESTORS TAX ACT OF 1966 hearse manufacturer without regard to whether it ultimately becomes an ambulance, hearse, or combination ambulance-hearse vehicle. Fur-. t.her, your committee has been informed that a rear-loading hearse can be easily converted into an ambulance or an ambulance-hearse combi- nation vehicle by the addition of certain accessories at a cost of about half of the excise tax saving which is realized by the manufacturers as a result of the conversion. Still furt.her evidence that it is unrealistic t.o classify hearses as trucks is the fact that most. of the States presently license hearses as automobiles while very few States license them as trucks. It is estimated that this bill will result in a revenue loss of approxi- iiiately $100,000 a year during the period while the excise tax on trucks is 10 percent. and that on automobiles is 7 percent. After April 1, 1968, when the rate on automobiles is reduced to 2 percent (and then to 1 per~ent on January 1, 1969) the revenue loss might actually de- crease because t.he increased differential in rates between hearses and ~mbulances ~ctually might result in fewer hearses, and more combina- t ion ambulance-hearses, being sold. For the reasons indicated above, your committee has amended the bill to specifically classify hearses, ambulances, and combination am- bulance-hearses as automobiles (.and not a*s trucks) for purposes of the excise tax on the sale of these vehicles by the manufacturer, producerS or importer. This amendment is made effective with respect to ve- hicles sold after the date of enactment of this act. 14. Interest equaii~ation tax; loans to insure raw material sources (see. 9214 of the bill and sec. 4,914 of the code) The interest, equalization tax, in general, is a t.ax imposed on Amen- cans with respect to the purchase of foreign securities. In the case of debt the tax rate varies with the period of time to maturity; in the case of stock the tax ra.te is 15 percent. The tax is designed to increase capital costs in the United States for foreigners by about 1 percent a year. Presently there is an exemption from the interest equalization tax- as the equivalent to a direct investment-for loans made by U.S. lenders to foreign subsidiaries of U.S. corporations producing foreign ores and minerals in short supply in the United States where the financing is secured by a so-called "take or pay" contract entered into between the foreign subsidiaries and the U.S. parent. However, these loans become subject to the interest equalization tax when and if they are subsequently transferred by the lender to another U.S. person, regardless of the intent of the investor at the time of acqui- sition. The amendment. made by your committee provides that t.ransfers by the original lender, subsequent to the original acquisition of the indebtedness wlicli is exempted under this provision, would not be subject to tax where the indebtedness was originally acquired by the lender without an intent to sell the indebtedness to other U.S. per- sons. However, where in fact more than one sale of the indebtedness occurs after the debt is held by the initial lender, for each such sale to he exempt the indebtedness must be purchased without any intent to resell. This amendment is to be effective with respect to debt obli- gat1ons acquired after the date of enactment of this act. 1484 PAGENO="0333" FOREIGN LNVESTORS TAX ACT OF 1966, 73 15. Interest equalisation tax; insurance con-tparty reserve funds (sec. ~15 of the bill and sec. 4914(e) of the code). The interest equalization tax provisions presently provide a limited exception for acquisitions of otherwise taxable securities made to maintain the reserve assets of a U.S. insurance company doing an in- surance business in foreign currencies abroad in developed countries. In addition, an exception for investments generally is provided with re- spect to those in "less developed countries." However, in order to claim the exemption with respect to developed countries, a life insur- ance company must. "establish" a fund of assets for each developed country for which it does business. However, the establishment of such a fund can only be made during the "initial" designation period which was the 30-day period between the enactment of the act, Septem- .ber 2, 1964, to October 2, 1964. Therefore, no American insurance company can commence doing business in a developed country after October 2, 1964, without being subject to the interest equalization tax on its reserve assets acquisitions. The same type of problem atises when a less developed country loses, its status as a less developed coun- try by an Executive order issued after October 2, 1964. In other words, there is no opportunity to establish a fund of assets in such a situation. Your committee adopted an amendment which would mitigate the foregoing anomalous situations. The amendment would permit a U.S. insurance company commencing activities in a developed country to establish a fund with respect to t.hat country provided it was ineh- gible to make an initial designation prior to October 2, 1964. The amendment would also permit. the establishment of a fund for a coun- try if the. status of that country was changed from a less developed country. by an Executiye order. .16. Interest equalisation tax; dollar loans of fo'reign branches of U.S. banks (sec. ~16 of the bill and sec. 4931(a) of the code) Presently, foreign currency loans of foreign branches of U.S. banks are exempt from the application of the interest equalization tax. Ad- ditionally, loans for a term of less than 1 year are exempt not only in the case of foreign branches of U.S. banks but generally without re- gard to who makes the'loan. Your committee adopted an amendment which would authorize the President to exempt from the interest equalization tax. U.S. dollar loans made by the foreign branches of U.S. banks (regardless of the maturities involved). To the extent that this authority is exercised, the President subsequently may withdraw or modify t.he exemption in the event he determines such withdrawal or modification is necessary to preserve the effectiveness of the interest equalization tax. This amendment is to be effective with respect to acquisitions of debt obligations after the date of enactment of this act; C. PRESIDENTIAL ELEcTION CAMPAIGN FuND ACT 1. Background Concern has been expressed by beth the President and the Con- gress on the possible ramifications of the manner in which national political campaigns are presently financed. Dependence on wealthy contributors for the bulk of needed funds will tend to leave candidates 1485 PAGENO="0334" `74 FOREIGN INVESTORS TAX ACT OF 1966 of modest means encumbered with stronger debts of loyalty to a wealthy fe'w than to the voting public. "Soaring campaign costs have intensified this concern and made it impractical merely to restrict the size of contributions. An alterna- tive source of financing political campaigns `must be developed. It was with an eye on developing such an alternative source of fi- liancing political campaigns that your committee in August of this year held hearings on a number of bills which would facilitate the financing of political campaigns. As an outgrowth of these hearings and of further committee delib- erations, your committee recommends the financing of presidential election campaigns based on the concept of one-man, one-vote, with each taxpayer able to share equally in the costs of such campaigns. This is brought about `by the creation of a presidential election cam- paign fund. Each taxpayer will be permitted to designate on his annual income tax `return that $1 of his tax liability is to be placed in the presidential election campaign fund. The amounts in the fund will then be made available to defray the presidential campaign ex- penses of those political parties whose candjdates received a significant number of votes in the preceding presidential election. Enactment of this recommendation into law will remove the cause of much of the improper influence in Government. Political parties ;uid their presidential candidates will be assured that they need not rely on the large contributions of relatively few wealthy contributors to meet the heavy financial demands of political campaigns. Your committee's recommendation, `by providing an alternative source of campaign financing, will be the most `significant improvement in this regard in over a century. Under this system of campaign financing, the man elected President will be dbligated equally to every taxpayer and to every voter, instead of to' `individual, large contributors or to corporation or, union executives whose raise great sums of money. The man elected President will be in debt to `all Americans, the ideal way to have it under the American system. Your committee's recommendation, of course, relates only to the executive branch of the Government. It is most important to `prevent the-possibility of improper influence on the Chief Executive because of the central position which the Office of the Presidency occupies in the Federal Government.. Through `the manner in which the Presi- dent executes the laws passed by Congress, exercises his veto power, frames the legislation which he submits, and selects his appoint- ees to the Federal bench, the President exerts an influence over all branches of Government. Moreover, bills the President has vetoed rarely are enacted over his objection. Indeed, the present President has never had a veto overridden by Congress. The measure recommended -by your committee concerns only presi- dential elections, not -only because of the central position of the Office of the Presidency but also because the feasibility of extending the program to cover other Federal elections should be studied in the light of the experience under this -measure and because the Federal Govern- ment- should not attempt to tell the States how to finance purely local elections. This measure will, nevertheless, have a ~avora'ble influence on other elections since the provision of funds for the most expensive of all campaigns will make it easier for political parties and cancli- 1486 PAGENO="0335" FOREIGN INVESTORS TAX ACT OF 1966 75 dates in lesser elections to raise funds and will thereby make it easier for them to refuse contributions from those who might demand favors in return. 2. Designation of income tacii payments to presidential election cam- paign fund (sec. 302 of the bill and sec. 609(3 of the code) Under your committee's bill, space is to be provided on the income tax return forms. to permit each individual taxpayer (other than a nonresident alien or an estate or trust) to designate, if he so desires, that $1 be appropriated from general revenues and paid into the presi- dential election campaign fund. The size of the fund will thus be determined by the voluntary acts of individual taxpayers, each of whom will have the opportunity to make a financial contribution of similar size. The designation is to be permitted with respect to in- come tax liability for each taxable year beginning after December 31, 1966. All taxpayers who show an income tax liability of at least $1 for the year are to be permitted to make a designation. On joint returns, both husband and wife are to be permitted to make a designation provided the tax liability shown on the return is at least $2. The designation is to be made at the time of filing the return or at such later time as may be provided in regulations (such as at the time of making a claim for refund of an overpayment of tax). 3. TIle presidential election campaign fund and payments there- from (sec. 303 of the bill) Amounts are only to be paid out of the presidential election cam- paign fund to reimburse certain political parties for expenses in- curred in presenting candidat~s for President and Vice President in presidential elections. In the view of your committee, payments should be limited to expenses in presidential campaigns unless experi- ence under the proposal proves the feasibility of extending the system to other Federal elections. To preclude any of the presidential elec- tion campaign fund from being used for other than the campaign expenses of candidates for President and Vice President, no reimburse- ment will be made for any item related t.o a candidate for any office other than President or Vice President. For example, if a Presiden- tial oi" Vice Presidential candidate should make a joint political ap- pearance with a candidate for another public office and a substantial purpose of the Presidential or Vice Presidential appearance is to fur- ther the candidacy of the other candidate, no reimbursement for such joint appearance will be allowed. Only those political parties whose candidates for President received at least 1,500,000 votes in the preceding presidential election will be eligible to receive payments from the fund. This rule* is necessary to prevent the prohferaition of minor parties as a result of this bill. It insures, however, that minor parties which receive significant public backing need not become dependent on large contributors. A political party whose candidate received more than 1,500,000 votes in the preceding presidential election but less than 10 million votes will be authorized to receive from the fund an amount equal to the lesser of its actual campaign expenses or an amount equal to $1 times the number of votes in excess of 1,500,000 that its candidate received. A political party whose candidate for President received 10 million votes or more in the preceding presidential election is to be reimbursed 1487 PAGENO="0336" 76 FOREIGN INVESTORS TAX ACT OF 1966 on a different basis. An amount equal to $1 for each vote received by all major parties in the last election is to be divided equally between (or among) them, with the limitation that payments to any one party cannot exceed the expenses incurred by the party in the current cam- pa~gn. The payments will be made at times to he determined by Treasury regulaitions, but no payment for a given presidential election campaign can be made before September 1 of the year the election is held. The Comptroller General is charged with the responsibility for cer- tifying to the Secretary of the Treasury the amounts payable to eligible political parties. In this certification he will take into account in- tormaiion supplied him by the treasurers of each political party re- garding campaign expenses incurred and on the basis of the votes cast in the preceding presidential election. The Comptroller General's decisions as to the total vote received by each party are to be final. If at the time payments are made, there are insufficient moneys in the fund. to meet the amounts specified under the rules set forth, payments to all entitled parties will be reduced pro rata, and the additional amounts paid out of later additions to the fund. If any moneys remain in the fund after all the payments authorized have been made with respect to a given presidential election, or if the fund exceeds the maximum payments which may be authorized, the amount remaining is to be returned to the general fund of the Treasury. 4. The Advisory Board (sec. 304 of the bill) The bill establishes the Presidential Election Campaign Fund Ad- visory Board to advise and assist the Comptroller General in con- nection with his duties under this act. The board is to consist of two members from each political party whose candidate received 10 million or more votes in the last presidential election plus three addi- tional members selected by a majority of the political party members. The first members of the board are to be appointed by the Comptroller General after the date of enactment of this bill and their term will expire 60 days after the date of the first presidential election held after the date of enactment of this bill. The next and succeeding boards will then serve 4-year terms ending 60 days after the date of each succeeding presidential election. Board members will be compensated at the rate of $75 a day for each day they serve and will receive travel expenses and a per diem in lieu of subsistence (at rates authorized for persons in intermittent Government service) when engaged in work away from their homes or regular places of business. 1). MISCELLANEOUS PRovisIoNs 1. Treasury notes payable in foreign currency (sec. 401 of the bill) Under present law, bonds or certificates of indebtedness may be issued by the Secretary of the Treasury payable both as to principal and interest in any foreign currency. However, presently there is no authorization for the Secretary of the Treasury to issue notes in foreign currency (31 U.S.C. 766). Your committee's bill adds an amendment to the Second Liberty Bond Act authorizing the Secretary of the Treasury to issue notes as 1488 PAGENO="0337" FOREIGN INVESTORS TAX ACT OF 1966 77 well as bonds and certificates of indebtedness in foreign currencies. Notes are evidences of indebtedness issued by the Treasury Depart- ment with a maturity of from 1 to 5 years from date of issue. Authorizing the Secretary of the Treasury to issue notes in foreign currency is designed to broaden the market for Federal securities. This. is important under current market conditions when~ it is difficult to float long-term, securities. This will enable the Secretary of the Treasury to issue notes in foreign currencies where no market exists for bonds and certificates of indebtedness in foreign currencies. To the extent a market is found in foreign currency issues of U.S. notes which would not be available for other U.S. securities, the balance of payments will be improved. Reports on Government contingent liabilities and assets (sec. 4O~. of the bill) In the past, it has been the practice of the Federal Government to determine its fInancial requirements primarily on an annual basis. This amendment does not depart from this practice. However, an an-, nual system of budgeting does not present a complete picture of the financial condition of the United States because it fails to depict numerous categories of contingent Federal obligations and commitments. Similarly, it fails to reveal fully those situations where Congress has enacted spending authorizations, but has not spe- cifically `appropriated' the moneys needed to fulfill the statutory commitment. Moreover, under present methods, U.S. liability under many of its insurance and guarantee programs is difficult to measure and analyze. This is because sufficient information regarding these programs either is not available at all, or if it is available, is inadequately presented. In many cases, information with respect to contingent liabilities of specific governmental programs now is available in reports of specific agencies or corporations. However, these data frequently lose much of their usefulness because they are not combined with similar data with respect to other programs. Thus, although part of this informa- tion may now be available it is not published in one place or on a uni- form basis, and therefore does not aid in the overall understanding of the current financial condition of the United States. Your committee believes that it is desirable to make available in single, concise report, pertinent `information with respect to the c.u~ - rent status of the contingent liabilities of t.he Federal Government, in- cluding its long-range obligations and commitments. Indeed, the committee recognizes a responsibility tQ make available in such a `report-as clear and complete as possible-the overall financial con- dition of our Government. Such a report, consolidating information now available only in part (in many diverse reports) with informa- tion which is not now available at all, will enable Congress and thc~ public to have a better understanding of the current fiscal needs of the Federal Government. For this reason, your committee has approved and recommends enactment of this amendment requiring th~ Secretary of the Treasury to submit to the Congress, `by March 31 of each year a report showing the amount (both on an aggregate and on an individual basis) of the' contingent. liabilities and the unfunded liabilities of the Federal Gov- 71-297 0-67-pt. 2-22 1489 PAGENO="0338" 78 FOREIGN INVESTORS TAX ACT OF 1966 ernment, determined as of December 31 of each year conunencing with 1966. The contingent liabilities re.ferred to by the amendment include (1) liability of the Government under its various trust funds (such as the old age and survivors insurance trust fund and the highway trust fund); (2) liabilities of Government-sponsored corporations (for ex- emple, the Commodity Credit Corporation); (3) indirect, liabilities of the Federal Government not included as part of the public debt, such as Federal Housing Administration debentures; and (4) liabili- ties of Federal insurance and annuity programs. Under the amendment, data with respect. to these insurance and annuity programs (which include the civil service retirement sys- tem, veterans' pension, and war risk insurance programs) are to include information regarding their actuarial status on both a balance-sheet basis and a projected source-and-application-of-funds basis. The report is also to indicate the collateral pledged, or the assets available (or to be realized) as security for the specified liabilities, and present an analysis of their significance in terms of past experi- ence and probable risks. Thus, for example, in the case of federally insured home mortgages the assets available on foreclosures may, under favorable circumstances, offset the potential. Federal liability. But. the reporting of assets is not to stop with a recording of assets related to t.he liabilities. Under the amendment the Secretary of the Treasury is to set. forth all other. assets which would be available to liquidate liabilities of the Federal Government. In order to provide flexibility, and to prevent data included in the report from being misconstrued or misleading, the amendment pro- vides that. the Secretary of the Treasury may set forth such explana- tory material as he determines to be necessary or desirable. Under this provision, if he believes particular data iIre likely to lead to im- proper conclusions he may qualify, that data sufficiently to negate such conclusions. A bill identical to t.his section (S. 1013) was reported favorably by the committee on September 14,1965, and passed the Senate. How- ever, the House has not acted on that bill. A substantially identical bill was also approved by the committee in the 88th Congress. It too passed the Senate but the ~House did not act on it prior to the adjournment, of the 88th Congress. 3. Coverage of drug expenses under supplementary medical insurance benefits (sec. 403 of the bill and secs. 1832,1833, 1845, 1846, and 7847 of the Social Sec~rity Act) 1. BACKGROUND OF AMENDMENT Part A of medicare is essentially designed to cover the costs of short- term institutional care provided in connection with acute illness. Part B, the supplemental medical insurance plan, `while providing benefits during periods of acute illness, is also . a mechanism for coping with certain of the expenses associated with chronic illness such as physician visits and home health services. Part A of medicare pays the cost of prescribed drugs provided to a beneficiary while he is receiving covered care in a hospital or extended 1490 PAGENO="0339" FOREIGN INVESTORS TAX A~T OF 1986 79 care facility. No coverage, however, is available under either part A or part B toward the cost of prescribed drugs purchased by the older person who is not hospitalized or in an extended care institution. During the debate in the Congress preceding the enactment of medi- care, as well as subsequent to passage of Public Law 89-97, recognition has been given to the fact that the cost of prescribed drugs represents a significant item of medical expense to older Americans. Durmg 1965, persons age 65 and over spent an estimated $600 million at the retail level for prescribed drugs. They spent several hundred million dollars more for nonprescribed drugs and drug sundries. Apart from the medications required as a result of acute illness, there are the re- current and repeated costs of prescribed drugs necessary to the treat- ment of chronic illnesses. Some 3 million older people each spend more than $100 a year for medicine, including 600,000 persons whose drug expenses exceed $250 annually. it appeared to your committee that part B of medicare would, therefore, be an appropriate vehicle for the provision of a benefit toward the expense of prescribed drugs which are not otherwise cover- able or encompassed by the provisions of part A. Your committee believes that this amendment represents a reasoned and economical approach toward meeting a genuine need of our older citizens. The caliber of the Formulary Committee and Advisory Group should assure responsible listing of covered drugs. The mecha- nism for determining allowances for each covered drug will aid in economy of operation as will the fact that coverage will be limited only to drugs requiring prescription. (Many items are prescribed by physicians which do not, by law, require prescription. Antacids and certain vitamins are prime examples. Prescriptions of this nature will not be covered. Theformulary committee has authority, however, t.o provide coverage for a drug of a lifesaving nature such as insulin which may not require a prescription.) The physician is enabled to prescribe by brand name if he desires and an allowance will `be payable for such prescription provided that. the drug is included by its generic or established name in the formulary. 2. EXPLANATION OF AMENDMENT The committee amendment adds as a covered item of service under part B of medicare (supplemental medical insurance plan) the expense of drugs requiring a prescription. The additional benefit would be- come available effective July 1, 1968, or earlier if the part B premium rate is recalculated prior to that time. A formulary committee would be established consisting of the Surgeon General, the Commissioner of the Food and Drug Administration, and the Director of the Na- tional Institutes of Health. The Formulary Committee would, with the assistance of an advisory group broadly representative of those groups concerned with pharmacy, determine which drugs would be covered under the plan. The formulary committee would promulgate a schedule of allowances payable for given quantities of covered drugs. Such allowances would `be based upon. the lowest wholesale price of any such drug, however named, plus an increment covering the rea- sonable cost of distribution, handling, and compounding. 1491 PAGENO="0340" 80 FOREIGN INVESTORS TAX ACT OF 1966 For example, the formulary committee might include tetracycline as a covered drug. They would determine the wholesale price of a given quantity of tetracycline and then add an appropriate factor covering the cost of handling, etc. That would constitute the allowance for tetracycline. The allowance thus determined would be payable on a generic basis for Achromycin, a brand name for one company's tetra-. cycline, or for any other brands of this drug. A drug included in the formulary under its generic or established name would also be deemed an eligible drug if prescribed under any of its proprietary or brand names and the scheduled allowance for the drug named in the formulary would also be the allowance for the proprietary or brand name version even though the wholesale costs of such proprietary or brand name items may be greater in price. Allowances are payable to the beneficiary in the same manner as other part B benefits or he may direct payment to a third party-such as a welfare department by assignment. The monthly cost of providing this benefit is estimated at 50 cents to the participant and 50 cents to the Federal Government. The par- ticipant's share would become part of the regular part B premium. The Federal contribution would, as is the present case with Federal participation in the costs of the part B program, come from general revenues. The cost to general revenues would be offset in part by a reduction in the amount of drug expense deductions on Federal income tax returns. V. TECHNICAL EXPLANATION OF THE FOREIGN INVESTORS TAX ACT For the technical explanation of this title, other than the amend- ments made by your committee, see the report of the Committee on Ways and Means-House Report 1450. For a discussion of the amendments made by your committee see the general explanation sec- tion of this report. VI. 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 (relirting to the showing of changes in existing law made by the bill, as reported). 1492 PAGENO="0341" SECTION 25 SENATE FLOOR DEBATE (From the daily Congressional Record) 1493 PAGENO="0342" PAGENO="0343" [Octboer 12, 1966] [P. 25317] EQUITABLE TAX TREATMENT FOR FOREIGN INVESTMENT IN THE IINITED STATES Mr. MANSFIELD. Mr. President, I ask unanimous consent that the Senate turn to the consideration of Calendar No. 1675, HR. 13103. The PRESIDING OFFICER. The bill will be stated by title. The ASSISTANT LEGISLATIVE CLERK. A bill (H.R. 13103) to amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign investment in the United States. The PRESIDING OFFICER. Is there objection to the request of the Senator from Montana? There being no objection, the Senate proceeded to consider the bill, which had been reported from the Committee on Finance, .vith an amendment, to strike out all after the enacting clause and insert: SECTION 1. TABLE OF CONTENTS, ETC. (a) TABLE OF CONTENTS.- Sec. 1. Table of contents, etc. (a) Table of contents. (b) Amendment of 1954 Code. TITLE I-FOREIGN INVESTORS TAX ACT Sec. 102. Source of income. (a) Interest. (b) Dividends. (c) Personal services. (d) Definitions. (e) Effective dates. Sec. 103. Nonresident alien individuals. (a) TaX on nonresident alien individuals. (b) Gross income. (c) Deductions. (d) Allowance of deductions and credits. (e) Beneficiaries of estates and trusts. (f) Expatriation to avoid tax. (g) Partial exclusion of dividends. (h) Withholding of tax on nonresident aliens. (I) Liability for withheld tax. (j) Declaration of estimated income tax by individuals. (k) Collection of income tax at source on wages. (1) Definitions of foreign estate or trust. (m) Conforming amendment. (n) Effective dates. Sec. 104. Foreign corporations. (a) Tax on income not connected with United States business. (b) Tax on income connected with United States business. (c) Withholding of tax on foreign corpo- rations. (e) Dividends received from certain wholly-owned foreign subsidiaries. (f) Distributions of certain foreign corpo- rations. (g) Unrelated business taxable income. (h) Corporations subject to personal hold- ing company tax. (i) Amendments with respect to foreign corporations carrying on insurance business in United States. (j) Subpart F income. (k) Gain from certain sales or exchanges of stock in certain foreign corpora- tions. (1) Declaration of estimated income tax by corporations. (m) Technical amendments. (n) Effective dates. Sec. 105. Special tax provisions. (a) Income affected by treaty. (b) Adjustment of tax because of burden- some or discriminatory foreign taxes. (c) Clerical amendments. (d) Effective date. (e) Elections by nonresident United States citizens who are subject ~to foreign community property laws. (f) Presumptive date of payment for tax withheld under chapter 3. Sec. 106. Foreign tax credit. (a) Allowance of credit to certain non- resident aliens and foreign corpora- tions. (b) Alien resident of the United States or Puerto R.ico. (c) Foreign tax credit in respect of Inter- est received from foreign subsidia- ries. Sec. 107. Amendments to preserve existing law on deductions under section 931. (a) Deductions. (b) Effective date. Sec. 108. Estates of nonresidents not citizens. (a) Rateof tax. (b) Credits against tax. (c) Property within the United States. (d) Property without the United States. (e) Definition of taxable estate. (f) Speciai methods of computing tax. (g) Estate tax returns. (h) Clerical amendment. (I) Effective date. Sec. 109. Tax on gifts of nonresidents not citizens. (a) Imposition of tax. (b) Transfers in general. (c) Effective date. Sec. 110. Treaty obligations. TITLE fl-OTHER AMENDMENTS To INTERNAL REVENUE CODE Sec. 201. Application of investment credit to property used In possessions of the United States. (a) Property used by domestic corpora- tions, etc. (b) Effective date. Sec. 202. Deduction of medical expenses of individuals age 65 or over. (a) Repeal of amendments made by social security amendments of 1965. (b) Cost of medical insurance. (C) Effective date. Sec. 203. Basis of property received on liqui- dation of subsidiary. (a) Definition of purchase. (b) Period of acquisition. (c) Distribution of installment obliga- tions. (d) Effective dates. Sec. 204. Transfers of stock and securities to corporations controlled by trans- ferors. (a) Transfers to investment companies. (b) Effective date. Sec. 205. Minimum amount treated as earned income for retirement plans of certain self-employed individuals. (a) Increase to $6,600. (b) Effective date. Sec. 206. Treatment of certain income of au- thors, Inventors, etc., as earned income for retirement plan pur- poses. 1495 PAGENO="0344" (a) Income from disposition of property created by taxpayer. (b) Effective date. Sec. 207. Exclusion of certain rents from personal holding company in.. come. (a) Rents from leases of certain tangible personal property. (b) Technical amendments. (c) Effective date. Sec. 208. Percentage depletion rate for cer- tain clay bearing alumina. (a) 23 percent rate. (b) Treatment processes. (c) Effective date. Sec. 209. Percentage depletion rate for clam and oyster shells. (a) 15 percent rate. (b) Effective date. Sec. 210. Sintering and burning of `shale, clay, and slate used as light- weight aggregates. (a) Treatment processes. (b) Effective date. Sec. 211. Straddles. (a) Treatment as short-term capital gain. (b) Effective date. Sec. 212. Tax treatment of per-unit retain allocations. (a) Tax treatment of cooperatives. (b) Tax treatment by patrons. (c) Definitions. (d) Information reporting. (e) Effective dates. (f) Transition rule. Sec. 213. Excise tax rate on ambulances and hearses. (a) Classification as automobiles. (b) Effective date. Sec. 214. Applicability of exclusion from in- terest equalization tax of certain loans to assure raw materials sources. (a) Exception to exclusion. (b) Technical amendments. (c) Effective date. Sec. 215. Exclusion from interest equaliza- tion tax for certain acquisitions by insurance companies. (a) New companies and companies oper- ating In former less developed coun- tries. (b) Effective date. Sec. 216. Exclusion from interest equaliza- tion tax of certain acquisitions by foreign branches of domestic banks. (a) Authority for modification of execu- tive orders. (b) Effective date. TITLE Ill-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT Sec. 301. Short title. Sec. 302. Authority for designation of $1 of income tax payments to presi- dential election campaign fund. Sec. 303. Presidential election campaign fund. (a) Establishment. (b) Transfers to the fund. (c) Payments from fund. (d) Transfers to general fund. Sec. 304. Establishment of advisory board, Sec. 305. Appropriations authorized. TITLE Iv-MI5cELLANE0U5 PROVISIONS Sec. 401. Treasury notes payable in foreign currency. Sec. 402. Reports to clarify to national debt and tax structure. [P. 25318) Sec. 403. Coverage of expenses of certain drugs under supplementary med- ical insurance benefits. (b) AMENDMENT OF 1954 C0DE.-Except as otherwise expressly provided, wherever In titles I, II, and III, of this Act an amendment or repeal Is expressed in terms of an amend- ment, to or repeal of, a section or other pro- vision, the reference is to a section or other provision of the Internal Revenue Code of 1954. TITLE I-FOREIGN INVESTORS TAX ACT SEc. 101. SHORT TITLE. This title ma'y be cited as the "Foreign In- vestors Tax Act of 1966". SEC. 102. SouRcE OF INCOME. (a) INTEREST.- (1) (A) Subparagraph (A) of section 861 (a) (1) (relating to interest from sources within the United States) is amended to read as follows: "(A) interest on amounts described in subsection (c) received by a nonresident alien individual or a foreign corporation, if such interest is not effectively connected with the conduct of a trade or business within the United States,". (B) Section 861 Is amended by adding at the end thereof the following new sub- section: `(c) INTEREsT ON DEPOSITS, Erc.-For pur- poses of subsection (a) (1) (A), the amounts described In. this subsection are- "(1) deposits with persons carrying on the banking business, "(2) deposits or withdrawable accounts with savings institutions chartered and su- pervised as savings and loan or similar asso- ciations under Federal or State law, but only to the extent that amounts paid or credited on such deposits or accounts are deductible under sectIon 591 (determined without re- gard to section 265) In computing the tax- able Income Of such institutions, and "(3) amounts held by an Insurance com- pany under an agreement to pay Interest thereon. Effective with respect to amounts paid or credited after December 31, 1971, subsection (a) (1) (A) and this subsection shall cease to apply." (2) Section 861(a) (1) is amended by striking out subparagraph (B) and (C) and inserting in lieu thereof the following: "(B) interest received from a resident alien individual or a domestic corporation, when it is shown to the satisfaction of the Sec- retary or his delegate that less than 20 per- cent of the gross income from all sources o'f such individual or such corporation has been derived from sources with in the United States, as determined under the provisions of this part, for the 3-year period ending with the close of the taxable year of such individual or such corporation preceding the payment of such interest, or for such part of such period as may be applicable, "(C) interest received from a foreign cor- poration (other than interest paid or credited after December 31, 1971, by a domestic branch of a foreign corporation, if such branch is engaged In the commercial banking busi- ness), when It is shown to the satisfaction of the Secretary or his delegate that less than 50 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of Its `taxable year preceding the payment of such 1496 PAGENO="0345" interest (or for such part of such period as the corporation has been in existence) was effectively connected with the conduct of a trade or business within the United States, "(D) in the case of interest received from a foreign corporation (other than Interest paid or credited after December 31, 1971, by a domestic branch of a foreign corporation, If such branch Is engaged in the commercial banking business) 50 percent or more of the gross income of which from all sources ror tne 3-year period ending with the close of its taxable year preceding the payment of such interest (or for such part of such period as the corporation has been in existence) was effectively connected with the conduct of a trade or business within the United States, an amount of such Interest which bears the same ratio to such interest as the gross In- come of such foreign corporation for such period which was not effectively connected with the conduct of a trade or business within the United States bears to its gross Income from all sources, "(E) income derived by a foreign central bank, of issue from bankers' acceptances, and "(F) interest on deposits with a foreign branch of a domestic corporation or a do- mestic partnership, if such branch is en- gaged in the commercial banking business," (3) Section 861 (relating to income from sources within the United States) is amended by adding after sfibsection (C) (as added by paragraph (1) (B)) the following new sub- section: "(d) SPECIAL RULES FOR APPLICATION OP PARAGRAPHS (1) (B), (1) (C), (1) (D), AND (2) (B) OF SussEcTIoN (a).- "(1) NEW ENTRIES-FOr purposes of para- graphs (1)(B), (1)(C), (1)(D), and (2)(B) of subsection (a), if the resident alien indi- vidual, domestic corporation, or foreign corporation, as the case may be, has no grosa Income from any source for the 3-year period (or part thereof) specified, the 20 percent test or the 50 percent test, as the case may be, shall be applied with respect to the taxable year of the payor in which payment of the interest or dividends, as the case may be, Is made. "(2) TRANSITION RULE-For purposes of paragraphs (1)(C), (1)(D), and (2)(B) of subsection (a), the gross Income of the for- eign corporation for any period before the first taxable year beginning after December 31, 1966, which is effectively connected with the conduct of a trade or business within the United States Is an amount equal to the gross Income for such period from sources within the United States." (4) (A) Section 895 (relatIng to income derived by a foreign central bank of issue from obligations of the United States) is amended to read as follows: "SEc. 895. INcosss DERIVED ST A FOREIGN CEN- TRAL BANK OF ISSUE FROM OBLI- GATIONS OF THE UNITm STATES OR FROM BANK DEPOSITS. "Income derived by a foreign central bank of issue from obligations of the United States or of any agency or Instrumentality thereof (including beneficial interests, participa- tions, and other instruments issued under section 302(c) of the Federal National Mort- gage Association Charter Act (12 U.S.C. 1717)) whIch are owned by such foreign cen- tral bank of issue, or derived from interest on deposits with persons carrying on the banking business, shall not be Included in gross income and shall be exempt from taxa- tion under this subtitle unless such obliga- tions or deposits are held for, or used in * connection with, the conduct of commercial banking functions or other commercial ac- tiVities. For purposes of the preceding sen- tence the Bank for International Settlements shall be treated as a foreign central bank of issue." (B) The table Of sections for subpart C of part 1[ of subchapter N of chapter 1 Is amended by striking out the item relating to sectIon 895 and inserting in lieu thereof the following: "Sec. 895. Income derived by a foreign cen- tral bank of issue from obliga- tions of the United States or from bank deposits." (b) DIVIDENDs-Section 861(a) (2) (B) (relating to dividends from sources within the United States) Is amended to read as follows: "(B) from a foreign corporation unless less than 50 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of Its taxable year preceding the declaration of such dividends (or for such part of such pericd as the corporation has been in exist- ence) was effectively connected with the conduct of a trade or business within the United States; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period which was effectively connected with the conduct of a trade or business within the United States bears to its gross income from all sources; but dividends (other than divi- dends for which a deduction Is allowable under section 245(b)) from a foreign corpo- ration shall, for purposes of subpart A of part III (relating to foreign tax credit), be treated as income from sources without the United States to the extent (and only to the extent) exceeding the amount which is 100/85ths of the amount of the deduction allowable under section 245 in respect of such dividends, or". (c) PERSONAL SERvIcES-Section 861 (a) (3) (C) (ii) (relating to Income from personal services) is amended to read as follows: "(ii) an Individual who is a citizen or resi- dent of the United States, a domestic part- nership, or a domestic corporation, If such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation." (d) DEFINITIONs-Section 864 (relatIng to definitions) Is amended- (1) by striking out "For purposes of this part," and inserting In lieu thereof "(a) SALE, ETC-For purposes of this part,"; and (2) by adding at the end thereof the fol- lowing new subsections: `(b) TRADE OR BUSINESS WITHIN THE UNITED STATES-For purposes of this part, part II, and chapter 3, the term `trade or business within the United States' Includes the performance of personal services within the United States at any time within the taxable year, but does not Include- "(1) PERFORMANCE OF PERSONAL SERVICES FOR FOREIGN EMPLOYER-The performance of personal services- "(A) for a nonresident alien individual, foreign partnership, or foreign corporation, not engaged In trade' or business within the United States, or "(B) for an office or place of business main- tained In a foreign country or In a possession 1497 PAGENO="0346" of the United States by an individual who is a citizen or resident of the United States or by a domestic partnership or a domestic corporation, by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year and whose compensa- tion for such services does not exceed in the aggregate $3,000. "(3) TRADING IN SECURITIES OR COMMODI- TIES.- "(A) STOCKS AND SECURITIES.- "(1) IN GENERAL.-Tradlng In stocks or securities through a resident broker, com- mission agent, custodian, or other inde- pendent agent. "(ii) TRADING FOR TAxpAYER's OWN AC- cOUNT-Trading in stocks or securities for the taxpayer's own account, whether by the taxpayer or his employees or through a resi- dent broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary au- thority to make decisions In effecting the transactions. This clause shall not apply in the case of a dealer In stocks or securities, or in the case of a corporation (other than a corporation which Is, or but for section 542(c) (7) or 543(b) (1) (C) would be, a per- [P. 253191 sonal holding company) the principal busi- ness of which is trading in stocks or securi- ties for Its own account, if Its principal of- fice is in the United States. "(B) COMMODITIES.- "(i) IN GENERAL-Trading in commodi- ties through a resident broker, commission agent, custodian, or other independex~t agent. "(11) TRADING FOR TAXPAYER'S OWN AC- couN'r.-Trading in commodities for the taxpayer's own account, whether by the tax- payer or his employees or through a resi- dent broker, commission. agent, custodian, or other agent, and whether or not any such employee or agent has discretionary au- thority to make decisions In effecting the transactions. This clause shall not apply in the case of a dealer in commodities. "(iii) LIMrrATI0N.-Clauses (I) and (ii) shall apply only if the commodities are of a kind customarily dealt in on an organized commodity exchange and If the transaction is of a kind customarily consummated at such place. "(C) LIMITATI0N.-Subparagraphs (A) (I) and (B) (I) shall apply only If, at no time during the taxable year, the taxpayer has an office or other fixed place of business In the United States through which or by the direction of which the transactions in stocks or securities, or in commodities, as the case may be, are effected. `(c) EFFECTIVELY CONNECTED INCOME, ETC.- "(1) GENERAL RULE-For purposes of this title- "(A) In the case of a nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year, the rules set forth in paragraphs (2), (3), and (4) shall apply in determining the income, gain, or loss which shall be treated as effectively con- nected with the conduct of a trade or busi- ness within the United States. "(B) Except as provided in section 871(d) or sections 882(d) and (e), in the case of a nonresident alien, individual or a foreign corporation not engaged in trade or business within the United States during the taxable year, no income, gain, or loss shall be treated as effectively connected with the conduct of a trade or business within the United States. "(2) PERIODICAL, ETC., INCOME PROM SOURCES WITHIN UNITED STATES-FACTORS.- In determining whether Income from sources within the United States of the types de- scribed in section 871(a) (1) or section 881(a), or whether gain or loss from sources within the United States from the sale or exchange of capital assets, Is effectively con- nected with the conduct of a trade or busi- ness within the United States, the factors taken into account shall include whether- "(A) the income, gain, or loss Is derived from assets used in or held for use in the conduct of such trade or business, or "(B) the activities of such trade or busi- ness were a material factor in the realization of the income, gain, or loss. In determining whether an asset is used in or held for use in the conduct of such trade or business or whether the activities of such trade or business were a material factor in realizing an item of income, gain, or loss, due regard shall be given to whether or not such asset or such income, gain, or loss was accounted for through such trade or business. In applying this paragraph and paragraph (4), interest referred to in section 861(a) (1) (A) shall be considered Income from sources within the United States. "(3) OTHER INCOME FROM SOURCES WITHIN UNITED STATES-All income, gain, or loss from sources within the United States (other than Income, gain, or loss to which para- graph (2) applies) shall be treated as effec- tively connected with the conduct of a trade or business within the United States. "(4) INCoME FROM SOURCES WITHOUT UNITED STATES.- "(A) Except as provided In subparagraphs (B) and (C), no income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States. "(B) Income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States by a nonresident alien individual or a for- eign corporation If such person has an office or other fixed place of business within the United States to which such Income, gain, or loss is attributable and such income, gain, or less- `(i) consists of rents or royalties for the use of or for the privilege of using Intangible property described in section 862 (a) (4) (in- cluding any gain or loss realized on the sale of such property) derived in the active con- duct of such trade or business; "(ii) `onsists of dividends or interest, or gain or loss from the sale or exchange of stock or notes, bonds, or other evidences of indebtedness, and either is derived in the active conduct of a banking, financing, or similar business within the United States or is received by a corporation the principal business of which is trading in stocks or securities for its own account; or "(lii) is derived from the sale (without the United States) through such office or other fixed place of business of personal property described in section 1221 (1), except that this clause shall not apply if the prop- erty is sold for use, consumption, or dlsposi- 1498 PAGENO="0347" tion outside the United States and an office or other fixed place of business of the tax- payer outside the United States participated materially In such sale. "(C) In the case of a foreign corporation taxable under part I of subchapter L, any income from sources without the United States which is attributable to its United States business shall be treated as effectively connected with the conduct of a trade or business within the United States. -" - "(D) No income from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States if it either- "(i) consists of dividends, interest, or royalties paid by a foreign corporation in which the taxpayer owns (within the mean- ing of section 958(a)), or is considered as owning (by applying the ownership rules of sec~ion 958(b)), more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or "(ii) is subpart F income within the mean- ing of section 952(a). "(5) RULES FOR APPLICATION OF PARAGRAPH (4) (B) -For purposes of subparagraph (B) of paragraph (4)- "(A) in determining whether a nonresi- dent alien individual or a foreign corporation has an Office or other fixed place of business, an office or other fixed place of business of an agent shall be disregarded unless such agent (i) has the authority to negotiate and conclude contracts in the name of the non- resident alien individu&l or foreign corpora- tion and regularly exercises that authority or has a stock of merchandise from which he regularly fills orders on behalf of such in- dividual or foreign corporation, and (ii) is not a general commission agent, broker, or other agent of independent status acting in the ordinary course of his business, "(B) income, gain, or loss shall not be considered as attributable to an office or other fixed place of business within the United States unless such office or fixed place of business is a material factor in the production of such income, gain, or loss and such office or fixed place of business regularly carries on activities of the type from which such income, gain, or loss Is derived, and "(C) the income, gain, or loss which shall be attributable to an office or other fixed place of business within the United States shall be the income, gain, or loss properly allocable thereto, but, in the case of a sale described in clause (iii) of such subpara- graph, the income which shall be treated as attributable to an office or other fixed place of business within the United States shall not exceed the income which would be de- rived from sources within the United States if the sale were made in the United States." (e) EFFECTIVE DATES.- (1) The amendments made by subsections (a), (c), and (d) shall apply with respect to taxable years beginning after December 31, 1966; except that in applying section 864(c) (4) (B) (iii) of the Internal Revenue Code of 1954 (as added by subsection (d)) with respect to a binding contract entered into on or before February 24, 1966, activities in the United States on or before such date n negotiating or carrying out such contract &iall not be taken into account. (2) The amendments made by subsection (b) sbaU applywith respect to amounts re- ceived after December 31, 1966. SEC. 103. NoNRESIDENT ALIEN INDIvIDUALs. (a) TAX ON NONRESIDENT ALIEN INDIVID- UALS.- (1 Section 871 (relating to tax On non- resident alien individuals) Is amended to read as follows: "SEC. 871. TAX ON NONRESIDENT ALIEN INDI- vIDUAL5. "(a) INCOME NoT CONNECTED WITH UNITED STATES BUSINE55-30 PERCENT TAx. "(1) INCOME OTHER THAN CAPITAL GAINS.- There is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by .a nonresident alien individual as- "(A) interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and Income, "(B) gains described in section 402(a) (2), 403(a) (2), or 631 (b) or (C), and gains on transfers described in section 1235 made on or before October 4, 1966, "(C) in the case of bonds or other evi- dences of indebtedness issued after Septem- ber 28, 1965, amounts which under section 1232 are considered as gains from the sale or exchange of property which is not a capital asset, and "(D) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trade- marks, trade brands, franchises, and other like property, or of any interest In any such property, to the extent such gains are from payments which are contingent on the pro- ductivity, use, or disposition of the property or interest sold or exchanged, or from pay- ments which are treated as being so con- tingent under subsection (e), but only to the extent the amount so received Is not effectively connected with the conduct of a trade or business within the United States. "(2) CAPITAL GAINS OF ALIENS PRESENT IN THE UNITED STATES 183 DAYS OR MoRE-In the case of a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year, there is hereby imposed for such year a tax of 30 percent of the, amount by which his gains, derived from' sources within the United States, from the sale or exchange at any time during such year of capital assets exceed his losses, allocable to sources within the United States, from the sale or exchange at any time during such year of capital assets. For purposes of this paragraph, gains and losses shall be taken into account only if, and to the extent that, they would be recognized, and taken into ac- count if such gains and losses were effec- tively connected with the conduct of a trade [P. 25320] or business within the United States, except that such gains and losses shall be deter- mined without regard to section 1202 (relat- ing to deduction for capital gains) and such losses shall be determined without the bene- fits of the capital loss carryover provided in section 1212. Any gain or loss which is taken into account In determining the tax under paragraph (1) or subsection (b shall not be taken into account in determining the tax under this pargraph. For purposes of the 183-day requirement of this paragraph, a nonresident alien individual not engaged in trade or business within the United States 1499 PAGENO="0348" who has not established a taxable year for any prior period shall be treated as having a taxable year which is the cale:~dar year. "(b) INCoME CONNECTED WITH UNITED STATES BUSINESS-GRADUATED RATE OF TAX.- "(1) IMPOSITION OF TAx-A nonresident alien individual engaged in trade or busi- ness within the United States during the taxable year shall be taxable as provided in section 1 or 1201(b) on his taxable income which is effectively connected with the con- duct of a trade or business within the United States. "(2) DETERMINATION OF TAXABLE INCOME.- In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States. "(c) PARTICIPANTS IN CERTAIN EXCHANGE OR TRAINING PRoGRAMs-For purposes of this section, a nonresident alien individual who (without regard to this subsection) is not engaged in trade or business within the United States and who is temporarily present in the United States as a nonimmigrant under subparagraph (F) or (J) of section 101(a) (15) of the Immigration and Nation- ality Act, as amended (8 U.S.C. 1101(a) (15) (F) or (J)), shall be treated as a nonresident alien individual engaged In trade or busi- ness within the United States, and any in- come described in section 1441(b) (1) or (2) which is received by such individual shall, to the extent derived from sources within the United States, be treated as effectively con- nected with the conduct of a trade or busi- ness within the United States. "(d) ELECTION To TREAT RRAL PROPERTY INCOME AS INCOME CONNECTED WITH UNITED STATES BuslNzss.- "(1) IN GENERAL-A nonresident alien in- dividual who during the taxable year derives any income- "(A) from real property held for the pro- duction of income and located in the United States, or from any Interest in such real property, including (i) gains from the sale or exchange of such real property or an interest therein, (ii) rents or royalties from mines, wells, `or other natural deposits, and (iii) gains described in section 631(b) or (c), and "(B) which, but for this subsection, would not be treated as income which is effectively connected with the conduct of a trade or business within the United States, may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as pro- vided in subsection (b) (1) whether or not such individual is engaged in trade or busi- ness within the United States during the tax- able year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary or his delegate with respect to any taxable year. "(2) ELECTION AFTER REVOCATION-If an election has been made under paragraph (1) and such election has been revoked, a new election may not be made under such para- graph for any taxable year before the 5th taxable year which begins after the first taxable year for which such revocation is effective, unless the Secretary or his delegate consents to such new election. "(3) FORM AND TIME OF ELECTION AND REVO- cATIoN-An election under paragraph (1), and any revocation of such an election, may be made only in such manner and at such time as the Secretary or his delegate may by regulations prescribe. "(e) GAINS FROM SALE OR EXCHANGE OF CERTAIN INTANGIBLE PROPERTY.-FOr purposes of subsection (a) (1) (fl) and for purposes of sections 881(a) (4), 1441(b), and 1442(a)- "(1) PAYMENTS TREATED AS CONTINGENT ON USE, ETC-If more than 50 percent of the gain for any taxable year from the sale or exchange of any patent, copyright, secret process or formula, good will, trademark, trade brand, franchise, or other like property, or of any interest in any such property, is from pay- ments which are contingent on the produc- tivity, use, o~ disposition of such property or interest, all of the gain for the taxable year from the sale or exchange of such property or interest shall be treated as being from payments which are contingent on the productivity, use, or disposition of such prop- erty or interest. "(2) SOURCE RuLE-In determining wheth- er gains described in subsection (a) (1) (D) and section 881(a) (4) are received from sources within the United States, such gains shall be treated as rentals or royalties for the use of, or privilege of using, property or an Interest in property. `(f) CERTAIN ANNUITIES RECEIVED UNDER QUALIFIED PLANS-FOr purposes of this sec- tion, gross income does not Include any amount received as an annuity under a quali- fied annuity plan described in section 403 (a) (1), or from a qualified trust described in section 401 (a) which is exempt from tax un- der section 501 (a), if- "(1) all of the personal services by reason of which such annuity is payable were either (A) personal services performed outside the United States by an individual who, at the time of performance of such personal serv- ices, was a nonresident alien, or (B) per- sonal services described in section 864(b) (1) performed within the United States by such individual, and "(2) at the time the first amount is paid as such annuity under such annuity plan, or by such trust, 90 percent or more of the em- ployees for whom contributions or benefits are provided under such annuity plan, or under the plan or plans of which such trust is a part, are citizens or residents of the United States." "(g) CRoss REFERENCES.- "(1) For tax treatment of certain amounts distributed by the United States to nonresi- dent alien individuals, see section 402(a) (4). (2) For taxation of nonresident alien in- dividuals who are expatriate United States citizens, see section 877. "(3) For doubling of tax on citizens of certain foreign countries, see section 891. "(4) For adjustment of tax in case of na- tionals or residents of certain foreign coun- tries, see section 896. "(5) For withholding of tax at source on nonresident alien Individuals, see section 1441. "(6) For the requirement of making a declaration of estimated tax by certain non- resident alien individuals, see section 6015(i)." (2) Section 1 (relating to tax on individ- uals) is amended by redesignating subsec- tion (d) as subsection (e), and by insert- ing after subsection (c) the following new subsection: "(ci) NONRESIDENT ALIENS.-IU the case of 1500 PAGENO="0349" a nonresident alien individual, the tax mi- posed by subsection (a) shall apply only as provided by section 871 or 877." (b) GROSS INCO.- (1) Subsection (a) of section 872 (relatLig to gross income of nonresident, alien indi- viduals) is amended to read as follows: "(a) GENERAL RuLE,~-In the case of a non- resident alien individual, gross income In- cludes only- "(1) gross income which is derived from sources within the United States and which is not effectively connected with the con- duct of a trade or business within the Unit- ed States, and "(2)' gross income which is effectively con- nected with the conduct of a trade or busi- ness within the United States." (2) Subparagraph (B) of section 872(b) (3) (relating to compensation of participants in certain exchange or training programs) is amended by striking out "by a domestic corporation" and inserting in lieu thereof "by a domestic corporation, a domestic part- nership, or an individual who is a citizen or resident of the United States". (3) Subsection (b) of section 872 (relating to exclusions from gross income) is amended by adding at the end thereof the following new paragraph: "(4) CERTAIN BOND INCOME OF RESIDENTS OF THE `RYUKYU ISLANDS OR THE TRUST TER- RITORY OF THE PACIFIC I5LANDs.-Income de- rived by a nonresident alien individual from a series E or series H United States savings bond, if such individual acquired such bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands." (c) DEDUCTIONS.- (1) Section 873 (relating to deductions allowed to nonresident alien individuals) is amended to read as follows: "SEC. 873. DEDUCTIONS. "(a) GENERAL RULE-In the case of a non- resident alien individual, the deductions shall be allowed only for purposes of sec- tion 871(b) and (except as provided by sub- section (b)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment' and alloca- tion of the deductions for this purpose shall be determined as provided In regulations pre- scribed by the Secretary or his delegate. "(b) ExcEpTIoNs-The following deduc- tions shall be allowed whether or not they are connected with income which is effec- tively connected with the conduct of a trade or business within the United States: "(1) LossEs-The deduction, for losses of property not connected with the trade or business if arising from certain casualties or theft, allowed by section 165(c) (3), but only If the loss is of property located within the United States. "(2) CHARITABLE CONTRIBUTIONS-The de- duction for charitable contributions and gifts allowed by section 170. "(3) PERSONAL EXEMPTION-The deduction for personal exemptions `allowed by section 151, except that in the case of a nonresident alien individual who is not a resident of a contiguous country only one exemption shall be allowed under section 151. `(c) Caoss REFERENCES.- "(1) For disallowance of standard deduc- tion, see section 142(b) (1). "(2) For rule that certain foreign taxes are not to be taken into account in deter- mining deduction or credit, see section 906 (b) (1)." (2) Section 154(3) (relating to cross ref- erences in respect of deductions for personal exemptions) is amended to read as follows: "(3) For exemptions of nonresident aliens, see section 873(b) (3) ." (d) ALLOWANCE OF DEDUCTIONS AND CREDIT5.-Subsection (a) of section 874 (re- lating to filing of returns) is amended to read as follows: "(a) RETURN PREREQUISITE TO ALLOW- ANCE.-A nonresident alien Individual shall receive the benefit of the deductions and [P. 25321] credits allowed to him in t~uis subtitle only by filing or causing to be fited with the Sec- retary or his delegate a true and accurate return, in the manner prescribed In subtitle F (sec. 6001 and following, relating to proce- dure and administration), including therein all the information which the Secretary or his delegate may deem necessary for the cal- culation of such deductions and credits. This subsection shall not be construed to deny the credits provided by sections 31 and 32 for tax withheld at source or the credit provided by section 39 for certain uses of gasoline and lubricating oil." (e) BENEFICIARIES OF ESTATE AND TRUSTS.- (1) Section 875 (relating to partnerships) is amended to read as follows: "SEc. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES AND TRUSTS. "For purposes of this subtitle- "(1) a nonresident alien individual or for- eign corporation shall be considered as being engaged in a trade or business within the United States if the partnership of which such Individual or corporation is a member is so engaged, and "(2) a nonresident alien individual or for- eign corporation which is a beneficiary of an estate or trust which is engaged in any trade or business within the United States shall be treated as being engaged in such trade or business within the United States." (2) The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by striking out the item relating to section 875 and inserfing in lieu thereof the following: "Sec. 875. Partnerships; beneficiaries of estates and trusts." (f) EXPATRIATION To AVOID TAX. (1) Subpart A of part II of subchapter N of chapter 1 (relating to nonresident alien individuals) is amended by redesignating section 877 as section 878, and by inserting after section 876 the following new section: "SEc. 877. EXPATRIATION To AVOID TAX. "(a) IN GENERAL-Every nonresident alien individual who at any time after March 8, 1965, and within the 10-year period im- mediately preceding the close of the taxable year lost United States citizenship, unless such loss did not have for one of its prin- cipal purposes the avoidance of taxes under this subtitle or subtitle B, shall be taxable for such taxable year in the manner pro- vided in subsection (b) if the tax Imposed pursuant to such subsection exceeds the tax which, without regard to this section, is im- posed pursuant to section 871. `(b) ALTERNATIVE TAx.-A nonresident alien individual described in subsection (a) shall be taxable for the taxable year as pro- vided in section 1 or section 1201 (b), except that- "(1) the gross income shall include only 1501 PAGENO="0350" the gross income described in section 872(a) (as modified by subsection (c) of this sec- tion), and "(2) the deductions shall be allowed if and to the extent that they are connected with the gross Income included under this section, except that the capital loss carry- over provided by section 1212(b) shall not be allowed; and the. proper allocation and ap- portionment of the deductions for this pur- pose shall be determined as provided under regulations prescribed by the Secretary, or his delegate. For purposes of paragraph (2), the deduc- tions allowed by section 873(b) shall be al- lowed; and the deduction (for losses not con- nected with the trade or business if incurred in transactions entered into for profit) al- lowed by section 165(c) (2) shall be allowed, but only if the profit, if such transaction had resulted in a profit, would be Included in gross income under this. section. `(c) SPECIAL RuLEs or Souscx.-For pur- poses of subsection (b), the following items of gross income shall be treated as Income from sources within the United States: "(1) SALE OF PROPERTY-Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States. "(2) SToCK OR DEBT oBLIGATIoNs-Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations .of United States persons or of the United States, a State or political subdivision thereof, or the District of Columbia. "(d) EXCEPTION FOR Loss OF CITIzENsHIP FOR CERTAIN CAusEs-Subsection (a) shall not apply to a nonresident alien individual whose loss of United States citizenship re- sulted from the application of section 301 (b), 350, or 355 of the Immigration and National- ity Act, as amended (8 U.S.C. 1401(b), 1482, or.1487). "(e) BURDEN OF PROoF-If the Secretary or his delegate establishes that It is reason- able to believe that an Individual's loss of United States citizenship would, but for this section, result In a substantial reduction for the taxable year in the taxes on his provable income for such year, the burden of proving for such taxable year that such loss of citi- zenship did not have for one of Its principal purposes the avoidance of taxes under this subtitle or subtitle B shall be on such individual." (2) The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by striking out the Item relating to section 877 and inserting in lieu thereof the following: "Sec. 877. Expatriation to avoid tax. "Sec. 878. Foreign educational, charitable, and certain other exempt orga- nizations." (g) PARTIAL EXCLUSION OF DIvIDENDS-Sub- section (d) of section 116 (relating to cer- tain nonresident aliens ineligible for exclu- sion) is amended to read as follows: "(d) CERTAIN NONRESIDENT ALIENS INELI- GIBLE FOR ExCLUSION-In the case of a non- resident alien Individual, subsection (a) shall apply only- "(1) In determining the tax imposed for the taxable year pursuant to sectIon 871 (b) (1) and only In respect of dividends which are effectively connected with the conduct of a trade or business within the United States, or "(2) In determining the tax imposed for the taxable year pursuant to section 877(b) ." (h) WITHHOLDING OF TAX ON NONRESIDENT ALIENS-Section 1441 (relating to withhold- tag of tax on nonresident aliens) is amended- (1) by striking out ", or of any partner- ship not engaged in trade or business with- in the United States and composed in whole or In part of nonresident aliens," in sub- section (a) and inserting in lieu thereof "or of any foreign partnership"; (2) by striking out "(except interest on deposits with persons carrying on the bank- ing business paid to persons not engaged in business in the United States)" in sub- section (b); (3) by striking out "and amounts de- scribed in section 402(a) (2)" and all that follows in the first sentence of subsection (b) and inserting in lieu thereof "gains de- scribed in section 402(a) (2), 403(a) (2), or 631 (b) or (c), amounts subject to tax un- der section 871 (a) (1) (C), gains subject to tax under section 871(a) (1) (D), and gains on transfers described in section 1235 made on or before October 4, 1966."; (4) by adding at the end of subsection (b) the following new sentence: "In the case of a nonresident alien individual who Is a member of a domestic partnership. the Items of income referred to in subsection (a) shall be treated as referring to items spectfied In this subsection Included in his distributive share of the Income of such nartnership."; (5) by striking out paragraph (1) of sub- section (C) and inserting in lieu thereof the following new paragraph: "(1) INCoME CONNECTED WITH UNITED STATES BUSINESS-No deduction or withhold- ing under subsection (a) shall be required in the case of any Item of income (other than compensation for personal services) which Is effectively connected with the conduct of a trade or business within the United States and which is included in the gross income of the recipient under section 871(b) (2) for the taxable year."; (6) by amending paragraph (4) of subsec- tion (c) to read as follows: "(4) COMPENSATION OF CERTAIN ALIENS.- Under regulations prescribed by the Secre- tary or his delegate, compensation for per- sonal services may be exempted from deduc- tion and withholding under subsection (a) ."; (7) by striking out "amounts described in section 402(a) (2), section 403(a) (2), section 631 (b) and (c), and section 1235, which are considered to be gains from the sale or ex- change of capital assets," in paragraph (5) of subsection (c) and Inserting in lieu there- of "gains described in section 402(a) (2), 403 (a) (2), or 631 (b) or (c), gains subject to tax under section 871(a) (1) (D), and gains on transfers described In section 1235 made on or before October 4, 1966,", and by strik- Ing out "proceeds from such sale or ex- change," in such paragraph and inserting in lieu thereof "amount payable,"; (8) by adding at the end of subsection (c) the following new paragraph: "(7) CERTAIN ANNUITIES RECEIVED UNDER QUALIFIED PLANS-NO deduction or withhold- ing under subsection (a) shall be required in. the case of any amount received as an annuity if such amount is, under section 871(f), exempt from the tax imposed by sec- tIon 871(a)."; and (9) by redesignating subsection (d) as (e), and by inserting after subsection (c) the fol- lowing new subsection: "(d) EXEMPTION OF CERTAIN FOREIGN PART- NERSHIPS-Subject to such terms and con- 1502 PAGENO="0351" ditions as may be prOvided by regulations pre- scribed by the Secretary or his delegate, subsection (a) shall not apply in the case of a foreign partnership engaged in trade or business within the United States if the Secretary or his delegate determines that the requirements of subsection (a) impose an undue administrative burden and that the collection of the tax imposed by section 871 (a) on the members of such partnership who are nonresident alien individuals will not be jeopardized by the exemptio~' (i) LIAI3ILrrY FOR WITHHELD Thx.-Section 1461 (relating to return and payment of with- held tax) is amended to read as follows: "SEC. 1461. LIABILITY FOR WITHHELD TAX. "Every person required to deduct and with- hold any tax under this chapter is hereby made liable for such tax and is hereby in- demnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this chapter." (j) DECLARATION OF ESTIMATED INCOME TAx BY INDIvIDUALs-Section' 6015 (relating to declaration of estimated income tax by in- dividuals) is amended- (1) by striking out that portion of sub- section (a) which precedes paragraph (1) and inserting in lieu thereof the following: "(a) REQUIREMENT OF DECLARATION-EX- cept as otherwise provided in subsection (I), every individual shall make a declaration of his estimated tax for the taxable year if-"; (2) by redesignating subsection (i) as subsection (j); and (3) by inserting after subsection (h) the following new subsection: `(i) NONRESIDENT ALIEN INDIVIDUALS.- No declaration shall be required to be made under this section by a nonresident alien in- dividual unless- [P. 25322J "(1) withholding under chapter 24 is made applicable to the wages, as defined in sec- tion 3401(a), of such individual, "(2) such individual has income (other than compensation for personal services sub- ject to deduction and withholding under section 1441) which is eftectively connected with the conduct of a trade or business with- in the United States, or "(3) such individual is a resident of Puer- to Rico during the entire taxable year." (k) COLLECTION OF INCOME TAX AT SOURCE ON WAGEs-Subsection (~) of section 3401 (relating to definition of wages for purposes of collection 8! income tax at source) is amended by striking out paragraphs (6) and (7) and inserting in lieu thereof the following: "(6) for such services, performed by a nonresident alien individual, as may be designated by regulations prescribed by the Secretary or his delegate; or". (1) DEFINITIoNS OF FOREIGN ESTATE OR TRUST.- (1) Section 7701(a) (31) (defining foreign estate or trust) is amended by striking out "from sources without the United States" and inserting in lieu thereof ", from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States,". (2) Section 1493 (defining foreign trust for purpose of chapter 5) is repealed. (m) CONFORMING AMENDMENT.-The first sentence of section 932(a) (relating to citi- zeus of possessions of the United States) is amended to read as follows: "Any individ- ual who is a citizen of any possession of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States shall be sub- ject to taxation under this subtitle in the same manner and subject to the same con- ditions as in the case of a nonresident alien individual." (n) EFFECTIVE DATES.- (1) The amendments made by this section (other than the amendments made by sub- sections (h), (i), and (k)) shall apply with respect to taxable years beginning after December 31, 1966. (2) The amendments made by subsection (h) shall apply with respect to payments made in taxable years of recipients begin- ning after December 31, 1966. (3) The amendments made by subsection (i) shall apply with respect to payments occurring after December 31, 1966. (4) The amendments made by subsection (k) shall apply with respect to remuneration paid after December 31, 1966. SEC. 104. FOREIGN CoRPORATIoNs. (a) TAX ON INCOME NOT CONNECTED WITH UNITED STATES BU5INE55.-Section 881 (re- lating to tax on foreign corporations not engaged in business in the United States) is amended to read as follows: "SEC. 881. TAX ON INCOME OF FOREIGN Coa- PORATIONS NOT CONNECTED WITH UNITED STATES BUSINESS. "(a) IMPOSITION OF TAX-There is hereby imposed for each taxable year a tax .ç~f 30 percent of the amount received from sotirces within the United States by a foreign cor- poration as- "(1) interest, dividends, rents, salaHes, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, "(2) gains described In section 631 (b) or (c), "(3) in the case of bonds or other evidences of indebtedness issued after September 28, 1965, amounts which under section 1232 are considered as gains from the sale or exchange of property which is not a capital asset, and "(4) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trade- marks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the pro" ductivity, use, or disposition of the property' or interest sold or exchanged, or from pay- ments which are treated as being so con- tingent under section 871(e). but only to the extent the amount so re- ceived is not effectively connected with the conduct of a trade or business within the United States. "(b) DOUBLING OF TAX.- "For doubling of tax on corporations of certain foreign countries, see section 891." (b) TAX ON INCOME CONNECTED WITH UNIT- ED STATES BUSINESS.- (1) Section 882 (relating to tax on resident foreign corporations) is amended to read as follows: "SEC. 882. TAX ON INCOME OP FOREIGN COR- PORATIONS CONNECTED WITH UNITED STATES BUsINESS. "(a) NORMAL TAX AND SURTAX.- "(1) IMPOSITION OF TAX.-A foreign cor- 1503 PAGENO="0352" poration engaged in ~trade or business within the United States during the taxable year shall be taxable as provided in section 11 or 1201 (a) on its taxable income which is effec- tively connected with the conduct of a trade or bualness within the United States. `(2) DETERMINATION OF TAXABLE INCOME.- In determining taxable income for purposes of paragraph (1), gross income includes only gross income which Is effectively connected with the conduct of a trade or business with- in the United States. `(b) GROSS INcoME.-In the case of a for- eign corporation, gross income includes only- "(1) gross Income which Is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and "(2) gross Income which Is effectively con- nected with the conduct of a trade or busi- ness within the United States. `(c) ALLOWANCE OF DEDUCTIONS AND CREDITS.- "(1) ALLOCATION OF DEDUCTIONS.- "(A) GENERAL RULE-In the case of a for- eign corporation, the deductions shall be al- lowed only for purposes of subsection (a) and (except as provided by subparagraph (B)) only if and to the extent that they are con- nected with Income which is effectively con- nected with the conduct of a trade or busi- ness within the United States; and the proper apportionment and allocation of the deduc- tions for this purpose shall be determined as provided In regulations prescribed by the Secretary or his delegate. "(B) CHARITABLE CONTRIBUTIONS-The de- duction for charitable contributions and gifts provided by section 170 shall be allowed whether or not connected with income which is effectively connected with the conduct of a trade or business within the United States. "(2) DEDUCTIONS AND CREDITS ALLOWED ONLY IS' RETURN FILED-A foreign corporation shall receive the benefit of the deductions and credits allowed to It in this subtitle only by filing or causing to be filed with the Secre- tary or his delegate a true and accurate re- turn, In the manner prescribed in subtitle F, Including therein all the information which the Secretary or his delegate may deem nec- essary for the calculation of such deductions and credits. The preceding sentence shall not apply for purposes of the tax imposed by section 541 (relating to personal holding company tax), and shall not be construed to deny the credit provided by section 32 for tax withheld at source or the credit provided by section 39 for certain uses of gasoline and lubricating oil. "(3) FOREIGN TAX cREDrr.-Except as pro- vided by section 906. foreign corporations shall not be allowed the credit against the tax for taxes of foreign countries and posses- sions of the United States allowed by section 901. "(4) Caoss REFERENCE.- "For rule that certain foreign taxes are not to be taken Into account In determining deduction or credit, see section 906(b) (1). "(d) ELEcTION To TREAT REAL PROPERTY IN- COME AS INCOME CONNECTED WITH UNITED STATES BusINEss.- "(1) IN GENERAL.-A foreign corporation which during the taxable year derives any Income- "(A) from real property located in the United States, or from any interest In such real property, Including (I) gains from the sale or exchange of real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described In section 631 (b) or (c) and "(B) which, but for this subsection, would not be treated as income effectively con- nected with the conduct of a trade or busi- ness within the United States, may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such Income shall be taxable as pro- vided in subsection (a) (1) whether or not such corporation Is engaged In trade or busi- ness within the United States during the tax- able year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary or his delegate with respect to any taxable year. "(2) ELECIION AFIEE REVOCATION, ETC.- Paragraphs (2) and (3) of section 871(d) shall apply In respect of elections under this subsection In the same manner and to the same extent as they apply In respect of elec- tions under sectIon 871(d). "(e) INTEREST ON UNITED STATES OBLIGA- TIONS RECEIVED BY BANKS ORGANIZED IN PosszssloNs.-In the case of a corporation created or organized in, or under the law of, a possession of `the United States which Is carrying on the banking business in a pos- session of the United States, interest on obligations of the United States shall- "(1) for purposes of this subpart, be treated as income which Is effectively con- nected with the conduct of a trade or busi- ness within the United States, and "(2) shall be taxable as provided in sub- section (a) (1) whether or not such corpora- tion is engaged in trade or business within the United States during the taxable year. `(f) RETURNS OF TAX BY AGENT-If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return re- quired under section 6012 shall be made by the agent." (2) (A) Subsection (e) of section 11 (re- lating to exceptions from tax on corpora- tions) is amended by Inserting "or" at the end of paragraph (2), by striking out ", or" at the end of paragraph (3) and inserting a period in lieu thereof, and by striking out paragraph (4). (B) Section 11 (relating to tax on corpora- tions) is amended by adding at the end there- of the following new subsection: `(f) FOREIGN CORPORATIONS-In the case of a foreign corporation, the tax imposed by subsection (a) shall apply only as provided by section 882." (3) The table of sections for subpart B of part II of subchapter N of chapter 1 is amended by striking out the items relating to sections 861 and 882 and inserting in lieu thereof the following: "Sec. 881. Tax on income of foreign corpora- tions not connected with United States business, [P. 25323) "Sec. 882. Tax on income of foreign corpora- tions connected with United States busi- ness." (c) WITHHOLDING OF TAX ON FOREIGN Coa- p0RATI0NS.-Section 1442 (relatIng to with- 1504 PAGENO="0353" holding of tax on foreign corporations) is amended to read as follows: `SEC. 1442. WITHHOLDING OF TAX ON FOREIGN CORPORATIONS. "(a) GENERAL RULE-In the case of for- eign corporations subject to taxation under this subtitle, there shall be deducted and withheld at the source in the same manner and on the same items of income as is pro- vided in section 1441 or section 1451 a tax equal to 30 percent thereo; except that, in the case of interest described in section 1451 (relating to tax-free covenant bonds), the deduction and withholding shall be at the rate specified therein. For purposes of the preceding sentence, the references in section 1441(b) to sections 871(a) (1) (C) and (D) shall be treated as referring to sections 881 (a) (3) and (4), the reference in section 1441 (c) (1) to section 871(b) (1) shall be treated as referring to section 842 or section 882(a), as the case may be, and the reference in sec- tion 1441(c) (5) to section 871(a) (1) (D) shall be treated as referring to section 881 (a) (4). "(b) EXEMPTION.-SUbjCCt to such terms and conditions as may be provided by regu- lations prescribed by the Secretary or his delegate, subsection (a) shall not apply in the case of a foreign corporation engaged in trade or business within the United States if the Secretary or his delegate determines that the requirements of subsection (a) impose an undue administrative burden and that the collection of the tax imposed by section 881 on such corporation will not be jeopard- ized by the exemption." (d) DIVIDENDS RECEIVED FRoss CERTAIN FOREIGN CORpoRATIoNS-Subsection (a) of section 245 (relating to the allowance of a deduction In respect of dividends received from a foreign corporation) is amended- (1) by striking out "and has derived 50 percent or more of its gross income from sources within the United States," in that portion of subsection (a) which precedes paragraph (1) and by inserting in lieu thereof "and if 50 percent or more of the gross income of such corporation from all sOurces for such period is effectively con- nected with the conduct of a trade or busi- ness within the United States,"; (2) by striking out "from sources within the United States" in paragraph (1) and inserting in lieu thereof "which is effectively connected with the conduct of a trade or business within the United States,"; (3) by striking out "from sources within the United States" in paragraph (2) and In- serting in lieu thereof ", which is effectively connected with the conduct of a trade or business within the United States,"; and (4) by adding after paragraph (2) the following new sentence: "For purposes of this subsection, the gross income of the foreign corporation for any period before the first taxable year beginning after December 31, 1966, which Is effectively connected with the conduct of a trade or business within the United *States is an amount equal to the gross Income for such period from sources within the United States." (e) DIvIoENos RECEIVED FROM CERTAIN WHOLLY-OWNED FOREIGN SuBsIDIARIEs.- (1) Section 245 (relating to dividends re- ceived from certain foreign corporations) is amended by redesignating subsection (b) as (c), and by Inserting after subsection (a) the following new subsection: * "(b) CERTAIN DIVIDENDS RECEIVED FROM WHOLLY-OWNED FOREIGN SUBSIDIARIES.- "(1) IN GENERAL-In the case of dividends described in paragraph (2) received from a foreign corporation by a domestic corpora- tion which, for Its taxable year In which such dividends are received, owns (directly or in- directly) all of the outstanding stock of such foreign corporation, there shall be allowed as a deduction (in lieu of the deduction pro- ~ided by subsection (a)) an amount equal to 100 percent of such dividends. "(2) ELIGIBLE DIvIDEN05.-Paragraph (1) shall apply only to dividends which are, paid out of the earnings and profits of' a foreign corporation for a taxable year during which- "(A) all of its outstanding stock is owned (directly or indirectly) by the domestic cor- poration to which such dividends are paid; and "(B) all of its gross income from all sources Is effectively connected with the con- duct of a trade or business within the United States. "(3) ExcEPTIoN-Paragraph (1) shall not apply to any dividends if an election under section 1562 is effective for either- "(A) the taxable year of the domestic cor- poration in which such dividends are re- ceived, or "(B) the taxable year of the foreign cor- poration out of the earnings and profits of which such dividends are paid." (2) Subsection (a) of such section 245 is amended by adding at the end thereof (after the sentence added by subsection (d) (4)) the following new sentence: "For purposes of paragraph (2), there shall not be taken into account any taxable year within such unin- terrupted period if, with respect to dividends paid out of the earnings and profits of such year, the deduction provided by subsection (b) would be allowable." (3) Subsection (c) of such section 245 (as redesignated by paragraph (1)) is amended by striking out "subsection (a)" and insert- ing in lieu thereof "subsections (a) and (b) ". (f) DISTRIBUTIONS OF CERTAIN FOREIGN C0R0RATI0NS.-Section 301(b) (1) (C) (re- lating to certain corporate distributees of foreign corporations) Is amended- (1) by striking out "gross Income from sources within the United States" in clause (I) and inserting in lieu thereof "gross in- come which Is effectively connected with the conduct of a trade or business within the United States"; (2) by striking out "gross income from sources without the United States" In clause (11) and inserting in lieu thereof "gross in- come which Is not effectively connected with the conduct of a trade or business within the United States"; and (3) by adding at the end thereof thefol- lowing new sentences: "For purposes of clause (I), the gross income of a foreign cor- poration for any period before its first tax- able year beginning after December 31, 1966, which is effectively connected with the con- duct of a trade or business within the United States is an amount equal to the gross in- come for such period from sources within the United States. For purposes of clause (II), the gross income of a foreign corpora- tion for any period before its first taxable year beginning after December 31, 1966, which is not effectively connected with the conduct of a trade or business within the United States is an amount equal to the gross Income for such period from sources without the United States." 1505 7 1-297 0-67-pt. 2-23 PAGENO="0354" (g) UNRELATED BuSINEss TAXABLE IN- COME-The last sentence of section 512(a) (relating to definition) is amended to read as follows: "In the case of an organization described in section 511 whIch is a foreign organization, the unrelated business taxable income shall be its unrelated business tax- able income which is effectively connected with the conduct of a trade or business within the United States," (h) CORPORATIONS SUBJECT TO PERSONAL HOLDING COMPANY TAX.- (1) Paragraph (7) of section 542(c) (re- lating to corporations not subject to per- sonal holding company tax) is amended to read as follows: "(7) a foreign corporation (other than a corporation which has Income to which sec- tion 543(a) (7) applIes for the taxable year), If all of Its stock outstardlng during the last half of the taxable year Is owned by non- resident alien individuals, whether directly or Indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations; ". (2) Section 543(b) (1) (relating to defini- tion of ordinary gross Income) is amended- (A) by striking out "and" at the end of subparagraph (A), (B) by striking out the period at the end of subparagraph (B) and Inserting in lieu thereof ", and", and (C) by inserting after subparagraph (B) the following new subparagraph: "(C) in the case of a foreign corporation all of the outstanding stock of which during the last half of the taxable year Is owne~t by nonresident alien Individuals (whether directly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations), all Items of income which would, but for this subparagraph, constitute personal holding company income under any paragraph of subsection (a) other than paragraph (7) thereof." (3) SectIon 545 (relating to definition of undistributed personal holding company in- come) Is amended- (A) by striking out subsection (a) and in- serting in lieu thereof the following: "(a) Drs'INITIoN.-For purposes of this part, the term `undistributed personal hold- ing company income' means the taxable in- come of a personal holding company adjustul in the manner provided in subsections (b), (c), and (d), minus the dividends paid d~- duction as defined in section 561. In the caso of a personal holding company which is a foreign corporation, not more than 10 percent iii value of the outstanding stock of which Is owned (within the meaning of section 958(a)) during the last half of the taxable year by United States persons, the term `un- distributed personal holding company in- come' means the amount determined by multiplying the undistributed personal hold- ing company income (determined without re- gard to this sentence) by the percentage in value of Its outstanding stock which Is the greatest percentage In value of its outstand- ing stock so owned by United States persons on any one day during such period."; and (B) by adding at the end thereof the fol- lowing new subsection: "(d) CERTAIN FOREIGN CORPORATIONS.-II1 the case of a foreign corporation all of the outstanding stock of which during the last half of the taxable year is owned by non- resident alien Individuals (whether directly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations), the taxable income for pur- poses of subsection (a) shall be the income which constitutes personal holding company income under section 543(a) (7), reduced by the deductions attributable to such income, and adjusted, with respect to such income, in the manner provided in subsection (b) (4) (A) Subchapter B of chapter 68 (relat- ing to assessable penalties) is amended by adding at the end thereof the following new section: "SEC. 6683. FAILURE OF FOREIGN CORPORATION To FILE RETURN OF PERSONAL HOLDING COMPANY TAX. "Any foreign corporation which- "(1) is a personal holding company for any taxable year, and "(2) fails to file or to cause to be filed with the Secretary or his delegate a true and [P. 25324) accurate return of the tax imposed by sec- tion 541, shall; In addition to other penalties provided by law, pay a penalty equal to 10 percent of the taxes imposed by chapter 1 (Including the tax imposed by section 541) on such for- eign corporation for such taxable year." (B) The table of sections for such sub- chapter B Is amended by adding at the end thereof the following new item: "Sec. 6683. Failure of foreign corporation to file return of personal holding company tax." (i) AMENDMENTS WITH RESPECT TO FOREIGN CORPORATIONS CARRYING ON INSURANCE BUSI- NESS IN UNITED STATES.- (1) Section 842 (relating to computation of gross income) is amended to read as follows: "SEc. 842. FOREIGN CORPORATIONS CARRYING ON INSURANCE BUSINESS. "If a foreign corporation carrying on an Insurance business within the United States would qualify under part I, II, or III of this subchapter for the taxable year If (without regard to income not effectively connected with the conduct of any trade or business within the United States) It were a domestic corporation, such corporation shall be tax- able under such part on Its Income effectively connected with its conduct of any trade or business within the United States. With re- spect to the remainder of Its income, which Is from sources within the United States, such a foreign corporation shall be taxable as provided in section 881." (2) The table of sections for part IV of subchapter L of chapter 1 Is amended by striking out the item relating to section 842 and Inserting In lieu thereof the following: "Sec. 842. ForeIgn corporations carrying on insurance business." (3) Section 819 (relating to foreign life In- surance companies) as amended- (A) by striking out subsections (a) and (d) and by redesignating subsections (b) and (c) as subsections (a) and (b), (B) by striking out "In the case of any company described In subsection (a) ," In subsection (a) (1) (as redesignated by sub- paragraph (A)) and inserting In lieu thereof "In the case of any foreign corporation tax- able under this part,", (C) by striking out "subsection (c)" in the last sentence of subsection (a) (2) (as re- designated by subparagraph (A)) and Insert- jng In lieu thereof "subsection (b) 1506 PAGENO="0355" (D) by adding at the end of subsection (a) (as redesignated by subparagraph (A)) the following new paragraph: "(3) REDUCTION OF SECTION 881 TAX-In the case of any foreign corporation taxable under this part, there shall be determined- "(A) the amount which would be subject to tax under section 881 if the amount tax- able under such section were determined without regard to sections 103 and 894, and "(B) the amount of the reduction pro.. vided by paragraph (1). The tax under section 881 (determined with- out regard to this paragraph) shall be re- duced (but not below zero) by an amount which is the same proportion of such tax as the amount referred to in subparagraph (B) Is of the amount referred to in subparagraph (A); but such reduction in tax shall not ex- ceed the increase in tax under this part by reason of the reduction provided by para- graph (1).", (E) by striking out "for purposes of sub- section (a)" each place it appears in sub- section (b) (as redesignated by subparagraph (A)) and inserting in lieu thereof "with re- spect to a foreign corporation", (F) by striking out "foreign life insurance company" each place it appears in such sub- section (b) and inserting in lieu thereof "foreign corporation", (G) by striking out "subsection (b) (2) (A)" each place it appears In such subsection (b) and inserting in lieu tháeof "subsection (a)(2)(A)", (H) by striking out "subsection (b) (2) (B)" in paragraph (2) (B) (ii) of such subsec- tion (b) and inserting in lieu thereof "sub- section (a) (2) (B) ", and (I) by adding at the end thereof the f 01- lowing new subsection: `(c) CRoss REFERENCE.- "For taxation of foreign corporations car- rying on life insurance business within the United States, see section 842." (4) SectIon 821 (relating to tax on mutual insurance companies to which part II ap- plies) is amended- (A) by striking out subsection (e) and by redesignating subsections (f) and (g) as sub- sections (e) and (f), and (B) by adding at the end of subsection (f) (as redesignated by subparagraph (A)) the following: "(3) For taxation of foreign corporations carrying on an insurance business within the United States, see section 842." (5) Section 822 (relating to determina- tion of taxable investment income) is amended by striking out subsection (a) and by redesignating subsection (f) as subsec- tion (e). (6) Section 831 (relating to tax on certain other insurance companies) is ameded- (A) by striking out subsection (b) and by redesignating subsection (c) as subsection (b), and (B) by amending subsection (d) to read as follows: `(c) CRoss REFERENCES.- "(1) For alternative tax in case of capital gains, see section 1201(a). "(2) For taxation of foreign corporations carrying on an insurance business within the United States, see section 842." (7) Section 832 (relating to insurance com- pany taxable income) is amended by strik- ing out subsection (d) and by redesignating subsection (e) as subsection (d), (8) The second sentence of section 841 (relating to credit for foreign taxes) is amended by striking out "sentence," and inserting in lieu thereof "sentence (and for purposes of applying section 906 with respect to a foreign corporation subject to tax under this subchapter) ,". (j) SuBPART F INcoME-Section 952(b) (relating to exclusion of United States in- come) is amended to read as follows: "(b) EXCLUSION OF UNrrm STATES IN- COME.- In the case of a controlled foreign corporation, subpart F income doss not include any item of income from sources within the United States which is effectively connected with the conduct by such cor- poration of a trade or business within the United States unless such item is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States." (k) GAIN FROM CERTAIN SALES OR Ex- CHANGES OF STocK IN CERTAIN FOREIGN COR- PoRATIoNS-Paragraph (4) of section 1248 (d) (relating to exclusions from earnings and profits) Is amended to read as follows: "(4) UNITED STATES INCOME-Any item includible in gross income of the foreign corporation under this chapter- "(A) for any taxable year beginning be- fore January 1, 1967, as income derived from sources within the United States of a for- eign corporation engaged In trade or busi- ness within the United States, or "(B) for any taxable year beginning after December 31, 1966, as income effectively con- nected with the conduct by such corporation of a trade or business within the United States This paragraph shall not apply with respect to any item which is exempt from taxation (or is subject to a reduced rate of tax) pur- suant to a treaty obligation of the United States." (1) DECLARATION OF ESTIMATED INCOME TAX BY C0RP0RATI0NS.-Section 6016 (relating to declarations of estimated income tax by cor- porations) is amended by redesignating sub- section (f) as subsection (g) and by insert- ing after subsection (e) the following new subsection: "(f) CERTAIN FOREIGN CORPORATI0NS.-FOr purposes of this section and section 6655, in the case of a foreign corporation subject to taxation under section 11 or 1201(a), or un- der subchapter L of chapter 1, the tax im- posed by section 881 shall be treated as a tax imposed by section 1L" (m) TECHNICAL AMENDMENTS.- (1) SectIon 884 is amended to read as follows: "SEC. 884. CRoss REFERENCES. "(1) For special provisions relating to un- related business incomq of foreign educa- tional, charitable, and certain other exempt organizations, see section 512(a), "(2) For special provisions relating to for- eign corporations carrying on an insurance business within the United States, see sec- tion 842. "(3) For rules applicable in determining whether any foreign corporation is engaged in trade or business within the United States, see section 864(b). "(4) For adjustment of tax in case of cor- porations of certain foreign countries, see section 896. "(5) For allowance of credit against the tax in case of a foreign corporation having income effectively connected with the con- duct of a trade or business within the United States, see section 906. "(6) For withholding at source of tax on 1507 PAGENO="0356" income of foreign corporations, see section 1442." (2) Section 953(b) (3) (F) Is amended by striking out `832(b) (5)" and inserting in lieu thereof "832(c) (5)". (3) Section 1249(a) is amended by strik- ing out `Except as provided in subsection (c), gain" and inserting in lieu thereof "Gain". (n) EFFECTIVE DATEs-The amendments made by this section (other than subsection (k)) shall apply with respect to taxable years beginning after December 31, 1966. The amendment made by subsection (k) shall apply with respect to sales or exchanges occurring after December 31, 1966. SEC. 105. SPECIAL TAX PROXISIONS (a) INCOME AFFECTED BY TREATY-Section 894 (relating to income exempt under treaties) is amended to read as follows: `SEC. 894. INCOME AFFECTED BY TREATY. "(a) INCOME EXEMPT UNDER TREATY-In- come of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle. (b) PERMANENT ESTABLISHMENT IN UNITED STATES.-FOr purposes of applying any ex- emption from, or reduction of, any tax pro- vided by any treaty to which the United States is a party with respect to income which is not effectively connected wiTh the conduct of a trade or business within the United States, a nonresident alien individual or a foreign corporation shall be deemed not to have a permanent establishment in the United States at any time during the tax- able year. This subsection shall not apply in respect of the tax computed under sec- tion 877(b)." (b) ADJUSTMENT OF TAX BECAUSE OF Bua- DENSOME OR DISCRIMINATORY FOREIGN TAxES-Subpart C of part II of subchapter N of chapter 1 (relating to miscellaneous provisions applicable to nonresident aliens and foreign. corporations) is amended by ~P. 25325) adding at the end thereof the following new section: "SEC. 896. ADJUSTMENT OF TAX ON NATIONALS, RESIDENTS, AND CORPORATIONS OF CERTAIN FOREIGN COUNTRIES. "(a) IMPosrrxoN OF MORE BURDENSOME TAXES BY FOREIGN C0UNTRY.-Whenever the President finds that- "(1) under the laws of any foreign coun- try,. considering the tax system of such for- eign country, citizens of the United States not residents of such foreign country or domestic corporations are being subjected to more burdensome taxes, on any item of in- come received by such citizens or corpora- tions from sources within such foreign coun- try, than taxes imposed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corporations of such foreign country, "(2) such foreign country, when requested by the United States to do so, has not acted to revise or reduce such taxes so that they are no more burdensome than taxes imposed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corporations of such foreign country, and "(3) it is in the public interest to apply pre-1967. tax provisions in accordance with the~provisions of this subsection to residents or corporations of such foreign country, the President shall proclaim that the tax on such similar income derived from sources within the United States by residents or corporations of such foreign country shall, for taxable years beginning after such pro- clamation, be determined under this subtitle without regard to amendments made to this subchapter and chapter 3 on or after the date of enactment of this section. `(b) IMPOSITION OF DISCRIMINATORY TAXES BY FOREIGN C0UIrrRY.-Whenever the Presi- dent finds that- "(1) under the laws of any foreign coun- try, citizens of the United States or domestic corporations (or any class of such citizens or corporations) are, with respect to any item of income, being subjected to a higher effec- tive rate of tax than are nationals, residents, or corporations of such foreign country (or a similar class of such nationals, residents, or corporations) under similar circumstances; "(2) such foreign country, when re- quested by the United States to do so, has not acted to eliminate such higher effective rats of tax; and "(3) it is in the public interest to adjust, in accordance with the provisions of this subsection, the effective rate of tax imposed by this subtitle on similar income of nationals, residents, or corporations of such foreign country (or such similar class of such flationals, residents, or corporations), the President shall proclaim that the tax on similar income of nationals, residents, or corporations of such foreign country (or such similar class of such nationals, residents, or corporations) shall, for taxable years begin- fling after such proclamation, be adjusted so as to cause the effective rate of tax imposed by this subtitle on such similar income to be substantially equal to the effective rate of tax imposed by such foreign country on such item of income of citizens of the United States or domestic corporations (or such class of citizens or corporations). In imple- menting a proclamation made under this subsection, the effective rate of tax imposed by this subtitle on an item of income may be adjusted by the disallowance, in whole or in part, of any deduction, credit, or exemption which would otherwise be allowed with re- spect to that item of income or by increasing the rate of tax otherwise applicable to that item of income. `(c) ALLEVIATION OF MORE BURDENSOME OR DISCRIMINATORY TAxEs-Whenever the Pres- ident finds that- "(1) the laws of any foreign country with respect to which the President has made a proclamation under subsection (a) have been modified so that citizens of the United States not residents of such foreign country or domestic corporations are no longer subject to more burdensome taxes on the item of in- come derived by such citizens or corporations from sources within such foreign country, or "(2) the laws of any foreign country with respect to which the President has made a proclamation under subsection (b) have been modified so that citizens of the United States or domestic corporations (or any class of such citizens or corporations) are no longer subject to a higher effective rate of tax on the item of income. he shall proclaim that the tax imposed by this subtitle on the similar income of na- tionals, residents, or corporations of such foreign country shall, for any taxable year 1508 PAGENO="0357" beginning after such proclamation, be de- termined under this subtitle without regard to such: subsection. "(d) N0TWIcATI0N os' CONGRESS RE- QUIRED-NO proclamation shall be issued by the President pursuant to this section unless, at least thirty days prior to such proclama- tion, he has notified the Senate and the House of Representatives of his intention to issue such proclamation. "(e) IMPLEMENTATION BY REGULATIONS.- The Secretary or his delegate shall prescribe such regulations as he deems necessary or appropriate to implement this section." (c) CLERICAL AMENDMENTS-The table of sections for subpart C of part II of subchap- ter N of chapter 1 is amended- (1) by striking out the item relating to section 894 and Inserting in lieu thereof "Sec. 894. Income affected by treaty."; (2) by adding at the end of such table the following: "Sec. 896. Adjustment of tax on nationals, residents, and corporations of certain foreign countries." (d) EFFECTIVE DATE-The amendments made by this section (other than subsections (e) and (f) shall apply with respect to taxa- ble years beginning after December 31, 1966. (e) ELECTIONS BY NONRESIDENT UNITED STATES CITIZENS WHO ARE SUBJECT TO FOR- EIGN COMMUNITY PROPERTY LAWS.- (1) Part III of subchapter N of chapter 1 (relating to income from sources without the United States) is amended by adding at the end thereof the following new subpart: "Subpart H-Income of Certain Nonresident United States Citizens Subject to Foreign Community Property Laws "Sec. 981. Elections as to treatment of in- come subject to foreign corn- Inunity property laws. "(a) GENERAL RULE-In the case of any taxable year beginning after December 31, 1966, if- "(1) an Individual is (A) a citizen of the United States, (B) fi bona fide resident of a foreign country or countries during the en- tire taxable year, and (C) married at the close of the taxable year to a spouse who is a nonresident alien during the entire tax- able year, and "(2) such Individual and his spouse elect to have subsection (b) apply to their com- munity income under foreign community property laws, then subsection (b) shall apply to such In- come of such Individual and such spouse for the taxable year and for all subsequent taxable years for which the requirements of paragraph (1) are met, unless the Secre- tary or his delegate consents to a termination of the election. "(b) TREATMENT OF COMMUNITY INCOME.- For any taxable year to whIch an election made under subsection (a) applies, the com- munity income under foreign community property laws of the husband and wife mak- ing the election shall be treated as follows: "(1) Earned income (within the meaning of the first sentence of section 911 (b)), other than trade or business income and a part- ner's distributive share of partnership in- come, shall be treated as the income of the spouse who rendered the personal services. "(2) Trade or business income, and a partner's distributive share of partnership income, shall be treated as provided in sec- tion 1402(a) (5). "(3) Community income not described in paragraph (1) or (2) which is derived from the separate property (as determined under the applicable foreign community property law) of one spouse shall be treated as the income of such spouse. "(4) All other such community income shall be treated as provided In the applicable foreign community property law. "(c) ELECTION FOR PRE-1967 YEARS.- "(1) ELECTJON.-If an individual meets the requirements of subsections (a) (1) (A) and (C) for any taxable year beginning before January 1, 1967, and if such individual and the spouse referred to in subsection (a) (1) (C) elect under this subsection, then para- graph (2) of this subsection shall apply to their community Income under foreign com- munity property laws for all open taxable years beginning before January 1, 1967 (whether under this chapter, the correspond- ing provisions of the Internal Revenue Code of 1939, or the corresponding provisions of prior revenue laws), for which the require- ments of subsection (a) (1) (A) and (C) are met. "(2) EFFECT OF ELECTION-For any taxable year to which an election made under this subsection applies, the community income under foreign community property laws of the husband and wife making the election shall be treated as provided by subsection (b), except that the other community in- come described in paragraph (4) of subsec- tion (b) shall be treated as the income of the spouse who, for such taxable year, had gross income under paragraphs (1), (2), and (3) of subsection (b), plus separate gross in- come, greater than that of the other spouse. "(d) TIlIE roa MAKING ELECTIONS; PERIOD OF LIMITATIONS; ETC.- "(1) TIME-An election under subsection (a) or (c) for a taxable year may be made at any time while such year is still open, and shall be made In such mnner as the Sec- retary or his delegate shall by regulations prescribe. "(2) EXTENSION OF PERIOD FOR ASSESSING DEFICIENCIES AND MAKING REFUNDS-If any taxable year to which an election under sub- section (a) or (c) applies is open at the time such election is made, the period for assess- ing a deficiency against, and the period for filing claim for credit or refund of any over- payment by, the husband and wife for such taxable year, to the extent such deficiency or overpayment Is attributable to such an elec- tion, shall not expire before 1 year after the date of such election. "(3) ALIEN SPOUSE NEED NOT JOIN IN SUB- SECTION (C) ELECTION IN CERTAIN CASES-If the Secretary or his delegate determines- "(A) that an election under subsection (c) would not affect the liability for Federal in- come tax of the spouse referred to in sub- section (a) (1) (C) for any taxable year, or "(B) that the effect on such liability for tax cannot be ascertained and that to deny the election to the citizens of the United States would be Inequitable and cause un- due hardship, such spouse shall not be required to join In such election, and paragraph (2) of this sub- section shall not apply with respect to such spouse. "(4) INTEREST.-TO the extent that any overpayment or deficiency for a taxable year [P. 25326] is attributable to an election made under this section, no Interest shall be allowed or paid for any perlo~i before the day which is 1 year after the date of such election. 1509 PAGENO="0358" "(e) DEFINITIONS AND SPECIAL RULES-For purposes of this section- "(1) DEnucTxoNs.-Deductlons shall be treated in a manner consistent with the man- ner provided by this section for the income to which they relate. "(2) OPEN YEARS-A taxable year of a citi- zen of the United States and his spouse shall be treated as `open' if the period for asses- sing a deficiency against such citizen for such year has not expired before ~the date of the election under subsection (a) or (c), as the case may be. "(3) ELECTIONS IN CASE OF DECEDENT5.-If a husband or wife is deceased his election under this section may be made by his execu- tor, administrator, or other person charged with his property. "(4) DEATH OF SPOUSE DURING TAXABLE YEAR.-In applying subsection (a) (1) (C), and in determining under subsection (C) (2) which spouse has the greater income for a taxable year, If a husband or wife dies the taxable year of the surviving spouse shall be treated as ending on the date of such death." (2) The table of subparts for such part III is amended by adding at the end thereof the following: "Subpart H. Income of certain nonresident United States citizens subject to foreign community property laws." (3) SectIon 911(d) (relating to earned in- come from sources without the United States) is amended- (A) by striking out "For administrative" and Inserting in lieu thereof the following: "(1) For administrative"; and (B) by adding at the end thereof the fol- lowing: (2) For elections as to treatment of In- come subject to foreign community property laws, see section 981." (f) PRESUMPTIVE DATE OF PAYMENT FOR TAX WITHHELD UNDER CHAPTER 3.- (1) Section 6513(b) (relating to time tax is considered paid in the case of prepaid in- come tax) is amended to read as follows: `(b) PREPAID INCOME TAx.-For purposes of section 6511 or 6512- "(1) Any tax actually deducted and with- held at the source during any calendar year under chapter 24 shall, in respect of the re- cipient of the Income, be deemed to have been paid by him on the 15th day of the fourth month following the close of his taxable year with respect to which such tax is allowable as a credit under section 31. "(2) Any amount paid as estimated in- come tax for any taxable year shall be deemed to have been paid on the last day prescribed for filing the return under section 6012 for such taxable year (determined without regard to any extension of time for filing such return). "(3) Any tax withheld at the source under chapter 3 shall, in respect of the recelpient of the Income, be deemed to have been paid by such recelpient on the last day pre- scribed for filing the return under section 6012 for the taxable year (determined with- out regard to any extension of time for filing) with respect to Which such tax is al- lowable as a credit under section 1452. For this purpose, any exemption granted under st~ction 6012 from the requirement of filing a return shall be disregarded." (2) Section 8513(c) (relating to return and payment of Social Security taxes and Income tax withholding) is amended- (A) by striking out "chapter 21 or 24" and inserting in lieu thereof "chapter 3, 21, or 24"; and (B) by striking out "remuneration" in pi"agraph (2) and inserting in lieu thereof "remuneration or other amount". (3) Section 6501(b) (relating to time re- turns deemed filed). Is amended- (A) by striking out "chapter 21 or 24" in paragraphs (1) and (2) and insertingin lieu thereof "chapter 3, 21, or 24"; and (B) by inserting after "taxes" in the heed- ing of paragraph (2) "and tax imposed by chapter 3". (4) The amendments made by this sub- section shall take effect on the date of the enactment of this Act. SEc. 106. FOREIGN TAX CREDIT. (a) ALLOWANCE OF CREDIT TO CERTAIN NON- RESIDENT ALIENS AND FOREIGN CORPORATIONS.- (1) Subpart A of part flI of subchapter N of chapter 1 (relating to foreign tax credit) is amended by adding at the end thereof the following new section: "SEc. 906. NONRESIDENT ALIEN INDIVIDUALS AND FOREIGN CORPORATIONS. "(a) ALLOWANCE OF CREDIT-A nonresi- dent alien Individual or a foreign corporation engaged in trade or business within the United States during the taxable year shall be allowed a credit under section 901 for the amount of any Income, war profits, and excess profits taxes paid or accrued during the tax- able year (or deemed, under section 902, paid or accrued during the taxable year) to any foreign country o'r possession of the United States with respect to income effectively con- nected with the conduct of a trade or busi- ness within the United States. "(b) SPECIAL RULES.- "(1) For purposes of subsection (a) and for purposes of determining the deductions allowable under sections 873 (a) and 882(c), in determining the amount of any tax paid or accrued to any foreign country or posses- sion there shall not be taken into account any amount of tax to the extent the tax so paid or accrued is imposed with respect to income from sources within the United States which would not be taxed by such foreign country or possession but for the fact that- "(A) in the case of a nonresIdent alien individual, such individual is a citizen or resident of such foreign country or posses- sion, or "(B) in the case of a foreign corporation, such corporation was created or organized under the law of such foreign country or possession or is domiciled for tax purposes in such country or possession. "(2) For purposes of subsection (a), in applying section 904 the taxpayer's taxable income shall be treated as consisting only of the taxable income effectively connected with the taxpayer's conduct of a trade or business within the United States. "(3) The credit allowed pursuart to sub- section (a) shall not be allowed against any tax imposed by section 871 (a) (relating to income of nonresident alien individuals not connected with United States business) or 881 (relating to income of foreign corpora- tions not connected with United States busi- ness). "(4) For purposes of sections 902(a) and 78, a foreign corporation choosing the bene- fits of this subpart which receives dividends shall, with respect to such dividends, be treated as a domestic corporation." (2) The table of sections for such subpart A is amended by adding at the end thereof the following: 1510 PAGENO="0359" "Sec. 906. Nonresident alien Individuals and foreign corporations." (2) SectIon 874(c) is amended by striking out `(c) FOREIGN TAX CREDIT NOT AlLowED-A nonresident" and inserting in lieu thereof the following: "(c) FOREIGN TAX CREDrr.-Except as pro- vided in section 906, a nonresident". (4) SubsectIon (b) of section 901 (relating to amount allowed) is amended by redesig- nating paragraph (4) as paragraph (5), and by inserting after paragraph (3) the follow- ing new paragraph: "(4) NONRESIDENT ALIEN INDIVIDUAlS AND FOREIGN coEpoRATIoNS.-In the case of any nonresident alien individual not described in section 876 and in the case of any foreign corporation, the amount determined pur- suant to section 906; and", (5) Paragraph (5) (as redesignated) of section 901(b) is amended by striking out "or (3) ," and insei'ting In lieu thereof "(3), or (4),". (6) The amendments made by this sub- section shall apply with respect to taxable years beginning after December 31, 1966. In applying section 904 of the Internal Revenue Code of 1954 with respect to section 906 of such Code, no amount may be carried from or to any taxable year beginning before Jan- uary 1, 1967, and no such year shall be taken into account. (b) ALIEN RESIDENTS OF THE UNITED STATES on PUERTO RIco.- (1) Paragraph (3) of section 901(b) (re- lating to amount of foreign tax credit al- lowed in case of alien resident of the United States or Puerto Rico) is amended by strik- ing out ", if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the United States resid- ing in such country". (2) Section 901 is amended by redesignat- ing subsections (C) and (d) as subsections (d) and (e), and by inserting after subsec- tion (b) the following new subsection: "(c) SIMILAR CREDIT REQUIRED FOR CERTAIN ALIEN REsIDENTs-Whenever the President finds that- "(1) a foreign country, in imposing in- come, war profits, and excess profits taxes, does not allow to citizens of the United States residing in such foreign country a credit for any such taxes paid or accrued to the United States or any foreign country, as the case may be, similar to the credit al- lowed under subsection (b) (3), "(2) such foreign country, when requested by the United States to do so, has not acted to provide such a similar credit to citizens of the United States residing in such foreign country, and "(3) it is in the public interest to allow the credit under subsection (b) (3) to citi- zens or subjects of such foreign country only if it allows such a similar credit to citizens of the United States residing in such foreign country, the President shall proclaim that, for taxable years beginning while the proclamation re- mains in effect, the credit under subsection (b) (3) shall be allowed to citizens or sub- jects of such foreign country only if such foreign country, in imposing income, war profits, and excess profits taxes, allows to citizens of the United States residing in such foreign country such a similar credit." (3) Section 2014 (relating to credit for foreign death taxes) is aniended by striking out the second sentence of subsection (a), and by adding at the end of such section the following new subsection: "(h) SIMILAR CREDIT REQUIRED FOR CERTAIN ALIEN RE5IDEN'rs.-Whenever the President finds that- "(1) a foreign country, in imposing estate, inheritance, legacy, or succession taxes, does not allow to citizens of the United States resident in such foreign country at the tints of death a credit similar to the credit allowed under subsection (a), "(2) such foreign country, when requested by the United States to do so has not acted to provide such a similar credit in the case of citizens of the United States resident In such foreign country at the time of death, and "(3) it is in the public interest to allow the credit under subsection (a) in the case of [P. 25327J citizens or subjects of such foreign country only if it allows such a similar credit in the case of citizens of the United States resident in such foreign country at the time of death, the President shall proclaim that, In the case of citizens or subjects of such foreign coun- try dying while the proclamation remains in effect, the credit under subsection (a) shall be allowed only if such foreign country al- lows such a similar credit in the case of citizens of the United States resident in such foreign country at the time of death." (4) The amendments made by this sub- section (other than paragraph (3)) shall ap- ply with respect to taxable years beginning after December 31, 1966. The amendment made by paragraph (3) shall apply with respect to estates of decedents dying after the date of the enactment of this Act. (c) FOREIGN TAx CREDIT IN REsPECT OF INTEREST REcEIvED FaoM FOREIGN SUBSIDI- ARIES,- (1) Section 904(f) (2) (relating to appli- cation of limitation3 on foreign tax credit in case of certain interest income) is amended- (A) by striking out subparagraph (C) and inserting in lieu thereof the following: "(C) received from a corporation in which the taxpayer (or one or more includible cor- porations in an affiliated group, as defined in section 1504, of which the taxpayer is a member) owns, directly or indirectly, at least 10 percent of the voting stock,". (B) by adding at the end thereof the fol- lowing new sentence~ "For purposes of subparagraph (C), stock owned, directly or indirectly, by or for a for- eign corporation shall be considered as being proportionately owned by Its shareholders." (2) The amendments made by paragraph (1) shall apply to interest received after De- cember 31, 1965, in taxable years ending after such date. SEc. 107. AMENDMENT To PRESERVE EXISTING LAw ON DEDUCTIONS Urmm Szc- TION 931. (a) DEDUCrI0N5.-Subsection (d) of sec- tion 931 (relating to deductions) is amended to read as follows: "(d) DEDUC'rloNs.- "(1) GENERAL RULE-Except as otherwise provided in this subsection and subsection (e), in the case of persons entitled to the benefits of this section the deductions shall be allowed only if and to the extent that they are connected with income from sources within the United States; and the proper ap- 1511 PAGENO="0360" portionment and allocation of the deduc- tions with respect to sources of income with- in and without the United States shall be determined as provided in part I, under regulations prescribed by the Secretary or his delegate. "(2) Exczs'TIoNs.-The following deduc- tions shall be allowed whether or not they are connected with income from sources within the United States: "(A) The deduction, for losses not con- nected with the trade or business If incurred in transactions entered Into for profit, al- lowed by section 165(c) (2), but only if the profit, if such transaction had resulted in a profit, would be taxable under this subtitle. "(B) The deduction, for losses of prop- erty not connected with the trade or busi- ness if arising from certain casualties or theft, allowed by section 165(c) (3), but only if the loss is of property within the United States. "(C) The deduction for charitable contri- butions and gifts allowed by section 170. "(3) DEDUcTIoN DISALLOWED.- "For disallowance of standard deduction, see section 142(b) (2)." (b) EFFECTIVE DATE.-T.he amendment made by this section shall apply with respect to taxable years beginning after December 31, 1966. SEC. 108. ESTATES O.F NONRESIDENTS NOT CITI- ZENS. (a) RATE OF TAx-Subsection (a) of sec- tion 2101 (relating to tax Imposed in case of estates of nonresidents not citizens) is amended to read as follows: "(a) RATE OF TAx.-Except as provided in section 2107, a tax computed in accordance with the following table is hereby imposed on the transfer of the taxable estate, deter- mined as provided In section 2106, of every decedent nonresident not a citizen of the United States: "If the taxable estate is: Not over $100,000___ Over $100,000 but not over $500000.. Over $500,000 but not over $1,000,- 000 Over $1,000,000 but not over $2,000,- 000 The tax shall be: 5% of the taxable estate. $5,000, plus 10% of excess over $100,- 000. $45,000, plus 15% of excess over $500,- 000. $120,000, plus 20% of excess over $1,000,- 000. Over $2,000,000 $320,000, plus 25% of excess over $2,000,- 000. (b) CREDITS AGAINST TAx.-Section 2102 (relating to credits allowed against estate tax) is amended to read as follows: "Szc. 2102. CREDITS AGAINST TAX. "(a) IN GzssEn~u~.-The tax Imposed by section 2101 shall be credited with the amounts determined in accordance with Sec- tions 2011 to 2013, inclusive (relating to State death taxes, gift tax, and tax on prior transfers), subject to the special limitation provided in subsection (b). "(b) SPECIAL LIMITATION-The maximum credit allowed under section 2011 against the tax imposed by section 2101 for State death taxes paid shall be an amount which bears the same ratio to the credit computed as provided in Section 2011 (b) as the value of the property, as determined for purposes of this chapter, upon which State death taxes were paid and which is Included in the gross estate under section 2103 bears to the value of the total gross estate under section 2103. For purposes of this subsec- tion, the term `State death taxes' means the taxes described in section 2011(a) ." (c) PROPERTY WITHIN THE UNITED STATEs-Section 2104 (relating to property within the United States) is amended by adding at the end thereof the following new Subsection: `(c) DEBT OBLIGATIoNs-For purposes of this subchapter, debt obligations of- `(1) a United States person, or "(2) the United States, a State or any political subdivision thereof, or the District of Columbia. owned and held by a nonresident not a citizen of the United States shall be deemed property within the United States. With respect to estates of decedents dying after December 31, 1971, deposits with a domestic branch of a foreign corporation, If such branch is engaged in the commercial bank- ing business, shall, for purposes of this sub- chapter, be deemed property within the United States. This subsection shall not apply to a debt obligation to which section 2105(b) applies or to a debt obligation of a domestic corporation if any interest on such obligation, were such Interest received by the decedent at the time of his death, would be treated by reason of section 861(a) (1) (B) as income from sources without the United States." (d) PROPERTY WITHOUT THE UNITED STATES-Subsection (b) of section 2105 (re- lating to bank deposits) is amended to read as follows: "(b) CERTAIN BANH DEPosITs, ETc-For * purposes of this subchapter- "(1) amounts described In section 861(c) If any Interest thereon, were such interest received by the decedent at the time of his death, would be treated by reason of section 861(a) (1) (A) as income from sources with- out the United States, and "(2) deposits with a foreign branch of a domestic corporation or domestic partner- ship, if such branch is engaged In the com- mercial banking business, shall not be deemed property within the United States." (e) DEFINITION OF TAXABLE EsTATE-Para- graph (3) sectIon 2106(a) (relating to de- duction of exemption from gross estate) is amended to read as follows: "(3) EXEMPTION.- "(A) GENERAL RULE-An exemption of $30,000. "(B) RESIDENTS OF POSSESSIONS OF THE UNITED STATEs-In the case of a decedent who Is considered to be a `nonresident not a citizen of the United States' under the provi- sions of section 2209, the exemption shall be the greater of (I) $30,000, or (Ii) `that propor- tion of the exemption authorized by section 2052 which the value of that part of the decedent's gross estate which at the time of his death is situated In the United States bears to the value of his entire gross estate wherever situated." (f) SPECIAL METHOD OF COMPUTING TAX.- Subchapter B of chapter 11 (relating to estates of nonresidents not citizens) is amended by adding at the end thereof the following new sections: "Szc. 2107. EXPATRIATION To AVOID TAX, "(a) RATE OF TAX.-A tax computed in ac- cordance with the table contained In section 2001 Is hereby imposed on the transfer of the 1512 PAGENO="0361" taxable estate, determined as provided in sec- tion 2106, of every decedent nonresident not a citizen of the United States dying after the date of enactment of this section, if after March 8, 1965, and within the 10-year period ending with the date of death such decedent lost United States citizenship, unless such loss did not have for one of its principal pur- poses the avoidance of taxes under this sub- title or subtitle A. "(b) GRoss ESTATE-For purposes of the tax imposed by subsection (a), the value of the gross estate of every decedent to whom subsection (a) applies shall be determined as provided in section 2103, except that- "(1) if such decedent owned (within the meaning of section 958(a)) at the time of his death 10 percent or more of the total com- bined voting power of all classes of stock en- titled to vote of a foreign corporation, and "(2) if such decedent owned (within the meaning of section 958(a)), or is considered to have owned (by applying the ownership rules of section 958(b)), at the time of his death, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of such foreign corporation, then that proportion of the fair market value of the stock of such foreign corpora- tion owned (within the meaning of section 958(a)) by such decedent at the time of his death, which the fair market value of any assets owned by such foreign corporation and situated in the United States, at the time of his death, bears to the total fair market value of all assets owned by such for- eign corporation at the time of his death, shall be included in the gross estate of such decedent. For purposes of* the preceding sentence, a decedent shall be treated as own- ing stock of a foreign corporation at the time of his death if, at the time of a trans- fer, by trust or otherwise, within the mean- ing of sections 2035 to 2038, inclusive, he owned such stock. "(c) CREnII's.-The tax imposed by sub- section (a) shall be credited with the [P. 25328] amounts determined in accordance with sec- tion 2102. "(d) ExCEPTIoN FOR Loss OF CITIzENsHIP rca CERTAIN CAusEs-Subsection (a) shall not apply to the transfer of the estate of a decedent whose loss of United States citizen- ship resulted from the application of section 301(b), 350, or 355 of the Immigration and Nationality Act, as amended (8 U.S.C. 1401 (b), 1482, or 1487). "(e) BURDEN OF PRooF-If the Secretary or his delegate establishes that it is reason- able to believe that an individual's loss of United States citizenship would, but for this section, result in a substantial reduction in the estate, Inheritance, legacy, and suc- cession taxes in respect of the transfer of his estate, the burden of proving that such loss of citizenship did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle A shall be on the executor of such individual's estate. "SEc. 2108. APPLICATION OF PRE-1967 ESTATE TAX PRovIsIoNs. "(a) IMPOSITION OF MORE BURDENSOME TAX BY FOREIGN COuNTRY-Whenever the Presi- dent finds that- "(1) under the laws of any foreign coun- try, considering the tax system of such for- eign country, a more burdensome tax is im- posed by such foreign country on the transfer of estates of decedents who were citizens of the United States and not residents of such foreign country than the tax imposed by this subchapter on the transfer of estates of decedents who were residents of such foreign country, "(2) such foreign country, when requested by the United States to do so, has not acted to revise or reduce such tax so that it is no more burdensome than the tax imposed by this subchapter on the transfer of estates of decedents Who were residents of such foreign country, and "(3) it is in the public Interest to apply pre-1967 tax provisions in accordance with this section to the transfer of estates of decedents who were residents of such foreign country, the President shall proclaim that the tax on the transfer of the estate of every decedent who was a resident of such foreign country at the time of his death shall, in the case of decedents dying after the date of such pros- larnation, be determined under this sub- chapter without regard to amendments made to sections 2101 (relating to tax imposed), 2102 (relatIng to credits against tax), 2106 (relating to taxable estate), and 6018 (re- lating to estate tax returns) on or after the date of enactment of this section. `(b) ALLEVIATION OF MoRE BURDENSOME TAx-Whenever the President finds that the laws of any foreign country with respect to which the President has made a proclama- tion under subsection (a) have been modi- fled so that the tax on the transfer of estates of decedents who were citizens of the United States and not residents of such foreign country is no longer more burdensome than the tax imposed by this subchapter on the transfer of estates of decedents who were residents of such foreign country, he shall proclaim that the tax on the transfer of the estate of every decedent who was a resident of such foreign country at the time of his death shall, in the case of decedents dying after the date of such proclamation, be determined under this subchapter without regard to subsection (a). (c) NoTIFIcATION OF CONGRESS RE- QUIRED-NO proclamation shall be issued by the President pursuant to this section unless, at least 30 days prior to such proclamation, he has notified the Senate and the House of Representatives of his intention to issue such proclamation. "(d) IMPLEMENTATION BY REGULATIONS.- The Secretary of his delegate shall prescribe such regulations as may be necessary or ap- propriate to implement this section." (g) ESTATE TAX RETURNs-Paragraph (2) of section 6018(a) (relating to estates of nonresidents not citizens) is amended by striking out ~`$2,000" and inserting in lieu thereof "$30,000". (h) CLERICAL AMENDMENT-The tables of sections for subchapter B of chapter 11 (re- lating to estates of nonresidents not citizens) is amended by adding at the end thereof the following: "Sec. 2107. Expatriation to avoid tax. "Sec. 2108. Application of pre-1967 estate tax provisions." (i) EFFECTIVE DATE-The amendments made by this section shall apply with respect to estates of decedents dying after the date of the enactment of this Act. SEc. 109. TAX ON GIIT5 OF NONRESIDENTS NOT CITIZENS. 1513 PAGENO="0362" (a) IMPosITIoN OF TAx-Subsection (a) of sectIon 2501 (relatIng to general rule for imposition of tax) is amended to read as follows: "(a) TAXABLE TRANSFERS.- "(1) GENERAL RULE-For the calendar year 1955 and each calendar year thereafter a tax, computed as provided In section 2502, is hereby Imposed on the transfer of property by gift during such calendar year by any individual, resident or nonresident. "(2) TRANSFERS OF INTANGIBLE PROPERTY.- Except as provided in paragraph (3), para- graph (1) shall not apply to the transfer of Intangible property by a nonresident not a citizen of the United States. "(3) ExcEPTIoNs-Paragraph (2) shall not apply In the case of a donor who at any time alter March 8, 1965, and within the 10-year period ending with the date of trans- fer lost United States citizenship unless- "(A) such donor's loss of United States citizenship resulted from the application of section 301(b). 350, or 355 of the Immigra- tion and Nationality Act, as amended (8 U.S.C. 1401(b), 1482, or 1487), or "(B) such loss did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle A. "(4) BURDEN OF PRooF-If the Secretary or his delegate establishes that It Is reasonable to believe that an Individual's loss of United States citizenship would, but for paragraph (3), result In a substantial reduction for the calendar year In the taxes on the transfer of property by gift, the burden of proving that such loss of citizenship did not have for one of Its principal purposes the avoidance of taxes under this subtitle or subtitle A shall be on such Individual." (b~ TRANSFERS IN GENERAL-Subsection (b) of section 2511 (relatIng to situs rule for stock In a corporation) Is amended to read as follows: `(b) INTANGIBLE PROPERTY-For purposes of this chapter, in the case of a nonresident not a citizen of the United States who is excepted from the application of section 2501 (a) (2)- "(1) shares of stock Issued by a domestic corporation, and "(2) debt obligations of- "(A) a United States person, or "(B) the United States, a State or any political subdivision thereof, or the District of Columbia. which are owned by such nonresident shall be deemed to be property situated within the United States." (c) EFFECTIVE DATE.-The amendments made by this section shall apply with respect to the calendar year 1967 and all calendar years thereafter. Szc. 110. TREATY OBLIGATIONS. No amendment made by this title shall apply in any case where Its application would be contrary to any treaty obligation of the United States. For purposes of the preceding sentence, the extension of a benefit provided by any amendment made by this title shall not be deemed to be contrary to a treaty ob- ligation of the United States. TITLE IT-OTHER AMENDMENTS TO INTERNAL REVENUE CODE Szc. 201. APPLICATION OF INVESTMENT CREDIT TO PROPERTY USED IN PoSSESSIoNS OF THE UNITED STATES. (a) PROPERTY USED BY DOMESTIC CORPORA- TIONS, ETC.-Section 48(a) (2) (B) (relating to property used outside the United States) Is amended- (1) by Striking out "and" at the end of clause (v); (2) by striking out the period at the end of clause (vi) and inserting in lieu thereof and"; and (3) by adding at the end thereof the fol- lowing new Clause: "(vii) any property which Is owned by a domestic Corporation (other than a corpora- tion entitled to the benefits of Section 931 or 934(b)) or by a United States citizen (oth- er than a citizen entitled to the benefits of section 931, 932, 933, or 934(b)) and which is used predominantly In a possession of the United States by such a corporation or such a citizen, or by a corporation created or organ- ized In, or under the law of, a possession of the United States." (b) EFFECTIVE DA~rs:.-The. amendments made by subsection (a) shall apply to tax- able years ending after December 31, 1965, but only with respect to property placed in Service after such date. In applying section 46(b) of the Internal Revenue Code of 1954 (relating to carryback and carryover of un- used credits), the amount of any Investment credit carryback to any taxable year ending on or before December 31, 1965, shall be de- termined without regard to the amendments made by this section. Szc. 202. DEDUCTION OF MEDICAL EXPENSES OF INDIVIDUALS AGE 65 OR OVER. (a) REPEAL AMENDMENTS MADE BY SOCIAL SECURITY AMENDMENTS OF 1965.-Subsections (a) and (b) of sectIon 106 of the Social Se- curity Amendments of 1965 are repealed. (b) COST OF MEDICAL INSURANCE-Section 213(a) (relating to allowance of deduction for medical, dental, etc., expenses) is amended- (1) by striking out "and" at the end of paragraph (1) (A); (2) by inserting after "such expenses" In paragraph (1) (B) "(reduced by any amount deductible under subparagraph (C) ) "; (3) by striking out the period at the end of paragraph (1) (B) and inserting In lieu thereof ", and"; (4) by adding at the end of paragraph (1) the following new subparagraph: "(C) an `amount (not In excess of $150) equal to one-half of the expenses paid dur- ing the taxable year for Insurance which con- stitutes medical care for the taxpayer, his Spouse, and dependents (other than any de- pendent described In subparagraph (A~) ) ."; (5) by striking out "and" at the end of paragraph (2) (B); (6) by Inserting after "such expenses" in paragraph (2) (C) "(reduced by any amount deductible under subparagraph (D) ) "; (7) by striking out the period at the end of paragraph (2) (C) and inserting In lieu thereof ", and"; and (8) by adding at the end of paragraph (2) the following new subparagraph: "(D) an amount (not In excess of $150) equal to one-half of the expenses paid during the taxable year for insurance which consti- tutes medical care for such dependents (other than any dependent described in paragraph (1) (A) ) ." (c) EFFEcTIVE DAFE.-The repeal and amendments made by this section shall ap- ply to taxable years beginning after December 31, 1966. {P. 25329j SEC. 203. BASIS OF PROPERTY RECEIVED ON LIQUIDATION OF SUBsIDIARY. (a) DEFINITION OF PURcHAsE-Section 334 1514 PAGENO="0363" (b) (3) (relating to definition of purchase) is amended by adding at the end thereof the following new sentence: "Notwithstanding subparagraph (C) of this paragraph, for purposes of paragraph (2) (B), the term `purchase' also means an acquisition of stock from a corporation when ownership of such stock would be attributed under sec- tion 318(a) to the person acquiring such stock, if the stock of such corporation by reason of which such ownership would be attributed was acquired by purchase (within the meaning of the preceding sentence) ." (b) PERIOD OF AcQulsrrloN.-Section 334 (b) (2) (B) (relating to exception) is amended by striking out "during a period of not more than 12 months," and inserting In lieu there- of "during a 12-month period beginning with. the earlier of- `(i) the date of the first acquisition by purchase of such stock, or "(Ii) if any of such stock was acquired in an acquisition which is a purchase within the meaning of the second sentence of para- graph (3), the date on which the distributee is first considered under section 318(a) as owning stock owned by the corporation from which such acquisition was made,". (c) DIsTRIBUTIoN OF INsTALLMENT OBLIGA- TIONs-Section 453(d) (4) (A) (relating to distribution of installment obligations in cer- tain liquidations) Is amended to read as follows: "(A) LIQUIDATIoNs TO WHICH SECTION 332 APPLIES-If- "(I) an installment obligation is distrib- uted in a liquidation to which section 332 (relating to complete liquidatIons of sub- sidiaries) applies, and "(ii) the basis of such obligation in the hands of the distributee is determined under section 334(b) (1), then no gain or loss with respect to the distribution of such obligation shall be rec- ognized by the distributing corporation." (d) EFFECTIVE DATEs-The amendment made by subsection (a) shall apply only with respect to acquisitions of stock after Decem- ber 31, 1965. The amendments made by subsections (b) and (c) shall apply only with respect to distributions made after the date of the enactment of this Act. Ssc. 204. TRANSFERS OF STOCK AND SECURITIES TO CORPORATIONS CONTROLLED BY TRANSFERORS. (a) TRANSFERS TO INVESTMINT C0M- PANIES.-The first sentence of section 351(a) (relating to transfers to corporations con- trolled by transferor) Is amended by striking out "to a corporation" and inserting in lieu thereof "to a corporation (including an in- vestment company) ". (b) EFFECTIVE DATE-The amendment made by subsection (a) shall apply with respect to transfers of property whether made before, on, or after the date of the enactment of this Act. SEC. 205. MINIMUM AMOUNT TREATED AS EARNED INCOME FOR RETIREMENT PLANS OF CERTAIN SELF-EMPLOYED INDIVIDUALS. (a) INCREASE TO $6,600-Section 401(c) (2) (B) (relating ot earned income when both personal services and capital are material in- come-producing factors) is amended by strik- ing out "$2,500" each place it appears therein and inserting in lieu thereof "$6,600". (b) EFFECTIVE DATE-The amendment made by subsection (a) shall apply to tax- able years beginning after December 31, 1965. SEC. 206. TREATMENT OF CERTAIN INCOME OF AUTHORS, INVENTORS, ETC., AS EARNED INCOME FOR RETIREMENT PLAN PURPOSES (a) INCOME FROM DISPOSITION OF PsoP- ERTY CREATED BY TAxPAYER-Section 401(c) (2) (relating to definition of earned Income) is amended by adding at the end thereof the following new subparagraph: "(C) INCOME FROM DISPOSITION OF CERTAIN PROPERTY-For purposes of this section, the term `earned income" Includes gains (other than any gain which is treated under any provision of this chapter as gain from the sale or exchange of a capital asset) and net earnings derived from the sale or other dis- position of, the transfer of any interest in, or the licensing or the use of property (other than good will) by an individuarwhose per- sonal efforts created such property." (b) EFFECTIVE DATE-The amendment made by subsection (a) shall apply to tax- able years ending after the date of the enact- ment of this Act. SEC. 207. EXCLUSION OF CERTAIN RENTS FROM PERSONAL HOLDING COMPANY IN- COME. (a) RENTS FROM LEASES OF CERTAIN TANGI- BLE PERSONAL PROPERTY-SeCtion 543(b) (3) (relating to adjusted income from rents) is amended by striking out "but does not in- clude amounts constituting personal holding company income under subsection (a) (6), nor copyright royalties (as defined in subsec- tion (a) (4) nor produced film rents) (as de- fined in subsection (a) (5) (B) ) ." and insert- ing in lieu thereof the following: but such term does not include- "(A) amounts constituting personal hold- ing company income under subsection (a) (6), "(B) Copyright royalties (as defined In subsection (a) (4)), "(C) produced film rents (as defined in subsection (a) (5) (B) ),or "(D) compensation, however designated for the use of, or the right to use, any tangi- ble personal property manufactured or pro- duCed by the taxpayer, if during the taxable year the taxpayer is engaged in substantial manufacturing or production of tangible personal property of the same type." (b) TECHNICAL AMENDMENTS.- (1) Section 543(a) (2) (relating to ad- justed income from rents included in per- sonal holding company income) is amended by striking out the last sentence thereof. (2) Section 543(b) (2) (relating to defini- tiosi of adjusted ordinary gross income) Is amended by adding at the end thereof the following new subparagraph: "(D) CERTAIN EXCLUDED RENTs-From the gross income consisting of compensation described in subparagraph (D) of paragraph (3) subtract the amount allowable as deduc- tions for the items described in clauses (I), (ii), (iii), and (iv) of subparagraph (A) to the extent allocable, under regulations pre- scribed by the Secretary or his delegate, to such gross income. The amount subtracted under this subparagraph shall not exceed such gross income." (C) EFFECTIVE DATE-The amendments made by subsections (a) and (b) shall apply to taxable years beginning after the date of the enactment of this Act. Such amend- ments shall also apply, at the election of the taxpayer (made at such time and in such manner as the Secretary or his delegate may 1515 PAGENO="0364" prescribe), to taxable years beginning on or before such date and ending after Decem- ber 31, 1965. SEc. 208. PERCENTAGE DEPLETION RATE FOR CERTAIN CLAT BEARING ALUMINA. (a) 23 PERCENT RATE-Section 613(b) (relating to percentage depletion rates) is amended- (1) by inserting "clay, laterite, and nephe- lite syenite" after "anorthosite" in para- graph (2) (B); and (2) by striking out "if paragraph (5) (B) does not apply" in paragraph (3) (B) and in- serting in lieu thereof "if neither paragraph (2)(B) nor (5)(B) applies". (b) TREATMENT PRocEssEs-Section 613 (c) (4) (relating to treatment processes con- sidered as mining) is amended- (1) by striking out "and" at the end of subparagraph (G), (2) by redesignating subparagraph (H) as (I), and by inserting after subparagraph (G) the following new subparagraph: "(H) in the case of clay, laterite, and nephelite syenite from deposits in the United States (to the extent that alumina and aluminum compounds are extracted there- from)-all processes applied to derive alu- mina or aluminum compounds therefrom; and". (c) EFFECTIVE DATE,-The amendments made by subsections (a) and (b) shall apply to taxable years beginning after the date of the enactment of this Act. SEc. 209. PERCENTAGE DEPLETION. RATE FOR CLAM AND OYSTER SHELLS, (a) 15 PERCENT RATE-Section 613(b) (relating to percentage depletion rates) is amended- (1) by striking out "mollusk shells (in- cluding clam shells and oyster shells) ," In paragraph (5) (A), and (2) by inserting "mollusk shells (includ- ing clam shells and oyster shells) ," after "marble," in paragraph (6). (b) EFFECTIVE DATE-The amendments made by subsection (a) shall apply to tax- able years beginning after the date of the enactment 01 this Act. SEC. 210. SINTERING AND BITRNING OF SHALE, CLAY, AND SLATE USED AS LIGHT- WEIGHT AGGREGATES. (a) TREATMENT PRoCEsSEs-Section 613 (c) (4) (relating to treatment processes con- sidered as mining) Is amended by striking out "and the furnacing of quicksilver ores" In subparagraph (E) and inserting In lieu thereof "the furnacing of quicksilver ores, and the sintering or burning of shale, clay, and slate used or sold for use as lightweight aggregates". (b) EFFECTIVE DATE-The amendment made by subsection (a) shall apply to tax- able years beginning after the date of the enactment of this Act. SEC. 211. STRADDLES. (a) TREATMENT AS SHORT-TERM CAPITAL GAIN-SectIon 1234 (relating to options) is amended by redesignating subsection (c) as subsection (d) and by inserting after sub- section (b) the following new subsection: "(c) SPEcIAL RULE FOR GaANToas OF STRAD- DLES.- "(1) GAIN ON LAPSE-In the case of gain on lapse of an option granted by the tax- payer as part of a straddle, the gain shall be deemed to be gain from the sale or exchange of a capital asset held for not more than 6 months on the day that the option expired. "(2) EXCEPTION-ThIS subsection shall not apply to any person who holds securities for sale to customers in the ordinary course of his trade or business. "(3) DEFINITIoNs-For purposes of this subsection- "(A) The term `straddle' means a simul- taneously granted combination of an option to buy, and an option to sell, the same quan- tity of a security at the same price during the same period of time. "(B) The term `security' has the meaning assigned to such term by section 1236(c) ." (b) EFFECTIVE DATE-The amendments made by subsection (a) shall apply to strad- dle transactions entered into after January 25, 1965, in taxable years ending after such date. SEC. 212. TAX TREATMENT OF PER-UNIT RE- TAIN ALLOCATIONS. (a) TAX TREATMENT OF COOPERATIVES.- (1) Section 1382(a) (relating to gross in- come of cooperatives) is amended by strik- ing out the period at the end thereof and inserting "or by reason of any amount paid to a patron as a. per-unit retain allocation (as defined in section 1388(f) ) ." (2) Section 1382(b) Is amended- [P. 25330] (A) by striking out "(b) PATRONAGE DIVI- DENDS.-" and inserting in lieu thereof "(b) PATRONAGE DIVIDENDS AND PER-UNIT RETAIN ALLOCATIONS.-", (B) by striking out "or" at the end of paragraph (1), (C) by striking out the period at the end of paragraph (2) and inserting a semicolon in lieu thereof, (D) by striking out the sentence follow- ing paragraph (2) and inserting in lieu thereof the following: "(3) as per-unit retain allocations, to the e:Itent paid In qualified per-unit retain cer- tificates (as defined in section 1388(h)) with respect to marketing occurring during such taxable year; or "(4) in money or other property (except pcr-unit retain certificates) in redemption of a nonqualified per-unit retain certificate which was paid as a per-unit retain alloca- tion during the payment period for the tax- able year during which the marketing occurred." "For purposes of this title, any amount not taken Into account under the preceding sen- tence shall, in the case of an amount de- scribed in paragraph (1) or (2), be treated in the same manner as an item of gross in- come and as a deduction therefrom, and In the case of an amount described in para- graph (3) or (4), be treated as a deduction in arriving at gross income." (3) Section 1382(e) is amended to read as follows: "(e) PRODUCTS MARKETED UNDER POOLING ARRANGEMENTS-For purposes of subsection (b), in the case of a pooling arrangement for the marketing of products- "(1) the patronage shall (to the extent provided In regulations prescribed by the Secretary or his delegate) be treated as pa- tronage occurring during the taxable year in which the pool closes, and (2) the marketing of products shall be treated as occurring during any of the tax- able years in which the pool is open." (4) Section 1382(f) Is amended by strik- ing out "subsection (b)" and Inserting in lieu thereof "paragraphs (1) and (2) of sub- section (b)'. 1516 PAGENO="0365" (5) The heading for section 1383 is amended by striking out the period at the end thereof and inserting "OR NONQUALIFIED PER-UNIT RETAIN CERTIFICATES." (6) Section 1383 (a) Is amended- (A) by striking out "section 1382(b) (2)" and inserting in lieu thereof "section 1382 (b) (2) or (4),", (B) by striking out "nonqi~alified written noticee of allocation" each place it appears and inserting in lieu thereof "nonqualified written notices of allocation or nonqualified per-unt retain certificates", and (C) by striking out "qualified written no- tices of allocation" and inserting in lieu thereof "qualified written notices of alloca- tion or qualified per-unit retain certificates (as the case may be) ". (7) Section 1383(b) (2) is amended- (A) by striking out "nonqualified written notice. of allocation" and inserting in lieu thereof "nonqualified written notice of allo- cation or nonqualified per-unit retain cer- tificate", (B) by striking out "qualified written no- tice of allocation" and inserting In lieu thereof "qualified written notice of allocation or qualified per-unit ret~'.in certificate (as the case may be) ", (C) by striking out "such written notice of allocation" and inserting In lieu thereof "such written notice of allocation or per-unit retain certificate", and (D) by striking out "section 1382(b) (2)" and inserting In lieu thereof "section 1382 (b)(2) or(4),". (8) The table of sections for part I of subchapter T of chapter 1 is amended by striking out-. "Sec. 1383. Computation of tax where co- operative redeems nonqualified written notices of allocation." and Inserting in lieu thereof- "Sec. 1383. Computation of tax where co- operative redeems nonqualified written notices of allocation or nonqualified per-unit retain certificates." (b) TAX TREATMENT BY PATRONS.- (1) SectIon 1385(a) is amended by strik- ing out "and" at the end of paragraph (1), by striking out the period at the £nd of para- graph (2) and inserting, in lieu thereor and", and by adding at the end thereof the following new paragraph: "(3) the amount of any per-unit retain allocation which is paid In qualified per- unit retain certificates and which is received by him during the taxable year from an or- ganization described In section 1381 (a) (2) The heading for section 1385(c) Is amended by striking out "ALLOCATION" and inserting In lieu thereof "ALLOCATION AND CERTAIN NONQUALIFIED Pza-Userr RETAIN CER- TIFICATES". (3) SectIon 1385(c) (1) Is amended to read as follows: (1) APPLICATION OF SUBSECTION-This subsection shall apply to- "(A) any nonqualified written notice of allocation which- "(I) was paid as a patronage dividend, or "(ii) was paid by an organization described in section 1381(a) (1) on a patronage basis with respect to earnings derived from busi- ness or sources described in section 1382 (c)(2)(A), and "(B) any nonqualified per-unit retain certificate which was paid as a per-unit retain allocation." (4) Section 1385(c) (2) is amended- (A) by striking out "nonqualified written notice of allocation" and inserting In lieu thereof "nonqualified written notice of allo- cation or nonqualified per-unit retain cer- tificate", and (B) by striking out "such written notice of allocation or pre-unit retain certificate". inserting in lieu thereof "such written notice of allocation or per-unit retain certificafb". (5) The table of parts for subchapter T of chapter 1 is amended by striking out- "Part II. Tax treatment by patrons of pa- ronage dividends." and inserting in lieu therof- "Part II. Tax treatment by patrons of pa- tronage dividends and per-unit retain allocations." (c) DEFINITIONS.- (1) (A) Section 1388(e) (1) is amended by striking out "allocation)" and inserting in lieu thereof "allocation or a per-unit retain certificate) ". (B) Section 1388(e) (2) is amended by striking out "allocation" and inserting in lieu thereof "allocation or qualified per- unit retain certificate". (2) Section 1388 Is amended by adding at the end thereof the following new subsec- tions: `(f) PER-UNIT RETAIN ALLOCATION-For purposes of this subchapter, the term `per- unit retain allocation' means any allocation, by an organization to which part I of this subchapter applies, other than by payment In money or other property (except per- unit retain certificates) to a patron with respect to products marketed for him, the amount of which is fixed without reference to the net earnings of the organization pur- suant to an agreement between the organi- zation and the patron. "(g) PER-UNIT RETAIN CERTIFICATE-For purposes of this subchapter, the term `per- unit retain certificate' means any written notice which discloses to the recipient the stated dollar amount of a per-unit retain allocation to him by the organization. (h) QUALIFIED PER-UNIT RETAIN CEz- TIFICATE.- "(1) DEFINED-FOr purposes of this sub- chapter, the term `qualified per-unit retain certificate' means any per-unit retain cer- tificate which the distributee has agreed, In the manner provided in paragraph (2), to take into account at its stated dollar amount as provided In section 1385(a). "(2) MANNER OF OBTAINING AGREEMENT-A distributee shall agree to take a per-unit re- tain certificate into account as provided in paragraph (1) only by- "(A) making such agreement in writing, or "(B) obtaining or retaining membership in the organization after- `(i) such organization has adopted (after the date of the enactment of this subsection) a bylaw providing that membership in the organization constitutes such agreement, and "(ii) he has received a written notification and copy of such bylaw. "(3) PERIOD FOR WHICH AGREEMENT IS EF- FECTIVE.- (A) GENERAL nuLz.-Except as provided in subparagraph (B)- `(i) an agreement described In paragraph (2) (A) shall be an agreement with respect to all products delivered by the distributee to the organization during the taxable year of the organization during which such agree- ment Is made and all subsequent taxable years of the organization; and 1517 PAGENO="0366" "(ii) an agreement described in paragraph (2) (B) shall be an agreement with respect to all products delivered by the distributee to the organization after he received the noti- fication and copy described In paragraph (2) (B) (II). "(B) REVOCATION, ETC.- "(I) Any agreement described In para- graph (2) (A) may be revoked (in writing) by the distributee at any time. Any such revocation shall be effective with respect to products delivered by the distributee on or after the first day of the first taxable year of the organization beginning after the revo- ca;lon is filed with the organization; except that In the case of a pooling arrangement described in section 1382(e) a revocation made by a distributee shall not be effective as to any products which were delivered to the organization by the distributee before such revocation. "(Ii) Any agreement described In para- graph (2) (B) shall not be effective with re- spect to any products delivered after the distributee ceases to be a member of the organization or after the bylaws of the or- ganization cease to contain the provision de- rcrlbed In paragraph (2) (B) (i). "(I) NONQUALIFIED PER-UNIT RETAIN Cm- TIFICATE.-For purposes of this subchapter, the term `nonqualified per-unit retain cer- tificate' means a per-unit retain ocrtlficate which is not described In subsection (h) ." (d) INFoRMATIoN REPORTING.- (1) AMOUNTS SUBJECT TO REPORTING.-Sec- tion 6044(b) (1) Is amended by striking out "and" at the end of subparagraph (B), by * striking out the period at the end of sub- paragraph (C) and inserting In lieu thereof and", and by adding after subparagraph (C) the following new subparagraphs: "(D) the amount of any per-unit retain allocation (as defined in section 1388(f)) which Is paid in qualified per-unit retain certificates (as defined in section 1388(h)). and "(E) any amount described in section 1382 (b) (4) (relating to redemption of nonquall- fled per-unit retain certificates) ." (2) DETERMINATION OF AMOUNT PAID.- (A) Section 6044(d) (1) Is amended by striking out "allocation)" and Inserting In lieu thereof "allocation or a qualified per- unit retain certificate) ". [P. 25331J (B) Section 6044(d) (2) Is amended by striking out "allocation" and inserting in lieu thereof "allocation or a qualified per- unit retain certificate". (a) EFFECTIVE DATES.- (1) The amendments made by subsections (a), (b), and (c) shall apply to per-unit re- tain allocations made during taxable years of an organization described In section 1381 (a) (relatIng to organizations to which part I of subchapter.T of chapter 1 applies) begin- fling after April 30, 1966, with respect to products delivered during such years. (2) The amendments made by subsection (d) shall apply with respect to calendar years after 1966. (1) TRANSITION Riri,z.- (1) Except as provided In paragraph (2), a written agreement between a patron and a cooperative association- (A) which clearly provides that the patron agrees to treat the stated dollar amounts of all per-unit retain certificates Issued to him by the association as representing cash dis- tributions which he has, of his own choice, reinvested In the cooperative association, (B) which Is revocable by the patron at any time after the close of the taxable year in which It was made, (C) whichwas entered into after October 14, 1965, and before the date of the enact- ment of this Act, and (D) which Is in effect on the date of the enactment of this Act, and with respect to which a written notice of revocation has not been furnished to the cooperative associa- tion, shall be effective (for the period prescribed In the agreement) for purposes of section 1388(h) of the Internal Revenue Code of 1954 as If entered Into, pursuant to such section, after the date of the enactment of this Act. (2) An agreement described in paragraphs (1) (A) and (C) which was included in a by- law of the cooperative association and which Is in effect on the date of the enactment of this Act shall be effective for purposes of sec- tIon 1388(h) of such Code only for taxable years of the association beginning before May 1, 1967. SEC. 213. EXCISE TAX RATE ON AMBULANCES AND HEARSES. (a) CLASSIFICATION AS AtrroMoPILEs.-Sec- tlon 4062 (relating to definitions applicable to the tax on motor vehicles) Is amended by adding at the end thereof the following new subsection: `(b) AMBULANCES, HEARSES, ETc-For pur- poses of section 4061(a), a sale of an am- bulance, hearse, or combination ambulance- hearse shall be considered to be a sale of an automobile chassis and an automobile body enumerated In subparagraph (B) of section 4061(a) (2)." (b) EFFECTIVE DATE-The amendment made by subsection (a) shall apply with re- spect to articles sold after the date of the enactment of this Act, SEC. 214. APPLICABILITY OF EXCLUSION FROM INTEREST EQUALIZATION TAX OF CERTAIN LOANS To AssuRE RAW MATERIALS SOURCES. (a) EXCEPTION TO EXCLU5ION.-Section 4914 (d) (relating to loans to assure raw mate- rials sources) Is amended by adding at the end thereof the following new paragraph: "(3) EXCEPTION-The exclusion from tax provided by paragraph (1) shall not apply in any case where the acquisition of the debt obligation of the foreign corporation is made with an Intent to sell, or to offer to sell, any part of such debt obligation to United States persons." (b) TECHNICAL AMENDMENTS.-(1) Section 4914(j) (1) (relating to loss of entitlement to exclusion In case of certain subsequent transfers) Is amended- (A) by striking out in subparagraph (A) or the exclusion provided, by subsection (d),", and (B) by striking out "subsection (d) or (f)" In subparagraph (D) and Inserting in lieu thereof "subsection (f) ". (2) Section 4918 (relating to exemption for prior American ownership) Is amended by adding at the end thereof the following new subsection: "(g) CERTAIN DEBT OBLIGATIONS ARISING OUT OF LOANS To ASSURE RAW MATERIAL SoURCES-Under regulations prescribed by the Secretary or his delegate, subsection (a) shall not apply to the acquisition by a United States person of any debt obligation to which section 4914(d) applied where the acquisi- tion of the debt obligation by such person Is 1518 PAGENO="0367" made with an intent to sell, or to offer to sell, any part or such debt obligation to United States persons. The preceding sen- tence shall not apply if the tax imposed by section 4911 has applied to any prior acquisi- tion of such debt obligation." (c) EmcTIvE DATE.-The amendments made by subsections (a) and (b) shall apply with respect to acquisitions of debt obli- gations made after the date of the enactment of this Act. SEC. 215. EXCLUSION FROM INTEREST EQUALIZA- TION TAX FOR CERTAIN AcQUIsI- TIONS BY INSURANCE COMPANIES (a) NEW COMPANIES AND COMPANIES Op.. ERATING IN FORMER LESS DEVELOPED CoUN- TRIEs-Section 4914(e) (relating to acquisi- tions by insurance companies doing business In foreign countries) is amended- (1) by striking out "at the time of the initial designation" in the last sentence of paragraph (2); (2) by striking out "An" in the first sen- tence of paragraph (3) (A) (i) and Inserting in lieu thereof "Except as provided in clause (iii), an"; (3) by striking out "under this subpara- graph" in paragraph (3) (A) (ii) and insert- ing in lieu thereof "under clause (i) "; (4) by adding after clause (ii) of para- graph (3) (A) the following new clauses: (iii) INITIAL DESIGNATION AlTER OCTOBER 2, 1964.-An insurance company which was not in existence on October 2, 1964, or was other- wise ineligible to establish a fund (or funds) of assets described in paragraph (2) by mak- ing an Initial designation under clause (i) on or before such date, may establish (and thereafter currently maintain) such fund (or funds) of assets at any time after the en- actment of this clause by designating stock of a foreign issuer or a debt obligation of a foreign obligor as a part of such fund in accordance with the provisions of clause (iv) (if applicable) and subparagraph (B) (i). "(iv) FUNDS INVOLVING CURRENCIES OF FORMER LESS DEVELOPED couNTRIEs-An in- surance company desiring to establish a fund under clause (iii) with respect to in- surance contracts payable in the currency of a country designated as a less developed country on October 2, 1964, which thereafter has such designation terminated by an Executive order issued under tection 4916(b), shall designate as assets of such fund, to the extent permitted by subparagraph (E), the stock of foreign Issuers or debt obligations of foreign obligors as follows: First, stock and debt obligations having a period remain- ing to maturity of at least 1 year (other than stock or a debt obligation described in sec- tion 4916(a)) acquired before July 19. 1963, and owned by the company on the date which the President, in accordance with sec- tion 4916(b), communicates to Congress his intention to terminate the status of such country as a less developed country; sec- ond, stock~and debt obligations having a period remaining to maturity of at leaèt 1 year described in section 4916(a) (and owned by the company on the date of such termination) which, at the time of acquisi- tion, qualified for the exclusion provided in such section because of the status of such country as a less developed country; and third, such stock or debt obligations as the company may elect to designate under sub- paragraph (B) (i). The period remaining to maturity referred to in the preceding sen- tence shall be determined as of the date of the President's communication to Con- grese."; (5) by striking out "TO MAINTAIN FUND" in the heading of paragraph (3) (B); (6) by striking out "as provided in sub- paragraph (A) (ii)" in paragraph (3) (B) (i) and inserting in lieu thereof "under subpara- graphs (A) (i) and (U)"; (7) by inserting before the period at the end of the first sentence of paragraph (3) (C) the following: "; except that, with re- spect to a fund established under subpara- graph (A) (iii), stock or debt obligations acquired before the establishment of such fund may not be designated as part of such fund under this subparagraph"; (8) by striking out "subparagraph (B) ," in paragraph (3) (E) (i) and Inserting in lieu there of "subparagraph (A) (iv), (B) ,"; (9) by striking out "subparagraph (A)" in paragraph (4) (B) (i) and inserting in lieu thereof "subparagraph (A) (I) "; (10) by striking out "paragraph (3) (A)" in paragraph (4) (B) (ii) and inserting in lieu thereof "paragraph (3) (A) (I) "; and (11) by adding at the end of paragraph (4) the following new paragraph: "(C) SPECIAL RULE-For purposes of sub- paragraph (A), if a country designated as a less developed country on September 2, 1964, thereafter has such designation terminated by an Executive order issued under section 4916(b), all insurance contracts payable in the currency of such country which were entered into before such designation was terminated shall be treated as insurance con- tracts payable in the currency of a country other than a less developed country." (b) EFFECTIVE DATE-The amendments made by subsection (a) shall take effect on the day after the date of the enactment of this Act, SEC. 216. ExcLusioN FROM INTEREST EQUAL- IZATION TAX OF CERTAIN ACQUISI- TIONS BY FOREIGN BRANCHES OF DOMESTIC BANKS. (a) AUTHORITY FOR MODIFICATION OF EXEC- tV~IVE ORDERs-Section 4931(a) (relating to commercial bank loans) i~ amended by add- ing at the end thereof the following new sentence: "Clause (A) of the preceding sen- tence shall not prevent a modification -of such Executive order (or any modification thereof) to exclude from the application of subsection (b) acquisitions by commercial banks, through branches located outside ti~ UI~ited States, of debt obligations of foreiçç~ obligors payable in currency of the United States." (b) EFFECTIVE DATE-The amendment made by subsection (a) shall apply witi respect to acquisitions of debt obligations made after the date of enactment of this Act. TITLE rn-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT SEC. 301. SHORT TITLE. This title may be cited as the "Presidential- Election Campaign Fund Act of 1966". SEC. 302. AUTHORITY FOR DESIGNATION OF $1 OF INCOME TAX PAYMENTS TO PRESIDENTIAL ELECTION CAMPAIGN FUND. (a) Subchapter A of chapter 61 of the In- ternal Revenue Code of 1954 (relating to re- turns and records) is amended by adding at the end thereof the following new part: 1519 PAGENO="0368" [P. 25332) "PART VIII-DESIGNATION OF INCOME TAX PAYMENTS TO PRESIDENTIAL ELECTION CAM- PAIGN FUND `Sec. 6096. Designation by Individuals. "SEC. 6096. DESIGNATION BY INDIVIDUALS. "(a) IN GENERAL-EVery individual (other than a nonresident alien) whose income tax liability for any taxable year is $1 or more may designate that $1 shall be paid into the Presidential Election Campaign Fund estab- lished by section 303 of the Presidential Elec- tion Campaign Fund Act of 1966. "(b) INcoME TAX LIABILITY-For purposes of subsection (a), the income tax liability of an individual for any taxable year is the amount of the tax imposed by chapter 1 on such individual for such taxable year `(as shown on his return), reduced by the sum of the credits (as shown in his return) allow- able under sections 32(2), 33, 35, 37, and 38. "(c) MANNER AND TIME OF DESIGNATION-A designation under subsection (a) may be made with respect to any taxable year, in such manner as the Secretary or his delegate may prescribe by regulations- "(1) at the time of filing the return of the tax imposed by chapter 1 for such taxable year, or "(2) at any other time (after the time of filing the return of the tax imposed by chap- ter 1 for such taxable year) specified in regulations prescribed by the Secretary or his delegate." (b) The table of parts for subchapter A of chapter 61 of such Code is amended by adding at the end thereof the following new item: "Part VIII. Designation of income tax pay- ments to Presidential Election Campaign Fund." (c) The amendments made by this section shall apply with respect to income tax liability for taxable years beginning after December 31, 1966. Szc, 303. PRESIDENTIAL ELECTION CAMPAIGN FUND. (a) ESTABLISHMENT-There is hereby es- tablished on the books of the Treasury of the United States a special fund to be known as the "Presidential Election Campaign Fund" (hereafter in this section referred to as the "Fund"). The Fund shall consist of amounts transferred to it as provided in this section. (b) TRANSFERS TO THE FUND-The Secre- tary of the Treasury shall, from time to time, transfer to the Fund an amount equal to the sum of the amounts designated by in- dividuals under section 6096 of the Internal Revenue Code of 1954 for payment into the Fund. (c) PAYMENTS FROM FUND.- (1) IN GENERAL-The Secretary of the Treasury shall, with respect to each presi- dential campaign, pay out of the Fund, as authorized by appropriation Acts, into the treasury of each political party which has complied with the provisions of paragraph (3) an amount (subject to the limitation in paragraph (3) (B)) determined under para- graph (2). (2) DETERMINATION OF AMOUNTS.- (A) Each political party whose candidate for President at the preceding presidential election received 10,000,000 or more popular votes as the candidate of such political party shall be entitled to payments under parR- graph (1) with respect to a presidential cain- paign equal to- (I) $1 multiplied by the total number of popular votes cast in the preceding presi- ~ential election for candidates of political parties whose candidates received 10,000,000 or more popular votes as the candidates of such political parties, divided by (ii) the number of political parties whose candidates in the preceding presidential elec- tion received 10,000,000 or more popular votes as the candidates of such political parties. (B) Each political party whose candidate for President at the preceding presidential election received more than 1,500,000, but less than 10,000,000, popular votes as the candidate of such political party shall be entitled to payments under paragraph (1) with respect to a presidential campaign equal to $1 multiplied by the number of popular votes in excess of 1,500,000 received by such candidate as the candidate of such political party in the preceding presidential election. (C) Payments under paragraph (1) shall be made with respect to each presidential campaign at such times as the Secretary of the Treasury may prescribe by regulations, except that no payment with respect to any presidential campaign shall be made before September 1 of the year of the presidential election with respect to which such cam- paign is conducted. If at the time so pre- scribed~ for any such payments, the moneys in the Fund are insufficient for the Secre- tary to pay into the treasury of each political party which is entitled to a payment under paragraph (1) the amount to which such party is entitled, the payment to all such parties at such time shall be reduced pro rata, and the amounts not paid at such time shall be paid when there are. sufficient moneys in the Fund. (3) LIMITATIONS.- (A) No payment shall be made under paragraph (1) into the treasury of a poltical party with respect to any presidential cam- paign unless the treasurer of such party has certified to the Comptroller General the total amount spent or incurred (prior to the date of the certification) by such party in carry- ing on such presidential campaign, and has furnished such records and other in.forma- tion as may be requested by the Comptroller General. (B) No payment shall be made under paragraph (1) into the treasury of a poltical party with respect to any presidential cam- paign in an amount which, when added to previous payments made to such party, ex- ceeds the amount spent or incurred by such party in carrying on such presidential campaign. (4) The Comptroller General shall certify to the Secretary of the Treasury the amounts payable to any political party under para- graph (1). The Comptroller General's deter- mination as to the popular vote received by any candidate of any political party shall be final and not subject to review. The Comp- troller General is authorized to prescribe such rules and regulations, and to conduct such examinations and investigations, as he determines necessary to carry out his duties and functions under this subsection. (5) DEFINITIONs-For purposes of this subsection- (A) The term "political party" means any political party which presents a candidate for electioll to the office of President of the United States. (B) The term "presidential campaign" 1520 PAGENO="0369" means the political campaign held every fourth year for the election of presidential and vice presidential electors. (C) The term "presidential election" means the election of presidential electors. (d) TRANSFERS TO GENERAL FUND-If, after any presidential campaign and after all political parties which are entitled to payments under subsection (C) with respect to such presidential campaign have been paid the amounts to which they are entitled under subsection (c), there are moneys remaining In the Fund, the Secretary of the Treasury shall transfer the moneys so remaining to the general fund of the Treasury. "SEc. 304. ESTABLISHMENT OF ADVISORY BOARD. (a) There Is hereby established an ad- visory board to be known as the Presidential Election Campaign Fund Advisory Board (hereafter in this section referred to as the "Board"). It shall be the duty and function of the Board to counsel and assist the Comp- troller General In the performance of the duties imposed on him under section 303 of this Act. (b) The Board shall be composed of two members representing each political party whose candidate for President at the last presidential election received 10,000,000 or more popular votes as the candidate of such political party, which members shall be ap- pointed by the Comptroller General from recommendations submitted by each such political party, and of three additional mem- bers selected by the members so appointed by the Comptroller General. The term of the first members of the Board shall expire on the 60th day after the date of the first presi- dential election following the date of the enactment of this Act and the term of sub- sequent members of the Board shall begin on the 61st day after the date of a presidential election and expire on the 60th day follow- ing the date of the subsequent presidential election. The Board shall elect a Chairman from among its members. (c) Members of the Board shall receive compensation at the rate of $75 a day for each day they are engaged In performing duties and functions as such members, in- cluding travel time, and, while away from their homes or regular places of business, shall be allowed travel expenses, including per diem in lieu of subsistence, as authorized by law for persons in the Government service employed Intermittently. (d) Service by an individual as a member of the Board shall not, for purposes of any other law of the United States, be considered as service as an officer or employee of the United States. SEC. 305. APPROPRIATIONS AUTHORIZED. There are authorized to be appropriated, out of the Presidential Elections Campaign Fund, such sums as may be necessary to en- able the Secretary of the Treasury to make payments under section 303 of this Act. TITLE IV-MISCELLANEOUS PROVISIONS SEC. 401. TREASURY NOTES PAYABLE IN Fos- EIGN CURRENCY. Section 16 of the Second Liberty Bond Act, as amended (31 U.S.C. 766), is amended by striking out "bonds" wherever it appears therein and Inserting in lieu thereof "bonds, notes,". SEC. 402. REPORTS To CLARIFY TO NATIONAL DEBT AND TAX STRUCTURE. The Secretary of the Treasury shall, on or before March 31 of each year (beginning with 1967), submit to the Senate and the House of Representatives a report setting forth, as of the close of December 31 of the preceding year, the aggregate and individual amounts of the contingent liabilities and the un- funded liabilities of the Government, and of each department, agency, and Instrumental- ity, thereof, Including, without limitation, trust fund liabilities, Government-sponsored corporations' liabilities, Indirect liabilities not Included as a part of the public debt, and liabilities of insurance and annuity pro- grams, including their actuarial status on both a balance sheet and projected source and application of funds basis. The report shall also set forth the collateral pledged, or the assets available (or to be realized), as security for such liabilities (Government securities to be separately noted), and an analysis of their significance in terms of past experience and probable risk, and shall also set forth all other assets available to liqui- date liabilities of the Government. The re- port shall set forth the required data In a concise form, with such explanatory material as the Secretary may determine to be neces- sary or desirable, and shall Include total [P. 25333) amounts of each category according to the department, agency, or instrumentality involved. SEC. 403. COVERAGE OF EXPENSES OF CERTAIN DRUGS UNDER SUPPLEMENTARY MEDICAL INSURANCE BENEFITS. (a) Section 1832(a) of the Social Security Act is amended (1) by striking out "and" at the end of paragraph (1), (2) by striking out the period at the end of paragraph (2) and inserting in lieu thereof "; and", and (3) by adding at the end thereof the following new paragraph: "(3) entitlement to be paid for allowable expenses (as defined in section 1845(a) (2)), or, if lower, actual expenses, incurred by him for the purchase of qualified drugs (as de- fined in subsection (a) (1) of such section) (b) Section 1833 (a) of such Act is amended (1) by inserting "or qualified drugs" after "incurs expenses for services", (2) by striking out the period at the end of paragraph (2) and inserting in lieu thereof "; and", and (3) by adding at the end thereof the following new paragraph: "(3) in the case of expenses covered under section 1832(a) (3)-100 per centum of such expenses." (c) Section 1833(b) of such Act is amended by adding at the end thereof the following new sentence: "For purposes of determining amounts to be counted toward meeting the $50 deductible imposed by the preceding sentence, there shall not be in- cluded any expenses incurred for any drug or biological which is in excess of the allow- able expenses (as defined in section 1845(a) (2)) of such drug or biological." (d) Part B of title XVIII of such Act Is amended by adding at the end thereof the following new sections: "ALLOWABLE EXPENSES FOR QUALIFIED DRUGS "SEc. 1845. (a) For purposes of this part- "(1) The term `qualified drug' means a drug or biological which is included among the items approved by the Formulary Com- mittee (established pursuant to section 1846(a)). "(2) The term `allowable expense', when 1521 71-297 0-67--pt. 2-24 PAGENO="0370" used in connection with any quantity of a qualified drug, means the amount established with regard to such quantity of such drug by the Formulary Committee and approved by the Secretary. `(b) Amounts to which an individual is entitled by reason of the provisions of section 1832(a) (3) shall be paid directly to such in- dividual or, if such individual has assigned his right to receive any such amount to an- other person, the amount so assigned shall be paid to such other person. No individual shall be paid any amount by reason of the provisions of section 1832(a) (3) prior to the presentation by him (or by another on his behalf) of documentary or other proof satis- factory to the Secretary establishing his en- titlement thereto. `(c) The benefits provided by reason of section 1832(a) (3) may be paid by the Sec- retary or the Secretary may utilize the serv- ice of carriers for the administration of such benefits under contracts entered into be- tween the Secretary and such carriers for such purpose. To the extent determined by the Secretary to be appropriate, the pro- visions relating to contracts entered into pursuant to section 1842 shall be applicable to contracts entered into pursuant to this subsection. - "FORMULARY COMMI~IEE "Szc. 1846. (a) There is hereby established a Formulary Committee to consist of the Surgeon General of the Public Health Serv- ice, the Commissioner of the Food and Drug Administration, and the Director of the Na- tional Institutes of Health. "(b) (1) It shall be the duty of the Formu- 1517 Committee, with the advice and assist- ance of the Formulary Advisory Group (es- tablished pursuant to section 1847) to- "(A) determine which drugs and biologi- cals shall constitute qualified drugs for pur- poses of the benefits provided under section 1832(a); and "(B) determine, with the approval of the Secretary, the allowable expense, for pur- poses of such benefits, of the various quanti- ties of any drug determined by the Commit- tee to constitute a qualified drug; and "(C) publish and disseminate at least once each calendar year among individuals in- sured under this part, ~physicians, pharma- cists, and other interested persons, in accord- ance with directives of the Secretary, an alphabetio list naming each drug or biologi- cal (by its generic name and by each other name by which it is known) which is a qualified drug together with the allowable expense of various quantities thereof, and if any such drug or biological is known by a trade name, the generic name shall also ap- pear with such trade name. "(2) (A) Until the Formulary Committee determines to the contrary, any drug or bio- logical which Is included in the United States Public Health Service Formulary shall be re- garded as a qualified drug for purposes of the benefits provided under section 1832(a) (3). Drugs or biologicals not included in such Formulary shall be regarded as qualified drugs for such purposes upon determina- tion of the Formulary Committee that such drugs or biologicals should be so regarded. Any drug or biological included on the list of qualified drugs shall, if listed by generic name, also be listed by its trade name or names, if any. "(B) Drugs and biologicals shall be deter- mined to be qualified drugs only if they can legally be obtained by the user pursuant to a prescription of a physician; except that the Formulary Committee may Include certain drugs and biologicals not requiring such a prescription if it determines such drugs or biologicals to be of a lifesaving nature. "(C) In the interest of orderly, economi- cal, and equltable administratIon of the benefits provided under section 1832(a) (3), the Formulary Committee may, by regula- tion, provide that a drug or biological other- wise regarded as being a qualified drug shall not be so regarded when prescribed below certain minimum quantities. "(3) In determining the allowable ex- pense for any quantity of any qualified drug, the Formulary Committee shall give due consideration to recognized pricing guides for drugs, and of other pertinent factors, with a view to determining with. respect to each qualified drug a schedule of prices for various quantities thereof which reflects the cost thereof to the ultimate dis- penscr of the drug plus a reasonable fee for the preparation, handling, and distribu- tion thereof to the consumer thereof. In any case in which a drug or biological is available by generic name and one or more trade names any one of which is different from such generic name the cost of such drug or biological, for purposes of the pre- ceding sentence, shall he deemed to he the lowest cost of such drug, however named." "ADVISORY asous TO FORMULARY COMMI'rTES "SEc. 1847. (a) For~ the purpose of assist- ing the Formulary Committee to carry out its duties and functions, the Secretary shall appoint an Advisory Group to the Form- ulary Committee (hereinafter in this sec- tion referred to as the `Advisory Group'). The Advisory Group shall consist of seven members to be appointed by the Secretary. From time to time, the Secretary shall desig- nate one of the members of the Advisory Group to serve as Chairman~ thereof. The members shall be so selected that eachrep- resents one or more of the following na- tional organizations; an organization of physicians, an organization of manufacturers of drugs, an organization of pharmacists, an organization of persons concerned with public health, an organization of hospital pharmacists, an organization of colleges of medicine, an organization of colleges of pharmacy, and an organization of con- sumers. Each member shall hold office for a term of three years, except that any mem- ber appointed to fill a vacancy occurring prior to the expiration of the term for which his predecessor was appointed shall be ap- pointed for the remainder of such term, and except that the terms of office of six of the members first taking office shall expire, as designated by the Secretary at the time of appointment, two at the end of the first year, two at the end of the second year, and two at the end of the third year, after the date of appointment. A member shall not be eligible to serve continuously for more than two terms. `(b) Members of the Advisory Group, while attending meetings or conferences therof or otherwise serving on business of the Ad- visory Group, shall be entitled to receive compensation at rates to be fixed by the Secretary, but not exceeding $75 per day, in- cluding traveltime, and while so serving away from the~r homes or regular places of business they may be allowed travel expenses, including per diem in lieu of subsistence, as authorized by section 3109 of title 5, United States Code, for persons in the Government service employed intermittently. 1522 PAGENO="0371" `(c) The Advisory Group is authorized to engage such technical assistance as may be required to carry out its functions, and the Secretary shall, in addition, make av8ilable to the Advisory Group such secretarial, clerical, and other assistance and such pertinent data obtained and prepared by the Department of Health, Education, and Wel- fare as the Advisory Group may require to carry out its functions." (e) Tue amendments made by this section shall become effective on whichever of the following first occurs: (1) the first day of the month with respect to which the rate of the monthly premium for participation is raised, pursuant to section 1839(b) of the Social Security Act, after the date of enact- ment of this Act, or (2) July 1, 1968. Mr. LONG of Louisiana. Mr. Presi- dent, H~R. 13103 has four titles. The provisions in the first title, which make up most of the bill, revise the tax code to provide more equitable tax treatment by the United States of nonresident alien individuals and foreign corpora- tions. The third title, which, in my view, is the most important part of the bill, establishes a presidential election campaign fund. The second and fourth titles of the bill contain a number of other provisions relating to the income tax code, medicare, and certain other matters. Before I discuss the bill generally, I would like to point out that the provi- sions in titles, 2, 3, and 4 of this bill were added by the Finance Committee. As chairman of the committee, I am well aware that the Constitution provides that ret'enue measures must originate in the House. I do not believe, however, that this constitutional provision was intended to prevent Senators from bringing important matters before the Congress when it is clear they would not otherwise be considered. The amend- ments added by the Finance Committee are important, in my judgment. Fur- thermore, it is clear that, in most cases, there would not be an opportunity for the House to consider them in this ses- sion of Congress. [P. 25334) PRESIDENTIAL ELECTION CAMPAIGN FUND ACT * For example, one of the most pressing problems facing our democracy Is that of insuring that a favored few do not exert undue influence over the opera- tions of Government at the expense of the interests of the public at large. In this regard, one of the most vulnerable aspects of the political process is the manner in which we finance political campaigns. As the Senators well know, a campaign for a major national office, particularly a campaign for the Presi- dency, is very expensive and cannot be financed today without the aid of welathy contributors willing to make large contributions. While in some cases these contributors seek no un- proper reward for their generosity, never theless, the, opportunity remains. In other cases, frankly, it is almost Impos- sible to distinguish between a campaign contribution and a bribe. The only way to remove this possible impediment to good government-the only way to make the one-man, one-vote principle a reality-is to broaden the base from which contributions are drawn. The President recognizes this . prob- lem. In May, he sent a special message to the Congress outlining his proposals. Members of the Senate are aware of this problem; a number have introduced legislation dealing with it. The Fi- nance Committee is concerned with this problem. We held hearings on various proposals advanced to deal with it in August and, as a result of these hearings and further deliberations,, approved a very important proposal in this area. This proposal is, in my opinion, so im- portant that it should be considered now. EXPLANATION OF THE PROPO5AL Under this proposal-the Presidential Election Campaign Fund Act, title III of the bill before us-each individual taxpayer will be able to designate on his tax return that $1 of his taxes be appro- priated to a special fund. The fund will be used to defray the campaign expenses incurred in presidential elections by poli- tical parties that received a significant portion of the total vote cast. The two major parties will receive equal amounts, determined by dividing the total vote cast for the major party candidates in the last presidential elec- tion by two. On this basis, then, each major party will receive up to roughly $37 million. Minor parties-those whose candidates received 1,500,000 votes or more In the last presidential election, will receive $1 for every vote over 1,500,000 that their candidate receives. These payments are to be subject to this important limitation: They cannot exceed the expenses actually incurred In the presidential campaign. Expenses will only be reimbursed, of course, if they are incurred for political purposes. Per- sonal expenses will not be reimbursed. Furthermore, the expenses must be in- curred predominantly for the purpose of furthering the candidacy of the presi- dential and vice-presidential nominees. The expenses incurred by these nominees predominantly to support candidates for other offices will not be reimbursed. This rule will not preclude the' presidential candidate from endorsing other candi-. dates as long as the primary purpose for his appearance is to further his own candidacy. Finally, expenses will not be reimbursed unless sufficient proof that they were actually made Is supplied. The Comptroller General Is charged with the responsibility for establishing the amount of expenditures which can be reimbursed. 1523 PAGENO="0372" The 1,500,000 vote restriction is neces- sary to avoid the proliferation of small parties interested more in publicity at public expense than in seriously offering a candidate for President. The level is low enough, however, to insure that any party which once gained significant voter support would come under the act and, if it kept this support, stay under it. Even minor party candidates would be able to refuse contributions offered on a strings-attached basis. Once a party gained 10 million or more votes in a presidential election, it would qualify as a major party and share equally with the other major parties in the major party funds made available in the next presidential election. THE PLAN IS SUPERIOR TO A TAX DEDUCTION SCHEME While this plan may seem novel, thoughtful consideration will show that it has many advantages over a tax de- duction scheme of the type proposed by the President and several Senators, in- cluding the ranking member of the mi- nority on the Finance Committee, the Senator from Delaware. In the first place, it would be more equitable. Every tax deduction scheme suffers from the disadvantage that it gives the rich taxpayer a larger tax saving than the poor taxpayer. For example, the Presi- dent proposed a tax deduction of up to $100. The taxpayer in the highest in- come bracket would receive a tax sav- ing of $70 by contributing $100 under this scheme, while the taxpayer in the bottom bracket would receive a tax sav- ing of only $14. I want to add, Mr. President, that you cannot gain much by making the deduc- tion available in addition to the stand- ard deduction. That might put stand- ard deduction taxpayers and itemized deduction taxpayers on a par, but, as I have explained, it will not put high and low bracket taxpayers on a par. In fact, it would create more problems. By placing political contributions on a better footing than charitable contribu- tions, it would put politicians in a more favorable category than the Almighty. The equity consideration points out a second shortcoming in the tax deduction plan. We want to provide an incentive for low.- and middle-income people to provide campaign funds, but the tax de- duction plan would provide the greatest incentive to high Income people. I submit that the high income people do not need any incentive. They are the ones who do the campaign financing now. In the third place, the funds provided by the committee-approved plan would clearly be adequate to finance a presi- dential campaign. Thus, we would be assured that there would be no reason why a few large contributors should ever be given an opportunity to establish a basis for exerting undue influence on the President. The tax deduction plans, on the other hand, cover contributions to campaigns at all levels of government. Thus diluted, the effect of the plan is probably not strong enough to eliminate the need for large contributions in any single campaign. And this brings up another point. If we were to approve a tax deduction for campaign contributions, we would have to authorize the Internal Revenue Serv- ice to check to make sure that the money was actually contributed and that it was actually used for political purposes. We would have to give the Internal Revenue Service the go-ahead, in other words, to investigate the political activity of every voter and the conduct of every election, Federal, State, and local. Frankly, Mr. President, I do not think we want to risk violating the sanctity of the ballot this way. The committee plan would, of course, have an effect on other political cam- paigns. Sinc3 the presidential cam- paigns would be entirely or largely paid for through the fund, more money would be available from private con- tributors for campaigns for the Senate, for the House, and for State and local offices. The greater availability of funds would make it easier for a candi- date to decline a contribution to which strings were attached. Moreover, if this plan works as well as I think it will, we may wish to consider extending It to cover other Federal election campaigns. It seems to me, however, that the financing of campaigns for State and local government offices is a matter which should be left to State and local governments. If we consider the Fed- eral Government to be beyond the undue influences which occur in financing cam- paigns, then it would seem that State and local governments should be able to arrange their own problems. I think it is fitting that the plan should be applied to presidential elections, at least at first, since it is most important to avoid the exercise of undue influence cver the Presidency. The President in- fluences the quality of government at all levels by, for example, the way he exer- cises the veto, by the nature of the leg- islation he introduces, by the nature of the appointments he makes, and by the way he oversees the execution of the laws passed by Congress. Congress, as I have said before, cannot get into any real mis- chief unless somebody in the executive branch is a party to it. I have heard it said that this provision would not reduce the pressure for large contributions but will merely provide ad- ditional funds. I do not understand this position. It is clear to me that if the Republican and Democratic Parties are each assured of some $37 million for their next presidential campaign, they will not find it necessary to spend so much time and energy soliciting large 1524 PAGENO="0373" contributions. Nor will contributors be as likely to contribute large sums when they know that the parties already have substantial financial backing. Further- more, this bill does not have to be the [P. 253351 last word as far as presidential election campaign financing goes. ~t can be sup- plemented by laws controlling the maxi- hum size of individual contributions- laws that have teeth in them. Such laws r :`e difficult to pass now, however, be- cause no alternative source of financing is available. This bill will break the chain which now binds us to the present system of campaign financing. Once we provide an alternative source of financ- ing, laws regulating individual contribu- tions can be tightened up. Mr. President, I am convinced that no other bill has been voted by this com- mittee or any other committee which would do so much to prevent the exercise of improper influence on government. That is why I consider this provision the most important title in this bill. Mr. LAUSCHE. Mr. President, will the Senator from Louisiana yield at that ~oint? Mr. LONG of Louisiana. I yield. Mr. LAUSCHE. How many taxpayers are there, as the records show? Mr. LONG of Louisiana. Approxi- mately 65 million returns are filed an- nually. Mr. LAUSCHE. And each one would be required to pay $1? Mr. LONG of Louisiana. Each per- son filing a return would be permitted to designate $1 and if a husband and wife filed a joint return they would jointly designate $2. In other words, each tax return would contain a box to be checked if the taxpayer wished to designate that $1 of tax revenues is to be paid into this election fund. Mr. LAUSCHE. It would not be man- datory to contribute the $1; only optional? Mr. LONG of Louisiana. It would be optional. If a taxpayer wished to desig- nate $1 to financing both major parties equally he could. In effect he would be authorizing 50 cents to be allocated to the Republican candidate and 50 cents to the Democratic candidate, so that both sides would be adequately financed. Mr. LAUSCHE. A party, if and when It attains 10 million votes in a general election, would be recognized as a major party and would be permitted to par- ticipate equally with the other major par- ties in the distribution of the funds. Mr. LONG of Louisiana. Yes. Mr. LAUSCHE. There are now, of course, only two major parties, so that the amount would be divided equally on a 50-percent. basis; is that not correct? Mr. LONG of Louisiana. Yes. Mr. LAUSCHE. Will the party, or a presidential candidate, in addition to the $37 million which would go to the campaign fund, if the bill is adopted, be permitted to develop a private campaign fund to be used for campaign purposes? Mr. LONG of Louisiana. We did not pass on that question. Of course, the Senator realizes that we really do not have jurisdiction over such a proposal, unless we claimed that because we are amending tax legislation, we do. If the proposal becomes law, it would set the stage for passing a law tO state that no private contributions could be accepted. But we do not attempt to answer that question here in this bill. It does not preclude an individual pri- vate contribution which could be made to the candidate. However, with an es- timated $37 million available to each side, then Congress might very well want another law passed to say that no pri- vate contributions can be accepted. But, we do not try to answer that here. Mr. LAUSCHE. It is my understand- ing, on the basis of what the Senator from Louisiana has said, that adoption of the pending bill, in and of itself, will not prohibit a candidate for the Presi- dency, after his campaign committee has received its share from the Federal Gov- ernment, to solicit other contributions. Mr. LONG of Louisiana. That is cor- rect; but it would seem reasonable to be- lieve that if the funds provided by this amendment were available there would be much less financing pressure. In the event a candidate running for President spent $50 million, let us say, it would still take the pressure off him to accept con- tribütions which might have strings at- tached to them if he had received $37 million from this special fund to finance his campaign. Mr. LAUSCHE. In other words, the only purpose of my inquiring is to get. clearly in my mind the status of a can- didate for the Presidency, that in addi- tion to the receipt of moneys which would come from the bill, he could obtain further moneys to promote his cam- paign; and the answer to that question is yes, unless we adopt additional legis- lation at a later time to prohibit it; is that not correct? Mr. LONG of Louisiana. The answer to that question is "Yes." But let me say that if Congress sees fit to enact this bill, it will undoubtedly want to think about it next year and provide a number of companion bills to go with it. For example, we might wish to enact ~ fraud statute for anyone who collects money and falsifies his expense account. Also, we have had our staff prepare an amendment, which could be passed, which would make absolutely clear that none of this money would be used indi- rectly to help in a senatorial or a con- gressional campaign. Therefore, it would be crystal clear that this a presi- dential campaign proposal only and not a proposal to be used in campaigns for Members of Congress. 1525 PAGENO="0374" Mr. LAUSCHE. What prohibition, if at all, is contained in the bill against a candidate for the Presidency using these funds to promote the candidacy, let us say, of a Governor, or a Lieutenant Gov- ernor, or a Representative or Senator? Mr. LONG of Louisiana. We feel that the bill as reported contains such a pro- hibition, that is, the presidential election campaign fund could not be used for ex- penses of candidates running for offices other than President and Vice Presi- dent. For example, a presidential can- didate cannot spend money for a tele- vision program on a candidate running for Governor. Mr. LAUSCHE. That is, he incidental- ly may do that. It is not primarily for himself, but he feels, he should help oth- er candidates? Mr. LONG of Louisiana. The test would be wether the television program or even the appearance of a presidential candidate was or was not really in his own behalf. If it was not in his own be- half, then he would be subject to receiv- ing no disbursement from the fund. Mr. LAUSCHE. That is, even though a goodly part of the program dealt with promoting other candidates, if the pre- dominant part was for himself, he would be within thelaw? Mr. LONG of Louisiana. If the Sen- ator feels that the language in the bill in this regard is not tight enough, we have an amendment drawn that would make this intention clear, but I believe the language already in the bill is suffi- cient. Mr. LAUSCHE. Would not there like- ly develop a situation where the funds solicited by the party would fall into what the Senator would call the danger- ous status of present conditions, of run- fling campaigns that would continue to have those funds used to promote sena- torial and House candidates, and in a measure to promote State candidates? That fund would remain* Intact, to be used by them, and this fund would be used for the Presidency. Is that cor- rect? Mr. LONG of Louisiana. Naturally, a party will try to help finance its own sen- atorial, congressional, and gubernatorial candidates. Some of us who have wor- ried about campaign financing because of the competition with presidential campaign financing. If this bill Is adopt- ed a citizen would be free to concentrate his financial support candidates in cam- paigns for election such as mayors, Gov- ernors, and Members of Congress. Recently, I went to, Houston, Tex., to attend a gathering of the President's Club, of which I am very proud to be a member. Each person paid $1,000 to attend a lovely dinner in honor of the President. The revenue was used to help pay off the deficit created by the last presidential campaign. When I looked around at some of the people attending that dinner who came from Louisiana, I saw some of my best poten- tial contributors there. Some of them had their wives with them, which meant that they had to contribute $2,000. If those contributors were not asked to contribute to presidential campaigns they would be good prospects as con- tributors to other campaigns. There- fore, we might be able to adequately finance congressional campaigns. Mr. LAUSCHE. Yes; but while the passage of the Senator's recommenda- tion might alleviate pressure that exists in the solicitation of funds, it would not guarantee an elimination of that pres- sure. Amlcorrect? Mr. LONG of Louisiana. The Senator is correct, but it would help. Mr. LAUSCHE. Mr. President, will the Senator yield further? Mr. LONG of Louisiana. I yield. Mr. LAUSCHE. I want to make the observation that, tragically, in our country, the psychology has developed that the only way one can successfully conduct a campaign is to get wagonloads of money. I have never subscribed to that philosophy, and I am rather proud to say that I was elected Governor of [P. 25336) my State five times and Senator twice, and never spent more than $50,000 In getting into office, in a State of 10 mil- lion people. Mr. LONG of Louisiana. I am very glad that the Senator was elected with- out spending more than $50,000. Mr. LAIJSCHE. I was elected because I was able to say that gold was not buy- ing the election for me. Mr. LONG of Louisiana. I have been associated with many campaigns and I have seen campaigns that cost a great deal of money. I regret to say that in Louisiana it costs much more than the amount the Senator mentioned for a successful can- didate. I salute the Senator from Ohio. He was a great Governor of his State and he is a great Senator. i only wish we could elect Governors in Louisiana without having to raise more than $50,000, but we have not had that good fortune. Mr. President, I should like to con- tinue with the remainder of my dis- cussion of the bill. The PRESIDING OFFICER. Does the Senator wish to have the committee amendment adopted? Mr. LONG of Louisiana. The com- mittee amendment will remain subject to amendment. It is one amendment. Senators will be able to offer amendments to the committee amendment. I do not care to ask that it be agreed to at this moment. I wish to continue with my statement. THE FOREIGN INVESTORS TAX ACT Mr. President, the first title of this bill 1526 PAGENO="0375" represents a major revision of the U.S. tax laws as they relate to the treatment of nonresident alien individuals and for- eign corporations. It is the first syste- matic reappraisal in this area of the tax law that has been undertaken in 25 years. While this title of the bill will have only a slight effect on revenue and will not directly affect U.S. citizens, it represents a carefully considered effort to bring up to date the part of our tax law which has an important bearing on our relations with other countries. The primary objective of this title of the bili is to establish the equitable tax treatment by this country of nonresident aliens and foreign corporations who come within the jurisdiction of our tax laws. To achieve this objective, your committee and the House Ways and Means Commit- tee have considered all the provisions of present law which affect foreign persons. I shall not attempt to discuss every pro- vision of this title, although I shall ask to insert a summary of them in the RECORD at the close of my remarks. I believe the major provisions of the bill can be grouped under four major headings. TAXABLE STATUS OF INCOME The first part of this title deals with the taxable status of Income. Un- doubtedly, the most important proposal from the standpoint of tax policy is the amendment which separates the U.S. in- vestment income from the U.S. business income of a nonresident alien or foreign corporation and taxes these two types of Income on different bases. Income of a foreigner derived from a U.S. business is to be taxed substantially in the same manner as if the business Income were received by a U.S. citizen or a domestic corporation-that Is, at the regular individual or corporate rates with all of the appropriate deductions. On the other hand, investment income of a nonresident alien or foreign corpo- ration, unless it is related to a U.S. busi- ness, is to be taxed at a flat rate of 30 percent or a lesser rate applicable where we have treaties with the foreign coun- tries involved. Your committee believes this method of taxing nonresident aliens and foreign corporations is more equitable and rea- sonable than the present law which taxes these persons at the regular rates or at a fiat 30 percent on their U.S. source in- come, depending on whether or not they are engaged in trade or business in the United States. In other words, under present law, investment income of a non- resident alien or foreign corporation is taxed at the regular rates, with the at- tributable deductions, if the receipient is engaged in business in the United States whether or not there is any relationship between the U.S. business and the U.S. investment income. Attention was also directed to the fact as a result of the Interplay between the tax rules of certain foreign countries and the United States, foreign corporations which carry on substantial business ac- tivities in the United States, in some cases, have been able to cast their trans- actions in a form which may avoid all or most United States and foreign taxes on income generated from U.S. business activities. The provisions provided by this legislation will subject certain in- come generated by the U.S. business ac- tivities of these foreign corporations to U.S. tax. The benchmark used In determining whether or not income Is related to a U.S. business and, therefore, taxable at regular rates rather than at the fiat 30 percent rate, is whether or not the in- come is effectively connected with the U.S. business. In the case of investment and other fixed or determinable income and capi- tal gains from U.S. sources the income Is to be treated as effectively connected with the U.S. business if the income Is derived from assets used, or held for use, in the conduct of U.S. business or if the activities of the U.S. business were a ma- terial factor in the realization of the in- come. All other types of U.S. source in- come are to be considered to be effec- tively connected if there is a U.S. busi- ness. The bill as approved by your commit- tee adopts the general House provisions regarding the taxation of income from sources without the United States. Gen- erally, this type of income will not be treated as effectively connected with a U.S. business and therefore subject to U.S. tax unless the nonresident alien or foreign corporation has a fixed place of business in the United States and the in- come is attributable to that place of business. Moreover, even in such cases the only types of foreign source income which may be subject to U.S. tax under the bill are rents or royalties from licensing operations, income from banking and similar type operations, or certain types of sales income. An additional modifi- cation provides that neither "Subpart F" income nor dividends, interest or roy- alties derived from a foreign corporation more than 50 percent owned by the non- resident alien or foreign corporation will be considered effectively connected under any circumstances. Although your committee adopted the foregoing House provisions regarding the taxation of foreign source income, your committee added certain specifying and clarifying amendments. In general, your committee's amendments provide specific rules regarding what activities of a for- eign corporation are to be considered a sufficient connection for assertion of U.S. tax jurisdiction as well as the types and proportion of foreign source income to be subject to U.S. tax. Additionally, your committee amended the foreign tax cred- it provision of the House bill which ap- 1527 PAGENO="0376" plies with respect to foreign source effec- tively connected income so as to extend that credit provision to country of resi- dence taxes. INCOME TAX SOURCE RULES The bill also proposes an amendment with respect to the taxation of the in- terest paid to nonresident aliens and for- eign corporations on their U.S. bank de- posits. Presently this type of interest income is subject to U.S. tax only if the foreign recipient is engaged in trade or business in the United States. Your com- mittee adopted the provision of the House bill which, in effect, subjects all nonresident aliens and foreign corpora- tions to U.S. tax on the interest income derived from their U.S. bank deposits after 1971. Your committee shared the House's concern that an immediate al- teration of the present rule might have an adverse effect upon our balance of payments. Consequently, your commit- tee agreed with the House that it is desir- able to postpone the effective date of this provision until after 1971 at which time the Congress will have an opportunity to reconsider the then existing balance-of- payments situation. The bill also pro- vides that as long as bank deposit inter- est is treated as foreign source income, similar types of interest income are to be given the same treatment. ESTATE TAX PROVISIONS Another major provision of the House- passed bill which was approved by your committee would modify the U.S. estate taxation of nonresident aliens. Although the U.S. estates of nonresident aliens are presently subject to the same estate tax rates as citizens or residents, the deduc- tions, exemptions, and credit available to them are substantially less than those allowed to citizens or residents of the United States. Therefore, the estate of a nonresident alien frequently pays a heavier tax on its U.S. assets-and, in some instances, a much heavier tax- than would be true in the case of a sim- ilar estate of a U.S. citizen or resident. In an effort to more closely equate the taxation of the U.S. estates of nonresi- dent aliens with the estates of U.S. citi- *zens or residents, the bifi establishes a [P. 25337] new scale of graduated estate tax rates applicable to nonresident aliens, which would tax those estates in an amount which would be generally equivalent to the tax imposed upon an estate of sim- ilar value of a U.S. citizen entitled to a marital deduction. Also, the bill would raise the estate tax exemption of non- resident aliens from $2,000 to $30,000. Mr. LAUSCHE. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. LAUSCHE. Will the Senator de- fine the term "nonresident alien"? Mr. LONG of Louisiana. That would be a person who is not a citizen of the United States and does not reside here. The present estate tax rule, which ex- cludes deposits in U.S. banks from the gross U.S. estate of a nonresident alien, was amended by the House bill so as to immediately include these assets in the taxable estates of such persons. In view of the fact that the provision dealing with the income taxation of the interest derived by nonresident aliens is not ef- fective until 1972, your committee con- sidered it appropriate to amend the House bill so as to postpone the effective date of this provision until that same date. EXPATRIATION PROVISIONS The bill as passed by the House and ap- proved by your committee provides an amendment which establishes special tax treatment for U.S. citizens who expa- triate in order to avoid U.S. taxes. Your committee agrees with the House that such an amendment is necessary since-although there are undoubtedly few Americans who would avail them- selves of such a maneuver-but for this provision, the bill does make such a scheme more advantageous. Therefore, we wish to foreclose the possibility that this bill would serve as an encouragement to such people. The expatriation provi- sions of the House bill provide that U.S. source income and the effectively con- nected income of a citizen received with- in 5 years after expatriation will be taped at the regular U.S. tax rates if a principal purpose of the expatriation was the avoidance of U.S. taxes. Your com- mittee adopted an amendment which would extend the 5-year period in the House bill to 10 years. This was an amendment suggested by the Senator from Delaware [Mr. WILLIAMSI, and I believe it is a very good amendment. OTHER AMENDMENTS TO THE FOREIGN INVESTORS TAX ACT The remaining amendments regarding the foreign investors tax bill, which I will not discuss in detail, do not in my opinion constitute major changes. In any event, I will ask to include in the RECORD at the conclusion of my remarks a summary of all the changes. OTHER PROVISIONS Mr. President, there are a number of other provisions in this bill. Many of them are, I believe, esentially of a tech- nical nature or are relatively minor in importance. I would hope we could agree to them without much discussion. Mr. President, I ask unanimous con- sent to insert at this point in the RECORD the summary of the provisions. There being no objection, the pro- visions were ordered to be printed in the RECORD, as follows: SUMMARX OF PROVISIONS A. THE FOREIG~T INVESTORS TAX ACT 1. Interest on deposits in foreign branch 1528 PAGENO="0377" banks of domestic corporations-Interest on deposits with foreign branch banks of U.S. corporations or partnerships Is to be treated as foreign source income, and thus free of U.S. income tax when paid to nonresident aliens and foreign corporations. 2. Source rules for bank deposit interest and similar income-After December 31, 1971, all interest on U.S. bank deposits (other than those described in No. 1 above), whether or not effectively connected with a U.S. business, is to be treated as U.S. source income (and subject to U.S. income tax) in the case of nonresident aliens and foreign corporations. Until then, this interest on bank deposits, interest paid on accounts with mutual savings banks, domestic building and loan associations, etc., and interest on amounts held by insurance companies on deposit also are to be treated as foreign source income (unle~s effectively connected with a U.S. business) and thereby free of U.S. income tax. 3. Rules for determining the source of dividends from foreign corporations-The source rule with respect to dividends paid by foreign corporations is amended to provide that dividends received from a foreign corpo- ration are to be considered as having a U.S. source only if 50 percent (House bill provided an 80-percent rule) of the corporation's gross income for the prior 3 years was effectively connected with the conduct of a trade or business in the United States. 4. Compensation for personal services.- The special source rule, providing that cer- tain payments of compensation for services performed in the United States by a non- resident alien are treated as foreign source income (and therefore free of U.S. tax) If the services are performed for certain foreign persons or a foreign office of a U.S. corpora- tion, is extended to services performed for a foreign office of a proprietor who Is a citizen or resident of the United States or for the foreign office of a domestic partnership. 5. Trading in stocks or securities or in commodities-Except in the case of dealers and certain investment companies, trading in stocks or securities in the United States for one's own account, whether by a foreign investor physically present in the United States, through an employee located here, or through a resident agent (whether or not the agent has discretionary authority) is not to constitute a trade or business in the United States for' income tax purposes. A parallel rule is provided for those trading In com- modities. 6. Income effectively connected with the conduct of a trade or business in the United States-The benchmark to be used in de- termining whether income is to be subject to a flat 30-percent rate or taxed substan- tially the same as income earned here by a U.S. citizen or domestic corporation is whether or not the income is effectively con- nected with a U.S. business. In the case of investment and other fixed or determinable Income, and capital gains from U.S. sources the income is to be treated as effectively connected with a U.S. business if the income is derived from the assets used or held for use in the conduct of a U.S. business or if the activities of the U.S. business are a ma- terial factor in the realization of the income. All other types of U.S. source income are to be considered to be effectively connected if there Is a U.S. business. Income from sources without the United States will not be treated as effectively connected with a U.S. business unless the nonresident alien or foreign cor- poration has a fixed place of business In the United States and the income is attributablq to that place of business. Moreover, in gen- eral only rents and royalties from licensing, certain income from banking and so forth, and sales income are to be taken into account for this purpose and only to the extent the income is not "subpart F" income or income derived from a foreign corporation 50 per- cent owned by the nonresident alien or for- eign corporation receiving the income. Your committee modified the provision of the House bill dealing with "effectively con- nected" foreign source income to exclude (a) income derived from a transaction in which the U.S. office was not a material factor, (b) income not derived from the usual business activities of the U.S. office, and (c) income not properly allocable to the U.S. office. Additionally, the definition of a U.S. office was redefined to exclude the office of certain agents. In another modification, the foreign tax credit provision was expanded to Include domiciliary taxes attributable to the foreign source effectively connected income. 7. Income tax on nonresident alien mdi- viduals.-The income of nonresident aliens which is effectively connected with a U.S. business Is to be taxed at the regular gradu- ated rates applicable to individuals and all income not so connected is to be taxed at a flat 30-percent rate (or lower applicable treaty rate). U.S. source capital gains of a nonresident alien not engaged in business in the United States are to be taxed only If the alien was in the United States for 183 days or mote during the year. Deductions are allowable only to the extent allocable to income which is effectively connected to a U.S. business. Also, an election Is provided which allows an alien to treat income from real property as U.S. business income in order to take deductions allocable to it. 8. Expatriation to avoid income tax-U.S. source income and the effectively connected income of a citizen received for 10 years after expatriation is, in most cases, to be taxed at the regular U.S. tax rates if a prin- cipal purpose of the expatriation was the avoidance of U.S. Income, estate, or gift taxes. The House bill would have provided a 5-year rule for income taxes. 9. Withheld taxes and declarations of esti- mated income tax-The Treasury Depart- ment Is authorized to require payment of amounts withheld from nonresident aliens and foreign corporations on a more cur- rent basis, rather than the annual basis pres- ently provided. Nonresident aliens who re- ceive income which is effectively connected with the conduct of a U.S. business are to be required to file declarations of estimated tax. 10. Income tax on foreign corporations.- The regular corporate income tax Is to apply to income of foreign corporations which is effectively connected with a U.S. business. U.S. source income which Is not so connected is taxable at a fiat 30-percent rate (or at a lower treaty rate). Foreign corporations are given an election to treat real property In- come as business income similar to that af- forded nonresident aliens. 11. Foreign corporations carrying on in- surance business in the United States-A foreign corporation carrying on a life Insur- ance business within the United States Is to be taxed under the present special insurance company provisions on its income effectively connected with a U.S. business. The re- mainder of the income of. this type of cor- poration from sources within the United 1529 PAGENO="0378" * States is to be taxed in the same manner as income of other corporations which is not effectively connected; that is, at a fiat 30- percent rate. An adjustment also is made to avoid double taxation which might re- suit from the interaction of the minimum surplus provision for life insurance companies under present law and the new method of taxing foreign life insurance companies. 12. Discrimination and more burdensome taxes by foreign countries-The House bill authorizes the President to reinstate the in- [P. 25338) come, estate, or gift tax provisions In effect prior to the enactment of this bill In the case of foreigners upon a determination that the foreign country in which they are resi- dents or were incorporated is imposing more burdensome taxes on U.S. citizens or domes- tic corporations on income from sources within the foreign country than the U.S. tax on similar U.S. source income of foreigners. Your committee added an amendment which provides the President with authority in the case of discrimination by a foreign govern- ment against U.S. persons, to take such ac- tion as is necessary to raise.the effective rate of U.S. tax on income received by nationals or corporations of that other country to sub- stantially the same effective rates as are ap- plied in the other country on income of U.S. citizens or corporations. 13. Foreign community property income.- A U.S. citizen who is married to a nonresi- dent alien and resident in foreign country with community property laws is to have an election for post-1966 years to treat the com- munity income of the husband and wife as Income of the person who earns it, or In the case of trade or business income, as income of the husband unless the wife manages the business. Income from separate property is to be treated as income of the person owning the property. All other community income Is to be governed by the applicable foreign community property law. For open pre-1967 years, an election may also be made and the rules set forth above govern except that the other community income is to be treated as the income of the person who had the greater income from the other community Income categories plus separate Income. 14. Foreign tax credit.-A foreign tax credit Is to be allowed nonresident aliens and for- eign corporations with respect to foreign taxes on foreign source Income which is effectively connected to the conduct of a U.S. business. Your committee extended this provision to Include income taxes paid to the foreigner's home country on grounds other than that the income was derived from sources within that country. 15. Similar income tax credit require- ment.-Under present law a foreign tax credit Is denied to citizens of a foreign country who are resident In the United States if the foreign country does not allow a similar credit to U.S. citizens who are resident In the foreign country. In the future the credit is to be denied only where the President finds that this is in the public interest and the foreign country refuses to grant U.S. citizens such a credit when requested to do so. - 16. Separate foreign tax credit limita- tion-The 10-percent exception to the sepa- rate application of the limitation on the foreign tax credit for interest income was amended by your committee so as to apply to a U.S. corporation which directly or in- directly owns 10 percent of the foreign cor- poration from which the interest is derived, or is a member of an affiliated group of cor- porations which has such ownership. The House bill contained a more limited excep- tion which would have provided that the separate limitation is not to apply to a do- mestic funding subsidiary which is formed and availed of for the principal purpose of (1) raising funds outside the United States through foreign public offerings, and (2) using these funds to finance the foreign op- erations of related foreign corporations. 17. Estate tax rates, exemptions, and re- turns-A separate schedule of estate tax rates is made applicable to estates of non- resident aliens. The rates are graduated from 5 percent on the first $100,000 of a taxable estate to 25 percent on the portion which exceeds $2 million. The exemption als'o is raised from $2,000 to $30,000. These two measures are designed to accord approxi- mately the same tax treatment in the case of the estate of a nonresident alien as Is ac- corded a similar-sized estate of a citizen eligible for a marital deduction. The filing requirement for returns for the estates of these nonresident aliens also is raised from $2,000 to $30,000. 18. Situs rule for bonds-For purposes of the tax imposed on the estates of nonresi- dent aliens, bonds of a U.S. person, the United States, a State, or political subdivi- sion owned by a nonresident not a citizen of the United States, are to be considered prop- erty within the United States and therefore subject to U.S. estate tax. This rule already applies In the case of other forms of debt obligations. 19. Situs rule for bank dcvosits.-TJ.S. bank deposits of nonresident aliens are to be treated as property within the United States and therefore subject to U.S. estate tax after 1971. The provisions of the House bill would have been effective immediately. 20. Situs rule for depos~ta in foreign branch banks-Deposits in a foreign branch bank of a U.S. corporation or partnership are to be treated as property without the United States and therefore not includable In a foreigner's U.S. estate tax base. 24. Expatriation to avoid estate tax-The estate of a nonresident alien is to be taxed at the regular U.S. estate tax rates if, within 10 years of his death, the alien had ex- patriateci from the United States with a prin- cipal purpose of avoiding U.S. taxes. 22. Ta.z on gifts of nonresident aliens.- Transfers of intangible property by nonresi- dent aliens are not to be cubject to gift tax whether or not they are engaged in business in the United States. However, gifts of In- tangibles made by citizens who become ex- patriates within 10 years of making the gift are to be subject to gift tax If the avoidance of income, estate or gift taxes was a principal purpose for their becoming an expatriate. In the case of a person who expatriated for tax avoidance reasons, debt obligations of a U.S. person, or of the United States or a State or political subdivision, are to be treated as having a situs in the United States. * 23. Treaty obligations.-No amendment made by this bill is to apply in any case where its application would be contrary to any treaty obligation of the United States. However, the granting of a benefit provided by an amendment made by this bill is not to be considered to be contrary to a treaty ob- ligation. Thus, even though a nonresident alien or foreign corporation has a permanent establishment in the United States, Income 1530 PAGENO="0379" which is not effectively connected with this business is to be taxed at the applicable treaty rate rather than at the regular indi- vidual or corporate rate. B. OTHRE AMENDMENTS TO THE INTERNAL REV- ENUE CODE (ADDED BY YOUR C0MMI'rrEE) 1. Application of the investment credit to certain property in U.S. possessions.-The in- vestment credit is extended to property lo- cated in U.S. possessions provided the prop- erty is owned by a U.S. company or citizen, subject to U.S. tax on its income from pos- sessions, would otherwise have qualified for the investment credit, and is not owned or used by U.S. persons who are presently ex- empt from U.S. tax. This amendment is ef- fective with respect to property placed in service after December 31, 1965. 2. Medical expense deductions of persons 65 and over.-~The amendment repeals the provisions with respect to a taxpayer age 65 or over, his spouse age 65 or over, and de- pendent mothers or fathers who are age 65 or over, which, beginning in 19~7, would. limit their medical deductions to medical care ex- penses in excess of 3 percent of adjusted gross income and define their medical care expenses to include only those medicine and drug expenses in excess of 1 percent of ad- justed gross income. 3. Corporate acquisition of assets of an- other corporation.-(a) Purchase of stock.- Under present law, the purchase from an unrelated party by one co;poration of at least 80 percent of the stock of another corpora- tion followed by the liquidation of the ac- quired corporation within 2 years is treated as a purchase of the assets of the acquired corporation. These amendments expand the definition of "purchase" to include the pur- chase of stock from a 50-percent owned sub- sidiary if stock in the 50-percent owned sub- sidiary was also aèquired by purchase. The change is to be effective with respect to acquisitions of stock made after December 31, 1965. (b) Installment notes-This amendment provides that when installment notes are transferred in the type of purchase and liquidation described above, gain is to be recognized to the distributing corporation in the same manner as if it had sold the notes. This amendment is to be effective with respect to distributions made after the date of enactment of this act. 4. Swap funds-The amendment sets aside certain Treasury regulations proposing to tax the exchange of appreciated securities for shares in a mutual investment fund. 5. Self-employed persons retirement plans: minimum amount treated as earned in- come.-This amendment raises from $2,500 to $6,600 the minimum amount of earnings from a trade or business, in which both personal services and capital are material income-producing factors, which a self-em- ployed person may. treat as earned income regardless of the general rule that only 30 percent of the net profits of the trade or business may be treated as a self-employed person's earned income. This amendment applies to taxable years beginning after December 31, 1965. 6. Self-employed persons retirement plans: certain income of authors, inventors, and so forth-The bill amends present law relating to self-employed individuals' retirement plans to permit authors, inventors, and so forth, to include gains (other than capital gains) from sales and other transfers of their works in their earned income base for the purpose of computing deductions for contri- butions to such plans. This change will be effective for taxable years ending after the date of enactment of this act. 7. Exclwsion of certain rents from personal holding company incomne.-This amend- ment provides, for taxable years beginning after the date of enactment of the act (and certain earlier years at the election of the taxpayer), that rent received from the lease of tangible personal property manufactured by a taxpayer is not to be treated as personal holding company income. 8. Percentage depletion In the case of cer- tain clay-bearing alumina-This amend- ment provides, with respect to taxable years beginning after the date of enactment, a percentage depletion rate of 23 percent for alumina and aluminum compounds extracted from domestic deposits of clay, laterite, and nephelite syenite. It further provides that in computing gross income from mining all processes applied to derive alumina or alum- inum compounds from such clay, laterite, and nephelite syenite are to be treated as mining processes. 9. Percentage depletion rate for clam and oyster shells.-This amendment provides that mollusk shells (including clam and oyster shells) are to be allowed percentage depletion at the same rate (15 percent) as is applicable in the case of limestone and other calcium carbonates. This change is applicable to taxable years beginning after the date of enactment. 10. Sinterlng and burning of shale, clay, and slate-This amendment provides that for purposes of percentage depletion, the sintering or burning of shale, clay, and slate used or sold for use as lightweight aggre- gates Is to be treated as a mining process. This amendment is applicable to taxable years beginning after the date of enactment. [P. 25339J 11. Straddles-This amendment provides that, with respect to straddle transactions entered into after January 25, 1965, the in- come from the lapse of an option which origi- nated as part of a straddle Is to be trea~ted as a short-term capital gain (instead of ordi-~ nary income). This permits it to be netted against any capital loss which may result from the exercise of the other option in the straddle while retaining what in most re- spects is ordinary income treatment for any excess of net short-term capital gain over net long-term capital loss. 12. The taxation of per-unit retain alloca- tions of cooperatives-The bill clarifies pres- ent law dealing with the taxation of coopera- tives and patrons to insure that a current single tax is paid, at either the cooperative or patron level, with respect to per-unit retain certificates. In so doing, the . amendment makes the treatment of these certificates generally comparable to the treatment of patronage dividends under present law. 13. The excise tax on hearses.-This bill provides that the sale of an ambulance, hearse, or combination ambulance-hearse ve- hicle is to be considered to be the sale of an automobile chassis or automobile body (rather than a truck chassis or body) for purposes of determining the manufacturers' excise tax on motor vehicles. This change applies with respect to articles sold after the date of enactment of this bill. 14. Interest equalization tax: raw material source loans.-Subsequent transfers of debt obligations to assure raw material sources are 1531 PAGENO="0380" to be exempt from the interest equalization tax where the indebtedness Is acquired with- out an intent on the part of the purchaser to sell it to other US. persons. This change is to be effective with respect to acquisitions of debt obligations made after the date of enact- ment. 15. Interest equalization tax: certain ac- quisitions by insurance companies in devel- oped countries-The present exemption for reserve asset pools of U.S. insurance com- panies Is extended to allow the establishment of reserve asset pools where a U.S. Insurance company commences activities in a developed country or where a less-developed country is designated as a developed country. This amendment is to take effect on the day after the date of enactment. 16. Interest equalization tax: Euro-dol- lars-The President is given the authority to exempt from the Interest equalization tax U.S. dollar loans of more than 1 year made by the foreign branches of U.S. banks. This change Is to apply to acquisitions of debt obligations made after the date of enactment. C. PRESIDENTIAL ELECTION CAMPAIGN FUND ACT This title provides for public support of presidential election campaign financing. Individual taxpayers are to be able to desig- nate on their annual tax returns that $i of their income tax liability Is to be placed in a presidential election campaign fund. The amounts in the fund are to be made avail- able to defray the expenses incurred by polit- ical parties In presenting candidates for President and Vice President. Amounts will only be paid to those political parties whose candidates received at least 1,500,000 votes in the preceding presidential election. A major political party (one whose candi- date polled 10 million votes Or more in the preceding presidential election) is to be eligi- ble to receive a payment from the fund equal to $1 times the number of votes cast for the presidential candidates of the major political parties in the preceding presidential election divided by the number of such major politi- cal parties. A minor party (one whose candi- date polled more than 1,500,000 but less than 10 million votes) is to be eligible to receive a payment from the fund equal to $1 for each vote in excess of 1,500,000 votes that its candidate received in the preceding presi- dential election. The payment received by any political party Is to be limited, however, to reimbursement of presidential campaign expenses actually Incurred by the party in connection with the current presidential election. The Comptroller General Is authorized to determine the campaign expenses of the political parties and to determine the amounts which may be paid to such parties. An advisory board Is established to advise and assist the Comptroller General with his duties under this act. D. MISCELLANEOUS PROVISIONS 1. Treasury bonds or certificates payable in foreign currency-This amendment ex- pands the debt management authority of the Secretary of the Treasury to permit the is- suance of 13.5. notes denominated in foreign currencies. This authority already exists in the case of bonds and certificates of indebt- edness. 2. Reports on Federal conting:nt liabilities and assets-This amendment requires the Secretary of the Treasury to submit a report to the Congress each year Indicating the full contingent liabilities of the Federal Govern- ment and the assets of the Federal Go-urn- Inent which might be made available to liquidate such liabilities. The first such report is to be submitted on or before March 31, 1967. 3. Medicare: Coverage of expenses for pre- scribed drugs-This amendment authorizes payments for prescribed drugs under the- Medicare Act. The estimated monthly cost of $1 per beneficiary will be shared equally by the Government and the beneficiary. Re- imbursements will be made under a schedule of allowances based upon generic drug prices. Mr. LAUSCHE. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. LAUSCHE. What does the Treas- ury Department say about title I? Mr. LONG of Louisiana. The Treasury thoroughly approves of title I. Mr. LAUSCHE. Does title I's general objective contemplate removing what are supposed to be inequities imposed upon aliens, as distinguished from the tax bur- den placed upon nationals of the United States? Mr. LONG of Louisiana. Yes. It pro- poses to tax nonresident aliens and for- eign corporations upon a more equitable basis. In other words these foreign per- sons would be placed in a position more in line with what their tax treatment might be in other countries, where they might consider putting their money. Mr. LAUSCHE. Then the objective is to induce foreign investors to come to the United States and invest their money here, and be assured that there will not be burdensome discriminatory taxes im- posed upon them, as distinguished from the load that is placed upon our own nationals? Mr. LONG of Louisiana. Yes. The purpose of title I is twofold as the Sen- ator has Indicated. It is, one, to provide greater tax equity to foreigners who in- vest their money in the United States; and, two, it is intended to encourage them to invest their money here rather than somewhere else, Additionally, the House added provisions which would actually cause some nonresident aliens and foreign corporations to pay more taxes than they paid before, in situations where we have given foreigners a better tax treatment than we give our own citi- zens. Mr. LAUSCHE. By adopting a tax. bifi that win be an inducement to foreign Investors to come to the United States, would we or would we not be lessening the burden of the outflow of our gold? Mr. LONG of Louisiana. We would be improving our balance-of-payments sit- uation, and we would be decreasing the outflow of gold. Mr. LAUSCHE. Mr. President, efforts are being made to dissuade American dollars from being invested in foreign countries. This provision would be an inducement to foreign holders of our money to invest in the United States. Mr. LONG of Louisiana. The Senator is correct. 1532 PAGENO="0381" COVERAGE OF PRESCRIBED DRUGS UNDER PART B OF MEDICARE It is generally conceded that the major gap in medicare coverage is the failure to provide protection against the heavy costs of drugs outside of those prescribed in a hospital or extended care facility. Older Americans spend more than $600 million, a year at the retail lecvel for prescriptions. More than 3 million peo- ple age 65 or over have annual drug costs of $100 or more, and 600,000 of these per- sons have drug expenses exceeding $250 a year. Obviously, these are citizens who need help, who should be helped, and who will be helped substantially by the committee's amendment. The committee amendment represents a sensible and economical approach to meeting a serious defect in medicare. Obviously, it would have been far too costly to provide protection against all drug costs and pay for them at the usual retail prices. The amendment provides a reasonable allowance toward the z~ost of necessary drugs requiring prescrip- tion. The payment under the plan will come closest to paying the full cost of the prescription when the doctor pre- scribes on a generic basis instead of by brand name. The doctor, however, is free to prescribe by brand name, but the allowance to his patient is based upon the price of the generic version of the drug-not the brand name. The amount involved is estimated at 50 cents a month for each aged person to be matched by 50 cents a month from the Government, or a total of $1 a month, to provide these drugs for the elderly. One of the modern wonder drugs is Tetracycline. It is sold in some instances by that name. However, if one were to buy it from the Lederle Co., the drug is called Achromycin. The Government, through the Defense Supply Agency, buys Tetracycline for approximately 1.5 cents to 2 cents a capsule. If one buys the same drug by brand name, the current cost is 30 cents a capsule. It used to be 50 cents a capsule. The Government will pay under a schedule of allowances what it would cost to buy this drug under the generic name Tetracycline. We will not pay for the cost involved in simply placing a fancy brand name on the drug and charging 10, 20, or 50 times what the drug would sell for under its generic name. The drugs for which coverage will be provided under the program would be [P. 25340) determined by a high-level formulary committee consisting of the Surgeon General, the Commissioner of the Food and Drug Administration, andthe Direc- tor of the National Institutes of Health. These men would be aided by an ad- visory group representing the major groups concerned with pharmacy. The benefit would be added to part B of medicare effective July 1, 1968, and possibly earlier if the part B premium is recalculated prior to that date. The monthly cost is estimated at 50 cents to the benefidiary and 50 cents to the Gov- ernment. OTHER AMENDMENTS The committee, in a related action, also approved amendments to the In- ternal Revenue Code which prevent the reimposition of limits on the deductible medical expenses of persons 65 and over. Right now, older persons can figure their deductible medical expenses without bothering with the 3-percent limit on general medical expenses or the 1-per- cent limit on expenses for medicine and drugs. One provision of the Medicare Act reimposed these limits beginning in 1967. That is, beginning in 1967, older taxpayers would only be allowed to de- duct that portion of their nonreim- bursed medical expenses which exceeded 3 percent of adjusted gross income and, in computing medical expenses for the purposes of the deduction, they would be required to disregard that portion of ex- penses for medicines and drugs which did not exceed 1 percent of adjusted gross income. In view of the fact that not all medical expenses will be covered by medicare, it is imlortant to preserve existing income tax provisions regard- ing the medical expense deduction of older persons. The committee amend- ment would retain present law. Mr. President, I have seen several newspaper editorials which criticize the committee because it placed about 23 amendments on the bill. About 18 of those amendments are approved by the Treasury Department. The Department says that these amendments should be agreed to, that they are appropriate and proper modifications of our tax law. This is one amendment not approve~L by the Treasury Department purely be- cause of the revenue involved. When the committee voted on this amendment, not a single committee member wanted to vote to deny these aged people the right to deduct all of their medical expenses. Furthermore, even though the Treas- ury Department is not willing to approve the amendment, I do not think any Sen- ator would like to deny the aged people the right to deduct all of the heavy ex- pense of drugs in the event of a costly illness. Mr. `LAUSCHE. What does the pres- ent law provide with reference to the de- ductibility of expenses for doctors and medical services? Mr. LONG of Louisiana. A person under the age of 65 Is presently per- mitted to deduct medical expenses to the extent that they exceed 3 percent of his income. There is a' further limitation which provides that such' a person is allowed to 1533 PAGENO="0382" deduct the expenses of drugs only inso- far as they exceed 1 percent of his in- come. Under present law, if a person is over the age of 65, he Is permitted to deduct the entire amount of his medical ex- penses without any limitations. It is well recognized that aged people have a great deal more medical expenses and less income than do people below the age of 65. It is therefore provided in the bill before us that people over the age of 65 can continue to deduct the entire amount. Starting this coming January, the law _would cause the aged people to be taxed on the same basis as people below 65. Judging from the letters we are receiv- ing at the present time, and particularly the letters being received in the Commit- tee on Aging, if we follow through on this provision, it would be one of the most unpopular things that we have ever done. The committee therefore moved to continue the status of the aged people as it presently exists in the law. Mr~ LAUSCHE. Under the existing law, a person under 65 years of age can- not deduct the first 3 percent of his gross income expended for medical expenses from his tax obligation. Mr. LONG of Louisiana. If a person is below the age of 65, he cannot deduct medical expenses unless they exceed 3 percent of his Adjusted gross income. If he is over the age of 65, he can presently deduct the entire amount. Mr. LAUSCHE. With regard to drug expenses, they must exceed 1 percent in order to be deducted. Mr. LONG of Louisiana. The Senator is correct. Mr. LAUSCHE. What would the pend- ing bill do in respect to changing that law? Mr. LONG of Louisiana. When we passed the medicare bill, in order to help cover the cost of the program, the bill contained, as one of the many items, the denial to aged people of the favorable tax treatment that they presently re- ceive. However, the denial of this priv- ilege that they have been receiving will not go into effect until January 1 of next year. Having thought about the matter and knowing the tremendous protest that we will experience, especially from people who are not in a position to take full advantage of medicare-people who have sickness at home And are paying their own expenses-we decided that it would he better to let these people continue to have the favorable tax treatment they have always received and not impose this more burdensome treatment on them. Mr. LAUSOHE. When Congress passed the medicare bill, it decided that since medicitre was to be financed by the program adopted by Congress, the special benefits which persons over the age of 65 then enjoyed should be repealed. Mr. LONG of Louisiana. The Senator is correct. Mr. LAUSCHE. And this provision recommended by the committee rein- states those benefits which the aged have? Mr. LONG of Louisiana. Yes. And may I say that this committee is being thoroughly consistent with what we have done before. When it passed the medi- care bill in 1965, the House put in its bill the provision that would cause this tax deduction to be reduced with respect to the aged. We, in the Senate committee, struck that out, and the Senate sustained the Committee on Finance. This is one of the points on which we were compelled to yield to the House when we went to conference. So we are now doing again what we did before. Mr. LAUSCHE. What is the dollar amount involved in this proposal? Mr. LONG of Louisiana. About $180 million annually. Mr. LAUSCHE. How much Is involved in all of the miscellaneous items that have been added to this bill, submitted by the Treasury Department? Mr. LONG of Louisiana. The commit- tee amendments increase expenses In one instance, such as providing drugs, and reduce revenues in the other Instance by a total of about $410 million. Most of It is in these two amendments. Mr. LAUSCHE. Which two? Mr. LONG of Louisiana. The one that goes into effect on January 1, to simply continue existing law on medical and drug deductions for the aged people, and the one to provide for drugs for the peo- pie under medicare. Mr. LAUSCHE. The total is $410 mil- lion. The total, according to the Sena- tor from Louisiana, will entail a loss of. revenues of about $410 million. Is there any disagreement on that figure? Mr. LONG of Louisiana. No, I do not think so. Mr. WILLIAMS of Delaware. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. WILLIAMS of Delaware. Includ- ing the cost of paying for the elections out of the Treasury when all these pro- posals, including the depletion allowance, and so forth, become fully operative, the Treasury estimated the revenue loss will be between $500 and $600 million. That is the Treasury estimate. Mr. LONG of Louisiana. We estimate that, every presidential year, the provi- sion on presidential campaign costs would cost us about $70 million. We elect a President every fourth year. But that Is a lot less money than it would cost If we had adopted the proposals sug- gested by the Senator from Delaware, who wanted to give a $100 tax deduction to everyone. Mr. LATJSCHE. Would the approval of this particular section or title, or whatever it is, mean an abandonment of 1534 PAGENO="0383" the judgment made in 1965, when we adopted the medicare bill, that we there- fore should withdraw the special tax benefits that were given the beneficiaries of the medicare bill? Mr. LONG of Louisiana. We would be reversing the judgment of the House of Representatives. We certainly would not be reversing the judgment of the Senate. Mr. LATJSCHE. I thank the Senator. Mr. LONG of Louisiana. Mr. Presi- dent, I should like to discuss briefly a number of other amendments. Three of these amendments involve the depletion f P. 25341] allowance. The first places alumina clay on the same basis as bauxite. This, incidentally, would involve no revenue loss at all presently; but by giv- ing what we believe to be appropriate tax treatment to this Georgia clay and to these low-grade ores in Arkansas, we would hope that this industry could im- prove its position and that this Nation could become self-sufficient in the pro- duction of aluminum. As a practical matter, this might result in more reve- nue, in the event that these American industries are successful in processing this clay and these low-grade ores. It deals with alumina clay. It takes about twice as much of it to make a ton of aluminum as it does when bauxite is used. The provision also includes more mining processes in the base to which the per- centage depletion rate applies. The second amendment places clam and oyster shells on the same deprecia- tion basis as other sources of calcium carbonate. The third clarifies the status of certain mining processes in the case of shale, clay and slate used in making concrete aggregates, such as cinder blocks. Two of the amendments involve the provisions of self-employed retirement plans. One deals with the case in which a self-employed person invests both his capital and his time in a business. Under this amendment, the first $6,600 of his net profits will, in any event, be regarded as earned income, rather than only the first $2,500. Amounts in excess of the limit will continue to be ailocated be- tween personal services and capital. The second amendment treats the royalty in- come of authors and inventors as earned income. These amendments insure that all self-employed persons have access to the retirement provisions on a more nearly equal basis. One final amendment I would like to call to the attention of the Senate is one that was proposed to the committee by the senior Senator from Massachusetts [Mr. SALTONSTALLI. This amendment requires the Secretary of the Treasury to submit to Congress by March 31 of each year a report showing the amount of the Federal Government's contingent liabilities and the amount of the assets available to meet these liabilities. I am sure that that would meet with the approval of the Senator from Ohio as well; because it was felt that we should have a statement somewhere of all our contingent liabilities, and it was felt that we should have a positive state- ment of what assets we have available to meet those liabilities. This provision will enable the Congress to better measure and analyze the im- pact of many long-range programs. Such analysis is often difficult when financial requirements are reported on an annual basis. Mr. President, the many and separate provisions of this bill have received the committee's consideration and approval. In this bill we have added, as I say, a number of amendments, in the effort to see that the suggestions that Senators have made-that they have been urging, that they have been studying-will re- ceive some consideration. I realize that revenue* bills must orig- inate in the House. The Senate does have the power to amend. Contrary to what some contend-that we only have a right to amend a revenue bill in a man- ner that is relevant to the bill, the Con- stitution provides nothing of the sort. I would hope that we never, are con- fronted with the kind of difficulty that once confronted our Committee on Ap- propriation~, when the committees ex- perienced an impasse of almost a year because of quarreling about who was going to walk to meet whom and about what room the Senators were to meet in. The Constitution is clear that the right of the Senate to amend a revenue bill is unlimited. We can add any amend- ment, except a constitutional amend- ment, which of course would be con- trary to the Constitution itself. So, in effect, we urged Senators not to offer amendments that were not germane on a number of revenue bills, in order to expedite those bills. The Senator from Massachusetts [Mr. SALTONSTALL] was prevailed upon a number of times to withhold his amendment with respect to a statement of liabilities. Eventually, Senators want their meas- ures considered before we adjourn. We selected this very important bill on which to consider those amendments. The committee has given its best con- sideration to the effort. Many provi- sions of the bill have received careful consideration by the committee.. Mr. President, I urge the Senate to give the measure prompt consideration. Mr. LAUSCHE. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. LAUSCHE. Since I have been in the Senate, I have listened to, and at times participated in, debates dealing with what one side claimed to be the evil of depletion allowances, and on the other side, those who argued that depletion allowances were sound. 1535 PAGENO="0384" We grant a 27.5-percent depletion al- lowance to the oil industry, and a 10- percent depletion allowance to the coal Industry. Am I correct in my under- standing that this principle of depletion allowance and special tax benefit as claimed by some is extended in this bill to three new classes? Mr. LONG of Louisiana. No. Mr. LAUSCHE. To how many new classes is it extended? Mr. LONG of Louisiana. They are al- ready eligible. They are permitted a somewhat greater depletion allowance than they had. Mr. LAUScHE. Is this increasing the percentage of depletion allowance? Mr. LONG of Louisiana. In two in- stances, yes. Mr. LAUSCHE. That would mean if I, as a Senator from Ohio, representing a coal State, submitted to the committee an amendment to increase the depletion allowance of 10 percent on coal to 15 or 20 percent, I would be falling within the principle of these three sections? Mr. LONG of Louisiana. Not neces- sarily. Mr. LAUSCHE. Why choose clay, clam, and oyster shells In increasing the depletion allowance and not coal? Mr. LONG of Louisiana. Let me ex- plain-bauxite already gets a 23-percent depletion allowance. If this Georgia clay is to compete with bauxite in the production of aluminum it would be only fair that Georgia clay get a 23-percent depletion allowance. It is a much lower grade of ore and it takes twice as much of it to produce a ton of aluminum than from bauxite. It is an inferior product for the purpose, but if it is going to com- pete in the production of aluminum, it should get as much depletion allowance as a superior ore. Mr. LAUSCHE. Did the Senator give any thought to the argument of the Senator from flhinois [Mr. DOUGLAs] that the depletion allowance should be eliminated and not expanded? Mr. LONG of Louisiana. I heard the argument, but one thing that impresses me when that argument is made is that before somebody comes in and contends for eliminating the depletion allowance, he should learn what depletion is. If he does not know what it is, he is not quali-~ fled to discuss it. I have never been able to understand when people say there should be no de- pletion allowances on these items that are subject to being exhausted. I can- not understand why people want to argue there should be no depletion allowances. Sometimes I am reminded of what happened to one of my friends who was working his way through college by fly- ing an airplane. I financed that air- plane. He was a good friend of mine. This young fellow coiildnot afford to hire a lawyer or an accountant. He operated on a cash-in, cash-out basis. He would get a couple of dollars to take somebody up in his airplane. We would buy 5 gallons of gasoline and go back and forth. He went out every day and he made a profit. In a year he was broke. He could not figure out how it was that he was broke when he made a profit every day. He had failed to set up a reserve for depreciation. He had failed to set up any account for his lease which had a year to run and had to be renewed: He was setting aside nothing to renew the lease. There was no reserve for depre- ciation, or for a number of items that would not meet the eye. After a year he was broke. If you are in Arkansas and you are in the business of mining bauxite it will not be long before all of that bauxite is gone and you are out of business. That ma- chinery for mining bauxite may be very good machinery but it is specialized ma- chinery. It is useless unless you find somebody to take it off your hands. If you are in the oil business you can figure that the oil is worth something to you, but when it is all gone the pipe, the rig, the bits, and things of that nature, the tanks that you have to con- tain the oil, are all worthless because you are out of the oil business. If Senators would understand there is such a thing as depletion, then we could proceed on thebasis of what would be a fair depletion allowance of products. These three amendments simply seek to do equity between two competing prod-. [P. 25342) ucts and give them the same considera- tion. Mr. LAUSCHE. What is the present depletion allowance on clay-bearing aluminum? Mr. LONG of Louisiana. Presently, it would get 15 percent. Mr. LAUSCHE. This bill would raise it to 23 percent, putting it on the same basis as bauxite? Mr. LONG of Louisiana. The Senator is correct. Mr. LAUSCHE. What is the present rate of the depletion allowance on clam and oyster shells? Mr. LONG of Louisiana. Presently, It is 5 percent. I wish to explain why we raised that figure. Mr. LAUSCHE. Did the Senator say 5 percent? Mr. LONG of Louisiana. Let me ex- plain this. Clams are competitive with limestone; both are calcium carbonate. If you take limestone and break It up and throw it on the ground to use as gravel, it would get a 5 percent depletion allowance, but if you crush it into powder and make it into cement; it would get 15 percent. Here we say that if you take clam shells and put them on the ground to use 1536 PAGENO="0385" as gravel, then you would get only 5 percent, just as you would if you were using limestone. But if you were going to powder it and make chicken grit or cement out of it we would give it the same depletion allowance as limestone. The question might be asked how we got into this situation in the first place. When we passed the law about limestone there was practically no one getting cal- cium carbonate out of seashells. Then, discoveries were made on the Continental Shelf whereby they could be used com- mercially. We would like for the people using clamshells to make cement, but they are very much at a competitive dis- advantage with limestone because of the difference in depletion rates. Mr. LATJSCHE. Where are the areas in which most of our clam and oyster shells are ~ieveloped? Mr. LONG of Louisiana. I should think there would be clam and oyster shells throughout the entire coastal areas of Florida, Louisiana, and Texas. Mr. LATJSCHE. Louisiana is an im- .portant State in that business, is it not? Mr. LONG of Louisiana. We are cer- tainly interested in them. I like oysters. Of course, Virginia has oysters. That is a very fine State. I have nothing against their oysters. They are not as good as Louisiana oysters, but they are not bad. Mr. LAUSCHE. In any event, three of the sections in the bill would expand the depletion allowance that is granted by the Federal Government to reduce the tax burden of persons engaged in re- fining clay-bearing aluminum, selling clam and oyster shells for various pur- poses, and cindering and burning of shale, clay, and slate; is that correct? Mr. LONG of Louisiana. The Senator is correct. Mr. LAUSCHE. Why the difference on the depletion allowance in raising it to 23 percent on clay-bearing aluminum. Why has coal been ignored? Mr. LONG of Louisiana. Coal is not competitive with aluminum-bearing ores. The products do not compete. We do not make aluminum out of coal. Mr. LAUSCHE. Forgetting that for a moment, why do we say 10 percent of coal, and 23 percent of alumina clay and 27.5 percent of oil? Why the difference? Mr. LONG of Louisiana. The com- mittee did not vote on the coal problem. If the Senator wishes to offer an amend- ment- Mr. LAUSCHE. I am not going to of- fer any amendment because I do not be- lieve in the depletion allowance. I think it is wrong. Mr. MORTON. Mr. President, will the Senator from Louisiana yield? Mr. LONG of Louisiana. I yield. Mr. MORTON. In order to keep the RECORD straight, on this alumina- or bauxite-bearing clay, let us remember this, that today this Is not a business. The Anaconda Co~~er Co. has worked out a process with which they think they can go into certain of the poorest areas of Georgia and take out this clay and get from it a product which would be similar to bauxite and It would get into the aluminum stream. Alcoa and Reynolds are working on the same operation in Arkansas. However, this is not in operation today, but is something to encourage an opera- tion in some of the areas in which we find the greatest poverty in this country, and would relieve us from the almost com- plete responsibility or necessity for rely- ing on overseas sources for this vital raw material. Mr. LONG of Louisiana. If this opera- tion is successful, it will cause increased tax revenues to the Government. It will put many fine people to work who now live on "tobacco roads" where poverty Is the worst, in Georgia, for example. They can take this Georgia clay, or the ores in Arkansas-and process them and make aluminum, and pay taxes. Yes, they will receive a depletion allowance, but so far as it goes, they will also be paying taxes. It will provide jobs, relieve unemploy- ment, and take people off the backs of the Federal ~Government and enable them to pay tax to Uncle Sam. Mr. TALMADGE. Mr. President, will the Senator from Louisiana yield? Mr. LONG of Louisiana. I yield. Mr. TALMADGE. The Senator is entirely correct. Aluminum is, perhaps, the second most important material in the defense of America, exceeded only by steel. We import into the United States 85 percent of the ore from which aluminum * is made. It costs the United States of America, at the present time, $150 mil- lion a year. Aluminum is increasing at the rate of doubling itself every 10 years. That means that 10 years from now the importation of ore for the manufacture of aluminum will cost $300 million instead of $150 million. * At a time when we are concerned about our dollars, our debts, and our gold drain, it never ceases to amaze me why anyone would object to developing an aluminum industry in the United States from materials located in the United States. It would save the loss of many dollars, help prevent the loss of our gold, and at the same time create jobs for our people in the United States of America. As the able Senator has pointed out, the amendment would not be an expense to the Treasury. Why? It would develop a new industry in this country. That new industry, in turn, would be paying taxes to the Gov- ernment of the United States. Job opportunities will be created as a result of adoption of the amendment and the military security of this country will be enhanced from the amendment. 71-297 0-67-pt. 2-25 1537 PAGENO="0386" Why anyone could object staggers my Imagination. Now we always have someone- Mr. LONG of Louisiana. I hope the Senator will allow me to interrupt him there long enough to say that everything the Senator has said is correct. Further- more, as a matter of tax equity, by bring- ing that ore in from Jamaica, we are losing dollars, we are losing jobs and losing gold, and we are impoverishing our own people and endangering our own national security by doing it that way. If we do it this new way, It will help the gold situation, It will raise revenue for the Government, it will provide em- ployment, and, in addition, it will do something to benefit our tax equity. Mr. TALMADGE. It will mean more jobs in Jamaica than it will In the United States of America. In the final analysis, anyone who ob- jects to a depletion allowance does not have the slightest idea of economics be- cause we are wasting a capital asset and when we waste that capital asset we must recognize that we have lost the capital that would provide new tax reve- nue and employment. The amendment was offered by me in committee and was approved by the com- mittee unanimously, as I recall-perhaps one or two dissenting votes, but virtually unanimous-and as has been pointed out, the Anaconda Copper Co. found that they could make aluminum ore from alumina In the United States of America. They have experimented with this alumina clay in several areas-in Idaho-and other sections of the country; but they have found that Georgia clay is ideal for the development of alumina and alu- minum, but they have found further that it takes two tons of Georgia clay to equal one ton of bauxite to develop aluminum ore; so that the plan would not be prac- tical unless they had a depletion allow- ance. If they get the depletion allow- ance, there is a good possibility that a vast aluminum industry can be developed in my State. As the Senator has pointed out, it will create jobs, it will save dollars, It will save gold, and it will benefit the Treasury from the receipt of additional tax reve- nue. Mr. LONG of Louisiana. The Senator Is correct. Mr. TALMADGE. I thank my friend for yielding to me to make these com- ments. Mr. GORE. Mr. President, will the Senator from Louisiana yield? Mr. LONG of Louisiana. I yield. [P. 2534.3~ Mr. GORE. I do not like to raise my voice in disagreement, but I should cite that percentage depletion in law has no relation whatsoever to wear, tear, and exhaustion or depletion of the product. It is nothing more and nothing less than a formula for tax reduction. Mr. LONG of Louisiana. Mr. Presi- dent, let the record speak for itself. Senators have varying opinions. The amendments which we have on depletion are merely based on the matter of tax equity, if nothing else. The PRESIDING OFFICER. The Chair would like to announce that the question before the Senate is on the adoption of the committee amendment in the nature of a substitute for the bill. Both proposed language to be stricken and language to be inserted are open to amendment in two degrees, with amend- ments to the language to be stricken taking precedence over amendments to the language to be inserted. Mr. WILLIAMS of Delaware. Mr. President, for the past hour and a half I have been listening to a discussion on methods of financing presidential cam- paigns out of the Treasury and the merits of a depletion allowance. I thought the bill before the Senate dealt with "tax on foreign investments in this country." Would the Chair ask the clerk to state the pending business now before the Senate? The PRESIDING OFFICER. Does * the Senator mean on the bill? Mr. WILLIAMS of Delaware. Yes; have the clerk state the bill we are dis- * cussing. The PRESIDING OFFICER. HR. 13103. Mr. WILLIAMS of Delaware. That is what I thought-the Foreign Investors Tax Act, but I am somewhat confused by the discussion which has just taken place. What has the depletion allow- ance on clam or oyster shells or the financing of Presidential campaigns to do with that bill? Perhaps the title of the act should be amended to read "Grab Bag Act of 1966." It was very properly referred to as such in the Wall Street Journal. I think that title would be more in line with what it actually is. This bill is loaded with everything but the kitchen sink. I have an amendment to strike out one section of the bill, which section is certainly not germane to a Foreign In- vestors Tax Act. I send it to the desk and ask that it be stated. The PRESIDING OFFICER. The amendment offered by the Senator from Delaware ~rill be stated. The LEGISLATIVE CLERK. It is pro- posed, on page 189, beginning with line 3, to strike out down to and through line 14, as follows: SEC. 204. Transfers of stock and securities to corporations controlled by trans- ferors. (a). TRANSFERS TO INVESTMENT COM- PANIES-The first sentence of section 351(a) (relating to transfers to corporations con- trolled by transferor) is amended by striking 1538 PAGENO="0387" out "to a corporation" and inserting in lieu thereof "to a corporation (including an in- vestment company) (b) EFFECTIVE DATE-The amendment made by subsection (a) shall apply with re- spect to transfers of property whether made before, on, or after the date of the enactment of this Act. Mr, WILLIAMS of Delaware. Mr. President, this amendment would strike out section 204. This section has to do with the tax liability of transfers of stock and securities to corporations controlled by transferors. This has been referfed toas the swap amendment. The Treas- ury has confirmed that if the amendment as set forth in the bill is agreed to by the House it will be a wide-open loophole whereby a certain group of investors may completely avoid the capital gains tax. To cite a specific example, let us take two individuals, one of whom owns a block of General Motors stock which he bought at a very low price as compared to today's high price. Another gentleman has a sizable block of Ford Motor Co. stock which he also brought at prices much lower than today's market. They decide to diversify their holdings so that the holder of General Motors stock will have 50 percent of his holdings in Ford Motor Co. and the holder of the Ford Motor Co. stock will have 50 percent of his investment in General Motors stock. Ordinarily they would both be subject to a capital gains tax, but under this bill they can set up a special holding com- pany or trust, transfer those shares of stock to this new company, and accept stock of this company in exchange. Therefore, by setting up a trust or a holding company they diversify their stockholdings and in so doing are exempt from any capital gains. They would have diversified their stockholdings whereby each of them would have half of their holdings in General Motors stock and half in Ford Motor stock, as between individual A and individual B. They would therefore diversify their holdings without being subject to a capital gains tax. This could be done by any number of stockholders with respect to stockhold- ings in four or five companies. These would be no limit with respect to a free stock exchange or an exchange of certifi- cates. The law has been that if an individual owns stock in corporation A and wishes to exchange that stock for the stock of corporation B he must pay a capital gains tax based on the value of the stock at the time of the transfer. Representatives of the Treasury De- partment appeared before our committee and took a strong position against this amendment as appearing in the bill and even went so far as to indicate that the Treasury might recommend a veto if that provision were left in the bill. Certainly this is not the time to pass a wide-open loophole in the tax laws. I hope my amendment, which deletes that section, will be adopted. Mr. President, I suggest the absence of a quorum. The PRESIDING OFFICER. The clerk will call the roll. The legislative clerk proceeded to call the roll. Mr. LONG of Louisiana. Mr. Presi- dent, I ask unanimous consent that the order for the quorum call be rescinded. The PRESIDING OFFICER. Without objecfion, It is so ordered. Mr. LONG of Louisiana. Mr. Presi- dent, I ask for. the yeas and nays on the amendment of the Senator from Dela- ware. The yeas and nays were ordered. Mr. WILLIAMS of Delaware. Mr. President, as far as I am concerned we can proceed to vote. I have outlined the purpose of the amendment. It is to strike from the bill the section which would permit a tax-free exchange of securities through a so-called swap fund arrangement. As has been pointed out, if this provision stays in the bill, in addi- tion to permitting securities to be ex- changed tax free it would also make it possible to have a tax-free exchange of real estate for securities or securities for real estate. This is not permitted under existing law. I know of no better way to describe it than to use the words of the Treasury Department when they said that this would be a glaring loophole whereby knowledgeable investors could completely escape the capital gains tax. I strongly urge the adoption of the amendment. Mr. McCARTHY. Mr. President, for the sake of the RECORD, and for those Senators who were not here previously, I would argue very strongly that a loop- hole does not exist in the law with ref- erence to the collection of capital gains. However, if such a loophole did exist, I do not believe we ought to change it by allowing the Treasury to reverse a ruling which it made in 1960, and to change a situation which it allowed to stand from 1960 until 1966. If there is a loophole, the Treasury has had 5 or 6 years in which to come up here and ask us to pass legislation. Of course, we could give up all re- sponsibility with reference to taxation, and let the Under Secretary or the Secre- tary of the Treasury and the Solicitor of the Treasury Department make all our tax laws and tax rulings, but I do not believe we want that. We examined this matter in the com- mittee, and we decided that the ruling was arbitrary and did not seem to be sustained by law; and that if there was grave concern over the loophole, the Treasury had had 5 years to come up and ask us to close it. It appears the Treas- ury has decided that it has the preroga- tive to make such rulings whenever it wants to, without consultation with Con- 1539 PAGENO="0388" gress and without proper concern for `what is in the law. The whole question of capital gains is a very complicated one. It is my judg- ment that the amendment would have very little effect, although it is possible that the allowance of transfers of this kind may have the effect of freeing up in- vestments. Insofar as we have a record, it indicates more revenue will be col- lected, through permitting that kind of transfer, than will be collected if we do not permit it. All these securities can be held for- ever. The only possibility of collecting on them may be in estate taxes. The transfer of them to a mutual fund does ~P. 25344J increase the likelihood that they wiil be traded, that capital gains will be realized, and that taxes will be paid, more than if we do not allow the transfers. I do not concur in the argument that the proposal in the bill is such a great and powerful one it will accomplish everything that It is indicated could be accomplished, for example, by the adoption of an increased depletion allowance on minerals. I can- not claim that much for it. I do not think it will do any harm. I think it is consistent with the law, and that it is in keeping with what I consder to be the responsibility of Congress: that is, to in- sist that the law be rewritten, if it needs to be rewritten, by Congress itself and not interpreted, as I consider somewhat arbitrarily, by the Treasury Department of the Federal Government. Mr. GORE. Mr. President, the major- ity of the committee has seen fit to load a worthwhile bill with many unworthy amendments. Perhaps the most un- worthy of all is the provision now under debate. I concur in the views expressed by the senior Senator from Delaware with respect to the pending amendment. If it remains in the bill, Mr. President, it' will operate as an invitation for other special interest amendments, which we shall anticipate, from the floor. I shall not detain the Senate further. I do not claim the responsibility of being the guardian of anyone's conscience ex- cept mine, but I firmly believe this pro- vision should be stricken from the bill., Mr. LONG of Louisiana. Mr. Presi- dent, I have no interest whatever in this amendment, one way or the other. I believe in the committee I voted against the amendment. But I do believe the RECORD should reflect what the facts are.' Until July 14 of this year, the Treas- ury Department interpreted the law as this amendment would have it. If Senators will read the provision before us, I am sure that they will agree that it is consistent with the law as it is today. But now Treasury says that they think this is something of a loophole, and they want to close it by a Treasury regulation which, in the point of view of many lawyers, is contrary to existing law. It is contended that, if the law is to be changed, we ought to change it. We should look at it, we should study it, we should legislate; the Treasury does not have the job of legislating, but has the job of administering the laws. As far as I am concerned, the Senate may do whatever it wishes to do with the provision in question, but this is how the Treasury permitted the law to be in- terpreted until July 14 of this year. It is a matter of whether we want the Treasury to change the law, or whether we want to change it. To me, it is not a matter of great moment one way or the other. But there is no doubt about the fact that most lawyers would tell you that what this amendment says is what the law actually is today. The law does not say that this particular provision applies to some transfers and not others. It makes no distinction whatsoever. But the Treasury thinks it is something of a loophole, and should be closed. The question is: Is that something upon which Congress should legislate, or some- thing on which the Treasury should take charge itself, and proceed to change the law? Mr. WILLIAMS of Delaware. Mr. President, what the Treasury has ruled is that the existing law does not permit the tax-free exchange of these securi- ties., This amendment in the committee bill proposes to spell out specifically that they must allow such tax exemption. If the committee amendment is deleted the law will continue to be interpreted as not allowing a tax-free exchange, and the Treasury has so given notice. The law is clear and will be interpreted so that such taxpayers cannot get their tax ex- emption on such an exchange of secu- rities. If there be those who feel that there should be a tax-free exchange of secu- rities let them amend the existing law. But existing law now prohibits it, and the committee amendment would legal- ize it. The question is very simple. As the Senator from Tennessee has pointed out, my amendment by all means should be accepted, and this section should be deleted from the bill. This would be a wide-open loophole, and I would hate to see it extended and fixed into permanent law. Mr. GORE. Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. GORE. Some Senators have asked questions as to the meaning of this provision in the bill. Would the Senator be willing to state specifically that it would permit the exchange of an asset which has had great appreciation in value for another asset, and another type of asset, without recognition of the gain and without tax consequence? Mr. WILLIAMS of Delaware. The 1540 PAGENO="0389" Senator is correct. In addition, as the Treasury Department point~ed out, a man could exchange land and real estate for securities under the language of the pending bill and still escape taxes. If a man had all of his investment in securities and another man had all of his investment in land they could ex- change on a tax-exempt basis. It would completely nullify the capital gains tax in this respect. Mr. GORE. If Senators wish to find the meaning of the amendment, they will find on page 6 of the report that it reads as follows: "These amendments expand the definition of `purchase.' It accomplishes its purpose by the definition of "purchase." One can do a great deal by definition of what is, tax- able income and what is not taxable in- come. Mr. WILLIAMS of Delaware. The Senator is correct. I do not think that anyone could picture the full extent and effect of the results of agreement to this loophole. I think it would be disastrous. Mr. GORE. Mr. President, does the E3enator agree with the senior Senator from Tennessee that the vote on his amendment would be a test as to whether the Senate wishes to use the pending bill as a grab-all for special Interest amend- rflents and that, if this provision Is not stricken, we are then apt to have many other such amendments from the floor? Mr. WILLIAMS of Delaware. If this provision Is not stricken I shudder to think of what will happen to the bill be- fore we get through, because it seems to me that our position for cleaning up this bill is stronger on this point than on any other. That is the reason that I selected this amendment as the first. The PRESIDING OFFICER. The question is on agreeing to amendment of the Senator from Delaware [Mr. WIL- LIAMS]. On this question the yeas and nays have been ordered and the clerk will call the roll. The assistant legislative clerk called the roll. Mr. LONG of Louisiana. I announce that the Senator from West Virginia [Mr. BYRD], the Senator from Idaho [Mr. CHURCH], the Senator from Massa- chusetts [Mr. KENNEDYI, and the Sena- tor from Maryland [Mr. TYDINGSJ, are absent on official business.. I also announce that the Senator from New Mexico [Mr. ANDERSON], the Sena- tor from Tennessee [Mr. BASS], the Sen- ator from Illinois [Mr. DOUGLAS], the Senator from Mississippi [Mr. EAST- LAND], the Senator from Alaska [Mr. GRUENING], the Senator from Arizona [Mr. HAYDEN], the Senator from New York [Mr. KENNEDY], the Senator from Montana [Mr. METCALF], the Senator from Utah [Mr. Moss], the Senator from Rhode Island [Mr. PELL], the Senator from West Virginia [Mr. RANDOLPH], the Senator from South* Carolh~a [Mr. RUSSELL], the Senator from Florida [Mr. SMATHERSI, and the Senator from New Jersey [Mr. WILLIAMS] are necessarily absent. - I further announce that, if present and voting, the Senator from Utah [Mr. Moss], the Senator from West Virginia [Mr. RANDOLPH], and the Senator from New Jersey [Mr. WILLIAMS] would each vote "nay." Mr. KUCHEL. I announce that the Senator from Colorado [Mr. ALLOTT], the Senator from New Jersey [Mr. CASE], the Senator from Kentucky [Mr. COOPER], the Senator from Nebraska [Mr. CURTIS], the Senator from Iowa [Mr. HICKEN- LOOPER], the Senator from New York [Mr. JAVITS], the Senator from Idaho [Mr. JORDAN], the Senator from Kansas [Mr. PEARSON], and the Senator from Texas [Mr. TOWER] are necessarily absent. - The Senator from Pennsylvania [Mr. ScoTT], is detained on bfficial business. If present and voting, the Senator from Nebraska [Mr. CURTIS], the Senator from Idaho [Mr. JORDAN], and the Senator from Kansas [Mr. PEARSON] would each vote "nay." On this vote, the Senator from Penn- sylvania [Mr. SCOTT], is paired with the Senator from Texas tMr. TOWER]. If present and voting, the Senator from Pennsylvania would vote "nay" and the Senator from Texas would vote "yea." The result was announced-yeas 30, nays 42, as follows: [P. 25345] Aiken Boggs Burdick Clark Cotton Pannin Fulbrlght Gore Griffin Hart Bartlett Bayli Bennett Bible Brewster Byrd, Va. Cannon Carlson Dirksen Dodd Dominick Ellender Ervin Fong Allott Anderson Bass Byrd, W. va. Case Church Cooper Curtis Douglas Eastland [No. 296 Leg.] YEAS-30 Kuchel Nelson Lausche Pastore Long, Mo. Prouty McClellan Proxmlre McIntyre Ribicoff Miller Simpson Monroney Symingtoll Morse Williams, Del, Mundt Yarborough Murphy Young, Ohio NAYS-42 Harris Mondale Hartke Montoya Hill Morton Holland Muskie Hruska Neuberger Inouye Robertson Jackson Russell, Ga. Jordan, NC. Saltonstall Long, La. Smith Magnuson Sparkman Mansfield Stennis McCarthy Talmadge McGee Thurmond McGovern Young, N. Dak. NOT VOTING-28 Gruening Pell Hayden Randolph Hickenlooper Russell, S.C. Javits Scott Jordan, Idaho Smathers Kennedy, Mass, Tower Kennedy, N.Y. Tydings Metcalf Williams, N.J. Moss Pearson 1541 PAGENO="0390" So the amendment of Mr. WILLIAMS of Delaware was rejected. Mr. LONG of Louisiana. I move to re- consider the vote by which the amend- ment was rejected. Mr. TALMADGE. I move to lay that motion on the table. The motion to lay on the table was agreed to. Mr. LAUSCHE. Mr. President,- The PRESIDING OFFICER (Mr. YAR- BOROUGH in the chair). The Senator from Ohio is recognized. Mr. LAUSCHE. Mr. President, will the Senator from Delaware, who is a member of the Committee on Finance, allow me to ask him a question or two? Mr. WILLIAMS of Delaware. If I am recognized, I yield to the Senator from Ohio. Mr. LAIJSCHE. I have been recog- nized. Will the Senator tell me whether or not the Secretary of the Treasury made a statement before the Committee on Finance pertaining to the merits or demerits of the amendment on which we just voted? Mr. WILLIAMS of Delaware. The representative of the Treasury Depart- ment, when he was before the Commit- tee on Finance, described the section which we just failed to debate from this bill as being the most glaring loophole in our tax structure that had ever been proposed by the Committee on Finance. I have been a Member of the Senate for 20 years and a member of the com- mittee for 15 years. There is no ques- tion-this will be confirmed by the Treasury Department and our staff- that the Senate has just voted the big- gest loophole in our capital gains struc- ture that has ever been approved in the history of Congress. For the benefit of all taxpayers who have any securities that they want to exchange and escape the capital gains tax all they would have to do is to get together, establish a special fund, and exchange their securities. This would nullify the capital gains structure, Mr. LAUSCHE. The statement which has just been made by the Senator from Delaware [Mr. WILLIAMS] is in sub- stance a restatement of the statement made by a representative of the Treas- ury Department that the adoption of this amendment would create an un- precedented loophole with respect to the ability of individuals to escape their ob- ligation on taxes. Mr. WILLIAMS of Delaware. There is no question about it. Mr. LAUSCHE. Did the representa- tive go to the point of saying that he would recommend a veto, of the meas- ure? Mr. WILLIAMS of Delaware. The of- ficial who was there did not have that authority, but the indication was that they would recommend a veto. I cannot conceive of the Treasury De- pariment endorsing this bill with this amendment in it. That is a decision they will have to make. Mr. LAIJSCHE. How many amend- ments were added to the bill after it came from the administration? Mr. WILLIAMS of Delaware. I un- derstand there were around 23 of the so-called nongermane amendments, be- ginning with the depletion allowance on clam shells and ending up with financ- ing elections from the Federal Treas- ury, plus a few other loopholes including the cutting of excise taxes on hearses. I will say that there may be some merit to the cut in the excise tax on hearses; somebody has said that they were get- ting ready to have a big funeral after the election to bury the Great Society. This bill was presented to the Senate on the basis that it was a proposal to amend and adjust laws related to taxes on foreign income in this country. In the first title of the bill, the committee working with the Department had de- veloped a good proposal; however, when we consider titles 2, 3, and 4, we find that they are not at all related. That is why this entire bill has been properly referred to as "the Grab Bag Act of 1966." Mr. LAUSCHE. By how much will the adoption of this bill reduce the rev- enues of the Federal Government? Mr. WILLIAMS of Delaware. The Treasury official before our committee as an offhand guess, estimated at the time a total loss of between $500 and $600 million a year. Mr. LATJSCHE. That is, in spite of the fact that they have been talking about cutting down expenses so as to avoid the imposition of `new taxes? Mi'. WILLIAMS of Delaware. The Senator is correct. In addition, title I of the bill, which is all the bill was sup- posed to embrace when it came over and which deals with foreign investors' tax credit, provided an increase in revenues of $26 million. The bill was not pie- sented on the basis of providing revenue. But the bill as it came to the committee would provide an additional $26 million in revenue. The bill as before the Sen- ate today would lose revenue of be- tween $500 and $600 million when it Is fully effective. That does not include what the effect of this will ultimately be with the loophole in the capital gains structure. Mr. LATJSCHE, With respect to the loss of revenue of about i500 million. Will that inure ~ the general taxpayer, or are these amendments of a character that affect a particular segment of the economy? Mr. WILLIAMS of Delaware. They are both. Mr. LAUSCHE. Inevitably the tax- payer will benefit a bit. Mr. WILLIAMS of Delaware. The Senator is correct. 1542 PAGENO="0391" Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. LONG of Louisiana. Mr. Presi- dent, it saddens this Senator to see mem- bers of what I believe to be the finest committee in the Senate reflect on their own committee, particularly when what they say is not accurate in every respect In order to so reflect. For example, the Senator stands on the floor and talks about this horrible bill, although he voted for all of the major amendments in the bill. The Senator talks about losing reve- nue Where is revenue lost? This bill has $385 million worth of benefits for the aged people. Of that $385 million there will be $100 million paid by those people themselves. It might be said, on balance, that this bill would provide about $285 million for those aged people. Every Senator on the committee voted for one amend- ment, and most Senators voted for the other. This partcular provision says the law is what the Treasury said it was until July 14, of this year. When the Treasury got ready to change the law administra- tively, which they have no power to do, they proceeded to look at who had these funds being organized. They said, "We will take care of that fellow, and this fellow, and this fellow." I voted with the Treasury on this mat- ter because I think they have a good argument on the merits. As far as the law is concerned, they are dead wrong, and the committee thinks so too. How do you want to change the law? Do you want Congress to legislate a change in the law or do. you want the Treasury to change the law by legis- lative usurpation? The whole matter is in conference and we can rewrite the provision, and this item will not cost the Treasury one penny. I can show why it is so. Suppose some- one owns stock which has been in the family for a long time, which was worth $100 a share when it was purchased. It is now worth $5,000 a share. Suppose he has a half million dollars worth of that stock. If he sells it he has to pay one- fourth of the profit on it in taxes. There- fore, he is not going to sell it. He will keep it. He would like to diversify his risk and put it into a common fund with some other stocks and have his interest in the fund and, therefore, not have as much risk in having all of his eggs in one [P. 25346J basket. If he does It, does he owe a capital gains tax or does he not? The Treasury Department until July 14, 1966, had an interpretation outstand- ing which said that he does not owe a tax on that transaction. If he sells his interest in the fund at such time as he disposes of It, he will pay taxes on the basis of tb~ $100 that be began with, and everything else would be a gain. He is not going to make the transaction to dispose of the stock and p~y all of the tax that he would owe if he did so. It may be that we should legislate the way that the Treasury would like us to legislate. If that is what we want to do, we could do~ It in conference. As the chairman of the committee, I voted against the provision In committee. In conference, the Treasury officials will be in the room to explain this-and the Senator from Delaware [Mr. WILLIAMsI can be a conferee if he wants to be, and hear what they think and how it should be worked out. We can do anything we wish to do, from leaving the law as it is or changing it, or any point between the two. As between changing the law by administrative usurpation and chang- ing the law by congressional act, I would prefer to see the latter. Mr. LAUSCHE. Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I yield to the Senator from Ohio. Mr. LAUSCHE. Mr. President, it Is apparent to me that the Senator from Louisiana is convinced that the Treas- ury Department is right. He admits that by his very statement. This bill or this amendment which we adopted is intended to frustrate the legitimate and honest judgment, certified to be so by the Sena- tor from Louisiana. Mr. LONG of Louisiana. If the Sena- tor will yield, the Treasury is- Mr. LAUSCHE. The Senator stated, and the RECORD will show, that the Treas- ury Department is right in its ~gument. Now, if it is right, why have we adopted an amendment to say it is wrong? - Mr. LONG of Louisiana. The Treas- ury, in my judgment, has a good argu- ment on the merits of whether such an exchange should be taxed, but as to an interpretation of what the law is at pres- ent, they are as wrong as anyone ever was, in my judgment. Mr. LAUSCHE. That is what he has said, but the Treasury Department does not agree with him and the Senate has now found it necessary to rewrite the law. If the law is contrary to what the Treas- ury Department says, why do we rewrite it? Mr. LONG of Louisiana. Well, we will tell the taxpayer what the law is and what it is not. Mr. LAUSCHE. Surely, but, anyhow, the Senator from Louisiana concedes. that the Treasury Department said that a loophole will be created and that the amendment should not be adopted, and the Senator from Louisiana voted against the amendment. Mr. LONG of Louisiana. Treasury says this is a loophole, but only Congress can do anything about It, not the Treasury. 1543 PAGENO="0392" Mr. LAUSCHE. But there Is a great inclination to open them. The Senator has created a `oophole through which his eloquence may be able to move. Mr. WILLIAMS of Delaware. Mr. President, I send tt the desk a second amendment and ask that it be stated. The PRESIDING OFFICER. The amendment wilL.be stated for the in- formation of the Senate. The legislative clerk read the amend- ment as follows: On page 214, begInning with line 18, strIke out all down to and Including line 19 on page 222, as follows: "TITLE rn-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT "SEC. 301. SHORT TITLE. "This title may be cited as the `Presidential Election Campaign Fund Act of 1966'. "SEC. 302. AUTHORITY FOR DESIGNATION OF $1 OF INCOME TAX PAYMENTS TO PRESIDENTIAL ELECTION CAM- PAIGN FUND. (a) Subchapter A of chapter 61 of the In- ternal Revenue Code of 1954 (relatIng to re- turns and records) is amended by adding at the end thereof the following new part: "Part Vill-Designation of income tax pay- ments to presidential election campaign fund "Sec. 6096. Designation by indlviduais. "`(a) IN GENERAL-Every individual (other than a nonresident alien) whose in- come tax liability for any taxable year is $1 or more may designate that $1 shall be paid into the Presidential Election Campaign Fund established by section 303 of the Presi- dential Election Campaign Fund Act of 1966. "(b) INcoME TAX LIABfl.ITY.-FO1' pur- poses of subsection (a). the income tax li- ability of an individual for any taxable year is the amount of the tax imposed by chapter 1 on such individual for such taxable year (as shown on his return), reduced by the sum of the credits (as shown in his return) allowable under sections 32(2), 33, 35, 37, and 38. "(c) MANNER AND TIME OF DESIGNATION.- A designation under subsection (a) may be made with respect to any taxable year, In such manner as the Secretary or his delegate may prescribe by regulations- "`(1) at the time of filing the return of the tax imposed by chapter 1 for such tax- able year, or "`(2) at any other time (after the time of filing the return of the tax imposed by chapter 1 for such taxable year) specified in regulations prescribed by the Secretary or his delegate.' `(b) The table of parts for subchapter A of chapter 61 of such Code Is amended by add- ing at the end thereof the. following new item: "`Part VIII. Designation of Income tax pay- ments to Presidential Elec- tion Campaign Fund.' `(c) The amendments made by this sec- tion shall apply with respect to income tax liability for taxable years beginning after December 31, 1966. "SEC. 303. PRESIDENTIAL ELECTION CAMPAIGN FUND. "(a) ESTABLISHMENT-There Is hereby es- tablished on the books of the Treasury of the United States a special fund to be known as the "Presidential Election Campaign Fund" (hereafter In this section referred to as the "Fund"). The Fund shall consist of amounts transferred to It as. provided in this section, "(b) TRANSFERS TO THE FUND-The Sec- retary of the Treasury shall, from time to time, transfer to the Fund an amount equal to the sum of the amounts designated by in- dividuals under section 6096 of the Inter- nal Revenue Code of 1954 for paylnent into the Fund. "(c) PAYMENTS FROM FUND.- "(1) lic GENERAL-The Secretary of the Treasury shall, with respect to each presi- dential campaign, pay out of the Fund, as authorlezd by appropriation Acts, Into the treasury of each political party which has complied with the provisions of paragraph (3) an amount (subject to the limitation In paragrap1~ (3) (B)) determined under para- graph (2). "(2) DETERMINATION OF AMOUNTS.- "(A) Each political party whose candi- date for President at the preceding presi- dential eledtlon received 10,000,000 or more popular votes as the ca~ndidate of such polit- ical party shall be entitled to payments under paragraph (1) wIth respect to a presidential campaign equal to- "(I) $1 multiplied by the total number of popular votes cast in the preceding presi- dential election for candidates of political parties whose candidates received 10,000,000 or more popular votes as the candidates of such political parties, divided by "(ii) the numbef of political parties whose candidates In the preceding presidential elec- tion received 10,000,000 or more popular votes as the candidates of such political parties. "(B) Each political party whose candi- date for President at the preceding presiden-. tial election received more than 1,500,000, but less than 10,000,000, popular votes as the candidate of such political party shall be entitled to payments under paragraph (1) with respect to a presidential campaign equal to $1 multiplied by the number of popular votes in excess of 1,500,000 received by such candidate as the candidate of such political party in the preceding presidential election. "(C) Payments under paragraph (1) shall be made with respect to each presidential campaign at such times as the Secretary of the Treasury may prescribe by regulations, except that no payment with respect to any presidential campaigns shall be made before September 1 of the year of the presidential election with respect to which such campaign is conducted. If at the time so prescribed for any such payments, the moneys in the Fund are Insufficient for the Secretary, to pay into the treasury of each political party which is entitled to a payment under para- graph (1) the amount to which such party is entitled, the payment to all such parties' at such time shall be reduced pro rata, and the amounts not paid at such time shall be paid when there are sufficient moneys in the Fund. "(3) LIMITATIONS.- "(A) No payment shall be made under paragraph (1) into the treasury of a political party with respect to any presidential cam- paign unless the treasurer of such party has certified to the Comptroller General the to- tal amount spent or incurred (prior to the date of the certification) by such party In carrying on such presidential campaign, and has furnished such records and other infor- mation as may be requested by the Comptrol- ler General. 1544 PAGENO="0393" "(B) No payment shall be made under paragraph (1) into the treasury of a political party with respect to any presidential cam- paign in an amount which, when added to previous payments made to such party, ex- ceeds the amount spent or incurred by such party in carrying on such presidential cam- paign. "(4) The Comptroller General shall certify to the Secretary of the Treasury the amounts payable to any political party under para- graph (1). The Comptroller General's deter- mination as to the popular vote received by any candidate of any political party shall be final and not subject to review. The Comp- troller General is authorized to prescribe such [P. 25347) rules and regulations, and to conduct such. examinations and investigations, as he de- termines necessary to carry out his duties and functions under this subsection. "(5) DzrnsrrxoNs.-For purposes of this subsection- "(A)' The term `political party' means any political party which presents a candidate for election to the office of President of the United States. (B) The term `presidential campaign' means the political campagin held every fourth year for the election of presidential and vice presidential electors. "(C) The term `presidential election' means the election of presidential electors. "(d) TRANSFERS To GENERAL FUND-If, after an~y presidential campaign and after all political parties which are entitled to payments under subsection (c) with respect to such presidential campaign have been paid the amounts to which they are entitled under subsection (c), there are moneys re- maining in the Fund, the Secretary of the Treasury shall transfer the moneys so re- maining to the general fund of the Treasury. "SEC. 304. ESTABLISHMENT OF ADvIsoRY BOARD. "(a) There is hereby established an ad- visory board to be known as the Presi)en- tial Election Campaign Fund Advisory Board (hereafter in this section referred to ~ts the `Board'). It shall be the duty and function of the Board to counsel and assist the Comp- troller General in the performance of the duties imposed on him under section 303 of this Act. "(b) The Board shall be composed of two members representing each political party whose candidate for President at the last presidential election received 10,000,000 or more popular votes as the candidate of such political party, which members shall be ap- pointed by the Comptroller General from recommendations submitted by each such political party, and of three additional mem- bers selected by the members so appointed by the Comptroller General. The term of the first members of the Board shall expire on the 60th day after the date of the first presidential election following the date of the enactment of this Act and the term of subsequent members of the Board shall be- gin on the 61st day after the date of a presidential election and expire on the 60th day following the date of the subsequent presidential election. The Board shall select a Chairman from among its members. `(c) Members of the Board shall receive compensation at the rate of $75 a day for each day they are engaged in performing duties and functions as such members. in- cluding travel time, and, while away from their homes or regular places of business, shall be allowed travel expenses, including per diem in lieu of subsistence, as author- ized by law for persins in the Government service employed intermittently. "(d) Service by an individual as a mem- ber of the Board shall not, for purposes of any other law of the United States, be con- sidered a.~ service as an officer or employee of the United States. `SEc. 305. APPROPRIATIoNS AUTHORIZED "There are authorized to be appropriated, out of the Presidential Elections Campaign Fund, such sums as may be necessary to en- able the Secretary of the Treasury to make payments under section 303 of this Act." Mr. WILLIAMS of Delaware. Mr. President, I ask for the yeas and nays on my amendment. The yeas and nays were ordered. Mr. WILLIAMS of Delaware. Mr. President, this amendment would strike from the bill title III, the purpose of * which Is to provide for the financing of * presidential campaigns out of the Fed- era.l Treasury. There is no question that Congress should some day deal with this question In some form; however, there are too many phases of a presidential campaign, * as well as a congressional campaign, which need dealing with other than just the question of financing. For one, we should provide for a greater degree of accounting by the nu- merous committees formed in the States. We need more information as to how the money is now being spent. All this pro- posal would do now would be to make funds available out of the Treasury for a presidential campaign at the expense of the American taxpayers. At the same time it would provide no rules as to how the money would be spent or how it would be accounted for. This proposal would provide $60 mil- lion to $70 million to finance presidential elections there is nothing that would prevent the parties from going on and raising all the money they wanted on top of that amount to be used for congres- sional or State races. Certainly we recognize that there must be some different method for financing political campaigns. Some time back I joined in support of a proposal which had been endorsed by the President which would allow a tax credit for the first $100, but Congress voted that down overwhelmingly. I was sorry that I did not get the support of the President's own party at that time. But this proposal has no place in this bill. This is not a bill in which to cor- rect campaign abuses or provide for methods of raising campaign funds. This bill is a foreign investors tax bill, and unless and until the Senate is ready to deal with all of the other proposals concerning ~11 e reporting as well as the financing of political campaigns I think it should be postponed. 1545 PAGENO="0394" Mr. SCOTT. Mr. President, will the Senator from Delaware yield at that point? Mr. WILLIAMS of Delaware. I yield. Mr. SCOTT. Let me say that I am interested in what the Senator has said about the amendment, and I agree with him in his view as to the fact that this particular amendment has no place in the bill at this point. I do think that we need better ways to finance political campaigns, and I think that there is need for the Federal Government to consider the degree of its participation; but I also think that we need to explore the utterly prohibitive cost of television and radio time in bringing the issues of the day before the people of this country through those who seek public franchise. However, I question that this is the time or the place, or that this is neces- sarily the best method. I regret, further, that I was unable to cast a vote on the previous amendment because the usual courtesies of the Sen.. ate were lacking at that time, and I was denied that opportunity; but I want to assure those who denied me those cour- tesies, that I will be present on this vote and will be prepared to move the regu- lar order in order to expedite proceed- Ings. Mr. COTTON. Mr. President, will the Senator from Delaware yield for a question? Mr. WILLIAMS of Delaware. Yes, in just a moment. The Senator from Pennsylvania has raised a valid point. There is no ques- tion that the Senate should deal with the question of equal time on television. There are so manyquestions which must be dealt with concerning campaigns. Under this proposal each citizen can contribute a dollar to go to the cam- paign fund for both parties, but the point is that we shall dip into the Federal Treasury to finance the elections. Now I yield to the Senator from New Hampshire. Mr. COTTON. First, Mr. President, I agree with the distinguished Senator that as intricate and difficult and complex a subject as is the control of campaign expenditures and the financing of cam- paigns, this subject should not be dealt with at the last minute with an amend- ment tucked into a bill with no more consideration than is being given or can be given it at this time. I shéuld like to ask the Senator a couple of general questions in. order to clarify my own thinking.' Here is a bill which came from the Finance Committee of which the Sen- ator is a distinguished member, and it is 231 pages long. It is supposedly a bill that relates to tax credits on foreign in- vestments. It is my understanding that there are more than 20 amendments on all kinds of subjects that have been added to the bill; is that not correct? Mr. WILLIAMS of Delaware. That is correct. It covers a great many unre- lated subjects, from depletion allowances for clam and oyster shells to financing a presidential election. Some may have merit, but they have nothing whatever to do with foreign investors tax credits. Mr. COTTON. In view of all the hodge- podge of the varying amendments and the subjeáts covered in the bill, and in view of the fact that this is a complicated bill, rushed into the Senate during what is supposedly and generally agreed to be almost the next-to-the-last week of the session, it would seem to me that it would be impossible to give all these amendments and the bill itself intelli- gent and careful attention, and that it is exceedingly poor legislation. I should like to ask the Senator this question: Will the heavens fall or will the United States of America be severely damaged if the main subject of the bill; namely, the tax credit for foreign invest- ments, went over until January? Mr. WILLIAMS of Delaware. No, there would be no serious harm done, although I should like to see title 1 of the bill enacted if it could be done by deleting the other three titles, which represent nothing more than a grab bag. After the pending amendment has been voted on I shall offer another amendment to strike out titles 2, 3, and 4 and leave it just a bill dealing with foreign investment [P. 25348) tax rates. This would strike out all these nongermane amendments. Mr. COTTON. I should like to sum- marize by asking my distinguished friend from Delaware, who has served so long and so well on the Committee on Finance, whether, if the hodgepodge of amendments on other subjects remained in the bill, a Senator would be justified, in the opinion of the Senator from Dela- ware, in voting against the bill, unless it were restricted to title 1, the subject which it is supposed to cover? Mr. WILLIAMS of Delaware. I an- swer the Senator in this way: I believe that title 1 is a meritorious proposal. I am in favor of it and would like to sup- port It, but If the nongermane amend- ments in titles 2, 3, and 4 are not deleted and are left as they are now, I shall vote against the bill, even though I favor the bill as originally introduced. I think that answers the Senator's question. The bill as it was originally introduced dealt only with the subject of title 1. The tax provisions on foreign invest- ments in this country would have pro- vided additional revenue of about $26 million, although it was not a revenue- producing measure as such-it was more of a tax adjustment act. Nevertheless, it did have the effect of producing ad- ditional revenue of $26 million. The bill as it is now, containing all the nongermane amendments, should it 1546 PAGENO="0395" become fully applicable would result in a loss of revenue that would reach as high as $600 million. The lowest esti- mate I have heard is $410 million. The Treasury concedes that the loss would be between $500 and $600 million, and this is a bill which was originally de- signed to produce revenue. Mr. COTTON. The Senator from New Hampshire has great respect for the Committee on Finance. He served on that committee during one session of Congress. When did the original pro- posal reach the Committee on Finance fOr consideration? Mr. WILLIAMS of Delaware. I do not have the exact date when the original proposal was submitted, but it was about 4 or 5 weeks ago. We held hearings on It, we arrived at our decision, and we were making excellent progress until all these nongermane amendments were submitted. I think the first one related to a depletion allowance on clam shells. Anyway, once those amendments got started the dam broke, and everything went in. In fact, one Senator had an amendment, and when it came his turn to offer his amendments he said In a joking manner, "We can save a lot of time; the committee seems to be in a mood of accepting everything so I will offer my file." In fact it was almost adopted before he had a chance to get it back. That is how irresponsible the committee was acting at that particular time. Mr. COTTON. Does the Senator from Delaware agree with the Senator from New Hampshire that, with the lateness of the time in the session, when things are being hurried through, when Mem- bers are tired and distracted with many other duties, when they are engaged In committees of conference, It would be an atrocity and e,ctremely Irresponsible to pass legislation under the conditions In which the present bill is before us? Mr. WILLIAMS of Delaware. Per- sonally, as I stated, I am not going to vote for the bill in its present form. I would have voted for-and I was enthusiasti- cally in favor of-the bill as it was origi- nally proposed. .1 refer to title I, the * bill which dealt with taxes on foreign in- vestors. Mr, COTTON. I thank the Senator. He has confirmed my own doubts about the wisdom of supporting this bill in its present form. Mr. WILLIAMS of Delaware. In con- clusion, I make just one point, that should not be overlooked. The argu- ment is made that under this proposal a taxpayer can help finance the election campaigns by having the taxpayer desig- nate in a box on his tax return that he wants $1 of his taxes' to be'diverted into a fund for this purpose. But do not overlook this point-the taxpayer has no authority to designate which political party or candidate is to get his dollar. Mr. LAUSCHE. Mr. President, may we have order?, I think the Senator who is speaking is entitled to be heard. Sena- tors who do not have the floor are talk- ing louder `than the .Senator who Is speaking. The PRESIDING OFFICER. It has been necessary to call for order several times. The Chair requests the coopera- tion of Senators in maintaining order. The Senator from Delaware may pro- ceed. Mr. WILLIAMS of Delaware. Under this proposal a taxpayer can mark in a box on his return that he wants $1 of his taxes to go into the campaign fund. The formula is designated by the committee as to how these funds are to be distrib- uted. It is conceivable-I do not say it will happen, but It is conceivable-that 10 or 15 million taxpayers who are mem- bers of the Democratic Party or who are members of the Republican Party will designate that their dollars go into the campaign fund. They will have no con- trol as to where that money goes. It is conceivable that all or almost all of the contributors may, for example, have been members of the Republican Party. Yet half of those funds will be distributed to a Democratic candidate. The situa- tion may be vice versa. We should have a proposal to encour- age small contributions I think we would encourage greater participation on the part of small taxpayers by giving them a tax credit for a contribution of $2, $3, $4, or $5, but always with the right of the taxpayer to designate the political party he wishes to support. Under the amendment in the com- mittee bill the taxpayer has no control over whether he is financing the Demo- cratic Party or the Republican Party. It is conceivable that all of the contribu- tions, or an overwhelming percentage `of them, may have come from members of one particular party. It seems to me that this question should have more study. We cannot cure the problem of our present cam- paigns by simply providing $50 or $60 million for campaign purposes from the Public Treasury. Mr. LONG of Louisiana. Mr. Presi- dent, it would be strange to compare the Senator's argument with the one `he made some time ago, when he was ad- vancing a plan to finance' presidential campaigns. A while ago we had a bill before us having to do with the tlebt limit. It was irrelevant to the debt limit, but the Senator proposed that a tax- payer should be allowed a deduction of up to $100 to finance presidential cam- paigns. The Senator from Louisiana made the announcement at that time that If the Finance Committee were permitted to consider it, the committee would study the matter, conduct hearings, have wit- nesses testify, and bring something be - 1547 PAGENO="0396" fore the Senate on which the Senate could vote one way or the other. We studied the Senator's plan and came to the conclusion that it was not as good as the one the committee has proposed. We came to the conclusion that a $100 deduction was not enough of an encour- agement for people to participate, except wealthy people, who would get a $70 de- duction in their taxes. In the opinion of many of us, we would be giving a deduc- tion to many people who would have put up that money anyhow. Some of those people might have strings attached to. their contributions, expecting to get something out of it. So we made another proposal. We proposed that if a taxpayer is sufficiently interested in good government, he will have an ~pportunity to contribute to the financing of the campaigns equally. He can mark a box on his income tax return that he is in favor of making a financial contribution to finance the campaigns of presidential candidates. The provi- sion was worked out so that If that tax- payer is Interested, he can have a dollar of his tax used to finance presidential candidates. Fifty cents of that dollar would presently go toward the Republi- can campaign and 50 cents of it toward the Democratic campaign. I believe that is a better way to do it, so that the can- didates do not have to pad around to corporations and unions looking for money for their campaigns. They will be equally obligated to the citizens. Then we will not have to have these President's clubs or any other clubs. Once a candidate is nominated, the peo- ple take care of his financing. In effect, a citizen contributes 50 cents to both sides. The citizen makes that contribu- tion as a matter of good government. He is not going to ask for any personal consideration. Nobody will know who he is. The $1 he has contributed will be split 50 cents for one party and 50 cents for the other; 50 cents to President John- son, if he runs again, and 50 cents to whomever the Republican nominee may be. This will be financing good govern- ment. The Senator from Delaware has said that this will not solve the equal time problem. It solves that problem. Tele- vision is very expensive. Both the Re- publican and the Democratic candidates will have plenty of time and will have money to pay for it. Splinter parties [P. 253491 would not be included, unless they had votes of more than 1,500,000. So this provision solves the equal time problem which has been plaguing Congress for so long. The provision the Senator from Dela- ware proposed-was studied, we bad hearings on it, we had witnesses testify, we thought about it, we meditated on It, and rejected it in favor of the provision before us today. It is the judgment of the 12 members of the Finance Commit- tee. I regret to say it is not the judgment of four members headed by the Senator who~ in the beginning was the ramrod of the suggestion that we do something about campaign contributions and who now suggests that we cut it out of this very bill. Now he finds it is inconsistent, that it is not relevant to the bill. That did not bother the Senator a bit when he was offering his campaign financing proposal. Mr. NELSON. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. NELSON. This provides that the taxpayer must mark his own tax return, indicating that it is his desire that a dollar of his tax money be allocated to both parties equally? Mr. LONG of Louisiana. That is cor- rect. Mr. NELSON. Some time ago, the Senator from Louisiana, the manager of the bill here, introduced a bill which I thought was much better than this pro- vision. I realize perhaps this is as far as he can go at this time. The fact of the matter is that this is the only genuinely creative idea, which I consider valuable, useful, and work- able, that I have seen proposed by any- body to reach the problem of financing campaigns in this country; and I con- gratulate the Senator on his proposal. The amount of money being spent on campaigns in the States and across this Nation is absolutely scandalous; and the influence, or possible influence, of power- ful financial and economic interests upon our legislative bodies in this country is very dangerous. I think it is time that Congress took some action to provide financing for campaigns so that there will be no question but that the people who are elected in our States and at the national level are responsive and respon- sible to the people of this country, and not to big, powerful economic groups, no matter what such groups might be. Mr. LONG of Louisiana. Mr. Presi- dent, a great Republican president, Theodore Roosevelt, after having been president, made the statement that presi- dential campaign ought to be financed with public funds, and they ought to be accounted for. . That is what this meas- ure provides. It does put every tax- payer in the position that he is encour- aged to make a $1 designation for good government out of the tax he already owes. All he has to do is mark on his tax return that he wants the dollar of his tax placed in the presidential elec- tion campaign fund, to be divided equally between the two major parties. That is all there is to it. If a third party should emerge, it is provided for. If you want to say you have got to get 15 million votes rather than 10 million votes to be re- 1548 PAGENO="0397" garded as a major party, we can do that. There has not been a serious contender among third party presidential candi- dates since the late Robert La Follette. But if the fate of this Nation should re- quire a third party to emerge, the meas- ure provides for that, too, because it pro- vides that when they receive 1,500,000 votes, they will be entitled to be financed to the extent of $1 for every vote they received over 1,500,000. It is a carefully considered propo- sition. It is the best we can do at the moment. I believe, if we pass this pro- vision, and begin moving in that direc- tion, that with time we can improve on it and make it a better measure. But this is a manner of saying that the President, when elected, would be equally obligated to every taxpayer who is interested in financing his campaign, and just as much to a man who voted against him as to a man who voted for him. Because, when a man marks on his tax return that he wants a dollar of his tax paid into the presidential election campaign fund he is in effect dividing his dollar between the two parties equally. He is not thereby indicating a political preference. Mr. LAUSCHE and Mr~ MURPHY ad- dressed the Chair. The PRESIDING OFFICER. The Senator from Ohio. Mr. LAUSCHE. Mr. President, I yield to the Senator from California. Mr. MURPHY. Mr. President, does the distinguished Senator mean to in- dicate by his last statement that the re- gard of the President of the United States for the individual is dependent upon a donation made for his election? I am sure the Senator did not mean that., Mr. LONG of Louisiana. The Sena- tor may draw his own' conclusions. My remarks will speak for themselves. I am simply trying to put into effect a one-man, one-vote principle in financ- ing the campaigns of presidential condi- dates and to encourage widespread par- ticipation in the process of financing presidential campaigns, something not at all inconsistent with the thinking of the President on this subject. Mr. MURPHY. I ask the Senator another question. Having experienced, at one point in my colorful career, the receipt of a message which said that if I did not donate a dollar to `a certain union of which I was a member, I would not be permitted to work, ever since then I have been sensitive about dollar donations, and whether any device may one day be found to control such dol- lar donations. I am of the belief, and would like to ask the Senator if he does not agree with me, that the matter of political costs and campaign costs has increased unnecessarily. I think there is no ques- tion about that. The greatest increase comes from the use of the new medium, television. Would it not be more prac- tical if we made an approach whereby ,the use of the air, which' belongs to' the ,people and not to the networks, would be divided between the candidates, for the time being? Then possibly: we would `not have to worry about future collections of moneys, and maybe we could begin to de-escalate this entire unnecessary expeniture that is taking place in our presidential campaigns. I ask the Senator if he does not think that would be a more practical ap- proach. Mr. LONG of Louisiana. Mr. Presi- dent, that might be an attractive sug- gestion for television stations that were making a lot of money. I would hate to tell a television station that was `losing money that it must give a lot of free time to put people on the air. But if the Sena- tor wishes to offer that suggestion, I would suggest that he propose it as legis- lation and send it to the appropriate committee. This committee does not have jurisdiction of that matter, but I would hope that the committee that does have jurisdiction of it would study it and give it their best judgment. Mr. MURPHY. If the Senator will for- give me, I did not expect the matter to be taken up in this bill. I had assumed that the principle of truth in packaging, which was so eloquently explained by the Senator from Michigan In this Chamber, which was designed to protect the house- wives of America, would also apply to the Members of the U.S. Senate. That is why I am amazed at the number of things that turn up in a bill which I understood had to do with foreign investments. I hope that the Senator will forgive my interruption. Mr. LONG of Louisiana. Mr. Presi- dent, I am happy to forgive the interrup- tion, but let me say that these 23 amend- ments are not all the amendments of the Senator from Louisiana. As a matter of fact, I believe only 2 of the 23 are amend- ments by the Senator from Louisiana. We have, among others, a very impor- tant amendment by the Senator from Massachusetts [Mr. ,SALTONSTALL]. That most able Senator, who is planning to re- tire after this year, has been working for a great number of years to pass a bill to say that, in computing what the Gov- ernment owes, it should give a statement of all its' contingent liabilities. My thought was, well, if it is going to do that, it is all right with me, provided that it also should give a statement of assets on the same basis. I have been urging the Senator to hold that amendment off all through this Con- gress to wait for some later bill. We `cannot originate revenue legislation, but, if we are going to treat the Senator fairly, we ought to let him offer his amend- ment; so we have put it on this bill along with the others. The Senator from Delaware [Mr. WIL- LIAMs], who says we have put all this 1549 PAGENO="0398" trash in the bill, was the man who, if I recall correctly, offered the amendment on behalf of the Senator from Massa- chusetts [Mr. SALTONSTALLI. It is a good amendment, and I am happy to agree to it, but I regret to say it is totally ir- relevant to the foreign investors' bill. That is all right. I am not going to demand the right to have the Senator's amendment withheld from consideration forever. But the same thing is true of a great number of amendments, includ- ing some amendments by the Senator [P. 253501 from Illinois [Mr. DIRKSENI and other amendments by both Republicans and Democrats. This bill is so bipartisan that it never occurred to me to even count up to see whether there were more Republican-sponsored amendments pro- posed than Democratic-sponsored ones. We thought we were doing the best we could, and let it go at that. Mr. LAUSCHE. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. LAUSCHE. Mr. President, I un- derstand that the bill contains a provi- sion to the effect that the maximum number of dollars to be distributed equally to the major parties shall not exceed the number of votes cast in the last national election. Mr. LONG of Louisiana. The Senator is correct. Mr. LAUSCHE. Does the record con- tain any testimony as to how much was spent by each of the presidential candi- dates in the last presidential election? Mr. LONG of Louisiana. We do not have any official Information on that. However, I have inquired of people who have had some contact with the presi- dential campaigns on both sides, Repub- licans and Democrats, and the judgment that they expressed to me was they thought to be a realistic figure. Mr. LAUSCHE. What is that realistic figure-$65 million? Mr. LONG of Louisiana. It is $1 for every vote cast, and It is to be divided equally between the two major parties. That would be a realistic figure. Mr. LAUSCHE. It would be ~32.5 mil- lion for each party. Mr. LONG of Louisiana. There is an estimate that, in the last presidential election year, $250 million was spent. Not all of that amount was spent in the presidential campaign. Not even a ma- jor portion of it was spent in the presi- dential campaign. A lot of it was spent in campaigns for Senators, Representa- tives. and even, I suppose, for clerks of court. It is estimated that in that year over $250 million was spent in political campaigns. Mr. LAUSCHE. There is nothing in the record to show, on the basis of the reports filed for the presidential cam- paign, how much was definitely spent by the presidential candidates. Mr. LONG of Louisiana. We do not have conclusive information on that. If I do say so, I believe the people who know best would not want to tell us except on a confidential basis. Mr. LAUSCHE. If the pending meas- ure is passed and each of the 65 million taxpayers consent to the use of $1 of his tax money for presidential campaigns, instead of for public services, it would produce $65 million. Mr. LONG of Louisiana. That would be for 1 year. Mr. LAUSCHE. Would this amount accumulate so that at the end of 4 years there would be $260 million? Mr. LONG of Louisiana. That would be the case if all of it were so designated. The money Is simply transferred to the fund by the Secretary of the Treasury in the presidential year. Mr. LAUSCHE. Instead of $260 mil- lion being available for public services and to supply public schools, the $260 million would be turned over to the polit- ical parties to promote the campaigns. Mr. LONG of Louisiana. I regret that the Senator did not understand me. Mr. LAUSCHE. It will accumulate for 4 years. Mr. LONG of Louisiana. It would not accumulate. It would all go back in the general fund. If there were more dollars there than there were votes or than there were expenses, -the remainder would go back to the general fund of the Treasury and would be used for the schools and all the other things in which the Senator Is Interested. The amendment does provide for an accounting of every nickel of these cam- t~aign expenditures. The man in whom we have the most confidence, when it comes to checking on who spends what, happens to be the Comptroller General of the United States. The Comptroller General of the United States would check these expenditures and be advised by a bipartisan board consisting of two Republican and two Democratic members, and three mem- bers chosen by those four members. The Democrats would be watching every dime expended by the Republicans, and the Republicans would be watching cvery dime expended by the Democrats. Both sides would be watching their own parties as well. Every nickel of this money would be accounted for. If any funds are improperly expended, there are statutes on the books to take care of that. Mr. WILLIAMS of Delaware. The Senator mentioned the fact that I spon- sored an earlier amendment dealing with campaign contributions. That is true. However, that amendment would have allowed every taxpayer to decide to whom he wished to make his contribu- tion. He could make a contribution of up to $100 to the party of hIs choice and then deduct it on his tax return. Each 1550 PAGENO="0399" taxpayer would have the right to deter- mine which political party he wanted to support. There is no freedom of choice con- tained in this particular. proposal. The Senator from Louisiana is correct that hearings were held on some of these proposals. However, when this proposal was first Introduced by the Senator from Louisiana and hearings were held on it, it was proposed to finance the cost en- tirely out of the Federal Treasury. The method of financing has since been changed, We should also have had hearings simultaneously with other committees to inquire into the other presidential pro- posal. We should require a greater de- gree of accountability with respect to all expenditures in preshlential, congres- sional, and local races. That is not done under this proposal. We will not cure the problem by taking $60 million or $70 million and pouring that much money into campaign funds with no accounting or control over the expenditures. The Comptroller General of the United States can audit this particular fund, but he cannot make an audit with respect to the amount of money that is spent over the amount provided under this proposal. Why not let the Comptroller General audit all campaign expenses? I . think that somebody should have the power to do so. Mr. President, I am ready to vote. The PRESIDING OFFICER. The question is on agreeing to the amend- ment of the Senator from Delaware [Mr. WILLIAMS]. On this question, the yeas and nays have been. ordered and the clerk will call the roll. The legislative clerk called the roll. Mr. LONG of Louisiana. I announce that the Senator from Idaho [Mr. CHURCH], the Senator from Massachu- setts [Mr. KENNEDY], and the Senator Maryland [Mr. TYDTNGS] are absent on official business. I also announce that the Senator from New Mexico [Mr. ANDERSON], the Sena- tor from Tennessee [Mr. BASS], the Sen- ator from Illinois [Mr. DOUGLAS], the Senator from Mississippi [Mr. EASTLAND], the Senator from Arizona [Mr. HAYDEN], the Senator from New York [Mr. KEN- NEDY], the Senator from New Hampshire [Mr. MCINTYRE], the Senator from Montana [Mr. METCALF], the Senator from Utah [Mr. Moss], the Senator from Rhode Island [Mr. PELL], the Senator from West Virginia [Mr. RANDOLPH], the Senator from Virginia [Mr. ROBERTSON], the Senator from South Carolina [Mr. RUSSELL], the Senator from Florida [Mr. SMATHERS], and the Senator from New Jersey [Mr. WILLIAMS] are necessarily absent. I further announce that, if present and voting, the Senator from Utah [Mr. Moss], the Senator from West Virginia [Mr~' RANDOLPH], and the Senator from New Jersey [Mr. WILLIAMS], would each vote "nay." Mr. KUCHEL. I announce that the Senator from Colorado [Mr. ALLOTT], the Senator from New Jersey [Mr. CASE], the Senator from Kentucky [Mr. COOPER], the Senator from Nebraska [Mr. CuRTIS], the Senator from Iowa [Mr. HICKENLOOPER], the Senator from New York [Mr. JAvITsI, the Senator from Idaho [Mr. JORDAN], the Senator from Kansas [Mr. PEARSON], the Senator from Vermont [Mr. PROUTY] and the Senator from Texas [Mr. TOWER] are necessarily absent. If present and voting, the Senator from Colorado [Mr. ALLOT], the Senator from Nebraska [Mr. CURTIS], the Sena- tor from Iowa [Mr. HICKENLOOPER], the Senator from Idaho [Mr. JORDAN], the Senator from Kansas [Mr. PEARSON], and the Senator from Texas [Mr. TOWER] would each vote "yea." The result was announced-yeas 33, nays 39, as follows: [No. 297 Leg.~ YEAS-33 Aiken Fong Mundt Bartlett Gore Murphy Bayh Griffin Russell, Ga. Bennett Harris Saltonstall Boggs Hill Scott carison Hruska Simpson Cotton Jordan, NC. Smith Dirksen Kuchel Sparkman Dominick Lausche Thurmond Ervin McClellan Williams, Del. Fannin . Miller Young, N. Dak. [P. 25351) NAYS-39 Bible Holland Morse Brewster Inouye Morton Burdick Jackson Muskie Byrd, Va. Long, Mo. Nelson Byrd, W. Va. Long, La, Neuberger Cannon Magnuson Pastore Clark Mansfield Proxmlre Dodd McCarthy Ribicoff Ellender McGee Stennis Fuibright McGovern Symlngton Gruening Mondale Talmadge Hart Monroney Yarborough Hartke Montoya Young, Ohio NOT VOTING-28 Allott Hickenlooper Prouty Anderson Javits Randolph Bass Jordan, Idaho Robertson Case Kennedy, Mass, Russell, S.C. Church Kennedy, N,Y. Smathers Cooper McIntyre Tower Curtis Metcalf Tydings Douglas Moss Williams, N.J. Eastlancl Pearson Hayden Pell So the amendment of Mr. WILLIAMS of Delaware was rejected. Mr. LONG of Louisiana. Mr. Presi- dent, I move to reconsider the vote by which the amendment was rejected. Mr. PASTORE. I move to lay that motion on the table. The motion to lay on the table was agreed to. The PRESIDING OFFICER. The bill is open to further amendment. Mr. WILLIAMS of Delaware. Mr. President, I send to the desk an amend- ment. 1551 PAGENO="0400" The PRESIDING OFFICER. The amendment will be stated. The assistant legislative clerk read as follows: The Senator from Delaware proposes on page 184, beginning with line 1, to strike out all down to and including line 3 on page 231. Mr. WILLIAMS of Delaware. Mr. President, I ask for the yeas and nays on the amendment. The yeas and nays were ordered. Mr. WILLIAMS of Delaware. Mr. President, I shall be very brief in con- nection with this amendment. Mr. YOUNG of Ohio. Mr. President, may we have order? Attaches are standing around the rear of the Cham- ber talking with each other. I suggest that if they have any work to do, they should be ordered out of here so that we can hear what is going; Mr. President, I am pointing right at them. They are talking together and it is difficult to hear anything. I feel that they should be back in their offices do- ing their work instead of standing around talking together and disturbing the Senate. The Sergeant at Arms should ask them to leave unless they cease disturbing the proceedings of the Senate. Mr. LONG of Louisiana. Mr. T~resi- dent, I am willing to cooperate with the Senator, but this is a very technical bill and I have to have the staff here to as- sist me in connection with the bill. Mr. YOUNG of Ohio. Mr. President, they should keep quiet and not talk with each other. If they have something to say they should talk with Senators. The PRESIDING OFFICER. If it is up to the Presiding Officer, he has been carefully observing the Senate and Is sure, in all candor, that 95 percent of the talk has been between Senators. However, the Presiding Officer asks that attaches desist from discussions in the rear of the Chamber. Mr. PASTORE. Mr. President, I agree with the observation of the Chair. The PRESIDING OFFICER. The Senate will be in order. Mr. WILLIAMS of Delaware. Mr. President, this bill started out to provide more equitable tax treatment for foreign investors in the United States. I feel that title I does an excellent job in tak- ing care of the situation. I am in favor of that part of the bill, and I would like to support it. Title I would increase revenues of the Government by $26 million, but titles II, III, and IV go far afield. As the matter now stands with all of the four titles in- cluded, when fully applicable they would cause a loss in revenues of between $500 and $600 million. Titles II, III, and IV deal with the vari- ous provisions beginning with providing special depletion allowances for clam and oyster shells, depletion allowances for various types of clay, financing an election from the Federal Treasury, and special deductions for medical expenses. One amendment to the Medicare Act of 1965 would provide an additional $180 to $200 million for the cost of drugs. The administration is already faced with the embarrassing fact that under title XIX of that act, as passed by Con- gress, there is about a $1 billion loophole. It is becoming apparent that Congress is not going to get time to deal with this before adjournment. This is indefensi- ble on the part of the administration, which for months has known of this loop- hole in title XIX, and yet they did not come to the Congress to correct it. Why? Are they afraid to tell the voters before election what they will have to take away from them? This bill provides a special authority to sell FNMA certifi- cates to foreigners abroad. Altogether these amendments-there are 23 of them-would decrease revenues by between $500 million and $600 million. This bill in its present form has been referred to in the Wall Street Journal as "the Grab Bag Act of 1966." I hope that this amendment will be adopted. If the amendment which I am now offering is adopted it would leave in the bill only that title dealing with foreign investment tax credit. It would save a $500 million loss in revenue at a time when everybody is talking about a tax increase soon after the votes are counted this November. Mr. AIKEN. Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. AIKEN. Mr. President, I think that this Congress should have adjourned sine die last week. In the 26 years that I have been here I do not believe I have seen any time when the Senate appeared more irresponsible than It does now. We have before us a 231-page tax bill, most of which we saw for the first time at 10 o'clock this morning. There is an 80- page report accompanying the bill. I have not had the time to know what this tax bill contains. I have noticed that many of the pro- visions are retroactive to last January; and that most of the other provisions take effect upon passage of the bill. To me it looks very much as if the people benefiting from the provisions of this bill are trying to nail them down before Con- gress knows what it is doing. We have a war on. I understand the President wanted more revenue to pay the cost of the war. It is my under- standing, and I believe It is common knowledge around town, that instead of providing funds this bill would reduce the income of the Government several hundred million dollars a year. This bill should be set aside until the time comes when we can act on it responsibly. Mr. LONG of Louisiana. Mr. Presi- dent, I thought that the purpose of mak- ing a speech on the floor of the Senate was to inform people. I thought that 1552 PAGENO="0401" that was the reason for making speeches, and not to explain how little we know. Mr. AIKEN. All that the chairman has told me so far has not adequately informed me. Maybe I am particularly dense, but I have not learned much about this bill yet. Mr. LONG of Louisiana. I regret to say to the Senator that I was not able to inform anybody of anything because I was stopped in my second sentence. Mr. President, I understand this bill. I am the chairman of the committee. I have a staff member who Is one of the finest tax authorities in America: He understands the bill. We have one of the members from the staff who is a very fine tax lawyer sitting beside the Senator. He can explain anything to the Senator, and I believe that I can explain anything in the bill. Here is the committee report. The committee has been working and study- ing diligently. Some of the items in the bill are items that have been talked about for 6 or 8 years, until they have become associated in the public mind with the Senators who are sponsoring them. Consider the Saltonstall amendment. It is in the bill. The Senator from Mas- sachusetts has been trying, since I came to the Senate 17 years ago, to have en- acted an accurate statement of the con- tingent liabilities of the United States. That subject is totally irrelevant to the bill. But there has not been any bill to which it would have been a relevant amendment, and I asked the Senator from Massachusetts not to offer it to five or six other bills. But eventually, if. such a provision is to be enacted, it is necessary to propose it and have it ex- plained. If there is anything in the bill that a Senator is worried about, whether he agrees with the amendment or not, I will try to explain it to him. That is why we have debate on the floor of the Sen- ate. Senators have the committee report before them. If they do not understand the meaning of an item the first time, the committee will supply a staff expert, a qualified expert, to talk to them on the side or in the cloakroom. Mr. PASTORE. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. [P. 25352) M". PASTORE. Will the depletion- allowance provisions of the bill reduce the income to the Treasury? Mr. LONG of Louisiana. Slightly. Mr. PASTORE. How slightly? Mr. LONG of Louisiana. The bill con- tains a proposal to allow the same per- centage for Georgia clay, which is used to produce aluminum, that is allowed for bauxite. That will provide revenue for the Government. Unless such a pro- vision is enacted, such producers can~~ not go into the business. It will help our balance of payments and reduce the out- flow of gold from the United States. The bill also contains a provision to treat oyster and clam shells, when they are used to manufacture cement, in the same way that limestone is treated when it is used to manufacture cement. It is estimated that the revenue loss on that item would be less than $1. million. When the Senator from Delaware spoke about a loss of $600 million, he was badly in error. The estimate of revenue costs of the bill in the fIrst year of opera- tion is about $400 million. The estimates of the revenue cost of the bill for the first year of its full op- eration would be about $400 million. Where will it be? Three hundred and eighty-five million dollars of that is to help the old folks. Of the $200 million to pay for drugs for the aged, $100 mil- lion is to be paid by the old people them- selves, who will put up 50 cents, and the Government will put up 50. cents also. That was an amendment by the Senator from Illinois [Mr. DOUGLAS], who has been interested in our aged folks for many years. Thus, out of the $385 mil- lion, $100 million is actually paid for by the old folks. So the revenue loss is $285 million. Mr. PASTORE. Then this is to pro- vide relief for the aged who need drugs? Mr. LONG of Louisiana. Yes. Mr. PASTORE. Would the amend- ment offered by the Senator from Dela- ware [Mr. WILLIAMS] delete that pro- vision? Mr. LONG of Louisiana. Yes. Mr. PASTORE. That is all I wanted toknow. Mr. LONG of Louisiana. Let me ex- plain that revenue loss a bit more. There is another provision that aged people whose bills are not paid by medicare will. be able to deduct fully medical expenses that they pay themselves. That is the tax treatment they have now, and they would lose it on January 1 unless we pass this bill. It has not even happened to the old people yet, but the Committee on Aging has bundles of letters from the old folks saying, "Please do not do this to us, Senators." Let me say that this is the idea of the House to do that. We took that out of the medicare bill in 1965, and the House made us take it in conference. I be- lieve that it will be the most unpopular measure enacted by Congress in 50 years, In the bill before us, we proceed to say that the old folks can continue to deduct all of their medical expenses. Mr. PASTORE. Unless this bill Is passed, that will expire? Mr. LONG of Louisiana. After the first of January, the old folks will no longer be able to deduct all of these ex- penses. 71-297 0-67-pt. 2-26 1553 PAGENO="0402" Mr. PASTORE. I do not think that `the Senator from Vermont [Mr. Arf~iN] would want to do that. He has always been a great protagonist for young people, for elderly people, and for the distressed and the poverty stricken. Mr. AIKEN. Let me say that if there Is anyone more distressed over the pend- ing legislation at this moment than the Senator from Vermont, I do not know who it could be. I am sure that this bill is not going to benefit him. Mr. PASTORE. Does the Senator from Vermont feel a little more corn- fortable after listening to this explana- tion? Mr. AIKEN. I do not feel much more enlightened than I was before. As for having a committee staff member, or a staff member of the chairman, available at any time for more explanations, I think he has spent much of. his time working with the chairman. Mr. LONG of Louisiana. Mr. Presi- dent, furthermore, when we voted on this item that would let the old people con- tinue to. deduct medical expenses, when we voted on that in committee, even though the point was made that it was not relevant to the bill-the point the Senator from Delaware has made al- ready-the vote was overwhelming. Why? Because who among us would want to tell these poor old people that they have got to pay taxes on the money which they spent just trying to stay alive, just trying to hold hide and hair together? Mr. SYMINGTON. Mr. President, will the Senator from Louisiana yield? Mr. LONG of Louisiana. I yield. Mr. SYMINGTON. Two of the amendments are on the amount of money which would be lost having to do with the old people? Mr. LONG of Louisiana. Yes. Mr. SYMINGTON. The able assistant majority leader has explained that to my satisfaction, but could I ask what re- maining amount of money will be lost to the Treasury, in addition to the two that he has just explained-and explained to my satisfaction-what additional amount of money will be lost? Mr. LONG of Louisiana. What I have just described costs about $385 million out of the $410 million revenue loss of the bill. Another item that would cost money is the one we voted on just now, the financing of presidential campaigns. That will not show up until the presi- dential election of 1968-in September, October, and November of 1968. It will cost us no money this year. Mr. SYMINGTON. How much of that cost is a component part of the re- maining $30 million? Mr. LONG of Louisiana. About half of it-about $15 million. So, with all the rest we are talking about now-the ideas of Senatoi on the committee, and Sen- ators not on the committee-all the rest of it put together, will cost $5 million. Mr. SYMINGTON. Only $5 million. What does the Senator have in mind would be done with the one-third, or most of the remaining $5 million? Mr. LONG of Louisiana. It is hard to say. In other words, probably no one provision remaining would cost as much as $1 million. It would be hard to say. Mr. THURMOND. What are they? Mr. LONG of Louisiana. With a bill of this size I cannot break down the $5 million, but the items are listed. Mr. SYMINGTON. Mr. President, I ask unanimous consent that the items in question be printed in the RECORD cov- ering the $5 million. There being no objection, the excerpt was ordered to be printed in the RECORD, as follows: Other amendments to the Internal Reve- nue Code Application of Investment credit to property used in U.S. possessions (sec. 201 of the bill and sees. 48(a) (2), 48(a)(5), and 48(d) of the code) Basis of property received in the liq- uidation of subsidiary (sec. 203 of the bill and sec. 334(b) (2) and (3) and sec.453(d) of the code) "Swap funds" (sec. 204 of the bill and sec. 351 of the code) Minimum amount treated as earned income for retirement plans of self- employed persons (sec. 205 of the bill and see; 401(c) (2) (B) of the code) Treatment of certain income of au- thors, inventors, etc., as earned in- come for retirement plan purposes (sec. 206 of the bill and sec. 401(c) (2) of the code) Exclusion of certain rents from per- sonal holdlhg company Income (sec. 207 of the bill and sec. 543 of the code) Percentage depletion rate for certain clay bearing alumina (sec. 208 of the bill and sec. 813 of the code) Percentage depletion rate for clam and oyster shells (sec. 209 of the bill and sec. 613 of the code) Sintering and burning of shale, clay, and slate used as lightweight aggre- gates (sec. 210 of the bill and see. 613 ofthecode) Income from lapsing of straddle op- tions (sec. 211 of the bill and sec. 1234(c) of the code) Tax treatment of per-unit retain allo- cations (sec. 212 of the bill and sees. 1382, 1383, 1385, 1388, and 6044 of the code) Excise tax rate on hearses (sec. 213 of the bill and sec. 4062 of the code) -- Interest equalization tax; loans to In- sure raw material sources (sec. 214 of the bill and sec. 4914 of the code) Interest equalization tax; Insurance company reserve funds (sec. 215 of the bill and sec. 4914(e) of the code) Interest equalization tax; dollar loans of foreign branches of U.S. banks (sec. 216 of the bill and sec. 4931 (a) of the code) Miscellaneous provisions Treasury notes payable in foreign cur- 1554 PAGENO="0403" rency (sec. 401 of the bill) Reports on Government contingent lia- bilities and assets (sec. 402 of the bill) Mr. SYMtNGTON. Mr. President, at the risk of being repetitious, let me ask again if the $385 million of the expenses lost by the old folks out of the $410 mil- lion, if this means that, a, Congress will provide 50 percent of the, drugs needed by elderly people and, b, will continue to give them the same tax rights in the future that they have had in the past. Is that correct? [P. 25353) Mr. LONG of Louisiana. We are ac- tually only talking about $310 million because the aged people will pay for half of the drug costs themselves. That takes $100 million out. So what we are talking about is roughly $310 million. Out of that $310 million, all but about $25 to $30 million is to help the old people with drugs and medical expenses. Mr. SYMINGTON. I thank the Sena- tor for what, to me, anyway, is a lucid and intelligent and well thought out ex- planation. - Mr. LONG of Louisiana. I thank the Senator. Mr. COTTON. Mr. President, will the Senator from Louisiana yield? Mr. LONG of Louisiana.' I yield. Mr. COTTON. I was much interested in this explanation which the distin- guishea chairman of the committee has given, but as I understand his last state- ment, that portion of the loss of revenue in this bill which is for the benefit of elderly people in the matter of drugs, and in the matter of continuing tax con- sideration, is now only $300 million roughly. Is that correct? Mr. LONG of Louisiana. $100 million will be collected for drug expenses from the aged people who are covered by part B of medicare, on the basis of 50 cents a month. So we will pick up $100 mil- lion in revenue to offset part of the $385 million gross loss for Items for the aged. Mr. COTTON. 1 have a great deal of sympathy with the statement of the Senator from Vermont [Mr. AmEN]. He comes from the same part of the coun- try that I do, and perhaps we were both equally dense in understanding when the Senator from Louisiana started to shed so much lucid light on this whole matter in order to inform the Senate as to just what is in the bill. He started out by saying vehemently, as he always does, and most forcefully, that of the $410 million lost In this bill, $385 million is for the old folks. So that they will pick up $85 million, which will leave $300 million. Therefore, the total figure is $410 million, Is it not? Mr. LONG of Louisiana. This bill will both `raise revenue and cost revenue. The answer would have to depend on' whether we are talking about net or gross figures. Mr. COTTON. Give us the net figure. I think even I can understand that. Mr. ,LONG of Louisiana. The net figure is $310 million, because, if this bill is passed, the old people who will be pay- ing half the cost of providing drugs un- der medicare will pay in about $100 mil- lion. In addition to that, we would lose $180 to $185 million in revenue starting on January 1, on a calendar basis, for the expense of allowing aged people to deduct all of their medical expenses in- stead of being able to deduct only that which exceeds 3 percent. Mr. COTTON. The Senator is work- ing much too hard. If he will simplify his statement sO that a high school sophomore can understand it, I am sure the Senator from New Hampshire will understand it. The Senator from New Hampshire would like to make sure he understands. All the Senator from New `Hampshire is interested in is the net loss or the net gain. The Senator from Louisiana need not go all over the road as he just did. How much will this bill give to the old folks and how much will it get back? I would like to know, in approximate figures, one, how much this bill will cost-net, not gross-and how much of that amount will be for the old folks. I think it ought to be possible to get a simple answer to that question. Mr. LONG of Louisiana. In terms of net revenue loss to the Treasury, it is $310 million. That is the cost of the bill. So the net revenue loss is $310 million. Of that net loss in revenue to the Treas- ury the old folks, the people of over 65 in this country, will have a net gain in benefits of $280 million. Their gain is a logs of Federal revenue. Of the loss to the Treasury of $280 million for the old folks, one is for medical attention for those whom medicare does not cover, and the other is to provide drugs. Mr. COTTON. When do they get that? Mr. LONG of Louisiana. Now. Mr. COTTON. They do not get that until 1968. Mr. LONG of Louisiana. They would not get the drugs until 1968, but the provision continuing the tax deduction of all medical expenses will go into effect January 1, 1967. Mr. COTTON. They get the tax con- sideration as of 1967. How much does the tax consideration cost? Mr. LONG of Louisiana. $180 million. Mr. COTTON. What is the cost of the drugs? Mr. LONG of Louisiana. On a net basis, $200 million. Mr. COTTON. But they do not get that until 1968? Mr. LONG of Louisiana. Yes. Mr. COTTON. We went through all this when medicare was passed. We were told that one title of it would cost $136 million. It now turns out that it is go- 1555 PAGENO="0404" ing to cost more than $1 billion, and it Is an open secret that a committee will come forward with a recommendation to plug that loophole. Mr. LONG of Louisiana. That was medicaid. * Mr. COTTON. The Senator may call It medicaid, but it was one of the titles of the medicare bill. Mr. LONG of Louisiana. It was in the bill. The bill was known as the Social Security Amendments of 1965. Mr. COTTON. I think I am justified in referring to any other bill by the name by which it is known, the medicare bill. If the Senator from Louisiana wants to split hairs, that is all right. There was one title in it called medicaid. If the Senator wants to treat us as if we were children, go ahead. If $100 million of this loss is to benefit the old people in 1968, why wait a year? If the Senator is going to propose this as an aid to old people, why not make it effective in 1967~ Let us help the old people. If they need help, let us start upon it immediately. Otherwise, what is the reason for all the hurry about ram- ming this bill through? Mr. WILLIAMS of Delaware. The year 1968 is a presidential election year. Could that be a reason? Mr. LONG of Louisiana. It is esti- mated that It will take a little time to set up the administrative part of it. Mr. COTTON. That means it is only window dressing because there will be a presidential election in November of that year. Mr. LONG of Louisiana. The Sena- tor- Mr. COTTON. The Senator says lie was getting it worked up simply enough to satisfy the intelligence of the Senator from New Hampshire. He assumes that the Senator understands. Will the Senator from Louisiana ac- cept an amendment to give the $100 mil- lion to buy drugs for old people, for which they are to pay on a 50-50 basis, and make it effective January 1, 1967, instead of 1968, or does the Senator's solicitation for the Treasury go that far? Mr. LONG of Louisiana. Whatever the Senate wants to do is all right with me. Mr. COTTON. But the Senator said we had to take his explanation- Mr. LONG of Louisiana. No. Mr. COTTON. We were supposed to listen to his exposition- Mr. SYMINGTON. Mr. President- Mr. LONG of Louisiana. Mr. Presi- dent, who has the floor? Mr. SYMINGTON. Mr. President, will the Senator yield? The PRESIDING OFFICER. The Sen- ator from Louisiana has the floor. Mr. LONG of Louisiana. Mr. Presi- dent, I try not to impugn the motives or ability of any Senator. If I have, I make a contrite apology. I simply said that if the Senator does not understand my explanation, I will try to find someone who can explain it. Some of these amendments have been proposed many times. The Senator from Massachusetts [Mr. SALTONSTALLJ has been working on one for a lifetime. If the Senator wants to offer his amendment, I will take it. We may have some administrative difficulties. Mr. COTTON. I thank the Senator for agreeing to do what I thought was my privilege as a Member of the Senate. I asked the Senator a direct question. If my references were unduly vehement, I, too, regret It, but it did seem to me that the Senator seemed to be a little complacent about the remarks of the Senator from Vermont. I do not think the Senator from Vei- mont was out of order in suggesting it is a very poor method of trying to push through a 231-page bill at this time of the session, when we have had no time to consider it. Of course, we depend on committees. No one in the Senate has a greater respect for the Finance Com- mittee than I. I served on it for one session of Congress. I respect the Sen- ator from Louisiana. I consider him one of the most hard-working and dili- gent Members of the Senate. In my own estimation, there is no committee which works harder than that committee. - However, we have our obligations, even though we do not serve on the committee and, though we must rely on it in great measure. I still have a duty to know what we are doing, if I wish to live up to my oath of office. [P. 25354] If I made an Insinuation that sounded political, I will take full responsibility for that, because that implication is justified. I rarely take the floor to talk about par- tisan politics-certainly when we are outnumbered 2 to 1. But in this par- ticular case, we have all these additions. Now we are told those additions are for the old people. Up in New Hampshire and Vermont we have auctions, and we are familiar with the way they work. The auctioneer says, "Do I have a bid? Do I have a bid?" If he does not have a bid, he adds something attractive to the trash, and then he tries to get a bid. If he does not succeed in getting a bid, he adds something else that is attractive. We have the same thing here. There is trash until someone says it is for the old folks. If there is something for the old people, the elderly-and God knows we want to help them-let us have it take effect, not in 1968, but January 1, 1967. Let us go the whole way, if that is to be the lump of sugar that will lead us down the pathway to pass the bill with Its accessories. I merely asked the Senator if he would accept such an amendment. I judge he will not. 1556 PAGENO="0405" Mr. LONG of Louisiana. I said I would accept it. I said if the Senator would offer the amendment, I would accept it. I will ask one of the staff to prepare it. Mr. MAGNUSON. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. MAGNUSON. Of course, we wish to help the old people, but it is possible to be cruel to them, too. If we have this take effect, when the testimony shows that they will not be ready to administer it by January 1967, then it is a hoax and a cruelty upon the old people. It ought not to take effect until they are ready to administer it, so that it will be of help to the old people. I do not know whether a year is needed or not. Per- haps 6 months will be sufficient. But I know they could not be ready, from read- ing the testimony, to put this provision into effect, administratively, in the next 21/2 months; therefore, I think to provide an effective date of January 1967 would be wrong. We would hold out a lump of sugar, and it would not be there for them. That is worse than postponing it, to hold it out as if it were there for them. Mr. LONG of Louisiana. That is the problem. The people who would ad- minister it said they need that much time, because there is a lot of detail in- volved here. May I say, this amendment to help old people with drugs does not come to us as an administration amend- ment. The administration did not ask for it. It was offered by the Senator from Illinois; and if he had tried to play politics by it, he would have had it take effect right now, because he is running for office right now. But he asked, from an administrative point of view, how soon did the respon- sible administrative agency think it would be able to handle it. They said they thought it would take until about 1968, because they have to make a care- ful study of which drugs would be made available, and all that. Mr. COTTON. The Senator certainly would not consider this an amendment that would be cruel to old people, would he? Mr. LONG of Louisiana. I am willing to do whatever the Senate wants to do. Mr. MAGNUSON. I said only if they cannot do it. Mr. COTTON. I do not think it would be such a terrible thing for the old people if we said it would take effect on the first day of January 1967, and they could not get it going until March. They would lose 3 months on it; but to say it would be a hoax and a fraud, I think that is a little bit farfetched. Mr. LONG of Louisiana. I would be willing to take the amendment, because the House is not going to agree to it unless they think it can be worked out, anyway. We could talk about it in con- ference. So as far as I am concerned, I would be willing to make it 6 months from now. Mr. AIXEN. Mr. President, will the Senator yield for two clarifying ques- tions? Mr. LONG of Louisiana. I yield. Mr. AIKEN. As I said earlier, I have not had time to read a 250-page bill since 10 o'clock this morning. But on the pro- visions relating to the deduction of full medical expenses for the old people, the bill states, "This section shall apply to taxable years beginning after Decem- ber 31, 1966." That means they could not take deductions for medical expenses incurred in this year of 1966; the first opportunity would be in the year 1967, would it not? Mr. LONG of Louisiana. No; the Senator is in error. The way the law stands today, they can deduct it all. But starting- Mr. AIKEN. They can deduct all of it? Mr. LONG of Louisiana. Yes; all of it. But the Medicare bill-and I am going to refer to it as Medicare also; I will explain later why I made the dis- tinction a few moments. ago-the so- called Medicare bill, ~n trying to find ways to finance that program, said that in 1967, starting in January, the aged people would no longer be permitted the favorable tax treatment they have been allowed for deductions for medical ex- penses. That was a House provision. We took it out in the Senate committee, and the Senate sustained us. But in conference, we had to yield on it. So we are now doing what we did in 1965, in the Senate committee, voting that they are not going to have to deduct only in excess of 3 percent. My guess is that if Congress wants to insist that those old people pay taxes on their medi- cal expenses, it is going to be a very un- popular thing, starting in January, and I know we will change it then. Mr. THURMOND. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. THURMOND. I wonder how many old people are involved in each of those categories, and about how much money is involved in each category. Mr. LONG of Louisiana. Every old person would be benefited by about $6 a year for the drugs, because we would be paying half of the cost of providing drugs for the aged people and they would be paying the rest at a rate of about 50 cents a month. Some old folks do not make enough money to pay any taxes,. and it would not benefit those; but as to those it would benefit, calculated on the assumption that about the same number of people would be eligible as for medicare, and averaging it out, it would average out to roughly a benefit of about $10 for every old person. 1557 PAGENO="0406" So, as a practical matter, if you want to vote for that amendment, the average old person is going to be $16 a year worse off than if we leave it in, Mr. THURMOND. And how many people would be involved, in each cate- gory? -Mr. LONG of Louisiana. There are about 17Y2 million aged people, over 65, and practically all of them would be benefited by one of the two provisions. Practically all of them would be bene- fited by one provision. Mr. THURMOND. By one or the other? Mr. LONG of Louisiana. Yes. Poten- tially, practically everybody would be benefited b~the drug provision. - Mr. THURMOND. That is, those over 65? Mr. LONG of Louisiana. Those over 65 would be benefited- Mr. THURMOND. Those over 65 would all be benefited by one category or the other? Mr. LONG of Louisiana. I think It would be fair to say that virtually all of them who have any medical expenses would be benefited by the tax provision, which is the most expensive from the Government's point of view. All those who pay taxes would be benefited if they have medical expenses. And out of those who are under medicare, all of them would be benefited, potentially, by the drug provision. Mr. THURMOND. I wonder If the Senator could get the actual figures. I am not trying to be unduly Inquisitive, but if the Senator could furnish that for the record, if we could get the figures in each category, I would appreciate it. Mr. LONG of Louisiana. There are about 17,500,000 aged people, over 65, in this country. Potentially, these two pro- visions could benefit every one of them. Mr. THURMOND. I might say to the Senator that I have introduced proposals in this Congress similar to this. My pro- posal would allow complete deductions without the 3 percent and 1-percent limit to any taxpayer who pays medical ex- penses far a dependent over age 65. 1 was just wondering what the Senator's most recent figures were. Mr. AIKEN. If I may ask my final question, I am interested in the provision for the furnishing of drugs, to old people because I offered a drug amendment to the medicare bill, 2 years ago, and the committee turned me down. It seems they have had a change of heart. But as I understand, the provisions relative to the furnishing of drugs under medicare take effect July 1, 1968. Is that correct? Mr. LONG of Louisiana. A member of my staff was speaking to me at the same time the Senator was speaking. [P. 25355] Will the Senator please repeat his ques- tion? Mr. AIKEN. The provisions of the bill relevant to the furnishing of drugs takes effect on July 1, 1968. Mr. LONG of Louisiana. The Senator is correct. Mr. AIKEN. Mr. President, as I said when the Senator was engaged In con- versation with a member of the staff, I offered an amendment to provide drugs for old people 2 years ago when medi- care was before the Senate. I was turned down rather abruptly by the committee. I am glad that there has been a change of heart. However, I do not see why this provision could not take effect on July. 1, 1968, whether the bill is passed this week or next February. I thank the Senator for answering my question. Mr. LONG of Louisiana. Mr. Presi- dent, as far as I am concerned, the bill will be in conference and if the Senator wants to offer an amendment to move the date forward, I would be willing to ac- cept it. Mr. MURPHY. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. MURPHY. Mr. President, is there any reason why the suggestion of the Senator from Vermont cannot be accepted? I respect the gracious con- duct of the Senator from Louisiana who said that he would accept such an amendment. However, it would seem at this point that there would be no reason why that particular date should be in the bill. Mr. LONG of Louisiana. Mr. Presi- dent, I regret to say that I was some- what in error. The chief counsel of our committee staff has refreshed my recol- léction on this matter. If the Senator will look at page 230 of the bill he will see that it reads as follows: The amendments made by this section shall be come effective on whichever of the following occurs first: (1) the first day of the first month with respect to which the rate of the monthly premium or participa- tion is raised, pursuant to section 1839(b) of the Social Security Act, after the date of enactment of this Act, or (2) July 1, 1968. It could become effective any time in 1968, as soon as the part B premium rate was adjusted. Mr. MURPHY. The statement about raising the social security would have no effect on this. Mr. LONG of Louisiana. It would be effective no later than July 1, 1968, but it could be effective earlier. Mr. MURPHY. Mr. President, I read from page 79 of the report as follows: A formulary committee would be estab- lished- 1558 PAGENO="0407" The report then continues, at the bot- tom of page 79: The formulary committee would promul- gate a schedule of allowances payable for given quantities of covered drugs. On page 80 of the report it reads: That would constitute the allowance Zor tetracycline. The allowance thus determined would be payable on a generic basis for Achromycin. a brand name for one company's tetracycline, or for any other brands of this drug. Does that indicate that the formulary committee will fix the wholesale price of drugs? Mr. LONG of Louisiana. It does not. It says that we will use the wholesale prices in calculating allowances. Mr. MURPHY. I have just read what it says. It is my understanding that it provides that they would fix the whole- sale price of the drugs. Mr. LONG of Louisiana. Mr. Presi- dent, I point out that we are willing to pay for the cost of the drugs on a generic name basis. We are not willing to pay the much higher price which is occa- sioned when one buys a drug by a brand name. Mr. MURPHY. The formulary com- mittee which this provision would set up would decide the price that the Govern- ment would pay for the drugs. Mr. LONG of Louisiana. We would decide ho~ much we would pay, but if one wants to pay a lot more than that allowance, he can go ahead and do it. That would be all right. Mr. MURPHY. Will the Senator yield further? Mr. LONG of Louisiana. I would like to answer the question, if I may. Mr. MURPHY. The Senator has an- swered my question. Mr. LONG of Louisiana. I would like to explain it then, if I may. Mr. MURPHY. The Senator may explain it. Mr. LONG of Louisiana. If a person has an infectious disease and needs Tet- racycline, ~we would pay him so much for it. Tetracycline is a wonder drug that one can buy in a great number of places for 5 cents a pill. It costs 1.5 cents a pill to manufacture. We are willing to pay 5 cents for each of 16 pills. Every bacteria would be killed by the time ~a person took all 16 capsules. But if one wants to buy Panalba, which is nothing but Tetra- cycline, manufactured by Pfizer Co., it will cost 30 cents a pill. It used to cost 50 cents a pill. Our Government can buy the same drug for 2 cents a pilL We provide It for our own servicemen in our hospitals. It is provided for Congressmen in the Capitol. We are willing to pay 80 cents for 16 capsules of Tetracycline. If one goes to the drug store and buys Panalba and pays 30 cents or 50 cents a pill or buys the Squibb product at a cost of 30 cents a pill, he can pay that much. If one wants to buy Achromycin, he can do so and pay 30 cents a pill. The Government can buy the same drug for 1.5 cent,s a pill and we are will- ing to allow the wholesale price of 5 cents a pill for it. A person can go to the. druggist and if he wants to buy a product by its generic name, that is all right. It is the same product as the 30-cent prod- uct. We will pay a nickel for that prod- uct. However, if one wants to buy the same drug by the trade name because be feels better about using a Pfizer prod- uct or a Squibb product, thinking that is the best company on earth, be can do so and pay more. That is his privilege. Mr. MURPHY. Mr. President, I thank the Senator for his explanation. Would it be possible to get a simple yes-or-no answer to this question? Would this in effect indirectly help to set the wholesale price of drugs? Mr. LONG of Louisiana. I do not think so. Mr. MURPHY. I can answer from my experience as a business executive that if this were done by a business firm, it would be referred to as unfair business competition. Mr. LONG of Louisiana. All we pro- vide is that we would simply look at the regular wholesale prices to determine what we think we ought to pay. Mr. MURPHY. We would tell the manufacturer what we would pay for it and the Government would be in the position of being the biggest customer. I would say this practice would be one by which the Government could be charged with attempted price fixing. Mr. LONG of Louisiana. I under- stand the situation well. I know that some people would like to see the Gov- ernment pay for drugs for old people at four or five times more than the actual cost. It would cost our Government hundreds of millions more than the Douglas amendment. Mr. MURPHY. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I shall be through in a moment. This would cost the Government and the old people would put up an equal amount. They would put up about 50 cents a month and the Government would match that money. We can provide all of the drugs the people need. We have a formulary committee composed of the finest people in the Government, from the Surgeon General on down. They are the finest professional people that we can find. They are people who can make sure that the drugs will not cost more than they should. However, if we want to run the cost of this t~aing up to $500 million, all we have to do is to let the drug com- panies have their say about it. 1559 PAGENO="0408" We would then be required to buy the drugs at the prices these companies set on a trade-name basis. They, would charge anywhere from 5 to 100 times the cost of production, even though other quality producers sell the same product for a fraction of that price. I can cite one example, and it does not involve trade names. A person can go into a drugstore and buy a bottle of aspirin tablets. I bought some the other day. A per- son can get a product manufactured by a firm and approved under its generic name. He can buy the aspirin tablets at a very nominal cost. If one wants to buy a name brand aspirin, it is exactly the same product. It may be advertised that there is none better. They are right. There is none better and there is none worse. It is all aspirin. That is all it is. [P. 25356] So one can buy the same size tablets and call them by a name brand. If he buys a large bottle, on a bulk basis, he will pay about a penny apiece. Why should we, as a government, pay a penny apiece for aspirin tablets, when there are bottles of them in every drugstore at seven for a penny-the same size and the same quality. It makes no sense. We could provide all the aspirin tablets necessary, but we think we should pro- vide them in the same way that we provide them for the President of `the United. States, the Members of the House of Representatives, the Members of the Senate, and the generals of the Army at Bethesda Naval Hospital and Walter Reed Army Hospital. Buy them for the quality we want, require that they be the proper quality; but so far as' we are concerned, we will pay what the article is worth. If you want to let them charge you 10 times that much, go ahead and pay the high price. I am not criticizing those people. My father at one time was a patent medicine salesman. He had two medi- cines. One was named High Poplar- lorum, and the other was named Low Poplarhirum. Both bottles were the same size. One bottle sold for 50 cents, the other for a dollar. The people prac- tically always bought the dollar bottle. The difference between these two pro- ducts was that the High Poplarlorum was made from the bark that had been skinned down the tree, and the Low Poplarhirum was made from the bark that had been skinned up the tree. I cannot criticize them for charging a dollar for a 50-cent bottle, when I know that my dad did the same thing, as a boy. But we have no business making the old people pay two or three times more than they should to get these products. Mr. COTTON. Mr. President, be- cause I am due downstairs at the con- ference committee on truth in pack- aging, the Senator from California [Mr. MURPHY] has, subject to the approval of the Senator from Louisiana, allowed me to interpolate one question at this point. Is that satisfactory? Mr.' LONG of Louisiana. That is sat- isfactory. Mr. COTTON. I note that the effec- tive date on the drugs is not January 1, but July 1, 1968. Also, having had my attention drawn to it-and I thank the Senator-I note the contingency dates that might come ahead of that. After the amendment of the Senator from Delaware is voted on, I would like to offer an amendment simply changing the date of July 1, 1968-leaving the con- tingency in-to January 1, 1968, 6 months. If that is done, would the Sen- ator accept it and take it to conference? Mr. LONG of Louisiana. Yes, I will. Mr. COTTON. Of course, I have been in the Senate too long not to know ex- actly what is meant when the chairman of a committee says that he will take an amendment to conference. It usually means "out the window." But if the Sen- ator from New Hampshire only advances that date 6 months and leaves all the contingencies in, would the Senator from Louisiana feel that the amendment had merit enough so that he really would attempt to keep it in the' bill? Mr. LONG of Louisiana. Yes. Mr. President, so far as I am con- cerned, I would like to see the old people be able to get these drugs just as soon as it can be arranged. I would be happy to accept the amendment, when it is In order. I do not believe it is in order at this time. Mr. COTTON. I shall not offer it now. The PRESIDING OFFICER. The question is on agreeing to the amend- ment. Mr. GORE. Mr. President, I desire the attention of the Senate for a very brief period. Ever so often a tax measure comes along which serves a.s a catchall for special interest amendments. The word is out that this is it. Mr. President, unless the Senate moves to strip from this bill unworthy amendments entirely extraneous to the measure, there will be many more. Ev- ery time I go out the door, I see someone `else drafting another amendment. H.R. .10 is in the works to be offered. Further depletion amendments will be offered. And why not? Why does not everyone offer everything he wishes, if we are to take a bill to encourage foreign invest- ment in the United States and then use it as a vehicle to give a 200-percent in- crease in the percentage depletion allow- ance to the gatherers of clamshells? That brings up a question, Mr. Presi- dent. A goodly number of Senators-at least, some who have expressed them- 1560 PAGENO="0409" selves-seem to be laboring under the misapprehension that percentage deple- tion is in some way related to the wasting, disappearance, or depreciation of the asset. It is not in any way so related. In the tax laws, we have depreciation, we have cost depletion, and we have percentage depletion. How could a tax- payer be given depletion on the clam shells on the Continental Shelf? Who owns the clam shells? God Al- mighty. We may as well give a 200 per- cent increase in a depletion allowance for the sands of the seas and the air we breathe. Mr. LAIJSCHE. What about the fish of the sea? Mr. GORE. Well, I see little differ- ence. really, between the fish of the seas and the mollusks of the seas. I am attempting to make two points: First. This legislation would arbi- tranily increase the percentage deple- tion for mollusk shells from 5 to 15 per- cent-IS percent of what? Not of the cost of the shells that the taxpayer has bought. Second. There are cutoff points for various minerals and materials. I re- call that we once had an amendr~ient in the Senate to prevent the steel industry from taking their percentage depletion allowance based on the retail value of finished nuts and bolts-instead of the ore. Where is the cutoff point on these shells? What is the excuse for percentage depletion? I really do not wish to pro- voke a debate on this matter. One of these days, we will have to have a debate, when the time is ripe. Percentage deple- tion has no relationship whatsoever to the cost of the natural resource, the depletion of the natural resource, or the depreciation of the natural resource. It is merely a formula for tax reduction. What does this bill do for molusk shells? It gives a 200-percent increa~e in that formula. Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator yield? Mr. GORE. I yield. Mr. LONG of Louisiana. Are any mollusk shells being used to manufac- ture cement? Mr. GORE. I should think the ans- wer would be "yes"; but that is not the point I am making. I am not talking about the use to which they are being put; I am talking about an increase of 200 percent in the formula for tax re- duction for those taxpayers concerned. What I really rose to plead for is to strip from the bill the special interest items. Unless that is done, we shall be here all night, if the majority and minority leaders hold us here. We shall be voting on HR. 10 and more depletion allowance amendents. If this is to be a grab-all bill in the closing days of the session, then I think we shall be in for a lot of unwarranted amendments. I hope the Senator from Delaware will modify his amendment. So far as the use of drugs for old people is con- cerned, that is an entirely different mat- ter. I wish he would move to strike from the bill the tax provisions which are unrelated and nongermane to the original bill as introduced. Mr. LAUSCHE. Mr. President, will the Senator yield? Mr. GORE. I yield. Mr. LATJSCHE. With respect to the depletion allowance, to whom do the shells of clams and oysters belong when they are in the sea? Whose property are they, and how can it be claimed that the person who takes oysters and clams out of the sea has suffered a depletion of his capital property? Mr. GORE. Only the uninformed would make such a claim. Percentage depletion is not based upon that. This is but a canard that is fostered. Mr. LAUSCHE. Suppose I am the owner of a coal mine. I take the coal out of the earth and deplete my capital resources. That is completely different from a harvester of clams and oysters, who takes them out of the sea and has no ownership in them. How does the Sena- tor reconcile the two principles? Mr. GORE. The owner of a coal mine would, as I understand it, have a choice between taking cost depletion or per- centage depletion. Coal owners are the beneficiaries of this magic formula of percentage depletion, also. Mr. LATJSCHE. They have a 10 per- cent depletion. Mr. GORE. As a matter of fact, I know of hardly any natural resource that does not have some formula for percent- age depletion associated with it, except air, sand of the seas, and the dirt that the farmer cultivates. There is just as much reason, and perhaps more, for giving a farmer percentage depletion. [P. 25357] Mr. LAUSCHE. There is more reason because the farmer owns the land and the -fisherman of clams and oysters does not own them. He takes them from the public domain. Mr. GORE. But this bill gives to those people a 200 percent increase-an increase from 5 percent to 15 percent. Mr. President, I hope that the Senator from Delaware [Mr. WILLIAMS] will modify his amendment and let us vote to strip the extraneous tax measures from this bill. Mr. WILLIAMS of Delaware. The Senator from Tennessee made a valid point. There are 23 amendments in the bill which were nongermane, only two of which deal with the elderly of the country, and they would not go into effect until 1968. Much of the argument- Mr. LONG of Louisiana. Mr. Presi- 1561 PAGENO="0410" dent, will the. Senator yield for a ques- tion? Mr. WILLIAMS of Delaware. I yield. Mr. LONG of Louisiana. Who was the Senator who offered the first nonger- mane amendment and got it agreed to in committee? I believe it was the Sen- ator from Delaware [Mr. WILLIAMs]. Mr. WILLIAMS of Delaware. The Saltonstall amendment which was of- fered was not germane; but would not in any way affect revenue this year, next year, or the years after. Mr. LONG of Louisiana. I am not talking about revenue. I am talking about who offered the first nongermane amendment. Mr. WILLIAMS of Delaware. The Senator should be thinking about rev- enue. The Senator from Louisiana of- fered the first nongermane amendment on clam shells to reduce taxes. * Mr. LONG of Louisiana. No. Who of- fered the first nongermane amendment? Mr. WILLIAMS of Delaware. The Saltonstall amendment calls for an annual accounting for the assets and liabilities of this Government. Why blame the Senator from Massachusetts for the sins committed upon this bill in all of these depletion and campaign amendments? Mr. LONG of Louisiana. Wholly nongermane. Mr. WILLIAMS of Delaware. Yes; the 23 amendments we are speaking of here are the amendments that lose rev- enue in the bill. They account for not $310 million as the Senator from Louisi- ana claims, but a loss of $500 million to $600 million. The committee estimate was $410 million. Mr. President, I ask unanimous con- sent that an excerpt of the committee report reflecting that figure be printed at this point in the RECORD. There being no objection, the excerpt from the report was ordered to be printed in the RECORD, as follows: The amendments added to the bill by your Committee, other than those relating to the Foreign Investors Tax Act, are expected to result in an annual revenue loss (or expendi- ture increase) of slightly over $400 million. Two hundred million dollars of this is at- tributable to the medicare amendment mak- ing provision for drugs under the supplemen- tary benefit program. The provision making medical expenses deductible In full with re- spect to most persons over age 65 Is expected to result in an annual revenue loss of $180 * million. An expenditure of approximately $70 million every 4 yeari also is expected from the Presidential Election Campaign Fund Act. The remaining provisions added by your committee are expected to result in a further revenue loss of approximately $10 million a year. Mr. WILLIAMS of Delaware. Mr. President, the estimate in the committee report shows $410 million as the lowest estimate. The estim,ate given to our com- mittee by the Treasury was between $500 million itnd $600 million. Mr. LONG of Louisiana. Mr. Presi- dent, would the Senator yield at that point? Mr. WILLIAMS of Delaware. I yield. Mr. LONG of Louisiana. That is not the net figure. Mr. WILLIAMS of Delawp~re. What is the difference? There are several sections in titles II, III, and IV, none of which are related to the elderly. In spite of all of the argu- ment that ha~ been made here, parading the elderly around and boasting of what is going to be done for them in 1968, there are only two sections dealing with that subject. All of the other 21 sections represent special tax treatment for some group. Mr. President, in order to get a clear vote on this matter I am going to comply with the request of the Senator from Ten- nessee [Mr. GORE] and confine this ~tmendment to eliminating all of titles II, III, and IV except those two sections, sections 202 and 403, which deal with the elderly. Mr. President, I ask unanimous con- sent to so modify the amendment. Mr. LONG of Louisiana. Mr. Presi- dent, I object. The PRESIDING OFFICER (Mr. Rus- SELL of South Carolina in the chair). Objection is heard. Mr. LONG of Louisiana. Mr. Presi- dent, the Senator asked for the yeas and nays on the amendment. He should remember that he has to vote on it. Mr. WILLIAMS of Delaware. The Senator is correct. Mr. President, I send to the desk a substitute amendment and ask `that it be stated. The PRESIDING OFFICER. The clerk will report. The legislative clerk read as follows: Mr. WILLIAMS of Delaware proposes In lieu of his amendment: Beginning on page 184, strike out sections 201, 203, 204, 205, 206, 207. 208, 209, 210, 211, 212, 213, 214, 215, and 216. Beginning on page 214 strike out title III. Beginning on page 222 strike out sections 401 and 402. Mr. GORE. Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. GORE. Does the substitute amendment do what the Senator sought to do by unanimous consent? Mr. WILLIAMS ~of Delaware. Ex- actly. 1 checked with the Parliamen- tarian. It is in order. Mr. GORE. If this substitute is agreed to- Mr. WILLIAMS of Delaware. It would knock out all of titles II, HI, and IV except sections 202 and 403. Mr. President, I ask for the yeas and nays on this amendment. Mr. President, I ask that the amend- ments be considered en bloc. The yeas and nays were ordered, 1562 PAGENO="0411" Mr. WILLIAMS of Delaware. Mr. President, I ask that the amendments be considered en bloc. Is that request agreed to? The PRESIDING OFFICER. Yes. Mr. WILLIAMS of Delaware. Mr. President, the adoption of this amend- ment would strike out all of titles II, III, and IV, except those on which there has been so much argument here with re- spect to what they are going to do for the elderly in 1968. Mr. President, so that there will be no misunderstanding, I shall outline just what is in these other sections. I start with section 201, which is the applica- tion of investment credit to property used in possessions of the United States. Section 202 would be left in the bill. That is the deduction of medical ex- penses of individuals age 65 or over. Section 204 deals with transfers of stock and securities to corporations con- trolled by transferors. This is the sec- tion we voted on earlier which the Treasury Department identified as the most glaring loophole ever proposed by any congressional committee in the his- tory of the Congress. Under this pro- posal a man could completely bypass the capital gains structure as far as diversi- fication of his stock holdings. It would strike that section out. Mr. LAUSCHE. Mr. President, may we have order? The PRESIDING OFFICER. The Senate will be in order. Mr. WILLIAMS of Delaware. Next is section 205; it deals with the minimum amount treated as earned income for re- tirement plans of certain self-employed individuals. This is with reference to H.R. 10. Section 206 would be stricken. That is treatment of certain income of authors, inventors, and so forth, as earned income for retirement plan pur- poses. This would be stricken. These sections do not deal with elderly who have been paraded here this after- noon and for whom so many crocodile tears have been shed. Section 207 is the exclusion of cer- tain rents from personal holding com- pany income. Section 208 is percentage depletion rate for certain clay-bearing alumina. Section 209 would be stricken-that deals with the percentage depletion rate for clam and oyster shells. Section 210 deals with the sintering and burning of shale, clay, and slate used as lightweight aggregates. SectIon 211 deals with tax treatment on stock transactions and options, and so forth. Section 212, deals with tax treatment of per-unit retain allocations. Section 213, excise tax rate ~n am- bulances and hearses. [P. 25358) Section 214, applicability of exclusion from interest equalization tax of certain loans to assure raw materials sources. Section 215, exclusion from interest equalization tax for certain acquisitions by insurance companies. Section 216, exclusion from interest equalization tax of certain acquisitions by foreign branches of domestic banks. Title III would be stricken, This is section 301, which deals with financing presidential election campaigns out of the Federal Treasury. These would be stricken along with all the other pro- posals in these three titles except those two sections of the bill over which so many crocodile tears have been shed this afternoon. The~ committee amendment dealing with the so-called drug amendment should be delayed until next year, when it can be prepared and presented to the committee in a workable form. We would have ample time to consider and act on it long before the 1968 so-called effective date. But, no, they want to put it in this year, ahead of the election of 1966, promising the voters something that they will get in the election year of 1968. Such action is like the President's speech in Baltimore today. Just ahead of the 1966 elections he is promising a 10-percent increase on all social security checks to become effective on January 1, 1968, ahead of the presidential elections. Significantly, the tax to pay for these increases goes into effect in January 1969, after the election. It is time this administration stopped playing politics with the elderly. If it plans to do something for them go ahead and do it; and if not let us stop talking about it. We have got a clean-cut vote here which will not affect either of two sec- tions dealing with the elderly, about whom so many crocodile tears have been shed here this afternoon. Mr. LONG of Louisiana and Mr. LAUSCHE,addressed the Chair. Mr. WILLIAMS of Delaware. I will yield first to the Senator from Louisiana and then to the Senator from Ohio. Mr. LONG of Louisiana. Does the Senatc~ propose to delete his own amend- ment? Mr. WILLIAMS of Delaware. The Saltonstall amendment? Yes. Mr. LONG of Louisiana. I am pleased to hear that. Mr. WILLIAMS of Delaware. Let us take them all out. The amendment of the Senator from Massachusetts {Mr. SALTONSTALLI is being reported in the House anyway. It has passed five times in the Senate unanimously. There is no objection to it, but I am deleting it, and I am now asking the Senator from Loui- siana to join the parade and support us in deleting his nongemane amendments. 1563 PAGENO="0412" Mr. LAUSCHE. Mr. President, if the amendment offered by the Senator from Delaware is accepted, will it leave the bill in the following form: one, that part of the bill which was recommended by the President and the administration dealing with equitable tax treatment for foreign investors in the United States, and two, the relief that is sought to be given to the aged, and beyond that, all of the provisions of the bill will be eliminated? Mr. WILLIAMS of Delaware. That is correct. Mr. LAUSCHE. The Senator makes this proposal because he believes that the provision which he asked to be stricken should not be in the bill and because he knows that before we get through tonight we will have a half dozen more proposals to reduce taxes and give special benefits to special groups; is that not correct? Mr. WILLIAMS of Delaware. That is correct. I want to make this clear, I think that these titles should be deleted in their entirety. Let the administration get its eyes off the election. There has been so much said here about opposing the amend- ment I had pending because they wanted to help the elderly. All right, we now have a clean-cut vote here to strike out the other 22 proposals which as the Sen- ator from Tennessee has pointed out, are just special tax deductions for special groups. Mr. President, I yield the floor. Mr. MCCARTHY. Mr. President, I think the point has been made'that near- ly everything that the Senator from Dela- ware is proposing to strike out, with the exception of the amendment on which we voted, plus the limited depletion allow- ance, everything else in the legislation he proposes to strike out was approved by the Treasury, recommended by the Treasury, not objected to by the Treas- ury or by any other department of Gov- ernment which was involved. So we do not have just in these 18 or 19 proposals propositions representing some kind of outside special interest, but we have pro- posals which were, as I said, with the exception of those four, not objected to or recommended to the House, or sup- ported by the Treasury. We are not try- ing to put through the Senate here today 18 or 19 special interest bills that the ad- ministration is not interested in at all. The Treasury people examined these pro- posals with the exception of the one amendment which we voted on plus the three amendments relating to depletion allowance. We had Treasury support of this arid administration support of this, too. Mr. AIKEN. The Senator from Min- nesota just referred to "outside special interests." Let me ask, outside what? Mr. McCARTHY. I do not know whose special interests they are. They are all Americans, so far as I am con- cerned. Mr. AIKEN. The Senator is assured that they are not inside special interests? Mr. McCARTHY. I did not raise the point. Mr. WILLIAMS of Delaware. "Spe- cial groups" was mentioned. Mr. AIKEN. Yes. I know that. I just point out by what line of reasoning can we justify depletion allowances on clam shells and oyster shells any more than we can on clams and oysters, or of. fish. Where are we going to stop in the depletion of fish from the. sea? Where are we going to stop? That is the point* I am raising. Mr. LONG of Louisiana. Mr. Presi- dent, clam shells are every bit as. subject to depletion as.. limestone. When these two products are used for a similar pur- pose, they are treated the same. Lime- stone gets the depletion allowance of 15 percent if it is ground into a powder or made into cement. If it is crushed and thrown onto the highway as gravel, it gets only a 5-percent depletion allow- ance. That was the judgment of Con- gress. The limestone people explained the problem, and Congress acted. Sub- sequently, oyster shells began to be used to make cement. Perhaps some of us may think that oyster shells belong to God, but they be- long to the U.S. Government when they are found on the Continental Shelf and to the States within 3 miles from their coastlines, except for Texas, Florida, and California which are favored with bound- aries extending 10 miles out to sea. When a lease is obtained from the U.S. Government on a bid basis, and the lessor may pay $1 million for it, he goes out and digs up the oyster shells and brings them in, and that product is com- petitive with limestone. It should get the same depletion allowance that limestone gets. We can use calcium carbonate, if we grind it out, to make chicken feed, but it is still calcium carbonate. This amendment will help the chicken farm- ers in Delaware because they will be able to produce chicken feed a little bit cheaper with oyster shells, if they get the depletion allowance. Mr. McCARTHY. That is a special group. Mr. LONG of Louisiana. Yes, that is a special group, the chicken farmers in Delaware. The products-oyster shells and limestone-are competitive because they are chemically the same. All this amendment provides is that the oyster shell. people will get the same tax treatment that the limestone people do. Why has not that been the case be- fore? Because when we passed the law on depletion allowances, no one was us- ing oyster shells for the same purpose as limestone. 1564 PAGENO="0413" How about Georgia clay? It takes 2 tons of Georgia clay to manufacture aluminum that can be made with 1 ton of bauxite. If the Georgia clay is used to make aluminum, it is in competition with bauxite. If this bill is approved, they will get similar tax treatment. Some people cannot understand deple- tion. If Senators cannot understand depletion, I wish they would make a study of it, because if they do not under- stand what depletion is, they cannot un- derstand the depletion allowance. Mr. LAUSCHE. Mr. President, will the Senator yield for a question? Mr. LONG of Louisiana. I yield. Mr. LAUSCHE. To whom do the oys- ters and clams with the shells belong when they are out in the ocean? Mr. LONG of Louisiana. One rnilliim dollars is paid- Mr. LAUSCHE. No. I asked to whom they belong. Mr. LONG of Louisiana. They belong to the U.S. Government if they are be- yond the 3-mile limit, except in Texas, [P. 25359~ Florida, and California, where they must be beyond 10 mIles. If they are Inside the 10-mile or 3-mile limits, they belong to the States. Mr. McCARTHY. Mr. President, I have the floor. I will clarify the question for the Senator from Ohio. The Senator wants to know who owns them when they are still alive; does he not? Mr. LATJSCHE. I want to know to whom they belong, on the shelf, in the ocean, and to whom they belong when they are on the shelf but within the boundary of the State. Mr. McCARTHY. On the shelf, but within the shell? Mr. LAUSCHE. Let us not be childish. Mr. McCARTHY. The Senator does not understand the problem. Mr. LAUSCHE. I do. Could the Sena- tor answer the question objectively? Mr. McCARTHY. What is the ques- tion? Mr. LAUSCHE. The question is if they belong to the United States. Mr. McCARTHY. The shell or the oyster? Mr. LAUSCHE. Both of them. Mr. McCARTHY. It Is a different problem. The Senator answered that. Mr. LAUSCHE. The Senator from Louisiana stated that the shells nor the oysters belong to the fishermen. How can it be argued tl~at there shall be a right to have a depletion allonwance on the use of a mineral or sea mollusk that does not belong to a person? Mr. LONG of Louisiana. The shells that we are talking about- Mr. LAUSCHE. They do not belong to a person. How can he claim a tax credit for exhausting the life of the sea? Mr. LONG of Louisiana. The shells we are talking about are the ones that have no oysters in them. They have been out there for thousands of years. The oysters have gone. The fishermen dig down there. They are exhaustible. Mr. LAUSCHE. This is an example of exhausting property of the United States. Mr. LONG of Louisiana. Let me ex- plain. Mr. LAUSCHE. The Senator will have a long time to do it. Mr. LONG of Louisiana. I hope the Senator will stay that long. To get a. lease, a person must bid for It. It is very competitive. A person may bid $1 million for a lease. Some of them are for more than $1 million. After securing a ,lease, he has a right to take oyster shells out of the certain area cov- ered by the lease. That is known as an economic interest. What he invests in is something that is known as a wasting asset. When that asset is gone, the per- son is out of business. It is somewhat like the example I gave earlier today. I know it does not impress the Senator, because he does not recognize depletion, but every accountant does. Mr. LAUSCHE. Would the Senator say that the lobster fisherman in Maine should also have the right of a depletion allowance? Would the Senator from Louisiana say he should? The lobsters do not belong to him. Mr. LONG of Louisiana. I have not studied the problem. I just do not know. That Is the best answer I can give- I do not know. I gave the example earlier of a man with whom I went to the bank in order to help him get a loan to start a flying school. On a cash basis, according to the figures, he made a profit every day. At the end of the year, he was broke and going out of business. Why? Because he had set aside no fund for depreciation. The airplane was wearing out. He had a lease from the airport. The lease was running out. He had no money to renew the lease. By the end of the year, he haçi had many costs, depreciation, overheacf. When it came time to renew the lease, he was broke. He had an old, worn out airplane. He was worse off than when he started out, because he had used the airplane. If a man has a great deal of oil, that oil is valuable In place. It might be worth $1.50 a barrel in place. It might be worth $3 a barrel when brought to the surface. When a person starts bringing the oil to the surface, and then runs out of It, he is out of business. I know many people who are getting out of the business. I hope the Senator's amendment to the amendment will not be agreed to. I would like to have the Senate vote affirmatively on the provision having to do with the old folks. The Senator will have an opportunity to do so by agreeing with the committee. We would like to do 1565 PAGENO="0414" something for those old people. I would like to have the Senate vote on the ques- tion affirmatively. We will have a chance to do that if the amendment Is not modified. Mr. GORE. Mr. President, I support the substitute amendment. The one side effect of this discussion with which I am perfectly delighted is the provoca- tion of some debate and understanding of what percentage depletion is. The junior Senator from Louisiana said that mollusk shells and clam shells are depletable. I suppose so, in the same way as are the fishes of the sea. But what does the word "depletable" mean, and what does it imply? I should not think that the junior Senator from Louisiana would continue to leave such an implication, but one who has not studied the whole technical field might race to the conclusion that percentage depletion is based upon the depletability of a resource and Is in some way related to it. It is not. What does this amendment provide? Here is what it provides. Here is how it works out. The taxpayer who is sell- ing clam and oystei~ and mollusk shells for, say, the manufacture of cement, would get a deduction from his taxable income of 15 percent of the cost of the product, in this case just before It goes into the kiln. Mind you, Mr. President, this cost is far different from the cost of gathering shells. The taxpayer gets this formula for reducing his taxable income. Under present law, he already is entitled to a percentage depletion, to which, in my opinion, he is not equitably entitled, of 5 percent of the cost of the calcium carbonate before it goes into the kiln. The bill would increase the depletion allowance by 200 percent. Why? All we have heard Is that it is a depletable item and that it is used for the manufacture of cement. Mr. LONG of Louisiana. Mr. Presi- dent, will tht Senator yield? Mr. GORE. In just a moment, I will. Mr. LONG of Louisiana. The Sen- ator has just made a statement- Mr. GORE. The Senator from Louisi- ana is a little impetuous. If he will wait, I will yield to him. Of course, the big percentage deple- tion is for oil and gas-27 1/2 percent. Yes, I am delighted that this item has provoked some debate about percentage depletion. Some of these days, when the circumstances are ripe, the Senate will go to the mat on this issue. We can never have true tax reform unless we be- gin with the oil percentage depletion al- lowance, which is the granddaddy of tax favoritism. But here, on a bill to encourage for- eign investors to invest In the United States, is an amendment to give a 200 percent increase in the tax-reduction formula for the gatherers of mollusk shells. It Is a big business. We are not thinking of or dealing with one man who goes out with a shovel and a bucket to gather up a few shells. We are dealing here with a large business. We are giv- ing taxpayers a tax break to which they are not entitled, in my opinion. So I rise to support the amendment. I undertook in the committee, and I am undertaking now, to support the ad- ministration in this bill, which I think Is a worthy bill. Our balance-of-pay- ments problem is a severe and acute one. This measure is designed to help bring capital to the United States. Our out- flow is severe. Our Imbalance Is danger- ous. This bill is worthy in Its purpose. I think it would have a good effect. But why do we have to load it? And unless we dislodge this load from its back, I think before the night is over It will be much more heavily loaded. I hope the Senate will take this step, which to me is a realistic one. I now yield to the Senator from Louisi- ana.. Mr. LONG of Louisiana. Mr. Presi- dent, I have been meditating over the matter, and if it be the will of the Sen- ate, in the interest of expediting the con- sideration of the bill, I ask that the Sen- ator from Delaware be granted unani- mous consent to modify his original amendment as suggested. The PRESIDING OFFICER. Does the Senator from Delaware renew his re- quest to modify the amendment? Mr. WILLIAMS of Delaware. Yes. I think it would be easier. It would save two votes. We could do with one vote what would otherwise require two. My amendment, as modified, would strike out titles II, III and IV, with the excep- tion of sections 202 and 403. The PRESIDING OFFICER. Is there objection? The Chair hears none, and it is so ordered. The amendment will be so modified. Mr. LONG of Louisiana. The yeas have been ordered, Mr. President. The PRESIDING OFFICER. The question is on agreeing to the amend- ment of the Senator from Delaware, as [P. 25360] modified. On this question, the yeas and nays have been ordered, and the clerk will call the roll. The legislative clerk called the roll. Mr. LONG of Louisiana. I announce that the Senator from Idaho [Mr. CHURCH], the Senator from Massachu- setts [Mr. KENNEDY], and the Senator from Maryland [Mr. TYDINGS], are ab- sent on official business. I also announce that the Senator from New Mexico [Mr. ANDERSON], the Sen- ator from Tennessee [Mr. BASS], the Senator from Illinois [Mr. DOUGLAS], the Senator from Mississippi [Mr. EAST- LAND], the Senator from Arizona [Mr. HAYDEN], the Senator from New York [Mr. KENNEDY], the Senator from Mon- tana [Mr. METCALF], the Senator from 1566 PAGENO="0415" Utah [Mr. Moss] , the Senator from Ore- gon [Mrs. NEUBERGER], the Senator from Rhode Island [Mr. FELL], the Senator from West Virginia [Mr. RANDOLPH], the Senator from Virginia [Mr. ROBERTSON], the Senator from Florida [Mr. SMATH- mis], and the Senator from, New Jersey [Mr. WILLIAMS], are necessarily absent. I further announce that, if present and voting, the Senator from Utah [Mr. Moss], the Senator from West Virginia [Mr. RANDOLPH], the Senator from Vir- ginia [Mr. ROBERTSON], and the Senator from New Jersey [Mr. WILLIAMS], would each vote "nay." Mr. KUCHEL. I announce that the Senator from Colorado [Mr. ALLOTT], the Senator from New Jersey [Mr. CASE], the Senators' from Kentucky [Mr. COOPER and Mr. MORTON], the Senator from Ne- braska [Mr. CURTIS], the Senator from Iowa [Mr. HICKENLOOPER], the Senator from New York [Mr. JAVITS], the Senator from Idaho [Mr. JORDAN], the Senator from Kansas [Mr. PEARSON], the Senator from Vermont [Mr. PROUTY] `and the Senator from Texas [Mr. TOWER] are necessarily absent. On this vote, the Senator from Colo- rado [Mr. ALLOTT] is paired with the Senator from Kentucky [Mr. MORTON]. If present and voting, the Senator ,from Colorado would vote "yea" and the Sen- ator from Kentucky would vote "nay." On this vote, the Senator from Ne- braska [Mr. CURTIS] is paired with the Senator from Kansas [Mr. PEARSON]. If present and voting, the Senator from Nebraska would vote "yea" and the Sen- ator from Kansas would vote "nay." On this vote, the Senator from Idaho [Mr. JORDAN] ~5 paired with the Sena- tor from Texas [Mr. TOWER]. If present and voting, the Senator from Idaho would vote "yea" and the Senator from Texas would vote "nay." The result was announced-yeas 30, nays 42, as follows: [No. 298 Leg.] YEAS-30 Aiken Fong Murphy Bartlett Gore Muskie Bennett Harris Nelson Boggs Hart Pastore Burdick Hruska Proxmlre Byrd, va. Kuchel Simpson Clark Lausche Symlngton Cotton McIntyre Thurmond Dominick Mônroney `Williams, Del. Fsnnia Mundt , Young, Ohio NAYS-~-42 ` Bayh Hill ` Mondale Bible Holland ` Montoya Brewster Inouye- Morse Byrd, w. vs. Cannon Jackson Jordan, NC. Riblcoff Russell, S.C. Carison Long, Mo. Russell, Ga. Dlrksen Long, La. Saltonstall Dodd Ellender Magnuson Mansfield Scott Smith Ervin Fuibright Griffin McCarthy McClellan McGee Sparkman Stennis Talmadge Gruening Hartke McGovern Miller Yarborough Young, N. Dak. So the amendment of Mr. WILLIAMS of Delaware was rejected. Mr. MANSFIELD. Mr. President, I ask unanimous consent to have printed in the RECORD at this point a statement on the bill prepared by the Senator from Florida [Mr. SMATHERS]. There being no objection, the state- ment was ordered to be printed in the RECORD, as f9llows: STATEMENT BY SENATOR SMATHERS The bill we are now considering contains a provision which was inserted during delib- eration on the bill by the Senate Finance Committee, at my request. This provision would continue full deductibility to medical and drug expenses of persons who are age 65 and over. In enacting the Social Security Amend- ments of 1965, which is chiefly remembered for its medicare provisions, Congress inci- dentally enacted an amendment to the In- ternal Rgvenue Code which would limit full deductibility of such medical expenses for older citizens starting January 1, 1967. The 1965 amendment requires that in com- puting Federal Income tax deductions for medical and drug expenses of the elderly, the deduction must be limited to that portion of such expenses which, in the case of medical expenses, exceeds three percent of adjusted gross income, and which in the case of drugs, exceeds one percent ofadjusted gross income. This amendment was enacted over .the oppo- sition of the Finance Committee, the full Senate, and its conferees. Time has shown the fallacy of the argu- ments upon which that , amendment was based. At the time, it was argued that with the enactment of medicare, there would no longer be any need to allow full deductibility of medical and drug expenses of the elderly. This argument falls short of the mark, however. Different people often have differ- ent types of medical expenses, and many of these people find that medicare provides minimal or no help with `their particular health costs. For example, 4 out of 5 older people suffer from one or more chronic illnesses. Chronic illness often requires very expensive medi- cation on a continuing basis, These drugs are not covered by medicare. These people frequently incur expenses related to their illness but which are not true medical ex- penses. The older woman who, because of her arthritis, has to pay a cleaning woman to do her housework is a good illustration of this. While we cannot pay for her cleaning woman, the least we can do is `to permit her to deduct all of her' out-of-pocket' direct medical and drug expenses. However, it is clear that the elderly can still incur large medical expenses which are not covered by medicare. Among expenses not so covered are drugs, dental bills, nurs- ing home care which is not preceded by at least three days in a hospital, or which is beyond medicare entitlement, private duty Allott Anderson Bass Case Church Cooper Curtis Douglas Eastland Hayden NOT VOTING-28 Hickenlooper Pell Javits Prouty Jordan, Idaho Randolph Kennedy, Mass, Robertson Kennedy, N.Y. Smathers Metcalf Tower Morton Tydings Moss Williams, N.J. Neuberger Pearson 1567 PAGENO="0416" nursing, and hospitalization beyond medi- care entitlement for one "spell of sickness." In fact, there are many of our older com- patriots who can expect to receive no hospital benefit whatever from medicare because the only hospital or hospitals In their areas have not qualified under medicare, for one reason or another. In view of these considerations, it is clear that many senior citizens need full deductibility of medical and drug expenses as much as they ever did. It was also argued that restricting the deductibility of medical expenses for Ameri- cans in this age group would raise revenue needed to finance medicare. However, it is inequitable to raise taxea upon this age group to finance medicare when taxes are not being raised on any other age group for this purpose. Therefore my amendment in the bill which is before us would restore full deductibility to medical and drug expenses of those who are 65 and over, and would repeal the re- quirement that the deduction be limited to the portion of such expenses over certain percentages of adjusted gross income. I hope the House conferees this time will see the desirability of permitting full deductibility of these expenses, and that the Senate po- sition on this issue will prevail. Mr. HARTKE. Mr. President, I call up my amendment No. 955 and ask that it be stated. The PRESIDING OFFICER. The amendment will be stated. * The legislative clerk proceeded to read the amendment. Mr. HARTK.E. Mr. President, I ask unanimous consent that further readin'g of the amendment be dispensed with. The PRESIDING OFFICER. With- out, objection, it is so ordered, and the amendment will be printed in the REC- ORD. The amendment, ordered to be printed in the RECORD, is as follows: At the end of the bill insert the following new section: "SEC-PERCENTAGE DEPLETION RATE FOR CLAY AND SHALE USED IN MAKING SEWER PIPE. "(a) RATE-Section 613(b) (relating to percentage depletion rates) is amended- "(1) by striking out `and clay used or sold for use for purposes dependent on its re- fractory properties' in paragraph (3) (B) and inserting in lieu thereof `clay used or sold for use for purposes dependent on its refractory properties, and clay and shale used or sold for use in the manufacture of sewer pipe'; "(2) by inserting after `shale,' in para- graph (5) (A) `except shale described in paragraph (3) (B) ,`; and `(3) by striking out `sewer pipe,' in para- graph (5)(B). (b) TREATMENT PRocEssEs-Section 613 (c) (4) (relating to treatment processes con- sidered as mining) is amended by inserting after `applies' in subparagraph (0) `and of clay and shale used or sold for use in the manufacture of sewer pipe'. "(c) EFFECTIVE DATE-The amendments made by subsections (a) and (b) shall ap- ply to taxable years ending after the date Of the enactment of this Act." [P. 25361J Mr. HARTKE. Mr. President, the amendment deals with the depletion- allowance schedule that was discussed in the committee. At that time the Sena- tor from Kansas [Mr. CARLSON] offered a different amendment which involved clay. I was informed at the time that the amendment of the Senator from Kansas covered the situation intended to be covered in my amendment when in fact it did not. My amendment would simply provide that the 15-percent depletion allowance allowed for other products, but especial- ly cement and other clay products, shall be allowed for clay used in sewer pipes. At the present time it is not only at a competitive disadvantage, but it is also treated in a different fashion than other clay products. I understand that the Senator from Georgia [Mr. TALMADGE] proposes to of- fer an amendment to my amendment. Mr. TALMADGE. Mr. President, the amendment of the Senator from Indi- ana refers to sewer pipe made from clay but not brick. Brick comes from the same category of material. I ask the distinguished Senator from Indiana if he will modify his amend- ment as follows: On page 2, line 2, after "sewer pipe" In- sert "and brick". On page 2, line 6, insert "building or pav- ing brick and"," before "sewer pipe". On page 2, line 12 after "sewer pipe" insert "and brick". Mr. HAR~KE. Mr. President, I so modify my amendment. The PRESIDING OFFICER. The amendment is accordingly modified. Mr. HARTKE. Mr. President, I yield to the Senator from Kansas. Mr. CARLSON. Mr. President, I as- sociate myself with the distinguished Senator from Indiana on this amend- ment as amended by the Senator from Georgia [Mr. TALMADGE]. We agreed to an amendment in com- mittee that I thought covered these items. However, it was discovered later that it did not. I hope that the amendment will be accepted by the chairman of the com- mittee. Mr. HARTKE. The chairman of the committee has indicated that he has no objection to accepting the amendment. The amendment was not acted on when it was considered i~i committee in conj3~lnction with the amendment of the Senator from Kansas [Mr. CARLSON]. Mr. JORDAN of North. Carolina. Mr. President, I ask unanimous consent that my name be added as a cosponsor of the amendment of the Senator from Indiana as amended by the Senator from Georgia. 1568 PAGENO="0417" The PRESIDING OFFICER. Without objection, it is so ordered. Mr. ERVIN. Mr. President, I make the same unanimous-consent request The PRESIDING OFFICER Without objection, it is so ordered. Mr. STENNIS. Mr. President, I com- mend the Senator from Indiana heartily for his thoughtfulness, research, and forethought in observing that this point was involved and in getting it In the form of an amendment. I shall certainly heartily support the amendment. Mr. HARTKE. Mr. President, I thank the Senator. Mr. RUSSELL of South Carolina. Mr. President, I wish to commend the Sen- ator from Indiana for offering this amendment. I am heartily in favor of it, and if there is no objection, I ask that I be made a cosponsor. Mr. HARTKE. I shall be glad to have the name of the Senator from South Carolina added as a cosponsor. Mr. LONG of Missouri. Mr. President, I also desire to commend the Senator from Indiana on this amendment, and I should like permission to be listed as a cosponsor. Mr. HARTKE. I shall be delighted to add the Senator as a cosponsor. Mr. COTTON. Mr. President, I wish to make the same request. Mr. HARTKE. I shall be glad to add the Senator from New Hampshire as a cosponsor. Mr. SPARKMAN. Mr. President, if the Senator from Indiana will be so kind, I should like him to place my name on the amendment as a cosponsor. Mr. HARTKE. I shall be glad to add the Senator's name. Mr. DOMINICK. Mr. President, may we have order? The PRESIDING OFFICER. The Senate will be in order. Mr. DOMINICK. As I remember, some years ago we had a problem with the Internal Revenue Service in connection with the taxation of clay for these pur- poses, and after a meeting with the In- ternal Revenue Service, the regulations were revised in order to take care of the problem. Am I correct? Mr. HARTKE. It was anticipated that that would take care of the problem, but it did not take care of this point. The matter could not be clarified with the Internal Revenue Service without legislation. Mr. DOMINICK. Therefore, is this amendment that the Senator has offered designed to take care of the problem that was raised by a change in the Internal Revenue system policy a couple of years ago? Mr. HARTKE. The Senator is cor- rect. Mr. DOMINICK. I am happy to join the Senator from Indiana. I am glad to have this background. Mr. STENNIS. Mr. President, I ask permission to be added as a cosponsor of the amendment. Mr. HARTKE. I shall be glad to do so. Mr. LONG of Louisiana. Mr. Presi- dent, the Senator had an amendment in the committee, and we had agreed to the amendment by the Senator from Kansas [Mr. CARLSON] which had something to do with clay. I believe that the Senator was informed in the committee that we thought perhaps the Carlson amendment took care of the problem. Unfortu- nately, the Senator discovered that it did not take care of the problem and that the Carison amendment related to an en- tirely different problem. Had it not been for that situation, I should imagine that we would have agreed to the amend- ment in the committee. Therefore, Mr. President, in view of all the cosponsors who are associated with the amendment, I have no objection to it. We will go to conference and see what we can work out. Mr. LAUSCHE. Mr. President, I un- derstand that this legislation expands. into four new programs the depletion al- lowance principle that has become im- properly, in my opinion, embedded in our law. Mr. GORE. Mr. President, will the Senator yield? Mr. LAUSCHE. I yield. Mr. GORE. I hope the Senator will state it correctly. It is percentage depletion. Mr. LAUSCHE. Yes, percentage depletion. Until - now, there have been three grants made in the expansion of the per- centage depletion. This is a fourth. We are today witnessing the repetition of what happened 2 years ago, when the tax bill was before us, and the Senator from New York started out by asking the removal of the excise tax on women's handbags. Then he came up with the fur tax. Then he came up with the jewelry tax. Then Senator HARTKE came up with the removal of the band instru- ment tax. Then another Senator came up with the removal of the excise tax on ball point pens. One after the other, there was this deluge of amendments offered. That is what Is happening now. I wonder whether this is the last amendment that will be offered, or whether others are in preparation. We are witnessing what could be called mob action. One grant has been made to one group. When that one grant was made, the second group stepped up with the label, and the third and the fourth and the fifth. It has now come to 13 or 14. I am interested to know what other de- mands will be made before we get through tonight. I ask for the yeas and nays on this measure. The yeas and nays were ordered. 71-297 0-67-pt. 2-27 1569 PAGENO="0418" The PRESIDING OFFICER. The question is on agreeing to the amend- ment, as modified, of the Senator from Indiana. Mr. LONG of Louisiana. Mr. Presi- dent, while I have no interest in the amendment, I do think that there is a logical case for the amendment. The amendment that the Senator has offered Involves clay used to manufacture sewer pipe. If the pipe is manufactured with cement, the limestone that goes into the cement is subject to a 15-percent deple- tion allowance. The argument of the clay people Is that they should have the same allowance their competitor receives. That is the basis of the amendment. If the Senate agrees to the amendment, that does not mean that it will survive the conference. The amendment has some merit, In my opinion, and I will be willing to take It to conference. Mr. GORE. Mr. President, I am con- strained to point out that this measure- [P. 25362] ment of competition-competitive rela- tivity-is not in keeping with the history of the development of percentage deple- tion. It started out as an estimate of discovery cost, not competitive relation- ship. Then it developed into a formula for tax deduction which is called per- centage depletion. If what the junior Senator from Louisiana says is a correct justification, then we would have no choice but to give to coal 27.5-percent depletion because it competes with gas as a fuel element. This is not a correct yardstick. In fact, the correct yardstick of depreciation or depletion is the relative use of and deple- tion, wear and tear, of the cost of a re- source. Percentage depletion has no relation- ship to this, nor does it have a relation- ship, to start with, to the competitive nature of the products. The PRESIDING OFFICER. The question is on agreeing to the amend- ment, as modified, offered by the Senator from Indiana and cosponsored. On this question, the yeas and nays have been ordered, and the clerk will call the roll. The assistant legislative clerk called the roll. Mr. LONG of Louisiana. I announce that the Senator from Idaho [Mr. CHURCH], the Senator from Arkansas [Mr. FULBRIGHT], the Senator from Mas- sachusetts [Mr. KENNEDY], and the Sen- ator from Maryland [Mr. TYonsos] are absent on official business. I also announce that the Senator from New Mexico [Mr. ANDERSON], the Sen- ator from Tennessee [Mr. BASS], the Senator from Illinois [Mr. DOUGLAS]. the Senator from Mississippi [Mr. EAST- LAND], the Senator from Arizona [Mr. HAYDEN], the Senator from New York [Mr. 1~ENNEDY], the Senator from Mon- tana [Mr. METCALF], the Senator from Utah [Mr. Moss], the Senator from Oregon [Mrs. NEUBERGER], the Senator from Rhode Island [Mr. PELL], the Sen- ator from WesfVirginia [Mr. RANDOLPH], the Senator from Virginia [Mr. ROBERT- SON], the Senator from Florida [Mr. SMATHERS], and the Senator from New Jersey [Mr. WILLIAMS] are necessarily absent. I further announce that, if present and voting, the Senator from Utah [Mr. Moss] and the Senator from West Vir- ginia [Mr. RANDOLPH] would each vote "yea". Mr. KUCHEL. I announce that the Senator from Colorado [Mr. ALLOTT], the Senator from New Jersey [Mr. CASE], the Senators from Kentucky [Mr. COOPER and Mr. MORTON], the Senator from Ne- braska [Mr. CURTIS], the Senator from Iowa [Mr. HICKENLOOPER], the Senator from New York [Mr. JAVITS], the Sena- tor from Idaho [Mr. JORDAN], the Sena- tor from Kansas [Mr. PEARSON], the Senator from Vermont [Mr. PROUTY], and the Senator from Texas [Mr. TOWER] are necessarily absent. If present and voting, the Senator from Colorado [Mr. ALLOTT], the Senator from Nebraska [Mr. CURTIS], the Senator from Idaho [Mr. JORDAN], the Senator from Kentucky [Mr. MORTON], the Senator from Kansas [Mr. PEARSON], and the Senator from Texas [Mr. TOWER] would each vote "yea." The result was announced-yeas 52, nays 19, as follows: So Mr. HARTKE'S amendment, as modi- fied, was agreed to. Mr. COTTON. Mr. President, I send Bartlett Bayk Bennett Bible Brewster Burdick Byrd, Va. Byrd, W. Va. Cannon Carlson Cotton Dirksen Dodd Dominick Ellender Ervin Fannin Gruening Alken Boggs Clark Fong Gore Griffin Hart Allott Anderson Bass Case Church Cooper Curtis Douglas Eastland Fulbright [No. 299 Leg.~ YEAS-52 Harris Monroney Hartke Montoya Hill Mundt Holland Murphy Hruska Ribicoff Inouye Russell, S.C. Jackson Russell, Ga. Jordan, NC. Saltonstall Kuchel Simpson Long, Mo. Sparkman Long, La. Stennis Magnuson Symington McCarthy Talmadge McClellan Thurmond McGee Yarborough McGovern Young, N. Dak. McIntyre Miller NAYS-19 Lausche Proxmire Mansfield Scott Mondale Smith Morse Williams, Del. Muskie Young, Ohio Nelson Pastore NOT VOTING-29 Hayden Pearson Hickenlooper Fell Javits Prouty Jordan, Idaho Randolph Kennedy, Mass. Robertson Kennedy, N.Y. Smathers Metcalf Tower Marton Tydings Moss Williams, N.J. Neuberger 1570 PAGENO="0419" to the desk an amendment and ask that it be stated. The PRESIDING OFFICER. The amendment will be stated for the in- formation of the Senate. The assistant legislative clerk read the amendment as follows: On page 231, line 3, strike out "July 1, 1968" and insert "January 1, 1968". Mr. COTTON. Mr. President, if I may have the attention of the Senate, I can explain the amendment in 2 minutes. It is my hope that the Senator from Loui- siana, the chairman of the committee, will accept it. On this amendment, the effective date of the provision in the bill for the fur- nishing of drugs to the elderly is based on whichever occurs first, the first day of the first month with respect to the rate, of the monthly premium for par- ticipation raised pursuant to section 1829(b) of the Social Security Act after the date of enactment of the act, or, two, July 1, 1968. In other words, if certain matters are complied with and the machinery is set up, and so forth, it would take effect the first month after that; but, otherwise, as the bill now reads, it would go to July 1, 1968. I stated in colloquy concerning the elderly that if they were going to receive this benefit, we should make it possible that they receive it sooner than July 1, 1968. Thus, my amendment simply moves the date forward 6 months, to take effect January 1, 1968, instead of July 1, 1968, which I understand is likely to be the approximate date to be trig- gered off by the machinery that would be in action. I want to make sure of it, and I hope that the Senator from Louisiana will ac- cept the amendment. Mr. LONG of Louisiana. Mr. Presi- dent, I said that I would accept the amendment, and I am glad to accept it. It is a worthy amendment and we will be glad to consider it. The PRESIDING OFFICER. The question is on agreeing to the amend- ment of the Senator from New Hamp- shire. The amendment was agreed to. Mr. HARTKE. Mr. President, I send to the desk an amendment and ask that is be stated. The assistant legislative clerk pro- ceeded to read the amendment: Mr. HARTKE. Mr. President, I ask unanimous consent that further reading of the amendment be dispensed with. The PRESIDING OFFICER. Without objection, it is so ordered; and the amendment will be printed in the RECORD at this point. The amendment submitted by Mr. HARTKE is as follows: On page 189, after line 25 insert: "SEc. 206. REMOVAL OF SPECIAL LIMITATIoNs WITH RESPECT TO DEDUCTIBILITY OF CONTRIBUTIONS TO PENSION PLANS BY SELF-EMPLOYED IN- DIVIDUALS "(a) REMOVAL OF SPECIAL LIMITATIONS.- Paragraph (10) of section 404(a) (relating to special limitation on amount allowed as deduction for self-employed individuals for contributions to certain pension, etc., plans) is repealed. `(b) (1) Each of the following provisions of section 401 is amended by striking out `(determined without regard to section 404 (a) (10))' each place it appears: "(A) Subsection (a) (10) (A) (ii). "(B) Subparagraphs (A) and (B) of sub- section (d)(5). "(C) Subparagraph (A) of subsection (d) (6). "(D) Subparagraphs (A) and (B) (i) of subsection (e) (1). "(E) Subparagraphs (B) and (C) and the last sentence of subsection (e) (3). "(2) Subparagraph (A) of section 404 (e) (2) is amended by striking out `deter- mined without regard to subsection (a) (10))'. "(3) Paragraph (1) and subparagraph (B) of paragraph (2) of section 404(e) are each amended by striking out `(determined without regard to paragraph (10) there- of)'. "(c) DEFINITION OF EARNED INCoME-Sec- tion 401(c) (2) (relating to, definition of earned income for certain pension and profit- sharing plans) Is amended by striking out subparagraphs (A) and (B) and inserting in lieu thereof the following: "`(A) IN GENERAL.-The term "earned in- come" means the net earnings from self- employment (as defined in section 1402(a)), but such net earnings shall be determined- ``(i) only with respect to a trade or busi- ness in which personal services of the tax- payer are a material income-producing fac- tor, "`(ii) without regard to paragraphs (4) and (5) of section 1402(c). "`(iii) in the case of any individual who is treated as an employee under sections 3121(d)(3) (A), (C), or (D), without re- gard to paragraph ~2) of section 1402(c), and "`(iv) without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items. For purposes of this subparagraph, section 1402, as in effect for a taxable year ending on December 31, 1962, shall be treated as [P. 25363) having been In effect for all taxable years ending before such date.' "(d) Ers'EcTIvE DATE-The amendments made by subsections (a) and (b) shall apply with respect to taxable years beginning after December 31, 1967." Mr. HARTKE. Mr. President, this amendment is offered on behalf of my- self, the Senator from Florida [Mr. SMATHERS], the Senator from Kentucky [Mr. MORTON] and the Senator from Kansas [Mr. CARLSON). The Senator from Florida [Mr. SMATHERS] is unable to be present today. This is a proposed amendment to further liberalize the Self-Employed In- 1571 PAGENO="0420" dividuals' Tax Retirement Act of 1962. The proposed amendment which em- bodies the provisions of H.R. 10 as re- cently passed by the House of Represent- atives by a unanimous vote, Is designed to improve the Self-Employed Individ- uals' Tax Retirement Act of 1962 by amending certain restrictive features of the act which have prevented the full utiliaztion of it by the self-employed. Briefly, the proposed amendment cor- rects two inequities in existing law. It would permit a self-employed to deduct the entire amount he contributes-but not in excess of $2,500, of course-for his own retirement benefits-the same as he may do for contributions on behalf of his other employees. The 50 percent limitation in the pres- ent law is neither fair nor logical. Orig- inally, this limtation was designed to place the self-employed plans on a par with those plans in which the employee, as well as the employer, contributes to the cost of the benefits. The fact is that, according to the re- ports of the Secretary of Labor, over 70 percent of the plans registered under the Welfare and Pension Plans Disclosure Act do not require contributions from the employee but are financed entirely by the employer. Moreover, it is ~a rare case where the employee pays for one-half of his bene- fits. Thus, it is difficult to justify the limitation on the ground that only half of the contribution represents a contrib- ution by the self-employed, as an em- ployee rather than as an employer. Second, it would remove the 30-per- cent limtiation on "earned income" to be considered for plan purposes. Since the allowable contribution for the self-em- ployed is based upon his earned income, the existing limitation means that the individual's net earnings must be at least $83,333.33 if he is to make the maximum contribution of $2,500-30 percent of $83,333.33 is $25,000; 10 per- cent of $25,000 is $2,500. The arithmetic alone demonstrates that it is highly unrealistic to attribute only 30 percent of the net profits of the business to personal services and that the act is of little help to small businessmen and farmers. The new definition of "earned income" will continue to require that substantial personal services be devoted to the busi- ness if deductions are to be taken with respect to contributions for the self-em- ployed individual's benefit. Deductions will not, therefore, be allowed for con- tributions based on income derived solely from capital. It should be noted that the proposed amendment makes no change in the basic structure of the act. The more stringent requirements with respect to coverage of employees and the benefits which must be provided them will re- main in effect to prevent discrimination in favor of the self-employed. Let me explain In a little more detail why the proposed amendment is desira- ble to make the Self-employed Indi- viduals' Retirement Act an effective one for the self-employed. When the act was passed by the Con - gress in 1962, it represented the culmi- nation of many years' effort to provide some means by which the self-employed could adopt pension plans for their re- tirement and deduct a part of the cost thereof in computing their Federal in- come tax liability. Although the self- employed wefe prevented from doing this, the tax laws for many years had permitted the corporate employer to es- tablish pension plans and. deduct the cost thereof, including the cost of pen-. sions for employees who were also owners of business. The 1962 act did not by any means equate the tax benefits of the self-em- ployed and the corporate employers. While a step in the right direction, it im- posed numerous limitations on the self- employed. Experience with the act since 1962 clearly demonstrates that the objectives of the act have not been ful- filled. In March of 1965,. the distin- guished Senator from West Virginia [Mr. RANDOLPH], chairman of the Subcom- mittee on Employment and Retirement Incomes of the Special Committee on Aging of the Senate, held hearings on the general problem of extending pri- vate pension coverage. Several wit- nesses testified to the fact that adop- tion of retirement plans by the self-em- ployed had been small indeed. When Congress considered legislation in 1962, it was estimated that some 6 million self-employed who pay income taxes would be permitted to establish retirement plans under the act. It is also estimated that these people employ about 9 million individuals. So there are approximately 15 million people who could be covered under pension plans for the self-employed. However, the In- ternal Revenue Service reports that as of March 31, 1966, only some 22,000 plans had been adopted, covering less than 40,000 people. In the same period quali- fied retirement plans were adopted by corporations which covered over 1,250,- 000 employers. It is obvious, therefore, that to date coverage of the self-employ- ed and their employees has been negligible. Additional evidence of the poor ac- ceptance of the act by the self-employed is found in the fact that in 1962 the Treasury estimated the cost of the act would amount to around $115 million for the first year, while the actual cost for 1964 was only some $9 million. The Treasury Department estimates that only about one-half of 1 percent of the self- employed took advantage of the deduc- tion for 1964. The reason for the failure of the act 1572 PAGENO="0421" to accomplish its purpose is quite ap- parent when one examines the many limitations imposed on the sélf-employ~ ed. In addition to imposing require- ments as to coverage of, and benefits for, employees not found in the require- ments applicable to corporate plans, the act limits the amount which a self-em- ployed may set aside for his own retire- ment to 10 percent of his earned income or $2,500 whichever is the smaller. On top of this basic limitation are two restrictions which have proved to be par- ticularly burdensome: First. The act limits the amount which the self-employed may deduct for tax purposes to 50 percent of the amount contributed to the plan for his retire- ment benefits. Thus, the maximum de- duction under the act is one-half of $2,500 or $1,250. Second. The act also restricts the amount of earned income which will be recognized for contribution purposes where capital, as well as personal serv- ices, is a material factor in the produc- tion of income. In such a case, earned Income cannot exceed 30 percent of the net profits from the business except that the amount of the individual's earned Income cannot be reduced below $2,500 by operation of this rule if the individ- ual renders personal services on a sub- stantially full-time basis. Just recently, the Washington Post contained an editorial, under date of October 10, 1966, which I would like to read at this time. It is entitled "Parity in Pensions" and states as follows: Under the Federal income tax laws self- employed persons are permited to make pen- sion fund contributions on their own behalf up to a limit of $2,500. But since only half of that amount may be taken as a deduction, the tax treatment of the self-employed is not as favorable as that accorded corporate em- ployes in the same income bracket. The House of Representatives by a unani- mous vote passed an amendment that would permit the self-employed to deduct 100 per- cent of their pension fund contributions. But the Senate Finance Committee rejected the measure. Even though the Treasury would suffer a modest loSs of revenue, the Senate ought to go along with the House in putting the self-employed taxpayer on a parity with others. There is just one other change made in the proposed amendment, and that is that it would make its provisions effec- tive as of January 1, 1968. Equality for 18 million self-employed and their employees is long overdue. The revisions embodied in the pro- posed amendment are just and fair, and I urge the Senate to adopt them by an overwhelming majority, as did the House of Representatives. I should like to read a partial list of. associations endorsing HR. 10 in the 89th Congress: Contracting Plasterers' &~ Latbers Inter- national .5ssociation. The American College of Radiology. Society of American Florists. American Dental Association. ~:P. 25364] Association of Consulting Management Engineers, Inc. The Authors League of America, Inc~ American Association of Life Underwriters. American Farm Bureau Federation. American Podiatry Association. American Society of Landscape Architects. American Association of Medical Clinics. American Optometric Association. National Wholesale Furniture Salesmen's Association. American Bar Association. American Hotel & Motel Associations. National Association of Women Lawyers. American Medical Association. National Livestock Tax Committee. AmerIcan veterinary Medical Association. Society of Magazine Writers. National Society of Professional Engineers. American Society of Industrial Designers- Industrial Designers Institute. National Council of Dance Teachers Or- ganization. National Society of Public Accountants. American Chicropractic Association. National Milk Producers Federation. National Association of Retail Grocers of the United States. Bureau of Salesmen's National Associa- tion. National Small Business Asociation. National Food Brokers Association. American Institute of Certified Public Accountants. That is only a partial list of associa- tions endorsing the measure. I do not see any reason why the amendment should not be adopted. I think most of us are aware that it repre- sents an equitable measure and should be adopted by a solid majority. Mr. CARLSON. Mr. President, will the Senator yield? Mr. HARTKE. I yield to the Senator from Kansas. Mr. CARLSON. . Mr. President, I wish to associate myself with the remarks of the Senator from Indiana. I also wish to state that the Senator from Kentucky [Mr. MORTON] has authorized me to state that he heartily endorses the amendment. Mr. President, an inequity existed as to the tax treatment accorded self-em- ployed persons who desired to establish private, retirement plans. Employer contributions to retirement plans have been tax deductible for some time and nontaxable to the employees until re- tirement benefits are actually received. The law discriminated against self-em- ployed persons by requiring them to pay taxes on income they set aside for retire- ment. Farmers, ranchers, and other small businessmen make up a large por- tion of this group. Congress recognized that discrimina- tion did exist and enacted the Self-Em- ployed Individuals Tax Retirement Act of 1962 This measure has tended to re- duce the discrimination, but it has fallen 1573 PAGENO="0422" demonstrably short of achieving its ob- jective. Under the Self-Employed Individuals Tax Retirement Act of 1962, most farm- ers are classified as "owner-employees." Owner-employees are authorized to con- tribute up to 10 percent of their earned income, but not more than $2,500 per year, to a retirement plan and to claim a Federal tax deferral for 50 percent of such contributions. However, in the case of farmers, the benefits of this act are drastically limited by a restrictive definition of "earned In- come." If the earnings of an "owner employee" are a joint product of personal services and invested capital, as Is the case with most farmers, not more than the larger of $2,500 or 30 percent of the taxpayer's earnings from self-employ- ment may be treated as "earned income." Limiting the deferral to 50 percent of the contributions has retained a serious inequity with respect to self-employed retirement programs. Consequently, very few retirement programs have been established. The restriction that earned income must be arbitrarily computed at 30 percent of net earnings has made the program meaningless to farmers and other self-employed who must invest capital as well as labor in their enter- prises. If enacted, this proposal would remove both the 50 percent and 30 percent limi- tations. For example, self-employed in- dividuals, professional and farmer, with a $10,000 net income could contribute $1,000 annually toward an authorized retirement program and deduct the full amount. This program would apply only to income where the self-employed individual's labor was a material income- producing factor. There is a misconception that a provi- sion included as an amendment to the Foreign Investors Act corrects the seri- ous inequity and discrimination in our tax laws. This is not true. That provi- sion simply states that the self-employed will not be discriminated against until his net income exceeds $6,600 per year. It is clear that an individual, for all practical purposes, must earn more than that in any given year before he is able to set aside funds for retirement purposes. It is also true that the provi- sion does nothing to remove the require- ment that only 50 percent of his contri- bution can be treated as a tax deduction. The provisions of H.R. 10, as passed by the House, correct the problem rather than confuse the situation. I believe that is the job we want to accomplish today. Mr. WILLIAMS of Delaware. Mr. President, I ask for the yeas and nays on the amendment. The yeas and nays were ordered. Mr. LONG of Louisiana. Mr. Presi- dent, I hope the amendment is not agreed to. People have been lobbying for 15 years that, because corporations have retirement plans and because an employee puts his money into it and has no vested interest in it until he retires and pays no tax on it until he starts drawing the money, doctors, lawyers, and others who do not have this plans should be protected and should have a deduc- tion of $2,500 to set up their own retire. ment funds. If these employees are so protected, there is a loophole that should be closed. This measure moves in the opposite di- rection from closing that loophole. The pending amendment would discriminate by using that loophole as a precedent against every workingman who paid a social security tax. He cannot deduct the social security tax that he puts into the fund, although his employer can de- duct his contribution as a necessary expense. This amendment would discriminate against all Federal employees. Senators are under the Federal retirement sys- tem, and they know that the 7 percent that they contribute to their retirement fund, which is matched by 7 percent Government money, is money on which they have paid a tax. Here it is pro- posed that a doctor, making $75,000 a year, should receive a better tax treat- ment than Members of Congress receive, or should be given preferential treat- ment over our own Federal employees who pay into the retirement fund money on which they have paid a tax. The amendment would provide a de- duction of $2,500, on which a person would not have to pay a nickel of tax for what he puts up. It would be used mainly by doctors and lawyers and others who are making more than $25,000 a year. It would be a complete deduction, above what they are allowed for their own expenses, for providing for their own retirement. I~ would make better sense to allow a man to deduct the expenses of an in- surance policy to provide for the living expenses for his wife and children in the event he should die at an early age. It would make better sense to deduct the expenses for an insurance policy to provide for food for that wife and children. There are all kinds of expenses for which an argument for deduction would be more compelling. It would make more sense to deduct the expense of paying rent- Mr. GORE. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. GORE. How would the Senator compare the fairness in an act of the Senate to permit doctors, lawyers, and dentists, who, according to the Treas- ury, would receive 75 percent of these benefits, to deduct the cost of the pre- mium of a retirement insurance policy, with giving to people who have a tragedy 1574 PAGENO="0423" in their families a deduction for hospital costs? Yet this amendment provides a deduc- tion for an investment for one's own re- tirement, but, does not provide for a deduction for all the other expenses that are, as the Senator has said, more worthy and more emergent. Mr. LONG of Louisiana. Mr. Presi- dent, as among personal expenses, it would seem to me to make better sense to let a man deduct the cost of burying his wife than to deduct the cost of putting aside a large retirement fund for himself. As among personal ex- penses, this is one of the most unneces- sary a person could have. It is entirely up to him whether he wants to do it. The adoption of this amendment would leave every workingman under social security paying taxes on every nickel he puts up for his retirement. He cannot deduct it. Yet the Senator would pro- vide deductions for the lawyer and the doctor. We would pick For taxatien of foreign cerporations carrying en an insurance business within the U-nite4 Stutes~ see see- tion842~ 14 -(73- Section 8~ -(-r-elating to insurance company 15 taxeble income)- is amended by striking oat subsection 16 -(-4)- and by redesigmthrig 5flhi5CCt~Ofl -fe3- as subsection 17 18 -(-83- ~Phe second sentence of section 844 (relating 1653 PAGENO="0502" 50 1 to erc4it fo~ foreign taxes)- is amende4 by striking oot 2 1-~sentcncc," and i serthig in lieu thereof ~±scntcnee -(-and 3 for purposes of. applying section ~ with respect to ft 4 foreign corporation si±b~e$ to tan under this sub- 5 ehaptcr),". 6 -(-k3- S+~BF*{~ ~ INCeME. Section 952~(b~)- -frelath~g .7 to anelasion of TJ-nited States ineorne}~ is amended to read as 8. fellows: 9 "-(b) EXeLIJSi0N OP ~H~PE+~ Sr~ns INCOME. In 10 the ease of a eontro~14e4 foreign eor~on~tion~ sabpar-~ ~ in- 11 come does. not include any isem of income from sourees 12 within the Ihiited States wiuieh is etfoetively eoimected 13 with the conduct by suel eorj~ratien of a trade or business 14 within the. 4~nited States unless suel± item ~s exempt from 15 ta~-ation. -(-or is oub~eet .to a. redneed rate of tan3- pursuant 16 to a treaty obl4~ation of.theTjnitcd Statcs~'~ 17 -fi3~ 4*i~ FuOM QEnT*i?~ ~EO OP EX( T~EH~S OP 18 S~~ee~ ~ 4~+i+~ Foiri~e~ ~en~eu*~e~-Paragmph 19 -(-4-)- of seetk)n 1~248-fd~)- -(relating to e~4usions from earn- 20 ings and pro&&)- is amended to read as follows-~ 21 `~-(4) ~w-Hi3 ~ +?cee~n. Any item m- 22 ektdTh4e in gross income of the foreign eoeporatiou under 23 this chapter 1654 PAGENO="0503" 51 .1 ~ (A) for a~y tft~&3Ie year begimthig before 2 J-anuary 4~ 1967- as ineeme ~1eri~e4 from ~ree~ 2 wit4thi the Uiofed States of a foreign corporation 4 engage4 iii tra4e or bnsiness within the T~e~ 5 Ses~or 6 I~fB3- for any tana4tie year beginn4ng thel! 7 Pceemher &1-~ 1-9G(3~ as income e 14~e4~ coo- 8 neeted with the eondaet by saeii e ~orat4oo of a 9 trade or business wiThin the United Ste4~ee 10 This paragraph shall net a~p4y with respeet to any :j~ which is exempt from aeion -(-or is ~i÷l4eet to 12 a reduced rate of tan3- parsT to a trea4-~ e14ga4~o 13 of the United Statcs.~ 14 43-)- DECLX1L~TIOX on ESTIM~H~B I-XCoMEE ~U*~ 15 ~ollrou~rIo~s~ Seetien f~O4-4~ -(-reli4iog to 4ara1ions of 16 estimated income t~a~ k~ eorporatioes3- is amended by redee- 17 ignating subsection -(43- as suhseetioa ~fg-)- and 1w im~eeting 18 a4tom~ scetien -(4 the following new 19 1f~ff3~ Gi i~*i~ ~~nmo~ Gø~-m*i&~s- For pro- 20 poses of this sef4ien and section ~&~-5,in the etose of a fer4gn 21 eor-poration siib~eet to taxation under sec44ou 44 or 22 or under su4ehapter ~h of ehapter 4-~ the tax impeeed 4w 23 section 884r shtdl be treeted as a tax impo~o4 b~ seetkm 44-~ 1655 PAGENO="0504" 52 I -(4~3- TEcIr~Ie*L AMDNDMENTS--- -fl-* Se(4 884 is t~++~ewIed to feft4 ftS ~o11~ws-~ ~ 884 CROSS RFERENE& ~(1~ For special provisions i~e1a4ing to nnrelated hu& mess income of foreign cdneational, ehai4tah1e~ and cer- tain ethel? eaempt organiations~ see section 54-2fa~ ~42~) For special provisions relating to foreign eorpe- ieations carrying on a-n insurance business within the United S4ate~ see section 84~ ~+3I For mien a phieabIe in determining whether any foreign corporation is engaged in trade or business within the United Sta-tcs~ see section 864(b)- ~(4~ For reinstatemeet of pre496~ income ta* .provi- sions in the ease of eorprations of certain foreign countries~ see section 8-96 ~(5~ For allowance of credit against the ta-~ in ease of a foreign corporation having income e1foetircl-y con- nected with the eon-d*et of a trade or business within the U-sited gt-ates see section 904b ~(6~ For withholding at source of tax on income of foreign eorporathns~ see section t442!! -(24- $eetion ~5*~*84)-(~E~ is amen4ed by s4~4k- 4 ii+g eat ~-(-b-)--f53-~' efid ertftg ie hoe thereof 5 6 -(24- Seetise 424~-(e3- is a.meiid~d by sit4kb~g oct 7 ~-~4~eeeist es h+ S e+4-ioe -fe-)-? go4+i~ oed hi- 8 serthig hi hoe thereof ~G~ah÷~ 9 -(13- EFFECTIVE 4)ATT~s~-The aoicndmeets rn&de b-y 10 this seetise -(-other thae s~thse(4ie+} -(43-)- sl÷a14 ap~ih~ with 11 respect to tseoal4e years begirethig a-her P ember ~4-~ 4-9~th 12 ~4ie a~eee4meet ma4e by 4~+~e -fi4- sbel4 apply whi+ 1656 PAGENO="0505" 53 1 fespeet ~e er e~f4~ftft es~ 4)e(1nmft f*4teP ~eee~thef ~4- 2 4-9~~ 3 SE~ & SP1?~CIAb TA~ PROVTSIONS~ 4 -faa- INe&?~H~ M~ETED B-Y TREATY. Section 8~4 -fre- 5 ~ ~eome cx-ernp~ ~wb~ ti~ee~ie~3- ie ififiefided ~o ~ea4 6 a~s ~.o14ows-~ 7 ~SE~G. 894w INCOME AFFECTED B-Y TREAT~ 8 !.`-~4 ~ 14~~pq~ J-~~ ~ P-Y~--I~neeme of 9 aey k-md, ~o the e~e~ i~eq~iise4 by a~ tI!eaty I4g~4ie]~i of 10 ~ TJ ited Stete~ ~be4I ~ be ~eIwde4 ~ gross ineell+e fffl4 11 sIrnl4 be e~em~ fi~oe~ ~ atieft FThde)? this aabtit1e~ 12 1L(~ Ijw~p Tp*J+}~-~P f~ H~}E 13 *ZP.E~~~~F+w p~÷i~p~e~ of appI~4n~ ~ew e~e~npf4on froTn~ 01~ 14 i~e4~e~on of~ acy ~arx ~wo~4Ie4 by a~y ~ea~ t~o whieh the 15 T~i-i~e4 ~a4e~ is a pa~t~z with ~espe4 ~o im~eme wh4ei~ is no~ 16 effe~4i~-e4y eeieee~ed with the f*ffl4H~ of a OP .17 withiii the T3n4e4 ~t4es~ o 0011 est4eft~ a#eo flldivUhH4 o~ a 18 fefeigo eorpoi~at4eo shal4 be ~ee~ed oo~ ~o I÷a-~e a perni~u+eo~ 19 esMb14shmee~ ifi the Th~ed S~4es at aoy thee 4e~ieg the 20 ~axob1e yea~ ~Ph4s ~eksee1~ion sball eat op~p4y ie ~espeat of 21 the ~ eem~ate4 en4er ~ee~ise 874-(-b)-~ 22 -fb3- ~ eF~ ~+E-i4M~-7- ~ ~I~** 4~RO~+- 23 &ie~ Subpai4 Q of 44 of ~4chnpter ~ of ehapter 4~ 1657 PAGENO="0506" 54 j -f~e1ating te misccllaneons provisions app~ieaTb~e to noriresi 2 dent aliens and ~orcign corporations)- is amended by adding ~ at the end theronf th~ following new seetien-i 4 ~SEC 8~& APPLICATION 0E PRE-19&7 INCOME !~AX PRO- 5 VISIONS (3 ~-(-a~- IMPOSIfl&N E)1 ~IORE BTRDENS0ME TAXES B-~ 7 ~-OHEICH~ QOTNTIIY. -Wi ~er the eeident 44n4s that- 8 nader the in-ws of any foreign eeuritry, eon- 9 s44e~4ng the ta~ system of soeli foreign eonntry7 e4tii~ens 10 of the ~n4i~ed States not residents of sneli foreign eoim 11 ~ry or domestie eerpnratfa+s are ben~g subjected to more 12 burdensome ta~es~ on any item of income reeeited by 13 each citinens or c orations from son-rees within such 14 ~ eount~y~ than t&xes imposed by the pros4sions of 15 44~ ~thta4e on ni~ome dei4wd from sourees 16 wiThin the 4-ni~ed States by residents or corporations of 17 snob foreign eountry~ 18 ~-~-(-~+ such foreign eoun{ry, when requested by the 19 4+u4ed States to do line not acted to revise or reduce 20 snob tones so tints they are no more l~nirdensome than 21 ta~ee imposed by the pro~4sione of this sn-btitlc on similar 22 income dethed from sources with-in the LTnited States by 23 resi4ents or eorpor&tions of each foreign eenntry and ~inthoeintercsttoapp4yprc19(~ 25 tax provisions in accordance with the pro-visions of this 1658 PAGENO="0507" 55 1 see1~ien ~e resi41ei~ Of eo iOft~ of &t~eh fefeig~ 2 cou~try~ 3 ~he P-rcsident ~hft14 p~oe1aim ~ha~ the ~ on ~+eh ~imilM h~- 4 come 4cri~cd from se~ees within ~he U~i4~e4 States ~v fes4- 5 dc~s Of eorporatione of ~neI~ foreign eeu+i~y s1+a~4~ fof Mx- 6 a4~4o yeai~s begiiin~ of~ei~ ~neI3 ~feeIffflmt~ion~ ~e t1e~ei~mined 7 tmdcr ~ ~ub~iflo without i~ega~d 1~o nmendment~ m-a~e ~e 8 ~h4s e~+bcImptcr e~d ~haptef ~ on Of af~ef the ~Me of e~ia~- 9 inen4~ of 14iis ~eetio~ 10 "(b) 4~±~H8~ ~+p 11 Whcne~zof tho President ~ ~at tI'e laws of ony fereig~ 12 country with respeet ~o wl~4eh the esidont has made a pros- 13 larnetion m+der &ithssetion -(4 ha~e been modi4~e4 so 14 eitizens of the TJnited States net sidents of sosh foreign 15 eonntry of 4omestie eorpofatons are no longer so~jeet ~o 16 more burdensome taxes on ~*wh item of i+ieome derived be 17 snel+ eEtizenS or corporations from som~ees 4th~ sm4~ foreign 118 country, he sl+ad4 proclaim thet the ~ on sneh sin~44nr H- 19 eome derived from sources within the United States by 20 residents or corporaf ions of SII*4+ foreign country shall5 for 21 ony taxtddo yea~ beginning after sush o4ama44on~ be de- 22 termiried nader this subtitle withoet regard to sithseetion 23(4~ 24 i1-fe~- ~OTIPICA~PIE)~ OP CONGRESS ~Tm~3N1() 25 proclamation s~l+a44 be issued by the President pursuant to 1659 PAGENO="0508" 5(3 1 4~S ~e4i~ rni1ess~ at la~4 ~O days prior to s+ie1~ pre4a- 2 mation~ he h~s fiotified the Senate and the House of Repre 3 sentati~es of 14s intention to is~ne saeh preelamation. 4 ~i~f4)~ IMPLEMENPATIO~ B~ REGUL*TION~. The See- 5 rotary or 1345 delegate s13a]4 prescribe s+3e13 regulations as he (3 deems neecssary or appropriate to implcment ~h4s section" 7 -(-e-)- G~e*b 4~ME3~T& The tf~M~ Of SCCtU}I15 8 fo~Gofp~behaptcr~efehaptcr4-4s 9 amended 10 -(4-)- by &trilth~g ont the i-tom relating to seetion 8-94 ii and inserting in lion thereof ~ee~ 8~4~ ~neome ~ffeete4 4~ trcn1~y."; 12 ~ ~ ~ Ap~i~÷~ H-c j~+~4~ +Wft+~ ~* 13 -(-4)- T~Ef~THI-Vi~ 44~F~-'T4w sfFwn~h~eats made by th4s 14 s~et4on (other than snhse~tian (-e}--)~ ~13a14 aj~ply with respect 15 to taxaide ~etws beginning otter 43eeernher ~ 4-96& 16 -(-e-)- ELECTIONS 3W NONREf~IDO3~'r TNITED STATES 17 QITIzENS W+ie ~-n~ SUBJECT ~F0 i~onnio~ QoM~rnNr~Y 18 PROPERTY L*WS- 19 -(-4-3- 4~ort m of siThdiapter N of eT+a~pter 4- 20 to income from aenrees w~443eat the Th~te4 States3- 1660 PAGENO="0509" 57 1. is ameri4e4 1w adding a4 the end there$ the Ilowing 2 new subpart: 3 !~Subptwt 11-Income of Cei4ain Nom~esident United States 4 Citizens Subject to Foreign Community Property Laws ~See ~84~ Elections ft9 te treatment o4 income subject te foreign commimi#y property 4~w~ 5 "SEC~ 98b ~bEGTION AS TO TREATMENT O~F INCOME SUB- 6 J-EgI~ TO FOREIGN COMMUNITY PROPERTY 7 LAWS4 8 ~-~-fa3- i~*i~ RuI1E. in the eftse any ta*a44e year 9 beginning 4ter December ~-1-~ 4~9f1G ii- 10 ~-(1) d~~)-aci~izene~theTJ1thted 11 Statesy -fP4- a bena bide resident e~ a foreign coimtry 12 e*nmtries 4~n4i+g the enl4fe tw~e1+Ie yea~ en4 -f(~- 13 ma dattheelesenf the ~ 14 a nenfesident a1~en dnth~g the ent4re ~a~a1~4e ~esi~ and 15 -~-~-f2~)- sin4~ 4Mdin4 and peu~e e4e$ ~n 16 ~ +14- appl-y ~e their a ninni4- ina*me u+tder 17 t~ereign a mrnanity prepert-y Ie~sy 18 ~ ~ ~ ~ 19 ~c44aa4 and sueh spouse ~er the tanable year and tar all sub- 20 seqneu-t taxaMe year-s tar whk4i the re +nents ot ptwa- 1661 PAGENO="0510" 58 I graph -(4-)- ofO fta4~ `~m1e~ the ~ of 1~i~ deIcga~e 2 C0~e~ ~o ~ ~efm~ftMefi of ~e e~ee~4o~ 3 ~(b)T ThE*~M~P eF Q8MH~FPI~ I~COME. F~of any 4 ~a~a~4e ~Cof ~e wh±e~ an e1~e~ien made n~o~ 4~see~on -fa-)- 5 a-pp11es~ the eernrnimi1~y ineome imdcr foi~eign oomu~it~-y 6 pfope~y Iaw~ of ~be i1~a~+4 and wife nnd4ng ~be e4eet~ien 7 ~ba~4 be ~ea~ed a~ fo41ew~ 8 !~L(4~)~ 44~wned ie~rne -(-wi~1-i~+ 4ie .nhig of ~be 9 44~ ~ (4 ~ ~4-t--fb-)-.)-~ (44~fAf 1~hftft ~fftdO Of 10 iflCOffie and a ~n~w~s i4Io4ii~e ~bare of 11 par1~ners1÷i~ i~ieei÷w~ ~1~iafl be ~e~4e4 aa ~be i~iwome Of ~the 12 ~pease wbo fendefed 4ie e~se~d ~e~ees~ 13 -~-f2- ~Pm4e or meeme and a 14 d4~uTh~e f4+are of pa~nen~T$p ~aeo+ne~ f4lftll be ~ren~e4 15 a~ ~4de4 ~+ i-~4ion 4-fa-)--f~ .1.6 ~ ~w+3me 1+# 4esei4bed ~n parw- 17 graph -(~* or -(-2+ -w4$4~ ~ +1eri~e4 fren 14ie separate .18 proper~ -(-as ~Werin~oed +tlor 4ie app4~eab1e foreign 19 fs*+FHft11-y ~ei4y ~* of oae. ~panse sbnl4 be treated 20 as the i~worne Of 21 LL(4)- 414 ot1i~r sael+ eoin~niiiii4~. i÷ieome sha4l be 22 treated as 1wo~$de4 m the ftpplftIflJ4e fère~gn eofflrnuni4y 23 property Iaw 1662 PAGENO="0511" 59 !í4$. Ei~nen~ T~EHi PRE 1-9~6 ~RS. 2 "-(1) ELEOTJON~-M nn indi~4dua1 meets the re- 3 guircrncnts e~ ~u see!' -fa--(4-)- 4-4)- and -(-03- fe~ any 4 ~eni~ begi~rn+ing befoFe January ~ ~4}(~7~ and i4 5 si+eh individual and the spow~e i~eferred ~e in subsection +*+1*fO* e4*~ +mder thi~s a etion~ then pan~gI2aph +2-)- of this s+thseetion sha44 apply to theif eo nni. in- cenie Under fo~*4gn eonuuu y propee~ laws for all 9 open ta~&4e years heginoing before January 4-~ i4~-7- 10 -(whether under this ehapter~ the eorsesponding pre~4- 11 sinus of the ~uterin4 4~ei~enue Gode of ~ or the eor- 12 responding provisions of prier revenue Taws-)-~ for whieh I :~ the r~ eroeftts of siihsee14on -(a-)--(4-)- 444- and -(03- 14 met- 1~) ~~-f 2-)- Ei~s~e~ ei~ ~o~-~or an-y tanabla ear to wh4eh an eleetion made nuder this sehseetAen 17 ~ t1+~ Q Hm1TO#~S' oeeme n-nder f~rs4'~u eomn~n+nft~ property laws of the lmshand and wife ma4~g the eleetion shall he treated as provided by su1)seet}on -fb3- 20 eneept that the other ennununity income desei4bed in 21 paragraph -(4)- of su4seeMon -fk)- shall be treated as the 22 ineome of the spouse who~ for such ta~ahle year~ had gross ineome under paragraphs -(43-i. -f2-)-~ and -(-3-)- of 1663 PAGENO="0512" 60 1 ~hseet4on -fb)-~ ph~ ?ieparftrte gi~es~ ineome gi~ea4~ef than 2 ~ha~ ef the ether ~pense ~d)- ~f~*E P0n J~WE~ E~E~EIE~$j ~1êf~ ØP 4 Mf~F.~HON-Sj E~T~- 5 ~-(-1) ~ An election nn4e~ ~uhscetion -(-a3- e~ 6 ~f~4 fei~ a ~anab4e year may be mftdc a~t awj~ time while 7 ~neh yeai~ ie ~t414 opens and ~he4l be made in man S ne~ a~ the Seei~e~u~y er h~ delegate ~ha14 by ia~ns 9 pfesefthe7 1() !~f2~ ~ 1~&JeN êP ~nw~en F+M~ *~SES&TNE* ~B- 11 PIe IdIE~ *Ni~ M~T~IN~+ i any ~a~ahIe 12 yeai~ ~e wh4~eh an elee14~an i+n4ei~ ~÷bsee1~ien -(-flu)- e~ i:~ f~p3 *~pen at the thne ~wh 4e~#ien i~ the 14 p*a4od far a 4efleieney aga~n~ and the period 15 for ~14ng elaim far are~ or refund of en~ overpayment 1.6 by- the hWthaT~4 and ~4$e for ~neh t~able year~ ~o the 17 ex~te~t sueh defleAeney or ov~crpnynien~ io at-tributable to 18 sneh an e etAon~ ~hal4 eat expire before 4~ year aft~er 19 ~h~~eef~heleetiou 20 ~±~)- spos~ ~EEn ~ecr ~ 21 ~ ~ (~44 the Seere- 22 ~ary or h4~ delegate datennine- 2:~ ~4~- that an eleetion under ~n4~eetion -fe)- would not a4~eet the liability for Federal ineome 1664 PAGENO="0513" (ii 1 ef the spouse fefrFfe4 ~o m ~fthSe(41ftH -(~-(4)- 2 fe~ ~ ~a~ab1e yea~ ei~ 3 ~!~E44* that the e~ee~ on ~4t 14aI$1~ fo~ t~~ix 4 etnrnoi~ be er~nine4 aod thet ~o 4eny the eket4on 5 ~o the eith~en e~ the 1ni~e4 S~a~ea wonl4 he ~neqii~4~- 6 ble an4 eau&e undue I~1÷i~p~ 7 ~ne~ ~onse sbe44 no~ be ~equife4 ~e ~join ~n ~i~4i eee44en~ S tied pa~ag~npI~ -f2~3- e4~ this ~ et44on ~ha14 eo~ ap~dy 9 wi~th i~esj~ee~ ~o f~ueI+ ~pothse7 10 ~ To the e~en~ tha~ any werpay 11 IIWH~ Of 4e4~ei-iey 4~ ~ ~e~aMe ~ea~ ~s a~4hu~a~1$e ~e 12 ~ e3ee~on n+ade undef this seethn~ no ei~es~ f41a~ll be 13 allowed Of ~ai4 ~ any pei4ud hefe~e ~be day wb4eb ~s 1~ ~ea~ af~ef the 4a~e of sueb election ~ ~-f~* i~e~s *~n SPeef~T~ Ii~-Fef j*w- 16 poses of thi~s see~ien- 17 `~-(~i~)- P+e~e-Dedaethn+s shall be ~ea~ed in 18 a rnarniei~ annsh4on4~ wth the rntmrlef pfO~i4dOd by ~b4s 19 set4ien fo~ the ineonie ~o wli4eb they i~e4a~e~ 20 £Lf2+ On~ ~*iis. A ~a~ahIe year of a 21 Of the ~-Ffl4~ed S~ft~OS tind f~pOHSC fthftl4 be ~e&~ed as 22 1open~ i4 the pei40d far assessh+g a 4efieici~oy agai~Hs~ 2~ sueb ei~en for su*4+ ~ORf 1+a~ ne~ e~red before the 71-297 0-67-pt. 2-33 1665 PAGENO="0514" 1 date of the election rn~4ef subsection -(a-)- or -(-e~)-~ as the 2 eemaybe~ 3 .f~I~(3~ EL1~CTIO~NS ~ CASE 8~ DECEDENTS. -fi a 4 husband or wi4e is deceased his election under this see- 5 tion may be made by his executor, ahe4nistrator; or 6 other person ehargcd with his propcrty. 7 "-f4)- P~sii e~ &i~o+~-s~ rniiu~-e- ~i~*i~ 8 k a-pplying subse~tien ~1-)--(G3-~ and in do- 9 termining under snbseetion -(e3--f23- wliieh spouse has 10 the greater ineeme fe~ a taxable yea~ if a husband or 11 wife dies the taxable year of the surviving spouse shall 12 be treated as end4~g on the hae of snob death." 13 -(2- The Wile of subpa4s for snob pai~ III is 14 amended by a&ling at the end thereof the following-i Subptwt ~b Incorno of eei~ta-i~ nonrcsidmt T~ite4 Stotes citizens &u-b . to foreign eoniinunity ~ e~ty Iaws~ 15 -(3-)- Seetion ~)44~d-)- -(-relating to earned income 16 from sourees without the Tin44ed States)- is airiended 17 -(4)- by striking out ~Fe~ a4ministra~ve!! and 18 inserting in lieu thereof the foI1owing-~ sf14 Fe~ ad- 19 ministrativ~4 and 20 ~(44)- by adding at the end thereof the fol4owing-~ ~±{2~ 1~o~ elections as to tfcatment of income subject to foreign eonimunity property 4aws, see section 981?! 1666 PAGENO="0515" (.;3 1 SE4~ 6 FORFdGN TAX CREDIT. 2 .f~b3 ALLOWANCE EW ~REDI~P ~ CERTAIN NONRESI 3 DRNP ALIENS ANS FOREICN OOIIPORATIONS~--. 4 -(4-)- Subpart A of. pact Ill of subchapter N of chap 5 tar ~ ~(reIating to foreign tan credit)- is amended by 6 adding at the end thereof the following rew section: 7 ~SRC~ 90& NONRE~SLD~NT ALIEN INDIVIDUALS AND FOR- 8 EJt~N CORPORATIONS 9 .~.~-fa)- ALLOWANCE ON CREDIT. A nonresident ad4en 10 individual or a foreign corporation engaged in trade or 11 business ~4thin the T~ideed States during the taxable year 12 ~h~14 be allowed a credit under section f)4)4 for the amoun4~ 13 of any iueome~ war profits~ and aneess profits taxes paid or 14 accrued during the tana1~de year -(-or deemed, under section 15 t)C2~ paid or aeeraed during the taxable yeat3- to any foreign 16 eountry or possession of the United States with respect to 17 ineomecifeetively connected with the conduct of a trade or 18 biness~4hinthe~i~ëdStates~ 19 "-(-b) ~SEsu~ 1~rEH7ES;-~--- 20 ~-(1)- ~or purposes of subsection -(-a)- and for pun- 21 poses of determining the deductions f4lowab4e mu4e~ 22 sections 87-3-fa)- ~nd 882 (f), in determining the amount 23 of any ta~ paid or atciued to any foreign country or 1667 PAGENO="0516" 64 1 ~osoeseon there sh~4 not he taken into account aey 2 amount of te~ to the extent the ta~ so ~~a4d or accrued is 3. imposed with respect to income whieh would nct be 4 taxed by such foreign eeuntry or possc~sion hot for the 5 fact that- 6 ~A) in the ease of a nonicsident alien indi- 7 ~4duai~ such indit4d-ual is a eith~en or resident of 8 such foreign country or possessi-on1 or 9 I~-fB~)- in the ease of a foreign eorporation7 such 10 eei'peratio+i was created or orgonh~ed under the law of such foreign country or possession or is 12 demielled for ta~ purposes in such country or 13 pesscss4on~ 14 "-(-2~)- F-or puiposes of suhseetien -(-a3-~ in apply- 15 ing section ~O4 the tanpaycr's taxable income shal4 he 16 treated as eonsisthg only of the taxable income effee- 17 ti-vely eeimected with the ta~puycr~s conduct of a. trade 18 ~ within the F-sited States. 19 if~(~3} The credit allowed pursimot to subsection -(4 20 shall net be allowed against any tax imposed by section 21 g74-(p-)- -f~elating to income of nonresident alien indit4d- 22 ~ connected with F-sited States business) or ~8-l~ 23 -(s~elating to income of foreign corporations not con- 24 nested with Tnitcd States business)-~ 25 11-f43- F-or purposes of sections ~Q2-H- and ~i-8~ a 1668 PAGENO="0517" 65 1 foreign cftrpoI'ation choosinìg the benefits of this sub- 2 paint whieh reeei~~es ~1i~c44ends shall, with rcspeet to 3 auth 44~44enda~ he tneate4 as a domestic eonporation~ 4 -f2~- The tuble of sections for such subpart A is 5 amended by adding an the end thereof the foll~w4rig: 9O~ Nonrcside~ ~4e+~ indi-vidu~ ~i4 ~e1zeigft ee~- poratior)&-~ 6 +~* ~ ~74~* is an~en4e4 by striking out 7 ~4 FOREIGN 42~* CREDIT ~E*P A~b+~OWED. A non- 8 rcsidcnt~ and inserting in lieu thereof the following~ 9 iLfe.)- F-oREIc~N ~P*?~ CREDIT. Ex-eept as provided in 10 section ~O6-~ a nonrcsident~ ii -(4)- Subsection -(~- of seetion ~ frelating~ to 12 ~ allOWed) is amended by redesignating para 13 graph -(4-)- as poragn. -f53~ and by inserting after 14 paragraph -(43-)- the following new paragraph: 15 ~-(-4) ~TONRESIDENT ALWN INDIVIDUALS ~ 16 EIGN CORrORATIONS.-4n the e.a~e of any nonresident 17 alien ind4~4di±a1 not described in section ~7-fl and in the 18 ease of any foreign eonporat7ion~ the amount determined 19 pursuant to section ~4Q6j an4~ 20 -(-5-)- I~aragraph -f~)- -(-as redesignated)- of section 21 9O~b)- is amended by striking oat !~or -(-3-~ and in-j 22 sertinig in lieu thereof `~-(-3-)-~ or ~{4) ,`~ 1669 PAGENO="0518" 66 -(6* Tho amendments made by t34s su4scction sI+a14 2 tLpply with respect to ta~abIe years beginning after 3 December &t-~ 1966; In a~pp~4ng section 904 of the 4 Internal Revenue Qode of 1954 with respect to section 5 906 of aneli Godo~ no amount may be earned from or to 6 any taxable year begipning before denuary 4~ 1967, and 7 no anch year shall be taken into aeeount~ * $ -fb3-. Ai~u~ REsmE~e er~ s~rns i~J~En S~~*ms en 9 IkPO Rico. 10 -ff3- Paragraph -(33- of section 901 (b)- -(relating 11 to amount of foreign tax credit allowed in ease of alien 12 resident of the United States or Puerto Riea3- is amended 13 by striking ant ~ if the foreign country of which seeh 14 allen resident is a citizen or subjcet~ in im-posing suèh 15 taxcs~ allows a smilar credit to citizens of the United 16 States residing in such country". 17 -(23- Section 904 is amended by redesignating sub- 18: sections -(e3- and -(43- as subsections -f4)- and -fe3-~ and 19 by inserting after subsection -(b3- the following new 20 21 ~-~-fe3- SIMILAn CREDI~P REQUIRED F-9f~ Qnns~*ix ALIEN 22 ~ Whenever the President finds that- 23 ~-f1-J a foreign eountry~ in he-posing income, war 24 prof1ts~ and excess profits taxes~ does not allow to 1670 PAGENO="0519" 67 I eiti~ei~is o~ the T4i4t~ed States residing in such foreign 2 eeuntryaeitferayita~espai4oraccriicdto 3 the United States or any. foreign emmtry~ as. the ease 4 may be~ similar to the credit allowed under sabsection 5 6 `-~(2-)- such foreign country~ when requested by the 7 United States to do so~ has not t~ete4 to provide such a 8 similar credit: to citizens of the United States residing 9 in such foreign country~ and 10 ~3-)- it it in the public interest to allow the credit 11 under subsection -fb3--f33- to citizens or subjects of such 12 foreign country only if it allo~s such a~ similar credit to 13 citizens of the United States residing in such foreign 14 eountry~ 15 the Th~esi4ent shall proclaim that~ for taxable years hegin- 16 ning while the p~roeamation remains~ in cffect~ the credit 17 ~m~kr subsection -(~k)-f3~- shall be al4owed to citizens Of *18 subjeets o~ such foreign country ènly if such foreign eount~y~ 19 in imposing ineon+e~ war profits; and eucess profits taxes~ 20 allows to citizens of the United States residing in such foreign 21 eonntry such a similar eredit~ 22 -f3~- Section ~0~4 (relating to credit for foreign 23 death taxes)- is amended by striking out the second sen- 1671 PAGENO="0520" 68 1. tence of subseetion -fa~)-~ end by adding at the end of 2 each section the following new subscctiom~ 3 ~-(h)- SIMILAR Qf~BfP REQUIRED F~R CERTAIN ALIEN 4 RRSInnNT&-Whcncvcr the President finds that - 5 "(1) a foreign eeuntry~ in imposing estate, in&rit 6 arice~ legacy, or succession ta~es~ does not al-law to ehi- 7 acne of the T~nited States resident in such foreign cone- 8 try at the time of death a credit similar to the credit 9 allewed under schseetien -fa-)-~ 10 ~-(-2+ such foreign country, when requested by the 11 United States to dese~ has net acted to provide such a 12 sind1a~ credit in the ease of eitlaens of the Tjnited States 13 resident in such foreign eountry at the time of death~ and 14 ~-(~3-)- it is in the public interest to allow the credit 15 under subsection -fa3- in the ease of citisens or subjeets 16 ofsuehforeigncountryonlyifltad4e-wssuehasimilar 17 credit in the ease of eiti~ens of the Tlaited States resident 18 in such foreign country at the time of death~ 19 the President shall proclaim that~ .in the ease of eiti~ens or 20 subjects of such foreign country d-ying while the pi'eclamation 21 remains in effect, the credit under subsection -(-a)- shall be ad- 22 lowed only if such foreign country allows such a similar 23 credit in the ease of eititens of the Tduited States resident in 24 such foreign country at the time of death." 25 -(-43- The amendments made by this subsection 1672 PAGENO="0521" (39 I ~other than paragraph -(-3*)- sha~14 apply with respect 2 to taxable years beginning after December ~ 1966; 3 The amendment made by paragraph -(-3* shall apply 4 with respect to estates of deccdonts dying after the date 5 of the enactment of this A~et 6 -fe)- FOREIGN ~P~4* CREI}IT ~ CASE OP ~ER~T*W 7 OVERSEAS OPERATIONS FUNDING Sun~sIrn*nIEs.- 8 -(-1-)- Section 904 (f-)--(4)- (relating to application of 9 limitations en foreign tan credit in ease of certain inter- 10 eat ineome-)- is amended 11 -(4)- by etriking out ~or~ at the end of sub- 12 - paragraph -fC3-~ 13 -f4B-)- by striking out the period at the end of 14 subparagn~ph -(4)3- and inserting in lieu thereof 15 16 -(Q)- by adding at the end thereof the following 17 new abparagroiph-: 18 ~-(-E)- r-cccived by an over~cas opera1tions fund- 19 ing subsidiary on obligations of a related foreign 20 eorporation~ 21 -(-2-)- Section 904-(f~ is amended by adding at the 22 end thereof, the following new paragraph-i 23 "(5)-' DEFINSETONS FOP PURPOSES OP PARA- 24 GRAPII ~(1)--fE). For purposes of paragraph -(4-)- 25 __ 1673 PAGENO="0522" 70 1 the ~e~m ~ovcrscas e~orations funding 2 subsidiary~ means a domes~ie eorporation w-hieh -(43- 3 is a memher of an affj44a~e4 group -(within the 4 mefui1ng of section 4-504)- ~n4 is net the eommon 5 pa~ent eoi~peraMon~ and -(443- was formed and is 6 availed of f~# the p ineipa~' p'cwpese of raising funds 7 outside the Uiiited States through pnb1ie offerings to 8 foreign persons and of using seeh funds to finance 9 the o-peratious in foreign eonnteies of one or more 10 reinted foreign eorporations~ and 11 "(B) a foreign eOrporation is~ with respect to 12 an overseas operations funding sfthsifl4ary~ a related 13 foreign eorporatinn if 14~ affiliated group of whith 14 sneh sithskliary is a mcinber owns 50 percent or 15 more of the voting stock of snob foreign eorporation 16 either directly or thrOugh o-~vnershi~p of the voting 17 stock of another foreign eorporation~ 18 -f3~- The anw~hnents made by paragraphs -f1~3- and 19 42-)- sho~14 app4~ to interest received after December ~ 2() 1~35, in fa~ab1è years ending afte~sneh dater 1674 PAGENO="0523" 71 1 SEG 7. AMENDMENT TO PRESERVE EXISTING LAW ON 2 DEDUCTIONS UNDER SECTION 931I 3 ~fa-)- D~BDUCTIONS. Subsection ~f4)- of seetion ~&1~ -(-re- 4 bating to deductions)- is amended to read OS fellows-f 5 ~-(-d)- DEDUCTIONS. 6~ ~(4)- Gn~niui~ IWLE. Except as. otherwise pro- 7 ~4led in this subsection and sub~cetion -fe3-~ in the ease 8 of persons entitled to the benefits of this section the .9 (leduetlons. shall be allowed only if and to the extent 10 that they are eonriceted with ineome from seurees within 11 the United States-; and the proper apportionment and 12 allocation of the deductions with respect to sources of 13 income within and without the United States shall he 14 4ctermined as provided in part l~ u~n4er regulations 15 presei4bed by the Secretary or his delegato. 16 ~-(~2~)- EXcEPTIONS. The following dednetiens shall 17 ~ ~ ~h~fl-iç~ ~ ~ ~ connected with i-n- 18 . (i~~ from sources within the United States: 19 "-(A)- The +hwtlom for loose- net coiinected 2() with the trade or business i-f incurred in tranìsactions 1675 PAGENO="0524" 72 I e~itered iiite for pro~ allowed by ~ee14ell 445-fe)- 2 -(-2-)-~ bu~ on4y if the pro4i~ if such transaction had 3 resulted in a profit~ would be taxable under this 4 subtitle 5 ~(B) The dcduetion~ for losees of p~er~ not 6 connected with the trade or business if arising from 7 ecrtain eaoualties or theft~ allowed by section 4-~5 8 -(-e)43)-~ but only if the less is of property wiThin 9 the United Statca 10 ~-fG)- The deduction for charitable eoutcibu- 11 ens and gifts allowed by seetion 4:7-07 12 "(3) ~)UOTfE)~ nIS~J~L&WED- ~ thsallowanee e~ sta~1nr4 4e4ue44en~ see seet4en 14Z~b)(23~ 1 ~ -f-k)- 4e~+'~'+~ 1M~rri. The t~mfndment made by this 14 section thal4 ~pplj~ with respeet to ta*hble years beginning 15 after Peeem-ber ~ 4-9~3& 16 S~E4~ 8; ESTATES OT NONRESIDENTS NOT CITIZENS. 17 -fa3- ~ 8F TAX. Subsection -(-a)- of section 24-04: 18 -(-relating to tec~ imposed in ease of cstntc~ of nonresidents 19 net citizens) is am~nde4 to read as follows: 20 `~(a)-R~n er~ TAX. E~eept as provided in section 21 2l07-~ a ta~ computed in accordance with the following table 22 is hereby impose4 o~* the transfer of the taxable estate7 de- 1676 PAGENO="0525" 73 termined ao provided io seetio~i 2106~ of every decedent nee- residee~ i+et o eith~en of the :U:i~ite4 States: ~ the taxable estate tax 4s÷ ~he tax sha4l be÷ eie~ $4-00,000 ~% 94 t3+e ~a-~+th3e es~te O~ze~ $100,000 ~3+-1~ ~ $500~000 $6~000~ p4~o 44% 94 e~oe~ e~e~ $1-00.000~ O~e+~ $600,000 b+i~ ~et e~e+' $1,000,000 $~15,000~ p4+~s 4.5-% 94 e~eee~ &`c~e~ ~00Q7 O-vei~ $1,000,000 tait i~oi~ $~000~000 $120~000, 148s ~4% e4 exee~s ~we+~ _________ $4~000~00Q. O~xe~ $2~000~000 $32O,O00~ ~ Q~-% 94 over $~00~. 3 -fI})- Q~EDI~PS A*i*INS~P -Seet~en ~1Ø~ -fre1atiog 4 to credits aJ4owed egainat estate ta*)- is amended to mad as 5 fo1Iows-~ 6 4SE~ 24O2~ ~)PIS AtAINS~P ~ 7 ~`-fa-)- ~ ~*+~--The tse~ imposed by section 24Q1 8 ~th~14 be credited with the ammmts determined in aeeordanee 9 with seetions 2011 to ~04-3~ inclusive -(-relating to State death 10 ta~xes~ gift ta*~ and ta~ on prior transfer-s}-~ subject to the 11 specia4 limitation provided in su~hscctien -(-b~)-~ 12 "(-13* S+1Ee~*T7 ~i ~ie~.-The m~imnm credit 13 allowed under section 21)14 against the tan imposed by see- 14 tion 2t01 for State death tanes paid shall be on amount 15 which bears the same ratio to the credit compated as pro- IC vided in section 2011 (1~- as the value of the propcr-ty~ as 1677 PAGENO="0526" 74 1 dctcrrnincd fe~ purposes ef tb4s ehapter, u~en whieh State 2 4eath taxes were paid and which is ineluded in the gi~ose 3 estate under eeetien 2403 bea~ to the value ef the tottd gross 4 estetè under section 240& F'er purposes of this subsection 5 the ter~ ~State death taxe& means the taxes described in 6 see1~ion 2~011-(a~-~ 7 -(-a)- 1~rtorni÷~I?-'~~ Wi~m~ ~ i~r~n ~i~ns. See- 8 tion 21-04 ~reIating to property within the United States)- is 9~ amended by o~dding .~t the end thereof the following new 10 sebsection-~ 11 ~P~pp 0~io e~s-Fer purposes of this sub- 12 ~ debt ~ 4_. 13 ~-(4* a United States person~ or 14 ~-(2~)- the United States~ a State or any political 15 subdi~4sion thcreof~ or the Pistriet of (~ohmibia5 16 owned by a nonresident not a eitizon of the United States 17 shal4 be deemed property within ~ United States~ ~Phié 18 su-bseetien shell not apply to a debt obligation of a domestic 19 coporation if any interest en sueh ob4~'ation~ were aneh in-~ 20 terest reeei~ed by the deeedent at the time of his 4enth~ 21 would be treated by reason of section 861 (a) ~1) (B-) as 22 ineome from seurees without the United States." 1678 PAGENO="0527" 75 1 ~+d* 9PEfH~ W~TfToT+T -m~ ~ 2. see~ieR of seet~oi~ 2445 freli~g ~o bank (IeJ3of4~s3- Ls 3~ amended ~a rea4 as ~o4i~ws-~ 4 .~ ~ ~ ~~s- .5 .FO~. ~afp0SeS of 4H5 1~p~ef~ 1f9~&S4S ~1~4+ if 6 brane1~ of a demcstic epa~ion~ if suth h~anf4+ is eogaged 7 in the eenm~ereia4. banking 4~esiness~ S1+s44. no~ he 4eemed 8 prope~v within the Tr~e4 a~es~ 9 4e)- P +:~ie~ ei~ ~~*BT~E Es~n-Pafag~aph 10 -f&)-of secthm ~4~043-fa-)- -frel ~g ~o 4edne4en of e~~ien 11 from gross estate~) is amended *o ~ea4 as fellows4 12 "(.3-)- Ex1~MrTIOx. - . ., . 13 ~(A~ .C~~E~n*j~ mi~. ~An e~emp~ion of 14. . $30,00fh .. 15 ~-(B) Rr~srnL~*~e er~ . 9SOJ~S{03~S 0+~ ~ET+~ 16 . i~n ~*pi~s~-4n the ease of a deeedent who i-s 17 . .. eonsifTefed ~o.ho a ~f resi-den~ ~e-~ a. ei~en of the 18 ... T~nit-e4 States' flnfTeF the pro.v4sio~risof ~ 19 ......~ . the cxcinpt~ion sh-aWho the gfea~ef of -fi3-.$30,OOO~- 20,. . ~ ~-f~~* that po oi4ion of. the e~cmptien aat4~orii'~ed 21 . ~ 22 ... deccdcnTt~s gross. estate whieh at the thne of his 1679 PAGENO="0528" 76 I death is situated in the Th4ted States bears to the 2 value of his entire gross estate wherever sitnated." 3 -(4-)- SPE1T*J~ METHODS ee QOMP-UTINe TAX. Sub- 4 ehapter 4~ of ehapter 44 -(relating to estates of nonresidents 5 not eith~eno)- is a~eiide4 by adding at the end thereof the 6 folowing new sections-: 7 "s~c. ~o7- EXPATRIATION fPO AVOID TAX~ 8 ~~-fa3- RATE e~ TAX. A tax eomputed in accordance 9 with the table contained in seet4on 2001 is hereby imposed 10 on the transfer of the taxable estate~ determined as pro-vided 11 in seetion 2 1O4~ of every deeedeet nonresident not a eiti~en 12 of the United States dying after the date of enactment of this 13 seetion-, if after Mareh ~ 4-94~ and w4thin the 4~O-year period 14 ending with the date of death sueh deeedent lost United 15 Stales eith~ensh4p~ unless sneh loss did not ha~e for one of its 16 p 4p4 purposes the avoidance of taxes under this snhtitle 17 orsubtitieA~r 18 ~ ~ purposes of the tax imposed 19 by sabseetion -fa~ the value of the gross estate of every 20 deeedent to whom si±bseetion -(-a3- appl4es slnd4 be determined 21 as provided in section 2103, exeept that 22 "(-1* if si~eh deeedent owned -(-within the meaning 23 of seetion ~58-(-a-)--)- at the time of his death 4-0 percent 24 or mere of the total emubined voting power of adi 1680 PAGENO="0529" 77 1 olasses of s4~oek eiititleA ~e ve~e of a foreign eofporatien, 2 and. 3 ~ (2) if sneli 4eeede~ owned -(within the mean- 4 ing of aee4~ion 958 (a*)-~ or is eonsidered 4~e ha~'e &wncd 5 -fby ap~plying the ow ership rules of seethn ~)58~(hfl-~ 6 a~ the thne of Ms death~ more than 50 percent of the 7 ~o~al eom~ined i~eMng pewei~ of aAl elasses of &toek en- 8 titled to `eote of sash foreign eorpat4on~ 9 then that proportion of the fa4r market i~a1ue of the stoek of 10 saeh foreign corporation owned -(within the meaning of see- 11 tion ~58-fa~)-)- by saeh decedent at the time of his death1 12 which the fair market ~ak+e of any assets owned by sash for- 13 *$.gn eorporat7ion and situated in the T~uited States1 at the time 14 of his death, bears to the total fair market ~ahie of all assets 15 owned by suel+ foreign corporation at the time of his death1 16 shall he included in the gross estate of sueh deeedent 4~-or 17 purposes of the preceding sentenee1 a deeeden4 shall be 18 treated as owning steek of a foreign corporation at the time' 19 of his death i41 at the time of a transfer~ by trust or otherwise~ 20 within the meaning of seetions ~0~3~5 to 2038; incinsi~e1 he 21 owned sash stock. 22 11-fe)- CREDITS. -The tan im-posed by subsection -fa+ 23 shall he credited with the amounts determined in aecordanee 24 with section 2102. 71-297 O-67-pt. 2-34 1681 PAGENO="0530" 78 .1 ~ei~ Lo&s e~ Q{~{zENsrnP i~o~ Ci~ 2 `~p*i~ Q~E&Es~ Subsection -fa3- shal4 net ~pply 4~o the trans 3 fei~ of .the estete of a decedeet whose loss of Unit1ed States 4 eitizcnship 1-ted fi~om the~ appl4ention of section 301 (b) ~ 5 8-50~ or ~-5~ of the immigration and ~ationa1ity A~et~ as 6 amended -(-8 :T SA~7 44O4-(4})-~ 4482~ or 148~)- .7 ±Lf~3 Buiwi~ o~ ~i~o~-Jf the Secretary or Ida deIe- 8 gate establishes that it is reasoneble to beliei-e that an mdi- 9 ~4duaI's less of United States eiti~ens14 woul4~ but for. this 10 seet4on~ reseit in a s stantial reduction in the estate~ in- 11 hei4tanee~ 1egaey~ and succession tanes in respect of the 12 transfer of ]dc estate, the burden of pr&\4ng thut such loss of 13 citizenship did not l+a~e for one of its prineipof purposes the 14 w&idanee of taucs under this subtitle or s+i~title A shell be en the executor of such ind-ividua4~s estate: 16 ~ 244~8 APPMCATJON ~W P4~E4967~ ESTATE ~PAX PRO- 17 ~VIS1ONS1,. 18 si~ie~ er~ ~ .B~Ennnse~m ~ iw 19 44~nmi~ ~ Whenever the President finds that 20 ~-~-(4-)- under the laws of any foreign eount~y~ ~een- 21 siderieg the ta~ system of such foreign, coimtry~ a more 22 burdensome tan is imposed~ by such foreign country on 23 the transfer of estates of deeedents who were citizens of 24 the 4~J-uited States and not residents of such foreign 25 country than the tan imposed by this subeh-apter on the 1682 PAGENO="0531" 79 ~ra~sfer estates of deee4en~s who were residcn-ts of 2 sneh foreign coimtry~ 3 ~-{2-3- sueh foreign eoun~try~ when requested by the 4 Tjriited States to do so~ hoe not aeted to re~4se or reduce 5 eaeh ta~ so that it is no mere burdensome than the ta~ 6 im-posed by this subchapter on the transfer of estates 7 of deeed()ntf~ who were residents of sueh foreign eounti~ 8 ~4 9 ~-(~3~- it is in the publie interest to apply prc 196~ 10 tax pro~4sions in accordanee with this seet4on to the II transfer of estates of deeedents who were residents of 12 sueh foreign eountry~ 13 the President shall proelaim that the ta~ on tho transfer of 14 the estate of every decedent w4~o was a res4dent of sueh for- 15 eign country at the time of his death shall~ in the ease of 16 dcccdcnts dying ofte~ the date of sash proelamation~ be 17 determined under this subel+apter WIth*)IIt I~CgaM tO amend 18 ments made to ~eetiens 2101 -(-relating to tax imposcd3-~ 19 240~ -(-relating to eredits' against te~e)-~ ~4Oti -(-relating to 20 taxable estate); a~4 ~3O4-S (relating to estate tax returns3- 21 on or alter the date of enfiet~ent of this sèetion~ 22 "-fb-)- AT~LEviA~u~TeN 0F ~& B E~SO~H~ ~X7- 23 Whene~er the President f~ndo that the laws of any foreign 24 country with respect to ~hiek the President has made a pree- 1683 PAGENO="0532" 80 1 li~rnation under subseetien -(4 h~we been modified so that 2 the ta~ on the transfer of estates of deecdents who were 3 eit+zens of the United States and not residents of such 4 foreign eonotry. is no longer more burdensome than the 5~ ta~ imposed by this subehapter on the transfer of estates 6 of deeedcnts who were residents of such foreign eountry 7 he shall preela4m that the ta~ on the transfer of the estate 8 of every &~cedent who was a resident of such foreign coun 9 try at the time of his death shall~ in the ease of dcecdents 10 dying after the date of such preeiamation~ be determined 11 under this subehapter without regard to sabsection -fa~)-~ 12 ~ ei~ CONGRESS REQUIRED. No 13 proclamation shall be issued by the President pursuant to 14 this section m4ess~ at least ~Q days prior to sueh proclama 15 tien~ he has notified the Senate and the Rouse of Repre- 16 scntatives of his intention to issue ~ueh proelamation. 17 ~ (d) IMpLEI~n~rATIoN B~ REGULA~1IIONS. The See- 18 rotary or his delegate sha44 prescribe such regulations as may 19 be neeessary or appropriate to implement this seetion~ 20 ~fg~ ESTATE ~ ~ETURNS.-Paragraph -(-2-)- of see- 21 tion &)1~8 {a)- ~(-relating to estates of nonrcsidcnts not eiti- 22 ~ens-)- is amended by striking out ~2-~OOO~! and inserting in 23 }4~ thereof 13f)~ø0~'. 24 ~fh-)- CLERrnAL AMENDMEN~PS.-The table of sections for 25 subchapter B of ehap-ter 14 -(-relating to estates of nonr-esi 1684 PAGENO="0533" 1 dents not eit~e- ~ amended ~ t~ eed th~eo~ 2 the ~e1Iowing-~ ~See7 ~24O~- ~4*4e~+ ~e ~i4 ~ £~See~ ~4~O& $ie~t~eft e4 p~e494~ e~#~e ~ 3 -(4-)- e-TP~ PATE. The ameedrnei#s made b~ this 4 section shal4 apply with respect to estates 4 doe 4ent-~ 4y-h÷g 5 after the date of the en-aetment of this Aet7 6 SE4 9 ~AX ON (~W4~S O~ ONP~ESIDENTS N4~f 7I~T4ZFNS~ 7 -(-a-)- T41POSITT9~ o~ L~x. Subsection -(-a-)- of seetien 8 2-5Ø1~ -(-relating to general rule for impositin- of tn4 is 9 amended to read as follows4 10 IL(-~-)- T~xABLE ~[~EANSFERS.- 11 `-`-(4~)- i~f~ nui~~n~F~er the ealender veer 12 14~h55 and oath ealendar year thereafter a taxi computed 13 as pro~4de4 in. section 25O~ i-s l~ereby imposed on the 14 transfer of property by gift during sn-eli ealcndar year by 15 any ind4~4dual~ resident or nenresidc1Ft~ 16 ~-f~(-2-)- ~Pf ~s~nns OP J~AG~EB-hP PE)PEfH~- 17 ~xeept as pre\4ded in paragraph -f3-~ paragraph -(4)- 18 shall net apply to the tranofer of intan-gi-ble propei4-i~ b~ 19 a neares4den$ not a eiti~en of the Ui$te4 Sta-tes7 20 i~~(3~)- ni~e~~rapIi -(-24- shall not 21 appI~ in the ease of a den-er. who at a time alter 22 Ma-r4+ ~ 14~G~ and within the -1-0--year period embn-g 1685 PAGENO="0534" 82 1 `with the a~e of transfer' Ies~ TJIIitiCd Sta~tes e~én~h4p 2 3 "(A~- ~ueh 4onor~s Ios~ of United States 44- 4 ~enship resulted from the a~plieation of seetion 3O1-{b-)-~ &~0 or &~ of the 1~mmigmtion and Na- 6 tionality Aet~ `as amended 48' U.S.C. 1-401 ~b)-~ 7 1482, or 1487) ~or 8 `~-(~ ~ loss did not lnwe for one of its pm- 9 - purposes the ~woidanee of tanes under this 10 siThtitle or subtitle A~ 11 -~{43- ~+~`f~Df~ 8i~ P eo~~4f the `Séemetary or his 12 delegate establishes that it is reasonthle to belie~e. that 13 an individuaVs loss of Thiited States eitizenship' woi44~ 14 but for paragraph -f3)-~ result in a substantial reduction 15 for the ealenlar year in the taxes on the transfer of 16 property by gi4t~ the burden of pre~iog that such loss 17 of citizenship did not lowe for one of its principal pur- 18 poses the a'c'oidanee of ta~ies under this subtitle or subtitle 19 A shall be on such individua1.'~ 20 41* ~ u*~~ Subsection -fb)-. of see- 21 tion 2511 -(relating to situs rule for steek in a corporation)- 22 isamc4toreadasfollpws-~ ` 23 ~~-(b)- I p~&iua~ pnepuuq~-4?-or purposes of this 24 chapter, in the ease of a nouresident not a citizen of the 1686 PAGENO="0535" 83 1 1~nitcd States who ~s exee~e4 fi~o~ ~he a~pl~ea~ion o~ se44~o 2 ~50i-faH2)--- 3 "(1~- shares ~$ stoek issued by a domest~e corp~m- 4 ~OR~ftRd 5 ~{2+ deb~ obl4gatiofts of~- 6 ~fA)- a Tnited States person~ Of 7 `-`(B) the T~i~e4 State~ a~ State oi~ any political 8 subdi~4sion thereof, oi~ the P4striet of Columbia~ 9 which are owned by su~eh nariresident shall be deemed te be 10 property 4toated with4a the TJnited States~ 11 -fe)- EFFECTIVE P~m.- The amendments made by this 12 ~ shall apply wi4~h respeet~ ~te the calendar year 44k-7 13 and all es4en+Ttw years thereafter. 14 SFGi IO~ TREATY OBLI(WFIONS 1 ~oamendrnent made by ~h4s Act fthall apply in any ease 16 where its appl4e&tien woald be contrary to any tre~ty obliga- 17 4on of the Th~ited States7 F~ purpeens of the preceding 18 senteaee~ the e~$ew4on of a bem4t i~o~4de4 by any amend- 19 ment made by this Aet~l+al4 aM~e deern~ed to be contrary 20 to a treaty obligation of the 4~nised States~ 21 SECTION 1. TABLE OF CONTENTS, ETC. 22 (a) TABLE OF CONTENTs~-~ Sec. 1. Table of contents. etc~ (a) Table of contents. (b) Amendment of 1954 Code. 1687 PAGENO="0536" 84 TITLE I-FOREIGN INVESTORS TAX ACT Sec. 10g. Source of income. (a) Interest. (b) Dividends. (c) Personal services. (d) Definitions. (e) Effective dates. Sec. 101. Nonresident a~lien individuals. (a) Tax on nonresident alien individuals. (b) Gross income. (c) Deductions. (d) Allowance of deductions and credits. (e) Beneficiaries of estates and trusts. (f) Expatr~at ion to avoid tax. (g) Partial exclusion of dividends. (Ii) lVithholding of tax on nonresident aliens. (i) Liability for withheld tax. (j) Declaration of estimated income tax by individuals. (ic) Collection of income tax at source on wages. (1) Definitions of foreign estate or trust. (m) Conforming amendment. (n) Effective dates. Sec. 104 Foreign corporations. (a) Tax on income not connected with United States business. (b) Tax on income connected with United States business. (c) TVitkholding of tax on foreign corporations. (d) Dicidends received from certain foreign corporations. (e) Dividends received from certain wholly-owned foreign subsid- iaries. (f) Distributions of certain fbreign corporations. (g) Unrelated business taxable income. (h) Corporations s-abject to personal holding company tax. (i) Amendments with respect to foreign corporations cari-ying on in- surance business in United States. (j) Subpart F income. (k) Gain from certain sales or exchanges of stock in certain foreign corporations. (1) Declaration of estimated income tax by corporations. (m) Technical amendments. (n) Effective dates. Sec. 105. Special tax provisions. (a) lnco'ine affected by treaty. (b) Adjustment of tax becawse of burdensome or discriminatory f or- eign taxes. (c) Clerical amendments. (d) Effective date. (e) Elections by nonresident United States citizens who are subject to foreign community property laws. (f) Presumptive date of payment for tax withheld under chapter 3. 1688 PAGENO="0537" 85 TITLE I-FOREIGN INVESTORS TAX ACT-Contii?ved Sec. 106. Foreign tax credit. (a) Allowance of credit to certain nonresident a/ens and foreign car- poratione. (b) Alien residents of the United States or Puerto Rico. (c) Foreign tax credit in respect of interest recezved from foreign subsidiaries. Sec. 107. Amendments to preserve exieting law on deductions under section 981. (a) Deductions. (b) Effective date. Sec. 108. Estates of nonresidents not citizens. (a) Rate of tax. (b) Credits against tax. (c) Property within the United States. (d) Property without the United States. (e) Definition of taxable estate. (f) Special methods of computing tax. (g) Estate tax returns. (h) Clerical amendment. (i) Effective date. Sec. 109. Tax on gifts of nonrcsidcnts not citizens. (a) Imposition of tax. (b) Transfers in general. (c) Effective date. Sec. 110. Treaty obligations. TITLE Il-OTHER AMENDMENTS TO INTERNAL REVENUE CODE Sec. 201. Application of Investment Credit to Property Used in Posses- sio'ns of the United States. (a) Property used by domestic corporations, etc. (b) Effective date. Sec. 202. Deduction of medical expenses of individuals age 65 or over. (a) Repeal of amcndmecits made by social security amendments of 1965. (h) Cost of medical insurance. (c) Effective date. Sec. 203. ilaris of property received on liquidation of subsidiary. (a) Definition of purchase. (b) Period of acquisition. (c) Distribution of installment obligation-s. (d) Effective dates. Sec. 204. Transfers of stock and securities to corporations controlled by transferors. (a) Tiansfcrs to in ?estin en t coin panics. (b) Effect/re date. 1689 PAGENO="0538" 86 TITLE Il-OTHER AMENDMENTS TO INTERNAL REVENUE CODE-Continued Sec. 205. Minimum~ amount treated as earned income for retirement plans of certain 8elf -employed individuaLs. (a) increase to $6~O0. (b) Effective date. Sec. 206. Removal of special limitations with respect to deductibility of contributions to pension plans by self-employed individuals. (a) Removal of special limitations. (c) Definition of earned income. (d) Effective date. Sec. 207. Treatment of iertain income of authors, inventors, etc., as earned income for retirement plan purposes. (a) Income from disposition of property created by taxpayer. (b) Effective date. Sec. 208. Exclusion of certain rents from personal holding company in- come. (a) Rents from leases of certain tangible personal property. (b) Technical amendments. (c) Effective date. Sec. 209. Percentage depletion rate for certain clay bearing alumina. (a) 23 percent rate. (b) Treatment processes. (c) Effective date. Sec. 210. Percentage depletion rate for clam and oyster shelLs. (a) 15 percent rate. (b) Effective date. Sec. 211. Sintering and burning of shale, clay, and slate used as light- weight aggregates. (a) Treatment processes. (b) Effective date. Sec. 212. Straddles. (a) Treatment as short-term capital gain. (b) Effective date. Sec. 213. Tax treatment of per-unit retain allocations. (a) Tax treatment of cooperatives. (b) Tax treatment by patrons. (c) Definitions. (d) information reporting. (e) Effective dates. (f) Transition rule. Sec. 214. Excise tax rate on ambulances and hearses. (a) Classification as automobiles. (b) Effective date. Sec. 215. Applicability of exclusion from interest equalization tax of cer- tain loans to assure raw materials sources. (a) Exception to exclusion. (b) Technical amendments. (c) Effective date. 1690 PAGENO="0539" 87 TITLE Il-OTHER AMENDMENTS TO INTERNAL REVENUE CODE-Continued Sec. 216. Exclusion from interest equalization tax for certain acquisitions by insurance companies. (a) New companies and companies operating in former less developed cou'ntries. (b) Effective date. Sec. 217. Exclusion from interest equalization tax of certain acquisitions by foreign branches of domestic banks. (a) Authority for modification of executive orders. (b) Effective date. TITLE Ill-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT Sec. 301. Short title. Sec. 302. Authority for designation of $1 of income taei payments to presi- dential election campaign fund. Sec. 303. Presidential election campaign fund. (a) Establishment. (b) Transfers to the fund. (e) Payments from fund. (d) Transfers to general fund. Sec. 304. Establishment of advisory board. Sec. 305. Appropriations authorized. TITLE IV-MISCELLANEO US PROVISIONS Sec. 401. Treasury notes payable in foreign currency. Sec. 402. Reports to clarify to national debt and tax structure. Sec. 403. Coverage of expenses of certain drugs under aupplementary medical insurance benefits. Sec. 404. Percentage depletion rate for clay and shale used in making sewer pipe. (a) Rate. (b) Treatment processes. (c) Effective date. Sec. 405. Preservation from reduction of certain widows' benefits under title II of the Social Security Act. (b) AMENDMENT OF 1954 CODE.-Except as otherwise 2 expressly provided, wherever in titles I, II, and III, of this 3 Act an amendment or repeal is expressed in terms of an 4 amendment to, or repeal of, a section or other provision, the 5 reference is to a section or other provision of the Internal 6 Revenue (lode of 1954. 1691 PAGENO="0540" 88 1 TITLE I-FOREIGN INVESTORS 2 TAX ACT 3 SEC. 101. SHORT TITLE. 4 This title may be cited as the "Foreign Investors Tax Act 5 of 1966". 6 SEC. 102. SOURCE OF INCOME. 7 (a) INTEREST.- 8 (1) (A) Subparagraph (A) of section 861 (a) (1) 9 (relating to interest from sources within the United 10 States) is amended to read as follows: 11 "(A) interest on amounts described in sub- 12 section (c) received by a nonresident alien mdi- 13 vidual or a foreign corporation, if such interest is 14 not effectively connected with the conduct of a trade 15 or business within the United States,". 16 (B) Section 861 is amended by adding at the end 17 thereof the following new subsection: 18 "(c) INTEREST ON DEPOSITS, ETC.-For purposes of 19 subsection (a) (1) (A), the amounts described in this sub- 20 section are- 21 "(1) deposits with persons carrying on the bank- 22 ing business, 23 "(2) deposits or withdrawable accounts with sty- 24 ings institutions chartered and supervised as savings 25 and loan .or similar associations under Federal or State 1692 PAGENO="0541" 89 1 law, but only to the extent that amounts paid or credited 2 on such deposits or accounts are deductible under section 3 591 (determined without regard to section 265) in corn- 4 puting the taxable income of such institutions, and 5 "(3) amounts held by an insurance company under 6 an agreement to pay interest thereon." 7 (2) Section 861 (a) (1) is amended by striking out 8 subparagraphs (B) and (C) and inserting in lieu 9 thereof the following: 10 "(B) interest received from a resident alien 11 individual or a domestic corporation, when it is 12 shown to the satisfaction of the Secretary or his dele- 13 gate that less than 20 percent of the gross income 14 from all sources of such individual or such corpora- 15 tion has been derived from sources within the United 16 States, as determined under the provisions of this 17 part, for the 3-year period ending with the close of 18 the taxable year of such individual or such corpora- 19 tion preceding the payment of such interest, or for 20 such part of such period as may be applicable, 21 "(C) interest received from a foreign corpo- 22 ration, when it is shown to the satisfaction of the 23 Secretary or his delegate that less than 50 percent 24 of the gross income from all sources of such foreign 25 corporation for the 3-year period ending with the 1693 PAGENO="0542" 90 1 close of its taxable year preceding the payment of 2 such interest (or for such part of such period as the 3 corporation has been in existence) was effectively 4 connected with the conduct of a trade or business 5 within the United States, 6 "(D) in the case of interest received from a 7 foreign corporation, 50 percent or more of the gross 8 income of which from all sources, for the 3-year 9 period ending with the close of its taxable year 10 preceding the payment of such interest (or for 11 such part of such period as the corporation has 12 been in existenc~) was effectively connected with 13 the conduct of a trade or business within the United 14 States, an amount of such interest which bears the 15 same ratio to such interest as the gross income of 16 such foreign corporation for such period which was 17 not effectively connected with the conduct of a trade 18 or business within the United States bears to its 19 gross income from all sources, 20 "(E) income derived by a foreign central bank 21 of issue from bankers' acceptances, and 22 "(F) interest on deposits with a foreign branch 23 of a. domesti~ corporation or a domestic partnership, 1694 PAGENO="0543" 91 1 if such branch is engaged in the commercial banking 2 business." (3) Section 861 (relating to income from sources within the United States) is amended by adding after 5 subsection (c) (as added by paragraph (1) (B)) the 6 following new subsection: "(d) SPECIAL RULES FOR APPLICATION OF PARA- 8 GRAPHS (1) (B), (1) (0), (1) (D), AND (2) (B) OF 9 SUBSECTION (a).- 10 "(1) NEW ENTITIES.-For purposes of paragraphs (1) (B), (1) (0), (1) (D), and (2) (B) of subsection 12 (a), if the resident alien individual, domestic corpora- 13 tion, or foreign corporation, as the case may be, has no 14 gross income from any source for the 3-year period 15 (or part thereof) specified, the 20 percent test or the 50 16 percent test, as the case may be, 3hall be applied with 17 respect to the taxable year of the payor in which payment 18 of the interest or dividends, as the case may be, is made. 19 "(2) TRANSiTIoN RULE.-For purposes of para- 20 graphs (1) (0), (1) (D), and (2) (B) of subsection 21 (a), the gross income of the foreign corporation for 22 any period before the first taxable year beginning after 1695 PAGENO="0544" 92 1 December 31, 1966, which is effectively connected with 2 the conduct of a trade or business within the United 3 States is an amount equal to the gross income for such 4 period from sources within the United States." 5 (4) (A) Section 895 (relating to income derived 6 by a foreign central bank of issue from obligations of 7 th.e United States) is amended to read as follows: 8 "SEC. 895. INCOME DERIVED BY A FOREIGN CENTRAL 9 BANK OF ISSUE FROM OBLIGATIONS OF 10 THE UNITED STATES OR FROM BANK DE. 11 POSITS. 12 "Income derived by a foreign central bank of issue from 13 obligations of the United States or of any agency or in- 14 strumentality thereof (including beneficial interests, participa- 15 tions, and other instruments issued under section 302(c) of 16 the Federal \atioaal J[orl9aue A~soeiation Charter Act 17 (12 U.S.C. 1717)) which are owned by such foreign central 18 bank of issue, or derived from interest on deposits with persons 19 carrying on the banking business, shall not be included in gross 20 income and shall be exempt from taxation under this subtitle 21 unless such obligations or deposits are held for, or used in con- 22 nection with, the conduct of commercial banking functions or 23 other commercial activities. For purposes of the preceding 24 sentence the Bank for International Settlements shall be 25 treated as a foreign central bank of issue." 1696 PAGENO="0545" 93 1 (B) The table of sections for subpart C of part 11 2 of subchapter N of chapter 1 is amended by striking out 3 the item relating to section 895 and inserting in lieu 4 thereof the following: "Sec. 895. Income derived by a foreign central bank of i~sne from obligations of the United States or from bank deposits." 5 (b) DJIIDENDS.-Section 861 (a) (2) (B) (relating to 6 dividends from sources within the United States) is amended 7 to read as follows: 8 "(B) from a foreign corporation unless less 9, than 50 percent of the gross income from all 10 sources of such foreign corporation for the 3-year 11 period ending with the close of its taxable year pre- 12 ceding the declaration of such dividends (or for such 13 part of such period as the corporation has been in 14 existence) was effectively connected with the con- 15 duct of a trade or business within the United States; 16 but only in an amount which bears the same ratio to 17 such dividends as the gross income of the corpora- 118 tion for such period which was effectively con- 19 necteci with the conduct of a trade or business within 20 the United States bears to its gross income from all 21 sources; but dividends (other thai? dirideiids for 22 which a deduction is ailovaL)ie n nder section 23 245(b)) [ron? a foreiç,n eor/)OratiOfl shall, for pur- 71-297 0-67-pt. 2-35 1697 PAGENO="0546" 94 1 poses of subpart A of part III (relating to foreign 2 tax credit), be treated as income from sources with- 3 out the United States to the extent (and only to the 4 extent) exceeding the amount which is 100/85ths 5 of the amount of the deduction allowable under sec- 6 tion 245 in respect of such dividends, or". 7 (c) PERSONAL SERVICES.-Section 861 (a) (3) (0) 8 (ii) (relating to income from personal services) is amended 9 to read as follows: 10 "(ii) an individual . who is a citizen. or 11 resident of the United States, a domestic part- 12 nersliip, or a domestic corporation, if such 13 labor or services are performed for an office 14 or place of business maintained in a foreign 15' country or in a possession of the United States 16 by such individual, partnership, or corpora- 17 tion." 18 (d) DEFINITIONS.-Section 864 (relating to defini- 19 lions) is amended-~ 20 (1) by striking out "For purposes of this part," 21 and inserting in lieu thereof 22 "(a) SALE, ETC.-For purposes of this part,"; and 1698 PAGENO="0547" 95 1 (2) by adding at the end thereof the following 2 new subsections: 3 "(b) TRADE OR BUSINESS WIThIN THE UNITED 4 S71ATES._For purposes of this part, part II, and chapter 3, 5 the term `trade or business within the United States' in- 6 eludes the performance of personal services within the United 7 States at any time within the taxable year, but does not 8 include- 9 "(1) PERFORMANCE OF PERSONAL SERVWES FOR 10 FOREIGN EMPLOYER .-T he performance of personal 11 services- 12 "(A) for a nonresident alien individual, 13 foreign partnership, or foreign corporation, not em- 14 gaged in .trade or business within the United States, 15 or 16 "(B) for an office or place of business main- 17 tamed in a foreign country or in a possession of the 18 United States by an individual who is a citizen or 19 resident of the United States or by a domestic 20 partnership or a domestic corporation, 21 by a nonresident alien individual temporarily present in 22 tue United States for a period or periods not exceeding 1699 PAGENO="0548" 9G 1 a total of 90 days during the taxable year and whose 2 compensation for such services does not exceed in the 3 aggregate ~3,000. 4 "(2) TRADING iN SECURiTiES OR CO]L1IODITIES.- 5 "(A) STOCKS AND SECURITIES.- 6 "(i) IN GENERAL.-Trading in stocks or 7 securities through a resident broker, co'inmission 8 agent, custodian, or other independent agent. 9 "(ii) TRADING FOR Ti1XPAYE~'5 OWN 10 ACCOUNT.-Trading in stocks or securities for 11 the taxpayer's own account, whether by the tax- 12 payer or his employees or through a resident 13 broker, commission agent, custodian, or other 14 agent, and whether or not any such employee or 15 agent has discretionary authority to make dcci- 16 sions in effecting the transactions. This clause 17 shall not apply in the case of a dealer in stocks 18 or securities, or in the case of a corporation 19 (other than. a corporation which is, or but for 20 section 542(c) (7) or 543(b) (1) (0) would be, 21 a personal holding company) the principal busi- 22 ness of which is trading in stocks or securities 23 for its own account, if its principal office is in 24 the United States. 1700 PAGENO="0549" 97 1 "(B) CoJnIoDrTIEs.- 2 "(L) IN GENERA L.-Trad!flg in commodi- 3 ties through a resident broker, commission agent, 4 custodian, or other independent agent. 5 "(ii) TRADING FOR TAXPAYER'S OTVN 6 ACCOUNT.-Tradiflg in commodities for the' 7 taxpayer's own account, whether by the tax- 8 payer or his employees or through a resident 9 broker, commission agent, custodian, or other .10 agent, and whether or not any such employee ii . or agent has dtscretionary authority to make 12 decisions in effecting the transactions. This 13 clau~e shall not apply in the case of a dealer in 14 commodities. 15 "(iii) LI~IuTATIoN.-Olauses (i) and (ii) 16 shall apply only if the commodities are of a kind 17 customarily dealt in on an organized commodity 18 exchange and if the transaction is of a kind 19 customarily cOnsummated at such place. 20 "(0) LnIITAT10N.-Subparagraphs (A) (i) 21 an.d (B) (i) shall apply only if, at no time during the 22 taxable year, the taxpayer has an office or other fixed 23 place of business in the United States through which 1701 PAGENO="0550" 98 1 or by the direction of which the transactions in 2 stocks or securities, or in commodities, as the case 3 may be, are effected. 4 "(c) EFFECTIVELY CONNECTED INCOME, ETC.- 5 "(1) GENERAL RULE.-For purposes of thi$ title- 6 "(A) In the case of a nonresident alien mdi- 7 vidual or a foreign corporation engaged in trade or 8 business within the United States during the taxable 9 year, the rules set forth in paragraphs (2), (3), 10 and (4) shall apply in determining the income, 11 gain, or loss which shall be treated as effectively con- 12 nected with the conduct of a trade or business within 13 the United States. 14 "(B) Except as provided in section 871 (d) or 15 sections 882(d) and (e), in the case of a nonresi- 16 dent alien individual or a foreign corporation not 17 engaged in trade or business within the United States 18 during the taxable year, no income, gain, or loss shall 19 be treated as effectively connected with the conduct 20 of a trade or business within the United Stases. 21 "(2) PERIODICAL, ETC., INCOME FROM SOURCES 22 WITHIN UNITED STATES-FACTOR&-In determining 23 whether income from sources within the United States 24 of the types described in section 871 (a) (1) or section 25 881(a). or whether gain or loss from sources within 1702 PAGENO="0551" 99 1 the United States from the sale or exchange of capital 2 assets, is effectively connected with the conduct of a 3 trade or business within the United States, the factors 4 taken into account shall include whether- 5 "(A) the income, gain, or loss is derived from 6 assets used in or held for use in the conduct of such 7 trade or business, or 8 "(B) the activities of such trade or business 9 were a material factor in the realization of the in- 10 come, gain, or loss. 11 In determining whether an asset is used in or held for 12 use in the conduct of such trade or business or whether 13 the activities of such trade or business were a material 14 factor in realizing an item of income, gain, or loss, due 15 regard shall be given to whether or not such asset or 16 such income, gain, or loss was accounted for through 17 such trade or business. In applying this paragraph and 18 paragraph (4), interest referred to in section 861 (a) 19 (1) (A) shall be considered income from sources within 20 the United States. 21 "(3) OTHER iNCOME FROM 2OUR~ES WITHIN 22 UNITED STATES.-All income, gain, or loss from sources 23 within the United States (other than income, gain, or 24 loss to which paragraph (2) applies) shall be treated 1703 PAGENO="0552" 100 1 as effectively connected `with the conduct of a trarie or 2 business within the United States. 3 "(4) INcWIE FROM SOURCES WIThOUT Uiv1TJ~i 4 STATES.- 5 "(A) Except as providc'cl in subparagraJ)h~ 6 (B) and (C), no income, gain, or loss from sourcis 7 without the Umted States shall be treated as c/f cc- 8 tivelij connected with the co'n(Iuet, of (1 t1'a(l~? 0; 9 business withim the United St&: s. 10 "(B) Income, qain, or loss from sources with- ii out the United States shall be treated as effectiveii~ 12 connected with the conduct of a trade or business 13 within the United States by a nonresident alien .14 individual or a foreign corporation if such person 15 has an office or other fixed place of business within 16 the United States to which such income, gain, or 17 loss is attributable and such income, gain, or loss- 18 "(i) consists of rents or royalties for the 19 use of or for the privilege of using intangib~ 20 property described in section 862(a) (4) (iii- 21 eluding any gain or loss realized on the sale of 22 such property) derived in the active conduot 23 of such trade or b~isiness; 24 . "(ii) consists of dividends or interest, ~i 1704 PAGENO="0553" 101 I gain or loss from the sale or exchange of stock 2 or notes, bonds, or other evidences of indebted- 3 ness, and either is derived in the active conduct 4 of a banking, financing, or similar business 5 within the United States or is received by a 6 corporation the principal business of which is 7 trading in stocks or securities for its own ac- 8 count; or 9 "(iii) is derived from the sale (without 10 the United States) through such office or other ii. fixed place of business of personal property de- 12 scribed in section 1221 (1), except that this 13 dense shall no! oppiy `if the 7no))e11/J is sold for 14 use, ConSumptiOn, or (lispositlon outside the 15 United States and an of/ice or other fixed place of 16 bnsiriess of the taxpayer outside the United States 17 participated materially in such sale. 18 "(C) In the case of a foreign corporation tax- 19 able under part I of subchapter L, any income from 20 sources without the United States which is attrih- 21 utable to its United States business shall be treated 22 as effectively connected with the conduct of a trade or bus~ess it'ithin the United States. "(D) No income from sources without the 1705 PAGENO="0554" 102 1 United States shall be treated as effectively connected 2 with the conduct of a trade or business within the 3 United States if it either- 4 "(i) consists of dividends, interest, or 5~ royalties paid by a foreign corporation in which 6 the taxpayer owns (within the meaning of 7 section 958(a)), or is considered as owning 8 (by applying the ownership rules of section 9 958(b)), more than 50 percent of the total 10 combined voting power of all classes of stock 11 entitled to vote, or 12 "(ii) is subpart F income within the mean- 13 ing of section 952(a). 14 "(5) RULES FOR APPLICATiON OF PARAGRAPH 15 (4) (B) .-For purposes of subparagraph (B) of para- 16 graph (4)- 17 "(A) in determining whether a nonresident 18 alien individual or a foreign corporation has an of- 19 fice or other fixed place of business, an office or other 20 fixed place of business of an agent shall be disre- 21 garded unless such agent (i) has the authority to ne- 22 gotiate and conclude contracts in the name of the 23 nonresident alien individual or foreign corporation 24 and regularly exercises that authority or has a stock 25 of merchandise from which he regularly fills orders 1706 PAGENO="0555" 103 I on behalf of such individual or foreign corporation, 2 and (ii) is not a general commission agent, broker, 3 or other agent of independent status acting in the 4 ordinary course of his business, 5 "(B) income, gain, or loss shall not be con- 6 sidered as attributable to an office or other fixed 7 place of business within the United States unless sue/i 8 office or fixed place of business is a material factor 9 in the production of such income, gain, or loss and 10 such office or fixed place of business regularly carries 11 on activities of the type from ?`Jhlch such income, 12 gain, or loss is derived, and 13 "(C) the income, gain, or loss which shall be 14 attributable to an office or other fixed place of busi- 15 ness within the United States shall be the income, 16 gain, or loss properly allocable thereto, but, in the 17 case of a sale described in clause (iii) of such sub- 18 paragraph, the income which shall be treated as at- 19 tributable to an office or other fixed place of business 20 within the United States shall not exceed the income 21 which would be derived from sources within the 22 United States if the sale were made in the United 23 States." 24 (e) EFFECTIVE DATES.- 25 (1) The amendments made by subsections (a), 1707 PAGENO="0556" 104 1 (c), and (d) shall apply with respect to taxable years 2 beginning after December `31, 1966; except that in 3 applying section 864(c) (4) (B) (iii) of the Internal 4 Revenue (lode of 1954 (as added by subsection (d)) 5 with respect to a binding contract entered into on or 6 before February 24, 1966, activities in the United 7 States on or before such date in negotiating or carrying 8 out such contract shall not be taken into account. 9 (2) The amendments made by subsection (b) 10 shall apply with respect to amounts ~eceived after Dc- 11 cember 31, 1966. 12 SEC. 103. NONRESIDENT ALIEN INDIVIDUALS. 13 (a) TAX o.v NONRESIDENT A LIEN INDIVIDUALS.- 14 (1) Section 871 (`relating to tax on nonresident 15 alien individuals) is amended to read as follows: 16 "SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS. 17 "(a) 1NCWIE NOT CONNECTED WITH UNITED 18 STATES BUS!NE~R-30 PERCENT TAX.- 19 "(1) INCOME OTHER THAN CAPITAL GAINS.- 20 There is hereby imposed for each taxable year a tax of 21 30 percent of the amount receiced from sources within 22 the United States liq a nonresident alien individual as- 23 "(A) interest, divic/em.ls, rents, salaries, waqes, 24 premiums, annuities, compensations, rem uncrations, 1708 PAGENO="0557" 105 emoluments, and oilier fixed or determinable annual 2 or periodical gains, profits, and income, "(B) gains described in section 402 (a) (2), 4 4oc~(a) (2), Di (5.~i (b) 01 (c), cuid gains on transfers (lescribHl In .~t?0'1l 123o made on or 6 before October 4, 1966, 7 "(0) in i/ic case of bonds or other evidences of 8 indebtedness issued after September 28, 1965, amounts which under section 1232 are considered as 10 gains from the sale or exchange of property which 11 is not a capital asset, and 12 "(D) gains from the sale or exchange after 13 October 4, 1966, of patents, cop'tji'ujhts, secret proc- 14 esses and formulas, ijood will, trademarks, trade brands, frdnchises, and other like property, or of 16 Ufl~ interest in any such property, to the extent such 17 gains are from payments ~çhich are contingent on 18 the productivity, use, or disposition of the property 19 or interest sold or exchanged, or from payments 20 which are treated as being so contingent under sub- 21 section (e), 22 but only to the extent I/ic anwunt so received is not eff cc- 23 lively conn~cted wit/i the conduct of a trade or business 24 within the United States. 1709 PAGENO="0558" 106 1 "(2) CAPITAL GAINS OF ALiENS PRESENT IN THE 2 UNITED STATES 188 DAYS OR MORE.-In the case of a 3 nonresident alien individual present in the United States 4 for a period or periods aggregating 183 days or more 5 during the taxable year, there is hereby imposed for such 6 year a tax of 30 perce~nt of the amount by which his 7 gains, derived from sources within the United States. 8 from the sale or exchange at any time during such year 9 of capital assets exceed his losses, allocable to sources 10 within the United States, from the sale or exchange at 11 any time during such year of capital assets. For pur- 12 poses of this paragraph, gains and losses shall be taken 13 into account only if, and to the extent that, they would 14 be recognized and taken into account if such gains and 15 losses were effectively connected with the conduct of a 16 trade or business within the United States, except that 17 such gains and losses shall be determined without regard 18 to section 1202 (relating to deduction for capital gains) 19 and such losses shall be determined without the benefits 20 of the capital loss carryover provided in section 1212. 21 Any gain or loss which is taken into account in deter- 22 mi~iing the tax under paragraph 1(1) or subsection `(b) 23 shall not be taken into account in determining the tax 24 under this paragraph. For purposes of the 183-day re- 25 quirement of this paragraph, a nonresident alien individ- 1710 PAGENO="0559" 107 1 ual not engaged in trade or business within the United 2 States who has not established a taxable year for any 3 prior period shall be treated as having a taxable year 4 which is the calendar year. 5 "(b) INCOME CONNECTED WITH UNITED STATES 6 BUSINESS-GRADUATED RATE OF TAX.- 7 "(1) IMPOSITION OF TAX.-A nonresident alien 8 individual engaged in trade or business within the 9 United States during the taxable year shall be taxable 10 as provided in section 1 or 1201 (b) on his taxable income 11 which is effectively connected with the conduct of a trade 12 or business within the United States. 13 "(2) DETERMINATION OF TAXABLE INCOME.-In 14 determining taxable income for purposes of paragraph 15 (1), gross income includes only gross income which is 16 effectively connected with the conduct of a trade or 17 business~ within the United States. 18 "(c) PARTiCIPANTS IN CERTAIN EXCHANGE OR 19 TRAiNING PROGRAMS.-FOr purposes of this section, a non- 20 resident alien individual who (without regard to this svb- 21 section) is not engaged in trade or business within the 22 United States and who is temporarily present in the United 23 States as a nonimmigrant under subparagraph (F) or (~J) 24 of section 101 (a) (15) of the immigration and Nationality 25 Act, as amended (8 U.S.C. 1101 (a) (15) (F) or 1711 PAGENO="0560" 108 1 shall be treated as a nonresident alien individual engaged in 2 trade or business within the United States, and any income 3 described in section 1441(b) (1) or (2) which is received 4 by such individual shall, to the extent derived from sources 5 within the United States, be treated as effectively connected 6 with the conduct of a trade or business within the United 7 States. 8 "(d) ELECTION To TREAT REAL PROPERTY INCOME 9 AS INCOME CONNECTED WITH UNITED STATES BusI- 10 NESS.- 11 "(1) IN GENERAL.-A nonresident alien individ- 12 ual who during the taxable year derives any income- 13 "(A) from real property held for the produc- 14 tion of income and located in the United States, 15 or from any interest in such real property, in- 16 cluding (i) gains from the sale or exchange of such 17 real property or an interest therein, (ii) rents or 18 royalties from mines, wells, or other natural deposits, 19 and (iii) gains described in section 631 (b) or (c), 20 and 21 "(B) which, but for this subsection, would not 22 be treated as income which is effectively connected 23 with the conduct of a trade or business within the United States, 25 may elect for such taxable year to treat all such income 1712 PAGENO="0561" 109 OS VflCO?flC ?(`hiCh is effecl,relij connfctecl with the con- 2 duct of a trade or bu;e~s within the United States. 3 In. such cane, such income shah be taxable as provided 4 in subsection (b) (1) whether or not such individual is engaged in trade or business within the United States 6 during the taxable year. An. election under this para- 7 graph for an'/ taxable i~ or shall remain in effect for 8' all subsequent taxable years, except that it may be re- 9 yoked `with the consent of the Secretary or his delegate 10 with respect to any taxable year. 11 "(2) ELECTION AFTER J?EVOCATION.-If an elec- 12 lion has been made under paiaq;aph (1) and such elec- 13 tion has been revoked, a new election may not be made 14 under such paragraph for any taxable year before the 15 5th taxable year which begim~ after the first taxable 16 year for which such revocation is effective, unless the 17 Secretary or his delegate consents; to such new election. 18 "(3) FORnIAND T[iIE OF ELECTION AND REVO- 19 CATION.-An election under paragraph (1), and any 20 revocation of such an. election, may be made only in 21 sue/i manner and at sue/i time as the Secretary or his 22 delegate may by regulations prescribe. 23 "(e) GAINS Fiw~ii S~'ii~; 0!? ExCII~l~vGE OF CERTAIN 24 INTANGIBLE PROPERTY.-For purposes of subsection (a) 7 1-297 O-67--pt. 2--36 1713 PAGENO="0562" 110 I (1) (D), and for purposes of sections 881(a) (4), 1441(b), 2 and 1442(a)- 3 "(1) PAYMENTS. TREATED AS CONTiNGENT ON .4 USE, ETC.-Jf more than 50 percent of the gain for 5 any taxable year from the sale or exchange of any patent, 6. copyright,, secret process or formula, good will, trade- `7 . mark, trade brand, franchise, or other like property, or .8 . of any interest in any such property, is from payments 9 which are . contingent On the productivity, use, or dis- 10 position of such property or interest, all of the gain for 11 . the taxable year from the sale or exchange of such prop- 12 erty or interest shall be treated as being from payments 13 which are contingent on the productivity, use, or diEpo- 14 sition of such property or interest. 15 "(2) SOURCE RULE.-In determining, whether 16 gains described in subsection (a) (1) (D) and section 17 881 (a) (4) are received from sources within the United 1'3 States, uch gains shall be treated as i entals or royalties 10 fo2 the use of, or privilege of using, property or an 20 interest in property 21 "(f) CERTAiN ANNUiTIES RECEIVED UNDER QUALI- 22 FlED PLANS.-FOr~ purposes of this section, gross income does 23 not include any amount received as an annuity under a quali- 24 fled annuity plan described in section 403(a~ (1), or from 1714 PAGENO="0563" lii 1 a qualified trust-described in section 401 (a) which -is exempt 2 from tax under section 501 (a), if- 3 "(1) all of -the personal services by-- reason of which 4 such annuity is payable were either (A) personal serv- 5 ices performed outside the United States by an- individual 6 - - who, at the time of per formance of -such -personal serv- 7 ices, was a nonresident alien, or (B) personal services 8 - described in - section 864(b) (1) performed within the 9 United States by such individual, and- 10 "(2) at the -time the first amount -is paid as such 11 - annuity under such annuity plan, -or by such trust, 90 12 percent or more of the employees for whom contributions 13 - or benefits are provided' under such annuity plan, or 14 under the plan or plans of which such trust is a part, 15 are citizens - or residents -of the United States." - - 16- - `-`(g) CROSS REFERENCES.- - - - - - - - "(1) For tax treatment of certain amounts distributed by the United States to nonresident alien individuals, see - section 402(a)(4). - "(2) For taxation of nonresident alien individuals who - are expatriate United States citizens, see section 877. "(3) For doubling of tax on citizens of certain foreign countries, see section 891. - "(4) For adjutitment of tax in case of nationals or resi~ dents of certain foreign countries, see section 896. "(5) For withholding of tax at source on nonresident alien individuals, see section 1441. - - "(6) For the requirement of making -a declaration -of estimated tax by certain nonresident alien individuals, see section 6015(i)." 17 (2) -Section 1 (relating to tax on individuals) is 1715 PAGENO="0564" 112 1 amended by rcdcs~qnating subsection (ci) as subsection 2 (e), and by inserting after subsection (c) the follow- 3 ing new subsection: 4 "(d) NONRESIDENT ALIENS.-In the óase of a non- 5 resident alien individual, the tax imposed by subsection (a) 6 shall apply only as provided by section 871 or 877." 7 (b) GROSS INCWIE.- 8 (1) Subsection (a) of section 872 (relating to 9 gross income of nonresident alien individuals) is 10 amended to read as follows: 11 "(a) GENERAL RULE.-In the case of a nonresident 12 alien individual, ,qross income incluxies only- 13 "(1) gross income which is derived from sources 14 within the United States and which is not effectively 15 connected with the conduct of a `rade or busimss within 16 the United States, and 1_7 "(2) gross income which is effectively connected 18 with the conduct of a trade or business within the 19 United States." 20 (2) Subparagraph (B) of section 872(b) (3) (re- 21 lating to compensation of part ~cipants in certain cx- 22 chanqe or train inq programs) is amended by striking 23 out "by a~ domestic corporation" and inserting in lieu 24 thereof "by a domestic corporation, a domestic partner- 1716 PAGENO="0565" 113 1 ship, or an individual who is a citizen or resident of the 2 United States". 3 (3) Subsection (b) of section 872 (relating to 4 exclusions from gross income) is amended by adding at 5 the end thereof the following new paragraph: 6 "(4) CERTAIN BOND INCOME OF RESIDENTS OF 7 THE RYUKYU ISLANDS OR THE TRUST TERRiTORY OF 8 THE PACiFIC LSLANDS.-Income derived by a nonresi- 9 dent alien individual from a series B or series H United 10 S~ates savings bond, if such individual acquired such 11 bond while a resident of the Ryukyu islands or the Trust 12 Territory -jf the Pacific islands." 13 (c) DEDUCTIONS.- 14 (1) Section 873 (relating to deductions allowed to 15 nonresident alien individuals) is amended to read as 1' follows: 17 "SEC. 873. DEDUCTIONS. 18 "(a) GENERAL RULE.-In the case of a nonresident 19 alien individual, the deductions shall be alkwed only for 20 purposes of secticni 871 (b) and (except as provided by sub- 21 section (b)) only if and to the extent that they are con- 22 nected with income which i~ effectively connected with the 23 conduct of a trade or business within the United States; and 1717 PAGENO="0566" .114 1 the proper apportionment and allocation áf the deductions 2 for this purpose shall be determined as provided in regula- 3 tions prescrthed by the Secretary oi h~s delegate 4 "(b) ExCEPTIONS.-The following deductions shall be 5 allowed whether or not they are connected with income 6 which is effectively connected with the conduct of a trade 7 or business within the United States: 8 "(1) LOSSE&-The deduction, for losses of prop- 9 erty not connected with the trade or business if arising 10 from certain casualties or theft, allowed by section 11 165(c) (3), but only if the~ loss is of property located 12 within the United States. 13 "(2) CHARiTABLE CONTR1BUT1ONS.-The deduc- 14 tion for charitable contributions and gifts allowed by 15 section 170. 16 "(3) PERSONAL EXEMPTION.-The deduction for 17 personal exemptions allowed by section 151, except that 18 in the case of a nonresident alien individual who is not a 19 resident of a contiguous country oniy one exemption 20 shall be allowed under section 151. 1718 PAGENO="0567" 115 1 "(c) CROSS REFERENCES.- "(I) For disallowance of standard deduction, see sec~ tion 142(b) (7). "(2) For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b) (1)." 2 (2) Section 154(3) (relating to cross references 3 in respect of deductions for personal exemptions) is 4 amended to read as follows: "(3) For exemptions of nonresident aliens, see section 873(b) (3)." 5 (d) ALLOWANCE OF DEDUCTiONS AND CREDITS.- 6 Subsection (a) of section 874 (relating to filing of returns) is amended to read as follows: 8 "(a) RETURN PREREQUISITE TO ALLOWANCE.-A 9 nonresident alien~ individual shall receive the benefit of the 10 deductions and credits allowed to him in this subtitle only ~i by filing or causing to be filed with the Secretary or his 12 delegate a true a~nd accurate return, in the manner prescribed 13 in subtitle F (sec. 6001 and following, relating to procedure 14 and administration), including therein all the information. is which the Secretary or his delegate may deem necessary 16 for the calculation of such deductions and credits. This sub- 1719 PAGENO="0568" 116 1. section shall not be construed to deny the credits provided 2 by sections 31 and 32 for tax withheld at source or the credit 3 provided by section 39 for certain uses of gasoline and* 4 lubricating oil." 5 (e) BENE1i~IcIARIEs OF ESTATES AND TRUSTS.- 6 (1) Section 875 (relating to partnerships) is 7 amended to read as follows: 8 "SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES 9 AND TRUSTS. 10 "For purposes of this subtitle- 11 "(1) a nonresident alien individual or foreign cor- 12 poration shall be considered as being engaged in a trade 13 or business within the United States if the partnership 14 of which such individual or corporation is a member is 1.5 so engaged, and 16 "(2) a nonresident alien individual or foreign cor- 17 poration which is a beneficiary of an estate or trust which 18 is engaged in any trade or business within the United 19 States shall be treated as being engaged in such trade or 20 business within the United States." 21 (2) The table of sections for subpart A of part II 22 of subchapter N of chapter 1 is amended by striking out 23. the item relating to section 875 and inserting in lieu 24 thereof the following: "Sec. 875. Partnerships; beneficiaries of estates and trusts." 1720 PAGENO="0569" 117 1 (f) EXPATRIATION To AVOID TAX.- 2 (1) Subpart A of part II of subchapter N of chap- 3 . ter 1 (relating to nonresident alien individuals) is 4 amended by redesignating section 877 as section 878, 5 and by. inserting after section 876 the following new 6 section: 7 "SEC. 877. EXPATRIATiON TO AVOID TAX. 8 "(a) IN GENERAL.-E Very nonresident alien individual 9 who at any time after March 8, 1965, and within the 10- 10 year period immediately preceding the close of the taxable 11 year lost United States citizenship, unless such loss did not 12 have for one of its principal purposes the avoidance of taxes 13 under this subtitle or subtitle B, shall be (arabic for such 14 taxable year in the manner provided in subsection (b) if the 15 tax imposed pursuant to such subsection excee(ls the tax 16 which, without regard to this section, is imposed p?crsuant to 17 section 871. 18 "(b) AL2'Emv~i Ti J `E TAX.-A nonresident alien indtvid- 19 val described in subsection (a) ShOll be (axcthle f~r the tat- 21) able year as provided in section .1 or Section 1201 (b), 21 except that- 22 "(1) the gross incontc s/tall include only the groSR 23 income described in section .872(a) (as modified by 24 subsection (c) of this section), and 25 "(2) the deduct~ons Sh(Ihi be allowed if aiid to the 1721 PAGENO="0570" 118 1 extent that they are connected with the gross income 2 included under this section, except that the capital less 3 carryover provided by section 1212(b) shall not be 4 allowed; and the proper allocation and apportionment of 5 the deductions for this purpose shall be determined as 6 provided under regulations prescribed by the Secretary 7 or his delegate. 8 For purposes of paragraph (2), the deductions allowed by 9 section 873(b) shall be allowed; and the deduction (for 10 losses not connected with the trade or business if incurred in 11 transactions entered into for profit) allowed~ by section 12 165(c) (2) shall be allowed, but only if the profit, if such 13 transaction had resulted in a profit, would be included in 14 gross income under this section. 15 "(c) SPECIAL RULES OF SOURGE.-For purposes of 16 subsection (b), the following items of gross income shall 17 be treated as income from sources u'ithin the United States: 18 "(1) SALE OF PROPERTY.-Gains on the sale or 19 exchange of property (other than stock or debt obliga- 20 tions) located in the United States. 21 "(2) STOCK OR DEBT OBLIGATIONS.-Gains on the 22 sale or exchange of stock issued by a domestic corpora- 23 tion or debt obligations of United States persons or of 1722 PAGENO="0571" 119 1 the United States, a State or political subdivision thereof, 2 or the District of Columbia. 3 "(d) EXCEPTION FOR Loss OF CITIZENSHIP FOR CER~ 4 TAIN CA USES.-SubsectWfl (a) shall not apply to a non~ 5 resident alien individual whose loss of United States citizen- 6 ship resulted from the application of section 301(b), 350, or 7 355 of the Immigration and Nationality Act, as amended 8 (8 U.S.C. 1401 (b), 1482, or 1487). 9 "(e) BURDEN OF PR00F.-If the Secretary or his dde- 10 gate establishes that it is reasonable to believe that an mdi- 11 vidual's loss of United States citizenship would, but for this `12 section, result in a substantial reduction for the taxable year 13 in the taxes on his probable income for such year, the burden 14 of proving for such taxable year that such loss of citizen- 15 ship did not have for one of its principal purposes the 16 avoidance of taxes under this subtitle or subtitle B shall be 17 on such individual." 18 (2) The table of sections for subpart A of part II 19 of subchapter N of chapter 1 is amended by striking out 20 the item relating to section 877 and inserting in lieu 21 thereof the following: "Bee. 877. Expatriation to avoid tax. "Bee. 878. Fareign educational, charitable, and certain other exempt organizatiOn8." 1723 PAGENO="0572" 120 1 (g) PARTIAL ExcLusIoN OF DIVIDENDS.-Subsection 2 (d) of section 116 (relating to certain nonresident aliens 3 ineligible for exclusion) is amended to read as follows: 4 "(d) CERTAIN NONRESIDENT ALIENS INELIGIBLE 5 FOR EXCLUSION.-In the case of a nonresident alien mdi- 6 vidual, subsection (a) shall apply only- 7 "(1) in determining the tax imposed for the tax- 8 able year pu.rsuant to section 871 (b) (1) and only in 9. respect of dividends which are effectively connected with 10 the conthtct of a trade or business within the United 11 States, or 12 "(2) in determining the tax imposed for the tax- 13 able year pursuant to section 877(b)." 14 (h) WITHHOLDING OF TAX ON NONRESIDENT 15 ALIENS.-Section 1441 (relating to withholding of tax on 16 nonresident aliens) i~ amended- 17 (1) by striking out ", or of any partnership not 18 engaged in trade or business within the United States and 19 composed in whole or in part of nonresident aliens," in 20 subsection (a) and inserting in lieu thereof "or of any 21 foreign partners/tip"; 22 (2) by striking out "(except interest on deposits 23 with persons carrying on the banking business paid to 24 persons not engaged in business in the United States)" 25 in subsection (b); 1724 PAGENO="0573" 121 1 (3) by striking out "and amounts described in sec- 2 tion 402(a) (2)" and all that follows in the first sentence 3 of subsection (b) and inserting in lieu thereof "gains 4 described in section 402(a) (2), 403(a) (2), or 631 5 (b) or (c), amounts subject to tax under section 871 6 (a) (1) (0), gai~ns subject to tax under section 871 7 (a) (1) (D), and gains on transfers described in section 8 1235 made on or before October 4, 1966."; 9 (4) by adding at the end of subsection (b) the foi~ 10 lowing new sentence: 11 "In the case of a nonresident alien individual who is a mem- 12 ber of a domestic partners/tip, the items of income referred 13 to in subsection (a) shall be treated as referring to itenm~ 14 specified in this subsection included in his distributive share 15 of the income of such partners/tip."; 16 (5) by striking out paragraph (1) of subsection 17 (c) and inserting in lieu thereof the following new 18 paragraph: 19 "(1) INCoME CONNECTED WITH UNITED STATES 20 BUSINESS.-No deduction or withholding under subsec- 21 lion (a) shall be required in the case of any item of 22 income (other titan compensation for personal services) 23 which is effectively connected with the conduct of a 24 trade or business within the United States and which 1725 PAGENO="0574" 122 1 is included in the gross income of the recipient under 2 section 871 (b) (2) for the taxable year."; 3 (6) by amending paragraph (4) of subsection (c) 4 to read as follows: 5 "(4) COMPENSATION OF CERTAIN ALIENS.-Un- 6 der regulations prescribed by the Secretary or his dele- 7 gate, compensation for personal services may be ex- 8 empted from deduction and withholding under subsection 9 (a)."; 10 (7) by striking out "amounts described in section 11 402(a) (2), section 403 (a) (2), .section 631 (b) and 12 (c), and section 1235, which are considered to be gains 13 from. the sale or exchan,qe of capital assets," in para- 14 graph (5) of subsection (e) and inscrting in lieu thereof 15 "gains described in section 402(a) (2), 403(a) (2), or 16 631 (b) or (c), gains subject to tax under section 871 17 (a) (1) (D), and gains on transfers described in section 18 1235 made on or before October 4, 1966,", and by 19 striking out "proceeds from such sale or exchange," in 20 such paragraph and inserting in lieu thereof "amount 21 payable,"; 22 (8) by adding at the end of subsection (c) the fol- 23 lowing new paragraph: 24 "(7) CERTAIN ANNUITiES RECEIVED UNDER 25 QUALIFIED PLANS.-No deduction or withholding under 1726 PAGENO="0575" 123 1 subsection (a) shall be required in the case of any amount 2 received as an annuity if such amount is, under section 3 871(f), exempt from the tax imposed by section 871 4 (a)."; and 5 (9) by redesignating subsection (d) as (e), and 6 by inserting after subsection (c) the following new 7 subsection: 8 "(d) EXEMPTION OF CERTAIN FOREIGN PARTNER~ 9 SHIPS.-Subject to such terms and conditions as may be 10 provided by regulations prescribed by the Secretary or his 11 delegate, siibsecf ion (a) shall not apply in the case of a 12 foreign partnership engaged in trade or business within the 13 United States if the Secretary or his delegate determine.'4 14 that the requirements of subsection (a) impose an undue 15 administrative burden, and that the collection of the tax 16 imposed by section 871(a) on the members of such partner- 17 ship who are nonresident alien individuals will not be jeop- 18 ardizeci by the exemption." 19 (i) Lr~irnr~y'y FOR WITHHELD TAx.-Section 1461 ~ (relatinçi to return and payment of withheld tax) is amended 21 to read as follows: 22 "SEC. 1461. LIABILITY FOR WITHHELD TAX. 23 "Every person required to deduct and withhold any tax 24 under this chapter is hereby made liable for such tax and is 25 hereby indemnified against the claims and demands of any 1727 PAGENO="0576" 124 1 person for the amount of any payments made in accordance 2 with the provisions of this chapter." 3 (j) DECLARATION OF ESTiMATED INCOME TAX BY 4 INDIVIDUALS.-Section 6015 (relating to declaration of esti- 5 mated income tax by individuals) is amended- 6 (1) by striking out that portion of subsection (a) 7 which precedes para,qraph (1) and inserting in lieu 8 thereof the following: 9 "(a) REQUIREMENT OF DECLARAT1ON.-EXCept as 10 otherwise provided in subsection (i), every individual shall 11 make a declaration of his estimated tax for the taxable year 12 if-"; 13 (2) by redesignating subsection (i) as subsection 14 (j); and 15 (3) by inserting after subsection (h) the follow- 16 ing new subsection: 17 "(i) NONRESIDENT ALIEN IND1VIDUALS.-NO dec- 18 laration shall be required to be made under this section by a 19 nonresident alien individual unless- 20 "(1) withholding under chapter 24 is made appli- 21 cable to the wages, as defined in section 3401 (a), of 22 such individual, 23 "(2) such individual has income (other than com- 24 pensation for personal services subject to deduction and 25 withholding under section 1441) which is effectively 1728 PAGENO="0577" 125 1 connected with the conduct of a trade or business within 2 the United States, or 3 "(3) such individual is a resident of Puerto Rico 4 during the entire taxable year." 5 (k) COLLECTION OF INCOME TAX AT SOURCE ON 6 WAGES.-Subsection (a) of section 3401 (relating to defini- 7 tion of wages for purposes of collection of income tax at 8 source) is amended by striking out paragraphs (6) and (7) 9 and inserting in lieu thereof the following: 10 "(6) for such services, performed by a nonresident 11 alien individual, as may be designated by regulations 12 prescribed by the Secretary or his delegate; or". 13 (1) DEFINITIONS OF FOREIGN ESTATE OR TRUST.- 14 (1) Section 7701 (a) (31) (defining foreign estate 15 or trust) is amended by striking out "from sources with- 16 out the United States" and inserting in lieu thereof 17 ", from sources without the United States which is not 18 effectively connected with the conduct of a trade or busi- 19 ness within the United States,". 20 (2) Section 1493 (defining foreign trust for pur- 21 poses of chapter 5) is repealed. 22 (m) CONFORMING AMENDMENT.-The first sentence 23 of section 932(a) (relating to citizens of possessions of the 24 United States) is amended to read as follows: "Any in- 71-297 O-67-pt. 2-37 1729 PAGENO="0578" 126 1 dividual who is a citizen of any possession of the United 2 States (but not otherwise a citizen of the United States) 3 and who is not a resident of the United States shall be sub- 4 ject to taxation under this subtitle in the same manner and 5 subject to the same conditions as in the case of a nonresident 6 alien individual." 7 (n) EFFECTIVE DATES.- 8 .(1) The amendments made by this section (other 9 than the amendments made by subsections (h), (i), and 10 (k)) shall apply with respect to taxable years beginning 11 after December 31, 1966. 12 (2) The amendments made by. subsection (h) shall 13 apply with respect to payments made in taxable years 14 of recipients beginning after December 31, 1966. 15 (3) The amendments made by subsection (i) shall 16 apply with respect to payments occurring after Decem- 17 ber 31, 1966. 18 (4) The amendments made by subsection (k) shall 19 apply with respect to remuneration paid after Decem- 20 ber 31, 1966. 21 SEC. 104. FOREIGN CORPORATIONS. 22 (a) TAX ON INCOME NOT CONNECTED WITH 23 UNiTED STATES BUSINESS.-Section 881 (relating to tax 24 on forei~jn corporations not engaged in business in the United 25 States) is amended to read as follows: 1730 PAGENO="0579" 127 1 "SEC. 881. TAX ON INCOME OF FOREIGN CORPORATIONS 2 NOT CONNECTED WITH UNITED STATES 3 BUSINESS. 4 "(a) IMPOSiTION (iF TAx.-There is hereby imposed 5 for each taxable year a tax of 30 percent of the amount 6 received from sources within the United States by a foreign 7 corporation as- 8 "(1) interest, dividends, rents, salaries, wages, pre- 9 miums, annuities, compensations, remunerations, emolu- 10 merits, and other fixed or determinable annual or 11 periodical gains, profits, and income, 12 "(2) gains described in section 631 (b) or (c), 13 "(3) in the case of bonds or other evidences of 14 indebtedness issued after September 28, 1965, amounts 15 which under section 1232 are considered as gains from 16 the sale or exchange of property which is not a capital 17 asset, and 18 "(4) gains from the sale or exchange after October 19 4, 1966, of patents, copyrights, secret processes and 20 formulas, good will, trademarks, trade brands, fran- 21 chises, and other like property, or of any interest in 22 any such property, to the extent such gains are from 23 payments which are contingent on the productivity, use, 24 or disposition of the property or interest sold or ex- 1731 PAGENO="0580" 128 1 changed, or from payments which are treated as being 2 so contingent under sectic~n 871 (e), 3 but only to the extent the amount so received is not effec- 4 tively connected with the conduct of a trade or business 5 within the United States. 6 "(b) DOUBLING OF TAX.-. "For doubling of tax on corporations of certain foreign countries, see section 891." 7 (b) TAX ON INCOME CONNECTED WITH UNITED 8 STATES BUSINESS.- 9 (1) Section 882 (relating to tax on resident for- 10 eign corporations) is amended to read as follows: 11 "SEC. 882. TAX ON INCOME OF FOREIGN CORPORATIONS 12 CONNECTED WITH UNITED STATES BUSI- 13 NESS. 14 "(a) NORMAL TAX AND SURTAX.- 15 "(1) IMPOSITION OF TAX.-A foreign corporation 16 engaged in trade or business within the United States 17 during the taxable year shall be taxable as provided in 18 section 11 or 1201(a) on its taxable income which is 19 effectively connected with the conduct of a trade or busi- 20 ness within the United States. 21 "(2) DETERMINATION OF TAXABLE INCOME.-In 22 determining taxable income for purposes of paragraph 23 (1), gross income includes only gross income which is 1732 PAGENO="0581" 129 1 effectively connected with the conduct of a trade or busi- 2 ness within the United States. 3 "(b) GROSS INCOME.-In the case of a foreign corpora- 4 tion, gross income includes only- 5 "(1) gross income which is derived from sources 6 within the United States and which is not effectively 7 connected with the conduct of a trade or business with- 8 in the United States, and 9 "(2) gross income which is effectively connected 10 with the conduct of a trade or business within the United 11 States. 12 "(c) ALLOWANCE OF DEDUCTIONS AND CREDITS.- 13 "(1) ALLOCATION OF DEDUCTIONS.~- 14 "(A) GENERAL RULE~-In the case of a for- 15 eign corporation, the deductione shall be allowed 16 only for purposes of subsection (a) and (except as 17 provided by subparagraph (B)) only if and to the 18 extent that they are connected with income which 19 is effectively connected with the conduct of a trade 20 or business within the United States; and the proper 21 apportionment and allocation of the deductions for 22 this purpose shall be determined as provided in 23 regulations prescribed by the Secretary or his 24 delegate. 1733 PAGENO="0582" 130 1 "(B) CHARiTABLE CONTRJBUTJONS.-The de- 2 duction for charitable contributions and gifts pro- 3 vided by section 170 shall be. allowed whet her or 4 not connected with income which is effectively con- 5 nected with the conduct of a trade or business 6 within the United States. 7 "(2) DEDUcTioNS AND CREDiTS ALLOTVED ONLY 8 IF RETURN FILED.-A foreign corporation shall receive 9 the benefit of the deductions and credits allowed to it 10 in this subtitle only by filing or causing to be filed with 11 the Secretary or his delegate a true and accurate return, 12 in the manner prescribed in subtitle F, including therein 13 all the information which the Secretary or his delegate 14 may deem necessary for the calculation of such deduc- 15 tions and credits. The preceding sentence shall not 16 apply for purposes of the tax imposed by section 541 17 (relating to personal holding company tax), and shall 18 not be construed to deny the credit provided by section 19 32 for tax withheld at source or the credit provided by 20 . section 39 for certain uses of gasoline and lubricating oil. 21 "(3) FOREIGN TAX CREDIT.-Except as provided 22 by section 906, foreign corporations shall not be allowed 23 the credit against the tax for taxes of foreign countries 24 and possessions of the United States allowed by section 25 901. 1734 PAGENO="0583" 131 1 "(4) CRoss REFERENCE.- "For rule that certain foreign taxes are not to be taken into account in detcrnuntng deduction or credit, see sec- tion 91)6(b) (1). 2 "(d) ELECTION To TREAT REAL PROPERTY INCOME 3 AS INCOME CONNECTED WITH UNITED STATES Busi- 4 NESS.- 5 "(1) IN GENERAL.-A foreign corporation which 6 during the taxable year derives any income- 7 "(A) from real property located in the United 8 States, or from any interest in such real property, 9 including (i) gains from the sale or exchange of 10 real property or an interest therein, (ii) rents or 11 royalties from mines, wells, or other natural de- 12 posits, and (iii) gains described in section 631 (b) 13 or (c), and 14 "(B) which, but for this subsection, would not 15 be treated as income effectively connected with the 16 conduct of a trode or business within the United 17 States, 18 may elect for such taxable year to treat all such income 19 as income which is effectively connected with the con- 20 duct of a trade or business within the United States. ln 21 such case, such income shall be taxable as provided in 22 subsection (a) (1) whether or not such corporation is 23 engaged in trade or business within the United States 1735 PAGENO="0584" 132 1 during the taxable year. An election under this para- 2 graph for any taxable year shall remain in effect for all 3 subsequent taxable years, except that it may be revoked 4 with the consent of the Secretary or his delegate with 5 respect to any taxable year. 6 "(2) ELECTION AFTER REVOCATION, ETC.-Par- 7 agraphs (2) and (3) of section 871(d) shall apply in 8 respect of elections under this subsection in the same 9 manner and to the same extent as they apply in respect 10 of elections under section 871(d). 11 "(e) INTEREST ON UNiTED STATES OBLIGATIONS 12 RECEiVED BY BANKS ORGANIZED IN POSSESS1ONS.-I~, the 13 case of a corporation created or organized in, or under the 14 law of, a possession of the United States which is carrying 15 on the banking business in a possession of the United States, 16 interest on obligations of the United States shall- 17 "(1) for purposes of this subpart, be treated as 18 income which is effectively connected with the conduct of 19 a trade or business within the United States, and 20 "(2) shall be taxable as provided in subsection 21 (a) (1) whether or not such corporation is engaged in 22 trade or business within the United States during the 23 taxable year. 1736 PAGENO="0585" 133 1 "(f) RETURNS OF TAX BY AGENT.-lf any foreign 2 corporation ha.s no office or place of business in the United 3 States but has an agent in the United States, the return 4 required under section 6012 shall be made by the agent." 5 (2) (A) Subsection (e) of section 11 (relating to 6 exceptions from tax on corporations) is amended by in- 7 serting "or" at the end of paragraph (2), by striking 8 out ", or" at the end of paragraph (3) and inserting 9 a period in lieu thereof, and by striking out paragraph 10 (4). 11 (B) Section 11 (relating to tax on corporations) is 12 amended by adding at the end thereof the following 13 new subsection: 14 "(f,) FOREiGN CORPORA TIONS.-In the case of a foreign 15 corporation, the tax imposed by subsection (a) shall apply 16 only as provided by section 882." 17 (3) The table of sections for subpart B of part II 18 of subchapter N of chapter 1 is amended by striking out 19 the iteius relating to sections 881 and 882 and inserting 20 in lieu thereof the following: "Sec. 881. Tax on ineome of foreign corporations not con- nected with United States business. "See. 88g. Tax on income of foreign corporations connectea~ with United States business." 1737 PAGENO="0586" 134 1 (c) TVJTHHOLDING OF T~ix ON FoREiGN CORPORA- 2 TJON&-ScctiOfl 1442 (relating to withholding of tax on 3 foreign corporations) is am('ndcd to read as follows: 4 "SEC. 1442. WITHHOLDING OF TAX ON FOREIGN CORPO. 5 RATIONS. 6 "(a) GENERAL RULE.-In the case of foreign corpora- 7 tions subject to taxation under this subtitle, there shall be 8 deducted and withheld at the source in the same manner and 9 on the same items of income as is prorided in section 1441 10 or section 1451 a tax equal to 30 percent thereof; except 11 that, in the case of interest described in section 1451 (relat-~ 12 ing to tax-f ice covenant bonds), the deduction and with- 13 holding shall be at the rate specifted therein. For purposes 14 of the preceding sentence, the references in section 1441 (b) 15 to sections 871 (a) (1) (C) and (D) shall be treated as re- 16 ferrin.q to sections 881 (a) (3) and (4), the reference in 17 section 1441 (c) (1) to section 871 (b) (1) shall be treated 18 as referring to section 842 or section 882(a), as the case 19 may be, and the reference in section 1441 (e) (5) to section 20 871 (a) (1) (D) shall be treated as referring to section 21 881 (a) (4). 22 "(14 ExE~iPTIo~v.-Subject to such terms and condi- 23 tions as mai/ be provided by regulations prescribed by the 24 Secretary or his delegate, subsccti~;n (a) shall not apply in 25 the case of a foreiqn coiporation cnç~aged in trade or business 1738 PAGENO="0587" 135 1 within the United States if the Secrctary or his delegate de- 2 termines that the requirements of subsection (a) impose an 3 undue administrative burdenS and that the öollection of the 4 tax imposed by section 881 on such corporation will not be 5 jeopardized by the exemption." 6 (d) DIVIDENDS RECEIVED FROM CERTAIN FOREIGN 7 CORPORATIONS.-Subsection (a) of section 245 (relating to 8 the allowance of a deduction in respect of dividends received 9 from a foreign corporation) is amended- 10 (1) by striking out "and has derived 50 percent 11 or more of its gross income from sources within the 12 United States," in that portion of subsection (a) which 13 precedes paragraph (1) and by inserting in lieu thereof 14 "and if 50 percent or more of the gross income of such 15 corporation from all sources for such period is effectively 16 connected with the conduct of a trade or business within 17 the United States,"; 18 (2) by striking out "from sources within the Unit'?d 19 States" in paragraph (1) and inserting in lieu thereof 20 "which is effectively connected with the conduct of a 21 trade or business within the United States"; 22 (3) by striking out "from sources within the United 23 States" in paragraph (2) and inserting in lieu thereof 24 ", which is effectively connected with the conduct of a 25 trade or business within the United States,"; and 1739 PAGENO="0588" 136 1 (4) by adding after paragraph (2) the following 2 new sentence: 3 "For purposes of this subsectionS, the gross income of the 4 foreign corporation for any period before the first taxable 5 year beginning after December 31, 1966, which is effec- 6 tively connected with the conduct of a trcide or business 7 within the United States is an amount equal to the gross 8 income for such period from sources within the United 9 States." 10 (e) DIVIDENDS RECEIVED FROM CERTAiN WHOLLY- 11 OWNED FOREIGN SUBSiDIARIES.- 12 (1) Section 245 (relating to dividends received 13 from certain foreign corporations) is amended by re- 14 designating subsection (b) as (c), and by inserting after 15 subsection (a) the following new subsection: 16 "(b) CERTAIN DIVIDENDS RECEIVED FROM WHOLLY 17 OWNED FOREIGN SUI3SIDIARJES.- 18 "(1) IN GENERAL.-In the case of dividends de- 19 scribed in paragraph (2) received from a foreign cor- 20 poration by a domestic corporation which, for its taxable 21 year in which such dividends are received, owns (di- 22 rectly or indirectly) all of the outstanding stock of such 23 foreign corporation, there shall be allowed as a deduction 24 (in lieu of the deduction provided by subsection (a)) an 25 amount equal to 100 percent of such dividends. 1740 PAGENO="0589" 137 1 "(2) ELiGIBLE DJVJDENDS.-Pa'ragraph (1) shall 2 apply only to dividends which are paid out of the earn- 3 ings and profits of a foreign corporation for a taxable 4 year during which- 5 "(A) all of its outstanding stock is owned (di- 6 rectly or indirectly) by the domestic corporation to 7 which snch dividends are paid; and 8 "(B) all of its gross income from all sources 9 is effectively connected with the conduct of a trade or 10 business within the United States. 11 "(3) ExCEPTI0N.-Paragraph (1) shall not apply 12 to any dividends if an election under section 1562 is 13 effective for either- 14 "(A) the taxable year of the domestic corpora- 15 lion in which such dividends are received, or 16 "(B) the taxable year of the foreign corpora- 17 lion out of the earnings and profits of which such 18 dividends are paid." 19 (2) Subsection (a) of such section 245 is amended 20 by adding at the end thereof (after the sentence added 21 ~ subsection (d) (4)) the following new sentence: "For 22 purposes of paragraph (2), there shall not be taken into 23 account any taxable year within such uninterrupted pe- nod if, with respect to dividends paid out of the earnings 1741 PAGENO="0590" 138 1 and profits of such year, the deduction provided by 2 subsection (b) would be allowable." 3 (3) Subsection (c) of such section 245 (as redesig- 4 nated by paragraph (1)) is amended by striking out 5 "subsection (a)" and inserting in lieu thereof "subsectiorts 6 (a) and (b)". .7 (f) DIsTRiBuTIoNS OF CERTAIN FOREIGN CORPORA- 8 TIONS.-Sectwn 301 (b) (1) (0) (relating to certain cor- 9 pOrate distributees of foreign corporations) is amended-. 10 (1) by striking out "gross income from sources 11 within the United States" in clause (i) and inserting in 12 lieu thereof "gross income wMch is effectirely connected 13 with the conduct of a trade or busiee~.s within the United 14 States"; 15 (2) by striking out "gross income from sources with- 16 out the United States" in clause (ii) and inserting in 17 lieu thereof "gross income which is not effectively con- 18 nected with the conduct of a trade or business within 19 the United States"; and 20 (3) by adding at the end thereof the following new 21 sentences: "For purposes of clause (i), the gross income 22 of a foreign corporation for any period before its first 23 taxable year beginning after December 31, 1966, which 24 is effectively connected with the conduct of a trade or 25 business within the United States is an amount equal 1742 PAGENO="0591" 139 1 to the gross income for such period from sources within 2 the United States. For purposes of clau~e (ii), the 3 gross income of a foreign corporation for any period 4 before its first taxable year beginning after December 5 31, 1966, which is not effectively connected with the 6 conduct of a trade or business within the United States 7 is an amount equal to the gross income for such period 8 from sources without the United States." 9 (g) UNRELATED BUSINESS TAXABLE INCOME.-The 10 last sentence of section 512 (a) (relating to definition) is 11 amended to read as follows: "In the case of an organiza- 12 tion described in section 511 which is a foreign organiza-~ 13 tion, the unrelated business taxable income shall be its 14 unrelated business taxable income which is effectively con- 15 nected with the conduct of a trade or business within the 16 United States." 17 (h) CORPORATIONS SUBJECT TO PERSONAL HOLD- 18 ING COMPANY TAX.- 19 (1) Paragraph (7) of section 542(c) (relating 20 to corporations not subject to personal holding company 21 tax) is amended to read as follows: 22 "(7) a foreign corporation (other than a corpora- 23 tion which has income to which section 543 (a) (7) ap- 24 plies for the taxable year), if all of its stock outstanding 1743 PAGENO="0592" 140 1 during the last half of the taxable year is owned by 2 nonresident alien individuals, whether directly or mdi- 3 rectiy through foreign estates, foreign trusts, foreign 4 partnerships, or other foreign corporations;". 5 (2) Section 543(b) (1) (relating to definition of 6 ordinary gross income) is amended- 7 (A) by striking out "and" at the end of sub- 8 paragraph (`A), 9 (`B) by striking out the period at the end of 10 subparagraph (B) and inserting in lieu thereof ", 11 and", and 12 7C) by inserting after subparagraph (B) the 13 following new subparagraph: 14 "(C) in the case of a foreign corporation all of 15 the outstanding stock of which during the last half 16 of the taxable year is owned by nonresident alien in- 17 dividuals (whether directly or indirectly through 18 foreign estates, foreign trusts, foreign partnerships, 19 or other foreign corporations), all items of income 20 which would, but for this subparagraph, constitute 21 personal holding company income under any para- 22 graph of subsection (a) other than paragraph (7) 23 thereof." 24 (3) Section 545 (relating to definition of undis- 25 tributed personal holding company income) is amended- 1744 PAGENO="0593" 141 1 (A) by striking out subsection (a) and insert- 2 ing in lieu thereof the following: 3 "(a) DEFINITION.-For purposes of this part, the term 4 `undistributed personal holding company income' means the 5 taxable income of a personal holding company adjusted in 6 the manner provided in subsections (b), (c), and (d), minus 7 the dividends paid deduction as defined in section 561. In 8 the case of a personal holding company which is a foreign 9 corporation, not more than 10 percent in value of the out- 10 standing stock of which is owned (within the meaning of 11 section 958(a)) during the last half of the taxable year by 12 United States persons, the term `undistributed personal hold- 13 ing company income' means the amount determined by multi- 14 plying the undistributed personal holding company income 15 (determined without regard to this sentence) by the percent- 16 age in value of its outstanding stock which is the greatest per- 17 centage in value of its outstanding stock so owned by United 18 States persons on any one day during such period."; and 19 (B) by adding at the end thereof the following 20 new subsection: 21 "(d) CERTAIN FOREIGN CORPORATIONS.-In the case 22 of .a foreign corporation all of the outstanding stock of which 23 during the last half of the taxable year is owned by nonresi- 24 dent alien individuals (whether directly or indirectly through 71-297 0-67-pt. 2-38 1745 PAGENO="0594" 142 1 foreign estates, foreign trusts, foreign partnerships, or other 2 foreign corporations), the taxable income for purposes of 3 subsection (a) shall be the income which constitutes personal 4 holding company income under section 543(a) (7), reduced 5 by the deductions attributable to such income, and adjusted, 6 with respect to such income, in the manner provided in sub- 7 section (b)." 8 (4) (A) Subchapter B of. chapter 68 (relating to 9 assessable penalties) is amended by adding at the end 10 thereof the following new sectiom: 11 "SEC. 6683. FAILURE OF FOREIGN CORPORATION TO FILE 12 RETURN OF PERSONAL HOLDING COMPANY 13 TAX. 14 "Any foreign corporation which- 15 "(1) is a personal holding company for any tax- 16 able year, and 17 "(2) fails to file or to cause to be filed with the 18 Secretary or his delegate a true and accurate return of 19 the tax imposed by section 541, 20 shall, in addition to other penalties provided by law, pay a 21 penalty equal to 10 percent of the taxes imposed by chapter 1 22 (including the tax imposed by section 541) on such foreign 23 corporation for such taxable year." 1746 PAGENO="0595" ~43 1 (B) The table of sections for such* subchapter B is 2 amended by adding at the end thereof the following new 3 item: "See. 6683. Failure of foreign corporation to file return of personal holding company tax." 4 (i) AMENDMENTS WITH RESPECT TO FOREIGN 5 CORPORATIONS CARRYING ON iNSURANCE BUSiNESS IN 6 UNITED STATES.- 7 (1) Section 842 (relating to computation of gross 8 income) is amended to read as follows: 9 "SEC. 842. FOREIGN CORPORATIONS CARRYiNG ON iN. 10 SURANCE BUSINESS. 11 "If a foreign corporation carrying on an insurance bu$i- 12 ness within the United Slates would qualify under part I, 13 II, or ill of this subchapter for the, taxable year if (without 14 regard to income not effectively connected with the conduct 15 of any trade or business within the United States) it were 16 a domestic corporation, such corporation shall be taxable 17 under such part on its income effectively coflnected with its 18 conduct of any trade or business within the United States. 19 With respect to the remainder of its income, which is from 20~ sources within the United States, such a foreign corpora- 21 tion shall be taxable as provided in section 881 ." 22 (2) The table of sections for part JV of subchapter 1747 PAGENO="0596" 144 1 L of chapter 1 is amended by striking out the item re- 2 lating to section 842 and inserting in lieu thereof the 3 following: "Sec. 842. Foreign corporatio~ carrying on insurance busi- ~flS8.~~ 4 (3) Section 819 (relating to foreign life insurance 5 companies) is amended- 6 (A) by striking out subsections (a) and (d) 7 and by redesignating subsections (b) and (c) as 8 subsections (a) and (b), 9 (B) by striking out "In the case of any com- 10 pany described in subsection (a) ," in subsection 11 (a) (1) (as redesignated by subparagraph (A)) 12 and inserting in lieu thereof "In the case of any 13 foreign corporation taxable under this part,", 14 (CI) by striking out "subsection (c)" in the 15 last sentence of subsection (a) (2) (as redesignated 16 by subpargraph (A)) and inserting in lieu thereof 17 "subsection (b)", 18 (D) by adding at the end of subsection (a) 19 (as redesignated by subparagraph (A)) the fol- 20 lowing new paragraph: 21 "(3) REDUCTIoN OF SECTION 881 TAX.-In the 22 case of any foreign corporation taxable under this part, 23 there shall be determined- 1748 PAGENO="0597" 145 1. "(A) the amount which would be subject to 2 tax under section 881 if the amount taxable under 3 such section were determined without regard to see- 4 tions 103 and 894, and 5 "(B) the amount of the reduction pror'idcd 6 by paragraph (1). 7 The tax under section 881 (determined without regard 8 to this paragraph) shall be reduced (but not below 9 zero) by an amount which is the same proportion of 10 sue/i tax as the amount referred to in subparagraph (B) 11 is of the amount referred to in subparagraph (A); but 12 such reduction in tax shall not exceed the increase in 13 tax under this part by reason of the reduction provided 14 by paragraph (1).", 15 (B) by striking out "for purposes of subsec- 1.6 tion (a)" each place it appears in subsection (h) 17 (as re(lcslgna!ct'l by subparagraph (A)) and insert- 18 ing in lien thereof "with respect to a foreign 19 corporation", 20 (P1) by Striking out "foreign life insurance 21 com.pa'nij" each place it ~7~/)C(l)~S in site/i subsectwn 22 (1)) (1.1111 iiisertinq in 1WU thereof "foreign corpora- 23 tion~", 1749 PAGENO="0598" 14~ 1 (G) by striking out "subsection (b) (2) (A)" 2 each place it appears in such subsection (b) and 3 inserting in lieu thereof "subsection (a) (2) (A)", 4 (H) by striking out "subsection (b) (2) (B)" 5 in paragraph (2) (B) (ii) of such subsection (b) 6 and inserting in lieu thereof "subsection (a) (2) 7 (B)", and 8 (I) by adding at the end thereof the following 9 new subsection: 10 "(c) CRoss REFERENCE.- "For taxation of foreign corporations carrying on life insurance business within the United States, see section 842." ii (4) Section 821 (relating to tax on mutual insur- 12 ance corn panics to which part 11 applies) i~ amended- 13 (A) by striking out subsection (e) and by 14 redesignating subsections (f) and (g) as sub- 15 sections (e) and (f), and 16 (B) by adding at the end of subsection (f) 17 (as red es'tgnated by subparagraph (A)) the fol- 18 lowing: "(3) For taxation of foreign corporations carrying on (I~ insurance business within the United States, see sec- tion 842." .19 (5) Section 822 (relatinj to determination of tax- 20 able investment income) is amended by striking out 1750 PAGENO="0599" 147 1 subsection (e) and by. redesignating subsection (f) as 2 subsection (e). 3 (6) Section 831 (relating to tax on certain other 4 insurance companies) is amended- 5 (A) by striking out subsection (b) and by re- 6 desiqnat'tnq subsection (c) as subsection (b), and 7 (B) by amending subsection (d) to read as 8 follows: 9 "(c) CROSS REFERENCES.- "(1) For alternative tax in case of capital gains, see* section 1201(a). "(2) For taxation of foreign corporations carrying on an insurance business within the United States, see see- - tion 812." 10 (7) Section 832 (relating to insurance company ii taxable income) is amended by striking out subsection 12 (d) and by redesignating s~thsection (e) as subsection 13 (d). 14 (8) The s('cond sentence of section 841 (relating 15 to C1~(dit for foievjn laics) iS am(fl(ied b11 striking out 16 "Se)lte)1ee," (1)1(1 in.s(1I'inq iii. lieU 1liei~eof "sentciice (and 17 Jo~ piiij~oses of (iJ)/)I1Jt'llf/ .ceetton 906 with respect to a 18 fo~evjn. CO1J)O1&W1i Rllb/('Ct to ta;i~ under this sub- 19 (~1ta/)teT),". 20 (j) Runr~i IIT F JNCOM1~.-S ccl ion 952(b) (relating 1751 PAGENO="0600" 148 1 to exclusion of l7'njted States income) is amended to read 2 as follows: 3 "(b) ExcLusioN oi~ UNiTED STATES INCOJIE.-Jn 4 the case of a controlled foreign corporation, subpart F in- 5 come does not include any item of income from sources 6 within the United States which is effectively connected 7 with the conduct bij such corporation of a trade or business 8 within the United States unless such item is exempt from 9 taxation (or is subject to a reduced rate of tax) pur.~iiani 10 to a treaty obligation of the United States." 11 (k) GAiN FROM CERTJ IN SJ LES 01? Excmi NGES 12 OF STOCK iN CERTAIN FOREIGN CoRPoR~1 TIONS.-Para- 13 graph (4) of section 1248(d) (relating to exclusions from 14 earnings and profits) is amended to read as follows: 15 "(4) UNITED STATES INCOME.-Any item in- 16 ciudible in gross income of the foreign corporation under 17 this chapter- 18 "(A) for (l~j/ taxable i/ear befjinninf/ b(?fore 19 Januari1 1, 1967, as income derwed from. sources 20 wit/un the iTnited States of a foreiqu eorporation~ 21 ençjaqed ~n tra(le 01' bi(siiieP5 ~i'i/h iii the Ti)Iit(d 22 States, or 23 "(B) for (1111/ tridable ?/e~!r beqtniiinq afiei 24 December 31, 1966, as income e/~ee1wel'I eon- 1752 PAGENO="0601" 149 1 nected with the conduct by such corporation of a 2 trade or business within the United States. 3 This paragraph shall not apply with respect to any 4 item which is exempt from tucalion (or is subject to 5 a `reduced rate of tax) pursuant to (1 ticaly obl~gatwn 6 of 1/ic United States." 7 (1) DECLARATION 0? Es7I~I~'Iq'ED iNCOME TAx BY 8 CORPORA TIONS.-Section 6016 (relating to declarations of 9 estimated income tax by corporations) is amended by redes- 10 ignating subsection (f) as subsection (g) and by inserting 11 after subsection (e) the following new subsection: 12 "(f) CEi~'r~i iN FOREIGN Col?Po11~,l TION&-For par- 13 poses of this section and section 6655, in the case of a. foreign 14 corporation subject to taxation under section 11 or 1201(a), 15 or under subchapter L of chapter 1, the tax imposed by 16 section 881 shall be treated as a tax imposed by section 11." 17 (m) TECHNICAL AMENDMENTS.- 18 (1) Section 884 is amended to read as follows: 19 "SEC. 884. CROSS REFERENCES. "(1) For special provisions relating to unrelated busi- ness income of foreign educational, charitable, and cer- tain other exempt organizations, see section 512(a). "(2) For special provisions relating to foreign corpo- rations carrying on an insurance business within the United States, see section 842. "(3) For rules applicable in determining whether any foreign corporation is engaged in trade or business within the United States, see section 864(b). "(4) For adjustment of tax in case of corporations of certain foreign countries, see section 896. 1753 PAGENO="0602" 15() "(5) For allowance of credit against the tax in case of a foreign corporation having income effectively con- nected with the conduct of a trade or business within the United States, see section 906. "(6) For withholding at source of tax on income of for. eign corporations, see section 1442." 1 (2) Section 953(b) (3) (F) is amended by sink- 2 ing out "832(b) (5)" and inserting in lieu thereof 3 "832(c) (5)". 4 (3) Section 1249(a) is amended by striking out 5 "Except as provided in subsection (c), gain" and in- 6 serli'ny in lica Ilicreof "Gain". 7 (n) E1~'FEC~l'1rE 1Lii'i~S.-The amendments made by 8 this section (other than subsection (k)) shall apply wit/i 9 respect to taxable years beginning after December 31, 1966. 10 The amendment made by subsection (k) shall apply with 11 respect to sales or exchanges occurring after December 31, 12 1966. 13 SEC. 105. SPECIAL TAX PROVISIONS. 14 (a) INcoME AFFECTED BY TRE~4TY.-Scction 894 (re- 15 ia!ing to income exempt under treaties) is amended to read 16 as follows: 17 "SEC. 894. INCOME AFFECTED BY TREATY. 18 "(a) INCOME ExE~IPT UNDER TREATY.-Income of 19 any kind, to the extent required by any treaty obligation of 20 the United States, shall not be included in gross income and 21 shall be exempt from taxation under this subtitle. 1754 PAGENO="0603" 151 1 "(b) PERMANENT ESTABLISHMENT IN UNITED 2 STATES.-FOT purposes of applying any exemption from, or 3 reduction of, any tax provided by any treaty to which the 4 United States is a party with respect to income which is not 5 effectively connected with the conduct of a trade or business 6 within the United States, a nonresident alien individual or a 7 foreign corporation shall be deemed not to have a permanent 8 establishment in the United States at any time during the 9 taxable year. This subsection shall not apply in respect of 10 the tax computed under section 877(b) 11 (b) ADJUSTMENT OF TAX BECAUSE OF BURDENSOME 12 OR DISCRIMINATORY FOREIGN TAxES.-Subpart C of part 13 II of subchapter N of chapter 1 (relating to miscellaneous 14 provisions applicable to nonresident aliens and foreign corpo- 15 rations) is amended by adding at the end thereof the follow- 16 ing new section: 17 "SEC. 896. ADJUSTMENT OF TAX ON NATIONALS, RESI.. 18 DENTS, AND CORPORATIONS OF CERTAIN 19 FOREIGN COUNTRIES. 20 "(a) IMPOSITION OF MORE BURDENSOME TAXES BY 21 FOREIGN GOUNTRY.-Whenever the President finds that- 22 "(1) under the laws .of any foreign country, con- 23 sidering the tax system of such foreign country, citizens 24 of the United States not residents of such foreign coun- 1755 PAGENO="0604" 152 1 try or domestic corporations are being subjected to more 2 burdensome taxes, on any item of income received by 3 such citizens or corporations from sources within such 4 foreign country, than taxes imposed by the provisions of 5 this subtitle on similar income derived from sources 6 within the United States by residents or corporations of 7 such foreign country, 8 "(2) such foreign. country, when requested by the 9 United States to do so, has not acted to `revise or reduce 10 such taxes so that they are no `more burdensome than 11 taxes imposed by the provisions of this subtitle on similar 12 income derived from sources within the United States by 13 residents or corporations of such forei,qn. country, and 14 "(3) it is in the public interest to apply pre-1967 15 tax provisions in accordance with the provisions of this 16 subsection to residents or corporations of such foreign 17 country, 18 the President shall proclaim, that the tax on such similar in- 19 come derived from sources within the United States by resi- 20 dents or corporations of such foreign country shall, for tax- 21 able years beginning after such proclamation, be determined 22 under this subtitle without regard to amendments made to 23 thi$ subchapter and chapter 3 Qfl or after the date of enact- 24 ment of this section. 1756 PAGENO="0605" 153 1 "(b) IMPOSITION OF DISCRIMINATORY TAXES BY 2 FOREIGN (JOUNTRY.-Whe'never the President finds that- 3 "(1) under the laws of any foreign country, citizens 4 of the United States or domestic corporations (or any 5 class of such citizens or corporations) are, with respect to 6 any item of income, being subjected to a higher effective 7 rate of tax than are nationals, residents, or corporations 8 of such foreign country (or a similar class of such na- 9 tionals, residents, or corporations) under similar cir- 10 cumstances; 11 "(2) sue/i foreign country, when requested by the 12 United States to do so, has not acted to eliminate such 13 higher effective rate of tax; and 14 "(3) it is in the public interest to adjust, in accord- 15 ance with the provisions of this subsection, the effective 16 rate of tax imposed by this subtitle on similar income of 17 nationals, residents, or corporations of such foreign 18 country (or such similar class of such nationals, resi- 19 dents, or corporations), 20 the President shall proclaim that the tax on similar income 21 of nationals, residents, or corporations of such. foreign country 22 (or such similar class of such nationals, residents, or corpo- 23 rations) shall, for taxable years beginning after such proc- 24 lamation, be adjusted so as to cause the effective rate of tax 1757 PAGENO="0606" 154 1 imposed by this subtitle on such similar income to be sub- 2 stantially equal to the effective rate of tax imposed by such 3 foreign country on such item of income of citizens of the 4 United States or domestic corporations (or such class of 5 citizens or corporations). In implementing a proclamation 6 made under this subsection, the effective rate of tax imposed by 7 this subtitle on an item of income may be adjusted by the dis- 8 allowance, in whole or in part, of any deduction, credit, or 9 exemption which would otherwise be allowed with respect to 10 that item of income or by increasing the rate of tax otherwise 11 applicable to that item of income. 12 "(c,) ALLEVIATION OF MORE BURDENSOME OR Dis- 13 CRIiIINATORY TAxES.-TVhenever the President find~s that- 14 "(1) the laws of any foreign country with respect 15 to which the President ii as made a proclamation under 16 subsection (a) have been modified so that citizens of the 17 United States not residents of such foreign country or 18 domestic corporations are no longer subject to more bur- 19 densome taxes on the item of income derived by such 20 citizens or corporations from son rces evithin such foreign 21 country, or 22 "(2) the laws of any foreign country with respect 23 to which the President has made a proclamation under 24 subsection (b) have been modified so that citizens of the 25 United States or domestic corporations (or any class of 1758 PAGENO="0607" 155 1 such citizens or corporations) are no longer subject to 2 a higher effective rate of tax on the item of `income. 3 he shall proclaim that the tax imposed by this subtitle on the 4 similar income of nationals, residents, or. corporations of 5 such foreign country shall, for any taxable year beginning 6 after such proclamation, be determined under this subtitle 7 without regard to such subsection. 8 "(d) NOTIFICATION OF CONGRESS REQUJRED.-No 9 proclanuition shall be `issued by the President pursuant to 10' this section unless, at least 30 (lays priOr to such procla- 11 mation, he has notified the Senate and the house of Repre- 12 sentatives of his intention to issue such proclamation. 13 "(e) J~IPLJJJJENTL1 TJON DY REGULATJONS.-The See- 14 retary or his delegate shall prescribe such regulations as he 15 deems necessary or appropriate to implement this section." 16 (c) CLERiCAL AJIENDJJENTS.-The table of sections 17 for subpart C of part 11 of subchapter N of chapter 1 is 18 amendedr- 19 (1) by striking out the item relating to section 894 20 and inserting in lieu thereof "Sec. 894. Income affected by treaty."; 21 (2) by adding at the end of such table the following: "Sec. 896. Adjustment of tax on natonals, residents, and corporations of certain foreign countries." 22 (d) EFFECTIVE DATE.-The amendments made by this 1759 PAGENO="0608" 156 1 section (other than subsections (e) and (f)) shall apply 2 with respect to taxable years beginning after December 31, 3 1966. 4 (e) ELECTIONS BY NONRESIDENT UNITED STATES 5 CITiZENS WHO ARE SUBJECT TO FOREIGN COMMUNITY 6 PROPERTY LAWS.- 7 (1) Part 111 of subchapter N of chapter 1 (relat- 8 ing to income from sources without the United States) 9 is amended by adding at the end thereof the following 10 new subpart: 11 "Subpart H-Income of Certain Nonresident United States 12 Citizens Subject to Foreign Community Property Laws "Sec. 981. Elections as to treatment of income subject to foreign community property laws. 13 "SEC. 981. ELECTION AS TO TREATMENT OF INCOME SUB- 14 JECT TO FOREIGN COMMUNITY PROPERTY 15 LAWS. 16 "(a) GENERAL RULE.-In the case of any taxable year 17 beginning after December 31, 1966, `if- 18 "(1) an individual is (A) a citizen of the United 19 States, (B) a bona fide resident of a foreign country 20 or countries during the entire taxable year, and (C) 21 married at the close of the taxable year to a spou~se who is 22 a noflresident alien during the entire taxable year, and 23 "(2) such individual and his spouse elect to have 1760 PAGENO="0609" 157 1 subsection (b) apply to their community income under 2 foreign community property laws, 3 then subsection (b) shall apply to such income of such mdi- 4 vidual and such spouse for the taxable year and for all sub- 5 sequent taxable years for which the requirements of para- 6 graph (1) are met, unless the Secretary or his delegate 7 consents to a termination of the election. 8 "(b) TnE/1 TAlENT OF COMMUNITY INCOME.-For any 9 taxable year to which an election ?nade under subsection (a) 10 applies, the community income under foreign community 11 property laws of the husband and wife making the election 12 shall be treated as follows: 13 "(1) Earned income (within the meaning of the 14 first sentence of section 911 (b)), other than trade or 15 business income and a partner's distributive share of 16 partnership income, shall be treated as the income of the 17 spouse who rendered the personal services. 18 "(2) Trade or business income, and a partner's 19 thstributwe share of parlnershtp income, shall be treated 20 as provided `in section 1402 (ci) (5). 21 "(3) Community income not described in para- 22 ~jraplt (1) or (2) which. is derived from the separate 23 prOpei~t?J (as (leterm ined under the applicable forei~qn 24 comm unity property law) of one spouse shall be treated 25 as the income of such spouse. 71-297 0-67-pt. 2-39 1761 PAGENO="0610" 158 1 "(4) All other such community `income shall be 2 treated as provided in the applicable foreign community 3 property law. 4 "(c,.) ELECTION FOR PRE-1967 YEARS.- 5 "(1) ELECTION.-If an individual meets the re- 6 qu~rements of subsections (a) (1) (A) and (C) for any 7 taxable year beginning before January 1, 1967, and if 8 such individual and the spouse referred to in subsection 9 (a) (1) (C) elect under this subsection, then paragraph 10 (2) of this subsection shall apply to their community in- 11 come under foreign community property laws for alt 12 open taxable years beginning before January 1, 1967 13 (whether under this chapter, the corresponding provi- 14 sions of the Internal Revenue Code of 1939, or the cor- 15 responding provisions of prior revenue laws), for which 16 1/ic requirements of subsection (a) (1) (A) and (C) 17 are met. IS "(2) EFPECT OF ELECTION.-For any taxable 19 yeai to which an election made under this subsection 2() a/)pl~'eR, 1/ic community income wiidcr foreign community 21 j)ropcvty laws of the lwsbctnd and wife making the 22 election s/jail be treated as provided by subsection (b), 2:~ ercept 1/tat the other community income described m 24 j)(Jr(UJ1'(Ij)/! (4) of subsection (b) shall be treated as the 25 income of the spouse who, for 511(11 t((xaliie i/ear, had 1762 PAGENO="0611" 159 1 gross income under paragraphs (1), (2), and (3) of 2 subsection (b), plus separate gross income, greater than 3 that of the other spous('. 4 "(d) TIMJ~ FOR MAKiNG ELECTIONS; PERIOD OF 5 Lnii71~i TIONS; ETC.- 6 "(1) TJi1IE.-An, election under subsection (a) or 7 (c) for a taxable year may be made at any time while 8 such year is still open, and shall be made in such man- 9 ncr as the Secretary or his delegate shall by regulations 10 prescribe. 11 "(2) EXTENSION OF PERIOD FOR ASSESSING DE- 12 F1CJENCIES AND MAKING REFUNDS.-lf any taxable 13 year to which an election under subsection (a) or (c) 14 applies is open at the time such election is made, the 15 period for assessing a deficiency against, and the period 16 for filing claim for credit or refund of any overpayment 17 by, the husband and wife for such taxable year, to the 18 extent such deficiency or overpayment is attributable to 19 such an election, shall not expire before 1 year after 20 the date of such election. 21 "(3) ALIEN SPOUSE NEED NOT JOIN 1N SUBSE~- 22 TJON (C) ELECTION iN CERTA1N CASES.-If the Secre- 21 tary or his delegate deteiinines- 24 "(A) that an election under s-ubsection (c) 25 ii'ould not affect the liability for Federal income 1763 PAGENO="0612" 160 1 tax of the spouse referred to in subsection (a) (1) 2 (Cl) for any taxable year, or 3 "(B) that the effect on such liability for tax 4 cannot be ascertained and that to deny the election 5 to the citizen of the United States would be inequita- 6 ble and cause undue hardship, 7 such spouse shall not be required to join in such election, 8 and paragraph (2) of this subsection shall not apply 9 with respect to such spouse. 10 "(4) INTEREST.-To the extent that any overpay- 11 ment or deficiency for a taxable year is attributable to 12 an election made under this section, no interest shall be 13 allowed or paid for any period before the day which is I 14 year after the date of such election. 15 "(e) DEFiNiTioNS AND SPECIAL RULES.-For pur- 16 poses of this section~- 17 "(1) DEDuCTIONS.-Deductions shall be treated in 18 a manner consistent with the manner provided by this 19 seètion. for the income to which 1/icy relate. 20 "(2) OPEN YEARS.-A taxable year of a citizen 21 of the United Stales and his spouse shall be treated as 22 `open' if the period for assessing a deficiency against 2~ such citizen for such year has not expired before 1/ic 24 date of the election ?tflder subsection (a) or (e), as the 25 case may be. 1764 PAGENO="0613" .161 1 "(3) ELECTIONS IN CASE OF DECEDENTS.-If a 2 husband or wife is deceased his election under this sec- 3 tion may be made by his executor, administrator, or 4 other person charged with his property. 5 "(4) DEATH OF SPOUSE DURING TAXABLE 6 YEAR.-In applying subsection (a) (1) (0), and in de- 7 termining under subsection (c) (2) which spouse has 8 the greater income for a taxable year, if a husband or 9 wife dies the taxable year of the surviving spouse shall 10 be treated as ending on the date of such death." 11 (2) The table of subparts for such part III is 12 amended by adding at the end thereof the following:. "Subpart H. Thcome of certain nonresident United States citzaens subject to foreign co.n~munity prop- erty laws." 13. (3) Section 911 (d) (relating to earned income 14 from sources without the United States) is amended- 15 (A) by striking out "For administrative" añd 16 inserting in lieu thereof the following: "(1) For ad. 17 ministrative"; and 18 (B) by adding at the end thereof the following: "(2) For elections as to treatment of income subject to foreign community property laws, see section 981." 19 (f) PRESUMPTIVE DATE OF PAYMENT FOR TAX 20 WITHHELD UNDER CHAPTER 3.- 21 (1) Section 6513(b) (relating to time tax is consid- 1765 PAGENO="0614" 1E~2 1 ered paid in the case of prepaid income tax) is amended 2 to read as follows: 3 "(b) PREPAID INCOME TAX.-For purposes of section 4 6511 or 6512~- 5 "(1) Any tax actually deducted and wit1~held at 6 the source during any calendar year under chapter 24 shall, in respect of the recipient of the income, be deemed 8 to have been paid by him on the 15th day of the fourth 9 month following the clOse of his taxable year with respect 10 to which such tax is allowable as a credit under section 11 31. 12 "(2) Any amount paid as estimated income tax for 13 any taxable year shall be deemed to have been paid on 14 the last day prescribed for filing the return under sec- 15 tion 6012 for such taxable year (determined without 16 regard to any extension of time for filing such return). 17 "(3) Any tax withheld at the source under chapter 18 3 shall, in respect of the recipient of the income, be 19 deemed to have been paid by such recipient on the last 20 day prescribed for filing the return under section 6012 21 for the taxable year (determined without regard to any 22 extension of time for filing) with respect to which sue/i 23 tax is allowable as a credit under section 1462. For 24 this purpose, any exemption granted under section 6012 1766 PAGENO="0615" 1~3 1 from the requirement of filing a return shall be disre- 2 garded." 3 (2) Section 6513 (c) (relating to return and pay- 4 ment of Social Security taxes and income tax withhold- 5 ing) is amended- 6 (A) by. striking out "clia pier 21 or 24" and 7 inserting in lieu thereof "chapter 3, 21, or 24"; and 8 (B) by striking out "remuneration" in para- 9 graph (2) and inserting in lieu thereof "remunera- 10 tion or other amount". 11 (3) Section 6501 (b) (relating to time returns 12 deemed filed) is amended- 13 (A) by striking out "chapter 21 or 24" in para- 14 graphs (1) and (2) and inserting in lieu thereof 15 "chapter 3, 21, or 24"; and 16 (B) by inserting after "taxes" in the heading 17 of paragraph (2) "and tax imposed by chapter 3". 18 (4) The amendments made by this subsection shall 19 take effect on the date of the enactment of this 4ct. 20 SEC. 106. FOREIGN TAX CREDIT. 21 (a) ALLOWANCE OF CREDiT TO CERTAIN N0NRESI- 22 DENT ALiENS ~1ND FOREIGN CORPORATIONS.- 23 (1) Subpart A of part III of subchapter N of 24 chapter 1 (relating to foreign tax credit) is amended 1767 PAGENO="0616" 164 1 by adding at the end thereof the following new section: 2 "SEC. 906. NONRESIDENT ALlEN INDIVIDUALS AND FOR- 3 EIGN CORPORATIONS. - 4 "(a) ALLOWANCE OF CREDJT.-A nonresident alien 5 individual or a foreign corporation engaged in trade or 6 business within the United States during the taxable year 7 shall be allowed a credit under section 901 for the amount 8 of any income, war profits, and excess profits taxes paid or 9 accrued during the taxable year (or deemed, under section 10 902, paid or accrued during the taxable year) to any foreign 11 country or possession of the United States with respect to 12 income effectively connected with the conduct of a trade or .13 business within the United States. 14 "(b) SPECIAL RULES.- 15 "(1) For purposes of subsection (a) and for pur- 16 poses of determining the deductions allowable under sec- 17 tione 873(a) and 882(c), in determining the amount of 18 any tax paid or accrued to any foreign country or posses- 19 sion there shall not be taken into account any amount of 20 tax to the extent the tax so paid or accrued is imposed 21 . with respect to income from sources within the United 22 States which would not be taxed by such foreign country * 23 or possession but for the fact that- 1768 PAGENO="0617" 165 1 "(A) in the case of a nonresident alien mdi- 2 vidual, such individual is a citizen or resident of such 3 foreign country or possession, or 4 "(B) in the case of a foreign corporation, such 5 corporation was created or organized under the law 6 of suci~t foreign country or possession or is domiciled 7 for tax purposes in. such country or possession. 8 "(2) For purposes of subsection (a), in applying 9 section 904 the taxpayer's taxable income shall be treated 10 as consisting only of the taxable income effectively con- 11 nected with the taxpayer's conduct of a trade or business 12 within the United States. 13 "(3) The credit allowed pursuant to subsection (a) 14 shall not be allowed against any tax imposed by section 15 871(a) (relating to income of nonresident alien individ- 16 ual not connected with United States business) or 881 17 (relating to income of foreign corporations not connected 18 with United States business). 19 "(4) For purposes of sections 902(a) and 78, a 20 foreign corporation choosing the benefits of this subpart 21 which receives dividends shall, with respect to such divi- 22 dends, be treated as a domestic corporation." 1769 PAGENO="0618" 166 1 (2) The table of sections' for such subpart A is 2 amended by adding at the end thereof the following: "Sec. 906. Nonresident alien individu,als and foreign cor~ porations." 3 (3) Section 874(c) is amended by striking out 4 "(c) FOREIGN TAX CREDIT NOT ALLOWED.-A non- 5 res~dent" and inserting in lieu thereof the following: 6 "(c) FOREIGN TAX CREDIT.-Except as provided in 7 section 906, a nonresident". 8 (4) Subsection (h) of section 901 (relating to 9 amount allowed) is amended by redesignating para- 10 graph (4) as paragraph (5), and by inserting after 11 paragraph (3) the following new paragraph: 12 "(4) NONRESIDENT ALIEN 1NDIT7IDUALS AND FOR- 13 EIGN CORPORA TIONS.-In the case of any nonresident 14 alien individual not described in section 876 and in the 15 case of any foreign corpora/ion, the amount determined pursuant to section 906; and 17 (5) Paragraph. (5) (as redesignated) of section 18 901 (b) is amended by striking out "or (3)," and in- 19 sert'ing in lieu thereof "(3), or (4),". 20 (6) The amendments made by this subsection shall 21 apply with respect to taxable years beginning after 22 December 31, 1966. in applying section 904 of the 23 internal Revenue Code of 1954 with respect to section 1770 PAGENO="0619" 1(37 1 906 of such Code, no amount may be carried from or to 2 any taxable year beginning before January 1, 1967, and 3 no such year shall be taken into account. 4 (b) ALIEN RESIDENTS OF THE UNITED STATES OR 5 PUERTO Rico.- 6 (1) Paragraph (3) of section 901 (b) (relating 7 to amount of foreign tax credit allowed in case of alien 8 resident of the United States or Puerto Rico). is amended. 9 by striking out ", if the foreign country of which such 10 alien resident is a citizen or subject, in imposing such 11 taxes, allows a similar credit to citizens of the United 12 States residing in such country". 13 (2) Section 901 is amended by redesignating sub- 14 sections (c) and (d) as subsections (d) and (e), and 15 by inserting after subsection (b) the following new 16 subsection: 17 "(c) SIMILAR CREDIT REQUIRED FOR CERTAIN ALIEN 18 RESIDENTS.-Whenever the President finds that- 19 "(1) a foreign country, in imposing inco~ne, war 20 profits, and excess profits taxes, does not allow to 21 citizens of the United States residing in such foreign 22 country a credit for any such taxes paid or accrued to 23 the United States or any foreign country, as the case 1771 PAGENO="0620" 168 1 may be, similar to the credit allowed under subsection 2 (b)(3), 3 "(2) such foreign country, when requested by the 4 United States to do so, has not acted to provide such a 5 similar credit to citizens of the United States residing 6 in such foreign country, and 7. "(3) it is in the public interest to allow the credit 8 under subsection (b) (3) to citizens or subjects of such 9 foreign country only if it allows such a similar credit to 10 citizens of the United States residing in such foreign 11 country, 12 the President shall proclaim that, for taxable years begin- 13 ning while the prcciamation remains in effect, the credit 14 under subsection (h) (3) shall be allowed to citizens or 15 subjects of such. foreign. country only if such foreign country, 16 in imposing income, war profits, and excess profits taxes, 17 allows to citizens of the United States residing in such foreign 18 country such a similar credit." 19 (3) Section 2014 (relating to credit for foreign 20 death taxes) is amended by striking out the second sen- 21 tence of subsection. (a), and by adding at the end of 22 such section the following new subsection: 23 "(h) SIMILAR CREDIT REQUIRED FOR CERTAIN 24 ALIEN RESIDEN7'S.-}J7henever the President finds that- 25 "(1) a foreign country, in imposing estate, inherit- 1772 PAGENO="0621" .169 1 ance, legacy, or succession taxes, does not allow to citi- 2 zens of the United States resident in such foreign coun- 3 try at the time of death a credit similar to the credit 4 allowed under subsection (a), 5 "(2) such foreign country, when requested by the 6 United States to do so has ru~it acted to provide such a 7 similar credit in the case of citizens of the United States 8 resident in such foreign country at the time of death, and 9 "(3) it is in the public interest to allow the credit 10 under subsection (a) in the ease of citizens or subjects 11 of such foreign country only if it allows such a similar 12 credit in the case of citizens of the United States resident 13 in such foreign country at the time of death, 14 the President shall proclaim that, in the case of citizens or 15 subjects of such foreign country dying while the proclamation 16 remains in effect, the credit under subsection (a) shall be al- 17 lowed only if such foreign country allows such a similar 18 credit in the case of citizens of the United States resident in 19 such foreign country at the time of death." 20 (4) The amendments made by this subsection 21 (other than paragraph (3)) shall apply with respect 22 to taxable years beginning after December 31, 1966. 23 The amendment made by parà graph (3) shall apply 24 with respect to estates of decedents dying after the date 25 of the enactment of this Act. 1773 PAGENO="0622" 170 1 (c) FOREIGN TAX CREDiT iN RESPECT OF INTEREST 2 REcEIVED FROM FOREIGN SUBSIDIARIES.- 3 (1) Section 904(f) (2) (relating to application of 4 limitations on foreign tax credit in case of certain interest 5 income) is amended- 6 (A) by striking out subparagraph (C) and 7 inserting in lieu thereof the following: 8 "(C) received from a corporation in which the 9 taxpayer (or one or more inciudible corporations in 10 an affiliated group, as defined in section 1504, of 11 which the taxpayer is a member) owns, directly or 12 indirectly, at least 10 percent of the voting stock,". 13 (B) by adding at the end thereof the following 14 new sentence: 15 "For purposes of subparagraph (C), stock owned, di- 16 reetly or indirect l~j, by or for a foreign corporation 17 shall be considered as being proportionately, owned by 18 its shareholders." 19 (2) The amendments made by paragraph (1) shall 20 apply to interest received after December 31, 1965, 21 in taxable years ending after such date. 1774 PAGENO="0623" iTt 1 SEC. 107. AMENDMENT TO PRESERVE EXISTING LAW ON 2 DEDUCTIONS UNDER SECTION 931. 3 (a) DEDUCTIONS.-Subsection (d) of section 931 (re- 4 lating to deductions) is amended to read as follows: 5 "(d' DEDuCTIoNs.- 6 "(1) GENERAL RULE.-Except as otherwise pro- 7 vided in this subsection and subsection (e), in the case 8 of persons entitled to the benefits of this section the 9 deductions shall be allowed only if and to the extent 10 that they are connected with income from sources within 11 the United States; and the proper apportionment and 12 allocation of the deductions with respect to sources of 13 income within and without the United States shall be 14 determined as provided in part 1, under regulations 15 prescribed by the Secretary or his delegate. 16 "(2) J!JXCEPTIONS.-The following deductions shall 17 he allowed whether or not they are connected with in- 18 come from sources ii,ithin the United States: 19 "(A) The deduction, for losses not connected 20 with the trade or business if incurred in transactions 21 entered into for profit, allowed by section 165(c) 1775 PAGENO="0624" 172 1 (2), but only if the profit, if such transaction had 2 resulted in a profit, would be taxable under this S subtitle. 4 "(B) The deduction, for losses of property not 5 connected with the trade or bnsiness if arising from 6 certain casualties or theft, allowed by section 165 7 (c) (3), but only if the loss is of property within 8 the United States. 9 "(C) The deduction for charitable contribu- 10 tions and gifts allowed by section 170. 11 "(3) DEDUCTION DISALLOWED.- "For disallowance of standard deduction, see section 142(b) (2)." 12 (b) EFFECTIVE DATE.-The amendment made by this .1 ~ section shall apply with respect to taxable years beginning 14 after December 31, 1966. 15 SEC. 108. ESTATES OF NONRESIDENTS NOT CiTIZENS. 16 (a) RATE OF TAx.-Subsection (a) of section 2101 17 (relating to tax imposed in case of estates of nonresidents 18 not citizens) is amended to read as follows: 19 "(a) RATE OF TAX.-Except as provided in section 20 2107, a tax computed in accordance with the following table 21 is hereby imposed on the transfer of the taxable estate, de- 1776 PAGENO="0625" 173 1 termined as provided in section 2106, of every decedent non- 2 resident not a citizen of the United States: "if the taxable estate is: The tax shall be: Not over $100,000 5% of the taxable e8tate. Over $100,000 but not over $500,000 $5,000, plus 10% of excess over Over $500,000 but not over $100,000. $1,000,000 $45,000, plus 15% of excess over Over $1,000,000 but not over $500,000. $2,000,000 $120,000, plus 20% of excess over $1,000,000. Over $2,000,000 $820,000, plus 25% of excess over $2,000,000." 3 (b) CREDITS AGAINST TAx.-Section 2102 (relating 4 to credits allowed against estate tax) is amended to read as 5 follows: 6 "SEC. 2102. CREDITS AGAINST TAX. 7 "(a) IN GENERAL.-The tax imposed by section 2101 8 shall be credited with the amounts determined in accordance 9 with sections 2011 to 2013, inclusive (relating to State death 10 taxes, gift tax, and tax on prior transfers), subject to the 11 special limitation provided in subsection (b). 12 "(b) SPECIAL LIMITATION.~-The maximum credit 13 allowed under section 2011 against the tax imposed by see- 14 tion 2101 for State death taxes paid shall be an amount 15 which bears the same ratio to the credit computed as pro- 16 vided in section 2011 (b) as the value of the property, as 17 determined for purposes of this chapter, upon which State 71-297 O-67-pt. 2-40 1777 PAGENO="0626" 174 1 death taxes were paid and which is included in the gross 2 estate under section 2103 bears to the value of the total gross 3 estate under section 2103. For purposes of this subsection, 4 the term `State death taxes' means the taxes described in 5 section 2011(a)." 6 (c) PROPERTY WITHIN THE UNiTED STATES.-Sec- 7 tion 2104 (relating to property within the United States) is 8 amended by adding at the end thereof the fQllowing new 9 subsection: 10 "(c) DEBT OBLIGATION&-For purposes of this sub- 11 chapter, debt obligations of- 12 "(1) a United States person, or 13 "(2) the United States, a State or any political 14 subdivision thereof, or the District of Columbia. 15 owned and held by a nonresident not a citizen of the United 16 States shall be deemed property within the United States. 17 This subsection shall not apply to a debt obligation to which 18 section 2105(b) applies or to a debt obligation of a domestic 19 corporation if any interest on such obligation, were such 20 interest received by the decedent at the time of his death, 21 would be treated by reason of section 861 (a) (1) (B) as* 22 income from sources without the United States." 1778 PAGENO="0627" 175 1 (d) PROPERTY WITHOUT THE UNITED STATES.-SUb- 2 section (b) of section 2105 (relating to bank deposits) is 3 amended to read as follows: `~`(b) CERTAIN BANK DEPoSITS, ETC.-For purposes 5 of this subchapter- 6 "(1) amounts described in section 861 (c) if any 7 interest thereon, were such interest received by the dece- 8 dent at the time of his death, would be treated by reason of 9 section 861 (a) (1) (A) as income from sources without 10 the United States, and ii. "(2) deposits with a foreign branch of a domestii~ 12 corporation or domestic partnership, if such branch is 13 engaged in the commercial banking business, 14 shall not be deemed property within the United States." 15 (e) DEFINITION OF TAXABLE ESTATE.'-Paragraph 16 (3) section 2106(a) (relating to deduction of exemption 17 from gross estate) is amended to read. as follows: 18 "(3) EXEMPTION.- 19 "(A) GENERAL RULE.~-An exemption of 20 $30,000. 21 "(B) RESIDENTS OF POSSESSIONS OF THE 22 . UNITED STATES.-In the case of a decedent who is 1779 PAGENO="0628" 176 1 considered to be a `nonresident not a citizen of the 2 United States' under the provisions of section~ 2~9, 3 the exemption shall be the greater of (i) $30,000, 4 or (ii) that proportion of the exemption authorized 5 by section 2052 which the value of that part of the 6 decedent's gross estate which at the time of his 7 death is situated in the United States bears to the 8 value of his entire gross estate wherever situated." 9 (f) SPECIAL METHODS OF COMPUTING TAx.-Sub- 10 chapter B of chapter 11 (relating to estates of nonresidents 11 not citizens) is amended by adding at the end thereof the fol- 12 lowing new sections: 13 "SEC. 2107. EXPATRIATION TO AVOID TAX. 14 "(a) RATE OF TAx.-A tax computed in accordance 15 with the table contained in section 2001 is hereby imposed 16 on the transfer of the taxable estate, determined as provided 17 in section 2106, of every decedent nonresident not a citizen 18 of the United States dying after the date of enactment of this 19 section, if after March 8, 1965, and within the 10-year pe- 20 nod ending with the date of death such decedent lost United 21 States citizenship, unless such loss did not have for one of its 22 principal purposes the avoidance of taxes under this subtitle 23 or subtitle A. 24 "(b) GROSS ESTATE.-FoP purposes of the tax imposed 1780 PAGENO="0629" 177 1 by subsection (a), the value of the gross estate of every 2 decedent to whom subsection (a) applies shall be determined 3 as prOVide(1 in sect jOfl 2103, except that- 4 "(1) if SUCh (iccedent O!(71ed (wit/tin the meaning 5 of section 958(a)) at the time of his death 10 percent 6 or moie of the total conthined voitny power of all classes 7 of stock entitled to vote of a foreign corporation, and 8 "(2) if .such decedent owned (within the meaning 9 of section 958(a)), or is considered to have owned 10 (by applying the ownership rules of section 958(b)), 11 at the time of his death, more than 50 percent of the 12 total combined votiiig power of all classes of stock en- 13 titled to vote of such foreign corporation, 14 then that proportion of the fair market value of the stock of 15 such foreign corporation owned (within the meaning of sec- 16 tion 958(a)) by such decedent at the time of his death, 17 which the fair market value of any assets owned by such for- 18 eign corporation and situated in the United States, at the time 19 of his death, bears to the total fair market value of all assets 20 owned by such foreign corporation at the time of his death, 21 shall be included in the gross estate of such decedent. For 22 purposes of the preceding sentence, a decedent shall be 23 treated as owning stock of a foreign corporation at the time 1781 PAGENO="0630" 178 1 of his death if, at the time of a transfer, by trust or otherwise, 2 within the meaning of sections 2035 to 2038, inclusive, he 3 owned such stock. 4 "(c) CREDJTS.-T he tax imposed by subsection (a) shall 5 be credited with the amounts determined in accordance with 6 section 2102. 7 "(d) EXCEPTION FOR Loss OF CITIZENSHIP FOR CER- 8 TAIN CAUSE5.-Subsection (a) shall not apply to the trans- 9 fer of the estate of a decedent whose loss of United States 10 citizenship resulted from the application of section 301 (b), 11 350, or 355 of the Immigration and Nationality Act, as 12 amended (8 U.S.C. 1401 (b), 1482, or 1487). 13 "(e) BURDEN OF PR0OF.-If the Secretary or his dele- 14 gate establishes that it is reasonable to believe that an mdi- 15 vidual's loss of United States citizenship would, but for this 16 section, result in a substantial reduction in the estate, in- 17 heritance, legacy, and succession taxes in respect of the 18 transfer of his estate, the burden of proving that such loss of 19~ citizenship did not have for one of its principal purposes the 20 avoidance of taxes under this subtitle or subtitle A shall be 21 on the executor of such individual's estate. 22 "SEC. 2108. APPLICATION OF PRE-1967 ESTATE TAX PRO- 23 VISIONS. 24 "(a) IMPOSITION OF MORE BURDENSOME TAX BY 25 FOREIGN CoUNTRY.-Wheneve~' the President finds that- 1782 PAGENO="0631" 179 .1 "(1) under the laws of any foreign country, con- 2 sidering the tax system of such foreign country, a more 3 burdensome tax is imposed by such foreign coun try on 4 the transfer of estates of (lecedents who were citizens of 5 the United States and not residents of such foreign 6 country than the tax imposed by this subchapter on the 7 transfer of estates of decedents who were residents of 8 sue/i foreign country, 9 "(2) such foreign country, when requested by the 10 United States to do so, has not acted to revise or reduce 11 such tax so that it is no more burdensome 1/ian the tax 12 imposed by this subchapter on the transfer of estates 13 of decedents who were residents of such foreign country, 14 and 15 "(3) it is in the public interest to apply pre-1967 16 tax provisions in accordance with this section to the 17 transfer of estates of decedents who were residents of 18 such foreign country, 19 the President shall proclaim that the tax on the transfer of 20 the estate of every decedent `who was a resident of such for- 21 eign country at the time of his death shall, in the case of 22 decedents dying after the date of such proclamation, be 23 determined under this subchapter without regard to amend- 24 ments made to sections 2101 (`relating to tax imposed), 25 2102 (relating to credits against iaa), 2106 (relating to 1783 PAGENO="0632" 180 1 taxable estate), and 6018 (relating to estate tax returns) 2 on or after the date of enactment of this section. 3 "(b) ALLEVIATION OF MORE BURDENSOME TAX.- 4 Whenever the President finds that the laws of any fO'i(igit 5 country with re.Sj)eei to which 1h~? Pfe~i(l('flt has made a ploc- 6 lamation under sub~eciion (a) have been modified so I/tat 7 the tax on the transfer of estates of tlt'cedents who were 8 citizens of the United Slates and not residents of such 9 foreign country `is `no longer IflOic burdensome titan the 10 tax imposed by this subchapter on the transfer of e~t at (.8 11 of decedents who wetc residents of such fGreign country, 12 he s/tail proclaim that the tax on the transfer of the 13 estate of every decedent who was a resident of such 14 foreign country at the time of his death shall, in 1/ic case 15 of decedenls dying after the (late of such proclamation, be 16 deteimineci under this subchapter wit/tout regard to sub- 17 section (a). 18 "(c) No~rIF1cATIoN OF CONGRESS REQU1RED.-NO 19 proclamati'~n s/tall be issued by 1/ic President pursuant to 20 this section unless, (it least 30 days prior to such proclaina- 21 tion, Ite has notified the Seit ate and 1/ic house of Repre- 22 sen tatives of his iii! ention to issue sue/i proclamation. 23 "(d) L1IPLE]1ENTATION BY i?EGULATIONS.-Thle See- 24 retary or his delegate shall prescribe such regulations as ma!, 25 be necessary or appropriate to implement this section." 1784 PAGENO="0633" 181 1 (g) EsT~1 TB T1ix RETUI?NS._Paragraph (2) of see- 2 tion. 60.18(a) (relating to estates of nonresk/ents not citi- 3 zens) iR~ ((mellth'ci b'j striling out "$2,000" and inserting in 4 lien, thereof "$30,000". 5 (Ii) GLEJ?T('Y~111 A]IENJ)1IENT.-The table of sections for 6 subchapter B of chapter ii (`relating to estates of nonresi- 7 dents not citizens) is amended hij ac/ding at the end thereof 8 the following: "S('C. 2707. Fxpatriat~on. to (`void tar. "Sec. 2108. ul ppNcation of prc-1.967 estate tax provisions." 9 (i) Er'FEC'i'zJ'E D~1TE.-The anl(ndments made by this 10 section. ~1,all aJ)pli/ `with respect to estates of decedents dying 11 after t1~e date of the enactment of this Act. 12 SEC. 109. TAX ON GiFTS OF NO]VRESJDENTS NOT CITI.. 13 ZENS. 14 (of) JJJpo'~/7'JoN Of' Tjx.--,Subsectjon (a) of section 15 2501 (relating to general rule for imposition of tax) is 16 amended to read as follows: 17 "(a) TJX~1BLE TR.INSI'El?S.-- 18 "(1) GENEnA11 1?UL1~.-For the calendar year 19 1955 and each calendar //ear thereafter a tax, computed 20 as procided `in section 2502, `is hereby imposed on the 21 transfer of property by gift during such calendar year by 22 any indh'iduai, resident or nonresident. 23 "(2) T1f~iNs1'Eits OF IXTANGIBLE PROPERTY.- 24 Except as provided in paragraph (3), paragraph (1) 1785 PAGENO="0634" 182 1 shall not apply to the Iransf Cl of intangible pro perty by 2 a nonresident not a citizen of the United Slates. 3 "(3) BXCEPTI0NS.-Palagraph (2) shall not ~t/)J)l~/ in the case of a donor who at any time after March 8, 1965, and within, i/ic lO-ycar period ending 6 wit/i the (late of transfer lost Uujted States citizenship unless- 8 "(A) such donor's loss of United States citi- 9 Zefls/11j3 resulted from the application of section 10 301 (b), 350, or 355 of 1/ic Inun igratioii and Na- 11 tionality Act, as amended (8 U.S.C. 1401(b), 12 1482, or 1487), or 13 "(B) such loss did not hare for one of its prin- 14 cipal purposes the avoidance of laces `under this 15 subtitle or subtitle A. 16 "(4) BURDEN OF PROOF.-If 1/ic Secretary or his 17 delegate establishes that it is reasonable to believe that 18 an individual's loss of Llllile(l States CitLcns/lip would, 19 but for paragraph (3), result in a substantial reduction 20 for the calendar `ycal in the fares on 1/ic transfer of 21 property by gift, 1/ic mi r(l(n of proving that sue/i loss 22 of citizenship (lid not have for one of~ ~i5 principal pur- 23 poses 1/ic avoidance of (ui-es under thii~ subijile or subtitle 24 A shall be on sue/i individual." 25 (b) TR;1iVSI~EI~ IN .C~xi~miJ~,-Svb~ef ion (b) of see- 1786 PAGENO="0635" 183 1 tion 2511 (relating to situs rule for stock in a corporation) 2 is amended to read as follows: 3 "(b) INTJNGIBLE PROPERTY.-FOr purposes of this 4 chapter, in the case of a nonresident not a citizen of the 5 United States who is excepted from the application of section 6 2501 (a) (2)- 7 "(1) shares of stock issued by a domestic corpora- 8 tion, and 9 "(2) debt obligations of- 10 "(A) a United States person, or 11 "(B) the United States, a State or any political 12 subdivision thereof, or the District of Columbia, 13 which are owned by such nonresident shall be deemed to be 14 property situated within the United States." 15 (c) EFFECTIVE DATE.-The amendments made by this 16 section shall apply with respect to the calender year 1967 17 and all calendar years thereafter. 18 SEC. 110. TREATY OBLIGATIONS. 19 No amendment made by this title shall apply in any case 20 where its application would be contrary to any treaty obliga- 21 tion of the United States. For purposes of the preceding 22 sentence, the extension of a benefit provided by any amend- 23 ment made by this title shall not be deemed to be contrary 24 to a treaty obligation of the United States. 1787 PAGENO="0636" 184 1 TITLE H-OTHER AMENDMENTS 2 TO INTERNAL RE VENUE CODE 3 SEC. 201. APPLICATION OF IN VESTMENT CREDIT TO 4 PROPERTY USED IN POSSESSIONS OF THE 5 UNITED STATES. 6 (a) PROPERTY USED BY DoiIEsTlc CORPORATIONS, ~ ETC.-Section 48(u) (2) (13) (ielating to propertY used out- 8 side the United States) is am ended- 9 (1) by stiiIin~j out "and at the end of clause (v); 10 (.2) by sfri1~inçj out the period at the end of clause 11 (vi) and inserting in lieu thereof "; and"; and 12 (3) by adding at the en(l thereof the following new 13 clause: 14 "(vii) any property which i~s~ owned by a 15 domestic corporation (other than a corporation 16 entitled to the benefits of section 931 or 934(b)) 17 or bij a United States citizen (other than a ciii- 18 zen. entitled to the benefits of section 931, 93,?, 19 933, or 934(b)) and which is used predomi- 20 nantly in a possession, of the United States by 21 such a corporation or such a citizen, or by a 22 corporation created or organized in, or under 23 the law of, a possession of the United States." 24 (b) EFFECTiVE DA TE.-The amendments macic by sub- 1788 PAGENO="0637" 185 1 section (a) s/i all apply to taxable years ending after Decern- 2 ber 31, 196:. hut Olll!J ii'it/i respect to property placed in, 3 serrice after such date. in appl~jinq section 46(b) of the 4 Internal Revenue Code of 195.4 (relating to carryhack and 5 carryorer of iiniu~ed Cre(lit.~), the amount of any inrestment 6 credit carryback to any taxable year ciid~ng on or before 7 December 31, 1965, shall be (l(t?rfliIflC(i WithOilt regard to the S anien(lniei1t.~ lflOd(' hi1 this S('Ct~O/i. 9 SEC. 202. DEDUCTION OF MEDICAL EXPENSES OF INDI. 10 VIl)UALS AGE 65 OR OVER. 11 (a) J?EPEAL OF A]IENDMENTS A~LIDE BY SOCIAL SE- 12 CURITY A MENDMEiVTS oi~~ 1965.-Subsections (a) and (b) 13 of section 106 of the Social Seen riti/ Amendments of 1965 14 are repealed. 15 (h) (Y0s7' OF ~11J~J)I(~.1 L JNSUIMNCE.-Section, 213(a) 16 (relatinq to allowance of dcthtetio~ for medical, dental, etc., 17 e;rpenses) is amended- 18 (1) by striking out "and" at the end of paragraph 19 (1)(A); 20 (2) h11 inserting after "such expenses" ifl paragraph 21. (1) (B) "(reduced by any amount deductible under sub- 22 paragraph (C))"; 23 (3) by striking out the period at the end of para- 24 graph (1) (B) and inserting in lieu thereof ", and"; 1789 PAGENO="0638" 186 1 (4) by adding cit the end of paragraph (1) the fol- 2 lowing new subparagraph: 3 "(C) an amount (not in excess of $150) equal 4 to one-half of the expenses paid during the taxable 5 year for insurance which constitutes medical care 6 for the taxpayer, his spouse, and dependents (other 7 than any depcnthnt described in subparagraph 8 (A))."; 9 (5) by striking out "and" at the end of paragraph 10 (2)(B); 11 (6) by inserting after "sue/i expenses" in para- 12 graph (2) (C) "(reduced by ani, amount deductible 13 under subparagraph (D))"; 14 (7) by striking out the period at the end of para- 15 graph (2) (C) and inserting in lieu thereof ", and"; 16 and 17 (8) by adding at the end of paragraph (2) the 18 following new subparagraph: 19 "(D) an amount (not in excess of $150) equal 20 to one-half of the expenses paid during the taxable 21 year for insurance which constitutes medical care 22 for such dependents (other than any dependent de- 23 scribed in paragraph (1) (A)) ." 24 (c) EFFECTIFE DATE.-The repeal and amendments 1790 PAGENO="0639" 187 1 made by this section shall apply to taxable years beginning 2 after December 31, 1966. 3 SEC. 203. BASIS OF PROPERTY RECEIVED ON LIQUIDA. 4 TION OF SUBSIDIARY. 5 (a) DEF1zcITlo~v OF PU1?CIl;ISE.-Section 334(b) (3) 6 (relating to definition of purchase) is amended by adding at 7 the end thereof the following new sentence 8 "N of w ifhsfriiufwg SUbJ)arafJraJ)h (C) of this para- 9 graph~, for purposes of paragraph (2) (B), the term 10 `pui~c/iase' also means an (Icqiusition of stock from a cor-. 11 poration when ownership of sue/i clock would be attributed 12 under section 318(a) to the person acquiring such 13 stock, if I/ic stock of sue/i corporation by reason of which 14 such ownership would be attributed was acquired by p?(rcllaSe (within the meaning of the preceding sen- 16 fence)." 17 (b) PERIOD OF AcQuIsn'Iox.-&ction 334(b) (2) 18 (B) (relating to exception) is amended by striking out "dur- 19 ing a period of not more than 12 months," and inserting in 20 lieu thereof "during a 12-month period beginning with the 21 earlier of.- 22 "(i) the (late of the first acquisition by pur- 23 chase of such stock, or 24 "(ii) if any of such stock was acquired in 1791 PAGENO="0640" 188 1 an acquisition which is a purchase within the 2 meaning of the second sentence of paragraph 3 (3), the date on which the distributee is first 4 considered under section 318(a) as owning 5 stock owned by the corporation from which such 6 acquisition was made,". (c) DISTI?IBuTI0N OF iNSTALLMENT OBUGATJ0NS.- 8 Section 453(d) (4) (A) (relatinq to distribution of install- 9 ment obligations in certain liquidations) is amended to read 10 as follows: 11 "(A) LIQrImf TJONS TO TVIITCH SECTION 332 12 APPLIES.-if- 13 "(i) an installment obliqation is distributed 14 in a liquidation to which section 332 (relating to cofl?J)lete liqui(/atrnn~ of *c?Ibsidiaries) applies, and 17 "(ii) the basis of such obligation in' the 18 hands of the distributee is determined under 19 section 334 (b) (1), 20 then no gain or loss wit/i respect to the distribution 21 of such obligation shall he recognized by the c/is- 22 tributing corporation." 23 (d) EPrI~CTlr~E D117'Es.-The amendment made by sub- 24 section (a) shall apply only with respect to acquisitions of 25 stock after December 31, 1965. The amendments made by 1792 PAGENO="0641" 189 1 sithseclions (b) and (c) shall ap])iy only with respect to dis- 2 tributions made after the date of the enactment of this Act. 3 SEC. 204. TRANSFERS OF STOCK AND SECURITIES TO 4 CORPORATIONS CONTROLLED BY TRANS. 5 FERORS. 6 (a) TRANSFERS TO INVESTMENT COMPANIES.-The 7 first sentence of section 3ô1 (a) (relating to transfers to coy- 8 porations controlled by transferor) is amended by striking out 9 "to a corporation" and inserting in lieu thereof "to a corpora- 10 tio'n (including an investment company)". 11 (b) E1~1~EcrJvE DíITE.-The amendment made by sub- 12 section (a) shall apply with respect to transfers of property 13 whether made before, on, or after the date of the enactment 14 of this Act. ~ SEC. 205. MINIMUM AMOUNT TREATED AS EARNED IN- 16 COME FOR RETIREMENT PLANS OF CERTAIN 17 SELF-EMPLOYED INDIViDUALS. 18 (a) INCREASE TO $6,600.-Section 401 (c) (2) (B) (re- 19 lating to earned income when both personal services and capi- 20 tal are material income-producing factors) is amended by 21 striking out "$2,500" each place it appears therein and in- 22 serting in lieu thereof "$6,600". 23 (b) EFFECTIVE DATE.-The amendment made by sub- 24 section (a) shall apply to taxable years beginning after De- 25 ceniber 31, 1965. 7 1-297 0-67-pt. 2-41 1793 PAGENO="0642" 190 1 SEC. 206. REMOVAL OF SPECIAL LIMITATIONS WITH RE- 2 SPECT TO DEDUCTIBILITY OF CONTRIBU- 3 TIONS TO PENSION PLANS BY SELF-EM- 4 PLOYED INDIVIDUALS. 5 (a) REi~IOVAL OF SPECIAL LIi1In~ATIoNs.-Paragraph 6 (10) of section 404 (a) (reiatinq to special limitation On 7 amount allowed as deduction for self-employed individuals 8 for contributions to certain pension, etc., plans) is repealed. 9 (b) (I) Each of the follow'inq provisions of section 401 10 is amended by striking out "(determined without regard to ~ section 404 (a) (10))" each place it~ appears: 12 (A) Subsection (a) (10) (A) (ii). 13 (B) Subparagraphs (A) and (B) of subsection 14 (d) (5). 15 (C) Subparagraph (A) of subsection (d) (6). 16 (D) Subparagraphs (A) and (B) (i) of subsec- 17 tion (e) (1). 18 (E) Subparagraphs (B) and (C) and the last 19 sentence of subsection (e) (3). 20 (2) Subparagraph (A) of section 404(e) (2) is 21 amended by striking out "(determined without regard to 22 * / / subsectwn (~) (10)) . 23 (3) Paragraph (1) and subparagraph (B) of para- 24 graph (2) of section 404(e) are each amended by striking 1794 PAGENO="0643" 191 1 out "(determined wit hout regard to paragraph (10) 2 thereof)". 3 (c) DEFINITIoN OF EARNED INCOME.-Section, 401 4 (c) (2) (relating to definition of eürned income for certain 5 pension and profit-sharing plans) is amended by striking out 6 snbparagraphs (A) and (B) and inserting in lie~L thereof 7 the following: 8 "(A) IN GENERAL.-The term `earned income' 9 means the net earnings from self-employment (as de- 10 fined in section 1402(a)), but such net earnings 11 shall be determined- 12 "(i) only with respect to a trade or busi- 13 ness in which personal services of the taxpayer 14 are a material income-producing factor, 15 "(ii) without regard to paragraphs (4) 16 and (5) of section 1402(c), "(iii) in the case of any individual who is 18 treated as an employee under sections 3121 (d) 19 (3) (A), (C), or (D), withOut regard to 20 paragraph (2) of sectiOn 1402(c), and 21 "(iv) without regard to items which are 22 not included in gross income for purposes of this :: chaptei, and the deductions pro perlij allocable to or chargeable agaimst such items. 25 For purposes of this subparagraph, section 1402, as 1795 PAGENO="0644" 192 1 in effect for a taxable year ending on December 31, 2 1962, shall be treated as hai~'inq been in effect for all 3 taxable years ending before such date." 4 (ci) EFFECTIVE DATE.-The amendments macic by 5 subsections (a) and (b) shall appl?J with respect to taxable 6 years beginning after December 31, 1967. 7 SEC. 207. TREATMENT OF CERTAIN INCOME OF AU- 8 THORS, INVENTORS, ETC., AS EARNED IN- 9 COME FOR RETIREMENT PLAN PURPOSES. 10 (a) INC QME FROM DISPOSITION OF PROPERTY ORE- 11 ATED BY TAXPAYER.-Section 401 (c) (2) (relating to defi- 12 nition of earned income) is amended by adding at the end 13 thereof the following new subparagraph: 14 "(0) INCOME FROM DISPOSITION OF CER- 15 TAIN PROPERTY.-For purposes of this section, the 16 term `earned income' includes gains (other than any 17 gain which is treated under any provision of this 18 chapter as gain from the sale or exchange of a 19 capital asset) and net earnings derived from the 20 sale or other disposition of, the transfer of any in- 21 terest in, or the licensing of the use of property 22 (other than good will) by an individual whose per- 23 sonal efforts created such property." 24 (b) EPFECTIVE DATE.-The amendment made by sub- 1796 PAGENO="0645" 193 1 section (a) shall apply to taxable years e~zding after the date 2 of the enactment of this Act. 3 SEC. 208. EXCLUSION OF CERTAIN RENTS FROM PER. 4 SONAL HOLDING COMPANY INCOME. 5 (a) RENTS FROM LEASES OF CERTAIN TANGIBLE 6 PERSONAL PROPERTY.-Section 543(b) (3) (relating to 7 adjusted income from rents) is amended by striking out "but 8 does not include amounts constituting personal holding corn- 9 pany income under subsection (a) (6), nor copyright royal- 10 ties (as defined in subsection (a) (4) nor produced film rents 11 (as defined in subsection (a) (5) (B)) ." and inserting in 12 lieu thereof the following: "but such term does not include- 13 "(A) amounts constituting personal holding 14 company income under subsection (a) (6), 15 "(B) copyright royalties (as defined in sub- 16 section (a) (4)), 17 "(C) produced film rents (as defined in sub- 18 section (a) (5) (B)), or 19 "(D) compensation, however designated, for the 20 use of, or the right to use, any tangible personal 21 property manufactured or produced by the taxpayer, 22 if during the taxable year the taxpayer is engaged 23 in substantial ma~nufacturing or production of 24 tangible personal property of the same type.'~ 1797 PAGENO="0646" 194 1 (b) TECHNICAL AMENDMENTS.- 2 (1) Section 543(a) (2) (relating to adjusted in- 3 come from rents included in personal holding company 4 income) is amended by striking out the last sentence 5 thereof. 6 (2) Section 543(b) (2) (relating to definition of 7 adjusted ordinary gross income) is amended by adding 8 at the end thereof the following new subparagraph: 9 "(D) CERTAIN EXCLUDED RENTS.-From the 10 gross income consisting of compensation described 11 in subparagraph (D) of paragraph (3) subtract 12 the amount allowable a~ deductions for the items 13 described in clauses (i), (ii), (iii), and (iv) of 14 subparagraph (A) to the extent allocable, under 15 regulations prescribed by the Secretary or his dele- 16 gate, to such gross income. The amount subtracted 17 under this subparagraph shall not exceed such gross 18 income." 19 (c) EFFECTIVE DATE .-T he amendments made by 20 subsections (a) and (b) shall apply to taxable years begin- 21 fling after the date of the enactment of this Act. Such 22 amendments shall also apply, at the election of the taxpayer 23 (made at such time and in such manner as the Secretary or 1798 PAGENO="0647" 195 1 his delegate may prescribe), to taxable years beginning on 2 or before such date and ending after December 31, 1965. 3 SEC. 209. PERCENTAGE DEPLETION RATE FOR CERTAIN 4 CLAY BEARiNG ALUMINA. 5 (a) 23 PERCENT RATE.-Section 613(b) (relating to 6 percentage depletion rates) is amended- 7 (1) by inserting "clay, laterite, and nephelite sye- 8 nite" after "anorthosite" in paragraph (2) (B); and 9 (2) by striking out "if paragraph (5) (B) does not 10 apply" in paragraph (3) (B) and inserting in lieu 11 thereof "if neither paragraph (2) (B) nor (5) (B) ap- 12 plies". 13 (b) TREATMENT PROCESSES.-Section 613(c) (4) 14 (relating to treatment processes considered as mining) is 15 amended- 16 (1) by striking out "and" at the end of subpara- 17 graph (G), 18 `(2) by redesignating subparagraph (H) as (I), 19 and by inserting after subparagraph (G) the following 20 new subparagraph: 21 "(H) in the case of clay, laterite, and nephelite 22 syenite from deposits in the United States (to the 23 extent that alumina and aluminum compounds are 1799 PAGENO="0648" 196 1 extracted therefrom)-all processes applied to derive 2 alumina or aluminum compounds therefrom; and". 3 (c) EFFECTIVE DATE.-The amendments made by stth- 4 sections (a) and (b) shall apply to taxable years beginning 5 after the date of the enactment of this Act. 6 SEC. 210. PERCENTAGE DEPLETION RATE FOR CLAM 7 AND OYSTER SHELLS. 8 (a) 15 PERCENT RATE.-Section 613(b) (relating 9 to percentage depletion rates) is amended- 10 (1) by striking out "mollusk shells (including clam 11 shells and oyster shells) ," in paragraph (5) (A), and 12 (2) by inserting "mollusk shells (including clam 13 shells and oyster s/tells) ," after `marble," in paragraph 14 (5). 15 (b) EFFECTIVE DATE.-The amendments made by sub- 16 section (a) shall apply to taxable years beginning after the 17 date of the enactment of this Act. 18 SEC. 211. SINTERING AND BURNING OF SHALE, CLAY, 19 AND SLATE USED AS LIGHTWEIGHT AGGRE- 20 GATES. 21 (a) TREATMENT PROCESSES.-Section 613(c) (4) 22 (relating to treatment processes considered as mining) is 23 amended by striking out "and the furnacing of quicksilver 1800 PAGENO="0649" 197 1 ores" in subparagraph (E) and inserting in lieu thereof 2 "the furnacing of quicksilver ores, and the sintering or burn- 3 ing of shale, clay, and slate used or sold for use as lightweight 4 aggregates". 5 (b) EFFECTiVE DATE.-The amendment made by sub- 6 section (a) shall apply to taxable years beginning after the 7 date of the enactment of this Act. 8 SEC. 212. STRADDLES. 9 (a) TREATMENT AS SHORT-TERM CAPITAL GAIN.- 10 Section 1234 (relating to options) is amended by redesig- 11 nating subsection (c) as subsection (d) and by inserting after 12 subsection (b) the following new subsection: 13 "(c) SPECIAL RULE FOR GRANTORS OF STRADDLES.- 14 "(1) GAIN ON LAPSE.-In the case of gain on lapse 15 of an option granted by the taxpayer as part of a strad- 16 dle, the gain shall be deemed to be gain from the sale or 17 exchange of a capital asset held for not more than 6 18 months on the day that the option expired. 19 "(2) EXCEPTION.-This subsection shall not apply 20 to any person who holds securities for sale to customers 21 in the ordinary course of his trade or business. 22 "(3) DEFIN1TIONS.-POr purposes of this subsec- 23 tiom- 24 "(A) The term `straddle' means a simultane- 25 ously granted combinatiofl of an option to buy, and 1801 PAGENO="0650" 198 an option to sell, the same quantity of a security at 2 the same price during the same period of time. 3 "(B) The term `security' has the meaning as- 4 signed to such term by section 1236(c)." 5 (b) EFFECTIVE DATE.-The amendments made by sub- 6 section (a) shall apply to straddle transactions entered into 7 after Jannary 25, 1965, in taxable years ending after such 8 date. 9 SEC. 213. TAX TREATMENT OF PER.UNIT RETAIN ALLO. 10 CATIONS. ii. (a) TAX TREATMENT OF COOPERATIVES.- 12 (1) Section 1382(a) (relating to gross income of 13 cooperatives) is amended by striking out the period at 14 the end thereof and inserting "or by reason of any amount 15 paid to a patron as a per-unit retain allocation (as de- 16 fined in section 1388(f)) ." 17 (2) Section 1382(b) is amended- 18 (A) by striking out "(b) PATRONAGE Div- 19 IDENDS.-" and inserting in lieu thereof "(b) PA- 20 TRONAGE DIVIDENDS AND PER-UNiT RETAIN 21 ALLOCATIONS.-", 22 (B) by striking out "or" at the end of para- 23 graph (1), 24 (C) by striking out the period at the end of 1802 PAGENO="0651" 199 1 paragraph (2) and inserting a semico~on in lieu 2 thereof, 3 (D) by striking out the sentence following para- 4 graph (2) and inserting in lieu thereof the following: 5 "(3) as per-unit retain allocations, to the extent paid 6 in qualified per-unit retain certificates (as defined in sec- 7 tion 1388(h)) with respect to marketing occurring dur- 8 ing such taxable year; or 9 "(4) in money or other property (except per-unit 10 retain certificates) in redemption of a non qualified per- 11 unit retain certificate which was paid as a per-unit retain 12 allocation during the payment period for the taxable year 13 during which the marketing occurred." 14 "For purposes of this title, any amount not taken into ac- 15 count under the preceding sentence shall, in the case of an 16 amount described in paragraph (1) or (2), be treated in 17 the same manner as an item of gross income and as a deduc- 18 tion therefrom, and in the case of an amount described in 19 paragraph (3) or (4), be treated as a deduction in arriving 20 at gross income." 21 (3) Section 1382(e) is amended to read as fol- 22 lows: 23 "(e) PRODUCTS MARKETED UNDER POOLING AR- 24 RANGEMENTS.-FOr purposes of subsection, (b), in, the case 25 of a pooling arrangement for the marketing of products- 1803 PAGENO="0652" 200. 1 "(1) the patronage shall (to the extent provided 2 in regulations prescribed by the Secretary or his dele- 3 gate) be treated as patronage occurring during the tax- 4 able year in which the pool closes, and 5 "(2) the marketing of products shall be treated as 6 occurring during any of the taxable years in which the* pool is open." 8 (4) Section 1382(f) is amended by striking out 9 "subsection (b)" and inserting in lieu thereof "para- 10 graphs (1) and (2) of subsection (b)". (5) The heading for section 1383 is amended by 12 striking out the period at the end thereof and inserting 13 "OR NONQUALIFIED PER-UNIT RETAIN CERTIFI- 14 GATES." 15 (6) Section 1383 (a) is amended- 16 (A) by striking out "section 1382(b) (2)" and 17 inserting in lieu thereof "section 1382(b) (2) or 18 (4),", 19 (B) by striking out "non qualified written no- 20 tices of allocation" each place it appears and in- 21 serting, in lieu thereof "non qualified written notices 22 of allocation or non qualified per-unit retain certifi- 23 cates", and 24 (C) by striking out "qualified written notices 1804 PAGENO="0653" 201 1 of allocation" and inserting in lieu thereof "qual- 2 ified written notices of allocation or qualified per-unit 3 retain certificates (as the case may be)". 4 . (7) Section 1383(b) (2) is amended- (A) by striking out "non qualified written no- 6 tice of allocation" and inserting in lieu thereof "non- qualified written notice of allocation or non~jualified 8 ver-unit retain certificate", (B) by striking out "qualified written notice of 10 allocation" and inserting in lieu thereof "qualified 11 written notice of allocation or qualified per-unit re- 12 tam certificate (as the case may be)", 13 (0) by striking out "such written notice 0f 14 * . . ten notwe of allocation or per-unit retain certificate 15 allocation" and inserting in lieu thereof "such writ- 16 and 17 (D) by striking out "section 1382(b) (2)" and 18 . . . inserting in lieu thereof "section 1382(b) (2) or 19 (4),". 20 (8) The table of sections for part I of subchapter 21 T of chapter 1 is amended by striking out- "Sec. 1383. Computation of tax where cooperative redeems non qualified written notices of allocation." 22 and inserting in lieu thereof- "Sec. 1383. Computation of tax where cooperative redeems non qualifl&t written notices of allocation or nonqualifled per-unit retain certificates." 1805 PAGENO="0654" 202 1 (b) TAX TREATMENT BY PATRONS.- 2 (1) Section 1385(a) is amended by striking out 3 "and" at the end of paragraph (1), by striking out the 4 period at the end of paragraph (2) and inserting in lieu 5. thereof ", and", and by adding at the end thereof the fol- 6 lowing new paragraph: 7 "(3) the amount of any per-unit retain allocation 8 which is paid in qualified per-unit retain certificates and 9 which is received by him during the taxable year from an 10 organization described in section 1381 (a) ." 11 (2) The heading for section 13S'~5(c) is amended by 12 striking out "ALLOCATIoN" and inserting in lieu thereof 13 "ALLOCATION AND CERTAIN NONQUALIFIED PER- 14 UNIT RETAIN CERTIFICATES". 15 (3) Section 1385(c) (1) is amended to read as fol- 16 lows: 17 "(1.) APPLICATION OF SUBSECTION.-This subsec- 18 tion shall apply to- 19 "(A) any non qualified written notice of alloca- 20 tion which- 21 "(i) was paid as a patronage dividend, or 22 "(ii) was paid by an organization described 23 in section 1381(a) (1) on a patronage basis 24 with respect to earnings derived from business 1806 PAGENO="0655" 203 1 or sources described in section 1382(c) (2) (A), 2 and 3 "(B) any nonqualified per-unit retain certif- 4 icate which was paid as a per-unit retain alloca- 5 tion." 6 (4) Section 1385(c)(2) is amended- 7 (A) by striking out "non qualified written notice 8 of allocation" and inserting in lieu thereof "non- 9 qualified written notice of allocation or non qualified 10 per-unit retain certificate", and 11 (B) by striking out "such written notice of al- 12 location" each place it appears and inserting in lieu 13 thereof "such written notice of allocation or per-unit 14 retain certificate". 15 (5) The table of parts for subchapter T of chapter 16 1 is amended by striking out- "Part II. Tax treatment by patrons of patronage dividends." 17 and inserting in lieu thereof- "Part II. Tax treatment by patrons of patronage dividends and per-unit retain allocations." 18 (c) DEFINITIoNS.- 19 (1) (A) Section 1388(e) (1) is amended by strik- 20 ing out "allocation)" and inserting in lieu thereof "allo- 21 cation or a per-unit retain certificate)". 22 (B) Section 1388(e) (2) is amended by striking 1807 PAGENO="0656" 204 1 out "allocation" and inserting in lieu thereof "alloca- 2 tion or qualified per-unit retain certificate". 3 (2) Section 1388 is amended by adding at the end 4 thereof the following new subsections: 5 "(f) PER-LINIT RETAIN ALLOCATION.-FOr purposes 6 of this subchapter, the term `per-unit retain allocation' means 7 any allocation, by an organization to which part I of this sub- 8 chapter applies, other than by payment in money or other 9 property (except per-unit retain certificates) to a patron with 10 respect to products marketed for him, the amount of which 11 is fixed without reference to the net earnings of the or,qaniza- 12 tion pursuant to an agreement between the organization and 13 the patron. 14 "(g) PER-UNIT RETAIN CERTIFICATE.-For purposes 15 of this subchapter, the term `per-unit retain certificate' means 16 any written notice which discloses to the receipient the stated 17 dollar amount of a per-unit retain allocation to him by the 18 organization. 19 "(h) QUALIFIED PER-UNIT RETAIN CERTiFICATE.- 20 "(1) DEFINED .-For purposes of this subchapter, 21 the term `qualified per-unit retain certificate' means any 22 per-unit retain certificate which the distributee has agreed, 23 in the manner provided in paragraph (2), to take into 24 account at its stated dollar amount as provided in section 25 1385(a). 1808 PAGENO="0657" 205 1 "(2) MANNER OF OBTAINING AGREEMENT.-A 2 distributee shall agree to take a per-unit retain certificate 3 into account as provided in paragraph (1) only by- 4 "(A) making such agreement in writing, or 5 "(B) obtaining or retaining membership in the 6 organization after- 7 "(i) such organization has adopted (after 8 the date of the enactment of this subsection) a 9 bylaw providing that membership in the organi- 10 zation constitutes such agreement, and 11 "(ii) he has received a written notification. 12 and copy of such bylaw. 13 "(3) PERIOD FOR WHICH AGREEMENT IS EFFECTIVE.- "(A) GENERAL RULE.-Except as provided in 15 subparagraph (B)- 16 "(i) an agreement described in paragraph 17 (2) (A) shall be an agreement with respect to 18 all products delivered by the distributee to the 19 organization during the taxable year of the orga- 20 nization during which such agreement is made 21 and all subsequent taxable years of the organiza- 22 tion; and 23 "(ii) an agreement described in paragraph 24 (2) (B) shall be an agreement with respect to 25 all products delivered by the distributee to the 7 1-297 O-67-pt. 2-42 1809 PAGENO="0658" 206 1 organization after he received the notification 2 and copy described in paragraph (2) (B) (ii). 3 "(B) REVOCATION, ETC.- 4 "(i) Any a,qreement described in para- 5 graph (2) (A) may be revoked (in writing) 6 by the distributee at any time. Any such revo- 7 cation shall be effective with respect to products 8 delivered by the distributee on or after the first 9 day of the first taxable year of the organization 10 beginning after the revocation is filed with the 11 organization; except that in the case of a pool- 12 ing arrangement described in section 1382(e) 13 a revocation made by a distributee shall not be 14 effective as to any products which were delivered 15 to the organization by the distributee before such 16 revocation. 17 "(ii) Any agreement described in para- 18 graph (2) (B) shall not be effective with re- 19 spect to any products delivered after the dis- 20 tributee ceases to be a member of the organiza- 21 tion or after the bylaws of the organization 22 cease to contain the provision described in para- 23 graph (2) (B) (i). 24 "(i) NONQUALIFIED PER-UNiT RETAIN CER Ti Fl- 1810 PAGENO="0659" 207 1 CATE.-For purposes of this subchapter, the term `non quali- 2. fled per-unit retain certificate' means a per-unit retain cer- 3 tificate which is not described in subsection (h) ." 4 (d) INFoRMATION REPORTING.- 5 (1) AMOUNTS SUBJECT TO REPORTING.-Section 6 6044(b) (1) is amended by striking out "and" at the 7.. end of subparagraph (B), by striking out the period at 8 the end of subparagraph (C) and inserting in lieu 9 thereof ", and", and by adding after subparagraph (C) 10 the following new subparagraphs: 11 "(D) the amount of any per-unit retain al- 12 location (as defined in section 1388(f)) which 13 is paid in qualified per-unit retain certificates (as 14 defined in section 1388(h)), and 15 "(E) any amount described in section 1382 16 (b) (4) (relating to redemption of non qualified per- 17 unit retain certificates)." 18 (.2) DETERMINATION OF AMOUNT PAID.- 19 (A) Section 6044(d) (1) is amended by strik- 20 ing out "allocation)" and inserting in lieu thereof 21 "allocation or a qualified per-unit retain certifi- 22 cate)". 2~ (B) Section 6044(d) (2) is amended by strik- 24 ing out "allocation" and inserting in lieu thereof 25 "allocation or a qualified per-unit retain certificate". 1811 PAGENO="0660" 208 1 (e) EFFECTIVE DATES.- 2 (1) The amendments made by subsections (a), (b), 3 and (c) shall apply to per-unit retain allocations made 4 during taxable years of an organization described in sec- 5 tion 1381 (a) (relating to organizations to which part I 6 of subchapter T of chapter 1 applies) beginning after 7 April 30, .1966, with respect to products delivered dur- 8 ing such years. 9 (2) The amendments made by subsection (d) shall 10 apply with respect to calendar years after 1966. 11 (f) TRANSITION RULE.- 12 (1) Except as provided in paragraph (2), a writ- 13 ten agreement between a patron and a cooperative as- 14 sociation- 15 (A) which clearly provides that the patron 16 agrees to treat the stated dollar amounts of all per- 17 unit retain certificates issued to him by the associa- 18 tion as representing cash distributions which he has, 19 of his own choice, reinvested in the cooperative 20 association, 21 (B) which is revocable by the patron at any 22 time after the close of the taxable year in which it 23 was made, 24 (0) which was entered into after October 14, 1812 PAGENO="0661" 209 1 1965, and before the date of the enactment of this 2 Act, and 3 (D) which is in effect on the date of the enact- 4 ment of this Act, and with respect to which a written 5 notice of revocation has not been furnished to the 6 cooperative association, 7 shall be effective (for the period prescribed in the agree- 8 ment) for purposes of section .1388(h) of the `Internal 9 Revenue Code of 1954 as if entered into, pursuant to 10 such section, after the date of the enactment of this Act. 11 (2) An agreement described in paragraphs (1) (A) 12 and (C) which was included in a by-law of the coopera- 13 tive association and which is in effect on the date of the 14 enactment of this Act shall be effective for purposes of see- tion 1388(h) of such Code only for taxable years of the 16 association beginning before May 1, 1967. 17 SEC. 214. EXCISE TAX RATE ON AMBULANCES AND 18 HEARSES. 19 (a) CLASsIFiCATIoN AS AUT0M0BILES.-Section 4062 20 (relating to definitions applicable to the tax on motor vehicles) 21 is amended by adding at the end thereof the following new 22 subsection: 23 "(b) AMBULANCES, HEARSES, ETcc-For purposes of 24 section 4061(a), a sale of an ambulance, hearse, or combina- 25 tion ambulance-hearse shall be considered to be a sale of an 1813 PAGENO="0662" 210 1 automobile chassis and an automobile body enumerated in 2 subparagraph (B) of section 4061 (a) (2) ." 3 (b) EFFECTIVE DATE.-The amendment made by sub- 4 section (a) shall apply with respect to articles sold after the 5 date of the enactment of this Act. 6 SEC. 215. APPLICABILITY OF EXCLUSION FROM INTEREST 7 EQUALIZATION TAX OF CERTAIN LOANS TO 8 ASSURE RAW MATERIALS SOURCES. 9 (a) EXCEPTION TO EXCLUSION.-SeCtiOn 4914(d) 10 (relating to loans to assure raw materials sources) is amended 11 by adding at the end thereof the following new paragraph: 12 "(3) EXCEPTION.-The exclusion from tax pro- 13 vided by paragraph (1) shall not apply in any case where 14 the acquisition of the debt obligation of the foreign corpo- 15 ration is made with a~i intent to sell, or to offer to sell, any 16 part of such debt obligation to United States persons." 17 (b) TECHNICAL AMENDMENTS.-(1) Section 4914 18 (j) (1) (relating to loss of entitlement to exclusion in case of 19 certain subsequent transfers) is amended- 20 (A) by striking out in subparagraph (A) ", or 21 the exclusion provided by subsection (d),", and 22 (B) by striking out "subsection (d) or (f)" in 23 subparagraph (D) and inserting in lieu thereof 24 "subsection (f)". 1814 PAGENO="0663" 211 1 (2) Section 4918 (relating to exemption for prior 2 American ownership) is amended by addin,q at the end 3 thereof the following new subsection: 4 "(g) CERTAIN DEBT OBLIGATIONS ARISING OUT OF 5 LOANS To ASSURE RAW MATERIAL~ S0URcIES.-Under 6 regulations prescribed by the Secretary or his delegate, sub- 7 section (a) shall not apply to the acquisition by a United 8 States person of any debt obligation to which section 4914(d) 9 applied where the acquisition of the debt obligation by such 10 person is made with an intent to sell, or to offer to sell, any 11 part of such debt obligation to United States persons. The 12 preceding sentence shall not apply if the tax imposed by 13 section 4911 has applied to any prior acquisition of such debt 14 obligation." 15 (c) EFFECTIVE DATE.-The amendments made by sub- 16 sections (a) and (b) shall apply with respect to acquisitions 17 of debt obligations made after the date of the enactment of 18 this Act. 19 SEC. 216. EXCLUSION FROM INTEREST EQUALIZATION 20 TAX FOR CERTAIN ACQUISITIONS BY INSUR. 21 ANCE COMPANIES. 22 (a) NEW COMPANIES AND COMPANIES OPERATING 23 IN FORMER LESS DEVELOPED COUNTRIES.-SeCtiOTh 4914 24 (e) (relating to acquisitions by insurance companies doing 25 business in foreign countries) is amended- 1815 PAGENO="0664" 212 1 (1) by striking out "at the time of the initial desig- 2 nation" in the last sentence of paragraph (2); 3 (2) by striking out "An" in the first sentence of 4 paragraph (3) (A) (i) and inserting in lieu thereof "Ex- 5 cept as provided in clause (iii), an"; 6 (3) by striking out "under this subparagraph" in 7 paragraph (3) (A) (ii) and inserting in lieu thereof 8 "under clause (i)"; 9 (4) by adding after clause (ii) of paragraph (3) 10 (A) the following new clauses: 11 "(iii) INITIAL DESIGNATION AFTER 12 OCTOBER 2, 196~4.-An insurance company 13 which was not in existence on October 2, 14 1964, or was otherwise ineligible to establish a 15 fund (or funds) of assets described in para- 16 graph (2) by making art initial designation un- 17 der clause (i) on or before such date, may estab- 18 lish (and thereafter currently maintain) such 19 fund (or funds) of assets at any time after the 20 enactment of this clause by designating stock of 21 a foreign issuer or a debt obligation of a foreign 22 obligor as a part of such fund in accordance 23 with the provisions of clause (iv) (if applicable) 24 and subparagraph (B) (i). 1816 PAGENO="0665" 213 "(iv) FUNDS INVOLVING CURRENCIES OF 2 FORMER LESS DEVELOPED COUNTRIES.-An 3 insurance company desiring to establish a fund 4 under clause (iii) with respect to insurance 5 contracts payable in the currency of a country 6 designated as a less developed country on Octo- 7 ber 2, 1964, which thereafter has such designa- 8 tion terminated by an Executive order issued 9 under section 4916(b), shall designate as assets 10 of such fund, to the extent permitted by sub- 11 paragraph (E), the stock of foreign issuers or 12 debt obligations of foreign obligors as follows: 13 First, stock and debt obligations having a period 14 remaining to maturity of at least 1 year (other 15 than stock or a debt obligation described in sec- 16 tion 4916(a)) acquired before July 19, 1963, 17 and owned by the company on the date which 18 the President, in accordance with section 4916 19 (b), communicates to Congress his intention to 20 terminate the status of such country as a less de- 21 veloped country; second, stock and debt obliga- 22 tions having a period remaining to maturity of 23 at least 1 year described in section 4916(a) 24 (and owned by the company on the date of such 1817 PAGENO="0666" 214 1 termination) which, at the time of acquisition, 2 qualified for the exclusion provided in such sec- 3 tion because of the status of such country as a 4 less developed country; and third, such stock or 5 debt obligations as the company may elect to des- 6 ignate under subparagraph (B) (i). The pe- 7 nod remaining to maturity referred to in the 8 preceding sentence shall be determined as of the 9 date of the President's communication to 10 Congress."; ii (5) by striking out "TO MAINTAIN FUND" in the 12 heading of paragraph (3) (B); 13 (6) by striking out "as provided in subparagraph 14 (A) (ii)" in paragraph (3) (B) (i) and inserting in lieu 15 thereof "under subparagraphs (A) (i) and (ii)"; 16 (7) by inserting before the period at the end of the 17 first sentence of paragraph (3) (C) the following: "; 18 except that, with respect to a fund established under sub- 19 paragraph (A) (iii), skck or debt obligations acquired 20 before the establishment of such fund may not be desi,q- 21 nated as part of such fund under this subparagraph"; 22 (8) by striking out "subparagraph (B)," in para- 1818 PAGENO="0667" 215 * 1 graph (3) (E)(i) and inserting in lieu thereof "sub- 2 paragraph (A) (iv), (B),"; 3 (9) by striking out "subparagraph (A)" in para- 4 graph (4) (B) (i) and inserting in lieu thereof "sub- 5 paragraph (A) (i)"; 6 (10) by striking out "paragraph (3) (A)" in para- 7 graph (4) (B) (ii) and inserting in lieu thereof "para- 8 graph (3) (A) (i)"; and 9 (11) by adding at the end of paragraph (4) the 10 following new paragraph: 11 "(0) SPECIAL RULE.-For purposes of sub- 12 paragraph (A), if a country designated as a less 13 developed country on September 2, 1964, thereafter 14 has such designation terminated by an Executive 15 order issued under section 4916(b), all insurance 16 contracts payable in the currency of such country 17 which were entered into before such designation was 18 terminated shall be treated as insurance contracts 19 payable in the currency of a country other than a less 20 developed country." 21 (b) EFFECTIVE DATE.-The amendments made by sub- 1819 PAGENO="0668" 216 i section (a) shall take effect on the day after the date of the 2 enactment of this Act. 3 SEC. 217. EXCLUSION FROM INTEREST EQUALIZATION 4 TAX OF CERTAIN ACQUISITIONS BY FOREIGN 5 BRANCHES OF DOMESTIC BANKS. 6 *(a) AUTHORITY FOR MODIFICATION OF EXECUTIVE 7 ORDERS.-Section 4931 (a) (relating to commercial bank 8 loans) is amended by adding at the end thereof the following 9 new sentence: "Clause (A) of the preceding sentence shall 10 not prevent a modification of such Executive order (or any 11 modification thereof) to exclude from the application of suh- 12 section (b) acquisitions by commercial banks, through 13 branches located outside the United States, of debt obligations 14 of foreign obligors payable in currency of the United States." 15 (b) EFFECTIVE DATE.-The amendment made by sub- 16 section (a) shall apply with respect to acquisitions of debt 17 obligations made after the date of the enactment of this Act. 18 TITLE HI-PRESIDENTIAL ELEC- 19 TION CAMPAIGN FUND A CT 20 SEC. 301. SHORT TITLE. 21 This title may be cited as the "Presidential Election Cam- 22 paign Fund Act of 1966". 1820 PAGENO="0669" 217 1 SEC. 302. AUTHORITY FOR DESIGNATION OF $1 OF IN. 2 COME TAX PAYMENTS TO PRESIDENTIAL 3 ELECTION CAMPAIGN FUND. 4 (a) Subchapter A of chapter 61 of the Internal Rev- 5 enue Code of 1954 (relating to returns and records) is 6 amended by adding at the end thereof the following new 7 part: 8 "PART Vill-DESIGNATION OF INCOME TAX PAY- 9 MENTS TO PRESIDENTIAL ELECTION CAMPAIGN 10 FUND "Sec. 6096. Designation by individua7s. 11 "SEC. 6096; DESIGNATION BY INDIVIDUALS. 12 "(a) IN GENERAL.-E very individual (other than a 13 nonresident alien) whose income tax liability for any taxable 14 year is $1 or more may designate that $1 shall be paid into 15 the Presidential Election Campaign Fund established by sec- 16 tion 303 of the Presidential Election Campaign Fund Act 17 of 1966. 18 "(b) INCOME TAX LIABILITY.-For purposes of sub- 19 section (a), the income tax liability of an individual for any 20 taxable year is the amount of the tax imposed by chapter 1 21 on such individual for such taxable year (as shown on his 1821 PAGENO="0670" 218 1 return), reduced by the sum of the credits (as shown in his 2 return) allowable under sections 32(2), 33, 35, 37, and 38. 3 "(c) MANNER AND TIME OF DESIGNATION.-A desig- 4 nation under subsection (a) may be made with respect to any 5 taxable year, in such manner as the Secretary or his delegate 6 may prescribe by regulation$- 7 "(1) at the time of filing the return of the tax im- 8 posed by chapter 1 for such taxable year, or 9 "(2) at any other time (after the time of filing the 10 return of the tax imposed by chapter 1 for such taxable 11 year) specified in regulations prescribed by the Secre- 12 tary or his delegate." 13 (b) The table of parts for subchapter A of chapter 61 14 of such Code is amended by adding at the end thereof the fol- 15 lowing new item: "Part VIII. Designation of income taco payments to Presi- dential Election Campaign Fund." 16 (c) The amendments made by this section shall apply 17 with respect to income tax liability for taxable years begin- 18 fling after December 31, 1966. 19 SEC. 303. PRESIDENTIAL ELECTION CAMPAIGN FUND. 20 (a) ESTABLLSHMENT.-TILere is hereby established on 21 the books of the Treasury of the United States a special fund 22 to be known as the "Presidential Election Campaign Fund" 23 (hereafter in this section referred to as the "Fund"). The 1822 PAGENO="0671" 219 1 Fund shall consist of amounts transferred to it as provided in 2 this section. 3 (b) TRANSFERS TO THE FUND.-The Secretary of the 4 Treasury shall, from time to time, transfer to the Fund an 5 amount equal to the sum of the amounts designated by mdi- 6 viduals under section 6096 of the Internal Revenue Code of 7 1954 for payment into the Fund. 8 (c) PAYMENTS FROM FUND.- 9 (1) IN GENERAL.-The Secretary of the Treasury 10 shall, with respect to each presidential campaign, pay 11 out of the Fund, as authorized by appropriation Acts, 12 into the treasury of each political party which has corn- 13 plied with the provisions of paragraph (3) an amount 14 (subject to the limitation in paragraph (3) (B)) de- 15 termined under paragraph (2). 16 (2) DETERMINATION OF AMOUNTS.- 17 (A) Each political party whose candidate for 18 President at the preceding presidential election re- 19 ceived 10,000,000 or more popular votes as the 20 candidate of such political party shall be entitled 21 to payments under paragraph (.1) with respect to 22 a presidential campaign equal to- 23 (i) $1 multiplied by the total number of 24 popular votes cast in the preceding presidential 25 election for candidates of political parties whose 1823 PAGENO="0672" 220 1 candidates received 10,000,000 or more popu- 2 lar votes as the candidates of such political par- 3 ties, divided by 4 (ii) the number of political parties whose 5 candidates in the preceding presidential election received 10,000,000 or more popular votes as 7 the candidates of such political parties. 8 (B) Each political party whose candidate for 9 President at the preceding presidential election re- 10 ceived more than 1,500,000, but less than 10,- 11 000,000, popular votes as the candidate of such 12 political party shall be entitled to payments under 13 paragraph (1) with respect to a presidential cam- 14 paign equal to $1 multiplied by the number of popu- 15 lar votes in excess of 1,500,000 received by such 16 candidate as the candidate of such political party in 17 the preceding presidential election. 18 (0) Payments under paragraph (1) shall be 19 made with respect to each presidential campaign at 20 such times as the Secretary of the Treasury may 21 prescribe by regulations, except that no payment with 22 respect to any presidential campaign shall be made 23 before September 1 of the year of the presidential 24 election with respect to which such campaign i~ con- 1824 PAGENO="0673" 221 .1 ducted. If at the time so prescribed for any such 2 payments, the moneys in the Fund are insufficient 3 for the Secretary to pay into the treasury of each 4 political party which is entitled to a payment under 5 paragraph (1) the amount to which such party is 6 entitled, the payment to all such parties at such time 7. shall be reduced pro rata, and the amounts not paid 8 at such time shall be paid when there are sufficient 9 moneys in the Fund. 10 (3) LIMITATiONS.- 11 (A) No payment shall be made under para- 12 graph (1) into the treasury of a political party with 13 respect to any presidential campaign unless the treas- 14 urer of such party has certified to the Comptroller 15 General the total amount spent or incurred (prior to 16 the date of the certification) by such party in carry- 17 ing on such presidential campaign, and has furnished 18 such records and other information as may be re- 19 quested by the Comptroller General. 20 (B) No payment shall be made under para- 21 graph (1) into the treasury of a political party with 22 respect to any presidential campaign in an amount 23 which, when added to previous payments made to 24 such varty, exceeds the amount spent or incurred by 71-297 0-67-pt. 2-43 1825 PAGENO="0674" 222 1 such party in carrying on such presidential cam- 2 paign. (4) The Comptroller General shall certify to the 4 Secretary of the Treasury the amounts payable to any 5 political party under paragraph (1). The Comptroller 6 General's determination as to the popular vote received 7 by any candidate of any political party shall be final 8 and not subject to review. The Comptroller General 9 is authorized to prescribe such rules and regulations, and to conduct such examinations and investigations, 11 as he determines necessary to carry out his duties and 12 functions under this subsection. 13 (5) DEFINITION&-For purposes of this sub- 14 section- 15 (A) The term "political party" means any 16 political party which presents a candidate for election 17 to the office of President of the United States. 18 (B) The term "presidential campaign" means 19 the political campaign held every fourth year for the 20 election of presidential and vice presidential electors. 21 (C) The term "presidential election" means the 22 election of presidential electors. 23 (d) TRANSFERS TO GENERAL FuND.-If, after any 24 pr'esidential campaign and after all political parties which 1826 PAGENO="0675" 223 1 are entitled to payments under subsection (c) with respect 2 to such presidential campaign have been paid the amounts 3 to which they are entitled under subsection (c), there are 4 moneys remaining in the Fund, the Secretary of the Treas- 5 ury shall transfer the moneys so remaining to the general 6 fund of the Treasury. 7 SEC. 304. ESTABLISHMENT OF ADVISORY BOARD. 8 (a) There is hereby established an advisory board to be 9 known as the Presidential Election Campaign Fund Advisory 10 Board (hereafter in this section referred to as the "Board"). 11 It shall be the duty and function of the Board to counsel and 12 assist the Comptroller General in the performance of the 13 duties imposed on him under section 303 of this Act. 14 (b) The Board shall be composed of two members rep- 15 resenting each political party whose candidate for President 16 at the last presidential election received 10,000,000 or more 17 popular votes as the candidate of such political party, which 18 members shall be appointed by the Comptroller General from 19 recommendations submitted by each such political party, and 20 of three additional members selected by the members so ap- 21 pointed by the Comptroller General. The term of the first 22 members of the Board shall expire on the 60th day after the 23 date of the first presidential election following the date of 24 the enactment of this Act and the term of subsequent members 25 of the Board shall begin on the 61st day after the date of a 1827 PAGENO="0676" 224 1 presidential election and expire on the 60th day following 2 the date of the subsequent presidential election. The Board 3 shall select a Chairman from among its members. 4 (c) Members of the Board shall receive compensation at 5 ~the rate of $75 a day for each day they are engaged in per- 6 forming duties and functions as such members, including 7 travel time, and, while away from their homes or regular 8 places of business, shall be allowed travel expenses, including per diem in lieu of subsistence, as authorized by law for per- 10 sons in the Government service employed intermittently. 11 (d) Service by an individual as a member of the Board 12 shall not, for purposes of any other law of the United States, 13 be considered as service as an officer or employee of the United 14 States. SEC. 305. APPROPRIATIONS AUTHORIZED. 16 There are authorized to be appropriated, out of the Presi- 17 dential Elections Campaign Fund, such sums as may be neces- 18 sary to enable the Secretary of the Treasury to make payments 19 under section 303 of this Act. 20 TITLE IV-MISCELLANEO US 21 PROVISIONS 22 SEC. 401. TREASURY NOTES PAYABLE IN FOREIGN CUR- 23 RENCY. 24 Section 16 of the Second Liberty Bond Act, as amended 25 (31 U.S.C. 766), is amended by striking out "bonds" wher- 1828 PAGENO="0677" 225 1 ever it appears therein and inserting in lieu thereof "bonds, 2 notes,". 3 SEC. 402. REPORTS TO CLARIFY TO NATIONAL DEBT 4 AND TAX STRUCTURE. 5 The Secretary of the Treasury shall, on or before 6 March 31 of each year (beginning with 1967), submit to the 7 Senate and the House of Representatives a report setting 8 forth, as of the close of December 31 of the preceding year, 9 the a.ygregate and individual amounts of the contingent liabili- 10 ties and the unfunded liabilities of the Government, and of 11 each department, agency, and instrumentality thereof, in- 12 eluding, without limitation, trust fund liabilities, Govern- 13 ment-sponsored corporations' liabilities, indirect liabilities not 14 included as a part of the public debt, and liabilities of insur- 15 ance and annuity programs, including their actuarial status 16 on both a balance sheet and projected source and application 17 of funds basis. The report shall also set forth the collateral 18 pledged, or the assets available (or to be realized), as secu- 19 rity for such liabilities (Government securities to be sepa- 20 rately noted), and an analysis of their significance in terms 21 of past experience and probable risk, and shall also set forth 22 all other assets available to liquidate liabilities of the Govern- 23 ment. The report shall set forth the required data in a 24 concise form, with such explanatory material as the Secre- 25 tary may determine to be necessary or desirable, and shall 1829 PAGENO="0678" 226 1 include total amounts of each category according to the de- 2 partment, agency, or instrumentality involved. ~ SEC. 403. COVERAGE OF EXPENSES OF CERTAIN DRUGS 4 UNDER SUPPLEMENTARY MEDICAL INSUR- 5 ANCE BENEFITS. 6 (a) Section 1832(a) of the Social Security Acf is 7 amended (1) by striking out "and" at the end of paragraph 8 (1), (2) by striking out the period at the end of paragraph 9 (2) and inserting in lieu thereof "; and", and (3) by adding 10 at the end thereof the following new paragraph: 11 "(3) entitlement to be paid for allowable expenses 12 (as defined in section 1845(a) (2)), or, if lower, actual 13 expenses, incurred by him for the purchase of qualified 14 drugs (as defined in subsection (a) (1) of such 15 section) ." 16 (b) Section 1833(a) of such Act is amended (1) by 17 inserting "or qualified drugs" after . "incurs expenses for 18 services", (2) by striking out the period at the end of para- 19 graph (2) and inserting in lieu thereof "; and", and (3) 20 by adding at the end thereof the following new paragraph: 21 "(3) in the case of expenses covered under section 22 1832 (a) (3)-100 per centum of such expenses." 23 (c) Section 1833(b) of such Act is amended by adding 24 at the end thereof the following new sentence: "For pur- 25 poses of determining amounts to be counted toward meeting 1830 PAGENO="0679" 227 1 the $50 deductible imposed by the preceding sentence, there 2 shall not be included any expenses incurred for any drug or 3 biological which is in excess of the allowable expenses (as 4 defined ~in section 1 845(a) (2)) of such drug or biological." 5 (d) Part B of title XVIII of such Act is amended by 6 adding at the end thereof the following new sections: 7 "ALLOWABLE EXPENSES FOR QUALIFiED DRUGS 8 "S~c. 1845. (a) For purposes of this part- 9 "(1) The term `qualified drug' means a drug or 10 biological which is included among the items approved 11 by the Formulary Committee (established pursuant to 12 section 1846(a)). 13 "(2) The term `allowable expense', when used in 14 co~nnection with any quantity of a qualified drug, means 15 the amount established with regard to such quantity of 16 such drug by the Formulary Committee and approved 17 by the Secretary. 18 "(b) Amounts to which an individual is entitled by 19 reason of the provisions of section 1832(a) (3) shall be paid 20 directly to such individual or, if such individual has assigned 21 his right to receive any such amount to another person, the 22 amount so assigned shall be paid to such other person. No 23 individual shall be paid any amount by reason of the pro- 24 visions of section 1832(a) (3) prior to the presentation by 25 him (or by another on his behalf) of documentary or other 1831 PAGENO="0680" 228 i proof satisfactory to the Secretary establishing his entitle- 2 ment thereto. "(c) The benefits provided by reason of section 1832 ~ (a) (3) may be paid by the Secretary or the Secretary ~ may utilize the service of carriers for the administration of 6 such benefits under contracts entered into between the Secre- ~ tary and such carriers for such purpose. To the extent deter- 8 mined by the Secretary to be appropriate, the provisions 9 relating to contracts entered into pursuant to section 1842 j~ shall be appli'cable to contracts entered into pursuant to this ii subsection. 12 "FORMULARY COMMiTTEE 13 "SEC. 1846. (a) There is hereby established a Formu- 14 lary Committee to consist of the Surgeon General of the 15 Public Health Service, the Commissioner of the Food and 16 Drug Administration, and the Director of the National In- 17 stitutes of Health. 18 "(b) (1) It shall be the duty of the Formulary Corn- 19 mittee, with the advice and assistance of the Formulary Ad- 20 visory Group (established pursuant to section 1847) to- 21 "(A) determine which drugs and biologicals shall 22 constitute qualified drugs for purposes of the benefits 23 provided under section 1832(a); and 24 "(B) determine, with the approval of the Secre- 1832 PAGENO="0681" 229 1 tary, the allowable expense, for purposes of such bene- 2 fits, of the various quantities of any drug determined by 3 the Committee to constitute a qualified drug; and 4 "(C) publish and disseminate at least once each 5 calendar year among individuals insured under this 6 part, physicians, pharmacists, and other interested per- 7 sons, in accordance with directives of the Secretary, an 8 alphabetic list naming each drug or biological (by its 9 generic name and by each other name by which it is 10 known) which is a qualified drug together with the al- 11 lowable expense of various quantities thereof, and if 12 any such drug or biological is known by a trade name, 13 the generic name shall also appear with such trade name. 14 "(2) (A) Until the Formulary Committee determines 15 to the contrary, any drug or biological which is included 16 in the United States Public Health Service Formulary 17 shall be regarded as a qualified drug for purposes of the 18 benefits provided under section 1832(a) (3). Drugs or 19 biologicals not included in such Formulary shall be re- 20 garded as qualified drugs for such purposes upon determina- 21 tion of the Formulary Committee that such drugs or bio- 22 logicals should be so regarded. Any drug or biological 23 included on the list of qualified drugs shall, if listed *by 24 generic name, also be listed by its trçide name or names, 25 if any. 1833 PAGENO="0682" 230 1 "(B) Drugs and biologicaLs shall be determined to 2 be qualified drugs only if they can legally be obtained by 3 the user pursuant to a prescription of a physician; except 4 that the Formulary Committee may include certain drugs 5 and biologicals not requiring such a prescription if it de- 6 termines such drugs or biologicals to be of a lifesaving nature. 7 "(C) In the interest of orderly, economical, and equi- 8 table administration of the benefits provided under section 9 1832(a) (3), the Focrmulary Committee may, by regula- 10 tion, provide that a drug or biological otherwise regarded 11 as being a qualified drug shall not be so re~jarded when 12 prescribed below certain minimum quantities. 13 "(3) In determining the allowable expense f~r any. 14 quantity of any qualified drug, the Formulary Committee 15 shall give due consideration to recognized pricing guides for 16 drugs, and of other pertinent factors, with a view to deter- 17 mining with respect to each qualified drug a schedule of 18 prices for various quantities thereof which reflects the cost 19 thereof to the ultimate dispensor of the drug plus a reason- 20 able fee for the preparation, handling, and distribution 21 thereof to the consumer thereof. In any case in which a 22 drug or biological is available by generic name and one or 23 more trade nan'tes any one of which is different from such 24 generic name the cost of such drugS or biological, for pur- 1834 PAGENO="0683" 231 1 poses of the preceding sentence, shall be deemed to be the 2 lowest cost of such drug, however named." 3 "ADVISORY GROUP TO FORMULARY COMMITTEE 4 "Sec. 1847. (a) For the purpose of assisting the Formu- 5 lary Committee to carry out its duties and functions, the 6 Secretary shall appoint an Advisory Group to the Formulary 7 Committee (hereinafter in this section referred to as the 8 `Advisory Group'). The Advisory Group shall consist of 9 seven members to be appointed by the Secretary. From 10 time to time, the Secretary shall designate one of the mem- 11 bers of the Advisory Group to serve as Chairman thereof. 12 The members shall be so selected that each represents one or 13 more of the following national organizations: an organiza- 14 tion of physicians, an organization of manufacturers of drugs, an organization of pharmacists, an organization of persons 16 concerned with public health, an organization of hospital 17 pharmacists, an organization of colleges of medicine, an orga- 18 nization of colleges of pharmacy, and an organization of con- 19 sumers. Each member shall hold office for a term of three 20 years, except that any member appointed to fill a vacancy 21 occurring prior to the expiration of the term for which his 22 predecessor was appointed shall be appointed for the remain- 23 der of such term, and except that the terms of office of sLx 24 of the members first taking office shall expire, as designated 25 by the Secretary at the time of appointment, two at the end 1835 PAGENO="0684" 232 1 of the first year, two at the end of the second year, and two 2 at the end of the third year, after the date of appointment. 3 A member shall not be eligible to serve continuously for more 4 than two terms. 5 "(b) Members of the Advisory Group, while attending 6 meetings or conferences thereof or otherwise serving on 7 business of the Advisory Group, shall be entitled to receive 8 compensation at rates to be fixed by the Secretary, but not 9 exceeding $75 per day, including traveltime, and while so 10 serving away from their homes or regular places of business 11 they may be allowed travel expenses, including per diem in 12 lieu of subsistence, as authorized by section 3109 of title 5, 13 United States Code, for persons in the Government service 14 employed intermittently. 15 "(c) The Advisory Group is authorized to engage such 16 technical assistance as may be required to carry out its 17 functions, and the Secretary shall, in addition, make available 18 to the Advisory Group such secretarial, clerical, and other 19 assistance and such pertinent data obtained and prepared 20 by the Department of Health, Education, and Welfare as the 21 Advisory Group may require to carry out its functions." 22 (e) The amendments made by this section shall become 23 effective on whichever of the following first occurs: (1) the 24 first day of the first month with respect to which the rate of 1836 PAGENO="0685" 233 1 the monthly premium for participation is raised, pursuant 2 to section 1839(b) of the Social Security Act, after the date 3 of enactment of this Act, or (2) January 1, 1968. 4 SEC. 404. PERCENTAGE DEPLETION RATE FOR CLAY AND 5 SHALE USED IN MAKING SEWER PIPE. 6 (a) RATE.-Section 613(b) (relating to percentage 7 depletion rates) is amended- 8 (1) by striking out "and clay used or sold for use 9 for purposes dependent on its refractory properties" in 10 paragraph (3) (B) and inserting in lieu thereof "clay 11 used or sold for use for purposes dependent on its ref rac- 12 tory properties, and clay and shale used or sold for use 13 in the manufacture of sewer pipe and brick"; 14 (2) by inserting after "shale," in paragraph ~(5) 15 (A). "except shale described in paragraph (3)(B),"; 16 and 17 (3) by striking out "building or paving brick" and 18 "sewer pipe," in paragraph (5)(B). 19 (b) TREATMENT PROCESSES .-Section 613(c) (4) 20 (relating to treatment processes considered as mining) is 21 amended by inserting after "applies" in subparagraph (G) 22 "and of clay and shale used or sold for use in the manu- 23 facture of sewer pipe and brick". 24 (c) EFFECTIVE DATE.-The amendments made by sub- 1837 PAGENO="0686" 234 1 sections (a) and (b) shall apply to taxable years ending 2 after the date of the enactment of this Act. 3 SEC. 405. PRESERVATION FROM REDUCTION OF CERTAIN 4 WIDOWS' BENEFITS UNDER TITLE II OF THE 5 SOCIAL SECURITY ACT. 6 (a) The first sentence of section 203 (a) of the Social 7 Securuy Act is amended (1) by striking out the period at 8 the end of paragraph (3) thereof and inserting in lieu of 9 such period a semicolon followed by the word "or", and (2) 10 by adding after paragraph (3) thereof the following new ii paragraph: 12 "(4) when one of such individuals is a widow of 13 such insured individual who is entitled, under section 14 202(e), to widow's insurance benefits for any month 15 on the basis of the wages and self-employment income 16 of such insured individual, the benefit to which she is 17 entitled, on the basis of such wages and self-employ- 18 ment income, shall not be reduced for any month undei~ 19 this subsection on account of monthly benefits to which 20 any other individual is entitled, on the basis of the 21 wages and self-employment income of such insured 22 individual, if (A) sac/i insured individual died prior to 23 1066 and if (B) such other individual (i) is entitled to 24 such benefits, under section 202(d), as a child of such 1838 PAGENO="0687" 235 1 insured individual, (ii) is not the child of such widow, 2 and (iii) would not have been considered to be the son 3 or daughter of such insured individual under section 4 216(h) as in effect prior to the enactment of the Social 5 Security Amendments of 1965." 6 (b) The amendments made ~ subsection (a) shall be 7 effective with respect to monthly benefits payable under 8 title II of the Social Security Act for months after the 9 month in which this Act is enacted. Amend the title so as to read: "An Act to provide equi- table tax treatment for foreign investment in the United States, to establish a Presidential Election Campaign Fund to assist in financing the costs of presidential election cam- paigns, and for other purposes." Passed the House of Representatives June 15, 1960. Attest: RALPH R. ROBERTS, Cleric. Passed the Senate with amendments October 13, 1966. Attest: FRANCIS B. VALEO, Secretary. 1839 PAGENO="0688" PAGENO="0689" SECTION 27 SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 FOREIGN INVESTORS TAX ACT OF 1966; PRESIDENTIAL * ELECTION CAMPAIGN FUND ACT; AND OTHER * AMENDMENTS 1841 7 1-297 0-67-pt. 2-44 PAGENO="0690" PAGENO="0691" SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 FOREIGN INVESTORS TAX ACT OF 1966; PRESIDENTIAL ELECTION CAMPAIGN FUND ACT; AND OTHER AMENDMENTS PREPARED FOR THE USE OF THE HOUSE AND SENATE CONFEREES ON H.R. 13103 BY THE STAFF OF THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION OCTOBER 18,1966 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON: 1966 JCS-14-66 1843 PAGENO="0692" PAGENO="0693" SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 TITLE I-FOREIGN INVESTORS TAX ACT Page No. of Senate amendments Section 101. SHORT TITLE. P. 88 Clerical changes. Section 102. SOURCE OF INCOME. (Pp. 88-104.) (a) Interest. (Pp. 87-93.) Pp. 89, (1) Source rvles for bank depo~it interest and similar 90 income.-The Committee on Finance did not change the provisions of the House bill which after December 31, 1971, treat as U.S. source income (and subject to U.S. tax) all in- terest, received by nonresident aliens and foreign corpora- tions, on U.S. bank deposits other than interest on deposits in foreign branch banks of domestic corporations. Until then, this interest on bank deposits (as provided by present law), interest paid on accounts with mutual savings banks, domes- tic building and loan associations, etc., and interest on amounts held by insurance companies on deposit are to be treated as foreign source income (unless effectively connected with a U.S. business) and thereby free of U.S. income tax. The Senate adopted a floor amendment offered by Senator Yarborough which struck ou;t the provision which would tax this bank deposit interest etc. after December 31, 1971. Thus, this floor amendment would exempt interest paid to nonresident aliens and foreign corporations on their U.S. bank deposits and similar types of income on a permanent basis. P~ 89 (2) Rules for determining source of interest from foreign corporat'ions.-Present law provides that all the interest paid by. a foreign corporation engaged in a trade or business in the United States is to be . considered U.S. source income, and * . therefore subject to U.S. tax, if. 20 percent or. more of the income of the foreign corporation paying the interest is from U.S. . sources during, the preceding 3-year period. Addi- tionally, since: in the case of this type of interest income there is no apportionment provision, all the interest paid by' a foreign corporation meeting the 20-percent rule is treated as being from U.S. sources notwithstanding the portion of the corporation's income which `is from U.S. sources. ``` 1' 1845 PAGENO="0694" 2 SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 Page No. of Senate amendments This amendment provides that none of the interest received from a foreign corporation is to be considered to be from LT.S. sources unless at least 50 percent (rather than 20 per- cent as provided in the House bill) of the corporation's gross income for the three preceding years was effectively con- nected with the conduct of a trade or business in the United States. Also, the portion of the interest treated as being from U.S. sources is to be the same proportion of the interest which the effectively connected income of the foreign cor- poration during the immediately prior 3-year period is of its gross income from all sources for that period. P. 90 (3) Interest on deposits in foreign branch banlcs.-The House bill provided that interest on deposits with foreign branch banks of U.S. corporations is to be treated as foreign source income and thus free of U.S. income tax when paid to iionresident aliens and foreign corporations. This amend- ment extends this treatment to foreign branch banks of U.S. partnerships. P. 92 (4) Foreign central banks and the Bank for International Settlements.-The House bill exempted from U.S. tax interest on U.S. bank deposits received by foreign central banks of issue and the Bank for International Settlements unless the deposits are held in connection with general commercial transactions of these banks. The Senate amendment extends the provision of present law which exempts interest from U.S. Government obligations received by a foreign central bank of issue to such interest received by the Bank for International Settlements. Also, the definition of what con- stitutes a governmental obligation, for purposes of this exemption, was extended both with respect to foreign central banks of issue and the Bank for International Settlements to include obligations of agencies or instrumentalities of the United States. Pp. 88- (5) Technical and clerical changes. 93 (b) Dividends. (Pp. 93-94.) P. 93 (1) Rules for determining source of dividends from foreign corporations .-T he Senate amended the source rule with respect to dividends paid by foreign corporations to provide that dividends received from a foreign corporation are to be considered as having a U.S. source only if 50 percent (House bill provided an 80-percent rule) of the corporation's gross income for the prior 3 years was effectively connected with the conduct of a trade or business in the United States. Pp. 93- (2) Technical and clerical changes. 94 (c) Personal services. (P. 94.) P. 94 Clerical change. (d) Definitions. (Pp. 94-103.) 1846 PAGENO="0695" SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 3 Page No. of Senate amendments P. 102 (1) Effectively connected foreign source income.-The House bill provided that income from sources without the United States is not to be treated as effectively connected with aU.S. business unless the nonresident alien or foreign corporation has a fixed place of business in the United States and the in- come is attributable to that place of business. In general, only rents and royalties from licensing, certain income from banking, financial and similar businesses, and sales income are to be taken into account for this purpose. However, they are not be be taken into account if the income is "sub- part F" income or income derived from a foreign corporation 50 percent owned by the nonresident alien or foreign corpo- ration receiving the income. This amendment modifies the House bill to exclude (a) income derived from a transaction in which~ the U.S. office was not a material factor in the production of the income, (b) income not derived from the usual (as distinct from casual) business activities of the U.S. office, and (c) income not properly allocable to the U.S. office. Additionally, the definition of a U.S. office was refined to exclude the activities of an independent agent operating in the ordinary course of his business. Pp. 94- (2) Technical and clerical changes. 103 (e) Effective dates. (Pp. 103-104.) Pp. 103- Clerical changes. 104 Section 103. NONRESIDENT ALIEN INDIVIDUALS. (Pp. 104-126.) (a) Tax on nonresident alien individuals. (Pp. 104-112.) Pp. 105, (1) Contingent intangible sales income.-This amendment 109 provides that gains realized on the sale of a patent or other and intangible property, where the income from the sale is de- 110 rived as a result of the use of the property in the United States, is not to be subject to U.S. tax as "fixed and deter- minable income" (which is taxed at 30 percent or lower treaty rate) unless a part of the income derived from the sale is contingent. If part of the profits from the sale are contingent, the amount subject to U.S. tax in any year is to be the contingent amount, or if this contingent amount exceeds 50 percent of the total amount paid in any 1 year, the total amount is to be taxed to the extent this amount represented gain realized on the sale of the property. This provision is to apply to gains derived from sales made after October 4, 1966. The provisions of existing law will con.. tinue to apply to transfers of patents made before that date. 1847 PAGENO="0696" 4 SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 Page No. of Senate amendments Pp. 110, (2) Certain annuities received under qualified plans.- 111 Under present law a nonresident alien receiving pension or annuity income from a plan located in the United States is subject to U.S. tax (flat 30 percent or lower treaty rate) on the interest portion of the pension income not withstanding the fact that the services qualifying the nonresident alien for the pension were entirely rendered outside the United States. This amendment exempts from U.S. tax the type of pension inco,~e described above if 90 percent of the per- sons under the plan were U.S. citizens. Pp. 104- (3) Technical and clerical changes. 112 (b) Gross income. (Pp. 112-113.) P. 113 Clerical change. (c) Deductions. (Pp. 113-155.) P. 113 Clerical change. (d) Allowance of deductions and credits. (Pp. 115-116.) P. 115 Clerical change. (e) Beneficiaries of estates and trusts. (P. 116.) P. 116 (1) Imputed business activities.-This amendment imputes the business activities of a trust or estate to its beneficiaries. In other words, if a trust, whether foreign or a domestic, is engaged in a trade or business in the United States, its beneficiaries also are deemed to be engaged in that trade or business. P. 116 (2) Clerical change. P. 117 (f) Expatriation to avoid tax. (Pp. 117-119.) (1) Period rule in effect.-Under this amendment U.S. source income and the effectively connected income of a citizen received for 10 years after expatriation are, in most cases, to be taxed at the regular U.S. tax rates if a principal purpose of the expatriation was the avoidance of U.S. income, estate, or gift taxes. The House bill would have provided a 5-year rule for income taxes. P. 117 (2) Clerical change. (g) Partial exclusion of dividends. (P. 120.) P. 120 Clerical change. (h) Withholding of tax on nonresident aliens. (Pp. 120- 123.) 1848 PAGENO="0697" SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 5 Page No. of Senate amendments Pp. 120, (1) Fixed or determinable income.-This amendment pro- 121, vides for a withholding tax on the following additional types 123 of income: (1) the contingent income derived from the sale of patents and other intangibles; (2) a foreign partner's share of the U.S. income of a domestic partnership which is not effec- tively connected with the partnership's business; and (3) amounts received on retirement or exchange of bonds issued after September 28, 1965, which are treated as gains from the sale of property which is not a capital asset (sec. 1232). Pp. 120- (2) Technical and clerical changes. 123 (i) Liability for withheld tax. (Pp. 123 and 124.) P. 123 Clerical change. (j) Declaration of estimated income tax by individuals. (Pp. 124-125.) P. 125 Clerical change. (k) Collection of income tax at source on wages. (P. 125.) (1) Recapture rule regarding depreciable realty.-T his amendment strikes the House provision which provides that the recapture rule applicable to depreciable realty is to apply to the transfer of depreciable real estate by a foreigner to a domestic corporation in a tax-free exchange for stock or securities of a domestic corporation. P. 125 (2) Clerical change. (1) Definitions of foreign estate or trust. (P. 125.) P. 125 Technical change. (m) Conforming amendment. (Pp. 125-126.) P. 125 Clerical change. (n) Effective dates, (P. 126.) P. 126 Clerical change. Section 104. FOREIGN CORPORATIONS. (Pp. 126- 150.) (a) Tax on income not connected with U.S. business. (Pp. 126-128.) 1849 PAGENO="0698" 6 SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 Page No. of Senate amendments P. 127 (1) Fixed or determinable income.-TJnder the bill, as amended by the Senate, the types of fixed or determinable income specified are generally the same as under present law and the House bill with the same two additions provided in the case of nonresident aliens, namely, (1) contingent income received from the sale of patents and other intangibles, and (2) amounts of original issue discount which are treated as ordinary income received on retirement or sale or exchange, of bonds or other evidences of indebtedness issued after September 28, 1965. A corresponding amendment to the House bill deleting the tax on income realized with respect to stock of a collapsible corporation was made in this pro.- vision. P. 127 (2) Technical changes. (b) Tax on income connected with U.S. business. (Pp. 128-133.) P. 130 (1) Allowance for personal holding company tax purposes of dividends paid deduction.-Under present law if a foreign corporation is determined to constitute a personal holding company and the foreign corporation has not filed a return or that which was filed is not a true and accurate return, the 70 percent personal holding company tax is assessed without allowance of the dividend-paid deduction. In such cases the. combination of the 30 percent tax and the 70 percent personal holding company tax can constitute an effective rate of tax of about 80 percent of the income of the foreign corporation. This amendment provides that a foreign corporation can claim all appropriate deductions in computing its personal holding company tax notwithstanding the general rule dlis.- allowing deductions where no return is filed. P. 132 (2) Certain interest received by banks, in U.S. possessions.- The application of the fiat 30-percent rate to U.S. source income which is not effectively connected with a U.S. trade or business results in a high effective rate of tax on interest. received by banks located in U.S. possessions with respect to U.S. Government obligations which they must necessarily hold to meet reserve requirements. The Senate added an amendment to the House bifi which provides that interest received by banks located in a U.S. possession from U.S. Government obligations will be treated as . effectively connected with a U.S. trade or business whether or not the bankhas such a business. Consequently, the interest received by a bank in a possession from U.S. Government obligations will be taxed on a net basis-gross interest income less allocable expenses. 1850 PAGENO="0699" *&ThL~AB~ OF SENATE AMENDMENTS TO E.R. 13103 7 Page No. of Senate amendments Pp~ 128- (3) Clerical changes. 133 (c) Withholding of tax on foreign corporations. (Pp. 134- 135.) P.. 134 (1) Conforming amendment. P. 134 (2) Clerical changes. (d) Dividends received from certain foreign corporations. (Pp. 135-136.) P. 136 Clerical change. (e) Dividends received from certain wholly-owned foreign subsidiaries. (Pp. 136-138.) Pp. 136-. This amendment to the House bill provides that in certain 138 situations a 100 percent dividends-received deduction is to be allowed to a domestic corporation for dividends received from a wholly owned foreign subsidiary which has 100 percent effectively connected incom.e. For this to be available a foreign corporation must be subject to U.S. corporate tax on all of its income, just as is a domestic corporation. (f) Distributions of certain foreign corporations. (Pp. * 138-139.) P. 138 Technical and clerical changes. (g) Unrelated business taxable income, (P. 139.) * P. 139 Clerical change. (h) Corporation subject to personal holding company tax. (Pp. 139-143.) P.139 (1) Nonexemptior~ of personal 8eri~ice income.-T his amend- ment provides that the general exception provided in the House bifi from the personal holding company provisions in cases where the corporation is wholly foreign owned is not to be available to a foreign corporation which is a personal holding company to the extent that corporation has income from personal services whioh is personal holding company income described in section 543(a) (7). 1851 PAGENO="0700" 8 5TJ~f~~ OF SENATE AMENDMENTS TO H.E.. 13103 Page No. of Senate Ia~nendments P. 141 (2) U.S. ownership de minimus ruie.-This amendment provides a de minimus rule in addition to the general excep- tion provided* in the House bill. Under the amendment, in the case of foreign corporations with only 10 percent or less U.S. ownership, the personal holding company tax is to be assessed only on the corporation's undistributed personal holding company income attributable to the U.S. share- holders' interest. P.~ 142 ... (3) Additional penalty for failure to file.-As indicated above the Senate adopted an amendment which provides that a foreign corporation can claim all appropriate deduc- tions in computing its personal holding company tax not- withstanding the general rule disallowing deductions where no return is filed. However, a 10 percent addition to taxes otherwise due is to be assessed in such a case. (i) Amendments with respect to foreign corporations carry- ing on insurance business in the United States. (Pp. 143- .147.) . :P. 143.: Clerical change;. * (j) Subpart F income. (Pp. 147-148.) P. 147 .~.. *. Clerical .change~ (k) Gain from certain sales or exchanges of stock in cer- tain foreign corporations.. (Pp. 148-149.) P. 148 Clerical change; (1) Declaration of estimated income tax by corporations. (P. 149.) P. 149 Clerical change; (m) Technical amendments. (Pp. 149-150.) Pp. 149- .. Technical and clerical changes. . 160 .... * . . (n) Effective dates. (P. 150.) P 150 Clerical change Section 105. SPECIAL TAX PROVISIONS. (Pp. 150- 163.) (a) Income affected by treaty. (Pp. 150-151.) P. 150 Clerical changes. (b) Adjustment to tax because of burdensome or discrimi-. natory foreign taxes. (Pp. 151-155.) 1852 PAGENO="0701" SUMMARY OF SENATE AMENDMENTS `TO:E.R.: 1~1O3 `9 Page No. of Senate amendments . Pp. 153- (1) Imposition of discriminatory taxes by foreign country.- .154 It was brought to the attention of the Senate that there are some foreign countries which discriminate against foreign taxpayers (including U.S. persons) either generally or with regard to specific classes of foreign taxpayers. The present provisions of the code do not provide the President with authority to counteract discrimination by effecting substan~' tially the same tax on the persons of the discriminating coun- try (the present provision provides only for a doubling of the tax). The `Senate~ added a provision to the House bill granting the President the authority to take such action as is necessary to raise the effective rate of U.S. tax on income received by ~iationals, residents, or corporations of a discriminating country to substantially the same rates as are applied in the other country. Pp. 151- (2) Technical and clerical changes. 155 (c) Clerical amendments. (P. 155.) P. 155 Clerical changes. (d) Effective date. (Pp. 155-156.) Pp. 155- Clerical changes. 156 , . (e) Election by nonresident U.S. citizens who are subject to foreign community property laws. (Pp. 156-161.) P. 156 Clerical changes. (f) Presumptive date of payment, for tax withheld under chapter 3. (Pp. 161-163.) , ` Pp. 161- This amendment adds a new provision which provides 163 that any tax withheld at the sources under chapter 3 of. the code (relating to withholding of tax on a nonresident alien and foreign corporation) is to be deemed to be paid by such recipients on the last day prescribed for ffling his income tax return. . Section 106. FOREIGN TAX CREDIT. (Pp. 163-170.) (a) Allowance of credit to certain nbnr~sident aliens and" foreign corporations. (Pp. 163-167.) ,, ., 1853 PAGENO="0702" 10 SUMMARY OF SENATE AMENIYMENTS TO HJ~. 13IOZ Page No. of Senate amendments P. 164 (1) Taxes of counti'~j of residence.-The House bill pro- * vided that a foreign tax credit is to be allowed nonresident * aliens and foreign corporations with respect to foreign taxes paid on foreign source income which is effectively connected * to the conduct of a U.S. business. This amendment extends this provision to include income taxes paid to the foreigner's home country on grounds other than that the income was * derived from sources within that country. Pp. 163- (2) Clerical change. 167 (b) Alien Residents of the United States or Puerto Rico. * (Pp. 167-169.) P. 167 Clerical change. (c) Foreign tax credit with respect to interest received from foreign subsidiaries. (P. 170.) P. 170 (1) Separate foreign tax credit limitation for interest.- The 10-percent exception to the separate application of the limitation on the foreign tax credit for interest income was was amended by the Senate so as to apply to a U.S. corpora- tion which directly or indirectly owns 10 percent of the foreign corporation from which the interest is derived, or is a member of an affiliated group of corporations which has such owner- ship. The House bill contained a more limited exception which would have provided that the separate limitation is not to apply to a domestic funding subsidiary which is formed and availed of for the principal purpose of (1) raising funds outside the United States through foreign public offer- ings, and (2) using these funds to finance the foreign opera- tions of related foreign corporations. P. 170 (2) Clerical change. Section 107. AMENDMENTS TO PRESERVE EXIST- * ING LAW ON DEDUCTIONS UNDER SECTION 931. (PP. 171-172.) Pp. 171- Clerical changes. 17P2 Section 108. ESTATES OF NONRESIDENTS NOT * * CITIZENS. (Pp. 172-181.) * (a) Rate of tax. (Pp. 172-173.) P. 17~ Clerical change. (b) Credits against tax. (Pp. 173-174.) 1854 PAGENO="0703" SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 11 Page No. of Senate amendments P. 173 Clerical change. (c) Propertywithin the United States. (Pp. 174-175.) P. 174 (1) Situs rule for ban/c deposits.-The Committee on Finance adopted an amendment which would have treated U.S. bank deposits of nonresident aliens as property within the United States, and therefore subject to U.S. estate tax, after 1971. The provisions of the House bill would have made this rule effective immediately. However, the Senate adopted a floor amendment offered by Senator Yarborough which, in effect, provides that U.S. bank deposits of non- resident aliens are to be treated as property without the United States on a permanent basis. Therefore, these assets are not at any time to be subject to U.S. estate tax. P. 174 (2) Clerical change. (d) Property without the United States. (P. 175.) P. 175 (1) Situs rule for deposits in foreign branch ban/cs.-The House bill provided that deposits in a foreign branch bank of a U.S. corporation are to be treated as property without the United States and therefore not includible in a foreigner's U.S. estate tax basis. The Senate adopted an amendment which extended this rule to foreign branch banks of U.S. partnerships. P. 175 (2) Clerical change. (e) Definition of taxable estate. (Pp. 175-176.) P. 175 Clerical change. - (f) Special methods of computing tax. (Pp. 176-180.) P. .176 Clerical change. (g) Estate tax returns. (P. 181.) P. 181 Clerical change. (h) Clerical amendment. (P. 181.) Clerical change. (i) Effective date. (P. 181.) P. 181 Clerical change. 1855 PAGENO="0704" 12 SUMMARY OF SENATE AMENDMENTS TO H.R.* 13103 Page No. of Senate amendments Section 109. TAX ON GIFTS OF NONRESIDENTS NOT CITIZENS. (Pp. 181-183.) S Pp. 181- Clerical changes. 183 Section 110. TREATY OBLIGATIONS. (P. 183.) P. 183 Clerical change. TITLE Il-OTHER AMENDMENTS TO INTERNAL REVENUE CODE Section 201. APPLICATION OF INVESTMENT CREDIT TO PROPERTY USED IN POSSESSIONS OF THE UNITED STATES. Pp. 184- The investment credit is extended by this amendment to 185 p~roperty located in U.S. possessions provided: (1) the property is owned by a U.S. company or citizen that is subject to U.S. tax on its income from possessions; (2) the property would otherwise have qualified for the investment credit; and (3) it is not owned or used by U.S. persons who are presently exempt from U.S. tax. This amendment is effective with respect to property placed in service after December 31, 1965. Section 202. DEDUCTION OF MEDICAL EXPENSES OF INDIVIDUALS AGE 65 OR OVER. Pp. 185- This amendment repeals the provisions with respect to a 187 taxpayer, or his spouse, age 65 or over, and a dependent mother or father of a taxpayer or his spouse if the mother or father is age 65 or over, which, beginning in 1967, would limit their medical deductions to medical care expenses in excess of 3 percent of adjusted gross income and define their medical care expenses to include only those medicine and drug expenses in excess of 1 percent of adjusted gross income. Section 203. BASIS OF PROPERTY RECEIVED ON LIQUIDATION OF SUBSIDIARY. Pp. 187- Under present law, the purchase from an unrelated party 189 by one corporation of at least 80 percent of the stock of another corporation followed by the liquidation of the acquired corporation within 2 years is treated as a purchase. of the assets of the acquired corporation. These amendments expand the definition of "purchase" to include the purchase of stock from a 50-percent owned subsidiary if stock in the 50-percent owned subsidiary was also acquired by purchase. 1856 PAGENO="0705" SUMMARY OF SENATE. AMENDMENTS TO H.R. .13103 13 Page No. of Senate amendments The change is to be effective with respect to acquisitions of stock made after December 31, 1965. These amendments also provide that when installment notes are transferred in the type of purchase and liquidation described above, gain is to be recognized to the distributing corporation in the same manner as if it had sold the notes at fair market value. This amendment is to be effective with respect to distributions made after the date of enact- ment of this act. Section 204. TRANSFERS OF STOCK AND SECURITIES TO CORPORATIONS CONTROLLED BY TRANS- FERORS. P. 189 This amendment provides that section 351 of present law applies to corporate investment funds. Under section 351, the transfer of property to a corporation by one or more persons in exchange for stock in the corporation is not to result in gain or loss if immediately after the exchange, the person o~r persons are in control of the corporation. Proposed Treasury regulations issued on July 14, 1966 took the position that the exchange of appreciated securities for shares in a mutual investment fund is not tax free. In 1960 the Service * issued several rulings that such exchanges-to so-called swap funds-were tax free. The proposed regulations would hold these transfers taxable. Section 205. MINIMUM AMOUNT TREATED AS EARNED INCOME FOR RETIREMENT PLANS OF CERTAIN SELF-EMPLOYED INDIVIDUALS. P. 189 This amendment raises from $2,500 to $6,600 the mini- mum amount of earnings from a trade or business, in which both personal services and capital are material income- producing factors, which a self-employed person may treat as earned income (for self-employed retirement income purposes) regardless of the general, rule that only 30 percent of the net profits of the trade or business may be treated as earned income. This amendment applies to taxable years * beginning after December 31, 1965. Section 206. REMOVAL OF SPECIAL LIMITATIONS WITH RESPECT TO DEDUCTIBILITY OF CON- TRIBUTIONS TO PENSION PLANS BY SELF- EMPLOYED INDIVIDUALS. P. 190 The Senate adopted as a floor amendment offered by Senator Hartke, the provisions of the House passed ver- sion of H.R. 10. The amendment provides for the repeal * ` of two limitations on the deduction from gross income a * ` `self-employed individual may `take with respect `to contribu- tions on his own behalf to a retirement plan. First, it 7 1-297 O-67-pt. 2-45 1857 PAGENO="0706" 14 SUMMARY OF SENATE AMENDMENTS TO H.IL 13103 Page No. of Senate amendments repeals the provision which limits the deduction to 50 percent of the contribution. However, it has retained the provision restricting the contribution for self-employed persons to the lesser of 10 percent of earned income or $2,500. Second, it also permits a self-employed individual to include in earned income all of his net profits when his income is earned from a business in which both the performance of personal services and capital are material income-producing factors. How.- ever, in such cases the personal services of the self-employed person involved must be material income-producing factors. The provisions of this amendment are to be effective for taxable years beginning after December 31, 1967. Section 207. TREATMENT OF CERTAIN INCOME AS AUTHORS, INVENTORS, ETC., AS EARNED IN- COME FOR RETIREMENT PLAN PURPOSES. P. 192 This amendment alters present law relating to sell.. employed individuals' retirement plans to permit authors, inventors, and others, to include gains (other than capital gains) and net earnings derived from the sale or other disposition of, the transfer of any interest in, or the licensing of the use of property (other than goodwill) where his own efforts created the property in their earned income base for the purpose of computing deductions for contributions to such plans. This change will be effective for taxable years ending after the date of enactment of this act. Section 208. EXCLUSION OF CERTAIN RENTS FROM PERSONAL HOLDING COMPANY INCOME. Pp. 193- This amendment provides, for taxable years beginning 195 after the date of enactment of this act (and certain earlier years at the election of the taxpayer), that rent received from the lease of tangible personal property manufactured by a taxpayer is not to be treated as personal holding company income if the taxpayer during the year is engaged in manu- facturing the same type of income. Section 209. PERCENTAGE DEPLETION RATE FOR CERTAIN CLAY BEARING ALUMINA. Pp. 1.95- This amendment provides, with respect to taxable years 196 beginning after the date of enactment, a percentage depletion rate of 23 percent for alumina and aluminum compounds extracted from domestic deposits of clay, laterite, and nephelite syenite. It further provides that in computing gross income from mining all processes applied to derive alumina or aluminum compounds from such clay, laterite. and nephelite syenite are to be treated as mining processes. 1858 PAGENO="0707" SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 15 Page No. of Senate amendments Section 210. PERCENTAGE DEPLETION RATE FOR CLAM AND OYSTER SHELLS. P. 196 This amendment provides that mollusk shells (including clam and oyster shells) are to be allowed percentage deple- tion at the same rate (15 percent) as is applicable in the case of limestone and other calcium carbonates. However, the rate remains at 5 percent (as is true of limestone) if the shells are used as riprap, ballast, road material, rubble, concrete aggregates or for similar purposes. This change is applicable to taxable years beginning after the date of enactment. Section 211. SINTERING AND BURNING OF SHALE, CLAY, AND SLATE USED AS LIGHTWEIGHT AGGREGATES. Pp. 196- This amendment provides that for purposes of determining 197 the applicable percentage depletion base, the sintering or burning of shale, clay, and slate used or sold for use as light- weight aggregates are to be treated as a mining process. This amendment is applicable to taxable years beginning after the date of enactment. Section 212. STRADDLES. Pp. 197- This amendment provides that, with respect to straddle 198 transactions entered into after January 25, 1965, the income from the lapse of an option which originated as part of a straddle is to be treated as a short-term capital gain (instead of ordinary income). This permits it to be netted against any capital loss which may result from the exercise of the other option in the straddle while retaining what in most respects is ordinary income treatment for any excess of net short-term capital gain over net long-term capital loss. This amendment is to apply to straddles written after January 25, 1965. Section 213. TAX TREATMENT OF PER-UNIT RETAIN ALLOCATIONS. Pp. 198- This amendment amends present law dealing with the tax- $309 ation of cooperatives and patrons to insure that a current single tax is paid, at either the cooperative or patron level, with respect to per-unit retain certificates. In so doing, the amendment makes the treatment of these certificates gen- erally comparable to the treatment of patronage dividends under present law. 1859 PAGENO="0708" 16 SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 Page No. of Senate amendments Section 214. EXCISE TAX RATE ON AMBULANCES AND HEARSES. Pp. 209- This amendment provides that the sale of a hearse, as well 210 as an ambulance or combination ambulance-hearse vehicle is to be considered to be the sale of an automobile chassis or automobile body (rather than a truck chassis or body) for purposes of determining the manufacturers' excise tax on motor vehicles. This change applies with respect to articles sold after the date of enactment of this act. Section 215. APPLICABILITY OF EXCLUSION FROM INTEREST EQUALIZATION TAX OF CERTAIN LOANS TO ASSURE RAW MATERIALS SOURCES. Pp. ~210- This amendment provides that subsequent transfers of 211 debt obligations to assure raw material sources are to be exempt from the interest equalization tax where the indebted- ness is acquired without an intent on the part of the pur- chaser to sell it to other U.S. persons. This change is to be effective with respect to acquisitions of debt obligations made after the date of enactment. Section 216. EXCLUSION FROM INTEREST EQUAL- IZATION TAX FOR CERTAIN ACQUISITIONS BY INSURANCE COMPANIES. Pp. 211- The present exemption for reserve asset pools of U.S. 216 insurance companies is extended to allow the establishment of reserve asset poois where a U.S. insurance company com- mences activities in a developed country or where a less-. developed country is designated as a developed country. This amendment is to take effect on the day after the date of enactment. Section 217. EXCLUSION FROM INTEREST EQUAL- IZATION TAX OF CERTAIN ACQUISITIONS BY FOREIGN BRANCHES OF DOMESTIC BANKS. P. 216 The President is given the authority to exempt from the interest equalization tax U.S. dollar loans of more than 1 year made by the foreign branches of U.S. banks. This change is to apply to acquisitions of debt obligations made after the date of enactment. 1860 PAGENO="0709" SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 17 TITLE Ill-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT Page No. of Senate amendments Pp. 216- This title is designed to obtain for public support of presi- 224 dential election campaign financing. Individual taxpayers are to be able to designate on their annual tax returns that $1 of their income tax liability is to be placed in a presidential election campaign fund. The amounts in the fund are to be made available to defray the expenses incurred by political parties in presenting candidates for President and Vice Presi- dent. Amounts will only be paid to those political parties whose candidates received at least 1,500,000 votes in the * preceding presidential election. A major political party (one whose candidate polled 10 million votes or more in the preceding presidential election) is to be eligible to receive a payment from the fund equal to $1 times the number of votes cast for the presidential candidates of the major political parties in the preceding presidential election divided by the number of such major political parties. A minor party (one whose candidate polled more than 1,500,000 but less than 10 million votes) is to be eligible to receive a payment from thefund equal to $1 for each vote in excess of 1,500,000 votes that its candidate received in the preceding presidential election. The payment received by any political party is to be limited, however, to reimburse- ment of presidential campaign expenses acturily incurred by the party in connection with the current presidential election. The Comptroller General is authorized to determine the campaign expenses of the political parties and to determine the amounts which may be paid to such parties. A bipartisan advisory board is established to advise and assist the Comp- troller General with his duties under this act. TITLE IV-MISCELLANEOUS PROVISIONS Section. 401. TREASURY NOTES PAYABLE IN FOR- * EIGN CURRENCY. Pp. 224- This amendment expands the debt management authority of 225 the Secretary of the Treasury to permit the issuance of U.S. notes denominated in foreign currencies. This authority already exists in the case of bonds and certificates of in- debtedness. 1861 PAGENO="0710" 18 SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 Page No. of Senate amendments Section 402. REPORTS TO CLARIFY TO NATIONAL DEBT AND TAX STRUCTURE. Pp. 225- This amendment requires the Secretary of the Treasury to 226 submit a report to the Congress each year indicating the amount of the contingent liabilities and unfunded liabilities of the Federal Government and the assets of the Federal Government which might be made available to liquidate such liabilities. The first such report is to be submitted on or before March 31, 1967. Section 403. COVERAGE OF EXPENSES OF CERTAIN DRUGS UNDER SUPPLEMENTARY MEDICAL INSURANCE BENEFITS. Pp. 226- The Senate amendment adds as a covered time of service 233 under part B of medicare (supplemental medical insurance plan) the expense of drugs requiring a prescription. The additional benefit would become available effective January 1, 1968 (the effective date of July 1, 1968, adopted by the Committee on Finance was amended by a floor amendment by Senator Cotton), or earlier if the part B premium rate is recalculated prior to that time. A formulary committee would be established consisting of the Surgeon General, the Commissioner of the Food and Drug Administration, and the Director of the National Institutes of Health. The Formu- lary Committee would, with the assistance of an advisory group broadly representative of those groups concerned with pharmacy, determine which drugs would be covered under the plan. The formulary committee would promulgate a~ schedule of allowances payable for given quantities of cov- ered drugs. Such allowances would be based upon the lowest wholesale price of any such drug, however named, plus an increment covering the reasonable cost of distribution, handling, and compounding. A drug included in the formulary under its generic or established name would also be deemed an eligible drug if prescribed under any of its proprietary or brand names and the scheduled allowance for the drug named in the formulary would also be the allowance for the proprietary or brand name version even though the wholesale costs of such proprietary or brand name items may be greater in price. Allowances are payable to the beneficiary in the same manner as other part B benefits or he may direct payment to a third party-such as a welfare department by assign- ment. * The monthly cost of providing this benefit is estimated at 50 cents to the participant and 50 cents to the Federal Govermnent. The participant's share would become part of the regular part B premium. The Federal contribution * would, as is the present case with Federal participation in 1862 PAGENO="0711" SUMMARY OF SENATE AMENDMENTS TO H.R. 13103 19 Page No. of Senate 2mendments the costs of the part B program, come from general revenues. The cost to general revenues would be offset in part by a reduction -in the amount of drug expense deductions on Federal income tax returns. Section 404. PERCENTAGE DEPLETION RATE FOR CLAY AND SHALE USED IN MAKING SEWER PIPE. P. 233- A floor amendment offered by Senator Hartke provides a 234 15 percent percentage depletion allowance for clay products used in the making of sewer pipe and brick. The presently applicable rate is 5 percent. This change applies to years ending after date of enactment. P. 234- Section 405. SOCIAL SECURITY BENEFITS REGARD- 235 ING CERTAIN ILLEGITIMATE CHILDREN. (P. 232.) This is a floor amendment offered by Senator Fong which amends the Social Security Act to exempt from reduction of monthly benefits (caused by the granting of benefits to certain illegitimate children) those widows whose husbands died prior to 1966 if the other claimants (the illegitimate children), first, are entitled to child's benefits under section 202(d), are not children of the widow, and would not have been considered prior to Public Law 89-97 to be the children of the deceased worker. As the amendment is drawn, the exemption from reduction of benefits is extended only to those widows whose husbands died in 1965 or earlier in those cases where claims of an illegitimate child or children based on the same man's earnings record would, because of the family maximum, force a reduction in her benefit. 1863 PAGENO="0712" PAGENO="0713" SECTION 28 CONFERENCE REPORT 1865 PAGENO="0714" PAGENO="0715" 89TH CONGRESS ~ HOUSE OF REPRESENTATIVES f RE~oi~r 2dSession J ~ No. 2327 FOREIGN INVESTORS TAX ACT OF 1966 OCTOBER 19, 1966.-Ordered to be printed Mr. MrLLS, from the committee of conference, submitted the following CONFERENCE REPORT [To accompany H.R. 13103] The committee of conference on the disagreeing votes of the two Houses on the amendments of the Senate to the bill (}LR. 13103) to amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign investment in the United States, having met after full and free conference, have agreed to recommend and do recommend to their respective Houses as follows: That the House recede from its disagreement to the amendment of the Senate to the text of the bill and agree to the same with the following amendments (pages and lines refer to pages and lines of the Senate engrossed amendments): Page 7, strike out line 6, and insert: an agreement to pay interest thereon. Effective with respect to amounts paid or credited after December 31, 1972, subsection (a) (1) (A) and this subsection shall cease to apply." Page 7, line 22, strike out "ration," and insert: ration (other than interest paid or credited after December 31, 1972, by a domestic branch of aforeign corporation, if such branch is engaged in the commercial banking business), Page 8, line 7, strike out "foreign corporation," and insert: foreign corporation (other than interest paid or credited after December 31, 1972, by a domestic branch of a foreign corporation, if such branch is engaged in the commercial banking business), Page 52, line 17, strike out "871(b) (1)" and insert 871(b) (2) Page 52, line 18, strike out "882(a)" and insert 882 (a) (2) Page 73, line 2, strike out the period and insert a comma. Page 74, in the matter following line 12, strike out "Elections" and insert Election Page 92, line 14, strike out the period and insert a comma. 1867 PAGENO="0716" 2 FOREIGN INVESTORS TAX ACT OF 1966 Page 92, line 16, after "States." insert: With respect to estates of decedents dying after December 31, 1972, deposits with a domestic branch of aforeign corporation, if such branch is engaged in the commercial banking business, shall, for purposes of this subchapter, be deemed property within the United States. Page 93, line 16, strike out "(3)" and insert (3) of Page 101, line 13, after "owned" insert and held Page 102, line 19, strike out "934(b)" and insert 934(c) Page 103, beginning with line 9, strike out all through line 2, page 105. Page 105, line 3, strike out "203" and insert 202 Page 107, beginning with line 3, strike out all through line 14, and insert: SEC. 203. TRANSFERS OF PROPERTY TO INVESTMENT COMPANIES CON- TROLLED BY TRANSFERORS. (a) TRANSFERS TO INVESTMENT CoiiP~tNIEs.-The first sentence of section 351(a) (relating to transfer to corporation controlled by the trans- feror) is amended by striking out "to a corporation" and inserting in lieu thereof "to a corporation (including, in the case of transfers made on or before June 30, 1967, an investment company)". (b) INVESTMENT COMPANIES REQUIRED To FILE REGISTRATION STATEMENT WITH THE SEC.-Section 351 is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection: "(d) APPLICATION OF JUNE 30, 1967, DATE.-For purposes of this section, if, in connection with the transaction, a registration statement is required to be filed with the Securities and Exchange Commission, a trans- fer of property to an investment company shall be treated as made on or before June 30, 1967, only if- "(1) such transfer is made on or before such date, "(2) the registration statement was filed with the Securities and Exchange Commission before January 1, 1967, and the aggregate issue price of the stock and securities of the investment company which are issued in the transaction does not exceed the aggregate amount therefor specified in the registration statement as of the close of De- cember 31, 1966, and "(3) the transfer of property to the investment company in the transaction includes only property deposited before May 1, 1967." (c) EFFECTIVE DATE.-The amendments made by subsections (a) and (b) shall apply with respect to transfers of property to investment com- panies whether made before, on, or after the date of the enactment of this Act. Page 107,b strike out lines 15 through 25. Page 108, line 1, strike out "206" and insert 204 Page 108, between lines 8 and 9, insert: (b) CONFORMING AJfENDMENTS.- Page 108, line 9, strike out "(b)". Page 110, line 7, strike out "207" and insert 205 Page 111, line 3, strike out "208" and insert 206 Page 113, line 3, strike out "209" and insert 207 Page 113, beginning with line 13, strike out all through line 5, page 114, and insert: (b) EFFECTIVE DATE.-The amendments made by subsection (a) shall apply to taxable years beginning after the date of the enactment of th~ Act. 1868 PAGENO="0717" FOREIGN INVESTORS TAX ACT OF 1966 3 Page 114, line 6, strike out "210" and insert 208 Page 114, beginning with line 18, strike out all through line 6, page 115, and insert: SEC. 209. PERCENTAGE DEPLETION RATE FOR CERTAIN CLAY, SHALE, AND SLATE. (a) 7~ PERCENT RATE.-Section 613 (b) (relating to percentage depletion rates) is amended- (1) by renumbering paragraphs (5) and (6) as (6) and (7), re- spectively, and by inserting after paragraph (4) the following new paragraph: "(5) 7~ percent-clay and shale used or sold for use in the manu- facture of sewer pipe or brick, and clay, shale, and slate `used or sold for use as sintered or burned lightweight aggregates."; (2) by striking o'ut in paragraph (3)(B) (as amended by section 207(a) (2)) "if neither paragraph (2)(B) nor (5)(B) applies" and inserting in lieu thereof "if neither paragraph (2) (B), (5), or (6) (B) applies"; (3) by striking out in paragraph (6) (as renumbered by para- graph (1)) "shale, and stone, except stone described in paragraph (6)" and inserting in lieu thereof "shale (except shale described in paragraph (5)), and stone (except stone described in paragraph (7))"; (4) by striking out, in subparagraph (B) of paragraph (6) (as so renumbered), "building or paving brick," and by striking out "sewer ptpé,"; and (5) by inserting afte~r "any such other mineral" in paragraph (7) (as so renumbered) "(other than slate to which pa~iagraph (5) ciipvl'ies)". (b) CONFORMING AMENDMENT.-Section 613(c)(4)(G) (relating to tr~atment processes) is amended by striking out "paragraph (5) (B)" and inserting in lieu thereof "partz~raph (5) or (6) (B)". (c) EFFECTIVE DATE.-The amendments made by subsections (a) and (b) shall apply to taxable years beginning after the date of the enactment of this Act. Page 115, line 7, strike out "212" and insert 210 Page 116, line 9, strike out "213" and insert 211 Page 117, line 13, strike out the quotation marks Page 117, line 14, strike out the quotation marks Page 127, line 17, strike out "214" and insert 212 Page 128, line 7, strike out "215" and insert 213 Page 129, line 19, strike out "216" and insert 214 Page 134, line 3, strike out "217" and insert 215 Page 137, line 19, strike out "10,000,000" and insert 15,000,000 Page 137, line 22, strike out "equal to-" and insert equal to the excess over $5,000,000 of- Page 138, line 1, strike out "10,000,000" and insert 15,000,000 Page 138, line 7, strike out "10,000,000" and insert 15,000,000 Page 138, lines 11 and 12, strike out "more than 1,500,000, but less than 10,000,000," and insert more than 5,000,000, but less than 15,000,000, Page 138, line 16, strike out "1,500,000" and insert 5,000,000 Page 141, line 15, strike out "10,000,000" and insert 15,000,000 Page 143, beginning with line 5, strike out all through line 2, page 144, and insert: The Secretary of the Treasury shall, on the first day of. each regular session of the Congress, submit to the Senate and the House of Representa- 1869 PAGENO="0718" * 4 FOREIGN INVESTORS TAX ACT OF 1966 tives a report setting forth, as of the close of the preceding June 30 (be- ginning with the report as of June 30, 1967), the aggregate and individual amounts of the contingent liabilities and the unfunded liabilities of the Government, and of each de~'partment, agency, and instrumentality thereof including, so far as practicable, trust fund liabilities, Government cor- porations' liabilities, indirect liabilities not included as a part of the pubis debt, and liabilities of insurance and annuity programs, including their actuarial status. The report shall also set forth the collateral pledged, or the assets available (or to be realized), as security for such liabilities (Government securities to be separately noted), and shall also set forth all other assets specifically available to liquidate such liabilities of the Government. The report shall set forth the required data in a concise form, with such explanatory material (including such analysis of the sicinificance of the liabilities in terms of past experience and probable risk) as the Secretary may determine to be necessary or desirable, and shall include total amounts of each category according to the department, agency, or instrumentality involved. Page 144, beginning with line 3, strike out all through line 9, page 153. On page 3, beginning with the matter in the table of contents relating to title II, strike out all through the end of the table of contents on page 5 and insert: TITLE Il-OTHER AMENDMENTS TO INTERNAL REVENUE CODE Sec. 201. Application of Investment Credit to Property Used in Possessions of the United States. (a) Property used by domestic corporations, etc. (b) Effective date. Sec. 202. Basis of property received on liquidation of subsidiary. (a) Definition of purchase. (b) Period of acquisition. (c) Distribution of installment obligations. (d) Effective dates. Sec. 203. Transfers of property to investment companies controlled by transferors. (a) Transfers to investment companies. (b) Investment companies required to file registration statement with S.E.C. (c) Effective date. Sec. 204. Removal of special limitations with respect to deductibility of contributions to pension plans by self-employed individuals. (a) Removal of special limitations. (b) Conforming amendments. (c) Definition of earned income. (d) Effective date. Sec. 205. Treatment of certain income of authors, inventors, etc., as earned income for retirement plan purposes. * (a) Income from disposition of property created by taxpayer. (b) Effective date. Sec. 206. Exclusion of certain rents from personal holding company income. (a) Rents from leases of certain tangible personal property. (b) Technical amendments. (c) Effective date. Sec. 207. Percentage depletion rate for certain clay bearing alumina. (a) 23 percent rate. (b) Treatment processes. (c) Effective date. * Sec. 208. Percentage depletion rate for clam and oyster shells. (a) 15 percent rate. * (b) Effective date. Sec. 209. Percentage depletion rate for certain clay, shale, and slate. (a) 73~ percent rate. (b) Conforming amendment. (c) E~ffective date. 1870 PAGENO="0719" FOREIGN INVESTORS TAX ACT OF 1966 5 Sec. 210. Straddles. (a) Treatment as short-term capital gain. (b) Effective date. Sec. 211. Tax treatment of per-unit retain allocations. (a) * Tax treatment of cooperatives. (b) Tax treatment by patrons. (c) Definitions. (d) Information reporting. (e) Effective dates. (f) Transition rule. Sec. 212. Excise tax rate on ambulanceè and hearses. ~a) Classification as automobiles. (b) Effective date. Sec. 213. Applicability of exclusion from interest equalization tax of certain loans to assure raw materials sources. (a) Exception to exclusion. (b) Technical amendments. (c) Effective date. Sec. 214. Exclusion from interest equalization tax for certain acquisitions by insur- ance companies. (a) New companies and companies operating in former less developed countries. (b) Effective date. Sec. 215. Exclusion from interest equalization tax of certain acquisitions by foreign branches of domestic banks. (a) Authority for modification of executive orders. (b) Effective date. TITLE Ill-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT Sec~301. Short title. Sec. 302. Authority for designation of $1 of income tax payments to presidential election campaign fund. Sec. 3"3. Presidential election campaign fund. (a) Establishment. (b) Transfers to the fund. (c) Payments from fund. (d) Transfers to general fund. Sec. 304. Establishment of advisory board. Sec. 305. Appropriations authorized. TITLE IV-MISCELLANEOUS PROVISIONS Sec. 401. Treasury notes payable in foreign currency. Sec. 402. Reports to clarify to national debt and tax structure. And the Senate agree to the same. That the House recede from its disagreement to the amendment of the Senate to the title of the bifi and agree to the same. W. D. MILLS, CECIL R. KING, HALE BOGGS, EUGENE J. KEOGH, JOHN W. BYRNES, JAMES B. U~r, Managers on the Part of the House. RUSSELL B. LONG, GEORGE A. SMATHERS, CLINTON ANDERSON, EUGENE J. MCCARTHY, FRANK CARLSO~, WALLACE 1~. BENNETT, Managerà on the Part of the Sen~tte. 1871 PAGENO="0720" STATEMENT OF TIlE MANAGERS ON THE PART OF TIlE HOUSE The managers on the part of the House at the conference on the disagreeing votes of the two Houses on the amendments of the Senate to the bifi (H.R. 13103) to amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign investment in the United States, submit the following statement in explanation of the effect of the action agreed upon by the conferees and recommended in the accompanying conference report: The Senate amendment to the text of the bifi struck out all after* the enacting clause of the bill as passed by the House and inserted in lieu thereof a substitute containing four titles: Title I: Foreign Investors Tax Act; Title II: Other Amendments to Internal Revenue Code; Title III: Presidential Election Campaign Fund Act; and Title IV: Miscellaneous Provisions. The effect of the action rec- ommended in the accompanying conference report is explained below under the four headings contained in the Senate amendment. TITLE I-FOREIGN INVESTORS TAX ACT* INCOME AND ESTATE TAX TREATMENT OF AMOUNTS HELD ON DEPOSIT (a) Income tax treatment.-Under existing law, interest on U.S. bank deposits is not treated as U.S. source income and, therefore, not subject to the Federal income tax in the case of nonresident aliens and. foreign corporations not engaged in trade or business in the United States. Under the bill as passed by the House (1) this source rule for interest on bank deposits was broadened for a temporary period so it applied also to accounts with mutual savings banks, domestic build- ing and loan associations, etc., and to amounts held on deposit by in- surance companies, and (2) after December 31, 1971, all interest paid or credited on.these U.S. deposits, accounts, or amounts (including in- terest on bank deposits) was to be treated as U.S. source income. Under the Senate amendment, the temporary income tax treatment provided by the bill as passed by the House for interest on these de- posits, accounts, and amounts was made permanent. Under the action recommended in the accompanying conference report, the temporary income tax treatment provided in the bill as passed by the House for interest on U.S. bank deposits, accounts with mutual sav- ings banks, domestic building and loan associations, etc., and amounts held on deposit by insurance companies, will apply with respect to amounts paid or credited before January 1, 1973. Such amounts paid or, credited after December 31, 1972, are to be treated as income de- rived from sources within the United States (and therefore subject to the Federal income tax). The conferees in inserting December .31, 1972, a~ the date for the termmation of the mcome tax exemption for mterest on bank deposits etc., believe that this will provide aü opportunity to review the ex~~ 6 1872 PAGENO="0721" FOREIGN INVESTORS TAX ACT OF 1966 7 emption in view of developments in the balance-of-payments situa- tion and other factors. (b) Estate tax treatmertt.-Tlnder existing law, United States bank deposits of nonresidents who are not citizens are not ineludible in their gross estates. Under the bifi as passed by the House, these bank deposits would have been includible in these gross estates, effec- tive with respect to decedents dying after the date of the enactment of the bifi. * Under the Senate amendment, U.S. bank. deposits, accounts with mutual savings banks, building and loan associations, etc., and amounts held on deposit by insurance companies were, in general, deemed to be property not within the United States (and therefore not includible in the gross estate of a nonresident not a citizen of the United States), effective with respect to decedents dying after the date of the enactment of the bifi. The effect of the action recommended in the accompanying con- ference report is to provide the estate tax treatment for these deposits, accounts, and amounts contained in the Senate amendment (namely, that they are not includible in the gross estate of nonresidents who are not citizens of the United States) with respect to estates of de- cedents dying after the date of the enactment of the bifi and before January 1, 1973. In the case of estates of decedents who are non- residents and not citizens of the United States and who die after December 31, 1972, these deposits, accounts, and amounts will be includible in gross estate for purposes of the Federal estate tax. OTHER MODIFICATIONS Title I of the Senate amendment, while in general retaining the sub- stance of the bill as passed by the House with respect to matters other than the tax treatment of bank deposits, made numerous technical and other modifications in the provisions which relate to the tax treat- ment of foreign.investors. For an explanation of the more important of these modifications, which are included in the action recommended in the accompanying conference report, see the report of the Committee ,on Finance of the Senate (S. Rept. No. 1707, 89th Cong., .2d sess.). TITLE TI-OTHER AMENDMENTS TO.INTERNAL REVENUE CODE * APPLICATION OF INVESTMENT CREDIT TO PROPERTY USED IN POSSESSIONS OF THE UNITED~ STATES Section 48(a) (2) (A) of the code provides the general rule that prop- erty used predominantlyoutside the United States is not to be included within the term "section 38 property" and therefore is not eligible for * the investment credit. Section 48(a)(2)(B) of the code provides exceptions to this general rule. The Senate amendment (in proposed section 201) amends section 48(a)(2)(B) to include among the exceptions~ from the general rule with respect to property used predominantly outside the U.S. property which is owned by a domestic corporation (other than a corporation entitled to the benefits of section 931 or 934(b)) or by. a U.S. citizen (other than a citizen entitled .to .the benefits of sec. 931, 932, 933, or 934(c)) and which is used predominantly in a possession of the United 71-297 0-67-pt. 2-46 1873 PAGENO="0722" 8 FOREIGN INVESTORS TAX ACT OF 1966 States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States. Under the Senate amendment, this provision was effective with respect to property placed in service on or after January 1, 1966 (but no carryback of an investment credit attributable to this provi- sion was permitted). The conference action includes this amendment to the code. DEDUCTION OF MEDICAL EXPENSES OF INDIVIDUALS AGE 65 OR OVER Section 106 of the Social Security Amendments of 1965 provided, in general, that, effective with respect to taxable years beginning after December 31, 1966, the medical expenses of individuals age 65 and over are to be treated for income tax purposes in the same way as the medical expenses of individuals under the age of 65 (that is, these expenses would be subject to the 3 percent of adjusted gross income provision and to the 1-percent provision for drugs). The Senate amendment would have made permanent the treatment of medical expenses of individuals age 65 and over as not being subject to the 3-percent and 1-percent provisions. The conference action recommended in the accompanying conference report does not include this provision of the Senate amendment with respect to the' medical expenses of the aged. BASIS OF PROPERTY RECEIVED ON LIQUIDATION OF SUBSIDIARY Under existing law, the "purchase" from an unrelated party by one corporation of at least 80 percent of the stock of another corporation, when followed (within 2 years) by the liquidation of the acquired corporation, is treated as a purchase of the assets of the acquired corporation. For this purpose, where the acquiring corporation owns 50 percent or more of the stock of a subsidiary corporation, the sub- sidiary corporation is treated as a related party (and, therefore, the acquiring corporation cannot take into account stock in the liquidated corporation which it acquired from such a subsidiary). The Senate amendment (in proposed sec. 203) `expands the defiuii- tion of "purchase" contained in.. section 334(b) (3) of the code to include the purchase of stock from a subsidiary `where the stock of such subsidiary was also acquired by purchase (within a specified period). This new definition of "purchase" applies with respect to acquisitions of stock after December 31, 1965. The Senate amendment also contained (in proposed sec. 203(c)) an amendment to section 453(d) of the code with respect to the treatment of installment notes in a distribution in complete liquidation of a subsidiary described in section 334(b)(2). For a description of such treatment under the Senate amendment, see the report of the Com- mittee on Finance (S. Rept. No. 1707). Under the conference action, the Senate amendment, insofar as it relates to section 334(b) (2) liquidations, is included. 1874 PAGENO="0723" FOREIGN INVESTORS TAX ACT OF 1966 9 TRANSFERS OF PROPERTY TO INVESTMENT COMPANIES CONTROLLED BY TRANSFERORS. Section 351(a) of the code, which provides a general rule for the transfer of property to a corporation controlled by the transferor, now reads as follows: . (a) GENERAL RULE.-No gain or loss shall be recognized if property is transferred to a corporation by one or more per- sons solely in exchange for stock or securities in such corpora- tion and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation. For purposes of this section, stock or securities iss~ied for services shall not be considered as issued in return for property. The Senate amendment (in proposed sec. 204(a)) amends the first sentence of section 351(a) by striking out "to a corporation" and inserting in lieu thereof "to a corporation (including an investment company)". Under the Senate amendment this amendment to section 351(a) was to apply with respect to transfers of property whether made before, on, or after the date of the enactment of the bill. Under the action recommended in the accompanying conference report, the first sentence of section 35 1(a) of the code is amended by striking out "to a corporation" and inserting in lieu thereof "to a corporation (including, in the case of transfers made before July 1,. 1967, an investment company)". The conference action also inserts a new subsection (d) in section 351 prOviding special rules relating to the application of section 351 in the case of investment companies which are required to file registration statements with the Securities and Exchange Commission. Under the conference actiOn, these amendments to section 351 are to apply to transfers to investment companies whether made before, on, or after the date of the enactment of the bifi. MINIMUM AMOUNT TREATED AS EARNED INCOME FOR RETIREMENT PLANS OF CERTAIN SELF-EMPLOYED INDIVIDUALS The Senate amendment (in proposed sec. 205) raised from $2,500 to $6,600 the minimum amount of earnings from a trade. or business, -. in which both personal services and capital are material income- producing factors, which aself-employed person may treat as earned income, for. purposes of section 401 of the code, without regard to the general rule that only 30 percent of the net profits of the trade or business may be treated as a self-employed person's earned income. This provision was to apply to taxable years beginning after December 31, 1965. . This provision is not included in the action recommended in the accompanying conference report: For a related provision which~. is included in such section, however, see the explanation which immedi- ately follows this paragraph. 1875 PAGENO="0724" 10 FOREIGN INVESTORS TAX ACT OF 1966 REMOVAL OF SPECIAL LIMITATIONS WITH RESPECT TO DEDUCTI- BILITY OF CONTRIBUTIONS TO PENSION PLANS BY SELF-EMPLOYED INDIVIDUALS Existing section 404(a)(1O) of the code limits the deduction with respect to contributions made on behalf of an individual who is an employee within the meaning of section 401(c)(1) (principally, the self-employed) to an amount equal to one-half of such contributions. The Senate amendment repeals section 404(a)(1O) of the code, effective with respect to taxable years beginning after December 31, 1967. The Senate amendment also amends section 401(c)(2) of the Code (relating to definition of earned income for purposes of certain pension and profit-sharing plans) to treat as earned income all of the net profits from a trade or business in which both the performance of personal services and capital are material income-producing factors. However, the earned income to be taken into account for this purpose. includes only net earnings with respect to a trade or business in which personal services of the. taxpayer are a material income-producing factor. Under the Senate amendment this provi- sion is effective for taxable years beginning after December 31, 1967. The action recommended in the accompanying conference report includes both the repeal of section 404(a)(1O) and the amendment of the earned income, provisions of section 401(c)(2), effective with respect to taxable years beginning after December 31, 1967. TREATMENT OF CERTAIN INCOME OF AUTHORS, INVENTORS, ETC., AS EARNED INCOME FOR RETIREMENT PLAN PURPOSES Section 401(c)(2) of the coder contains the definition of "earned income" for purposes of pension and profit-sharing plans which cover self-employed individuals and: owner-employees. The Senate amendment adds a new subparagraph providing that the term "earned income" includes gains (other than capital gains) and net earnings derived from the sale or other disposition of, the transfer of any interest in, or the licensing of the use of property (other than good will) by an individual whose personal efforts created such property. Under the conference action, this~ provision is retained.. EXCLUSION OF CERTAIN RENTS FROM PERSONAL HOLDING COMPANY INCOME Section 543(b)(3) of the code defines the term "adjusted income from rents" for purposes of the provisions of the code relating to personal holding* companies. The Senate amendment adds a provi- sion providing that such term does not include compensation, how- ever designated, for the use of, or the right to use, any tangible personal property manufactured or produced by the taxpayer, if during the taxable year the taxpayer is engaged in substantial manu- facturing or production of tangible personal property of the same type. Under the conference action this provision is retained. 1876 PAGENO="0725" FOREIGN INVESTORS TAX ACT OF 1966 11. PERCENTAGE DEPLETION RATE FOR CERTAIN CLAY-BEARING ALUMINA Section 613(b)(6) of the code provides a 15-percent-depletion rate for all other minerals not otherwise provided a percentage depletion rate. Under that provision, clay, laterite, and nephelite syenite used for the extraction of alumina would receive a 15-percent-depletion rate. Section 613(c)(4) of the code sets forth the treatment processes which are cinsidered as mining. The Senate amendment (in proposed sec. 209(a)) amends section 613(b) to provide a 23-percent-depletion rate for clay, laterite, and nephelite syenite produced from deposits in the United States to the extent that alumina and aluminum compounds are extracted there- from. Section 209(b) would have amended section 613(c)(4) to pro- vide that in the case of clay, laterite, and nephelite syenite extracted from deposits in the United States, all processes applied to derive alumina or aluminum compounds would be considered as mining. Such amendments would apply to taxable years beginning after the date of enactment of the bill. Under the conference action proposed section 209(a) is retained but proposed section 209(b) is deleted. The amendment is to apply to taxable years beginning after the date of enactment of the bill. PERCENTAGE DEPLETION RATE FOR CLAM AND OYSTER SHELLS Section 613(b)(5) of the code provides a 5-percent-depletion rate for mollusk shells (including clam shells and oyster shells). The Senate amendment (in proposed sec. 210) amends section 6 13(b) to provide a 15-percent-depletion rate for mollusk shells, except when used for riprap, ballast, road material, rubble, concrete aggre- gates or for similar purposes, in which event a 5-percent rate applies. The amendment applies to taxable years beginning after the date of enactment of the bill. Under the conference action this provision is retained. PERCENTAGE DEPLETION RATE FOR CERTAIN CLAY, SHALE, AND SLATE Section 6 13(b) of the code provides a 5-percent-depletion rate for shale; clay used, or sold for use, in the manufacture of brick or sewer pipe; and clay or slate used or sold for use as concrete aggregates or for similar purposes. Section 613(c)(4) sets forth certain treatment processes considered as mining. The Senate amendment (in proposed sec. 211) would have amended section 613(c)(4) to provide that the sintering or burning of clay, shale, and slate, used or sold for use, as lightweight aggregates, would be considered a mining process. This amendment would apply to taxable years beginning after the date of enactment of the bill. Under the Senate amendment (in proposed sec. 404) the depletion rate for clay and shale used or sold for use in the manufacture of sewer pipe and brick would be 15 percent. This amendment would apply to taxable years ending after the date of enactment of the bill. Under the conference action the depletion rate for clay or shale used or sold for use in the manufacture of sewer pipe and brick, and for clay, shale or slate used or sold for use as sintered or burned lightweight aggregates, is to be 734 percent. Under the conference action this 1877 PAGENO="0726" 12 FOREIGN INVESTORS TAX ACT OF 1966 amendment is to apply to taxable years beginning after the date of enactment of the bifi. STRADDLES The Senate amendment (in proposed sec. 212) amends section 1234 to provide that the gain from the lapse of an option granted by the taxpayer as part of* a straddle is to be treated as a short-term capital gain. This provision does not apply to any person who holds securities for sale to customers in the ordinary course of his trade or business. The amendment is applicable to straddle transactions entered into after January 25, 1965. Under the conference action this provision is retained. * TAX TREATMENT OF PER UNIT RETAIN ALLOCATIONS The Senate amendment (in proposed sec. 213) amends the present law relating to the taxation of cooperatives and their patrons to provide tax treatment with respect to per unit retain certificates which parallels, in general, the tax treatment applicable with respect to patronage dividends. The amendment applies generally to taxable years beginning after April 30, 1966. Under the conference action, this provision is retained. EXCISE TAX. RATE ON AMBULANCES AND HEARSES The Senate amendment (in proposed sec. 214) provides that the sale of a hearse, as well as an ambulance or combination ambulance- hearse vehicle, is to be considered to be the sale of an automobile chassis and an automobile body (rather than a truck chassis and body) for purposes of determining the manufacturers' excise tax on motor vehicles. This amendment applies with respect to articles sold after the date of the enactment of the bill. APPLICABILITY OF EXCLUSION FROM INTEREST EQUALIZATION TAX OF CERTAIN LOANS TO ASSURE RAW MATERIAL SOURCES Section 4914(d) of the code excludes from interest equalization tax certain loans to assure raw material sources. However, the exemp- tion may be lost if the obligation is subsequently transferred. The Senate amendment would impose the tax only on a person who* acquires the obligation with an intent to sell it to other U.S. persons. This amendment is effective with respect to acquisitions of debt obligations after the date of enactment. Under the conference action this provision is retained. EXCLUSION FROM INTEREST EQUALIZATION TAX FOR CERTAIN ACQUISI- TIONS BY INSURANCE COMPANIES Section 4914(e) of the code permits life insurance companies to establish reserve funds of assets under specified circumstances. The Senate amendment extends this privilege to permit a life insur- ance company to establish a reserve fund of assets where such a company commences activities in a developed country or where a less developed country is designated as a developed country. This amendment is to take effect on the day after the date of enactment. Under the conference action this provision is retained. 1878 PAGENO="0727" FOREIGN INVESTORS TAX ACT OF 1966 13 EXCLUSION FROM INTEREST EQUALIZATION TAX OF CERTAIN ACQUISI~ TIONS BY FOREIGN BRANCHES OF DOMESTIC BANKS The Senate amendment gives the President authority under section 4931 (a) to exempt from the interest equalization tax U.S. dollar loans made by the foreign branches of U.S. commercial bauks. Under the conference action this provision is retained. TITLE Ill-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT Title III of the Senate amendment adds five new sections (secs. 301-305) to the bifi. Under the conference action, these five new sections are retained with the changes noted below. Section 801. Short title Seetion 301 provides that title III may be cited as the "Presidential Election Campaign Fund Act of 1966." Section 30~2. Authority for designation of $1 of income tax payments to presidential election campaign fund Section 302 amends subchapter A of chapter 61 of the code by adding a new part VIII consisting of a new section 6096. The new section 6096 of the code permits every individual (other than a non- resident alien individual) to designate that an amount equal to $1 of his income tax liability for any taxable year shall be paid into the presidential election campaign fund (established by sec.~ 303 of the Senate amendment). Under the Senate amendment, such designa- tions may be made with respect to income tax liability for taxable years beginning after December 31, 1966. Section 303. Presidential election campaign fund Subsection (a) of section 303 of the Senate amendment establishes a special fund, to be known as the "presidential election campaign fund," on the books of the Treasury. Subsection (b) of section 303 directs the Secretary of the Treasury to transfer to the fund amounts equal to the amounts designated by individuals under section 6096 of the code (added by sec. 302 Of the Senate amendment). Subsection (c) of section 303 provides for payments by the Secretary of the Treasury, as authorized by appropriation acts, out of the fund to political parties which have qualified under the provisions of the subsection. With respect to each presidential campaign, the Senate amendment provides that payments wifi be made to political parties whose candidate for President at the preceding presidential election received 10,000,000 or more popular votes in a total amount equal to $1 multiplied by the total number of popular votes cast in such pre- ceding presidential election for candidates of political parties whose candidates received 10,000,000 or more popular votes.. Under the Senate amendment each such political party wifi share equally in the total amount authorized for payment to these political parties. A political party whose candidate for President at the preceding presi- dential election received more than 1,500,000 but less than 10,000,000 popular votes wifi be entitled to payments equal to $1 multiplied by the number of popular votes in excess of 1,500,000 received by the candidate of such political party in such preceding presidential election. 1879 PAGENO="0728" 14 FOR~'IGN INVESTORS TAX ACT OF 1966 Under the conference action, the provisions in the Senate amend- ment with respect to payments to political parties whose candidates received 10,000,000 or more popular votes in the preceding presidential election are made applicable only with respect to political parties whose candidates received more than 15,000,000 popular votes in the preceding presidential election. In addition, under the conference action, the provisions in the Senate amendment applicable to political parties whose candidates received more than 1,5000,000 but less than 10,000,000 popular votes in the preceding presidential election are made applicable only to political parties whose candidates received more than 5,000,000 but less than 15,000,000 popular votes in the pre- ceding presidential election. Finally, under the conference action, no payment is to be made to any political party with respect to the first 5,000,000 votes received by its candidate in the preceding presidential election. Under the Senate amendment, payments may be made, with respect to any presidential campaign, beginning September 1 of the year in which a presidential election is held. No payment may be made to a political party with respect to any presidential campaign unless the treasurer of such party has certified to the Comptroller General the total amount spent or incurred by such party, prior to the certification, in carrying on such presidential campaign and has furnished such records and other information as may be requested by the Comptroller General. in addition, no payment may be made to a political party in advance of the time that the party has incurred the expenses for which the payment is made. Under the Senate amendment, the Comptroller General is to certify to the Secretary of the Treasury the amounts payable to each political party which qualifies for payments. The Comptroller General is authorized to prescribe such rules and regulations, and to conduct such examinations and investigations, as he determines necessary. Subsection (d) of section 303 provides that any moneys in the fund remaining after political parties have been paid the amounts to which they are entitled with respect to a presidential campaign are to be transferred to the general fund of the Treasury. Section 304. Establishment of Advisory Board Section 304 of the Senate amendment establishes an advisory board, to be known as the Presidential Election Campaign Fund Advisory Board, to counsel and assist the Comptroller General in the per- formance of his duties under section 303~ Under the Senate amend- ment, the Board is to consist of two members representing each politi- cal party whose candidate for President at the last presidential election received 10,000,000 or more popular votes. These members are to be appointed by the Comptroller General from recommendations submitted by the qualifying political parties. The members of the Board appointed by the Comptroller General will select three addi- tional members of the Board. Under the conference action, the number of votes required in order for a political party to have representatives on the Advisory Board is raised to 15,000,000. Section 305. Appropriations authorized Section 305 of the Senate amendment authorizes appropriations to be made out of the presidential election campaign fund to enable the 1880 PAGENO="0729" FOREIGN INVESTORS TAX ACT OF 1966 15 Secretary of the Treasury to make payments to political parties under section 303 of the Senate amendment. TITLE TV-MISCELLANEOUS PROVISIONS Title IV of the Senate amendment added five new sections (secs. 401-405) to the bill. TREASURY NOTES PAYABLE IN FOREIGN CURRENCY Under section 16 of the Second Liberty Bond Act, the Secretary of I the Treasury is authorized to issue bonds (obligations with maturities over 5 years) and certificates of indebtedness (obligations with maturi- ties of less than 1 year) payable in foreign currencies. Section 401 of the Senate amendment amends this section so as to authorize the issuance of notes (obligations with maturities between 1 and 5 years) payable in foreign currencies. The conference action retains this provision. REPORTS TO CLARIFY NATIONAL DEBT AND TAX STRUCTURE Section 402 of the Senate amendment directs the Secretary of the Treasury to submit to the Congress, on or before March 31 of each year (beginning with 1967), a report setting forth the aggregate and individual amounts of the contingent liabilities and the unfunded lia- bilities of the Government. The conference action inserts a substitute for. this section which requires that a report be made on the first of each regular session of the Congress with respect to the close of the preceding June 30 (beginning withJune 30, 1967). - COVERAGE OF EXPENSES OF CERTAIN DRUGS UNDER SUPPLEMENTARY MEDICAL INSURANCE BENEFITS The Senath amendment (in proposed sec. 403) extends the benefits provided by the supplementary medical insurance program (pt. B of title XVIII of the Social Security Act) to include payment in full for certain expenses incurred by eligible individuals in purchasing drugs and biologicals. The drugs and biologicals covered ("qualified drugs") would include only those approved by a newly established Formulary Committee consisting of the Surgeon General of the Public Health Service, the Commissioner of the Food and Drug Adminis- tration, and the Director of the National Institutes of Health (except that until otherwise determined by such committee the. U.S. Public Health Service formulary is to govern) ; and the amount of the expenses paid therefor with respect to which payment under the program may be made ("allowable expenses") would be established by the formulary committee and approved by the Secretary. The formulary com- mittee, which would be assisted by a seven-member advisory group appointed by the Secretary, is directed to publish and disseminate at least once a year a list of all qualified drugs and the allowable expenses of various quantities of each. This portion of the Senate amendment would become effective on January 1, 1968, or, if earlier, whenever the monthly premium rate under the supplementary medical insurance 1881 PAGENO="0730" 16 FOREIGN INVESTORS TAX ACT OF 1966 program is increased (under sec. 1839(b) of th~ act) above its present level of $3. Under the conference action, the portion of the Senate amendment relating to coverage of drugs and biologicals under the supplementary medical insurance program is omitted. PERCENTAGE DEPLETION RATE FOR CLAY AND SHALE USED IN MAKING SEWER PIPE The Senate amendment (in proposed sec. 404) contained provisions relating to the percentage depletion allowance for clay and shale used or sold for use in the manufacture of sewer pipe and brick. The conference action with respect to this provision is explained under title II under the heading "percentage depletion rate for certain clay, shale, and slate." PRESERVATION FROM REDUCTION OF CERTAIN W1DOWS' BENEFITS UNDER TITLE II OF THE SOCIAL SECURITY ACT The Senate amendment (in proposed sec. 405) amends the "family maximum" provisions in title IT of the Social Security Act to provide that a widow's insurance benefits will not be reduced on account of any child's insurance benefits which may be payable to a child of an insured individual who died before 1966, if such child is i~ot the widow's child and would not have been considered to be the insured individual's child under the applicable provisions of section 216(h) of the act (relating to determination of family status) before that section was amended in 1965 to permit certain sons and daughters of insured individuals to qualify as "children" for benefit purposes although not so qualified under State law. This portion of the Senate amendment would apply only to monthly benefits for months after the month of enactment. Under the conference action, the portion of the Senate amendment relating to these widow's insurance benefits is omitted. W. D. MILLS, CECIL R. KING, HALE BOGGS, EUGENE J. KEOGH, JOHN W. BYRNES, JAMES B. UTT, Managers on the Part of the House. 1882 PAGENO="0731" SECTION 29 HOUSE FLOOR DEBATE ON CONFERENCE REPORT (From the daily Congressional Record) 1883 PAGENO="0732" PAGENO="0733" [October 19, 1966) [P. 26665) FOREIGN INVESTORS TAX OF 1966 Mr. MILLS. Mr. Speaker, I ask un- animous consent that the conferees on the part of the House may have until midnight tonight to file a conference re- port on the bill, H.R. 13103. The SPEAKER. Without objection, It Is so ordered. There was no objection. CONFERENCE REPORT (H. Rxi'T. No. 2327) The committee of conference on the dis- agreeing votes of the two Houses on the amendments of the Senate to the bill (HR. 13103) to amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign investment in the United States, having met after fuLl and free conference, have agreed to recommend and do recom- mend to their respective Houses as follows: That the House recede from its disagreement to the amendment of the Senate to the text of the bill and agree to the same with the following amendments (pages and lines refer to pages and lines of the Senate engrossed amendments): Page 7, strike out line 6, and insert: "an agreement to pay interest thereon." Effective with respect to amounts paid cir credited after December 31, 1972, subsection (a) (1) (A) and this subsection shall cease to apply.'" Page 7, line 22, strike out "ration," and insert: "ration (other than interest paid or credited after December 31, 1972, by a do- mestic branch of a foreign corporation, if such branch is engaged in the commercial banking business) Page 8, line 7, strike out "foreign corpora- tion," and Insert: "foreign corporation [P. 26666) (other than Interest paid or credited after December 31, 1972, by a domestic branch of a foreign corporation, if such branch is en- gaged in the commercial banking busi- ness) ,". Page 52, line 17, strike out "871 (b) (1)" and insert: "871 (b) (2)". Page 52, line 18, strike out "882(a)" and insert: "882(a) (2)". Page 73, line 2, strike out the period and Insert a comma. Page 74, in the matter following line 12, strike out "Elections" and insert: "Election". Page 92, line 14, strike out the period and insert a comma. Page 92, line 16, after "States." insert: "With respect to estates of decedents dying after December 31, 1972, deposits with a domestic branch of a foreign corporation, If such branch is engaged in the commercial banking business, shall, for purposes of this subchapter, be deemed property within the United States," Page 93, line 16, strike out "(3)" and in- sert: "(3) of". Page 101, line 13, after "owned" Insert: "and held". Page 102, line 19, strike out "934 (b)" and insert: "934(c)". Page 103, beginning with line 9, strike out all through line 2, page 105. Page 105, line 3, strike out "203" and in- sert: "202". Page 107, beginning with lins 3, strike out all through line 14, and insert: "SEc. 203. TRANSFERS OF PROPERTY TO INVEST- MENT COMPANIEs CONTROLLED BY TRANSFERORS. "(a) Transfers to Investment Com- panies-The first sentence of section 351 (a) (relating to transfer to corporation cOn- trolled by the transferor) Is amended by striking out `to a corporation' and Insert- ing in lieu thereof `to a corporation (includ- ing, in the case of transfers made on or before June 30, 1967, an investment com- pany)'. "(b) Investment Companies Required to File Registration Statement With The S.E.C.-Section 351 is amended by redesig- nating subsection (d) as subsection (e) and by Inserting after subsection (c) the follOw- ing new subsection: "`(d) Application of June 30, 1967, Date.- For purposes of this section, if, In connection with the transaction, a registration state- ment is required to be filed with the Securi- ties and Exchange Commission, a transfer of property to an investment company shall be treated as made on or before June 30, 1967, only if- "`(1) such transfer Is made on or before such date, "`(2) the registration statement was filed with the Securities and Exchange Commis- sion before January 1, 1967, and the aggre- gate issue price of the stock and securities of the Investment company which are issued in the transaction does not exceed the aggre- gate amount therefor specified in the regis- tration statement as of the close of December 31, 1966, and "`(3) the transfer of property to the In- vestment company In the transaction in- cludes only property deposited before May 1, 1967.' "(c) Effective Date.-The amendments made by subsections (a) and (b) shall apply with respect to transfers of property to In- vestment companies whether made before, on, or after the date of the enactment of this Act." Page 107, strike out lines 15 through 25. Page 108, line 1, strike out "206" and insert: "204". Page 108, between lines 8 and 9, insert: `(b) Conforming Amendments.-". Page 108, line 9, strike out `(b) ". Page 110, line 7, strike out "207" and insert: "205". Page 111, line 3, strike out "208" and In- sert: `206". Page 113, line 3, strike out "209" and In- sert: "207". Page 113, beginning with line 13, strike out all through line 5, page 114. and insert: "(b) Effective Date-The amendments made by subsection (a) shall apply to tax- able years beginning after the date of the enactment of this Act." Page 114, line 6, strike out "210" and in- sert: "208". Page 114, beginning with line 18, strike out all through line 6, page 115, and insert: "SEC. 209. PERCENTAGE DEPLETION RATE FOR CERTAIN CLAY, SHALE, AND SLATE. "(a) 71/2 Percent Rate-Section 613(b) (relating to percentage depletion rates) is amended- "(1) by renumbering paragraphs (5) and (6) as (6) and (7), respectively, and by in- serting after paragraph (4) the following new paragraph: "`(5) 71/2 percent-clay and shale used or sold for use in the manufacture of sewer pipe or brick, and clay, shale, and slate used 1885 PAGENO="0734" or sold for use as sintered or burned light- weight aggregates.'; "(2) by striking out in paragraph (3) (B) (as amended by section 207(a) (2)) `if neither paragraph (2) (B) nor (5) (B) applies' and inserting in lieu thereof `If neither paragraph (2)(B), (5), or (6)(B) applies'; "(3) by striking out in paragraph (6) (as renumbered by paragraph (1)) `shale, and stone, except stone described in paragraph (6)' and inserting In lieu thereof `shale (ex- cept shale described in paragraph (5)), and stone (except stone described in paragraph (7))'; "(4) by striking out, in subparagraph (B) of paragraph (6) (as so renumbered), `build- ing or paving brick,' and by striking out `sewer pipe,'; and "(5) by inserting after `any such other mineral' in paragraph (7) (as so renum- bered) `(other than slate to which paragraph (5) applies)'. "(b) Conforming Amendment-Section 613(c) (4) (G) (relating to treatment proc- esses) is amended by striking out `para- graph (5) (B)' and inserting in lieu thereof `paragraph (5) or (6) (B)'. "(c) Effective Date-The amendments made by subsections (a) and (b) shall apply to taxable years beginning after the date of the enactment of this Act." Page 115, line 7, strike out "212" and in- sert: "210". Page 116, line 9, strike out "213" and in- sert: "211". Page 117, line 13, strike out the quotation marks. Page 117, line 14, strike out the quotation marks. Page 127, line 17, strike out "214" and In- sert: "212". Page 128, line 7, strike out "215" and in- sert: "213". Page 129, line 19, strike out "216" and In- sert: "214". Page 134, line 3, strike out "217" and in- sert: "215". Page 137, line 19, strike out "10,000,000" and insert: "15,000,000". Page 137, line 22, strike out "equal to-" and insert: "equal to the excess over $5,000,- 000 of-". Page 138, line 1, strike out "10,000,000" and Insert: "15,000,000". Page 138, lIne 7, strike out "10,000.000" and insert: "15,000,000". Page 138, lines 11 and 12, strike out "more than 1,500,000, but less than 10,000,000," and insert: "more than 5,000,000. but less than 15,000,000,". Page 138, line 16, strike out "1,500,000" and insert: "5,000,000". Page 141, line 15, strike out "10,000,000" and insert: "15,000,000". Page 143, beginning with line 5. strike out all through line 2, page 144, and Insert: "The Secretary of the Treasury shall, on the first day of each regular session of the Congress, submit to the Senate and the House of Representatives a report setting forth, as of the close of the preceding June 30 (beginning with the report as of June 30, 1967), the aggregate and individual amounts of the contingent liabilities and the un- funded liabilities of the Government, and of each department, agency, and instrumen- tality thereof, including, so far as practicable, trust fund liabilities, Government corpora- tions' liabilities, indirect liabilities not in- cluded as a part of the public debt, and liabilities of insurance and annuity pro- grams, Including their actuarial status. The report shall also set forth the collateral pledged, or the assets available (or to be realized), as security for such liabilities (Government securities to be separately noted), and shall also set forth all other assets specifically available to liquidate such liabilities of the Government, The report shall set forth the required data in a con- cise form, with such explanatory material (including such analysis of the significance of the liabilities in terms of past experience and probable risk) as the Secretary may determine to be necessary or desirable, and shall include total amounts of each category according to the department, agency, or in- strumentaiity involved." Page .144, beginning with line 3, strike out all through line 9, page 153. On page 3, beginning with the matter in ~` the table of contents relating to title II, strike out all through the end of the table of contents on page 5 and Insert: "TITLE 11-OTHER AMENDMENTS TO INTERNAL REVENUE CODE - "Sec. 201. Application of Investment Credit to Property Used in Possessions of the United States. "(a) Property used by domestic corpora- tions, etc. "(b) Effective date. "Sec. 202. Basis of property. received on liquidation of subsidiary. "(a) Definition of purchase. "(b) Period of acquisition. "(c) Distribution of installment obliga- tion~. "(d) Effective dates. "Sec. 203. Transfers of property to Invest- ment companies controlled by transferors. "(a) Transfers to investment companies. "(b) Investment companies required to file registration statement'with S.E.C. "(c) Effective date. "Sec. 204. Removal of special limitations with respect to deductibility of contributions to pension plans by self-employed Individuals. "(a) Removal of special limitations. "(b) Conforming amendments. "(C) Definition of earned income. "(d) Effective date. "Sec. 205. Treatment of certain income of authors, inventors, etc., as earned income for retirement plan purposes. "(a) Income from disposition of property created by taxpayer. "(b) Effective date. "Sec. 206. Exclusion of certain rents from personal holding company In- come. "(a) Rents from leases of certain tangible personal property. "(b) Technical amendments. "(c) Effective date. "Sec. 207. Percentage depletion rate for cCr- tam clay bearing alumina. "(a) 23 percent rate. "(b) Treatment processes. "(c) Effective date. [P. 26667) "Sec. 208. Percentage depletion rate for clam and oyster shells. "(a) 15 percent rate. "(b) Effective date. "Sec. 209. Percentage depletion rate for cer- tain clay, shale, and slate. "(a) 7~2 percent rate. 1886 PAGENO="0735" "(b) Conforming amendment. "(c) Effective date. "Sec. 210. Straddles. "(a) Treatment as short-term capital gain. "(b) Effective date. "Sec. 211. Tax treatment of per-unit retain allocations. "(a) Tax treatment of cooperatives. "(b) Tax treatment by patrons. "(c) Definitions. "(d) Information reporting. "(e) Effective dates. "(f) Transition rule. "Sec. 212. Excise tax rate on ambulances and hearses. "(a) Classification as automobiles. "(b) Effective date. "Sec. 213. Applicability of exclusion from in- terest equalization tax of cer- tain loans to assure raw ma- terials sources. "(a) Exception to exclusion. "(b) Technical amendments. "(C) Effective date. "Sec. 214. Exclusion from interest equaliza- tion tax for certain acquisitions by insurance companies. "(a) New companies and companies oper- ating in former less developed countries. "(b) Effective date. "Sec. 215. Exclusion from interest equaliza- tion tax of certain acquisitions by foreign branches of domestic banks. "(a) Authority for modification of execu- tive orders. "(b) Effective date. "TITLE Ill-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT "Sec. 301. Short title. "Sec. 302. Authority for designation of $1 of income tax payments to presi- dential election campaign fund. "Sec. 303. Presidential election campaign fund. "(a) Establishment. "(b) Transfers to the fund. "(c) Payments from fund. "(d) Transfers to general fund. "Sec. 304. Establishment of advisory board. "Sec. 305. Appropriations authorized. "TITLE IT-MISCELLANEOUS PROVISIONS "Sec. 401. Treasury notes payable in foreign currency. "Sec. 402. Reports to clarify to national debt and tax structure." And the Senate agree to the same. That the House recede from its disagree- ant to the amendment of the Senate to `e title of the bill and agree to the same. W. D. MILLS, CECIL R. KING, HALE Boacs, EUGENE J. KEOGH, JOHN W. BYRNES, JAMES B. Urr, Managers on the Part of the House. RUSSELL B. LONG, GEORGE A. SMATHERS, CLINTON ANDERSON, EUGENE J. MCCARTHY, FRANK CARL5ON, WAI.LAcE F. BENNETT, Managers on the Part of the Senate. STATEMENT The managers on the part otthe House at the conference on the disagreeing votes of the two Houses on the amendments of the Senate to the bill (H.R. 13103) to amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign invest- ment in the United States, submit the fol- lowing statement in explanation of the effect of the action agreed upon by the conferees and recommended in the accompanying con- ference report: The Senate amendment to the text of the bill struc~ out all after the enacting clause of the bill as passed by the House and in- serted in lieu thereof a substitute containing four titles: title I, foreign investors tax act; title II, other amendments to internal reve- nue code; title III, Presidential election cam- paign fund act; and title IV, miscellaneous provisions. The effect of the action recom- mended in the accompanying conference re- port is explained below under the four head- ings contained in the Senate amendment. TITLE I-FOREIGN INVESTORS TAX ACT Income and estate tax treatment of amounts held on deposit (a) Income tax treatment.-Under exist- ing law, interest on United States bank de- posits is not treated as United States source income and, therefore, not subject to the Federal income tax in the case of nonresident aliens and foreign corporations not engaged in trade or business in the United States. Under the bill as passed by the House (1) this source rule for interest on bank deposits was broadened for a temporary period so It applied also to accounts with mutual savings banks, domestic building and loan associa- tions, etc., and to amounts held on deposit by Insurance companies, and (2) after De- cember 31, 1971, all Interest paid or credited on these United States deposits, accounts, or amounts (including interest on bank de- posits) was to be treated as United States source income. Under the Senate amendment, the tem- porary income tax treatment provided by the bill as passed by the House for interest on these deposits, accounts, and amounts was made permanent. Under the action recom- mended in the accompanying conference re- port, the temporary income tax treatment provided in the bill as passed by the House for interest on United States bank deposits, accounts with mutual savings banks, do- mestic building and loan associations, etc., and amounts held on deposit by insurance companies, will apply with respect to amounts paid or credited before January 1, 1973. Such amounts paid or credited after December 31, 1972, are to be treated as In- come derived from sources within the United States (and therefore subject to the Federal income tax). The conferees in inserting December 31, 1972, as the date for the termination of the income tax exemption for interest on bank deposits, etc., believe that this will provide an opportunity to review the exemption in view of developments in the balance of pay- ments situation and other factors. (b) Estate tax treatment-Under existing law, United States bank deposits of non- residents who are not citizens are not in- cludible in their gross estates. Under the bill as passed by the House, these bank deposits would have been Includible In these gross estates, effectlvfi with respect to decedents dying after the date of the enactment of the bill. Under the Senate amendment, United States bank deposits, accounts with mutual savings banks, building and loan associa- ttons, etc., and amounts held on deposit by 1887 PAGENO="0736" insurance companies were, in general, deemed to be property not within the United States (and therefore not includible in the gross estate of a nonresident not a citizen of the United States) effective with respect to de- cedents dying after the date of the enact- ment of the bill. The effect of the action recommended in the accompanying conference report is to provide the estate tax treatment for these deposits, accounts, and amounts contained In the Senate amendment (namely, that they are not includible in the gross estate of nonresidents who are not citizens of the United States) with respect to estates of decedents dying after the date of the enact- ment of the bill and before January 1, 1973. In the case of estates of decedents who are rionresidents and not citizens of the United States and who die after December 31, 1972, these deposits, accounts, and amounts will be includible in gross estate for purposes of the Federal estate tax. Other modifications Title I of the Senate amendment, while in general retaining the substance of the bill as parsed by the House with respect to mat- ters other than the tax treatment of bank deposits, made numerous technical and oth- er modifications in the provisions which re- late to the tax treatment of foreign investors. For an explanation of the more important of there modifications, which are included in the action recommended in the accom- panying conference report, see the report of the Committee on Finance of the Senate (Senate Report No. 1707, 89th Congress, 2d session). TITLE SI-OTHER AMENDMENTS TO INTERNAL REVENUE CODE Application of investment credit to property used in possessions of the United States Section 48(a) (2) (A) of the code provides the general rule that property used predomi- nantly outside the United States is not to be included within the term "section 38 prop- erty" and therefore is not eligible for the in- vestment credit. SectIon 48(a) (2) (B) of the code provides exceptions to this general rule. The Senate amendment (in proposed sec- tion 201) amends section 48(a) (2) (B) to in- clude among the exceptions from the general rule with respect to property used predonii- nantly outside the United States property which is owned by a domestic corporation (other than a corporation entitled to the benefits of section 931 or 934(b)) or by a United States citizen (other than a citizen entitled to the benefits of section 931, 932, 933, or 934(c)) and which is used predomi- nantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States. Under the Senate amendment, this provision was effective with respect to prop- erty placed in service on or after January 1, 1966 (but no carryback of an investment credit attributable to this provision was per- mitted). The conference action includes this amend- ment to the code. Deduction of medical expenses of individuals age 65 or over Section 106 of the Social Security Amend- ments of 1965 provided, in general, that, ef- fective with respect to taxable years beginning after December 31, 1966, the med- ical expenses of individuals age 65 and over are to be treated for income tax purposes in the same way as the medical expenses of individuals under the age of 65 (that is, these expenses would be subject to the 3- percent of adjusted gross income provision and to the 1-percent provision for drugs). The Senate amendment would have made permanent the treatment of medical ex- penses of individuals age 65 and over as not being subject to the 3-percent and 1-per- cent provisions. The conference action recommended in the accompanying conference report does not include this provision of the Senate amendment with respect to the medical ex- penses of the aged. Basis of property received on liquidation of subsidiary Under existing law, the "purchase" from an unrelated party by one corporation of at least 80 percent of the stock of another cor- poration, when followed (within 2 years) by [P. 26668) the liquidation of the acquired corporation, is treated as a purchase of the assets of the acquired corporation. For this purpose, where the acquiring corporation owns 50 percent or more of the stock of a subsidiary corporation, the subsidiary corporation is treated as a related party (and, therefore, the acquiring corporation cannot take into account stock in the liquidated corporation which it acquired from such a subsidiary). The Senate amendment (in proposed sec- tion 203) expands the definition of "pur- chase" contained in section 334(b) (3) of the code to include the purchase of stock from a subsidiary where the stock of such subsidiary was also acquired by purchase (within a specified period).* This new defi- nition of "purchase" applies with respect to acquisition of stock after December 31, 1965. The Senate amendment also contained (in proposed section 203(c)) an amendment to section 453(d) of the code with respect to the treatment of installment notes in a dis- tributioti in complete liquidation of a sub- sidiary described in section 334(b) (2). For a description of such treatment under the Senate amendment, see the report of the Committee on Finance (Senate Report No, 1707). Under the conference action, the Senate amendment, insofar as it relates to section 334(b) (2) liquidations, is included. Transfers of property to investment com- panies controlled by transferors Section 351(a) of the code, which provides a general rule for the transfer of property to a corporation controlled by the transferor, now reads as follows: "(a) General Rule-No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the ex- change such person or persons are in control (as defined in section 368(c)) of the corpo- ration. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property." The Senate amendment (in proposed sec- tion 204(a)) amends the first sentence of section 351 (a) by striking out "to a corpo- ration" and inserting in lieu thereof "to a corporation (including an investment com- pany) ". Under the Senate amendment this amendment to section 351(a) was to apply with respect to transfers of property whether 1888 PAGENO="0737" made before, on, or after the date of the en- actment of the bill. Under the action recommended in the ac- companying conference report, the first sen- tence of section 351(a) of the code is amend- ed by striking out "to a corporation" and in- serting in lieu thereof "to a corporation (In- cluding, in the case of transfers made before July 1, 1967, an investment company) ". The conference action also inserts a new subsec- tion (d) in section 351 providing special rules relating to the application of section 351 in the case of Investment companies which are required to file registration state- ments with the Securities and Exchange Commission. Under the conference action, these amendments to section 351 are to apply to transfers to investment companies whether made before, on, or after the date of the enactment of the bill. Minimum amount treated as earned income for retirement plans of certain self-em- ployecl individuals The Senate amendment (in proposed sec- tion 205) raised from $2,500 to $6,600 the minimum amount of earnings from a trade or business, In which both personal services and capital are material income-producing factors, which a self-employed person may treat as earned income, for purposes of sec- tion 401 of the code, without regard to the general rule that only 30 percent of the net profits of the trade or business may be treated as a self-employed person's earned income. This provision was to apply to tax- able years beginning after December 31, 1965. This provision Is not included in the action recommended in the accompanying confer-. ence report. For a related provision which Is included in such section, however, see the explanation which immediately follows this paragraph. Removal of r'pecial limitations with respect to deductibility of contributions to pension plans by self-employed individuals Existing section 404(a) (10) of the code limits the deduction with respect to contri- butions made on behalf of an individual who is an employee within the meaning of sec- tion 401(c) (1) (principally, the self-em- ployed) to an amount equal to one-half of such contributions. The Senate amendment repeals section 404(a) (10) of the code, effective with respect to taxable years beginning after December 31, 1967. The Senate amendment also amends section 401(c)(2) of the code (relating to definition of earned Income for purposes of certain pension and profit-sharing plans) to treat as earned Income all of the net profits from a trade or business In which both the performance of personal services and capital are material income-producing factors. How- ever, the earned Income to be taken into ac- count for this purpose Includes only net earnings with respect to a trade or business In which personal services of the taxpayer are a material income-producing factor. Un- der the Senate amendment this provision Is effective for taxable years beginning after December 31. 1967. The action recommended In the accom- panying conference report includes both the repeal of section 404(a) (10) and the amend- ment of the earned income provisions of sec- tion 401(c) (2), effective with respect to tax- able years beginning after December 31, 1967. Treatment of certain income of authors, inventors, etc., as earned, income for re- tirement Plan purposes Section 401(c) (2) of the code contains the definition of "earned income" for purposes of pension and profit-sharing plans which cover self-employed individuals and owner- employees. The Senate amendment adds a new sub- paragraph providing that the term "earned income" includes gains (other than capital gains) and net earnings derived from the sale or other disposition of, the transfer of any interest in, or the licensing of the use of property (other than good will) by an indi- vidual whose personal efforts created such property. Under the conference action, this pro- vision is retained. Exclusion of certain rents from personal holding company income Section 543(b) (3) of the code defines the term "adjusted income from rents" for pur- poses of the provisions of the code relating to personal holding companies. The Senate amendment adds a provision providing that such term does not Include compensation, however designated, for the use of, or the right to use, any tangible personal prop- erty manufactured or produced by the tax- payer, If during the taxable year the tax- payer is engaged in substantial manufactur- ing or production of tangible personal prop- erty of the same type. Under the conference action this pro- vision is retained. Percentage depletion rate for certain clay bearing alumina Section 613(b) (6) of the code provides a 15 percent depletion rate for all other min- erals not otherwise provided a percentage depletion rate. Under that provisionS clay, laterite, and nephelite syenlte used for the extraction of alumina would receive a 15 percent depletion rate. Section 613(c) (4) of the code sets forth the treatment processes which are considered as mining. The Senate amendment (In proposed sec- tion 209(a)) amends section 613(b) to pro- vide a 23 percent depletion rate for clay, laterite, and nephelite syenite produced from deposits in the United States to the extent that alumina and aluminum com- pounds are extracted therefrom. Section 209(b) would have amended section 613 (c) (4) to provide that in the case of clay, laterite, and nephelite syenite extracted from deposits In the United States, all proceses applied to derive alumina of alu- minum compounds would be considered as mining. Such amendments would apply to taxable years beginning after the date of enactment of the bill. Under the conference action proposed sec- tion 209(a) is retained but proposed sec- tion 209(b) is deleted. The amendment Is to apply to taxable years beginning after the date of enactment of the bill. Percentage depletion rate for clam and oyster shells Section 613 (b) (5) of the code provides a 5 percent depletion rate for mollusk shells (including clam shells and oyster shells). The Senate amendment (in proposed sec- tion 210) amends section 613 (b) to provide a 15 - percent depletion rate for mollusk shells, except when used for rip rap, ballast, road material, rubble, concrete aggregates or for similar purposes, In which event a 5 per- cent rate applies. The amendment applies to taxable years beginning after the date of ena~tment of the bill. 1889 Under the conference action this provision is retained. 71-297 0-67-pt. 2-47 PAGENO="0738" Percentage depletion rate for certain clay, shale, and slate Section 613(b) of the code provides a 5 percent depletion rate for shale; clay used, or sold for use, in the manufacture of brick or sewer pipe; and clay or slate used or sold for use as concrete aggregates or for similar purposes. Section 613(c) (4) sets forth cer- tain treatment processes considered as mining. The Senate amendment (in proposed sec~- tion 211) would have amended section 613(c) (4) to provide that the sintering or burning of clay, shale, and slate, used, or sold for use, as lightweight aggregates, would be considered a mining process. This amendment would apply to taxable years be- ginning after the date of enactment of the bill. Under the Senate amendment (In proposed section 404) the depletion rate for clay and shale used or sold for use in the manu- facture of sewer pipe and brick would be 15 percent. This amendment would apply to taxable years ending after the date of en- actment of the bill. Under the conference action the depletion rate for clay or shale used or. sold for use in the manufacture of sewer pipe and brick, and for clay, shale or slate used or sold for use as sintered or burned lightweight ag- gregates, is to be 71,4 percent. Under the conference action this amendment is to ap- ply to taxable years beginning after the date of enactment of the bill. Straddles The Senate amendment (in proposed sec- tion 212) amends section 1234 to provide that the gain from the lapse of an option granted by the taxpayer as part of a straddle is to be treated as a short-term capital gain. This provision does not apply to any person who holds securities for sale to customers in the ordinary course of his trade or business. The amendment -Is applicable to straddle trans- actions entered into after January 25, 1965. Under the conference action this provision is retained. [P. 26669) Tax treatment of per-unit retain allocations The Senate amendment (in proposed sec- tion 213) amends the present law relating to the taxation of cooperatives and their patrons to provide tax treatment with respect to per-unit retain certificates which parallels, in general, the taxtreatment applicable with respect to patronage dividends. The amend- ment applies generally to taxable years be- ginning after April 30, 1966. Under the conference action, this provision is retained. Excise tax rate on ambulances and hearses The Senate amendment (in proposed sec- tion 214) provides that the sale of a hearse, as well as an ambulance or combination ambulance-hearse vehicle, is to be considered to be the sale of an automobile chassis and an automobile body (rather than a truck chassis and body) for purposes of determin- ing the manufacturers' excise tax on motor vehicles. This amendment applies with re- spect to articles sold after the date of the enactment of the bill. Applicability of exclusion from interest equalization tax of certain loans to assure raw material sources Section 4914(d) of the code excludes from interest equalization tax certain loans to assure raw material sources. However, the exemption may be lost if the obligation is subsequently transferred. The Senate amendment would impose the tax only on a person who acquires the obligation with an intent to sell it to other U.S. persons. This amendment is effective with respect to ac- quisitions of debt obligations after the date of enactment. Under the conference action this provi- sion is retained. Exclusion from interest equalization tax for certain acquisitions by insurance companies Section 4914(e) of the code permits. We insurance companies to establish reServe funds of assets under specified circum- stances. The Senate amendment extends this privilege to permit a life insurance com- pany to establish a reserve fund of assets where such a company commences activities in a developed country or where a less de- veloped country is designated as a developed country. This amendment is to take effect on the day after the date of enactment. Under the conference action this provision is retained. Exclusion from interest equalization tax of certain acquisitions by foreign branches of domestic banks The Senate amendment gives the President authority under section 4931 (a) to exempt from the Interest Equalization Tax U.S. dollar loans made by the foreign branches of U.S. Commercial banks. Under the conference action this provi- sion is retained. TITLE Ill-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT Title III of the Senate amendment adds five new sections (secs. 301-3(Th) to the bill. Under the conference action, these five new sections are retained with the changes noted below. Section 301-Short title: Section 301 pro- vides that title III may be cited as the "Presi- dential Election Campaign Fund Act of 1966". Section 301-Authority for designation of $1 of income tax payments to Presidential Election Clanipaign Funds: Section 302 amends subchapter A of chapter 61 of the code by adding a new part VIII consisting of a new section 6096. The new section 6096 of the code permits every individual (other than a nonresident alien individual) to designate that an amount equal to $1 of his income tax liability for any taxable year shall be paid into the Presidential Election Campaign Fund (established by section 303 of the Sen- ate amendment). Under the Senate amend- snent, such designations may be mhde with respect to income tax liability for taxable years beginning after December 31, 1966. Section 303-Presidential election cam- paign fund: Subsection (a) of section 303 of the Senate amendment establishes a special fund, to be known as the "Presidential Elec- tion Campaign Fund", on the books of the Treasury. Subsection (b) of section 303 directs the Secretary of the Treasury to transfer to the Fund amounts equal to the amounts desig- nated by individuals under section 6096 of the code (added by section 302 of the Sen- ate amendment). Subsection (c) of section 303 provides for payments by the Secretary of the Treasury, as authorized by appropriation Acts, out of the Fund to political parties which have qualified under the provisions of the sub- section. With respect to each presidential 1890 PAGENO="0739" campaign, the Senate amendment provides that payments will be made to political parties whose candidate for President at the preceding presidential election received 10,- 000000 or more popular votes in a total amount equal to $1 multiplied by the total number of popular votes cast In such pre- ceding presidential election for candidates of pollttcal parties whose candidates re- ceieved 10,000,000 or more popular votes. Under the Senate amendment, each such political party will share equally in the total amount authorized for payment to these political parties. A political party whose candidate for President at the preceding presidential election received more than 1,- 500,000 but less than 10,000,000 popular votes will be entitled to payments equal to $1 multiplied by the number of popular votes in excess of 1,500,000 received by the candi- date of such political party in such preceding presidential election. Under the conference action, the provisions in the Senate amendment with respect to payments to political parties whose candi- dates received 10,000,000 or more popular votes In the preceding presidential election are made applicable only wIth respect to political parties whose candidates received more than 15,000,000 popular votes in the preceding presidential election. In addition, under the conference action, the provisions in the Senate amendment applicable to po- litical parties whose candidates received more than 1,500,000 but less than 10,000,000 popular votes in the preceding presidential election are made applicable only to political parties whose candidates received more than 5,000,000 but less than 15,000,000 popular votes in the preceding presidential election. Finally, under the conference action, no pay- ment is to be made to any political party with respect to the first 5,000,000 votes re- celvect by its candidate in .the preceding presidential election. Under the Senate amendment, payments may be made, with respect to any presidential campaign, beginning September 1 of the year In which a presidential election is held. No payment may be made to a political party with respect to any presidential campaign unless the treasurer of such party has certi- fied to the Comptroller General the total amount spent or incurred by such party, prior to the certification, In carrying on such presidential campaign and has furnished such records and other information as may be requested by the Comptroller General. In addition, no payment may be made to a political party in advance of the time that the party has incurred the expenses for which the payment is made. Under the Senate amendment, the Comp- troller General is to certify to the Secretary of the Treasury the amounts payable to each political party which qualifies for payments. The Comptroller General Is authorized to prescribe such rules and regulations, and to conduct such examinations and Investiga- tions, as he determines necessary. Subsection (d) of section 303 provides that any moneys in the Fund remaining after po- litical parties have been paid the amounts to which they are entitled with respect to a presidential campaign are to be transferred to the general fund of the Treasury. Section 304.-Establishment of advisory board: Section 304 of the Senate amendment establishes an advisory board, to be known as the Presidential Election Campaign Fund Ad- visory Board, to counsel and assist the Comp- troller General in the performance of his duties under~sectlon 303. Under the Senate amendment, the Board is to consist of two members representing each political party whose candidate for President at the last presidential election received 10,000,000 or more popular votes. These members are to be appointed by the Comptroller General from recommendations submitted by the qualifying political parties. The members of the Board appointed by the Comptroller Gen- eral will select three additional members of the Board. Under the conference action, the number of votes required in order for a political party to have representatives on the Advisory Board is raised to 15,000,000. Section 305-Appropriations authorized: Section 305 of the Senate amendment au- thorizes appropriations to be made out of the Presidential Election Campaign Fund to enable the Secretary of the Treasury to make payments to political parties under section 303 of the Senate amendment. TITLE xv-MI5cELLANE0us PROVI5ION5 Title IV of the Senate amendment added five new sections (secs. 401-405) to the bill. Treasury notes payable in foreign currency Under section 16 of the Second Liberty Bond Act, the Secretary of the Treasury is authorized to issue bonds (obligations with maturities over five years) and certificates of indebtedness (obligations with maturities of less than one year) payable in foreign cur- rencies. Section 401 of the Senate amend- ment amends this section so as to authorize the Issuance of notes (obligations with ma- turities between one and five years) payable In foreign currencies. The conference ac- tion retains this provision. Reports to clarify national debt and tax struct are Section 402 of the Senate amendment di- rects the Secretary of the Treasury to sub- mit to the Congress, on or before March 31 of each year (beginning with 1967). a report setting forth the aggregate and Individual amounts of the contingent liabilities and the unfunded liabilities of the Government. The conference action inserts a substitute for this section which requires that a report be made on the first of each regular session of the Congress with respect to the close of the preceding June 30 (beginning with June 30, 1967). Coverage of expenses of certain drugs under supplementary medical insurance bene- fits The Senate amendment (in proposed sec- tion 403) extends the benefits provided by the Supplementary Medical Insurance pro- gram (part B of title XVIII of the Social Security Act) to include payment in full for certain expenses incurred by eligible in- dividuals in purchasing drugs and blologi- cals. The drugs and biologicals covered ("qualified drugs") would Include only those approved by a newly-established Formulary Committee consisting of the Sur- geon General of the Public Health Service, the Commissioner of the Food and Drug Administration, and the Director of the Na- tional Institutes of Health (except that until otherwise determined by such Committee the United States Public. Health Service Formulary is to govern); and the amount of the expenses paid therefor with respect to which payment under the program may be 1891 PAGENO="0740" [P. 26670] made ("allowable expenses") would be estab- ltshed by the Formulary Committee and ap- proved by the Secretary. The Formulary Com- mittee, which would be assisted by a 7-mem- ber Advisory Group appointed by the Secre- tary, is directed to publish and disseminate at least once a year a list of all qualified drugs and the allowable expenses of various quantities of each. This portion of the Sen- ate amendment would become effective on January 1, 1968, or, if earlier, whenever the monthly premium rate under the Supple- mentary Medical Insurance program is in- creased (under section 1839(b) of the Act) above its present level of $3. Under the conference action, the portion of the Senate amendment relating to cover- age of drugs and biologicals under the Sup- plementary Medical Insurance program is omitted. Percentage depletion rate for clay and shale used in making sewer pipe The Senate amendment (in proposed sec- tion 404) contained provisions relating to the percentage depletion allowance for clay and shale used or sold for use in the manu- facture of sewer pipe and brick. The con- ference action with respect to this provision is explained under title II under the head- ing "percentage depletion rate for certain clay, shale, and slate". Preservation from reduction of certain wid- ows' benefits under title II of the Social Security Act The Senate amendment (in proposed sec- tion 405) amends the "family maximum" provisions in title II of the Social Security Act to provide that a widow's insurance bene- fits will not be reduced on account of any child's insurance benefits which may be pay- able to a child of an insured individual who died before 1966, if such child is not the widow's child and would not have been con- sidered to be the insured individual's child under the applicable provisions of section 216(h) of the Act (relating to determination of family status) before that section was amended in 1965 to permit certain sons and daughters of insured individuals to qualify as "children" for benefit purposes although not so qualified under State law. This por- tion of the Senate amendment would apply only to monthly benefits for months after the month of enactment. Under the conference action, the portion of the Senate amendment relating to these widow's insurance benefits is omitted. W. D. MILLS, CECIL R. KING, HALE B0GG5, EUGENE J. KEOGH, JOHN W. BYRNES, JAMES B. Urr, Managers on the Part of the House. [P. 27088] [October 20, 1966] FOREIGN INVESTORS TAX ACT OF 1966 Mr. MILLS. Mr. Speaker, I call up the conference report on the bill (HR. 13103) to amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign investment in the United States, and ask unanimous con- sent that the statement of the managers on the part of the House be read in lieu of the report. The Clerk read the title of the bill. The SPEAKER. Is there objection to the request of the gentleman from Ar- kansas? Mr. SMITH of Virginia. Mr. Speaker, I desire to make a point of order against title III of the conference report. The SPEAKER. The gentleman will state his point of order. Mr. SMITH of Virginia. Mr. Speaker, this point of order is directed at title III of the conference report. That title is the one that provides for the contribu- tion of $1 apiece from any taxpayer who wishes to do so, to be used as a fund to be divided between the political parties in Presidential elections. The title itself has never been before the House. This is a Senate amendment to the bill that the gentleman from Arkansas has just called up. It is not germane to that bill itself and comes under the prohibition of rule XX of the rules of the House. And, Mr. Speaker, I shall read the part that is relevant to the point of order: Any amendment of the Senate to any House bill shall be subject to the point of order that it shall first be considered in the Committee of the Whole House on the state of the Union, if originating in the House, it would be subject to that point. Mr. Speaker, the point of the rule is not applicable to this situation, but the rule is there for the purpose of seeing that the House of Representatives has an opportunity to at least consider and de- bate any legislation that It has never had an opportunity to consider before. Mr. Speaker, in this case, and in some others that we could mention, we are confronted very often with amendments such as this which have been put onto a House bill in the Senate and sent to conference and accepted by the House and Senate conferees, and the House has never had an opportunity to even read It. Mr. Speaker, this conference report, I believe, was just printed, probably last night. Did the gentleman from Arkansas have until midnight last night to file the con- ference report? Mr. MILLS. If the gentleman from Virginia will yield, I believe the gentle- man from Virginia Is correct; yes. Mr. SMITH of Virginia. Until mid- night last night, this conference report was not filed in the House. It was not available from the printer's office until early here this morning, probably later than 7 o'clock. The House of Represent- atives, under the unanimous-consent agreement, met at 10 o'clock this morn- Ing. Now, obviously, that is something that the House has never had an oppor- tunity to consider or to even read, or to know anything about it, except what the Members of the House had seen in the newtpapers or other than through 1892 PAGENO="0741" common gossip that has gone around the Capitol. Mr. Speaker, this represents a clear vioi:ation of the rules of the House, and I do not see how under these circum- stances it can be considered in the House of Representatives. Mr. Speaker, I have no particular prej- udice one way or the other as to the merits or the demerits of the proposal, and I am not discussing this. However, I do feel that this is the wrong way In which to legislate. Mr. Speaker, the rules of the House seem to be positively against this proce- dure and it is my opinion that we should stop doing this sort of business. Mr. MILLS. Mr. Speaker, may I be heard on the point of order? The SPEAKER. The Chair will hear the gentleman from Arkansas. Mr. MILLS. Mr. Speaker, the bill, HR. 13103, which is the bill that the con- ference report accompanies, amends the Internal Revenue Service Code of 1954, to provide equitable treatment for for- eign investment in the United States. Mr. Speaker, the bill amends provi- sions in that respect, dealing with both the income tax and with the estate tax and perhaps others-I do not recall, there may be even some other aspects of the code that are affected. Mr. Speaker, title III to which the gentleman from Virginia makes the point of order, under rule XX, as I understood his point of order, amends the Internal Revenue Service Code. Mr. Speaker, the authority within the entire title is based upon an amendment to section 6096 of the code which is amended by sectIon 302. of title LU of the bill as reported by the conferees on the part of the House. Mr. Speaker, It is my opinion that the matter Is certainly germane to the bill in that both the bill and the amendment amend provisions of the Internal Rev- enue Service Code. The responsibilities here are such as we normally would place upon the Sec- retary of the Treasury in providing for a separate account in his books. And I thiflk clearly that It Is germane to the bill. Mr. SMITH of Virginia. Mr. Speaker, will the gentleman yield? Mr. MILLS. I will be glad to yield. Mr. SMITH of Virginia. Mr. Speaker, I just want to ask this question: If that amendment had been offered when the bill was under consideration in the House It would have had to be under rule XX, and considered under rule XX that I have just read. 1 Now, because it Is a bill which is an appropriation bill we cannot consider it except in the Committee of the Whole House on the State of the Union. This rule provides that if there Is put on It a Senate amendment and It comes bark it is subject to a point of order that it has not been considered in the Commit- tee of the Whole House on the State of the Union. Mr. MILLS. Providing it Is not ger- mane to the bill. But I am contending that it is germane in that it is an amend- ment of the Internal Revenue Code which the bill itself is an amendment of. the Internal Revenue Code. Mr. SMITH of Virginia. Mr. Speaker, if the gentleman will yield further? Mr. MILLS. I yield to the gentle- man. Mr. SMITH of Virginia. Mr. Speaker, I was just going to ask the chairman this question: The rule provides that the bill must be considered, if this bill was introduced in the House, the rule is that the amend- ment of the Senate, If it had been intro- duced in the House, it would have bad to be considered In the Committee of the Whole House on the State of the Union. And the rule is that if it comes in as a Senate amendment then it Is subject to a point of order because it was not con- sidered in the Committee of the Whole House on the State of the Union. The gentleman addressed himself to the matter of whether it would have been germane in the House. That is not the question that I am seeking to make clear at this time~ it is a question of whether the rule XX has been violated because a Senate amendment, If it was intro- duced In the House, was subject to a point of order, would have had to have been in the Committee of~ the Whole House on the State of the Union. Mr. CURTIS. Mr. Speaker, will the gentleman yield? Mr. MILLS. Yes; I yield to the gen- tleman from Missouri. Mr. CURTIS. Mr. Speaker, I simply wanted to add on this point of order- and I agree with the gentleman from Virginia-that on examination this Sen- ate amendment Is an appropriation, this Is authorized revenue, it has to do with actually appropriating funds, and clearly Is subject to the point that the gentleman from Virginia [Mr. SMITH] makes. The SPEAKER. The Chair Is pre- pared to rule. The gentleman from Virginia makes the point of order that title III of the conference report contravenes the first sentence of rule XX: Any amendment of the Senate to any ~Iouse bill shall be subject to the point of order that -it shall first be considered in the Committee of the Whole House on the State of the Union, If, originating In the House, It would be subject to that point: Without passing upon the germaneness of the amendment, because that point was not raised, the Chair calls attention to the fact that the Senate amendment went to conference by unanimous con- sent. Where unanimous consent was ob- tained, the effect of that Ito circuit rule 1893 PAGENO="0742" [P. 27089] XX, in other words, to waive or vitiate that portion of rule XX. If objection had been made at the point when the unanimous consent re- quest was made to send the bill to con- ference, then the bill could have been referred to the proper standing commtt- tee, and then, if and when reported out of the committee would have been brought up for consideration in the Com- mittee of the Whole House on the State of the Union. At this point, and under the parlia- mentary situation, the bill was sent to conference by unanimous consent; and this applies to all bills that go to con- ference by unanimous consent, if there be provisions therein that might be sub- ject to the first sentence of rule XX. If there is no objection made at that time, the bill goes to conference; which in this case had the effect of suspending that portion of rule XX. Therefore, it Is properly before the House at the present time as part of the conference report and the Chair overrules the point of order. Mr. SMITH of Virginia. Mr. Speaker, may I add one comment since this is a very important question. The SPEAK.ER. The Chair will, of course, hear the gentleman. Mr. SMITH of Virginia. Mr. Speaker, this did not go to conference by unani- mous consent because it was never in the House bill. It was in the Senate bill and It never got in the House bill until last night. The SPEAKER. The Chair will call to the attention of the gentleman from Virginia that the unanimous consent re- quest was made to take a bill from the Speaker's desk with Senate amendments thereto, and disagree to the Senate amendments and request a conference. Of course, the Chair has already ruled on the point of order. Mr. MILLS. Mr. Speaker, may I be recognized on this particular point? The SPEAKER. The gentleman from Arkansas is recognized. Mr. MILLS.. Mr. Speaker, there was a unanimous consent request to take the bill with Senate amendments from the Speaker's table, disagree to the Senate amendments and agree to the conference requested by the Senate. I made that request myself. (Mr. SMITH of Virginia asked and was given permission to revise and ex- tend his remarks.) The SPEAKER. Is there objection to the request of the gentleman from Ar- kansas [Mr. MILLS] that the statement of the Managers on the part of the House be read in lieu of the report? There was no objection. The Clerk read the statement. (For conference report and statement, see proceedings of the Hopse of October 19, 1966.) Mr. MIlLS (during the reading of the statement). Mr. Speaker, I ask unani- mous consent that the further reading of the statement of the Managers on the part of the House be dispensed with. The SPEAKER. Without objection, It is so ordered. There was no objection. The SPEAKER. The gentleman from Arkansas [Mr. Mixi.s] Is recognized for 1 hour. Mr. MILLS. Mr. Speaker, I yield my- self 10 minutes. Mr. Speaker, let me say first that there is no one in this House who is more con- cerned about orderly procedure than I am nor about the fact that it Is becom- ing more difficult with each passing year to have tax bills passed through the House and through the Senate without a great number of amendments being added when the bill is in the other body. I have no objection, Mr. Speaker, whatsoever to the other body working its will with respect to the subject matter which is sent to it. And they do amend our bills. The social security bill, as I recall, which we passed in 1965 had in excess of 500 amendments attashed before It was finally passed by the Senate. The Senate amendments, however, in that instance were by and large germane to the sub- ject matter of the bill. My rebollection In that Instance Is that as to those which were not germane to the subject matter of the bill we succeeded in causing the Senate conferees to agree to eliminate them. Now, Mr. Speaker, this Is a matter over which conferees have a great deal of difficulty and, of course, we have our share of those difficulties. Mr. Speaker, HR. 13103 is the bill which the House passed on June 15, 1966. The bill as passed by the House added as its primary objective the equal tax treat- ment by the United States of nonresi- dent aliens and foreign corporations. Additionally, to the extent consistent with the primary objective of this.bill, it was designed to provide increased in- centives for investment by foreigners and foreign corporations in the United States. The bill as passed by the Senate adopted, with little change, the House- passed version of the Foreign Investors Tax Act of 1966. This part of the bill as passed by the Senate is contained In title I. In addition, the Senate added other amendments to the bill which appear as titles U, III, and IV. These relate to other Internal Revenue Code provisions and the Presidential Election Campaign Fund Act as well as other matters. I will first discuss the amendments made with respect to the Foreign Investors Tax Act and then the other amend- ments. AMENDMENTS TO FOREIGN INVESTOR TAX ACT The amendments made by the Sen- ate to the Foreign Investors Tax Act were primarily perfecting changes which 1894 PAGENO="0743" were made because of problems brought to their attention. There was, however, one Senate amendment in this area of major importance. As the bill passed the House it would, in general, subject to IJ.S tax-as U.S. source income-all Interest received after December 31, 1971, by nonresident aliens and foreign corporations on their U.S. bank deposits, and similar funds. A related amend- ment in the estate tax area also would have subjected these deposits to U.S. es- tate tax after the date of enactment 0 this bill. The Senate adopted an amend- ment which would have stricken the House-passed provision from the bill and thereby continued present law which grants an exemption from U.S. Income and estate tax to the interest income and the deposits of these foreigners. It was the opinion of the conferees that interest income of this type, which is so clearly derived from U.S. sources, should not escape U.S. taxation. On the other hand, we all realized that an immediate alteration of the present exemption might have a substantial adverse effect on our balance of payments. To meet these two quite different problems, the conference committee agreed to the re- peal of the special income tax and estate tax exemptions relating to deposits of foreigners, but the effective date of the repeal was postponed until 1973. More- over, postponing the date when these funds are taxed until 1973 will give Con- gress ample opportunity in the future to consider the impact of this provision on our balance of payments and on the gold flow. Should circumstances require, there will be plenty of time to reconsider the effective date of this provision. * The remaining Senate amendments of Title I are perfecting in nature and do not disturb the major substantive provisions of the House bill. They were made In response to technical problems presented by witnesses testifying before the Committee on Finance. I am cer- tain that bad these problems been * brought to the attention of the Commit- tee on Ways and Means, it would have made the changes prior to reporting the bill to the House. The Treasury Depart- ment is not opposed to any of these Sen- ate amendments. At this point, I would like to insert a summary of these addi- tional Senate amendments to which the House receded: TITLES U, SIT, AND TV The Senate added a number of amend- ments to the House bill which appear in the Senate bill as titles II, III, and IV. These titles relate to other Internal Rev- enue Code amendments, the Presidential Election Campaign Fund Act, and other amendments, respectively. In total, these 3 tItles contain 23 amendments. Of these 23 amendments, the Senate re- ceded on 4, 6 were adopted with amend- ments and the House receded on 13. Let me make two Important obser- vations about the amendments which the House receded. First, of these amend- ments, the Committee on Ways and Means had previously favorably reported, as separate bills, three and, In addition, it has extensively considered two others but had been unable to complete action on them. The second point, and the one which I should like to emphasize, is that the estimated revenue loss of approxi- mately $460 million, which the 23 Sen- ate amendments would have produced, was reduced by the insistence of your conferees to about $80 million, a reduc- tion of $380 million. Moreover, of the re- maining $80 million, the Senate amend- ment which adopted the House-passed jP. 27090) version of H.R. lO, represented approxi- mately $50 million. Therefore, the Sen- ate amendments which had not already passed the House, upon which your con- ferees receded, represent a revenue loss of approximately $30 million. One of the two most important Sen- ate amendments to which your conferees agreed relates to a provision which had already been adopted by the House. I am referring to H.R. 10, which as the Mem- bers of the House will recall, passed the House on June 6 of this year by a vote of 291 to.nothing. There, of course, can be no question with respect to the House conferees agreeing to this amendment in view of this mandate from the House. H.R. 10, both as passed by the House and as included in the Senate amendment, provides for the repeal of two limitations on the deduction a self-employed indi- vidual may take with respect to contri- butions on his own behalf to a retire- ment plan. First, it repeals the pro- vision which limits the deduction to 50 percent of the contribution. However, it retains the provision restricting the con- tribution for self-employed persons to the lesser of 10 percent of earned Income or $2,500. Second, It also permits a self- employed individual to include in earned income all of his net profits when his income is earned from a business in which both the performance of personal services and capital are material income- producing factors. However, in such cas~a the personal services of the self- employed person involved must be a material income-producing factor. In this same area, the House conferees also agreed to a Senate amendment which alters present law relating to self- employed individuals' retirement plans to permit authors, inventors, and others, to include in their earned income base for the purpose of computing deductions for contributions to such plans income derived from the sale or lease of the books they wrote or other products cre- ated from their own personal efforts. In addition to H.R. 10, the Senate amendments which either have been 1895 PAGENO="0744" favorably reported by the Committee on Ways and Means as separate bills or have been extensively considered by the com- mittee relate to the taxation of "strad- dles" transactions, the basis of property received on the liquidation of certain sub- sidiaries, reports to clarify the national debt and tax structure and the applica- tion of investment credit to property used in possessions of the United States. The amendment relating to the tax treatment of "straddles" provides that the income from the lapse of an option which originated as part of a "straddle" is to be treated as a short-term capital gain-instead of ordinary income-so the income can be netted against any possible capital loss from the other side of the straddle option. The provision relating to the liquida- tion of a subsidiary In general provides that, where stock in a corporation Is ac- quired indirectly, the same tax conse- quences may flow from the liquidation of this corporation as in cases where the stock is acquired directly. This extends the tax-free liquidation provisions of ex- isting law, for example, to cases where one corporation acquires stock In a sec- ond corporation by purchasing stock of a third corporation and then acquires the stock holdings of the third corpora- tion in the second by exchanging its holdings in the third corporation for the stock it holds in the second corporation. The third of this group of Senate amendments requires annual reporting on the current status of contingent lia- bilities of the Federal Government, in- cluding its long-range obligations and commitments, together with a report of the assets available to meet these liabili- ties. This provision has been carefully gone over by the Bureau of the Budget, and the revised version we have adopted meets its requirements from the stand- point of practicability. I am sure that all of us will find this a useful report. One provision which took a consider- able amount of time for the conferees re- lated to the so-called swap funas. Under section 351 of the Internal Revenue Code, transfers of property to a corporation by one or more persons in exchange for stock in a corporation does not result in gain or loss if immediately after the ex- change the person or persons in question are in control of the corporation. On July 14, 1966, the Treasury Department issued a proposed regulation indicating that the exchange of appreciated stock for shares in a.n investment fund where immediately after the exchange the per- sons' who transferred the stock to the corporation are in control of it does not qualify under this provision. The Sen- ate added an amendment to the bill pro- viding that section 351 applied to cor- porate investment funds. The conferees considered this provi- sion at length and concluded that, at least at this time, they did not think that stock or rea.l estate investment funds should be eligible for this tax-free treat- ment under section 351. It was recog- nized, however, that in view of the past experience under this provision, it prob- ably was unfair to cut these funds off immediately. After all, in 1960 the In- ternal Revenue Service ruled that these funds did come under section 351, and while it is true that since that time they have refused to so rule, nevertheless, private tax counsel has so ruled for many funds since that time. In view of these considerations, the conferees provided that these investment funds should come within section 351 only with respect to transfers of stock to the funds prior to July 1, 1967. Moreover, funds required to register with the Securities and Ex- change Commission under either of two applicable laws, to be eligible for this treatment must file their registration applicatiOns with the Securities and Ex- change Commission by January 1, 1967; the prospective shareholders must have deposited their stocks with the fund by May 1, 1967, and the actual transfers must have occurred before July 1, 1967. Where registration applications have set a maximum dollar amount for a fund, this may not be revised upward after January 1, 1967. Any additional amount wOuld qualify for the tax-free treatment under this provision. This latter limita- tion, of course, applies only to those funds not already established. The Senate adopted four amendments dealing with the depletion deduction. Your conferees receded on one of these amendments without amendment but made substantial modifications in the other three. The provision upon which your conferees receded without amend- ~nent provides that clam, oyster and other mollusk shells are to be allowed percentage depletion at the same 15 per- cent rate as limestone when it is used for the same purposes; namely, when it is used for calcium carbonate content. Equality of competitive treatment re- quires this. Two of the other three de- pletion amendments were altered at the insistence of your conferees so as to de- lete the aspects of these amendments which would grant the depletion allow- ance on new processes which are not presently classified as mining processes. The portion of the Senate amendment re- lating to alumina bearing clay, which set the percentage depletion allowance at 23 percent was not altered by the con- ference. This is the rate now available to bauxite, the principal source of alumi- num. The other two depletion amend- ments which relate to shale, clay, and slate used as a light-weight aggregate and clay and shale used in the making of sewer pipe and brick were altered by the conference so as to provide a 7 Y2 per- cent depletion allowance. The Senate also adopted three interest equalization tax amendments and one 1896 PAGENO="0745" relating to Treasury notes issued in for- eign currencies. The House conferees accepted these four amendments. The first interest equalization tax amend- ment provides that subsequent transfers of debt obligations to assure raw material resources are to be exempted from the interest equalization tax where the in- debtedness is acquired without an Intent (such as a bona flde investment repre- sentation) on the part of the purchaser to sell -it to other U.S. persons. The second interest equalization tax pro- vides that the present exemption for re- serve a.sset pools of U.S. Insur- ance companies is extended to allow the establishment of reserve asset pools where a U.S. insurance company commences activities in a developed country or where a less developed coun- try is designated by the President as a developed country. The final interest equalization tax amendment grants the President the authority to exempt from the interest equalization tax U.S. dollar loans of more than 1 year made by the foreign branches of U.S.' banks. The Senate amendment relating to Treasury notes grants the Secretary of the Treasury authority to issue U.S. notes denominated in foreign currencies. In addition to the amendments dis- cussed above, the Senate added to the House bill three other amendments. These dealt with: First, the exclusion of rents from personal holding company income where they are attributable to property the company manufactured if it is still currently doing so; second, the extension of essentially the present treatment of patronage dividends of co- operatives to their per-unit retains; and third, the equating of the manufacturer's excise tax rate on hearses with the tax [P. 27091) on ambulances. The House conferees a~reed to these amendments. The last amendment I plan to discuss is the one on which the gentleman from Virginia raised his point of order under rule XX. I misunderstood him. At the time I thought he was raising a point of order under rule XXII. Title III, which the Senate added to the bill, establishes the presidential elec- tion campaign fund. The House receded to the addition of this title with certain amendments. As altered by the confer- ence, this provision provides, in general, that by designations on income tax re- turns, taxpayers will be allowed to create a fund of approximately $60 million which will be equally divided between the major political parties for the pur- pose of defraying the expenses of presi- dential election campaigns. This is dis- tributed to the parties during the presi- dential campaign year-that Is 1 year in every 4. Individual taxpayers are to be given an opportunity to designate on their tax returns that $1 of their income tax ha- biity-$2 In the case of a joint return- Is to be placed in the presidential elec- tion campaign fund. The amounts In this fund are to be used to defray the expenses incurred by the political parties in presenting candidates for President and Vice President. The funds cannot be used for any other purposes or for any other campaigns. The major par- ties under this provision are treated equally. All parties receiving more than 15 million votes in the last presidential election are to be given the same amount. For example, In the last presidential elec- tion, two candidates for President re- ceived more than 15 million votes. The total of the votes they received was ap- proximately 70 million. Therefore, in the next presidential election each of the two principal parties would be eligible to receive an amount equal to one-half of the total votes cast multiplied by $1. In other words, each of them would be eli- gible to receive $35 million. However, because there is a de minimus rule as- cording no contribution for the first 5 millIon votes, these amounts would be reduced to $30 million apiece. Of course, this distribution would be made only if campaign expenses of this amount were incurred. Minor parties are also provided for under this amendment. They will be eligible for funds equal to $1 times the number of votes cast for their candidate in the last presidential election to the extent the votes cast for their candidate exceed 5 million. The Comptroller General is given supervision of this fund to be sure that the payments to the political parties for presidential campaign expenses are ac- tually incurred, and to see that they are* presidential campaign expenses as dis- tinct from personal expenses and as distinct from campaign expenses of other ofilceseekers. It will also be his respon- sibility to determine the popular vote which determines the amount which Is to be available for distribution. An Ad- visory Board consisting of two members from each of the principal parties, to- gether with three Independent members selected by them, will assist the Comp- troller General In the administration of the fund. The question often is raised as to what happens if the amount designated by in- dividuals on their tax returns is more or less than the amount which can be dl-. vided up among the pai~ties based upon the popular vote. To the extent the amounts designated exceed the popular vote in the last election, the moneys In- volved are not to go into the fund, but rather to remain in the general fund. To the extent the amounts designated are less than the amount which `should be distributed based upon the popular vote, the parties, in effect, receive an "account receivable" which is paid to them in fu- 1897 PAGENO="0746" ture years to the extent designations are made. - This is a provision about which I was originally somewhat apprehensive. The more I listened to it, the more I be- came convinced that something needed to be done. I say this despite the fact that It was an amendment added by the Senate that was not related to the sub- ject matter of the bill. Though this amendment does apply to the Internal Revenue Code, the bill Itself has to do with the question of the foreign Investors' tax treatment here in the United States. After a thorough consideration of the many proposed solutions to the problem of how to finance presidential election campaigns, I have concluded that this provision is at least a good starting point. I cannot assure the Members of the House that this, in all respects, Is the final solution to the problems of funding a presidential election cam- paign. However, I believe It, at the least, Is a good beginning and I believe It is important that we start now. We are all, particularly at this time, aware of the soaring costs of po- litical campaigns. The dependence on wealthy contributors for substantial portions of needed funds tend to leave candidates of modest means encum- bered with debts of loyalty to a wealthy few, rather than to the voting public as a whole. Certainly we should do some- thing about a system which tends to ob- ligate presidential officeholders to * wealthy contributors and taxes them with difficulties in maintaining the in- dependence which all of us want them to have. Although candidates other than the President and the Vice Presi- dent will not directly benefit from this provision, it may be that taking the pressure off from raising funds for the presidential elections will lessen the problems of others in raising funds for their elections. In any event, it seems appropriate to try this proposal in this limited area before making any deci- sions as to whether it should be broad- ened. As I ~have said, it seems to me that the enactment of this provision will be an Important factor in removing the potential for possible improper Influence in Government. Political parties and their presidential candidates will be as- sured that they need not rely on the large contributions of a relatively few wealthy contributors to meet the heavy financial demands of political cam- paigns. Under this system of campaign financing, the man elected President will be obliged equally to every taxpay- er and every voter. In other words, the man elected President will be in debt to all American voters and taxpayers and this would seem to be quite close to the ideal of the American system. Frankly, I do not know how many peo- ple will use the system. I am not neces- sarily concerned at this point about how many people would do It. But I am con- cerned that we have not yet found a way toprovide for the expensive financing of presidential campaigns other than through the present methods that are followed by both major parties of getting most of their moneys in amounts much larger than a dollar. I have heard a whole lot of complaints recently about the possibility that some- body who belongs to a presidential $1,000 club might get some special favor from Government. The Impression is abroad, although I doubt whether there Is any truth In It, that this may sometimes be the situation: that some people make large campaign contributions to either of the political parties expecting to exer- cise some degree of influence upon either of the political parties greater than that which they normally would exercise with- out the making of that sizable contribu- tion. The President, when he sent his state of the Union message, I believe this year, in January, asked the Congress to enact a provision that would allow a person to make a political contribution of up to $100 to an individual party, from the presidential level down to the township level. Under that proposal if a person made a political contribution to any Member, to me, to a county judge or to anybody else, he could deduct it from his income tax up to $100. That in effect would be his act of appropriating whatever the amount was under the rate applicable in his case to that $100. This Is true since otherwise this amount would go in- to the Federal Treasury~ Under the Senate amendment also the taxpayer, when he makes this X on his return indicating that he wants $1 out of, say, the $61 he is taxed not to go to the general fund of the Treasury but rather to go to this special fund to help the campaigns of those who aspire to be President, Is making an appropriation of Federal money by his own act. He would do that In either Instance. The difference is that under the Senate amendment the appropriation is equal for all taxpayers. But what is wrong with It? What Is wrong with the effort here being made to induce 70 million people over a 4-year period to provide $70 million so that 7,000 or 70,000 or whatever the number would be, would not have to provide the same amount of money? Is it wrong to create a circumstance wherein every voter In the United States, if he wants to, can of his own volition make available $1 a year or $4 every 4 years, not to help his political party nec- essarily but to go into a fund which will be divided between the two major politI- cal parties? 1898 PAGENO="0747" 1P. 27092] Why, we even saw fit to make provi- sion for some of It to go to a third party under the circumstances involved in the conference report. I do not see anything wrong with It. But I do see something wrong with not * trying to do something about the impres- sion that exists on the part of many peo- ple, the impression that something ought to be done to minimize the possibility- I am not saying it exists; they are think- ing it exists-of people having a greater influence than they ought to have be- cause of the size of their contributions. Mr. MAcGREGOR. Mr. Speaker, will I the gentleman yield? / Mr. MILLS. I am glad to yielfrto the gentleman from Minnesota. Mr. MACGREGOR. From what the distinguished chairman of the Commit- tee on Ways and Means has said I be- lieve I can support this $1 per year idea, but the distinguished chairman also made reference to the proposal to allow a deduction of up to $100 per year per person for contributions for political candidates and political parties. In the State of Minnesota we have had in our State income tax laws for some time such a provision. We believe it has been very beneficial in broadening the base of political contributions and en- couraging citizens' participation. I should like to ask the gentleman two questions. Did the committee give any consideration to this $100 per year pro- posal, which many of us have intro- duced in legislative form? Second, can the distinguished gentleman from Ar- kansas give us any figures as to the burden on tax receipts which the $1 per year proposal would amount to, and can he tell us anything about what the $100 per year contribution proposal would amount to in terms of lost revenues? Mr. MILLS. Let me take the gentle- man's questions in the order asked. In the first place, we have not been able to give consideration to the $100 de- ductible in the committee although this was reviewed in the Senate hearings along with the amendment As to the pending proposal, we know the maximum, how much is Involved. It could never be more than $1 times the number of votes cast in the last Presi- dential election less 10 million if there are two parties, or more if there are more parties polling over 15 millIon votes. I used 1964 in my example because the combined vote of the Democratic and Republican candidates came to 70 mil- lion. Subtracting 10 million from this leaves a cost of $60 million. The SPEAKER pro tempore. The time of the gentleman has expired. Mr. MILLS. Mr. Speaker, I yield my- self 5 additional minutes. That is the maximum, in other words, that could be in this fund for the elec- tion year 1968. You always look back* to the prior election. The fund rises to a level of $1 times the number of total votes cast at the last eleôtlon minus $10 million as long as there are two major parties. I am told the $100 deduction would cost about $100 million in rev- enues. But this may not be* a satisfac- tory estimate since this is not limited to presidential campaigns; it Is not limited to senatorial or r9presentatlve races; It is not limited to gubernatorial races, but it can go down to whatever level of. elec- tions are involved. Very frankly, I have not looked with too much favor upon that. I appreciate the gentleman's statement, and I can be wrong. If It has worked in Minnesota, it could work elsewhere, but what I am getting to is this: Remember the $1 has no applica- tion except to presidential campaigns. I do not know that the two ideas are even in conflict. Maybe they could be meshed together. I do know this: Even though congressional races are not in- volved in this proposition, if you get separate financing for presidential cam- paigns it might be easier for the Re- publican Campaign Committee of the House and the Democratic Campaign Committee of the House to get what I understand it needs under the present circumstances. My main point is that this is a worth- while experiment to see whether or not we can get money this way. It is possi- .ble that President Eisenhower and Pres- ident Truman could get on TV and make *a concerted drive and urge the taxpayers to make this contribution in behalf of good Government with the elimination of any possibility of undue influence by those who otherwise would make larger contributions. It seems to me people will buy it. However, I am interested in making an effort here to do some- thing to create a better atmosphere with respect to the collection of contributions in Presidential campaigns. Mr. KEOGH. Mr. Speaker, will the gentleman yield? Mr. MILLS. I will be glad to yield to my colleague from New York. Mr. KEOGH. Mr. Speaker, I appreci- ate the gentleman's yielding tome. First, Mr. Speaker, I would like to pay my tribute to the sterling work that the chairman has done in the conferences that have been presented heretofore and the one pending now. I hope he does not mind if I call the attention of the House to the fact that there is In- cluded in the pending conference report the amendments to the Self-Employed Individuals Retirement Tax Act which passed the House on June 6 by a record vote of 291 to nothing. The only change that was effected was that the effective date of those amendments was made for taxable years following December 31, 1967, instead of 1965. Mr. Speaker, I would like to pay my 1899 PAGENO="0748" respects again and express my appreci- ation to the chairman for his having co- operated in the retention of what I like to think is a most important improve- men of the Self-Employed Individuals Retirement Tax Act that will make It far more workable than it has been up to now. Mr. MILLS. I thank the distin- guished gentleman from New York. There are many provisions In the bill. The gentleman has referred to one of them. Most of these provisions were worked out with complete Treasury sup- port. The gentleman put his finger on one provision that had passed the House. There are several others In it that have also. Certainly this one did. It passed by a record vote. There seemed to be unanimous approval. As I remem- ber it, no one voted against It. The Senate, as I said, included it and made only that one change in the effective date. And permit me to say, Mr. Speaker, that the distinguished gentleman from New York worked effectively and in his usual intelligent and persuasive manner in securing passage of HR. 10. Mr. Speaker, the gentleman from New York has served many years on the commit- tee. He is possessed of a brilliant mind. He is industrious. He attends all meet- ings of the committee. We will miss him when he retires in January. Mr. BATTIN. Mr. Speaker, will the gentleman yield? Mi'. MILLS. I yield to the gentle- man. The SPEAKER pro tempore (Mr. PRICE). The time of the gentleman from Arkansas has again expired. Mr. MILLS. Mr. Speaker, I yield my- self 3 additional minutes. Mr. BATTIN. Mr. Speaker, if the gentleman will yield, under title III as the gentleman was explaining, the divi- sion of the funds which the. gentleman mentioned would be that they would be divided equally between the two major political parties. Mr. MILLS. Mr. Speaker, let me get into a little more detail about it. Mr. BATrIN. Then the gentleman mentioned a third party. Mr. MILLS. Yes. Neither major party would get a dollar for the first 5 million votes that it re- ceived In the previous election. Neither would a third party begin to participate In this fund until it has received as many as 5 million votes. If the third party receives as many as 15 million votes, then It becomes a third equal partner in the total of the fund. But if it does not get to the 15 million vote level, it gets less than this; it would get a dollar for each vote above the 5-million-vote level. So, if a party received 10 million votes, It would not be paid for the first 5 mIl- lion, but It would get a dollar for the remaining 5 million votes or $5 million, to help defray the cost of Its campaign, Now, you understand you do not give a party anything until there Is certifica- tion that actual expenditures have been incurred, This is what I am talking about, the limit you would give in return for. certified records of expenditures in that amount. Mr. BATrIN. Mr. Speaker, if the gen.. tleman will yield further, then if I un- derstand the gentleman from Arkansas correctly, you would take the last presi- dential year, 1964- Mr. MILLS. That is right; you always have to do that. Mr. BATTIN. And as I recall, there was somewhat of a landslide during that year. Mr. MILLS. That makes no differ- ence. In the case, about which we are talking, there was no third party which receIved 5 millIon votes. If there were 70 million votes-even though the Demo- crats receiVed 40 million votes and the Republican 30 million votes-the fund [P. 27093] would still be divided evenly. The fund would be divided equally between these parties because both of them received more than 15 million votes. Once you get to the 15-million-vote level, you be- come an equal partner, even though the other party may have gotten 50 million votes and you only 30 million. Mr. BATTIN. Mr. Speaker, if the gen- tleman will yield further, but the divi- sion would not become equal based upon the percentage of the total votes? Mr. MILLS. They would be on the actual votes received less 5 million until you got 15 million votes. Then the divi- sion would be equal. Mr. WATSON. Mr. Speaker, will the gentleman yield? Mr. MILLS. I am glad to yield to the gentleman from South Carolina. Mr. WATSON. Mr. Speaker, lam sure that the gentleman in the well appreci- ates the fact that no one has a higher regard for the gentleman than I. And, certainly, I can appreciate the effort that is being made here to broaden the base for political contributions. Mr. Speaker, I am sure that the gen- tleman in the well, as I, believes in the matter of voluntary contributions. However, Mr. Speaker, the thing that disturbs me is that under the provisions of this particular section 3, an individual, although he might decide to give only a dollar and checks the square therefore that individual might feel that the Re- publicans have been spending too much money and that they are threatening us with bankruptcy and they are causing inflation, and might say, "I will give my dollar instead to the Democratic Party which is trying to keep expenses down." Now, Mr. Speaker, although the check- ing of the square is a voluntary matter, 1900 PAGENO="0749" subsequent to that there is a compulsory proposition to the effect that a part of that dollar is being forced to go to an- other party which that individual might not desire to help, even to the extent of 50 cents. Mi'. MILLS. The gentleman is com- pletely accurate in that respect. Ac- tually this is a voluntary contribution for good government. It presents both par- ties a chance to get their ideas across without having to beg for funds. The main thing here is to stimulate people to take an interest in politics and to broaden the base, as my friend, the gentleman from South Carolina, said, of those who make these contributions to political campaigns. I think it is much better to do it in one fund, and to divide it among the parties, than to use tax dollars for the purpose of electing a Democratic Presi- dent pm' se, by designation, or a Repub- lican President per se by designation. This is only $4 in a presidential cam- paign. If the man wants to make a con- tribution to one of the parties In addi- tion to that he may do so in addition to the $4, Mr. WATSON. Then we would both agree on this proposition that the initial designation of $1 is a voluntary pro- position? Mr. MILLS. Absolutely. Mr. WATSON. But thereafter the person is being compelled to? Mr. MILLS. That is right. After that It goes to both parties, Mr. WATSON. The person is being compelled to contribute to people and parties not necessarily of his choice? Mr. MILLS. He has the right to des- ignate a dollar to go into the presidential campaign fund. He does not have the right to say that it go to the Republican National Committee, or to the Demo- cratic National Committee. If he puts it In there he will do so with the full knowledge that he is making that con- tribution toward the costs of the presi- dential campaign-the presidential cam- paign of both parties: Mr. HARSHA. Mi'. Speaker, if the gentleman will yield? Mr. MILLS. I yield to the gentleman from Ohio. Mr. HARSHA. If it were not operated in this way would you not soon use up the dollar in trying to categorize or collect the dollar and set aside every individual taxpayer's dollar to a particular candi- date? Mr. MILLS. I would think it would be much less expensive to do it the way the conference report has it. Mr. HARSHA. Otherwise you would use up the d,ollar. Mr. MILLS. Yes. Mrs. GRIFFITHS. Mr. Speaker, will the gentleman, yield? Mr. MILLS. I yield to the gentlewo- man from Michigan. Mrs. GRIFFITHS. Mr. Speaker, it seems to me that this is going to con- tribute to the growth of a third party. I believe that the genius of American politics is that we have two parties, both of them largely `occupying the middle of the road. I think it is naive to assume that there are not organizations already in exist- ence in the country that are already con- tributing to campaigns that could run their own candidates and their own President.' If they are assured that this money can be transferred then to the taxpayer I think that it will contribute to such growth. I would assume that it is possible that you could have a labor candidate. I would assume that it is possible that Mr. Wallace, as a States' Rights candidate, may run. I would assume that it is possible that you could have a black power candidate. I believe that these things should be considered. Mr. MILLS. Mr. Speaker, let me call the gentlewoman's attention to the fact that there is nothing here that provides any encouragement to the development of a third party or a fourth party or a fifth party. What we have here is a proposition that if the major parties are joined by a third party, that receives as much as 5 million votes in an election, that party is going to qualify for part of this dollar for the votes that they re- ceived above 5 million. But, that party has to get that many votes first on Its own through some other means of financ- - Ing, before it ever gets anything out of this fund. It has to be qualified first. Mrs. GRIFFITHS. There are orga- nizations available now that have the money to run the candidate, and that are already contributing to candidates. So if they can rely upon the fact that in the future they are going to get it all paid back to them, to my mind I think you are building up toward the possibil- ity of splintering American politics. Mr. MILLS. The gentlewoman mis- understands when it gets it paid back. You do not finance a campaign in 1968 and then get paid enough money on the basis of 5 million votes received in that campaign. Mrs.. GRIFFITHS. They will have been putting it in all these years and in' future years when they get more than 5 million votes they will get paid. Mr. MILLS. Let me ask my good friend, the gentlewoman from Michigan if this is not worth a trial? That is the only thing I am asking you, to give it a trial. I am not saying it ~s going to work. I do not know whether it will or not. It is hard to get people to make a political campaign contribution. I know it-we all know it. What I am concerned about is that we make some effort to interest more people 1901 PAGENO="0750" in this business of participating in the financing of these extremely costly pres- idential campaigns. I do not know what they are going to cost. But it looks like to me as if every time we run one of them, both parties wind up in the hole and then spend the next 4 years trying to have dinners somewhere with people to speak to pay off the deficit. Mr. DINGELL. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman. Mr. DINGELL. I have several con- cerns about this legislation, the first of which is that no hearings were held on this matter before the great Committee on Ways and Means. Mr. MILLS. The gentleman is right in that respect. Mr. DINGELL. I have always viewed it as being highly important that tax legislation originate in the House of Rep- resentatives as the Founding Fathers originally intended it to be done. Mr. MILLS. This bill did-but the gentleman is right as to this provision. Mr. DINGELL. I think this is the de- fect in the legislation that is before us. Now apropos of what the gentlewoman has been discussing, with the distin- guished chairman, I would like to point out that political third parties in this country are very ephemeral in their existence and exist for a short period of time. The SPEAKER pro tempore (Mr. PRICE). The time of the gentleman has expired. Mr. MILLS. Mr. Speaker, how much time have I used? The SPEAKER pro tempore. The gen- tleman from Arkansas has consumed 29 minutes. Mr. MILLS. Mr. Speaker, I yield my- self 1 minute and that is all because I must yield time to other Members. Mr. DINGELL. I would simply like to point out that I agree with the gentle- woman from Michigan that this is going to continue the third-party structure in this country. [P. 27094) Mr. MILLS. I do not think it would have anything to do with that. Mr. LONG of Maryland. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman. Mr. LONG of Maryland. Was any pro- vision added having to do with the use of this money? Mr. MILLS. This is to be handled by the Comptroller General under the bill. Mr. KEOGH. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman from New York. Mr. KEOGH. Is it not a fact that no third party could participate earlier than 1972? Mr. MILLS. That is right. Mr. KEOGH. And then they could participate only if they had a candidate In 1968 who received more than 5 mil- lion votes. Is that not correct? Mr. MILLS. The gentleman is exactly correct. Mr. Speaker, I urge the adoption of the conference report. The SPEAKER pro tempore. The time of the gentleman has expired. Mr. MILLS. Mr. Speaker, I yield 5 minutes to the gentleman from Missouri [Mr. CuRTIs]. Mr. CURTIS. Mr. Speaker, as I have said in speaking on previous conference reports, even though I had serious ques- tions on them, I voted as an individual Congressman against the last final ver- sion of the suspension of the investment credit, as a conferee I still signed the report. The point I want to make about this previous bill in reference to this one is that this contained matters that at least the President of the United States said were serious and the House over my ob- jections, of course, and my best endeav- ors to persuade the House. differently, that this would actually combat Inflation. I felt to the contrary but as a conferee I felt it was necessary to uphold the posi- tion of the House and that this bill was so important because inflation is indeed a serious problem I thought I had a re- sponsibility to report back to the House some version of this measure even though it contained extraneous matters, such as we discussed. on football. I did not sign this report because the vehicle used by the other body in this instance, although a good and im- portant bill, certainly is not going to shake the foundations of this Nation if it does not become law this year and, indeed, waits until next year. The F-or- eign Investors' Tax Act of 1966 is the result of many years of hard work. Our committee did a great deal of work de- veloping it. The Senate Finance Com- mittee did some excellent work in im- proving it. And there are many Senate amendments that are germane to the bill and have improved this bill. This bill is in such good shape now that I can tell the House it can be introduced in the next Congress and probably become law within about a month. However, this bill became what some news reporter described as "Christmas tree," on which our colleagues on the other side put one after another amend- ment, amendments that were completely nongermane to the bill, and, with few ex- ceptions, were matters that the House of Representatives and the Ways and Means Committee had had no oppor- * tunity at all of studying. I must disagree with my Chairman of the committee. I respect him, but be- lieve me, my good colleague, you cannot understand what this new concept of financing political parties is from the 1902 PAGENO="0751" conversations that we had-and they were no more than conversations that we had in the conference on this subject. It cannot be understood that easily. In fact, I believe that this is an un- constitutional provision, as I tried to point out. I thought the point of order made by Judge SMITH was well taken, although, of course, I respectfully bow to the decision of the~Speaker. But this Is not a tax bill. It is actually an appro- priation bill, and one of the strangest that has ever come down the pike. Under the Constitution the appropria- tion process requires the action of the Congress of the United States. This bill provides that an individual citizen, by putting an "x" on his income tax return, may direct money that is not his-be- cause as soon as he pays it as a taxpayer it is part of the general funds of the United States-that an individual citi- zen, by putting an "x" in the box, can direct how money of the United States Is to be spent. I think this is unconsti- tutional. I think an examination into it would reveal it probably to be so. But I do not really know. I am giving an off- the-top-of-the-head opinion on this from what I have seen. There are other implicatiqus. We were promised by the Secretary of the Treasury this year when another nongermane amendment from the Sen- ate was put on ~ne of our bills that no longer tax deduction for a method that both political parties had developed- The SPEAKER. The time of the gen- tleman has expired. Mr. CURTIS. Mr. Speaker, will the gentleman yield me an additional 5 min- utes? Mr. -MILLS. I yield the gentleman from Missouri 5 additional minutes. Mr. CURTIS. Both political parties had developed a method In financing their affairs, namely, the Almanac and advertising in it. I did not think it was too good a way of doing it. But let me say this. It. had one virtue: It was honest and aboveboard, and all of us know the problems that exist in financing political parties and political campaigns, and I think we are all agreed that this matter is so serious that we have to look at it and look at it in depth. It has become one of the subject matters studied by the Joint Committee on the Reorganiza- tion of the Congress. One of the recommendations we made was that we must get into this subject matter. But let us not get into it in this kind of haphazard, piecemeal method of having a bill cOme into the confer- ence on a tax measure of some serious- ness and some complexity, and hope t~' get by, as the chairman of the Ways and Means said, "Well, why not try it, It might work." I hope that Is not the way we will pro- ceed in legislation. Mr. RUMSFELD. Mr. Speaker, will the gentleman yield for a question? Mr. CURTIS. I yield to the gentleman from Illinois. Mr. RUMSFELD. Is the gentleman suggesting it would be more proper, and in fact, constitutional, if the dollar were sent in by the individual to a candidate or a political organization and then marked as a legitimate deduction, if the law so provided, but that because the check box on the form is something which goes to the Government, and then the Government pays the money, it be- comes unconstitutional? Is this the dis- tinction the gentleman is making? Mr. CURTIS. It is a distinction, yes. We can say to any taxpayer, "We are not going to tax certain money-money you give to your church, money you give to charity. We will not tax that." But this is money that has been paid as taxes. It is not a deduction from the tax bill. It is money that the citizen owes. Those who put on an X mark and say, "This money shall be spent," are designating. Suppose I do not put on an X mark. Then nothing will go out of the Treasury for this purpose. This might be going back to the days when the citizens were those who were property owners, because those who are not in the income brackets to pay in- come tax and only pay excise taxes to the Federal Government will not get to direct any money from the Federal Treasury to go for this purpose. Having said this on that particular subject, let me call attention to the ail- too-limited discussion on a conference report on a very serious and fine bill, the Foreign Investors Tax Act of 1966. If Members will look at the statement on the part of the managers of the House, they will find that this is only one of the items. There are four items here that change depletion allowances. There are many of us who in our districts have problems with respect to depletion allowances which affect us. The Ways and Means Committee had no hearings or discus- sions on these three things. They were just put in here, and they were not kicked out. I say that the House of Representa- tives has got to stand firm on this opera- tion of those from the other body, put- ting on matters at will, almost, that have not been studied, even with very little study on their own part. Many of these are amendments offered on the floor of the Senate, and not even considered by the Senate Finance Committee. There is one final thing. The one ray of hope about all of this tragedy-and I call it a tragedy so far as the legislative process is concerned-is, the President might well veto the bill. Frankly, I hope he does. Then we can get back and bring in a proper bill in regard to the Foreign Investors Tax Act of 1966. 1903 PAGENO="0752" I have said about all I care to say on the subject. I will close by saying I hope that some day, if I am here-and I hope I will be here long enough-I will see the House of Representatives stand up against the operations, irresponsible-I will use that word-the Irresponsible operations we have experienced in this instance, and in instance after instance [P. 27095] on the part of Members of the other body. This is not the way to legislate. This particular idea is an interesting idea for financing campaigns. Frankly, * it is no more than just that, an interest- ing idea that ought to be examined. Mr. LONG of Maryland. Mr. Speak- er, will the gentleman from Arkansas yield to me? Mr. MILLS. I yield to the gentleman from Maryland. Mr. LONG of Maryland. I am not sure the gentleman understood my ques- tion asked a while ago, when I asked about the audit system. There are-two aspects to this prob- lem. One of course is what control the minority party could have over the ques- tion of whether there was an honest count of the amouritof money that was to be handled. Mr. MILLS. Let me explain how it will be handled. Mr. LONG of Maryland. The other and more important question is how does one control the use of the money, let us say, by the Republican or Democratic National Committee? Suppose this were very successful and resulted in a nice, big windfall and they just decided to pay the chairman a couple of hundred thousand dollars a year? In other words, suppose they declared themselves an informal dividend. What sort of control would there be over that? Mr. MILLS. Let me answer the gen- tleman's first question first. The ex- penditures may be audited by the Comp- troller General. They are certified, and submitted by the Democratic National Committee in behalf of the election of a Democrat or by the Republican Na- tional Committee in behalf of a Republi- can for President. I do not think the gentleman has to have any worry about the fact that this matter would be very carefully scrutinized in that respect. Then there is an advisory committee made up of members of both parties to aid in supervising it. I do not think any Republican member of that committee would allow the Democratic National Committee to fudge or vice versa. There is no limitation with respect to the matter of whether a part of it could be used to pay a Democratic National committeeman a greater salary than he deserves-or tO pay a Republican National committeman a greater salary than he deserves. Mr. LONG of Maryland. I wonder If I could ask the chairman one other ques- tion. Mr. MILLS. Yes. Mr. LONG of Maryland. Which I do not think would necessarily be very real- istic, but it could be conceivable, I sup- pose. As Mr. DINGELL pointed out, third parties are notoriously ephemeral. Sup- pose you had a third party that managed to poll 7 million votes in 1968. It would not get that money in 1968, but, of course, it would get it in 1972. Suppose the party then virtually disappeared and all that is left is the national committee of that party that decided to get a couple of mil- lion dollars and decided to spend it In a very high, wide, and handsome way. Would you have any control over any- thing like that to keep that money from being dissipated and wasted? Mr. DINGELL. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman. Mr. DINGELL. Will we then be plac- ing the Appropriations Committee, which is sometimes a partisan body and oft- times very partisan, in charge of ex- penditures by the recipients of this fund? Mr. MILLS. I do not think the gen- tleman from Michigan would want to say that a Democratic Congress or a Republican Congress could not be fair in appropriating under the provisions of any act. Actually, however, the Appro- priations Committee would be involved. Mr. DINGELL. At least the gentleman from Arkansas will admit that what we are setting up is a situation where the Committee on ~4~ppropriations may at a time later scrutinize the activity of what has been previously preaudited by the great political parties of. this country. Am I correct? Mr. MILLS. You have the Comptroller General to supervise this and you have an advisory committee set up over people who are set up here on a bipartisan, basis aiding in the supervision. I do not think the parties are going to misuse this po- litical fund. Mr. DINGELL. Mr. Speaker, if the gentleman will yield further- Mr. MILLS. No. I do not think they are going to misuse this fund. Mr. DINGELL. Mr. Speaker, if the gentleman will yield further, I have one further question of the distinguished gentleman from Arkansas Mr. Speaker, the rationale as I under- stand it for this proposal is to do away with the great fundraising efforts which are now handled and incurred by the two parties. Mr. MILLS. That would be our hope, to broaden the base. Mr.- DINGELL. Mr. Speaker, if the gentleman will yield further, the simple answer to that is that this would be in addition to the funds which would be raised based upon the traditional man- ner and practices in which they have been raised heretofore. 1904 PAGENO="0753" Mr. MILLS. No. If the gentleman thinks that, the gentleman has missed the entire point of this amendment. There will never be a penny paid out of this fund until it is certified that there has been an expenditure in- curred-expenditure incurred-and then they send the amount into the fund, showing how it has been expended and the purpose for which it has been ex- pended. Then the fund could reimburse them for that amount. Mr. DINGELL. Mr. Speaker, if the distinguished gentleman will yield fur- ther, the gentleman has a great oppor- tunity to convince me In this respect, but I see nothing contained in the state- ment of the managers on the part of the House- Mr. MILLS. Read the bill. Mr. DINGELL. Which would indicate that henceforward the responsibility and obligation for conventional-type fundraising by both parties will either be done away with or otherwise lgnored~- As I read this statement of the man- agers on the part of the House, the conventional type of fundralsing prac- tices will continue to operate- Mr. MILLS. We have not tried to stop it here. You or I or anyone else could say that, "I have $100 in my pocket and I want to give it to the Republican, the presidential candidate-the candidate of my choice." However, the party is not going to try so hard to get money this way if it already has adequate financing. Mr. BYRNES of Wisconsin. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman from Wisconsin. Mr. BYRNES of Wisconsin. Mr. Speaker, I believe the gentleman from Michigan [Mr. DINGELL] has missed the point that has to be recognized that this only covers the expenditure after a nom- ination. Mr. MILLS. That is right; on the first of September. Mr. BYRNES of Wisconsin. This will not finance preconventions or conven- tion activities. It is only after a nom- inee has been selected. Mr. MILLS. And, it is set out in the bill itself that no expenditure can be made prior to September 1 out of this fund in the presidential election year. Mr. DINGELL. Mr. Speaker, if the gentleman from Arkansas will yield further, there is nothing contained in this legislation which would stop the political parties from having the presi- dential clubs, from conducting the tra- ditional type of fundraising other- wise. Mr. MILLS. Mr. Speaker- Mr. DINGELL. Or having a special party-type of fundraising, or any other device with which to raise funds. But this would be additional device through which to raise money for a political party. Mr. MILLS. It certainly is true that it is posible to have large contributions. But the pressure will be less for them. Moreover, we can still pass some legis- lation limiting these contributions. Mr. DINGELL. Mr. Speaker, if the gentleman from Arkansas will yield further, I do not see anything contained in this bill that changes the present situ- ation with reference to the present pol- icies of fundraising. Mr. Speaker, there is nothing con- tained in this bill, aside from the fact that we will make an additional contri- bution and make additional money avail- able. Mr. MILLS. The gentleman from Michigan, my good friend knows, that there is nothing in the Internal Revenue Service Code that has anything to do with the control of political contribu- tions. Political contributions which are made are controlled by legislation, I as- sume, within the jurisdiction of the Committee on the Judiciary. Certainly, Mr. Speaker, such control is not within this bill. There is no effort made here to say that a man cannot make a contribution of his own money. All we are trying to do here is to say that an Individual can provide $1 a year to a presidential campaign fund and this would give him the opportunity to do it, if he wants to do it; If we can get 70 million people to contribute to this presidential campaign fund this should finance most, if not all, of the cost of a presidential campaign. Then there [P. 27096] is no need for a presidential group or for you or for me to go further into our own pockets. We could spend our money if we so desired toward helping to elect a Governor of some State or a congres~ sional colleague. But do not bring into this discussion things that are not con- tained in this legislation or in the con- ference report. The question Is whether what is here is worth a trial run to see if it will work because if it will work, it can have a very wholesome effect in eliminating some of the things that may be in the minds of some people who talk about undue influence. Mr. JOELSON. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman from New Jersey. Mr. JOELSON. Mr. Speaker, we have heard much criticism of our campaign contribution laws, that candidates and parties depended on individual contribu- tors, and therefore there were certain obligations. Now, it does not seem to me we can solve this in the least bit. Your com- mittee is not set up to go into campaign practices. And I just cannot accept the premise that if the national committee 71-297 0-67-pt. 2-48 1905 PAGENO="0754" gets a few million from this source that it will not seek it from other sources. Mr. MILLS. They are going to seek it from other sources until they get enough money to run the campaign. You know that and I know that. If they can get two-thirds of what they want here then they only have to get one- third from other sources. Does not my good friend from New Jersey agree that this is a good way to bring about broadening the contribution base, and it would not hurt us to at least try to broaden the base, so as to get more people helping with the polit- ical campaign costs so that we do not have to go to a few people and get more from them? Mr. JOELSON. I would answer that by saying we are not broadening the base; we are just fattening up the till. Mr. MILLS. I do not think my friend from New Jersey understands the amendment. Mr. FULTON of Pennsylvania. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman from Pennsylvania. Mr. FULTON of Pennsylvania. The question here is: Are we stacking It against minority groups by really sub- sidizing through the Government the major parties? Mr. MILLS. I do not know whether my friend from Pennsylvania was on the floor or not, but the argument has just been made by others that we are stack- ing it for them. Mr. FULTON of Pennsylvania. I am speaking in a different context. Mr. MILLS. I do not think we are stacking it for or against. Mr. FULTON of Pennsylvania. I am raising the other question. Mr. MILLS. We are going to rectg- riize a third party whenever that third party gets more than 5 million votes. In that event we will help that party to some degree and whenever it gets 15 mil- lion votes, in the previous presidential election, it will become a fuil party in the division of the money with the other major parties. Mr. FULTON of Pennsylvania. The question then Is this: You are making it the equivalent of one vote and one dol- lar. That Is one of the cheapest elec- tions I ever heard of, where you get a vote for every dollar in your party. I might say to the gentleman, if I were in one of the what we now call orga- nized groups I would certainly go on the presidential end of It, and do it quick, and altogether, because I would be able to control them. I would not have to finance the presidential end of It. Mr. MILLS. This might help us to get money needed in congressional cam- paigns, and I think it would serve a good purpose if it did. But let me say this to my friend from Pennsylvania: I am sure he would- Mr. FULTON of Pennsylvania. Is this constitutional? I do not think it is. Mr. MILLS. I do not think there is any constitutional question. But my friend from Pennsylvania, I am sure, would rather see 10,000 people contribute $1 to a campaign than to see one individual contribute $10,000 to cover the same costs. Mr. FULTON of Pennsylvania. Yes, but you see- Mr. MILLS. I think the gentleman would agree with me that there is less possibility of suspicion of influence, real or unreal. * Mr. FULTON of Pennsylvania. Yes, but the gentleman can see what you come to is this, when you make equivalent and equal one vote and one dollar. I really do not know what the philosophical background of that. is, and whether It is right or wrong. Mr. MILLS. What would the gentle- man make of it? Mr. FULTON of Pennsylvania. I would not think a dollar a vote. I do not believe I would. It may be right. I am questioning that, and saying it may not be constitutional, because I do not think public money should really finance private groups for political purposes. Maybe. I do not know. I am asking the question. Mr. MILLS. I would think the gentle- man would believe that this would be preferable than tax deductions. There is no control possible over that. I would believe that the gentleman would think this would be the better way to do it. Mr. BINGHAM. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman. Mr. BINGHAM. I was going to say, it seems to me that this is worth trying. Mr. MILLS. Yes, I think it is. Mr. BINGHAM. I have heard for many years a great deal of discussion and debate about this problem. Many sug- gestions are made about getting away from the existing system-and of course it is possible for anybody to shoot holes in any, proposal. Mr. MILLS. That Is right. Mr. BINGHAM. But it seems to me, this Is a proposal that Is worth trying and I think It makes sense. Mr. FULTON of Pennsylvania. Mr. Speaker, will the gentleman yield to me so that I may answer my friend, the gentleman from New York? Mr. MILLS. I will yield briefly to the gentleman for a question. Mr. FOLTON of Pennsylvania. I would like to answer my friend, the gen- tleman from New York, whom I respect highly. Suppose somebody who believes contrary to the gentleman from New York and my particular feelings about voting rights and civil rights and all that? If Wallace in the Suuth gets 5 million votes, we have the Government 1906 PAGENO="0755" subsidizing things that are against what we believe in. Mr. MILLS. Has the gentleman looked into this matter close enough to realize that in the case of a third party running for the first time in 1968 even if the party gets over 5 million votes, it would not get anything in 1968? Mr. CURTIS. But if he is also run- fling under a third party, his third party would. Mr. MILLS. No, I must say to the gentleman, I am right. That third party would not be eligible to get anything until the campaign in 1972. Mr. CURTIS. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman. Mr. CURTIS. The gentleman speaks with such positiveness-let me emphasize again that we did not hold a single bit of hearings. Mr. MILLS. We did not have any hearings. I agree with the gentleman. Mr. CURTIS. All we had was some discussion in the conference room off there for maybe about three-quarters of an hours. That is the most the gentle- man knows about it and it is the most that I know. Mr. MILLS. The gentleman cannot say how much I know of this, I did a lot of studying of it. Mr. CURTIS. There have been no hearings as I said as far as the House is concerned and we do not know beans about it. Mr. MILLS. The gentleman Is right. Mr. FRASER. Mr. Speaker, will the gentleman yield? Mr. MILLS. I yield to the gentleman. Mr. FRASER. I just want to com- mend the chairman. I think it is an ex- cellent proposal. I think it ought to be tried. If particular provisions need to be modified, we can take a look at it next year. But this is a wonderful oppor- tunity to free our political system from dependence on large contributors. I feel very strongly about it. Mr. MILLS. 1 thank the gentleman very much. Mr. VIVIAN. Mr. Speaker, the con- ference report now before us on H.R. 13103, proposes, as has been thoroughly discussed this evening, that starting in 1967 each Individual taxpayer be given an option to divert exactly $1 per year of his Federal income tax payment to a special Treasury fund. This fund would be equitably allocated between the major national political parties to help defray the costs of presidential campaigns. Mr. Speaker, this scheme definitely does have some merit. In particular, it provides a simple, direct, and practical [P. 27097] process by which large numbers of pee- ple Individually can contribute a small amount to national political campaigns, sufficient to fund these campaigns mod-' erately well, and thereby relieving the candidates of the necessity of depending on a limited number of affluent givers. This scheme therefore would reduce the Influence of wealthy individuals or orga- nizations upon the National Government. Unfortunately, Mr. Speaker, there are two very basic faults of this scheme which overshadows its merits: First, the funds are to be available only for presi- dential elections, rather than all elec- tions at all levels of government; and the funds will be dispersed according to the inclinations of national party leaders, persons who to date seldom have been known to the public, and hardly immedi- ately subject to broad public choice. Mr. Speaker, this good idea is being applied wrongly. Suppose instead, these funds were al- located In proportion to the number of voters each delegate receives directly to the control of the local precinct delegates elected precinct by precinct throughout the Nation by the voters of each party. These delegates, who would be your neighbors, and probably well known to you, in turn would distribute the funds over which they gained control to the local, State, and National candidates and party organizations as they so de- sired, or more particularly, as they would have promised prior to their own election. The control of political party activities and finances then would stem from where It should-the neighborhood level, the grassroots of politics, rather than from the Nation's political center. Today, a national TV network, or a national news service, surely can more strongly Influence legislation than can, for example, any one or a few Members of Congress, such as myself. Today, the Nation's political party leaders, of both parties, and particularly of whichever party controls the agencies or controls the congressional committees, surely can wield "the carrot and the stick" to gain frequent conformity of action of representatives from many districts. Now I personally do not desire to In-. crease this centralization of political power. Therefore I have decided to vote against the conference report. Of course, In doing so, I recognize that I will be voting against a number of other provisions encompassed In the re- port, some of which I certainly support, particularly the provision liberalizing tax deductibility of contributions to pension plans by self-employed Individuals. I was a sponsor of that provision. But because the other body, the Senate, has imposed this unamendable conference report upon us, I will have no oppor- tunity to separate the provisions. * Mr. Speaker, the Senate should not have accepted the election fund scheme, and neither should we. 1907 PAGENO="0756" Mr. MILLS. Mr. Speaker, I move the previous question. The previous question was ordered. The SPEAKER pro tempore. The question Is on agreeing to the conference report. Mr. CURTIS. Mr. Speaker, I offer a motion to recommit. The SPEAKER pro tempore. Is the gentleman opposed to the conference report? Mr. CURTIS. I am, Mr. Speaker. The SPEAKER pro tempore. The gentleman qualifies. The Clerk will report the motion to recommit. The Clerk read as follows: Mr. Cuarts moves to recommit the bill, HR. 13103, to the committee of conference. Mr. MILLS. Mr. Speaker, I move the previous question on the motion to recommit. The previous question was ordered. The SPEAKER pro tempore. The question is on the motion to recommit. The question was taken. Mr. CURTIS. Mr. Speaker, I object to the vote on th.e ground that a quorum Is not present and make the point of order that a quorum Is not present. The SPEAKER pro tempore. Obvl- ously, a quorum Is not present. The Doorkeeper will close the doors, the Sergeant at Arms will notify absent Members, and the Clerk will call the roll. The question was taken; and there were-yeas 95, nays 127, not voting 210, as follows: [Roll No. 395] YEAS-95 Dole Passman Dowdy Pelly Downing Pickle Duiski Poage Duncan, Tenn. Poff Ford, Gerald R. Quie Fulton, Pa. Quillen Grover Reid, Ill. Gubser Reifel Gurney Rhodes, Ariz. Hardy Rumsfeld Harvey, Mich. Ryan Hechler Satterfielci Henderson Saylor Hull Selden Hutchinson Shriver Jarman Skubitz Johnson, Pa. Smith, Calif. Jonas Springer Kunkel Stalbaum Langen Teague, Calif. Latta Tuck Lipscomb Vigorito Long, Md. Vivian McCiory Waggonner McDade Watson MacGregor Whalley Mahon Widnall Marsh Williams Mize Wolff Morse Wydler Mosher - Natcher NAYS-127 Byrnes, Wis. Harsha Pepper Ca.Han Hathaway Perkins Clark Herlong Philbin Conable Holland Pike Conyers Horton Price Corbett Hosmer Rees Daniels Ichord Reid,N.Y. Dawson Irwin Rhodes, Pa. tie la Garza Jennings Rodino Dent Joelson Rogers, Cob. Diggs Johnson, Okla. Ronnn Donohue Jones, Ala. Rooney, Pa. Dow Karsten Rosenthal Edwards, Calif, Karth Rostenkowski Everett Kastenmeier Roybal Farbstein Kee St Germain Farnuni Keogh St. Onge Fascell Krebs Scheuer Flood Landrum Schneebeli Ford, Leggett Schweiker William D. Love Secrest Fraser McGrath Sickles Friedel Machen Smith, Iowa Garmatz Mills Staggers Gathings Minish Stubblefleld Giaimo Monagan Teague Tex. Gibbons Morgan Tenser Gilbert Morris Thomas Gonzalez Morrison Tupper Gray Multer Tuten Green, Oreg. I Murphy, fll. Udall Green, Pa. Murphy, N.Y. utt Grider Nedzi Vanik Griffiths O'Hara, Ill. Weltner Hagen, Calif. O'Hara, Mich. White, Tex. Halpern O'Neill, Mass. Wright Hamilton Patman Young Hçtnley Patten Zablocki NOT VOTING-210 Abbitt Ellsworth Kupferman Abernethy Erlenborn Laird Adams Evans, Cob. Lennon Albert Evins, Tenn. Long, La. Anderson, Dl. Fallon McCarthy Andrews, Farnsley McCulloch Glenn Feighan McDowell Andrews, Findley McEwen N. Dak. Fino McFall Aspinall Fisher McMiiian Ayres Flynt MeVicker Baring Fogarty Macdonald Barrett Foley Mackay Belcher Fountain Mackie Berry Frelinghuysen Madden Blatnik Fulton, Penn. Maliliard Boland Fuqua Martin, Ala. Boiling Gallagher Martin, Mass. Bow Gettys Martin, Nebr. Bray Gilligan Mathias Brown, Calif. G-oodell Matsunaga Brown, Clar- Grabowaki Matthews ence J., Jr. Greigg May Broyhill, Va. Gross Meeds Cahill Hagan, Ga. Michel Callaway Haley Miller Carey Hall Mink Carter Halleck Minshall Cederberg Hanna Moeller Chelf Hansen, Idaho Moore Clawson, Del Hansen, Iowa Moorhead Clevenger Hansen, Wash. Morton Cohelan Harvey, md. Moss Colmer Hawkins Murray Cooley Hays Nelsen Corman Hébert Nix C~raley Helstoski O'Brien Culver Hicks O'Konski Curtin Holifield Olsen, Mont. Daddario Howard Olson, Minn. Davis, Ga. Hungate O'Neal, Ga. Davis, Wis. Huot Ottinger Delaney Jacobs Pirnie Denton Johnson, Calif. Pool Derwinsld Jones, Mo. Powell Devine Jones, N.C. Pucinski Dickinson Keith Purcell Dorn Kelly Race Duncan, Oreg. King, Calif. Randall Dwyer King, N.Y. Redlin Dyal King, Utah Reinecke Edmondson Kirwan Resnick Edwards, Ala. Kluczynski Reuss Edwards, La. - Kornegay Rivers, Alaska Adair Andrews, George W. Arends Ashbrook Ashmore Bates Battin Bell Bennett Betta Bolton Brock Broomfield Broyhill, NC. Buchanan Burton, Utah Cabell Cameron Casey Celler Chamberlain C'iancy Clausen, Don H. Cleveland Collier Conte Cramer Cunningham Curtis Dague Dingell Addabbo Anderson, Tenn. Annunzio Ashley Bandstra Brooks Beckworth Burke Binghanj Burleson Boggs Burton, Calif. Bradernas - Byrne, Pa. 1908 PAGENO="0757" Rivers, S.C. Smith, Va. Van Deerlin Roberts Stafford Waldie Robison Stanton Walker, Miss. Rogers, Fla. Steed Walker, N. Mex. Rogers, Tex. Stephens Watkins Roncalio Stratton Watts Rooney, N.Y. Sullivan White, Idaho Roudebush Sweeney Whitener Rou.sh Talcott Whitten Schisler Taylor Willis Schmidhauser Thompson, N. Wilson, Bob Scott Thompson, Tc Wilson, Senner Thomson, Wi.~ Charles H. Shipley Todd Wyatt Sikes Toll Yates Sisk Trimble Younger Slack Tunney Smith, N.Y. Ullman So the motion to recommit was re~ jeeted. ~P. 27098] The Clerk announced the following pairs: Mr. Hébert with Mrs. Dwyer. Mr. King of California with Mr. Reinecke. Mr. Holifield with Mr. Moore. Mr. Laird with Mr. McEwen. Mr. Miller with Mr. Hansen of Idaho. Mr. Feighan with Mr. Glenn Andrews. Mr. Fogarty with Mr. Pirnie. Mr. Rivers of Alaska with Mr. Walker of Mississippi. Mr. Frelinghuysen with Mr. Harvey of Indiana, Mr. Ayres with Mr. Abernethy. Mr. Kirwan with Mr. Whitten. Mr. Barrett with Mr. Colmer. Mr. Aspinail with Mr. Fountain. Mr. McFall with Mr. Taylor. Mr. Matsunaga with Mr. Kornegay. Mr. Gallagher with Mr. Scott. Mr. Gilligan with Mr. Jones of North Carolina. Mr. Olsen of Montana with Mr. Cooley. Mr. Stafford with Mr. Dorn. Mr. McDowell with Mr. Rivers of South Carolina. Mr. Johnson of California with Mr. Mc- Milan. Mr. Shipley with Mr. Lennon. Mr. Nix with Mr. Foley. Mr. Delaney with Mr.Morton, Mrs. Kelly with Mr. Belcher. Mr. Carey with Mr. Smith of New York. Mr. Brown of California with Mr. Itobison. Mr. Hungate with Mr. Michel. Mr. Hays with Mr. King of New York. Mr. Dyai with Mr. Hall. Mr. Evins of Tennessee with Mr. Dickinson. Mr. Moorhead with Mr. Del Clawson. Mr. Watts with Mr. Derwinskl. Mr. Charles H. Wilson with Mr. Halleck. Mr. Mackay with Mr. Mailliard. Mr. Fuqua with Mr. O'Konski. Mr. Schisler with Mr. Younger. Mr. Rogers of Florida with Mr. Wyatt. Mr. Helstoski with Mr. Bob Wilson. Mr. Jacobs with Mr. Watkins. Mr. Hicks with Mr. Thomson of Wisconsin. Mr. Hawkins with Mr. Talcott. Mr. Long of Louisiana with Mr. Stanton. Mr. Craley with Mr. Roudebush. Mr. Davis of Georgia with Mr. Nelsen. Mr. Cohelan with Mr. Minshall, Mr. Blatnik with Mr. Martin of Nebraska. Mr. Albert with Mr. McCulloch, Mr. Corman with Mr. Keith. Mr. Denton with Mr. Martin of Massachu- setts. Mr. Mackie with Mr. Kupfermán. Mr. Edmoncison with Mr. Goociell. * Mr. Evans of Colorado with Mr. Martin of Alabama. Mr. Meeds with Mr. Findley. Mr. O'Neal of Georgia with Mr. Erlenborn. Mr. Gettys with Mr. Ellsworth. Mr. Haley with Mr. Fino. Mr. Race with Mr. Edwards of Alabama. Mr. Resnick with Mr. Devine. Mr. Reuss with Mr. Davis of Wisconsin. Mr. Yates with Mr. Cederberg. Mr. Thompson of New Jersey with Mr. Carter. Mr. Trimble with Mr. Callaway. Mrs. Sullivan with Mr. Clarence J. Brown, Jr. Mr. Sisk with Mr. Bray. Mr. Senner with Mr. Bow. Mr. King of Utah with Mr. Berry. Mr. Schmidhauser with Mr. Andrews of North Dakota. Mr. Howard with Mr. Anderson of fllinols. Mr. Roush with Mr. Huot. Mr. Baring with Mr. Chelf. Mr. Clevenger with Mr. McCarthy. Mr. Stratton with Mr. KIuczynski. Mr. Smith of Virginia with Mr. Roneaiio, Mr. Rooney of New York with Mr. Rogers of Texas. Mr. Slack with Mr. Van Deerlin, Mr. Sikes with Mr. Todd. Mr. Uliman with Mr. White of Idaho. Mr. Whitener with Mr. Willis. Mr. Moss with Mr. Fulton of Tennessee. Mr. Fisher with Mr. Falion. Mr. Duncan of Oregon with Mrs. Mink. Mr. Dacidarlo with Mr. Culver. Mr. Madden with Mr. Macdonald. Mr. Moeller with Mr. O'Brien. Mr. Olson of Minnesota with Mr. Powell. Mr. Purcell with Mr. Pucinski. Mr. Randall with Mr. Grabowski. Mr. Greigg with Mr. Hanna. Mr. Hagan of Georgia with Mrs. Hansen of Washington. Mr. Redlin with Mr. Ottinger. Mr. Hansen of Iowa with Mr. Pool. Mr. Thompson of Texas with Mr. Stephens. Mr. Steed with Mr. Roberts. Mr. Boland with Mr. Adams. Mr. Abbitt with Mr. Flynt. Mr. Matthews with Mr. McVlcker. Mr. Sweeney with Mr. Broyhill of Virginia. Mr. Farnsley with Mr. Cahill. Mr. Toll with Mrs. May. Mr. Tunney with Mr. Mathias. Mr. Walker of New Mexico with Mr. Curtin. Mr. Waldie with Mr. Murray. Mr. CAMERON changed his vote from "nay" to "yea." Mr. RONAN changed his vote from "yea" to nay," Mr. ANNTJNZIO changed his vote from "yea" to "nay." Mr. LIPSCOMB changed his vote from "nay" to "yea." Mr. BROOMFIELD changed his vote from "nay" to "yea." Mr. DUNCAN of Tennessee changed his vote from "nay" to "yea." Mr. MIZE changed his vote from "nay" to "yea." Mr. MAHON changed his vote from "yea" to nay." Mr. SCHEUER changed his vote from "yea" to "nay." The result of the vote was announced as above recorded. The doors were opened. 1909 PAGENO="0758" 8~C7Q ~ ~ ~ 0 0~ L~1 ___ !~ ~ CD~ ~ -~ * 2 I I ~HQft ~ ~ C) ~ CD ~ r u ~ CD ~ CD S1~ bCCD ~ ~ 0~ 0 CD ~1 *~ CD CD CD 0) ~ PAGENO="0759" The Clerk announced the following pairs: Mr. Fallon with Mrs. Mink. Mr. Pucinski with Mr. Haley. Mr. Hansen of Idaho with Mr. Grabowski. Mr. Foley with Mr. Olson of Minnesota. Mr. Macdonald with Mr. Long of Louisiana. Mr. Thompson of New Jersey with Mr. Sweeney. Mr. Shipley with Mr. Huot. Mr. Hays with Mr. Adams. Mr. Schisler with Mr. Scott. Mr. Slack with Mr. Todd. Mr. Ullman with Mr. McMlllan. Mr. Van Deerlin with Mr. Duncan of Ore~ gon. - Mr. White of Idaho with Mr. Dorn. Mr. Clevenger with Mr. Trimble. Mr. Rivers of Alaska with Mr. Hanna. Mr. Reuss with Mr. Powell. Mr. Pool with Mr. Ottinger. -. Mr. Charles H. Wilson with Mr. Whitten. Mr. Whitener with Mr. Toll. Mr. Walker of New Mexico with Mr. Mat- t?heWs. Mr. Edwards of Louisiana with Mr. Waldie. Mr. Edmondson with Mr. Farnsley. Mr. Fisher with Mrs. Hansen of Washing- ton. Mr. Rivers of South Carolina with Mr. Redlin. Mr. Yates with Mr. Thompson of Texas. Mr. Thnney with Mr. McCarthy. Mr. Culver with Mr. Blatnik. Mr. Boland with Mr. Roncalio. Mr. Craley with Mr. Roberts. Mr. Roush with Mr. Willis. Mr. Baring with Mr. Greigg. Mr. Race with Mr. O'Brien. Mr. Howard with Mr. Rogers of Texas. Mr. Stephens with Mr. Murray. Mr. Hawkins with Mr. Kupierman, Mr. Johnson of California with Mr. Cahill. Mr. Byrne of Pennsylvania with Mr. O'Konskl. Mr. Jacobs with Mr. Cederberg. Mr. Hungate with Mr. Watkins. Mr. King of Utah with Mr. Thomson of Wisconsin. Mr. Cohelan with Mr. Carter. Mr. McDowell with Mr. Mathias. Mr. Brown of California with Mr. Martin of Massachusetts. Mr. Jones of North Carolina with Mr. Rouciebush. Mr. McVicker with Mr. Callaway. Mr. Denton with Mr. Bob Wilson. Mr. Evans of Colorado with Mr. Martin of Alabama. Mr. Feighan with Mr. Laird. Mr. Fogarty with Mr. Goodell. Mr. Fountain with Mr. Fino. Mr. O'Neal of Georgia with Mr. Derwinski. Mr. Purcell with Mr. Walker of Mississippi. Mr. Gilligan with Mr. Younger. Mr. Fuqua with Mr. Martin of Nebraska. Mr. Gettys with Mr. Hansen of Idaho. Mr. Gallagher with Mr. Erlenborn. Mr. Moeller with Mr. Curtin. Mr. Meeds with Mr. Dickinson. Mr. Taylor with Mr. Harvey of Michigan. Mr. Stratton with Mr. Wydler. Mrs. Sullivan with Mr. Wyatt. Mr. Hicks with Mr. Findley. Mr. Helstoski with Mr. Chelf. Mr. Abbitt witl~t Mr. Mackie. Mr. Davis of Georgia with Mr. Madden. Mr. Corman with Mr. Nix. Mr. Colmer with Mr. Gray. Mr. Dulskl with Mrs. Griffiths. Mr. Flynt with Mr. Resnick. Mr. Fulton of Tennessee with Mr. Randall. Mr. Hébert with Mr. Halleck. Mr. Kirwan with Mr. McCulloch. Mr. Delaney with Mr. Morton. Mr. Holifield with Mr. Belcher. Mr. Kornegay with Mr. Broyhill of Virginia. Mr. Miller with Mr. Stafford. Mrs. Kelly with Mr. Reinecke. Mr. King of California with Mr. Michel. Mr. Steed with Mr. McEwen. Mr. Lennon with Mr. Ellsworth. Mr. Smith of Virginia with Mr. Devine. Mr. Sikes with Mr. Del Clawson. Mr. Schmidhauser. with Mr. Anderson of Illinois. Mr. Rostenkowski with Mr. Robinson. Mr. Albert with Mr. Frelinghuysen. Mr. Abernethy with Mr. Bray. Mr. Aspinall with Mr. Moore. Mr. Carey with Mr. Smith of New York. Mr. Cooley with Mr. Talcott.. Mr. McFall with Mr. Clarence 3. Brown, Jr. Mr. Matsunaga with Mr. Glenn Andrews. Mr. Dyal with Mr. Nelsen. Mr. Moss with Mr. Mailliard. Mr. Watts with Mr. Harvey of Indiana. Mr. Evins of Tennessee with Mr. Hall. Mr. Mackay with Mr. Davis of Wisconsin. Mr. Daddario with Mr. Halpern. Mr. Leggett with Mrs. Dwyer. Mr. Kluczynski with Mr. Edwards of* Alabama. Mr Senner with Mr. Keith. Mr. Sisk with Mr. Minshall. Mr. Rooney of New York with Mr. King of New York. Mr. Rogers of Florida with Mr. Stanton. Mr. Barrett with Mr. Bow. Mr. Moorhead with Mr. Berry. Mr. Olsen of Montana with Mr. Andrews of North Dakota. Mr. MACGREGOR changed his vote from "yea" to "nay." Mr. MIZE changed his vote from "present" to "nay." The result of the vote was announced as above recorded. A motion to reconsider was laid on the table. 1911 PAGENO="0760" PAGENO="0761" SECTION 30 SENATE FLOOR DEBATE ON CONFERENCE REPORT* (From the daily Congressional Record) 1913 PAGENO="0762" PAGENO="0763" [October 21, 1966) [P. 27277] FOREIGN INVESTORS TAX ACT OF 1966-CONFERENCE REPORT Mr. LONG of Louisiana. Mr. Presi- dent, I submit a report of the committee of conference on the disagreeing votes of the two Houses on the amendments of the Senate to the bill, H.R. 13103, to amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign investments in the United States. I ask unanimous consent for the present consideration of the report. The PRESIDING OFFICER. The re- port will be read for the information of the Senate. The assistant legislative clerk read the * report. (For conference report, see House pro- ceedings of Oct. 19, 1966, pp. 26665-. 26667, CONGRESsIONAL RECORD.) Mr. LONG of Louisiana. Mr. Presi- dent, I ask unanimous consent that I may withdraw that request temporarily. The PRESIDING OFFICER. With- out objection, it is so ordered. [October22 1966) [P. 27575) ThE PARLIAMENTARY SITUATION Mr. MANSFIELD. Mr. President, be- fore I ask that the Journal be consid- ered as read, I shouldilke to make a brief statement about the events on yesterday. The ACTING PRESIDENT pro tern- pore. Is there objection? The Chair hears none. * Mr. MANSFIELD. As the Senate knows, a number of conferences were held yesterday in my office, in the Wee President's office, which we usurped for the moment, and in the cloakroom. At those conferences were the distinguished and able Senator from Tennessee [Mr. GORE]; the distinguished and able Sen- ator from Louisiana, the chairman of the Finance Committee [Mr. LONG]; the distinguished and able senior Senator from Delaware [Mr. WILLIAMS]; the dis- tinguished and able Senator from Rhode Island [Mr. PASTORE], and from time to time other Senators. "The purpose of these meetings was to discuss the con- ference report on the foreign investors' tax bill, which had passed the House and Senate, which had gone to conference, which had been agreed to, as far as the conference report was concerned, by the* House, and which was eligible for im- mediate consideration on yesterday by the Senate. On yesterday morning, the distin- guished chairman of the Committee on Finance the Senator from Louisiana [Mr. LONG], who has been most considerate and understanding throughout all this, called up the 7-percent investment tax bill; and when that was agreed to by the Senate and sent to the White House, he called up the conference report on the Foreign Investors' Tax. At my request, he withdrew his proposal, which was perfectly in order; and, at my further request, he allowed a number of other bills and conference reports to be con- sidered while attempts were being made to find out If there was any area of agreement between the differing parties on the foreign investors' tax legislation. [P. 27576) I must admit, Mr. President, that I put in 6 of the most exhausting hours of my life, and certainly the 6 toughest hours during my service in the Senate. The end result, despite evidence-sound evidence-of some give and take, was absolutely nothing. Because of that, we will be faced with a situation which may well keep the Senate in session for some time, I am deeply and personally sorry to say. I know that the Senator from Tennes- see [Mr. GOREL the Senator from Lou- isiana [Mr. LONG], the Senator from Delaware [Mr. WILLIAMS], and the Sena- tor from Rhode Island [Mr. PASTORE] feel just as deeply and personally regret- ful about this development as I do. But, because of the fact that there was no area of agreement, despite the fact that some most substantial concessions had been offered by the distinguished Senator from Louisiana, the chairman of the Fi- nance Committee, there was no possi- bility of agreement; and last night I sent telegrams to all Democratic Members re- questing their presence today.. I am happy to report that, on the basis of the evidence which we have accumu- lated today, if we do not have a quorum at the moment, we will have one by 12 o'clock. I see, also, the distinguished secretary for the Democratic conference [Mr. SMATHERS] in the Chamber, who likewise participated in some of these conferences, and I want to give him full credit, also. I feel especially sorry for those Sena- tors who are running for reelection. Many of them are coming back. Some of their colleagues, who are not running for reelection, will be a little late in arriving. I want to express, on the floor of the Senate, my deep and personal apprecia- tion to the distinguished minority leader, who is now in Walter Reed Hospital, and who of his own volition called me on yesterday and said that if we needed an- other body, he was ready, able, and avail- able. We will not call on him, nor will we call on certain other Senators nearby, because of events which have happened In their families. But I do want to say, Mr. President, that I have nothing but admiration and affection for the distinguished Senator * from Tennessee. He is exercising his 1915 PAGENO="0764" rights as a Senator; and while it may cause some inconvenience to the rest of us, nevertheless, I have nothing but praise for his tenacity, his determination, and his belief that what he is doing is the right thing to do. By the same token, I have just as much, if not a little more, praise for the distinguished Senator from Louisiana [Mr. LONG] who found himself in the dual capacity of being the deputy ma- jority leader, trying to bring this Con- gress to a close, and, on the other hand, being the chairman of the Finance Com- mittee, in charge of a bill which had passed both bodies, which had been agreed to in conference; and the con- ference report itself had been agreed to in the House. I want to express my deep personal thanks for the understanding he has shown, and to say that on yes- terday he showed a great deal more leadership and understanding than did the Senator from Montana. I also thank the distinguished senior Senator from Delaware [Mr. WILLIAMS], who is opposed to the conference re- port and intends to fight it and speak against it. He has always, and espe- cially in this case, been most consider- ate and understanding and very helpful in trying to work a way out of the im- passe in which we find ourselves. I am also deeply grateful to the dis- tinguished senior Senator from Rhode Island [Mr. PASTORE] who participated actively in these discussions and who is fully aware of the situations which de- veloped, the possibilities which were con- sidered, and the conclusions which were reached. I cannot thank him enough for the courtesy, the consideration, and the kindness which he has shown toward the Senator from Montana, because he, like- wise, is in a particularly difficult spot after having had his supplemental bill passed by the Senate, agreed to in con- ference, and ready to be taken up on the floor. It is a bill which is very im- portant. It has to do with funds for education, for veterans, for health, and other related matters, and which will not be forthcoming until the supplemental bill is passed. I am aware of the situation which confronts this body at' this time. Some of us have personal problems, others have election problems, and every Mem- ber, I am sure, has had to cancel engage- ments of some degree of significance. That is all right. We are paid to be Senators. We are paid to be on the job, and every Senator involved in this situa- tion is acting within the rules and regu- lations of the Senate. I find fault `with no one for what is being done, but I did think that this situation should be brought to the attention of the Senate and the public so that the cards would be laid on the table. Every time we have meetings of the sort we had yesterday, rumors and innuendoes and things of that sort spread and it is better that what can be done be done in the open, what can be said be said for all to hear. We are in for a long session before we adjourn. I only express the `hope that enough Senators will remain on hand so that we can attend to the business and vote this matter up or down. I think that the Senator from Ten- nessee [Mr. GORE] is entitled to and will give this body a full explanation. I know that, being the man of honor and integ- rity he is, he will operate within the rules and regulations of the Senate and will keep me informed, insofar as he can, of what he intends to do, as he has done thus far, and I, in turn, will do my best to keep him informed of anything I in- tend to do before it is done. Again, I am most sorry for those who have difficult campaigns and who have come back, or are on their way back, but I am deeply appreciative to them for what they are doing. I now yield to the Senator from Ohio [Mr. LAUSCHE]. Mr. LAUSOHE. What is the reason that we cannot take up the supplemental appropriation bill first, on which there' is general agreement, and then take up the controversial issue which seems to block us? Mr. MANSFIELD. The reason Is a practical one. I hope-and I stress the "I"-that we can keep enough Senators here so that we can pay proper attention to both of these bills, because both of them are important. Mr. PASTORE. Mr. President, will the Senator yield? Mr. MANSFIELD. I yield. Mr. PASTORE. I want to say to the distinguished leader that no one has been more inconvenienced by the tactics being employed, and I use the word "tactics" advisedly and with no meanness, than has the Senator from Rhode Island. As a matter of fact I stayed up nights re- viewing the record made on the appro- priation bill, both on the floor of the Sen- ate and in the House, so that I would be prepared and be able to expedite the ad- journment of this Congress sine die, and so that I would not be held at fault be- cause of delay on the part of our sub- committee. We held hearings on the supplemental appropriation bill under strenuous and pressing circumstances. We came to the floor, and the Senate was very coopera- tive. We passed, a bill in a very short time. We went to conference and re- solved all of our difficulties. I want to say to the distinguished lead- er that even I suggested to him the pos- sibility of bringing up the supplemental appropriation bill before we discussed the foreign investment bill, and he explained his position well and explicitly to me. I realize the realities of the situation. If we passed the supplemental bill we could not get 20 Senators back to pass this other important bill. 1916 PAGENO="0765" Mr. MANSFIELD. Or to defeat it. Mr. PASTORE. I realize that. I paid my price. I do not know how many engagements I had back home. I have been inconvenienced, too. The trouble with the majority leader is that he is too genteel; he never pushed any- body; he never pressed anybody, he never raised his voice to anybody, and he has always gone that extra mile to be chiv- alrous and a gentleman. There is not a blessed thing in this bill holding us up that has not been con- sidered and voted by the Senate. We are entitled to a second lOok but we have to take into account the interest and comfort of other Members of this body, and the fact that there are a lot of Mem- bers here in marginal States where it is absolutely necessary for them to go back home and fight the battle that needs to be fought so that they may return to Congress in January. If the bill that is holding us up con- tained anything that was added by the House, I think we would have every right to say we never considered that matter before, and you could stay here and de- lay and delay and delay, and you would be right in doing so. I understand the matters that are the bones of contention, and I voted against the bill. Mr. MANSFIELD. And so did I. Mr. PASTORE. I understand the matters that are bones of contention are matters passed upon not only by the f P. 27577] committees, but also voted upon on this floor and overwhelmingly passed. This is nothing new. The people who are holding up the Senate knew that there was a lack of a quorum yesterday afternoon. While the majority leader said that it is within every Senator's right to exercise his pre- rogatives-I am not critical of that-this Is most unfair to the men who are strug- gling to be reelected and have to be car- ried all the way across the country to say, "I am present," because when the smoke clears from the battlefield, wheth- er it is tonight, whether it is next week, or whether it is next month, the situa- tion that exists today will be the same situation: that conference report is going to be approved as it is. I know that just as sure as the Lord made little apples. That is all I have to say. No one is suffering more because of this than is the Senator from Rhode Island. We were ready to go last night. I would hope that the Senator will keep us here around the clock until we vote to adjourn sine die. - Mr. MORSE. Mr. President, will the Senator yield? Mr. MANSFIELD. I yield to the Sen- ator from Oregon. Mr. MORSE. Mr. President, I want to say in the very tense moments in the Senate that we ought to pause a moment to appreciate our blessings. One of our great blessings, to which I call attention, and a great source of inspiration for all of us, is to see a man with us today who, I suspect, should not be with us for his own good-the fact that the Senator from Arizona [Mr. HAYDEN] IS back. The Senator from Arizona isa veteran of many battles, over the years, such as the one we are now confronting. His presence here should stimulate us this morning as we seek to get together to resolve the parliamentary situation which confronts us. I am sure that the Senate wishes to join me in expressing that view, when we welcome our very dear friend the Sena- tor from Arizona back to the Senate this morning. [Applause.] Mr. HOLLAND. Mr. President, I real- ize that there are Senators on both sides of the aisle who have a critical need to be home campaigning. Heretofore, I have never supported all- night sessions, or continuing sessions, but it seems to me, in simple justice to the many Senators on both sides of the aisle who have critical problems at home which require them to be there, that we should terminate this business, whether It go one way or the other-and I am not committed on either side-and do it as quickly as possible. I hope that the distinguished majority leader will depart from his normal prac- tice and keep us here, all night if neces- sary, and for such time as may be neces- sary tomorrow, until we can get through with this business. I remind the majority leader that this L'~ a matter on which no amendments can be offered. It is a matter on which two speeches on an Issue are involved. It has application to a matter on which we can come to a head one way or the other and which can be disposed of In a brief time. I think that in justice to the many Senators running for reelection and the difficult races which are confronting some of them, we should dispose of this matter in the shortest possible time. My own strong recommendation-and this is a departure from everything I have done heretofore-is that we should stay here continuously until we dispose of the business before us. This may call for a Sunday session-I hope not-but I think we should get rid of this business and let Senators who have critical prob- lems of campaigning go home and get back into the business of campaigning. I hope that the distinguished majority leader will depart from his normal prac- tice for the reasons which I have men- tioned. Mr. MANSFIELD. Let me say to the Senator from Florida that that matter is being given the utmost consideration. Mr. LONG of Louisiana. Mr. Presi- 1917 PAGENO="0766" * dent, I offered to yield everything in the bill that was my handiwork. Not only in my judgment, but in other judgments-those of the Secretary of the Treasury and of many of his assistants, and I think I could confidently say in the judgment of the President-the proposal to finance presidential campaigns by a $1 designation from every taxpayer Is the best thing in the bill. It is the best thing we will have done in years for good government. It will avoid the necessity of either party having to be de.. pendent upon large contributions from corporation executives In order to pre- sent properly their case before the people and to be heard in political campaigns. I offered to yield on that. `I am not offering any more. I am through bending the knee, Mr. Leader. Mr. MANSFIELD. I think the REC- ORD should explicitly show that the Sen- ator from Louisiana did that. He did offer to yield on the campaign contri- bution amendment, which we all know Is very dear to his heart. Mr. LONG of Louisiana. I would have been willing to yield on everything in the bill which was my own handiwork, even as Senator in charge of the bill and as chairman of the committee from which the bill was reported. But, I have no right to yield on things which the Senate and the House of Representatives care to do. I did not vote for H.R. 10, but the House agreed to it by a unanimous vote. The House is determined that that mat- ter should go to the President for his signature. I have no right to yield on that-none whatever. The House would not let me do that if I tried, and I do not think I could obtain unanimous con- sent if I did try. I am not going to bend my knee any longer. We can vote one way or the other on it. I appreciate the kind consideration which the majority leader has given me, as well as others. I approve completely of the right of every Senator to do what his conscience tells him is right. I point no finger of scorn at anyone who would filibuster on a conference report. I have done it my- self. I have held the Senate in session for 3 days past midnight. But, I repeat, I do not point the finger of scorn at others. They have that right and that privilege. All I want is the right to have the power of the majority exercised to bring this matter to a vote. I know that no matter how long I spoke against a bill, the Senate always worked its will. Mr. GORE. Mr. President, first, I wish to express my deep gratitude for the generous remarks of the able and distinguished and beloved majority leader. Next, I wish to express appreciation for his deeds of consideration and kind- ness. Third, I wish to thank all of those who, individually and collectively, par- ticipated in the conferences yesterday, for the spirit of gentility which pre- vailed. There is no animus in this issue, Mr. President. The senior Senator from Delaware [Mr. WILLm~ssJ and I sug- gested several ways in which the public interest portion of the bill under ques- tion could be brought to enactment- and quickly, leaving the nonessential, unrelated, controversial, and question- able features of the bill to be dealt with in January-only a few weeks away. I shall not detail the suggestions which the Senator from Delaware and I made, but there were many. There are ways yet available In which the foreign in- vestors portion of title I of the bill can be sent to the President within the hour, and the Senate can adjourn by noon. But, Mr. President, if the novel and bizarre provision in the bill, and the tax favoritisms in the bill are insisted upon at this late hour, then the Senator from Tennessee is duty bound to resist its passage. Let me say that on day before yester- day, I made a statement with respect to the bill in the hope that the follow- ing morning Members of the Senate who were not present when I spoke, it being late in the afternoon, could read my remarks. However, because of the pressure of business and the long hours in session, the CONGRESSIONAL RECORD was in two volumes. It was possible to print only one volume yesterday-the second vol- ume not being available anytime during the day. I was ready to speak all day* yesterday on the Issue, if brought up. There was no opportunity. It is with regret that Senators are called back. But, it is not the senior Senator from Tennessee who has pro- vided that the Senate can operate only with a quorum. It is not the responsi- bility of the senior Senator from Ten- nessee that the bill, which was worth- while in its original form, was loaded, or was brought here at this time. I have no voice in scheduling. My duty is to support or oppose issues as they come to the Senate. It is, of course, a matter of disappointment when my sense of duty leads to the disappoint- ment, the displeasure, or the discomfort of any other Member of the Senate. No one can regret that more than I, but conscience bound, I shall attempt, when I have the opportunity, to present the issues in this bill. * Instead of making a point of no quorum-which .1 have not yet done-I 1918 PAGENO="0767" [P. 27578) would suggest that the clerk read the Journal of yesterday as our colleagues gather into the Chamber. I thank the distinguished majority leader. Mr. MANSFIELD. Mr. President, I am sure the Senator from Tennessee [Mr. GORE], with whom I have served in Con- gress for nigh onto 24 years-he has served longer than I-knows how highly I think of him and how much~I appreci- ate his friendship and understanding, as I have down through the years, in this instance as in all the others. It is true there were various proposals made yesterday by both the distinguished Senator from Tennessee [Mr. GORE] and the distinguished Senator from Dela- ware [Mr. WILLIAMs]. Those proposals were given every possible consideration. I was in to :ch with the chairman of the Finance Committee, on several Occasions, to try to see if something could be worked out on the only matter which could be worked out, which the Senator from Louisiana has mentioned. That pro- posal was to drop the campaign contri- bution provision from the conference re- tort and to have it accepted in the other body. On the other proposal made to drop HR. 10, it was an impossibility. On the other suggestions there was no chance, because we would have too many roadblocks. If there is a corporal's guard at the other end of the building I would be sur- prised, but I can say this: There will be no more conferences. We have received that word from the Speaker. So we have a conference report before us. We have two choices, and we are going to make them. We will either adopt that conference report or defeat it, and I hope those who are opposing it will not be unduly harsh on those in this body. I hope they will avail themselves of every opportunity to express their view- points, and I am sure they will; but 1 hope, in good conscience, they, too, will recognize that there is such a thing as coming to the point of no return and will let Senators have a chance to vote their convictions. If the conference report is defeated, that is the end. If it is carried, that is the end. But it is going to be de- feated or carried just as it is before this body at this moment. Mr. WILLIAMS of Delaware. Mr. President, will the Senator yield? Mr. MANSFIELD. I yield. Mr. WILLIAMS of Delaware. Mr. President, I took part in those confer- ences yesterday. I want to say I have never worked with a man who was more gracious or who worked harder to reach an agreement than the majority leader. I want to join with other Senators in paying respects to him. As Members of the Senate know, when the bill was before the Senate, I opposed the so-called grab-bag amendments in titles II, III, and IV and tried to have them deleted in the Senate. I was sup- ported in my opposition to many of them by the majority leader as well as by other Members of the Senate, but not by enough, and so the bill was passed. * Recognizing that I had opposed the amendments that had been adopted by the Senate I stepped aside as a conferee because I did not think it would be proper to go to conference on the bill when I did not support the position of the Senate. When the conference report was agreed upon earlier this week, I men- tioned to the majority leader that when the report was brought before the Senate I wanted an opportunity to state my op- position before it was acted upon. He most graciously said he would not take it up until I was notified and had that op- portunity. I appreciated very much his cooperation. At the same time, while I told the majority leader that I wanted to express my opposition to the conference report when it came up I told him I was always able to express my opposition in a rather brief time, and that it would probably not take over 30 minutes. I repeated again yesterday that it was my intention to express my opposition to the confer- ence report that I wanted a chance to express my opposition to it, that I did not care to have an extended debate and that I could express my opposition in a reasonable time. Right or wrong, I have reasons why I believe this conference report should not be adopted, and I wanted an oppor- tunity to express those reasons. That is all that I am asking for today. In all fairness, I think it will be recog- nized that Members of the Senate have a right to express their views and exer- cise their rights under the rules of the Senate and take advantage of parlia- mentary situations. I suggest that we would proceed much more harmoniously if we could proceed without threats of a long session. Why is there so much interest in lay- ing aside an important bill dealing with financing the war in the interest of ap- proving certain proposals that will bene- fit a handful of corporations in a special interest bill passed in the closing days of the Senate? If the Senate, by a majority vote, wants to pass such a bill I shall go home and sleep as well as the rest of them, but I want a chance to outline what is in the bill and why I object to its enactment. I shall not go into details at this time, but one particular point I want to bring out is, why, in the closing days of the session, does Congress propose to pass retroactively tax legislation benefiting one corporation by giving it a $2 million retroactive tax reduction? I refer to the special provision in this bill benefiting the Harvey Aluminum. I want an answer to that. 1919 PAGENO="0768" I want to express my opposition to this proposal made in the closing days of the session. I shall not be unduly long but I will insist upon my right to be heard. I repeat what I said earlier this week and what I told the majority leader yes- terday. I will try not to take too long in expressing my opposition. I will try to be brief in giving my reasons, but I do want the Senate to have a clear under- standing of what is in this bill. Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. LONG of Louisiana. Mr. Presi- dent, let me just make this point clear: The Treasury opposed approximately five amendments which the Senate added to this bill. The other 18 amendments were either things the Treasury thought provided more equity for taxpayers, or were matters to which the Treasury had no objection whatever, feeling that they were problems which it would be well for Congress to resolve. The conference modified the five amendments Treasury bad opposed so that the Treasury objections were met in every way that the conference thought it could compromise. We were so. suc- cessful that the Treasury now strongly supports this bill. It feels it is a very good bill, providing more equitable tax treatment for the many taxpayers ef- fected. There is only one thing now in the bill to which Treasury strongly ob- jects as a tax proposition, H.R. 10, the amendment which provides a large tax deduction for self-employed people. This will help doctors, lawyers, account- ants, and other self-employed people. Mr. President, I agree with the Treas- ury position. But it has passed the House by a vote of 291 to 0. I did all I could to defeat the measure as did the majority leader. The Treasury itself made a determined effort led by the Secretary, the Under Secretary, and the Assistant Secretary. Notwithstanding all pleading with Senators we failed, it passed the Senate by a margin of eight votes. In view of this history, I say it is the will of the Senate; and it is the will of the House. That is the only thing in the bill that Treasury thinks is not good tax legisla- tion. Mr. President, the Treasury De- partment, as I am, is prepared to admit that sometimes we in the minority have to recognize that the majority has a right to legislate. The Senator from Florida [Mr. SMATHERSI thinks it is a wonderful amendment. He has been working for it for many years. The Senator from Louisiana does not agree. But when the House votes 291 to 0, together with a ma- jority of the Senate, we have no right to tell them they cannot legislate. Mr. SMATHERS. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. SMATHERS. Will the Senator not agree that there has never been a piece of legislation more cussed, dis- cussed, debated, written about and held up to the light of public scrutiny, than that provision known as HR. 10, whIch would establish the right of self- employed people to set up pension plans for themselves, and given the same right as millions of men and women employed in the business community. Whether you agree with it or not, it has been dis- cussed, and everyone knows all about it-and has known for many, many years. Mr. LONG of Louisiana. That item has been discussed pro and con, it has been held up to more opprobrium on one side and more approval on the other, than any other feature of the measure. But when the other body votes the way It has, it is beyond our ability to change. [P. 27579] Mr. MANSFIELD. The only trouble with HR. 10 Is that it gives the poor working stiff, who really needs it, no help. Mr. LONG of Louisiana. I am against H.R. 10. Mr. MANSFIELD. So am I. Mr. LAUSCHE. Did the Senator vote against it? Mr. LONG of Louisiana. Yes, I voted against H.R. 10. I spoke against it. Mr. LAUSCHE. Will the Senator yield to me for a moment? Mr. LONG of Louisiana. The major- ity leader has the floor. Mr. MANSFIELD. I yield first to the Senator from Florida. Then I shall be happy to yield to the Senator from Ohio. Mr. SMATHERS. Mr. President, I should like to say that H.R. 10 is not de- signed to take care of the poor as such. We have hundreds of programs from welfare to poverty programs which are calculated to take care of the poor. I have supported, sponsored, and voted for those programs-we have not had one to provide the same opportunities for re- tirement for the self-employed. Mr. MANSFIELD. Not like H.R. 10. Mr. SMATHERS. I disagree with the majority leader. There Is no purpose served In debating the matter again at length, but if you are the president of the largest corporation, or any corporation that wants to provide a pension for its employees, you can set aside tax-free, for yourself and members of your family, and your employees as much as $50,000 a year for one individual, and it is tax free. This exemption for the self-em- ployed is limited to $2,500 a year, and is designed for the self-employed people. And it is not as generous as any of the present pension programs already ap- proved by the Treasury. More than that, it requires that the self-employed establish a pension program for their 1920 PAGENO="0769" employees who are now uncovered-and number about 15 or 20 million. Indeed these employees cannot, in the greatest stretch of imagination, be called rich people. I love the majority leader. I respect his objectivity. I think he is fair, and I admire his patience and diplomacy. But I completely disagree with him on the statement that H.R. 10 does not provide for the poor stiff. Mr. MANSFIELD. The poor working stiff. [Laughter.] Mr. SMATHERS. The poor working man. Actually, the farmer-the individ- ual, self-employment farmer, the barber, the small grocery operator, and others- for the first time, will be able to provide for himself and herself a pension, some- thing he was never before able to obtain. He contributes all the money himself- no one adds anything to his pension. But we allow him to lay this money aside for his old age-tax free. This was the whole argument. This is why a majority of the Senate and ihe House voted for it, and all the conferees. But the matt~ has been debated up and down and back and forth. The Sen- atorfrom Rhode Island put his finger on it earlier when he stated that these mat- ters have all been discussed and voted on. Nobody has sought to bring any- thing in here on a dark night, under cover, and not been willing to discuss It. All these matters have been debated in public for all to see. Mr. MANSFIELD. Of course, they have. Mr. SMATHERS. They have been discussed and argued back and forth in our committee, on the floor of the Senate, in the House, in the House committee, and in conference; and the majority of Congress has apparently had its say. There are a few people who apparently disagree with that position. They have the right to disagree, but now they want - to follow every stratagem and tactic available-as they have the right to do- in an attempt to defeat It. But I think the majority will ultimately prevail, If we will stay here and do our duty and vote. Mr. MANSFIELD. We will. But let me say that the Senator from Montana, notwithstanding his position on any measure, accepts the will of the majority, whether he likes It or not. As far as I am concerned, It is in and will stay in, and be a part of this bill. Now I should like to end my personal filibuster but first I shall yield once more to the distinguished Senator from Ohio.. Mr. LAUSCHE. Mr. President, earlier I put the question, why can we not take up the supplemental appropriation bill, upon which there is general agreement, and after that has been decided, take up this foreign investment bill? The answer to that question was that If we dispose of the supplemental appro- priation bill, no one will pay any atten- tion to the foreign Investment bill. Mr. MANSFIELD, Not at all. The Senator is incorrect. Mr. LAUSCHE. That was implied in the answer. Mr. MANSFIELD. Mr. President, the Senator from Ohio now and again, as we all do, makes statements which call for correction, and this is one. That statement was not made. Mr. LMJSCHE. Well, the statement implied that there would not be a quorum present. Mr. MANSFIELD. Exactly. That is correct. Mr. LAUSCHE. I submit that in prin- ciple there is not much difference be- tween the two. That means, Mr. Presi- dent, that there is no faith nor ~desire to pass this foreign investment bill. It was not the Senator from Montana who yesterday motioned up the foreign investment bill before the. supplemental appropriations; it was the Senator from Louisiana. Mr. MANSFIELD. And he withdrew it at my request. Mr. LAtJSCHE. But insist that it be brought back prior to the bringing up of the supplemental appropriation bill. Mr. MANSFIELD. Will the Senator yield right there? Mr. LAUSCHE. Yes, I yield. Mr. MANSFIELD. Is the Senator aware of the fact that had the Senator from Louisiana desired to do so, he could have held up four other bills, because his matter was privileged at 10:30 yester- day morning? Mr. LAUSCHE. Yes, I understand that. But the point I am trying to make, Mr. President, Is that I cannot subscribe to a procedure which contem- plates taking up, in advance, what seems to be an unacceptable bill, and holding in abeyance a bill that is important to the Nation, and upon which there is no disagreement. Mr. MANSFIELD. Mr. President, may I say, before I ask that the Journal be considered read- Mr. LAUSCHE. May I finish my re- marks? Mr. MANSFIELD. Oh, I thought the Senator had concluded. Surely. Mr. LAUSCHE. The Senator from Louisiana, in discussing the merits, urged that Senators should vote for it because it contained provisions to take care of the aged. That was the argument th'at was made, and that was the argument that was in- tended to overpower the thinking of the Members of the Senate. That provision is now out. All that is left are these very controversial provisions. I desire to make one remark before I close. Tomorrow the Nation will be hon- oring in final words the great services rendered by the late Harry Byrd as a Member of the Senate. He was chair- man of the Committee on Finance. Re- spect will be shown to him because of his 1921 PAGENO="0770" courtesy to his fellow members of the committee and his fidelity to service to the country. Not one implication will be made that he used his chairmanship to promote what was of interest to his State and of unconcern to the people of the country. Mr. President, I think the time is today to serve notice upon the chairman of the Committee on Finance that as chairman of that committee he has an obligation to the Nation not to promote what is of spe- cial interest to his State. Mr. MANSFIELD. Mr. President, `I think I have yielded enough. I would hope that the Senator from Ohio would be a little more considerate in his re- marks, because on occasion I have lis- tened to him wound Members of this body, singly or the body collectively. I know he does not really mean to do so, because I feel that he believes, as I do, that every Member of this body is a Sen- ator in his own right. I do not doubt the integrity of any Member of the Senate, on either side of the aisle, either directly or indirectly. If there is any question about a Senator's standing or his integrity, he should be called before the bar of this body. I would hope that Ser~ators would be a lit- tle more understanding of their fellows and recognize that all of us are here not because we are great men, but because, by and large, we happen to be lucky and were elected at the right time because of a certain set of circumstances. There are far smarter people back in all of our States than any of us, and we know it. So let us recognize the fact that we are human beings and that we are each try- ing to do his, job in the best possible fashion in the interest of the State and Nation. That is all I have to say. Mr. LAUSCHE. Mr. President, I am speaking, of course, about oyster shells and clam shells. How did they get into the bill? [P. 27580] ~ Mr. MANSFIELD. When it comes to projects such as the Hungry Horse Dam, the Yellowtail or Libby Dam on the Koo- tenal River In Montana, I am right In there with everybody else. When it comes to Montana, it is going to be my number one interest all the time because I would not be back here if the people of Montana had not sent me back here. I am first and foremost a Senator from the State of Montana and that is true of every other Senator `with respect to his own State. I think that what is good for my State is good for the United States. I find no difference between tho two, and I do not ever intend to. Mr. LONG of Louisiana. Mr. Presi~ dent, will the Senator yield? Mr. LAUSCHE. Mr. President, may I finish? The PRESIDING OFFICER. The Sen- ator from Ohio may proceed. Mr. LAUSCHE. Mr. President, in con- clusion I cannot subscribe to the pro- gram of bringing up the foreign invest- ment bill first and the supplemental ap- propriations bill second. Mr. MANSFIELD. Mr. President, will the Senator yield? Mr. LATJSCHE. I yield. Mr. MANSFIELD. Mr. President, the Journal of yesterdays' proceedings shows that the supplemental conference report did not come to the Senate until 6:02 p.m. just as we were ready to adjourn last night. That is when it was received from Mr. Harris. The foreign investment bill was received in the Senate at 9:03 a.m., yesterday morning. Mr. President, I yield to the Senator from Louisiana. Mr. LONG of Louisiana. Mr. Presi- dent, I say to the Senator that I am not going to return these insults in kind. `Sometimes these insults pass from Sena- tor to Senator when people get carried away with their own self-righteousness. As much as I want the bill, as hard as I have worked on it, and as hard as the House, the Senate, the President, and the Secretary of the Treasury have worked on the bill, which is a good bill, I do not think enough of the bill to have a mutual heart attack with anybody. As far as I am concerxled, I will just debate thebill. Sometimes, when intensely fighting a bill, I have inferred that someone was corrupt because he was supporting the bill. I have later found It necessary to offer my most contrite apologies for my action. The rules do not permit such action and I will not engage in it. If somebody wants to insult me, let him go ahead and I will try to let it roli off my back like water off a duck's back. Mr. KUCHEL. Mr. President,'will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. KTJCHEL. Mr. President, I want the Senate to know that as far as I am concerned, and I think I can speak for the minority leader, we approve the procedure suggested. I wonder if It would be helpful, since it has been said that there would be a quorum call in an hour or two, if the majority leader ~ifbuld consider asking the Senate to approve a unanimous-con- sent request to vote on the matter 6 hours after a live quorum has been obtained. Mr. MANSFIELD. Mr. President, I would be delighted to do so, but I think it would be a futile gesture. I have raised the suggestion and been turned down In no uncertain terms. In response to a question that has been raised by the senior Senator from Dela- ware [Mr. WILLIAMSL there will be no power play; nothing will be done outside of the rules and ordinary procedures of the Senate. 1922 PAGENO="0771" THE JOURNAL Mr. MANSFIELD. Mr. President, I ask unanimous consent that the reading of the Journal of the proceedings of Fri- day, October 21, 1966, be dispensed with. The ACTING PRESIDENT pro tern- pore. Is there objection? Mr. GORE. Mr. President, reserving the right to object, and I shall not ob- ject, I wish to contribute briefly to an understanding of the program. As I understand the program, after the Journal has been read and the morn- ing hour concluded, the distinguished chairman of the committee will call up the conference report. Thereafter, as is appropriate, the senior member of the committee will respond. It is then the right of the senior Sen- ator from Tennessee to insist that the Journal be read. Because of the confer- ence report and the technicalities in- volved yesterday, that could consume a large portion of the day. I shall not insist upon that procedure. I have sought to obtain a hearing on the bill. I am convinced, deeply con- vinced, that if a majority of the Mem- bers of the U.S. Senate would hear the views of the senior Senator from Dela- ware and of the senior Senator from Tennessee with respect to the non-public- interest portion of the bill, the conference report would be rejected. A quorum is in prospect. I shall desist and listen to the presentation by the senior member of the committee, and then I shall seek recognition. The PRESIDING OFFICER. Is there objection to dispensing with the reading of the Journal? The Chair hears none, and it is so -ordered. FOREIGN INVESTORS TAX ACT OF 1966-CONFERENCE REPORT Mr. LONG of Louisiana. Mr. Presi- dent, I submit a report of the committee of conference on the disagreeing votes of the two Houses on the amendments of. the Senate to the bill, H.R. 13103, to amend the Internal Revenue Code of 1954 to provide equitable tax treatment for foreign investnlents In the United States. I ask unanimous consent for the present consideration of the report. The ACTING PRESIDENT pro tern- pore. The report will be read for the information of the Senate. The legislative clerk read the report. (For conference report, see House pro- ceedings of Oct. 19, 1966. pp. 26665- 26667, CoNGREssIoN~ RECORD.) The ACTING PRESIDENT pro tern- pore. Is there objection to the present consideration of the report? There being no objection, the Senate proceeded to consider the report. Mr. LONG of Louisiana. Mr. Presi- dent, H.R. 13103 is the bill which the Senate passed or~ October 13, of thIs year. The bill as passed by the Senate, and approved by the conferees contains four titles. The first title concerns the For- eign Investors Tax Act of 1966. The ré- maining titles relate to Internal Revenue Code amendments, the Presidential Elec- tion Campaign Fund Act, and other amendments, respectively. Mr. President, as to the so-called ex- traneous amendments, permit me to say that the Constitution does not permit the Senate to originate revenue legislation. Senators well know that such legislation must originate in the House of Repre- sentatives. The Constitution says that the Senate may amend, and it does not limit how we may amend, revenue legisla- tion. We can put any amendment we wish on a revenue bill. But the Senate is bound to amend bills that were revenue bills when they came from the House, because that is the only way we can act on revenue bills. There Is nothing new about this. I think it is fair to say that every mem- her of our committee and almost every Member of the Senate at one time or another has offered an amendment to a reve:iue bill. As chairman of the com- mittee, my recollection is that the amend- ments have been irrelevant as often as they have been relevant. For 2 years this Senator has been ask- ing Senators to withhold their amend- ments. For example we asked them not to put them on the debt ilmit bill, because we wanted the debt limit bill to go di- rectly to the President and to be signed into law. Senators also were requested not to offer amendments to the excise tax ex- tension legislation. There was a need for haste in passing that legislation so that people would know where they stood. So we asked Senators to withhold their amendments until this bill came before the Senate, and at that time we indicated would consider their amend- ments. We followed this procedure. We gave the amendments our best judg- ment and voted on them. So the newspaper accounts of this bill as being a Christmas tree is In poor taste. These are good amendments. As the bifi comes back from conference there is only one fundamental objection the Treasury has to the bill. They do not like H.R. 10. In the past we have often added amendments to bills. My recollection is there were 212 amend- ments to the Revenue Act of 1964 of which perhaps 100 were important sub- stantive amendments. The bill as passed by the Senate con- tained 49 substantive amendments to the House bill. Your conferees receded on four of these amendments without change and two of these amendments with changes. In addition, the Senate conferees accepted amendments on six 1923 PAGENO="0772" of its amendments to which the House receded. The two Senate amendments upon which your conferees receded with changes were the floor amendments of- fered by Senator Yarborough. These Senate amendments altered the provi- [P. 27581J slons of the Foreign Investors Tax Act relating to the income and estate taxa- tion of the bank deposits and the in- terest derived from those deposits of nonresident aliens and foreign corpora- tions. The effect of the Senate receding on those two amendments was to tighten up on the tax laws. In the future they will force foreigners to pay taxes they do not presently owe on income and on their estates. The manager~ on the part of the House were wiling to recede to 23 other Senate amendments made to the Foreign Inves- tors Tax Act, but they insisted that this provision of the act contain the prin- ciples present in the bill as it passed the House. Although your conferees re- ceded to the House provision, we were able to persuade the House conferees to extend the exemption of present law until 1973, which is 1 more year than that provided by the House bill. There- fore, the permanent exemption that would have been granted by Senator YAR- BOROUGH'S amendments is to be con- tinued until 1973. Moreover, postponing the date when these funds are taxed un- til 1973 will give Congress ample oppor- tunity in the future to consider the im- pact of this provision on our balance of payments and on the gold flow. Should circumstances require, there will be plenty of time to reconsider the effective - date of this provision. Your conferees receded on four amendments, one of which related to deductions of medical expenses of individuals age 65 or over. Mr. President, next year we may well enact this provision. But the House conferees were adamant on it. It was an amendment offered by the Senator from Florida [Mr. SMATHERS]. It was a good amendment. But the House wants more time to think about this matter. I have no doubt that after the House conferees have gone back to their people, in November or December-if they ever get there-and have an opportunity to discuss with the old folks, the increase in tax that the aged people will have to pay, they will return in January and go along with the Senate on this matter on which we had to recede. That was one of the most expensive Items in the bill. It would have cost about $180 million. We also had to recede on Senator DOUGLAs' amendment to provide for cov- erage of expenses of certain drugs under supplemental medical insurance benefits. The House conferees said they will study this entire matter next year. In addi- tion they will study a plan to increase social security benefits that would dwarf this proposal; and when the House sends us a social security bill, if we still wish to provide for drugs for the elderly we can provide them. We were told that it would take quite a while, probably more than a year, to work out the details of this matter, because it wiil be neces- sary to analyze the various drugs that would be provided to aged people and to determine how much should be paid for each one of the drugs when it is pro- vided. The technical aspect of the mat- ter, we were advised, would delay it for a long time. Another amendment on which the Senate conferees receded related to so- cial security benefits regarding certain illegitimate children. We were required to drop that item. The House will study it next year and see what they can do about it. The fourth amendment on which the Senate conferees receded related to the minimum amount to be treated as earned income for retirement plans of certain self-employed individuals. The reason why we found it necessary to drop this amendment was that we took all of H.R. 10. That was offered by Senator HARTKE, on behalf of himself and Senator SMATH- ERS. The result was that all of H.R. 10 was agreed to by the House conferees. Therefore, this other amendment which had been put in by the Senate commit- tee and which provided a small part of HR. 10, was not needed. The action of your conferees on this latter amendment was only technically a recession. It was necessary that we re- cede to this amendment since the bene- fits provided by it also were provided on a much more liberal basis in the Senate amendment which provided for the re- moval of the special limitations with re- spect to the deductibility of contribu- tions to pension plans of self-employed individuals. This is the so-called HR. 10 provisIon. The House accepted that amendment, as they well should, because the House had passed the bill unani- mously. Your conferees were most reluctant to recede on the amendment which would have provided the old folks with cover- age of expenses of drugs under supple- me~~tal medical insurance benefits. Al- thô~tzgh I was not the primary sponsor of this amendment, I feel very personally the deletion of this provision from the bill. In my judgment, this is a benefit which should be granted to the old folks; and I believe that the only major ob- stacle which kept it off this bill was the question of Its timeliness. The Senate should remember that the President re- cently announced that he will request legislation early In the next Congress which will provide increased social secu- rity benefits, the House conferees had just finished two strenuous days of dis- cussion in the Ways and Means Com- 1924 PAGENO="0773" mittee regarding increased social secu- rity benefits, and, additionally, this is a time when we must hold down on Gov- eminent expenditures. As I indicated, the President plans to request legislation early in the next Con- gress which will provide increased social security benefits. As the chairman of the Committee on Finance, I think I can assure the Senate that we will reconsider this matter next year either in that, or in separate, legislation. I need only remind the Senate that this amendment was ap- proved by almost all of the members of the Finance Committee, and it is my be- lief that these same votes will remain favorable when we reconsider this meas- ure next year. The Senate conferees also were most reluctant to come back from conference without the amendment removing the 3- percent and 1-percent limitations on medical expenses for those 65 and over. We fought long and hard for this pro- vision but the House conferees simply would not yield. While I do not agree with them, their view is that the provi- sion of benefits under part B of the medicare bill at Government expense compensated the elderly for this loss of deduction. I doubt very much whether this view will be generally accepted by the public, and I expect the House itself next year to send us legislation remov- Ing this limitation. The Senate conferees accepted modi- fications to three of the Senate amend- ments dealing with depletion. The amendments accepted by your commit- tee would delete from these provisions the features granting the depletion al- lowance with respect to processes not presently classified as mining processes. The two depletion amendments which relate to shale, clay, and slate used as a light-weight aggregate and clay and shale used in the making of sewer pipe and brick were altered by the confer- ence to provide a minimum 7 1/2-percent depletion allowance In these cases. This was in lieu of changing the processes treated as mining processes for these minerals. Mr. President, in connection with that subject, I wish to point out that the Treasury Department usually disagrees with liberalizing depletion amend- ments. They recognize the validity of allowing cost depletion, but they have been critical of percentage de- pletion. As a policy, they consistently tend to say they do not want to expand percentage depletion in any field. But on these amendments as agreed on in conference, they said, as a practical mat- ter, that for the most part justice and equity would indicate that the products involved should receive the treatment ac- corded by the amendments to equate them with the treatment received by competitive products. Mr. President, much has been said about oyster and clam shells. If those shells, which have been building up for perhaps a million years off the coasts of Louisiana, Florida, Georgia, Texas, Alaska and any other State that borders on an ocean or major body of water, are to be used in competition with lime- stone, it seems only fair that they get the same treatment as limestone. More- over, these are dredged from the sea un- der leases from the Government. So they do have economic Interests which are depleted. The Treasury Department objected to any modifications of the principle of the Gore amendment, and won on this point. The Senator from Tennessee labored a number of years ago to see that depletion does not apply to a manufactured or finished product, but relates only to the value of the product before the applica- tion of any processes generally consid- ered to be "manufacturing" as distinct from "mining." The Senate conferees yielded on this matter of deleting any liberalization of the so-called "cutoff point." Unfor- tunately, not doing anything about the cutoff point for depletion, allowance, [P. 27582) merely raising the rate will, I under- stand, be of little help in Georgia in making alumina from clay. Minor modifications were also ac- cepted by your conferees to the Presi- dential Election Campaign Fund Act. These amendments raised to 15 million the number of votes a party must re- ceive to be classified as a major party. In addition the conferees raised from 1 1/~ to 5 million the number of votes a minor party must receive to be eligible for a distribution under this fund. They also extended the application of this 5 million "deductible" rule to the major parties as well. In other words, no party, major or minor, is to receive any reimbursement from the fund for its first 5 million votes. With respect to the defi- nition of major and minor parties, the amendments provide that a party must receive 15 million votes to constitute a major party and 5 million votes to con- stitute a minor party. The effect of these amendments is that a party will not qualify for a proportionate share of the fund unless it receives 15 million votes and it will receive nothing from the fund until Its total votes exceed 5 mil- lion. Those receiving between 5 and 15 million votes in the last election, how- ever, will continue to be elegible to re- ceive $1 for every vote they received over 5 million. Mr. President, I drafted this proposal with the assistance of the Treasury De- pariment, the staff of the Joint Commit- tee on Internal Revenue Taxation, and our own fine staff of the Senate Commit- tee on Finance. Much of the thinking that caused me to come up with this pro- 1923 PAGENO="0774" posal came from speeches made by the late Senater Richard Neuberger in the Senate when he would quote something that Theodore Roosevelt said over 60 years ago. Theodore Roosevelt said that the only way to have honest elections is for the Federal Government to find a way to help pay for the expense of a man running for the Presidency of the United States. The Senator from Tennessee [Mr. GORE] carried on investigations in this field to point out the situation was bad. Practically the only source of financing for campaigns had to come from large corporation executives or labor unions, and it would be well if there could be another way devised. While this proposal is not perfect, af- ter having studied it and discussed it with people who have the responsibility* of managing campaigns for the Republi- can Party and for the Democratic Party, I felt this would probably provide the money it would take to see that both campaigns are adequately financed so that both sides could make their case before the people. This proposal would authorize every taxpayer to designate $1 of his tax liabil- ity to be placed in a presidential election campaign fund. If he wanted to, he could designate that $1.50 would go to pay for the Democratic campaign and 50 cents to pay for the Republican cam-. paign. In other words it is financing of good government on a bipartisan basis. Every man elected would be equally ob- ligated to everyone. This Is a clean elec- tion bill. It isa good-government bin. The President sent down his own elec- tion proposal that included a $100 ta~ deduction provision. This item has ap-. pealed to Senators, including the great Senator from Delaware [Mr. WILLIAMS]. - We studied it and the committee did not think it would reduce undue influence. But the proposal we approved would help prevent improper influence in Govern- ment because the money goes to both sides. It also does not give the wealthy, to whom deductions are worth more, a greater incentive to give than the less fortunate. When someone runs for office and has to go hat in hand from one group of wealthy individuals to another, pleading for money to help finance the campaign, that candidate is not as free as if his campaign were financed equally by every citizen. Then he will not be obligated to any special group. There has been discussions of amend- ing the corrupt practices law. If we do pas~s such amendments, it is not neces- sarily going to clean up anything. It would compel people to find more sophis-. ticated ways to finance their campaigns than they have to date. After all they must obtain the money from somewhere. The wealthy can finance their own cam- paigns, but what about candidates of moderate means? Here in the bill before us is a way to eliminate the need for those running for office to be under the compulsion of mak- ing a cOmmitment they do not wish to make in order to get campaign funds. A fraud provision was suggested for the presidential election campaign fund provisions. I thought about it and had our staff draft one up in case anyone cared to offer it. One was drawn up as tight as "Dick's hatband," but we think that there is no need for it. Let me read the broad statute that would be applicable under present law, in any event: 1 1001. Statements or entries generally. Whoever, in any matter within the june-. diction of any department or agency of the United States knowingly and willfully falsi- fies, conceals or covers up by any trick. scheme, or device a material fact, or makes any false, fictitious or fraudu1~nt statements or representations, or makes or uses any false writing or document knowing the same to contain any false, fictitious or fraudulent statement or entry, shall be fined not more than $10,000 or imprisoned not more than five years, or both. (June 25, 1948, cli. 645, 62 Stat. 749.) The provision before us provides that there is to be a bipartisan board com- posed of two Republicans and two Demo- crats, who will proceed to pick three other impartial men-So that the Republicans will watch the Democrats and the Demo- crats will watch the Republicans. Each party will watch the other party, to make sure that no one receives a distribution of a cent for funds not properly spent. Every Democrat and every Republican has a responsibility to report on his own candidate and the other candidate, in case anyone uses any of the money im- properly, so that every dollar of the cam- paign fund should be accounted for, both as it comes in and as it is expended. Mr. MflRPHY. Mr. President, will the Senator from Louisiana yield? Mr. LONG of Louisiana, I am happy to yield to the Senator from California. Mr. MURPHY. Is there presently a ceiling on what can be spent by the na- tional committees? Mr. LONG of Louisiana. I think there is one. Mr. MURPHY. I think it is $33 znfl- lion. Mr. LONG of Louisiana. I think it Is $~ million. Mr. MURPHY. How would we appro- priate the money, which, as I understand it, would go to the national committees? How would we get around that? Mr. LONG of Louisiana. Mr. Presi- dent, let me comment on the question of limitations on receipts of contributions and their expenditures by political com- mittees. The bill before us is carefully drafted in terms of "political parties," not "po- litical committees." This was purpose- 1926 PAGENO="0775" fully done in order not to conflict with the limitation In the law. The bifi before us Is also carefully drafted so that the amounts paid into the treasury of political parties do not be- come "contributions" which might make them subject to the $3 million limit. The special limitations on the amounts paid into the treasury of political parties under this bill were drafted in full rec- ognition of the $3 million limit. We wrote our limitation in terms of amounts spent by a political party for two reasons. First, to make sure that It was different from the limitation now in the law, and second to provide an after- enacted limitation which would have to be interpreted apart from the $3 million limit. This special limitation In the bill, in- deed the bill itself, has nothing to do with contributions at all. The purpose of the bill is to free presidential candidates from having to seek contributions-to free political parties from having to cre- ate a plethora of political committees in order to get around the $3 million limit. The $3 million limit now in the law is not affected by this bill. It will continue to apply to the cases to which It applies today. However, it will not limit the disbursements made under the bill be- cause these disbursements do not in- volve "contributions" and they are not made by "political committees." Mr. MURPHY. In other words, this would wipe out the limitation which presently exists? Mr. LONG of Louisiana. No, as I in- dicated I think this provision avoids any conflict with present law. Let me say that the limitation In present law doesn't work in any case. I will tell the Senator why. Mr. MURPHY. I was not questioning whether it was a farce or a fraud. I just asked the question as to whether that would- Mr. LONG of Louisiana. No, as I have said, this provision of the bill does not affect the limitation. Mr. MURPHY. It does not affect the limitation? Mr. LONG of Louisiana. Not In my judgment. [P. 27583J The Senator from Tennessee [Mr. GORE] compiled a "best seller" on this subject. He did quite a bit of investi- gating on this subject. I wish I could be favored with a copy of It. Perhaps ad- ditional copies should be reprinted-I do not have one of them. Mr. GORE. We have had that re- quest. Mr: LONG of Louisiana. I am having difficulty getting reprints. I should like to have a copy of the lists published in his document because inasmuch as it deals with private financing, I might find a few prospects myself when I run again for office. The Senator from Tennessee has kind- ly handed me a list which he compiled of those who contributed to President Eisenhower's campaign and also to Adlai Stevenson's campaign. If the Senator will pardon me for saying it, I do not fInd it all here, I find about only half. Mr. GORE. I think it is $33 million. Mr. LONG of Louisiana. $33 million. I asked the Senator for an educated guess on what he thought President Eisenhow- er's supporters had spent in the Re- publican campaign, and how much he would guess Adlai Stevenson had spent. I must say that at that time the Demo- cratic Party was the loser. We did not do too well. The Senator's guess, as I re- call it, was that the Republicans spent about $40 million in the campaign and the Democrats about $12 million. Mr. MURPHY. Does that include ex- penditure of union funds? Mr. LONG of Louisiana. Union funds? Mr. MURPHY. I am talking about the figure the Senator just quoted, $12 million opposed to $40 million. Mr. LONG of Louisiana. It was the best guess of the Senator from Tennessee. The Democratic Party finds itself in the position of being for the poor man, the common man-so that it does not always have sufficient funds, which was true in that campaign. With expenses going up, it was esti- mated that as an educated guess about $52 million was spent by the two parties. I heard an estimate that in the last pres- idential election for all candidates, every- one running for office from constable up to President, about $250 million was spent that year. I would assume that about $55 million to $60 million was spent in the Johnson-Goldwater campaigns. Mr. MURPHY. Has there been con- sideration-because campaigns are sensi- tive to rising costs-to possibly using television? Mr. LONG of Louisiana. Let me talk about that for a moment, because I think that the bill helps that. I will tell the Senator why. There is a provision in law which states that if a television net- work donates free time, it has to pro- vide equal time for all. So that if Presi- dent Johnson and the fine gentleman whom the Republicans will nominate for President at the next election, are put on television, the TV networks have to include the minority parties as well, un- less the law is amended. If we bypass those small parties, there would still be the problem that while It might be all right to request one big television network to provide equal time, it would seem to me to be unfair to re- quire it of a little television station, be- cause such a station would lose needed revenues by having to provide to other political candidates free time which it otherwise could have sold to paying sponsors. 1927 PAGENO="0776" The proposal before us, however, would provide that whoever could pay for time would pay for it, in order to present his case to the American people. Mr. MURPHY. In other words, it would eliminate the smaller parties, and only those who had an allocation from the contribution of that dollar could use the air? Mr. LONG of Louisiana. It would not eliminate them. They would have to finance themselves; the way they do now. However, funds are provided for minor parties when they have polled over 5 million votes in the last election. Mr. MURPHY. Would it not be fea- sible to allocate time on the air instead of charging the American people $1 apiece, and allocate the time on the air, which belongs to the people in the first place, on the same basis which the Sen- ator suggests as to dividing up the money? Mr. LONG of Louisiana. Well, the Senator- Mr. MURPHY. This would eliminate the cost and save the taxpayer a dollar. Mr. LONG of Louisiana. The Sen- ator would simply make the television stations foot the bill. Does the Senator think it is fair to make a small television station lose money in order to make free time available, when the station could be using that time to make a few dollars to pay off its debts? It seems to me it is better to provide both sides with money so they can buy time during the campaigns and make their case to the American people. The television station would be required to treat everybody the same way. Some of the small parties would have to finance themselves, but if they obtained 5 mil- lion votes they would get financial as- sistance from the fund. It has been suggested that this is discriminatory. But under the proposal as agreed on In conference, the major parties also will get no reimbursement for the first 5 mil- lion votes they garner. I point out that there are all kinds of deductible items in the law. There is a $100 deductible allowance for casualty losses; a deduction of 3 percent from the income with regard to medical expenses before any of these expenses are allowed; and a 1 percent deductible in the case of drugs. There are all sorts of exemptions and deductions. Mr. MURPHY. There are so many and it is so confusing that I am afraid the poor, general citizen has no knowl- edge of them and needs an accountant, a lawyer, and specialist to tell him what his rights are. I do not know, and I con- sider myself a normal citizen. I have been around half a century. The longer I stay, the more complicated and con- fusing it all becomes. That is one rea- son why I question this part of the bill. May I say that I voted for the bill, but as it comes back in the condition it was returned, I would have to oppose the bill, because the most eloquent presentation the Senator made with reference to helping the poor folks get medicine was what persuaded me to vote for the bill, and that provision has disappeared. Mr. LONG of Louisiana. I regret to say we could not hold that provision in conference. We expect to get it passed next year. I regret that it failed. But there were other provisions in the bill. There was the self-employed retirement provision, for example, in which doctors, lawyers, and other self-employed have been interested for years. This will help them in their old age when they retire. I have been opposing it, but there are so many good provisions in the bill that each Senator should be able to think that even though there might be one or two items in the bill with which he does not agree, there are enough good pro- visions that he should vote for it. I am not only Interested in seeing that the poor man's party Is put above improper Influence, but I should like to see the Re- publican Party put above Improper in- fluence also. Mr. MURPHY. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. MURPHY. Speaking of party, would this provision include deductions for members of the President's Club, or would that be a separate matter? Mr. LONG of Louisiana. May I say that I am a member of the President's Club and proud to be, but I am not too happy about the $1,000 a year it costs me. It is hoped that this provision would eliminate the need for such clubs. I would hope to get the support of many persons in and around Louisiana who now contribute to the President's Club. I shall be running at the same time the President is. It is always difficult to fi- nance campaigns for Members 0 the Senate and of the House at a time when the President is running. But now he will have perhaps $30 million to finance his campaign. If a presidential candidate can ob- tain $30 million to finance his campaign, maybe members of the President's Club, including myself, would be relieved of the $1,000 contribution, and that money could go to finance the campaigns of candidates for the Senate and the House of Representatives. Some of us have great difficulty raising money to finance our campaigns. Mr. MURPHY. That does not answer my problem. I ran at the time when everybody was talking about Goldwater and Rockefeller and I could not get any- body on the phone. I financed my cam- paign at the cost of a package of ciga- rettes for all of the people who voted for me in the primary. I recommend it. Mr. LONG of Louisiana. Senators and Representatives do not have the terrible problem of financing a campaign that is presented to a man running for the Pres- idency. 1928 PAGENO="0777" With reference to the subject previous- ly discussed of the penalties applying un- der present law, here is another stat- [P. 27584) ute that is now on the books. This stat- ute is so broad that it covers almost any- thing. Let me read it: § 1002. Possession of false papers to defraud United States. Whoever, knowingly and with intent to defraud the United States, or any agency thereof, possesses any false, altered, forged, or counterfeited writing or document for the purpose of enabling another to obtain from the United States, or from any agency, officer or agent thereof, any sum of money, shall be fined not more than $10,000 or imprisoned not more than five years, or both. So that provides for 5 years in jail and a $10,000 fine. The Comptroller General would be responsible for checking into every single item of expense certified by the political parties under the proposal before us. Someone has suggested that perhaps we could set standards as to how much should be spent in every single State. If anybody wants to work it out, I shall be glad to consider it, or we could have the staff work it out. But I do not think it is necessary, because no question is raised as to the percentage of the money raised by the people of New York, for example, as compared with Louisiana. The remaining Senate amendments to which your conferees accepted changes were those dealing with swap funds and the provision requiring reports to clarify the national debt and tax structure. Changes made to this latter amendment are minor and represent changes sug- gested by the Bureau of the Budget to make the reporting system practical. You will recall the discussion on the Senate floor with respect to swap funds. Under section 351 of the Internal Reve- nue Code, transfers of property to a cor- poration by one or more persons in ex- change for stock in a corporation does not result in. gain or loss if immediately after the exchange the person or persons in question are in control of the corpora- tion. On July 14, 1966, the Treasury De- partment issued a proposed regulation indicating that the exchange of appreci- ated stock for shares in an investment fund where immediately after the ex- change the persons who transferred the stock to the corporation are in control of it does not qualify for this provision. The Senate added an amendment to the bill providing that section 351 applied to corporate investment funds. The conferees considered this provi- sion at length and concluded that, at least at this time, they did not believe that stock or real estate investment funds should be eligible for this tax-free treat- ment under section 351. It was recog- nized, however, that in view of the past experience under this provision it prob- ably would have been unfair to cut these funds off immediately, As Senators will recall from the Senate discussion in 1960, the Internal Revenue Service ruled that these funds did come,under section 351, and while it is true that since that time they have refused to so rule, neverthe- less, private tax counsel has so ruled for many funds since that time. In view of these considerations, the conferees pro- vided that these investment funds should come within section 351 only with re- spect to transfers to stock to the funds prior to July 1, 1967. Moreover, funds required to register with the Securities and Exchange Commission under either of the two applicable laws, to be eligible for this treatment must file their regis~ tration applications with SEC by January 1, 1967; the prospective shareholders must have deposited their stocks with the fund by May 1, 1967; and the actual transfers must have occurred before July 1, 1967. Where registration application set a maximum dollar amount for a fund, this may not revised upward after Janu- ary 1, 1967. Any additional amount would not qualify for the tax-free treat- ment under this provision. This latter limitation, of course, applies only to those funds not already established. I believe that the bill as revised by the conferees is a good bill and should be approved by the Senate. I have a letter from the Secretary of the Treasury, who says this is a good bill and that it should be agreed to by the Senate. The~ Treasury Department did have some concern about some of the provisions in the bill as passed by the Senate, but they are satisfied with the conference agreement. The only provi- sion they really take exception to is HR. 10. The revenue loss of the bill as passed by the Senate was put at approximately $470 million a year. As we bring it back from conference, the cost of it is about $80 million a year. So the cost of this bill to the Treasury Is only about 15 percent of what it would have been as passed by the Senate. The only very expensive item in the bill is the one provision, HR. 10, the self- employed retirement provision. That provision, as I have stated, Mr. Presi- dent, is something I have fought against for many years, and if it were here on its own merits alone, I would still be fighting it. But the House passed it 291 to 0. And in spite of my best efforts, all the arguments I could make, all the arguments the majority leader [Mr. MANSFIELD] could make, all the argu- ments the Secretary of the Treasury could make in talking to Senators, all the arguments the Under Secretary, the Assistant Secretary could make, and all the arguments that our staff could help us make, we simply lost. We did not have the votes to outvote them. So this 1929 PAGENO="0778" provision, which is of interest to doctors, lawyers, accountants, and other self-. employed people, is still in the bill. But the bill in its present form should at least be much less objectionable than the bill which Senators opposed when it was brought to the floor of the Senate, because every agreement in conference, and every action by the conferees, had the effect of reducing or eliminating the cost of something which those Senators who had opposed the bill did not want to do, anyway. So It would seem to me, Mr. President, that even Senators who voted against the bill originally would be well justified in voting for the confer- ence report, because even if they did not like the bill originally, what we present here from the conference is much bet- ter, from their point of view, than what the Senate passed. If they were worried about the expense, this measure will only cost 15 percent as much as the bill wè~ passed. If they are worried about some provision which might have given the Treasury a problem, the Treasury now feels, as a practical matter, that this is a fine bill, that it will help tremendously with our balance-of-payments problem, and It is one of the few things we will have passed In this Congress that will help our balance-of-payments problem. From the point of view of a number .of people in the Johnson administration-* and I say it would be fair to say this is probably an opinion shared by the Presi- dent himself-this bill is even more im- portant to the Nation than the supple- mental appropriation bill which waits right behind it, which provides funds for almost everything. We have enough money on hand to operate the Govern- ment for a little while, but we have a very serious problem with our balance of payments, and need to do something Immediately to help with that matter. Most of the amendments retained in conference were amendments the Treas- ury was asking for, or did not oppose, because the Treasury Department felt that those matters involved fairness and equity, and followed the principle of treating all taxpayers alike and Impar- tially. Therefore, Treasury wanted al- most everything in this bill except for about fiTe of our amendments; and the two that cost the greatest amount of money-that would have cost $385 mil- lion out of the total $470 million cost to the Government of this bill-the two that Treasury was most worried about because of their cost, we were compelled to recede on. So Treasury feels It is a good bill, the President feels It is a good bill, the House feels it is a good bill by a 3 to 2 margin, the Senate voted for it by a vote of 58 to 18, and insofar as someone who does not like It Is concerned, If there is some prin- ci~ple or some effect here that offends him, every compromise we made In con- ference moved in his direction, to make the bill at least less objectionable, I think, and represented what he would have done himself If he did not like the bill to begin with. Mr. President, I urge that the confer- ence report be agreed to. Mr. WILLIAMS of Delaware. Mr. President, I rise to object to the con- ference report. As I stated earlier, when the bill was before the Senate I was wholeheartedly in support of title I of the bill, that phase which dealt with the foreign investors' tax. As the bill was passed by the House and as title I, which dealt with that subject, was reported by the Senate committee, I felt it was a con- structive proposal. I would have sup- ported, and will support today, title I as it is before the Senate. That is sup- posedly the matter that is now before the Senate-the question of the Foreign In- vestors' Tax Act. But this bill has gone far afield. Yesterday it was suggested to the Treasury Department and to the leadership that we take title I of the bill and attach it to another bill which is presently on the Senate Calendar and which was reported by the Senate Fi- nance Committee. This bill was reported unanimously by the Finance Committee and had the approval of the Treasury [P. 27585] Department. It would be a very con- venient vehicle. We could put title I in its entirety on that bill and sent it to the House, carrying these other so-called grab bag proposals over until next year for debate. Mr. GORE. Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. GORE. Does the Senator believe that the public interest would be ad- versely affected by postponement of these nongermane amendments? Mr. WILLIAMS of Delaware. I cer- tainly do not. In fact, I think the public interest would be better protected if they were defeated. Certainly title lis all the administration was asking for. As to the major amendments which are in controversy here, when the Treas- ury Department witnesses were before our committee they were unalterably op- posed to each of those amendments. They described one of the amendments as the greatest loophole that had ever been proposed by the Finance Commit- tee. That amendment, Mr. President, is in the bill before us now; and I regret to say that the Treasury Department has swallowed it, because they say, "WeU, we will cut off this loophole after July 1, 1967, with the proviso that they must file their report with the Securities Ex- change Commission by January 1." I do not question the motives of anyone who supports these proposals, but I do dis- agree with their conclusions. Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator yield? Mr. WILLIAMS of Delaware. Just a 1930 PAGENO="0779" moment. I do not question the motives of the Treasury Department in this flip- flop. It is not the first time they have suddenly changed positions. I am not unmindful that in late August, the Sec- retary of the Treasury said he was un- alterably opposed to suspension of the 7- percent investment credit, and 10 days later he was for it. He had a right to change his mind on that issue, and he has a right to change his mind now and ask for this bill. I now wish to discuss some of the fea- tures in the bill to which I object and ex- press my opinion as to why I think it would be better if it were not enacted at this time. I yield to the Senator from Louisiana. Mr. LONG of Louisiana. Of course, the Senator is entitled to his opinion. Those of us who voted for the swap fund amendment felt that if we looked at the law, we would find that the present law permits the tax-free transfer of secu- rities to investment companies. The Treasury felt that this was something of a loophole, and wanted it to be closed. The Treasury proposed to close it by an administrative regulation; but it seemed to us that it ought to be done bylaw. We believe that Congress ought to act, rather than to have the Treasury act admin- istratively. The Treasury is pleased that the conferees have closed the loophole affirmatively. Mr. WILLIAMS of Delaware. I know that the Treasury is apparently pleased today to accept a proposal which only 1 week ago they denounced as the most glaring loophole ever proposed by Con- gress. Mr. LONG of Louisiana. What we have before us is a different proposal. This is a proposal that the Treasury helped us to draft. The Treasury feels that it is a good proposal. Mr. McCARTHY, Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I shall yield in a moment. The only change that has been made is that we have fixed the final termination date as July 1 of next year. Mr. LONG of Louisiana. The SEC registration must be filed before Janu- ary 1, 1967, and the funds must be depos- ited by May 1, 1967. Mr. WILLIAMS of Delaware. Appli- cation must be filed in December but July 1 is the final date. Mr. LONG of Louisiana. And cannot be amended to raise the amount. Mr. WILLIAMS of Delaware. After January. I shall discuss the merits of the pro- posal later. When the committee had this particular proposal before it, the representatives of the Treasury Depart- ment said it was a glaring loophole and even indicated that if that one amend- ment alone were in the bill, they would have to recommend its veto. But now we are told they are willing to accept It. That is the Treasury flip-flop about which I am talking. I now yield to the Senator from Minne- sota. Mr. McCARTHY. The Senator from Delaware keeps quoting the Treasury; but the Senator himself knows that it was not a glaring loophole. He knows better. Mr. WILLIAMS of Delaware. I agreed with the Treasury that it is a loophole. Mr. McCARTHY. But not the largest loophole in the tax code. The Senator would not commit his reputation in sup- port of the Treasury official he quotes and say that this was the most glaring loophole in the whole tax code. He will quote the Treasury official as saying that, but he himself will not say that it is. Mr. WILLIAMS of Delaware. I con- curred in what the Treasury representa- tives said to our committee, and no one has caused me to change my mind. I respect the opinion of the Senator from Minnesota even though he differs with me. Mr. McCARTHY. No one can prove that a penny of revenue would be lost if the amendment is adopted; neither can the Senator prove that there would be a loss of a nickel of taxes in that "glaring loophole," that a nickel's worth of taxes would be lost. In fact, the rec- ord shows that it might bring in revenue, if anything. This is a loophole through which the Treasury could get revenue. The Treasury ought to be for that kind of loophole. Mr. WILLIAMS of Delaware. I do not want this debate to get to the silly stage. Certainly there is a loss in revenue. Mr. McCARTHY. Who ever heard of a loophole through which the Treas- ury would make money? Who ever heard of the Treasury closing a loophole or asking the taxpayers to close a loop- hole because the Government was mak- ing money? Mr. WILLIAMS of Delaware. Let us not get this to the ridiculous stage. The Treasury agreed that there was a loop- hole, and in my opinion, there is a loop- hole now. Perhaps it would be just as well to proceed to show how this is tax relief for a certain group so that there can be no misunderstanding. This proposal legalizes a method by which those who have a sizable block of securities or real estate which has been secured at a very low cost in relation to its present market value can, by forming a group or a fund, diversify their invest- ments by turning their stock over to a fund and taking stock in the newly formed corporation, thus avoiding the payment of capital gains tax. They cannot do this under existing law without paying a capital gains tax. It is something which they will not be able to do after July 1, 1967, but the supporters of this bill say, "We will legal- ize what you have done heretofore and 1931 PAGENO="0780" give you until January to get your house in order; you will not have to pay any taxes on what you have done." This tax-free exchange of securities is a loophole that benefits only seven or eight operations in America. Mr. President, I yield to the Senator from Ohio. Mr. LAUSCHE. Mr. President, am I correct is my understanding that all that has been done to supposedly improve the original bad provision is to establish a cutoff date as of July 1? Mr. WILLIAMS of Delaware. The Senator is correct. That would be July 1 of next year. However, it contains a January 1 date by which they must file with the Securities Exchange. They must file at the end of this year with the Securities and Exchange Commission. Mr. LAUSCHE. The situation is that the Treasury Department concluded that there was a loophole that had to be blocked, and they proceeded to do so. Along came the Senate committee, and the Senate, with this new legislation to prohibit the Secretary of the Treasury from blocking the loophole. Mr. WILLIAMS of Delaware. The Senator is correct. The Secretary said that under the existing law he could stop this practice. This provision would pro- hibit him from issuing rulings against the past practices or any other exchange made prior to next July. It would give a clear ruling to all of those who have not been able to get a favorable ruling. It would also include all transactions that took place hereafter, up to the date mentioned. This is a loophole with a termination date of next July. Mr. LAUSCHE. Mr. President, is it not correct that the Secretary felt that the practice in effect cheated the tax- payer because of the loophole that existed in the law? He concluded that he could block the loophole, and when he reached such conclusion, the Senate committee adopted an amendment to stop him from doing what he thought was in the best interest of the taxpayer. ~P. 27586] Mr. WILLIAMS of Delaware. The Senator is correct. I will cite an example of how this would work. We will assume that there are four investors. This could only operate with relation to larger interests because the average fellows could not get together to form such a group. Suppose that Mr. A has $1 million worth of bonds. Mr. B has $1 mil- lion worth of a certain stock acquired at a cost of $100,000, and Mr. C has $1 mil- lion worth of Gen~ral Electric or General Motors stock. If these three men get together and contact Mr. D, who has very large hold- ings in real estate and would like to diversify his holdings, exchanging his land for bonds and securities, they could not do so under the present law without paying a capital gains tax. Under the present law any of the indi- viduals whom I have mentioned, if he wanted to diversify, would have to sell a part of his holdings and pay a capital gains tax on the portion which he sold. He could then invest the remainder after the payment of taxes in other corporations. Under the present proposal, these four gentlemen could get together and put up their securities and real estate. They could then issue shares out of a new fund in proportion to the amount that had been put up. These men would thus have diversified their interests and the man who owned the real estate would own a percentage of those bonds and securities and the other men would be the owners of the real estate. No capital gains tax would have been paid under this transaction. The pending measure would provide that that procedure would be permissible on former transactions and new trans.. actions until next July. A few of these corporations have been formed, and the Treasury Department ruled that such procedure was an avoid- ance of the capital gains tax and that a capital gainst tax must be paid. This provision would overrule the rul- ing of the Secretary of the Treasury and provide that such transactions would be tax exempt. In effect, it would say: "Keep on doing it until this next July and then go and sin no more." Mr. LAIJSCHE. The Treasury De- partment said that the scheme of set- ting up a pool and then taking stock in the pool enabled those investors to escape the payment of a capital gains tax and that this procedure was illegal. A nil- Ing was issued. Mr. WILLIAMS of Delaware. The Senator is correct. Mr. LAUSCHE. The Senate commit- tee, however, through the provision in the pending bill is attempting to prevent the Secretary of the Treasury from is- suing a regulation that would prevent such practice. Mr. WILLIAMS of Delaware. The Senator is correct. The Senatecommit- tee's first proposal would extend this in perpetuity. The conference report does contain a termination date, but it does at the same time legalize all of these pending transactions which have hereto- fore been rejected by the Treasury De- partment. The pending measure would allow these people to keep their tax-free ex- change status up to next July. This is the proposal which the Treas- ury Department described as one of the most glaring loopholes ever proposed by the Senate Finance Committee. All the conferees did was to place a termination date on such transactions. That is better than permitting this to be done in perpetuity, but nevertheless it 1932 PAGENO="0781" is still unfair to other taxpayers who must pay the tax. Mr. LAUSCHE. Mr. President, if the argument of the Senator from Minnesota is sound, that there was no tax loss suf- fered by the Government, I ask the Sen- ator from Delaware why the committee proceeded to place such a provision in the bill. What was the need of placing such a provision in the pending bill if it meant nothing? Mr. WILLIAMS of Delaware. In saying there would be no tax loss, they proceeded on the premise that these same people would not sell and diversify. Conceivably, they would not sell, but if they did sell they would have to pay the capital gains tax just the same as any one of the 90 million Americans had to do up to this point and will have to do from now on. They are not being ex- cused. This provision excused no one, as near as I can determine, but seven small groups that are operating these funds. They are the only ones that are involved or benefited here. This section is certainly not general tax legislation. Congress here is legalizing what seven small outfits were trying to do, and try- ing to do in the face of a warning that the Treasury Department would not ap- prove it. Mr. LAUSCHE. I wish to repeat my question: If there was no loss in taxes suffered by the Government, what was the need of the Senate committee put- ting into the bill this provision? Mr. WILLIAMS of Delaware. None. whatever. Certainly there is a loss in revenue. Mr. LAUSCHE. Who was sought to be protected? It was not the Govern- ment. And if the provision was placed in there, one would contemplate that the committee did not intend doing a futile act. They wanted to affect someone. Who was to be affected and how, I ask? Mr. WILLIAMS of Delaware. It af- fected, to the best of my knowledge, seven operations, and certainly there would be loss suffered. It would be ridiculous to argue otherwise. Who ever heard of a loophole that did not cause the loss of revenue? I did not coin this word-the Treasury Department coined the word describing this section as one of the most glaring loopholes. Mr. LAUSCHE. If there was not a loophole, why did the Secretary of the Treasury and the conference committee finally agree to put a cutoff date in the present bill? The cutoff date undoubt- edly was put In there under the confes- sion that the taxpayer generally was be- ing despoiled or robbed for the benefit of a few. Mr. WILLIAMS of Delaware. I could not answer that. But the representative of the Treasury Department, who, by the way, was Mr. Surrey, the high official who used the words that this particular section was a most glaring loophole. Nothing has been changed. Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. LONG of Louisiana. I am not at- tempting to change the Senator's mind, but I want the RECORD to show what the facts are, from the standpoint of those of us who think that this provision should be agreed to. At this time, there is no question that if you have a business purpose, you can diversify by just putting business assets into a corporation, which gives you the effect of diversification, and no taxes are owed. The Treasury is not seeking to change a word of that. But until July 14 of this year, Treasury also did not take a published position In opposition to the tax-free exchanges called swap funds. If what Treasury did not oppose until July 14 of this year was wrong, we only extend it by this bill for 6 more months. So if what we are doing is questionable, we are only permitting this questionable practice to go on for a very short time and after all the Treasury did not chal- lenge this scheme for years. The Treasury sought to cut off tax- free exchanges in investment funds by regulation. The Treasury thought it was a loophole, and we have closed the loop- hole for them. We do give these people 6 more months. But they. have to file their plan by December 31, 1966, and have to consummate the whole thing by July. 1 of next year. Mr. WILLIAMS of Delaware. Mr. President, I have expressed my opinion about this proposal. The Under Secre- tary of the Treasury, Mr. Surrey, de- nounced this section, and quite a few members of the committee staff, as well, concurred in the opinion that this was and is a loophole, only with a termina- tion date. Mr. GORE. Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. GORE. I wish to congratulate the able Senator for his lucid explana- tion of this particular amendment in the bill. The senior Senator from Delaware has served a number of years as a mem- ber of the Senate Committee on Finance. I want to compliment him upon giving an explanation of this bill that would be a credit to any expert tax lawyer, ac- countant, or both. Mr. WILLIAMS of Delaware. I thank the Senator for his comments. I do not claim to be an expert. This is just a simple, straight mathematical computa- tion. Much has been said about what this bill proposes to do for the average American. I just wish to dispel that fact. To the best of my knowledge there are seven companies or funds that will be 1933 PAGENO="0782" given tax exemption tinder this proposal, and if the proposal is rejected those seven will have to pay capital gains tax on their stock exchanges. It is that simple. Mr. GORE. Mr. President, will the Senator yield further? [P. 27587] Mr. WILLIAMS of Delaware. I yield. Mr. GORE. The discussion of this point. In the debate thus far today, Illus- trates my conviction that if this bill were thoroughly discussed before a quo- rum of the Senate, it would be rejected. As a result of the discussion thus far, I have heard two Senators say that they have changed their view and would now vote against the bill. Mr. WILLIAMS of Delaware. There are many more reasons than this point. Some of them in themselves are enough to justify rejecting this report so far as I am concerned. Mr. GORE. It is regrettable that this kind of bill comes here In the closing hours of the session. The Senator from Delaware no more welcomes than does the Senator from Tennessee the duty of having such a discussion in the Senate on Saturday afternoon, when football games are being played. But we did not bring the bill before the Senate in the closing hours of this session. However, I wish to proceed to this point: The exchange between the senior Senator from Ohio and the senior Sena- tor from Delaware clearly brought out that the Treasury Department had, by regulation, closed this loophole. The Senate Committee on Finance, by its amendment, overruled the ruling of the Secretary of the Treasury, and reopened the glaring loophole, as tJnder Secretary Surrey described it, according to the sen- ior Senator from Delaware. The conference report represents-I wish to be fair in saying this-an im- provement over the original Senate bill; because, as the senior Senator from Del- aware has said, though it still overrules the ruling and the regulation of the Sec- retary of the Treasury and leaves the door wide open for a while, it does fix a terminal date. This is an improvement. But why do we come here with an amendment, in the closing days of the session, on a foreign investors tax bill, and adopt an amendment to give tax re- duction and tax relief and tax exemp- tion to certain groups of people-some of whom I can now identify-and then leave the door open for all those who wish to get In under the wire between now and December 31? Mr. LAUSCHE. Identify them. Mr. GORE. I am asked by the senior Senator from Ohio, to identify them. Will the Senator yield for that purpose? Mr. WILLIAMS of Delaware. I yield. Mr. GORE. This is not secret infor- mation. I have obtained this informa- tion from the Securities and Exchange Commission. I shall read three items-the date of the filing, the name of the fund, and the dollar amount of registustion. October 18, 1965; Science & Technology Exchange Fund, $5 million. December 20, 1965, Third Presidential Fund, $20 million. December 20, 1965, Fourth Empire Fund, $20 million. March 3, 1966, Second Federal Street Fund, $50 million; March 22, 1966, Life Stock Ex- change Fund, $25 million-and Senators will note that they are coming fast in the early part of this year-May 23, 1966, Industries' Exchange Fund, $20 million; July 8, 1966, Putnam Exchange Fund, $30 million; July 12, 1966, Fifth Empire Fund, $14 million; July 14, 1966, Exeter Second Fund, $40 million; July 15, 1966, First Atlantic Fund, $1 million; July 25, 1966, Second Diversification Fund, $29,- 999,900. And the door is left open for others to come in. Who knows, when we give absolute assurance by law that they will be ex- cused from payment of any tax whatso- ever upon their capital gains, how many are now standing by, just waiting for the President to sign the bill, then to file their plans and to take advantage of this loophole we would write into law for this definite period? Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. LONG of Louisiana. I wonder If the Senator would be so kind, since he has read off the list of swap funds, to disclose how many were covered in the regulations put out by the Treasury, and, therefore, are not involved in this legis- lation at all? The Senator said that there is a loophole. Would the Senator explain how many were approved by the Treasury? Mr. GORE. I do not have that infor- mation. Mr. LONG of Louisiana. If the Sena- tor does not know, why does he- Mr. GORE. I have here the date of filing of the registration statement with the Securities and Exchange Commis- sion, the name of the fund, the shares registered, the price per share, and the dollar amount of registration. Mr. President, I ask unanimous con- sent that the table to which I have re- ferred be printed in the RECORD. This is the source of my information. There being no objection, the table was ordered to be printed In the RECORD, as follows: 1934 PAGENO="0783" Num- her * Date of filing registration statement with SEC Effective date Name of fund ~ Shares registered Price per share ])ollar amount of regis- tration 1 2 3 4 5 6 7 8 9 10 11 Oct. 18,1965 Dec. 20, 1965 do Mar. 3, 1966 Mar. 22, 1966 May 23,1966 July 8, 1966 July 12,1966 July 14,1966 July 15,1966 July 25, 1966 None Mar. 10, 1966 do May l1,1960 None do do do do do do Science & Technology Exchange Fun& Third Presidential Fund Fourth Empire Fund Second Federal Street Fund Second Federal Street Fund (post-effective amendment) Life Stock Exchange Fund Industries' Exchange Fund Putnam Exchange Fund Fifth Empire Fund Exeter Second Fund First Atlantic Fund Second l)iverslflcation Fund 250,000 400,000 1,000,000 2,000,000 `1, 000,000 $20 50 20 25 25 20 20 25 20 50 25 100 $5, 000,000 20,000,000 20,000,000 50,000,000 50,000,000 25,000,000 20,000,000 30,000,000 14,000,000 40,000,000 1,000,000 29,999,900 1,250,000 1,000,000 1,200,000 700,000 800,000 40,000 299,999 Mr. LONG of Louisiana. Would the Senator explain how many were taken care of by that Treasury regulation? Mr. WILLIAMS of Delaware. I do not have a list; but It is my understand- ing that seven would be involved in this matter. Whether there are others in the same category if approved, I do not know. It is my understanding that one, similar to the seven, had been approved. The Treasury Department thought that it had made a mistake. My opinion was that if the Department had made a mis- take It should reverse Itself and not ex- pand that error. The Treasury said there definitely were seven funds that had reached the stage with application status that they would be affected by what we are doing here today. Mr. GORE. I shall consult with the staff to get that information. Mr. -WILLIAMS of Delaware. The in- formation could be placed in the RECORD. We were told that there 1were seven that were involved. ~ 27588 Mr. LAUSCHE. Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. LAUSCHE. Is the Senator going to proceed to another subject? Mr. WILLIAMS of Delaware. I was going to proceed to another part of the bill. Mr. `McCARTHY. Mr. President, I wish to make a unanimous-consent re- quest. Mr. GORE. Mr. President, I can give the information. Will the Senator from Delaware yield? Mr. WILLIAMS of Delaware. Mr. President, I yield to the Senator from Tennessee [Mr. GORE]. Mr. GORE. lam advised by the tech- nical staff that three of these funds have an effective date and only three. They are: Third Presidential Fund, Fourth Empire Fund, and Second Federal Street Fund. Mr. LAUSCHE. Mr. President. will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. LAIJSCHE. Is the Senator going to turn to another subject? Mr. WILLIAMS of Delaware. Yes. Mr. LAUSOHE. I wish to ask the Sen- ator if this is one of the Christmas gifts or one o~ the grab bags that have been Included ~n the bill, and which have been discussed by Senators and by newspaper columnists? Mr. WILLIAMS of Delaware. The Senator is correct. Mr. LAUSCHE. Are there, other Christmas gifts and grab bags? Mr. WILLIAMS of Delaware. There are, and by no line of reasoning could they be pictured as Important to the balance of payments or having anything to do with the Foreign Investment Tax Act of 1966. It is for that reason I have said that these amendments should be left and that we should go about the business of the Senate, except as to title I, on which there is complete agreement. As to the loss in revenue, the chairman has pointed out that as the bill came from the House there is about a $40 or $50 million loss in revenue, but title I provides for increased revenues of $26 million. In effect, the titles we are dis- cussing would lose around $75 million. That does not include any estimate what- soever for loss in revenue in the swap section we have just finished discussing. Mr. LATJSCHE. Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I yield. Mr. LAUSCHE. Is it not a fact that when the bill came to us, under title I, the argument was that it would give equitable treatment to foreign investors with respect to their tax liabilities, and secondly, If the proposal of the admin- istration was accepted there would be an increase In the tax revenues? Mr. WILLIAMS of Delaware. The Senator is correct. Mr. LATJSCHE. Those are the two main arguments. How does the bill end up? Mr. WILLIAMS of Delaware. The con- ference report estimates a $50 million deficit instead of a $26 million increase in revenue in title I. The bill as intro- duced provided $26 million in revenue al- though it was not advanced by the Treas- ury as a revenue-producing measure. It was advanced by the Treasury as equall- 1935 PAGENO="0784" zation of the tax liability of foreign in- come and bringing it more into con- formity with treaties and our arrange- ments with other countries. I am in complete agreement with that title of the bill as it has been worked out. The conference report is even bet- ter, and it strengthened the bill. I am In complete agreement with that phase of the bill. Mr. LAUSCHE. What will be the loss of revenue from that standpoint when there is taken into account all titles of the bill? Would the Senator say that the amount is about $44 million? Mr. WILLIAMS of Delaware. H.R. 10 would cost about $40 to $60 million. One could only guess in that connection. There are several other sections here which would run the loss figure up $15 or $20 million, and then there is the $26 million increase revenue in title I. I would not quarrel with the estimate of the chairman that the net result of the adoption of the package, as a whole, would be in the neighborhood of $50 million. Mr. LAUSCHE. I commend the Sen- ator from Delaware. I request that he continue his discussion, describing the other Christmas gifts made to special taxpayers by this bill, and the grab bags. Mr. LONG of Louisiana. Mr. Presi- dent, would the Senator yield at that point? Mr. WILLIAMS of Delaware. I yield. I had told the chairman that I would not be too long. Mr. LONG of Louisiana. I appreciate the opportunity to affirmatively explain why we do not agree with the Senator's view that there is a revenue* loss from the operation of swap funds. If one man holds a share of stock which he bought for $1, which is now worth $100, and he puts it in a common fund with another man who had a share of stock in a different company which he bought for $1, which now sells for $100, and they have to pay a 25-percent capital gains tax, they are not going to put the stock in a common fund, but rather, they will hold it in their safe de- posit boxes. That being the case, the Government would get no revenue at all. If they put It in a common fund, the fund would be likely to sell some of it and then the Government gets revenue from the fund. The fund would have the same cost basis as the shareholders when they contributed the stock. Those who argue for the swap funds contend that it makes money for the Government, but the Treasury did not like it and thought it might be a loop- hole because it permits stock diversifica- tion without the payment of capital gains tax. They sought any regula- tion to correct thi~ All we did was to attempt to affirm at a date beginning 6 months to a year later what the Treasury sought to do by its own regula- tion. The Treasury now supports this provision. Mr. WILLIAMS of Delaware. I should like to point out to the Senator from Louisiana clearly what is involved here. Say that A has a million dollars in stock which cost him $1 a share and which on the market today is worth $100 per share. Say that B has a similar investment in another company which cost him $1 a share and its market value is 100 times that. Each wants to diversify his hold- ings so that he will own half the stock of A and half the stock of B. Under existing law if they sell they have to pay a capital gains tax. Under the so-called loophole, by joining together in an ex- change stock fund they will be diversi- fied, each owning a half million dollars of each company. They pay no capital gains tax. There is no possible way to make an estimate as to what would be lost or gained under this loophole. There is no possible way to estimate what any man would do, if. But the point I am making is that there are 90 million Americans today who pay taxes. All except those who are in these seven combines will have to pay the capi- tal gains tax. They want to diversify, and what this bill is saying is, "You seven can go ahead and diversify your real estate holdings, your bonds, and your stocks, and the capital gains tax is waived. They can diversify and will have no capital gains tax to pay. Mr. President, I do not think it is right. Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator from Delaware yield right there? Mr. WILLIAMS of Delaware. I think we have debated this phase long enough. I promised the majority leader that I would confine my remarks to the ques- tion before the Senate today, but I am glad to yield to the Senator from Lou- isiana further. However, I want the RECORD to show that I am not delaying this colloquy. Mr. LONG of Louisiana. I should like to read into the RECORD section 351(a). I should like to read what the law states: (a) General Rule-No gain or loss shall be recognized If property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the ex- change such person or persons are In con- trol (as defined in section 368(C)) of the cor- poration. For purposes of this section, stock or securities issued for services shall not be considered as issued In return for property. Many tax lawyers think that means these swap funds are legal. The Treas- ury wanted to stop the establishment of these funds and its regulations seem to have had that effect since no one can arrange to have the question litigated *without risking large amounts of money. Mr. WILLIAMS of Delaware. I do 1936 PAGENO="0785" not want to discuss~ this all day long. I should like to hurry along and comply with the desire of the majority leader for adjournment. I am well aware of that section of the law. The Under Secretary of the Treasury quoted that same law the time he said it was not ap- plicable to these swap funds on securi- ties but that the section was intended to deal with the situation where one corporation would organize another cor- poration and receive its stock in ex- change for property it contributes to the new corporation. Under Secretary Surrey said it was in no way related to the problem we are discussing today. I think we have d~bated this point long enough. It is a loophole to aid a very small group to avoid its tax obligation. Mr. GORE. Will the Senator from Delaware yield to me long enough to make this observation? I have listened with great interest to the explanations of the distinguished Senator from Minnesota and the distinguished Sena- tor from Louisiana. Their explanations of how the Treasury Is not going to lose money by this amendment reminds me of that intrepid merchant down my way who was not quite satisfied with the condition of his business, so he put on a big sale. During the sale, one of his neighbors came by and said to him1 "How are you getting along?" The merchant replied, "Oh, fine. I am losing money on every item I am selling, but I am making it up on vol- ume." * Mr. WILLIAMS of Delaware. Mr. President, I next want to discuss section 201 of the conference report. This deals with the application of investment tax credit to property used in possessions of the United States. That is the title of the section. When the 7-percent invest'. ment tax credit was first enacted, Con- gress intentionally and very clearly con- fined it to purchases of equipment used in the continental United States. It did not apply to any equipment used by American corporations abroad. There is no argument about that. Congress did that, clearly and inten- tionally. Right or wrong, that is the law. As evidence of that point there are pending before the Committee on For- eign Relations one or two treaties which the Treasury Department first approved, but in light of the recent suspension I think it has withdrawn its support. These treaties would have extended the investment tax credit to American corpo- rations for their investments in certain countries-Pakistan was one, and Israel another. Several others were waiting in line in case one tre~ty was approved. ~P. 27589) This bill deals with investment tax credit on property used by American corporations in possessions of the United States. The section which is before us now carries retroactivity. Let me quote from the summary In the committee report concerning section 201: i. Application of the investment credit to certain property in u.s. possessions-The in- vestment credit is extended to property lo- cated in U.S. possessions provided the prop- erty is owned by a U.S. company or citizen, subject to U.S. tax on its income from pos- sessions would otherwise have qualified for the investment credit, and is not owned or used by U.S. persons who are presently ex- empt from U.S. tax. This amendment Is ef- fective with respect to property placed in service after December 31, 1965. Mr. President, construction of this property started prior to that date and It was put into use after December 31, 1965. Why did they pick this one date, and why was that section so designed? Be- cause it fits exactly one company. It fits, to my knowledge, just one company, the Harvey Aluminum Co., which will get a windfall of about $2 million in tax credit. The tax credit which goes to that company would be retroactive in that this amends the old law to apply to investments of American companies abroad. In other words, at the same time, Con- gress is suspending the 7-percent invest- ment credit for other taxpayers the bill provides a retroactive $2-million invest- ment credit for another company. Un- der the law they could not have obtained such credit, but now it is proposed to permit it retroactively. In addition, I should like to point out the other concession that this company already gets with its investment in the islands. This company in the Virgin Islands has already had approved a 75- percent rebate on its tax on income from its plant in the Virgin Islands for 16 years. That tax subsidy in the Virgin Islands had already been approved. It will be noted that the language of the bill cleverly states that the $2-mil- lion bonus in this bill is deductible from the Income of the parent organization in the United States. The company has shipped equipment to the Virgin Islands, so that means that the bulk of $2-million windfall will be deducted from the top obligation of the parent organization in the United States. The plant itself is al- ready exempt from income taxes to the exent of 75 percent b3f virtue of an agree- ment it has in the Virgin Islands govern- ment. Mr. President, I ask unanimous con- sent to have printed in the RECORD a series of correspondence concerning this project, including one letter from the Secretary of the Interior, one letter from the General Services Administration, and one letter from the Treasury Depart- ment. There being no objection, the corre- spondence wa~ ordered to be printed in the RECORD, as follows: 1937 7 1-297 0-67-pt. 2-50 PAGENO="0786" U.S. DEPARTMENT OF THE INTERIOR, OFFICE OF THE SECRETARY, Washington, D.C., March 8, 1962. Hon. JOHN J. WILLIAMS, U.S. Senate, Washington, D.C. DEAR SENATOR WILLIAMS: The Governor of the Virgin Islands, the Honorable Ralph Paiewonsky, signed an agreement with a sub.. sidiary of the Harvey Aluminum Company on February 8, 1962, looking toward that firm's locating an alumina plant on St. Croix. This agreement, about which you wrote on Feb- ruary 15, does contemplate a plant costing about $25,000,000 to reduce bauxite to alum- ina; the alumina would be subsequently shipped to Harvey's plant at The Dalies, Oregon, for reduction to aluminum. The Legislature of the Virgin Islands ratified this agreement on February 19, 1962, which step was a prior condition to its becoming binding on either party. Contrary to the information which you have received, this move was not made under * my sponsorship, at my suggestion, or with my approval. I. hasten to add, of course, that the foregoing statement does not imply any disapproval on my part, but simply that this was a matter wholly within tl~ie compe- tence of the local government. Governor Paiewonsky has kept me informed since ne- gotiations with Harvey became serious last summer, but we both recognized that the decisions involved could and indeed must be made by the Virgin Islanders' own Governor and their elected representatives. This De- partment has long shared Governor Pale- wonsky's concern about the lack of sufficient industrial and commercial enterprises in the Virgin Islands to afford an adequate living to its population, but decisions on the type of industry to seek, the particular firms, and the specific details of an agreement, are all local matters. As to whether the United States Govern- ment has given its approval to such a project, I would say "No" insofar as the specific agree- ment mentioned above relating to the proj- ect's location In the Virgin Islands is con- cerned. However, Harvey did enter into a still valid contract with the United States in September 1955 which, among other things, provides for the construction of a facility of this nature somewhere. Regarding your questions 1, 2, and 4, we suggest that you may wish to ask these of the Defense Materials Service, General Serv- ices Administration, which is administering the subject contract, DMP-78, because that is the agency with complete, first-hand infor- mation on these matters. You ask, in question 3, if there is any tax advantage to Harvey's locating In the Virgin Islands as opposed to locating in the United States. We assume you mean as opposed to locating "elsewhere" in the United States, since the Virgin Islanders are not only just as American as any other of our citizens, but probably need economic development worse than most of our other communities. Insofar as local tax advantages are con- cerned, we would be unable to make any comparisons, since we take for granted that whatever alternative sites Harvey may have considered in the United States for its plant would also have involved considerable local tax concessions, In accordance with usual In- dustry-attraction practices of many states and local communities. However, we do be- lieve there are two potential financial advan- tages of a non-local nature which should be mentioned. - The first potential advantage is that should the United States import duty on alumina, now suspended, be reinstated, savings would accrue to Harvey through its not having to pay such impost on this alumina. This re- sult would follow from the fact that the Virgin Islands are outside United States Cus- toms area. The second potential tax advantage of a non-local nature would materialize if Har- vey (a) invests at least $15,000,000, (b) pro- cluces at least 50,000 short tons of aluminum, and (c) has a net profit on operations in the Virgin Islands. Under such circumstances Harvey would pay, constructively although this would not be the precise technical posi- tion, an income tax which would be but 25 percent of the Federal income tax it would pay were it to locate in the mainland of the United States. Lastly, you ask If the contract were ap- proved by Interior would it have been done on the basis of need for increased facilities for producing aluminum. Of course Interior has not and will not approve the contract for location in the Virgin Islands. If this con- tract were subject to our approval we would not have given such approval on the basis of present need for more aluminum facilities. We would have referred a decision on such a limited basis to the Office of Emergency Planning, even though we are well aware that there seems to be no need at the present time for increased facilities for producing alumi- num. However, this proposed plant will only produce alumina, replacing that which is presently being purchased abroad, and will not increase at all Harvey's capacity for pro- ducing aluminum. If, however, you are referring to the con- tract executed in September 1955, while In- terior was not involved in such contract, it is our understanding that it was entered Into by the United States because of the then existing or anticipated need for increasing facilities for producing aluminum. Sincerely yours, STEWART L. UDALL, Secretary 0/ the Interior. GENERAL SERVICES ADMINISTRATION, Washington, D.C., May 2, 1966. Hon. JOHN J. WILLIAMS, U.S. Senate, Washington, D.C. DEAR SENATOR WILLIAMS: Your letter of April 4 requests information concerning Government purchases from the Harvey Aluminum Company, now known as Harvey Aluminum (Incorporated), during the past 15 years. We believe you have reference only to those purchases with respect to which General Services Administration has cog- nizance, and the information contained herein has been prepared accordingly. Aside from the possibility of routine sup- ply contracts covering aluminum extrusions which, in any event, would have been on a competitive bid basis and. with respect to which we doubt that you have any interest, there have been only two contracts with the Harvey Company during this period. One of these contracts was evidenced only by a Let- ter of Intent issued December 19, 1950 and accepted by Harvey on January 4, 1951 pro- viding for the construction of primary aluminum reduction facilities in Kalispell, Montana with alumina facilities at a point to be determined in the Northwest and baux- ite facilities, capable of producing 72,000 short tons per annum of primary aluminum, the Government agreeing to purchase if 1938 PAGENO="0787" tendered up to 360,000 short tons of alumi- num, representing 5 years of production. The letter of intent was to be followed by a formal contract but such formal contract was never executed within the time limit prescribed, and accordingly the letter of in- tent expired by its terms. We are informed that the primary aluminum reduction facill- {P. 27590) ties were installed in Montana by a company in which Harvey and the Anaconda Copper Mining Company had interests but such fa- cilities were not covered by any Government contract. The principal contract in which we believe you are interested is numbered DMP-78 and was effective September 13, 1955. It super- seded, however, a letter of Intent issued May 15, 1953, and accepted by Harvey on May 19, 1953. This contract was awarded Incident to the third Government-sponsored aluminum ex- pansion program and was designed to bring into existence primary aluminum reduction facilities capable of producing 54,000 tons of aluminum pig per annum. The primary re- duction facilities have been completed and -are capable of producing something more than than 60,000 tons per annum, so that the primary purpose of the contract has been ac- complished. As part consideration the Gov- ernment agreed to purchase if tendered by Harvey, up to 270,000 short tons of primary aluminum pig over the life of the contract, this representing 5 years of production, if not utilized or otherwise disposed of by Harvey. As of December 31, 1961 the Government had purchased 114,068 short tons at a cost of $57,798,000. Harvey at that date had lost the right to tender 46,130 short tons which tonnage had been used or otherwise dis- posed of by the contractor, which left the Government's remalnlng exposure at 109,802 short tons. Our best estimate, however, based upon Harvey's historic consumption of aluminum in its integrated operations Is that we shall be required to purchase only 101,948 tons of this remainder. The price paid by the Government is in effect market price. While the contract calls for the- lowest published price of the contrac- tor, it provides that if the prices published by any of the three principal producers, the Aluminum Company of America, Kaiser Alu- minum and Chemical Corporation or Reyn- olds Metals Company are lower, the weighted average of the prices published by those 3 companies averaged over the 90 day period preceding delivery shall be the effec- tive price. Under the date of December 24, 1952, Harvey was issued necessity certificate TA- NC-20722 by the Defense Production Admin- istration covering 85% of the cost of con- struction of aluminum, alumina and bauxite facilities estimated at $65,250,000. The fi- nanclal assistance extended by GSA aside from providing a market for up to 270,000 short tons of aluminum, took the form of a guarantee of bank loans up to $65,000,000 for the construction of the primary reduction facilities at The Dallas, Oregon, and facilities for the production of alumina and bauxite if the latter two are undertaken by Harvey. The bank loans covering the cost of con- structing the primary reduction facilities amounted to $44,000,000. The Government obligation to guarantee loans obtained to finance the cost of the alumina plant and ,bauxlte facilities is to guarantee an amount the Government participation in which, In the event of loss, shall not exceed $21,000,000. The contractor has elected to construct such facilities and under the terms of the contract such construction must commence by June 30, 1962. Incident to negotiations concern- ing the election to construct, GSA has sub- stantially completed arrangements to be dis- charged of the guarantee of the reduction portion of the loan, originally $44,000,000, as of March 31, 1962. As you have indicated, the alumina facil- ities we understand are to be constructed In the Virgin Islands, with the bauxite facilities in all probability to be constructed elsewhere. It is these two facilities which would be the subject of the guarantee up to $21,000,000 of bank loans for construction, if requested by Harvey. That company, however, has agreed to use Its best efforts to accomplish the con- struction without the guarantee of loans by GSA. This was a negotiated contract and did not involve competitive bids. Harvey Machine Company, the predecessor of the present contractor, applied for a con- tract during the third Government spon- sored aluminum expansion program in 1952. The company had experience In the alumi- num industry and had obtained a firm power contract and a supply source of alumina. The development of competition in the pri- mary aluminum production field was con- sidered extremely advisable. Accordingly. and upon certification of Harvey by the Office of Defense Mobilization, the contract was executed. In essence the contract terms, particularly as to price and principal fea- tures are the same as the terms included in expansion contracts awarded to Alcoa, Kaiser and Reynolds. If we can be of any further assistance please call upon us. Sincerely yours, BERNARD L. Bourvrr, - Administrator. TREASURY DEPARTMENT, Washington, May 17,1962. Hon. JOHN J. WILLIAMS, U.S. Senate, Washington, D.C. DEAR SENATOR WILLIAMS: This is in re- sponse to your question at the hearings Fri- day, May 11, 1962, on whether the Virgin Islands could be used as a tax haven. You were concerned in particular about Harvey Alumina Virgin Islands, mc., a Virgin Islands corporation which is a wholly owned subsidi- ary of Harvey Aluminum, a domestic corpora- tion. The subsidiary has entered a contract with the Virgin Islands under which the in- ducements, such as free land, and exemption from real estate tax, commonly offered by lo- cal governments in the United States are granted. One of the additional induce- ments granted by the Virgin Islands is a sub- sidy based on income tax liability. In general, the Virgin Islands taxes cor- porations created in the Virgin Islands at full Internal Revenue Code rates on the income from all sources. Under section 934, added in 1960, however, the Virgin Islands may grant subsidies based on the tax liability of a Virgin Islands corporation 80 percent of whose gross Income is from sources within the Virgin Islands and 50 percent of whose gross Income is from the active conduct of a trade or business In the Virgin Islands. Although section 934 in itself would not pre- clude all tax haven operations, Virgin Islands 1939 PAGENO="0788" law provides that the subsidy based on in- come tax liability can be granted only with respect to income from the construction, ownership, or operation of new housing proj- ects, factory buildings or hotels. In the case of the Harvey Aluminum subsidiary a non- taxable subsidy equal to 75 percent of the in- come tax liability over a period of 16 years is granted on the condition that the subsidi- ary construct and operate a plant costing $15 million and produce at least 50,000 tons of alumina from bauxite ore. Such substantial production is not con- sidered a tax haven operation in the case of foreign countries even though the country in which the production takes place grants special write-offs, or reduced rates. Such operations in foreign countries would con- tinue to obtain deferral under H.R. 10650. The Virgin Islands incentive program is com- parable to those provided by many foreign countries. A problem will exist, however, in making certain that the prices paid by the domestic parent corporation to the subsidiary for alumina to be further processed in the United States will not shift to the Virgin Islands income which is properly attributable to the United States. This problem, just as in the case of transactions between other related domestic and related foreign corporations, will be dealt with under the amendments to section 482 made by section 6 of the bill. The Virgin Islands government cooperates completely In providing the necessary infor- mation. Sincerely yours, STANLEY ~S. SURREY, Assistant Secretary. Mr. WILLIAMS of Delaware. Mr. President, I shall quote from the letter from the Treasury Department, in the case of a Harvey Aluminum Co., subsidiary, a nontaxable subsidiary: In the case of the Harvey Aluminum sub- sidiary a nontaxabie subsidy equal to 75 per- cent of the income tax liability over a period of 16 years is granted on the condition that the subsidiary construct and operate a plant costing $15 million and produce at least 50,000 tons of alumina from bauxite ore. Mr. President, in addition, I ask unan- imous consent to have printed in the RECORD a statement issued by the St. Croix Chamber of Commerce released at the time the tax exemption was granted. The chamber of commerce of St. Croix vigorously denounced thO special tax benefits being given to this plant and pointed out that the company was re- ceiving an outright option on 700 acres of land which belongs to the people of the Virgin Islands. There being no objection, the letter was ordered to be printed in the RECORD, as follows: ST. CROIX CHAMBER OF COMMERCE. Re Contract with Harvey Aluminum, St. Croix, Inc. To the LEGISLATURE OF THE VIRGIN ISLANDS, In Committee of the Whole, Government House, Christiansted, St. Croix: The St. Croix Chamber of Commerce is vitally concerned with the welfare of the Virgin Islands, and especially with the island of St. Croix. We have assisted the promo- tion of industries for St. Croix, and have on file letters of appreciation from many or- ganization that we have assisted in their efforts to come here and establish their busi- nesses. Thus, it cannot be said that we are against Industry coming to St. Croix. But, when a company does indicate its intention to come here, we investigate Its plans and determine that its operation will be beneficial to the economic and overall structure of our island. Such an investigation requires a full knowl- edge of the company, Its products, the proc- ess that will be engaged in here, and if it will be good for St. Croix now and for fu- ture generations. The Chamber of Com- merce wholeheartedly indorses the principles outlined by the Governor in attempting to upgrade the employment available to ~ur native sons and daughters, and will do every- thing in its power to help them advance in the economic and social scale. However, we have grave fears that the Governor may be badly mistaken in the results to be achieved by this particular contract. You, the legis- lators, are the ones who must answer to posterity and bear full responsibility for the results. In the case of the present industry, Harvey Alumina of St. Croix, Inc., we have sought detailed information many times from the Governor of these Virgin Islands; from the company direct through Vice President S. Keith Linden; ~nd from you gentlemen. Thus far, we have had a summary of the contract furnished as a press release, talks with Mr. Linden, talks with the Governor, all about generalities-and no detailed in- formation, no copy of the contract and the supporting documents. Mr. Linden tells us [P. 27591) that he is dealing with the Government of the Virgin Islands, not the Chamber of Com- merce; the Governor says that certain mat- ters in the contract are confidential, and that he must protect the interests of the Company against information that mig1~t leak out to their competitors; and further, that he cannot release to us and to the people of St. Croix, the contract and documents until they have been released first to the Legisature-and then become public prop- erty. We were last told this on Tuesday, February 6th, and since that time it has become apparent that delivery of the docu- ments has been delayed from day to day. Last schedule we received was that they were to be presented to you on Tuesday, Febru- ary 13th. It is very apparent that this move was to prevent free access to these documents until too late to study them carefully before tonight's hearing. The Governor says that the Chamber of Commerce should have had a survey made long ago, in response to our request that time be granted now for research by the Arthur D. Little Co. He well knows that the facts from the principals were not made available to anyone. These facts are the basis from which the survey could be made. Now, if this alliance of the Virgin Islands Government and a private enterprise was an outright straight business deal, in which the company proposed to pay a fair price for what the Virgin Islands has to offer and they were prepared to establish themselves in accordance with our laws controlling in- dustry, availing themselves only of such tax advantages as are open to all that qualify under our tax exemption program-there would be little reason to question their mo- 1940 PAGENO="0789" tives. But when the transaction involves an outright donation of 700 acres of land belonging to the people of the Virgin Islands, as well as Krause Lagoon-another area of 150 acres more, payment of 3 million dollars of taxpayers money for a channel to be dug and maintained and used principally by the recipient of the gift of land; and generous tax exemption for a period of 16 years-it becomes a matter of great interest to all the people of St. Croix-and should have more than a passing glance by afl Virgin Islanders. What do Cruzans get in return for this 3 millions of dollars and large area of land? Promises of jobs in an alumina processing plant: 1. If there are Virgin Islanders qualified and available and seeking those jobs-Har- vey agrees that 75% of the entire work force shall be island residents. On opening day, how many Island resi- dents will be qualified, trained workers for anything but common labor? But we are told that Harvey will have a vocational training school that will be open to all corners, whether they are to be em- ployed at the Harvey plant or not. That they will furnish scholarships to top stu- dents whose interest lies in the field of chemistry or engineering. But these prom- ises are not in the Summary of the contract release to the Press. However, we must re- member that a vocational school will offer on the job training. So the plant will have to be in operation months before any Cruzan will be sufficiently trained to be useful. By that time, the entire staff that had to be on hand at the beginning of the operation, because of 6 months residence, will have become Virgin Islands residents by virtue of living and working here. How then can they be displaced? Of course, if the indi- vidual is an imported alien, and that may be the case since Harvey representatiVes have asked our local Virgin Islands employ- ment office for the necessary forms to be filled out to bring, aliens in-it will be an easier substitution. But if the job-holder Is from the States, or from Puerto Rico, and is performing his work satisfactorily and well-will Harvey be ready and willing to fire a trained man and take on a green hand? So-the Cruzan waits for a vacancy! A?so, will the labor union allow this to take place to their members? Perhaps, within a generation, Mr. Linden will realize his ideal to have the plant manned 100% by Virgin Islanders-will we, who are here tonight, live to see his dream come true? 2. We can hope to start receiving full tax payments from the Company after 16 years have passed, and the year 1978 rolls around. In the meantime, we get fractional income taxes from Harvey and the income ,taxes from the employees. Of course, if the employees are Virgin Islanders we would get their taxes from their present source of employment, since there is no unemploy- ment here at present. Immediately, on the start of construction, we can anticipate greater loads on our school, medical and police facilities-so any taxes we get will be consumed at once in this expansion. Weighing the cost of these presumed bene- fits in terms of land and money-can we afford to have Harvey Alumina on St. Croix with us? The Governor states that these concessions are in order because Harvey will spend 25 million dollars for the construction of their plant. The plant will belong to Harvey- not the people of the Virgin Islands. It seems that a better bargain could be driven than Is represented by the present contract. Eliminate the gift of land and the costly channel-the tax Incentive is sufficient. We strongly suggest that you refuse to ratify this contract, and attempt to get more for the people-not give away their heritage. The people of St. Croix are entitled to ,be fully informed on all things that the Gov- ernment undertakes to do for them. These islands are still supposed to be operating as a Democracy-we even refer to the Virgin Islands as "The Show Place of Democracy". In a democracy, the people share in self-gov- ernment, and in self-determination toward shaping their future. The aura of suspicion and mystery that surrounded these negotia- tions from the very beginning makes us wonder if Democracy here is something you can find only in the dictionary! You, our legislators, still have time to re- store the right to the people to proceed in enlightenment-let them know In detail what this deal involves-then hear their opinions and be guided by them. They will accept your decision more readily if this matter is not rushed through. What we ask for is time! ST. Csoix CHAMBER OF COMMERCE, JOHN L. COLBY. FEBRUARY 14, 1962. Mr. WILLIAMS of Delaware. Mr. President, has Congress not done enough for this company? It is already being granted entrance of its products into this country duty free. In addition, the company is excused from 75 percent of its tax liability in the islands. Now Con- gress provides retroactively $2 million in investment credit, which the company could not receive if this section were not included and which could not be received under existing law. The argument is made that it has since been proposed that perhaps the provision should be extended to the islands. Perhaps so; I do not argue that. I personally would support such a proposal, prospectively. I so stated in committee. But I do not agree that retroactively such favoritism should be shown to one company. The argument that this provision is tailored for the benefit of other investments in the islands is not correct. If it were, why is the effective date for the completion of the buildings after December 31, 1962? Certainly this is tailor made for Har- vey Aluminum. Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator yield? Mr. WILLIAMS of Delaware. I prom- ised to yield to the Senator from OhiO [Mr. LAUSCHEI. Mr. LONG of Louisiana. The Senator asked a question. I would like to answer it. Mr. WILLIAMS of Delaware. I will yield to the Senator in a moment, but I yield first to the Senator from Ohio [Mr. LAUSCHEJ. Mr. LAIJSCHE. Mr. President, I shall ask several questions, trying to punctu- ate what the Senator from Delaware has 1941 PAGENO="0790" said. When the 7-percent investment tax credit was adopted, it was specifically intended to have it applicable only to operations within the United States, and not in our territorial possessions. Is that correct? Mr. WILLIAMS of Delaware. That is correct. Mr. LAUSCHE. That has been the law ever since the tax credit bill was passed. This year, in this session, we have suspended the operation of the 7- percent investment tax credit by ap- propriate legislation. Am I correct in that statement? Mr. WILLIAMS of Delaware, That is correct. Mr. LAUSCHE. In spite of the sus- pension of that law, this bill contem- plates to expand the operation of it, go- ing back to December 31, 1965. Is that correct? Was it ever mentioned by the Treasury Department until the committee wrote the provision in the bill,, as far as the Senator ithows? Mr. WILLIAMS of Delaware. To my knowledge, it was not mentioned. The Treasury Department was strongly op- posed to this proposal when it was put in the bill, although as the Senator from Louisiana has pointed out, the Treasury Department later reversed its position. I understand the Treasury Department yesterday endorsed the whole package; I have not heard what their position is today. Mr. LAUSCHE. Has the Senator identified who the specific beneficiary of the provision is? Mr. WILLIAMS of Delaware. The Harvey Aluminum Co., in the Virgin Is- lands, was the particular beneficiary of this provision, and it was so tailored to give them a $2-million windfall. Mr. LAUSCHE. Does the Senator have any knowledge of anyone else who is to have the benefits from the provi- sion, so far as the testimony now shows? Mr. WILLIAMS of Delaware. Under this section, so far as I know, there are no others. I shall yield to the Senator from Louisiana [Mr. LONG] in a moment. He may know of others, but I do not. Mr. LAUSCHE. Is this another one of what we call gifts that are to be put under the Christmas tree of 1966 for [P. 27592] specific enterprises ~that are contem- plated to be benefited? * Mr. WILLIAMS of Delaware. This Is the big red ball we see over on the side of the tree. Mr. LAUSCHE. This is that gift. So the Senator has identified two, instances. Mr. WILLIAMS of Delaware. Yes. I am not sure whether the Senator from Louisiana supported this when it went into the bill. I yield now to the Senator from Lou- Isiana [Mr. LONG]. Mr. LONG of Louisiana. Mr. Presi- dent, the Senator from Delaware says he does not think it is necessary to have this for our possessions. .1 did not know that the Harvey Aluminum Co. was the beneficiary. It does not have invest- ments In Louisiana that I am aware of, and I do not know the president of the company. I understand the Treasury has negotiated tax treaties with two less developed countries and are in the proc- em of negotiating more which will grant this benefit to other less-developed countries. If this benefit is going to be given to less developed countries I think we may as well give those benefits to our possessions-Puerto Rico, Guam, American Samoa, and the Virgin Is- lands. Whenever such a bill is passed, it is usually made effective January 1, even though the law is net passed until July, August, or September. I remind the Senator that the same thing was done for the chickens. When that law was passed it was made effective retro- actively, because that was the logical and convenient way to do it. In that case it was retroactive more than a year if I remember correctly. Mr. WILLIAMS of Delaware. I have no objection to bringing a few chickens in this discussion. Maybe we could give the taxpayers who were forgotten a good chicken dinner. The Senator from Louisiana may have forgotten, but the measure he refers to dealt with an exchange in Selbyville, which is a co- operative and which has first been de- termined to be a tax-exempt coopera- tive. Suddenly the rules were changed. The total amount involved was around $30,000. Those proceeds of this organiza- tion go to the University of Maryland and the University of Delaware. There are on stockholders involved, and no salaries paid to the officers. The Treas- ury Department supported the correc- tion. That proposal had nothing to do with the poultrymen in Delaware. So let us get back on the subject of the pending grab bag or Christmas tree bill, as it has been designated. Mr. LONG of Louisiana. There was a retroactivity problem in that bill. That is all I was saying. When we fix an ef- fective date, it is not unusual-In fact, it Is almost typical-that it be effective the first of the calendar year in which we take the action. Mr. WILLIAMS of Delaware. I want to hasten with my statement, in line with my agreement with the majority leader that I would not take long. I have al- ready taken longer than I had intended. I shall conclude as fast as I can. I repeat, this tailor-designed piece of legislation is designed to take care of one company on a retroactive basis, esti- mated to involve $2 million to be applied as a credit against the tax on earnings created in the United States. This credit is on an investment the company is mak- ing in the islands, where it already has a 1942 PAGENO="0791" 75-percent exemption on income taxes as well as a very favorable duty treatment. This represents the big red ball we see on this Christmas tree. This section has nothing to do with the balance of pay- ments. It has nothing to do with taking care of the elderly people, who were pa- raded on the floor when the bill was passed, all of whom were forgotten in the conference. It has nothing to do with the average American taxpayer, except that the 90 million taxpayers will make up the $2 million being given to this one company. Mr. GORE. Mr. President, will the Senator yield? Mr. WILLIAMS of Delaware. I yield to the Senator from Tennessee. Mr. GORE. Since the intended bene- ficiary of the amendment under discus- sion has been identified, I would like to remark that it is a fine company. I do not wish my remarks in any way to be considered as critical of that company. The company has a large operation in the State of Tennessee. Many of its officials are my personal friends. Some are my political supporters. I decline, however, to support the amendment. I consider the amendment special interest legislation-only one in- terest being the beneficiary. The fact is that the plant on which this amendment would retroactively give to this corporation the investment credit is already completed, already in opera- tion. It was constructed without the expectation of this benefit, and without relationship to the benefit being in exist- ence within the continental United States. So this is, it seems to me, clearly unjustified tax favoritism to one corpora- tion; and I say that in view of the fact that its officials are friends of mine, and it has operations in the State of Tennes- see. Mr. WILLIAMS of Delaware. I thank the Senator from Tennessee, and I con- cur. What I am saying is not criticism of the corporation itself; it is criticism of the Congress if it sees fit to make this gift, because there Is no logical reason for It that I can see. This platit is al- ready constructed. It is ready for op- eration. It was constructed by the com- pany with the full knowledge and under- standing that under the law they would not receive the investment credit. Now, since we are approaching the Christmas holidays, in a spirit of great generosity Congress apparently proposes to give that company $2 million which they never even expected and for which there is no basis whatsoever. Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator yield at that point? Mr. WILLIAMS of Delaware. I yield to the Senator from Louisiana. Mr. LONG of Louisiana. Mr. Presi- dent, we made the original investment tax credit provisions in the Revenue Act of 1962 effective as of January 1, 1962, the beginning of that year-although the measure was not enacted until about 9 months later. To that extent, the orig- inal investment credit provisions them- selves were retroactive. I voted for this provision in the com- mittee. But I was voting for It having no idea who might have built a plant in the Virgin Islands, Puerto Rico, Ameri- can Samoa, or Guam. If the Senator is in a position to assure us that nobody except one company has built anything in the Virgin Islands, Guam, American Samoa, or Puerto Rico that qualifies for this credit provision, if he Is in a posi- tion to assure us that nobody else has built a plant in any one of those Ameri- can possessions before October 10 of this year, he is certainly more knowledgeable than I am. It never occurred to us to look into it. It seemed to us that if Americans aie to receive the credit for investing money in underdeveloped countries, in justice itnd equity, we ought to treat Americans who invest money in our own possessions just as fairly. But I repeat, if the Sena- tor has found out that only one company has built anything subject to the invest- ment credit in the Virgin Islands, Puerto Rico, American Samoa, or Guam, he is more knowledgeable than I on this sub- ject. Mr. WILLIAMS of Delaware. Mr. President, all I am saying is that I have checked and been advised by the De- partment that as far as it is aware there is only this one company involved. At least I will say this: It is tailor de- signed to fit the pattern of this one com- pany. As to the Senator's argument of why not give the investors in these Amer- ican possessions the benefits we give un- dbr treaties to investors in foreign coun- tries, I should like to point out to the Senator that not one treaty has been ratified wherein we give the 7-percent investment credit to investors in foreign countries. We rejected one, the treaty with Pakistan, In our committee. That Brgument is not valid. Mr. LONG of Louisiana. Of course, those treaties are pending before the For- eign Relations Committee, in the sub- committee so ably headed by the Senator from Tennessee [Mr. GORE]. But let me point out to the Senator that he may be in error when he says he is sure- * Mr. WILLIAMS of Delaware. I beg the Senator's pardon. If there is an- other company for which the amendment would provide a $2 million gift, I should like to know who it is. The Depart- ment has advised me that they know of only one. Mr. LONG of Louisiana. Perhaps the Treasury knows of only one now; but should other builders come in and apply for the investment credit, the Treasury may become aware of more than one. I know we have had some wateh assem- 1943 PAGENO="0792" b:.y people going over to Guam; we just passed a bill relative to their quota. I would think we would find a number of people who have put people to work building plants in the Virgin Islands or Puerto Rico-there are a lot of small ill- dustries going up there. But I take the Senator's word for it that there is one company for sure which has invested ~P. 27593J some money and put people to work down there. I understand that is the Harvey Aluminum Co. My only regret is that they did not do it in Louisiana. Mr. WILLIAMS of Delaware. The Senator mentions the watch company. This is another red herring. It makes no difference whether they own a com- pany in Guam or anywhere else; the in- vestment credit has been suspended as of October 9, 1966. No one can question but that this amendment is tailor- designed to fit one company, the Harvey Aluminum, which stands to receive about $2 million. Mr. LONG of Louisiana. Will the Senator yield? Mr. WILLIAMS of Delaware. I will yield to the Senator, but I do not want him later to be saying that I delayed the adoption of the conference report because I am yielding to him all the time. Mr. LONG of Louisiana. The Senator is most kind. This amendment is not tailor Iriade to fit one company. In gen- eral, any company, as I understand it, that builds a building in those American possessions gets the same type of con- sideration as far as investment credit is concerned that it would get if it had built it in the United States. Mr. WILLIAMS of Delaware. I shall not argue with the Senator whether it is tailored desiged or not. I will say most emphatically that the date selected fits exactly that one case. It would be a series of strange coincidences if all of that just accidently happened exactly that way. I repeat: It did not leave them out. Mr. President, I see no need to pursue the question any longer. We have dis- cussed it in detail. This was to be a Foreign Investors' Tax Act. I cite just a few other examples of special treat- ment. Increased depletion allowances for clam and oyster shells, gravel and slate, and certain types of alumina-bearing clay are all in this grab bag. Those are examples of many presents in this bill, every one of which is tailor designed to fit specific cases. Such matters do not belong in general legislation; they should be handled as private bills, if at all, and voted on as such. When I objected to these extraneous matters during the debate on the bill when it was before the Senate I was described as the most hardhearted in- dividual in the Senate. The Senator' from Louisiana asked huw one could op- pose a measure which would do so much for the old people. For a while I thought we were going to turn the Senate into an old folks home, so many examples were brought forth of these elderly peo- ple, starving to death, needing doctors, medicine, drugs, and unable to get them without the original bill then before us. That was the argument then. Mr. President, what happened? They deleted every one of these items in the bill. Even the provision dealing with the elderly people was deleted. The con- ferees kept every item in the bill that takes care of some special individual or company, such as the gift of $2 million to the Harvey Aluminum Co. and other such special group amendments. This is a special bill for special groups. I guess that the elder citizens will have to wait until another election approaches, and then they will hear more concern expressed for them, or perhaps if we ad- journ between now and election day they will hear much said on the campaign trail about how the administration wanted to do something for them. Such promises and expressions are a political farce. They traded off and deleted every item that would benefit the elderly people in return for the acceptance of these grab bag amendments. The conferees brought back every item that takes care of some special interest or some special group by way of a tax reduction. Such hypocrisy. Mr. LAUSCHE. Mr. President, is it not a fact that when the Senator offered his amendment to strike from the bill all of the titles except title I, the senior Senator from Tennessee [Mr. GOREL I believe, suggested that he carry that amendment into effect except that he allowed to remain in the bill the section providing aid to the aged in the pur- chase of drugs and medicines, and that in pursuance to that suggestion the Sen- ator from Delaware persisted in his amendment but agreed to allow the pro- vision for the aged to remain in the bill. Mr. WILLIAMS of Delaware. The Senator is correct. My first proposal was to strike the three titles which did not deal with the Foreign Investment Tax Act. However, after I had heard all. the eloquent pleas to take care of these elderly people and after I had seen so many crocodile teams shed, I thought perhaps the situation was so bad that we ought to yield and permit them to keep in the provision for the elderly people. Accordingly my amendment was amended to strike out all except that part pertaining to the elderly people. We lost on that amendment. The meas- ure went to conference, and, lo and be- hold, the conferees took out all the provi- sions benefitting the elderly, which they had argued for, and they retained all of the special privilege amendments. I re- 1944 PAGENO="0793" peat, they dropped out every single item dealing with the elderly people. Frankly, I do not know if they have stopped their shedding of tears or not. Perhaps they are trying to forget their own speeches. After reading the RECORD I was amazed when I learned that they had deleted that section. Why do we place top priority on a de- pletion allowance for clay, clam sheels, and oyster shells and include a special provision for a $2 million gift and to just one company, then another provision to save taxes for seven special operations in the stock "swap" arrangements? Why are these special provisions in- cluded in a bill which deals with the For- eign Investment Tax Act? The Senator from Tennessee is going to discuss H.R. 10. But that proposal rep- resents a $60 million tax reduction at a time when we are talking about increas- ing taxes after the election. Let us face it, we are operating today with an aver- age deficit of approximately $600 million or $700 million per month. There is no question in the minds of many that as soon as the votes have been counted the President will suddenly de- cide that he has information which will necessitate his increasing taxes. Yet, today Congress isreducing taxes for certain special groups. I think it is wrong. Earlier I supported a tax increase bill providing for the suspension of invest- m'ent credit because I thought we had to do something to combat this inflation. I think inflation is a serious threat. I think that the President has not gone far enough to combat this threat. My criticism does not concern what he did, but it does concern his failure to recog- nize the actual situation which exists and the cost of the war, and so forth. Why should we vote here for a tax reduction for a handful of people who happen to have lobbyists in the corridors to get their proposals presented before the com- mittee when we all know that in a very short period the chances are 10 to 1 that the administration will be increasing the taxes for the rest of the people? That is the reason that the pending bill has been referred to as a grab bag. I did not coin the word. The Wall Street Journal, which is certainly not unfavor- able to business, referred to the measure before us a~ a grab bag. That reflects on the committee that reported the measure. The measure has also been referred to as a Christmas tree. I have tried to outline and describe some of the balls that are on this tree. In my 20 years of service in the Sen- ate this is the most indefensible measure ever reported by the Finance Committee. In another section $60 million is pro- vided~ for presidential elections. We al- ready have on the books a proposal pro- vidiilg that no political party can spend more than $3 million. That provision applies to any political party. If a party were to spend more it would be in viola- tion of the law. The pending bill does not change that law, yet it would supply $60 million, $30 million for each party, for campaign ex- penses. The statute says that it would be illegal if a political party were to spend more than $3 million on such a cam- paign. Certainly the measure should wait until next year and be given more care- ful study. * The provision does nothing to take care of the needed election reforms. The measure does nothing whatsoever about this. I know, and the Senator from Ohio knows, that the mood of Congress is such that they are never enthusiastic about passing election reform measures. The only way to get a reform measure through Congress is to tie it to the money. I say that as one who feels that we need some kind of legislative pro- posal to finance the Federal election campaigns. I think the Federal Government has a responsibility, and I think that a mean- ingful law could be worked out. In addition, I disagree completely with the theory, advanced under this pro- posal. [P. 27594] If an individual citizen wants to con- tribute to the Republican Party in order to do so he must contribute an equal amount to the Democratic Party and 50 cents to the Republican Party. If a Democrat wants to contribute to the Democratic Party he must contribute an equal amount to the Republican Party. I have advocated laws which would en- courage greater participation in the gen- eral elections on the part of the small wage earners of America. I have been sponsoring a proposal to encourage greater participation in the general election. I think it would be helpful not only to raise money but, even more important, I think it would be healthy in that it would encourage the American people to take a greater inter- eat in their government. If we are going to do that, why should John Doe not have the right to make a contribution to the political party of his choice? If a man wants to contribute to the Democratic Party, he has a right to con- tribute to the Democratic Party, and I think he is a better citizen for having contributed to the national elections. I would, of course, rather that he con- tributed to the Republican Party, but I know that he is a better citizen if he takes an interest in the campaign, and contributes to the party of his choice. Why should we provide by law that 1945 PAGENO="0794" one cannot contribute to his own party without contributing to the other party? Furthermore, we do nothing in the pend- ing bill concerning the reform measures or the accounting of expenditures. We do nothing to change the law that limits the amount of money that can be spent, the $3 million, in the presidential cam- paign, and we do nothing about the abuse in congressional elections. The Senator from Louisiana paints out that if he could get the presidential campaign financed he may pick up the various $1,000 contributions now being made to the presidential campaign. This Is not solving the problem. We are merely moving the problem around. We need a general revision of our elec- tion laws in the country. However, let us do it from the bottom up and. put some teeth in the measure. Let us not pass a bill to provide that an additional $60 million could be spent iii the same loose manner. This measure would o~ily aggravate the current situation. I yield to the Senator from Ohio. Mr. LAUSCHE. Mr. President, I want to get back to the argument made on the measure when it was before the Senate several weeks ago. I contemplate, before this debate Is concluded, reading the RECORD showing that the principal argument was made for the bill because it contained provi- sions giving relief to the aged in their buying of medicines and drugs. I ask the Senator from Delaware whether it is not a fact that practically every argument made in support of the bifi several weeks ago highlighted the fact that it contemplated helping the aged. Mr. WILLIAMS of Delaware. The Senator is correct. Mr. LAUSCHE. And because of those arguments, Senator GORE, Senator WIL- LIAMS of Delaware, and others concluded to challenge the bill, but not to chal- lenge the provision giving aid to the elderly. Now, what has become of the main part of the argument-that is, that we will help the aged? How are they helped by the bill as it has been brought back by the conferees? Mr. WILLIAMS of Delaware. There Is not a single comma or a single word In the bill which would in any way help them at all. Quite the contrary. As taxpayers they will have to pay addi- tional taxes to make up for these Christmas gifts that are being given to the select groups. Mr. LAUSCHE. That Is, the section of the bill that provided help for the aged is gone? Mr. WILLIAMS of Delaware. They are the forgotten people of the Johnson administration. Mr. LAUSCHE. What has happened to the other sections of the bill which provided special grants to privileged taxpayers? Mr. WILLIAMS of Delaware. Every one of the so-called special privilege amendments was retained in the bill in some form. Mr. LAUSCHE. And the Senator dis- cussed the sections of the bill that place the mineral depletion formula within the principle for the purpose of paying taxes. Is it not a fact that there is now in the bill an expansion of the grants made to the harvesters of minerals? Mr. WILLIAMS of Delaware. The Senator is correct-to those producing or processing clam shells, oyster shells, and various types of clay. Mr. LAUSCHE. And tile? Mr. WILLIAMS of Delaware. And tile. All are the beneficiaries of a tax reduction in the form of additional de- pletion allowances in this bill. Mr. LAUSCHE. Did the administra- tion originally oppose the expansion of that principle, or at least did not request that it be in this bill? Mr. WILLIAMS of Delaware. They opposed it. Mr. LAUSCHE. They opposed it. So that now the fishermen, the harvesters of oysters and clams, and the miners of clay and the manufacturers of tile are given a special tax consideration by the bill as we passed it and as recommended by the conferees? Mr.. WILLIAMS of Delaware. The Senator is correct. To illustrate how absurd this situation is, why would anyone claim a depletion allowance on clam and oyster shells? If that is to be allowed why not claim the depletion allowance on the clams and the oysters? Why not claim It on fish? They can be depleted the same way. Mr. LONG of Louisiana. Mr. Presi- dent, will the Senator yield? Mr. WILLIAMS of Delaware. I will yield in a moment. I realize the sensi- tivity of clam and oyster shells to the Senator from Louisiana, and I shall yield in a moment. The depletion allowance might just as well be claimed on fish. Mr. LAUSCHE. And on lobsters. Mr. WILLIAMS of Delaware~ And lobsters. But I say that I see no argument for it. To the extent that the depletion rates are changed In this bill it repre- sents a reduction in the tax liability for those particular companies that are en- gaged in that operation. There is~ no argument about that. Personally, I think it is wrong. This is initiating a tax reduction for these companies on the eve of an election, when we all know that shortly after the election Congress may be confronted with a Presidential request for a tax in- crease for all other taxpayers. Count the votes and then raise taxes is the slogan of this Great Society. 1946 PAGENO="0795" Mr. LAUSCHE. The Senator has made statements about a Christmas tree with its colored bulbs. On this Christ- mas tree are there or are there not col- ored bulbs paying tribute to the harvest- ers of oysters and clams, the miners of clay, and the manufacturers of tile? Mr. WILLIAMS of Delaware. There are. Mr. LAUSCHE. Is this another of those grab bags which are written about in the newspapers? Mr. WILLIAMS of Delaware. This Is the "Grab Bag Act of 1966." However, I think I made one statement earlier that perhaps should be corrected to a certain degree. I said that there was nothing in this bill that would affect the elderly of America, and that is 99.9 percent correct because the conferees struck out of the bill all those provisions which would help them. But there is one section, section 214, in which the committee did reduce the excise taxes on hearses by 3 percent a.s compared with existing law, and per- haps that is the contribution to which the Senator from Louisiana [Mr. LONG] was referring. Mr. LAUSCHE. I did not hear what the Senator said. Mr. WILLIAMS of Delaware~ The conferees reduced the excise tax rate on ambulances and hearses by 3 percent as compared with existing law, and that is the only contribution that they made to the elderly. Mr. LAUSCHE. A final question: The provision dealing with health to the old is gone? Mr. WILLIAMS of Delaware. It is * gone, yes. - Mr. LAIJSCHE. But the provisions dealing with help to the harvesters of oysters and clams, the miners of clay, and the manufacturers of tile is still in? Mr. WILLIAMS of Delaware. Those provisions are still in. Mr. LATJSCHE. And those provisions provide added tax relief to those special groups? Mr. WILLIAMS of Delaware. They do. To begin with, it was not proper that these items be inserted as a rider to a bill which was designed to amend and modify our method of taxing income of foreign investors. Mr. President, I yield the floor. (At this point Mr. IN0UYE assumed the chair as Presiding Officer.) Mr. LONG of Louisiana. Mr. Presi- dent, I should like to straighten out a few matters on which there seems to be misunderstanding. [P. 27595J The Senator made the statement that this bill provides ambulances and hearses an additional tax break. Perhaps he would like to revise his remarks to cor- rect himself. Ambulances and the ambulance- hearse combinations already have the benefit of the 7-percent excise tax rate that passenger cars have. But if a man buys a straight hearse, which is not part ambulance and part hearse, he must pay a 10-percent tax. It was the thought of the Senator from Indiana that we ought to give to a man who buys a hearse the same tax treat- ment that we give to someone who buys an ambulance or a combination ambu- lance-hearse. So, in justice to under- takers, we accepted the amendment of the Senator from Indiana. The Treasury thinks that it is only fair that these vehicles should be taxed alike, and so do we. - Mr. SMATHERS Mr. President, will the Senator yield? Does this constitute relief for a dying industry? Mr. LONG of Louisiana. I suppose It would be viewed that way. Perhaps the Senator from Ohio would like to revise his remarks. He referred to the harvesters of oysters. Mr. President, we do not do anything In the bill for the harvesters of oysters. Involved here, so far as oysters are con- cerned, are not the oyster shells that have oysters in them, but the ones who have not seen an oyster for many a year. These are the empty shells beneath the sand that someone digs up, washes and cleans, crushes and from which cement Is made. We would give them this con- sideration, which amounts to about a half million dollars in revenue. Mr. President, the reason that we give them this consideration is that the peo- ple who are taking these oyster shells and making cement from them are com- peting with people who make cement from limestone. It is a matter of grant- Ing the same depletion allowance to min- erals which are used for the same purposes. Both are depletable and both should have the same allowance. The Treasury Department said if there Is going to be depletion at all, this arrangement would be about as good as any. It provides tax equity between the industries. Mr. President, with respect to this talk about discriminating In favor of the Harvey Aluminum Co., I wish to say that no one raised the point at the time we were passing the investment tax credit law in 1962 and the amendment to it in 1964. I do not recall if any one from any U.S. possession protested the exclusion of the Virgin Islands, Puerto Rico, American Samoa, and Guam. I wish to ask the junior Senator from Florida if he has any recollection of such a protest. Mr. SMATHERS. I do not recall any such protest. As a matter of fact, it has been amazing to some that this legisla- tion has not been passed before. We have many programs calculated to assist our possessions and we have provided programs calculated to hem the develop- 1947 PAGENO="0796" ment of Puerto Rico. We have our PHA program there. Most of the bootstrap operation in Puerto Rico which was so ably run by former Governor Mann was successful and most of that success re- sulted not only from his leadership but from the fact that the United States was very generous in its programs directed toward Puerto Rico. We did not give to the people who made investments in Puerto Rico the ad- vantage of the 7-percent investment tax credit when we instituted the program in 1962. An amendment in the bill before us would propose that we give the same consideration to those people operating in Puerto Rico. This provision was discussed in our committee in connection with H.R. 13103 and we took action on it. The House conferees accepted the provision. No- body charged that one company was go- ing to benefit over another company. Anybody who operates in Puerto Rico or any U.S. possession would get the same consideration. Mr. LONG of Louisiana. I cannot re- call anyone raising the point on when this bill was pending on the floor that this matter would benefit the Harvey Company. So far as I am concerned it does not make any difference who is go- ing to be benefited. It is a matter of tax equity. The Treasury Department and the State Department have negotiated treaties with less developed countries, trying to give the, same consideration to Americans who invest money there. I am sorry that we cannot vote on those treaties in this Congress. The Senator from Tennessee kept that inside his sub- committee for quite a while, which he is privileged to do, and I respect his rights to disagree and to study it as long as he desires. Mr. President, there are one or two other points that should be made. The Virgin Islands has its own tax system and in this it presently allows exemp- tions to some companies to encourage them to operate there. This provision would not help these companies because they pay no tax to the United States. This provision would, however, make the investment credit available to U.S. companies owning property used in the possessions and receiving rental income from this property. The investinent credit, in effect, helps only when the income from the property is included in the U.S. tax return. A limitation in the bill denies the invest- ment credit to any U.S. corporation which presently receives the benefit of income tax exemptions under the present law. It is said that this provision is retro- active. It goes back only to the first of this year. This is customary in reve- nue legislation. This is also true when we passed the investment tax credit originally, it was retroactive to Janu- ary 1. It was effective as of the first of the year, even though we passed the law later in the year. Mr. President, every provision here is general law. It is not tailored to any- body. The presidential campaign financing proposal would not make anybody put $1 in a campaign fund, but it would permit him to do so if he wants to put in a dollar which would be divided 50-50 be- tween the major parties. This would help to assure that a presidential candi- date would not be subject to any im- proper influence of the large money in- terests who otherwise would contribute to his campaign. If, under this proposal, taxpayers wish to share the burden of the cost of government and make a good government contribution, fine. As a matter of fact, my thoughts on the subject had received inspiration from the Senator from Tennessee [Mr. GORE], who now seems to be so strongly op- posed to this proposal, although he did support it in committee at one time. The proposal is the result of our com- mittee meetings. We studied the mat- ter, conducted hearings, and promised the Senate that we would report such a bill. Senators will recall that when the debt limit bill was before the Senate, the Senator from Delaware [Mr. WILLIAMS] made a strong argument for the Presi- dent's suggestion of a $100 tax deduction for persons who contributed to cam- paigns. That would have cost much more money than the solution that the committee recommended. The esti- mate was at least $100 million. The Senator from Delaware chastised some of us, in a quiet, friendly way, saying that we were not supporting the Presi- dent's recommendation of a $100 deduc- tion. But some of us felt that that would not do anything but give some of the wealthy who were already financing campaigns an advantage that they did not need. So we rejected that Idea; we turned it down. I believe that at one time the Senator from Delaware offered me a compromise: that he would take half of my proposal if I would take half of his. This provision has been studied by the President and the administration, who I think feel that It would be a good way to proceed. Perhaps it can be improved upon. Anyway, I hope we can make a start. The plan can be studied for Im- perfections, and refinements can be made if they are desirable and can be included in the law in the future. There are al- ready general criminal prohibitions in the Federal statutes to cover a situation of this sort. Any little thing that might have been overlooked could be perfected. Not the slightest bit of difference would be made, revenuewise, until September, 1968. Then if it is thought that a fraud statute should be enacted, especially tailored to presidential election campaign fund ar- 1948 PAGENO="0797" rangements, one could, of course, be drafted to take Into account every pos- sibility that the mind of man could con- ceive. If someone had an idea that perhaps the President should not be permitted to say something nice about a Senator or a Representative, or even something that might hurt him in some areas, that could be suggested as a refinement. The Senator from Illinois [Mr. Douc- LAS] who is a cosponsor of the proposal thinks that all private contributions to major parties in a presidential cam- paign should be outlawed. That might very well be a good suggestion; but we need not cross that bridge just now. We [P. 27596] can take a good look at it and let the committees of the Senate and House consider it, knowing that we have in- itiated a plan to improve election cam- paigns by eliminating improper influence and permitting income-tax payers to make a contribution. It is felt by the administration and by a majority of Members of the Senate and House that this is the most con- structive step that has been made along this line in a great number of years. It Is one thing we will have done to help to prevent improper influence in gov- ernment. I Mr. SMATHERS. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. SMATHERS. The Senator from Louisiana well knows my views on the subject, but I should like, once again, to commend him for having taken the ml- tiativein this particular matter. It is a proposal that has been discussed for years in an effort to determine how we can remove suspicions of bad influence from presidential campaigns. Different people have come in with different ideas. The distinguished Sen- ator from Tennessee, as I remember, sev- eral years ago, had a suggestion along this line. I had one. Hearings were held, but on that day I was unable to be present so I presented a statement as to how I thought it should be done. Other Senators presented their views. The dis- tinguished Senator from Delaware was one of those most enthusiastic about a tax incentive approach. He adopted the same approach which the President him- self had sent over. After much give and take, the Senator from Louisiana came in with what everyone finally concluded was a most workable and a most practical solution to the problem. It was to be totally voluntary, yet it would do the job and make it possible for men running for high office to be absolutely free from the suspicion that some one individual or some segment of the economy, or some person-if I may be permitted to suggest it-with an ulterior motive had come in and contributed a large sum of money and made it possible, because of that cOitributlon, to influence the outcome of election. That can no longer happen with this kind of legislation. Thus, I highly commend the Senator from Louisiana. In all candor, I think *that this is almost the most important part of the bill. If we had not done it this way, It is my humble judgment we would be debating this kind of thing for the next 10 years. For years, the Senate has been talking about the need to change the electoral college system, which everyone knows is outmoded and outdated and leads to all kinds of injustices. Every Senator thinks it should be changed according to his way of thinking, and I think that if this situation prevails, we will never get it corrected. It will be my prediction that if we did not pass this campaign financing pro- posal now, we would be debating it for the next two generations, and probably would never accomplish anything along that line. So I am happy that It is being done. If, in practice, evidence develops that it is not working as well as we like, then, on the basis of experience, we can correct it. I happened to be the chair- man of Democratic campaigns on three occasions for a period of 6 years, and I can testify to the fact that we need something in this field. This is a major start. While it does not yet go down to the areas of the congressional level, nevertheless, when it goes into effect at the highest level, the No. 1 level, the level of a presidential campaign, I think it will give us experience so that in time we might be able to place it into the law with respect to other political campaigns. Thus, I want to commend the Senator from Louisiana again for his energy in pursuing this particular program, and I know that it will redound to the better- ment of this Republic. Mr~ LONG of Louisiana. I thank the Senator very much. Let me just make a few brief references to what I believe to be the completely erroneous state- ments which have been made here. I would like to say that the rules require me to accord Senators due consideration in this regard as to their being in error. A Senator said that those of us voting for the bill admitted that everything in it was special privilege. We do not ad- mit any such thing. As a practical matter, we could say that every facet in life has its special privilege. If we do something only for women, we discriminate against men. That involves them, but not everyone. If we are doing something to limit the tax liability of a particular industry, that in- volves a special group. There is no way to draw up any tax laws which do not involve one group or another. There are married couples who have children and 1949 PAGENO="0798" there are married couples who have no children. There are married couples whose children go to college and there are married couples whose children do not go to college. All revenue laws in- volve the question of groups. There is no other way to write revenue laws. It has been said that we should not put these amendments in a bill that the Pres- ident has to sign. My undeI~standing Is that the President wants to sign this bill the way it is. He wants everything that is in the bill, with the exceptions of one thing. My understanding is that he is not particularly happy about having to sign a bill to include a liberalization of the tax treatment of private retirement plans for self-employed individuals. Mr. President, the President of the United States once served In the House of Representatives. He once served in the Senate, where he was majority leader at one time, and whip as well. The Presi- dent thus understands that this legisla- tive process is a matter of give and take, and sometimes one has to give some ground. We have to take something in order to obtain something. I had to do that when we voted on this bill. I do not like H.R. 10. I fought it. But lam man enough to take a beating and go on to the next thing. I thank the Senator from Florida and the Senator from Indiana [Mr. HARTKE] for their support of me. Mr. SMATHERS. Again I want to commend the Senator from Louisiana. I know that he was opposed to H.R .10, as were several members of the commit- tee, and many Members on the floor of the Senate. I myself was opposed to some of the amendments which are still in the bill; but, as I understand the working of the democratic process, there is such a thing as majority rule. When I had made my argument and had done everything I could to defeat the amend- ments with which I did not agree in com- mittee, I felt it was necessary for the legislative process to get some kind of expression to the President, and that I would therefore go ahead and be out- voted. The same thing happened on the floor, and the same thing happened in conference. One of the problems which seems to surface right here at the end of the ses- sion, is that those people who now oppose what has been done by committees of both Houses of Congress, and by both the House and Senate, apparently do not particularly like majority rule. In other words, they are now going to say that a minority that lost after fair and free discussion of all these matters somehow will still win. They have every right to do it. I do not for one moment try to say that they do not have the right to do it. I know as a matter of fact that we are in the closing stages of this session. I have done the s nd the Senator from Louisiana has done the mine thing. We have tried to negotiate to get something that perhaps suited what we wanted, but which did not suit the majority. We have the same thing here. All these matters have been fully discussed and aired. No suggestion has been made by anyone tl~at anything has been done in an improper fashion, but the will of the Congress has been stated and ex- pressed. Congress would like to go home. Its Members would like to have an op- portunity to go home as soon as we can get a quorum. Those matters which have already been approved will be ap- proved again. No change will be made. All we will have done is lost a Saturday, and maybe a Sunday, and perhaps lost the opportunity to watch a good foot- ball game, or perhaps campaign. That is all right. We all do that in order to accommodate Members. The Senator from Tennessee has accommodated me. More remarks will be made this after- noon, but finally it will be passed. That is the legislative process, and it is the way it should work. Mr. LONG of Louisiana. Mr. Presi- dent, this measure has been referred to as a grab bag. Much time has been spent discussing so-called "swap" funds. A large number of tax lawyers believe that this tax-free exchange arrangement is clearly within the present law, and that those firms that are furnishing such ar- rangements have the law on their side. The Treasury did not like it. It felt that It amounted to . some kind of loophole. The Treasury sought changes, well real- izing that the law might be against it. In the committee, I voted against the proposalto amend the Internal Revenue Code to permit swap funds tà be t~ated [P. 27597) as tax-free exchanges. Those now in business will continue to operate, but I voted against the provision to permit others. I was against it, but when my committee, on which I am proud to serve, thought about it and voted for it, I felt I could support my committee. I am happy, when . we got back from confer- ence,- that w~ had worked it out in a way that I think is a good settlement. The Treasury did not like the committee's original decision. Now that we have worked it out as we have in conference, the Treasury feels the compromise is all right and that it is a fair decision. Mr. SMATHERS. Mr. President, will the Senator yield? Mr. LONG of Louisiantt. I yield. Mr. SMATHERS. With respect to the swap fund, like the distinguished chair- man of the committee, I felt it was time that the practice be brought to an end, but there is no question that the law as presently written providing for swapping of stocks in a mutual or other fund with- out a tax liability. As we said in the committee, though it may be legal, there 1950 PAGENO="0799" may be some question as to . its merits, and we decided that as of July 1967, it will come to an end. So, for practical purposes, we have closed that loophole, if it was a loophole. We felt the Treasury Department should not be able, without legislative direction, to change the law on Its own. So we have provided that those who are now in business must file on January 1, 1967, a registration statement with the SEC and they must have deposited the stock by May 1, 1967, and they must have concluded their transfers by July 1, 1967. Those who do not think the tax-free exchange of securities with respect to investment funds Is a good practice- and I happen to be one of those-have provided for its end in July 1967. It seems to me that is a fair and logical way to handle the matter. To get up on the floor and say some- thing that should not have been done has been done, when there have been written approvals of such transactions by the U.S. Government, is not a fair statement. I do not know where any- one got that notion. But we are going to stop the practice completely as* of July 1. We felt it should be stopped, and we so provided. Mr. LONG of Louisiana. The Treas- ury Department wanted to provide by regulation that if the fund had been or- ganized and the stocks had been de- posited by July 14, 1966, those transfers prior to that would be all right and would not be taxed on those exchanges, but if such a transfer were to take place July 15 or later, a capital gains tax would have to be* paid on the apprecia- tion in value of the property transferred. Frankly, It seemed fafrer, since Treas- ury did not see fit to take a published position on this problem until July of this year to provide that firms would have until January 1, 1967, to file their registration statements and then 6 months later the tax-free exchanges would stop. Mr. SMATHERS. Let me read the present law on this matter. I read from section 351(a): SEC. 351. TRANSFER TO CORPORATION CON- TROLLED BY TRANSFERROR. [Sec. 351(a)l (a) GENERAL lItTLE-NO gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the ex- change such person or persons are In con- trol (as defined in section 368 (c)) of the corporation. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property. SourCe: Sec. 112(b) (5), 1939 Code, There is the law, and there is no way it can be ,changed by Treasury regula- tion. It must be changed by Congress. That is what we are now going to do. We are not going to let Treasury usurp our legislative responsibility. Mr. LONG of Louisiana. The Senator is correct. Mr. President, I have heard many com- plaints today about the many provisions in this bill. There are many good, structural changes in the bill which will basically improve the tax laws. They are good changes: First, there is the section broadening the application of the provision where one corporation acquires the assets of another corporation. The law provides that when one ac- quires 80 percent of a corporation he does not have to pay a tax, but if he acquires 60 percent from one source and indirectly acquires 40 percent from an- other source where he has acquired con- trol of a company, he must pay a tax because he acquirred this stock from a controlled corporation other than by purchase. It is a technicality. It is a trap some people fall Into. It is much like a manhole cover being left open to trap the unwary. So we have taken care of that technicality. Another provision is the one excluding rents from property manufactured by a taxpayer from the personal holding com- pany tax. A third provision is the one improving the tax treatment of straddles. That is another good, constructive change. Another provision is the one dealing with the taxation of cooperatives and patrons with respect to per-unit retain certificates, making their treatment comparable to that of patronage divi- dends under present law. That is a matter which has been studied for some time, and it is a good structural change in the law. There are three provisions removing discrimination in the case of the interest equalization tax. These are provisions very much needed by businessmen and companies abroad, which help bring the services of banks to visiting American company representatives and Americans who have investments there. Then there Is the Williams amend- ment, offered by the Senator from Dela- ware, providing for a new type retire- ment savings bond for those holding bonds 10 to 30 years, which should also improve the balance of our debt between long- and short-term obligations. Here is an amendment by the same Senator who made that charge about special interests. His amendment pro- vides for a bond bearing a higher inter- est rate, designed to attract retirement money into the purchase of those bonds. The Treasury thinks this is a good amendment. The Senator stated that everything in this bill was for special interests. How about the Williams amendment, the amendment of the very Senator who made that statement? 1951 PAGENO="0800" Mr. SMATHERS. Is it not the belief of many of us, even though we finally voted for it, that this particular Williams amendment would do more to freeze high interest rates in the country than any- thing else we have done this session? Mr. LONG of Louisiana. I was not too happy about that one, because I favor low interest rates, and some of us feared that it might be regarded as con- gressional approval of higher interest rates, but in the spirit of getting on with the business, since the Treasury thought the Senator had a good point, I did not vote against it. The amendment was agreed to by a small majority, and we, as sincere con- ferees speaking for the Senate, fought to retain it and did retain it in the bill, be- cause the Senate accepted the amer~d- ment. And so it is there. Then there is another amendment, by the Senator from Massachusetts [Mr. SALTON5TALL] which requires that we have reports on the contingent liabilities of the U.S. Government which it was felt would be useful in helping to under- stand the nature of our U.S. obligations. The Senator from Massachusetts re- tires this year. He has been working in that vineyard for more than 12 years, trying to get a statement somewhere of all the contingent liabilities of the United States, so we could know what they are. The Senator from Massachusetts ac- cepted an amendment I suggested to his amendment to get a statement of what assets we have available to us, even on a contingent basis, to meet these liabilities. As I recall, the amendment was offered by the Senator from Delaware [Mr. WIL- LIAMS] lfl behalf of Senator SALTONSTALL. The Senator from Delaware has said, "We admit that everything in here Is a special privileged matter." But I sup- pose that here is another Williams amendment-though offered on behalf of the Senator from Massachusetts by the fine Senator from Delaware-which I am sure does not meet the Senator's description of everything being an item of special privilege, for the special ad- vantage of some special group, of every- thing being tailor made. In fact, Mr. President, there is nothing in the bill that meets that standard at all. The Foreign Investment Tax Act should be adopted. It is highly desirable. It will help our balance-of-payments problems and will also help improve the equity in our tax laws, as they apply to foreign corporations and nonresident aliens who invest money here. We need this bill. It is badly needed to attract foreign money and foreign in- vestments into the United States, to help in our balance of payments and to help our total situation around the world. [P. 27598) Mr. President, I very much hope that the conference report will be agreed to. Mr. GORE. Mr. President, before sug- gesting the absence of a quorum, I wish to advise the Senate that I shall with- draw the proceeding under the quorum call after it has gone on for a sufficient time to advise Senators that at least there has been another Senator recog- nized to speak. Mr. President, I ask unanimous con- sent that without it being counted as a speech by the Senator from Tennessee, I may suggest the absence of a quorum. The PRESIDING OFFICER. Without objection, it is so ordered. The clerk will call the roll. The legislative clerk proceeded to call the roll. Mr. GORE. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded. The PRESIDINGOFFICER. Without objection, it is so ordered. Mr. GORE. Mr. President, I am pleased that finally I am recognized to address the Senate upon the pending conference report, even though it be Saturday afternoon, October 22. It is not a new experience, Mr. Presi- dent, for the Senate to face a compli- cated, technical: tax bill, or a sugar bill, in the dying hours of a session. Admittedly, this renders debate and meaningful consideration most difficult. For this circumstance, which I regret, I neither claim nor accept responsibility. Mr. President, I wish to advise that from here on, though in the past I have done so, I shall not diminish the exer- cise of my duty and responsibility be- cause of either the lateness of the day on the calendar or the lateness of the hour on the clock. One's responsibility as a Senator does not diminish by the length of the term nor the duration of the session. This is an important measure. 1 find myself in agreement with the opinion expressed by the junior Senator from Florida [Mr. SMATHERS] that the provi- sion in the bill having to do with the use of public money for political campaigns is the most important part of the bill. It surely is the most ingenuous, novel, bizarre, and, I think, the most unwise and dangerous. Mr. President, I would like to make a preliminary statement before proceed- ing to discuss this .Ieature of the bill. My address shall be divided roughly into two parts: One, a discussion of this most important part of the bill, the campaign contribution section; and two, the tax favoritism in the bill. The senior Senator from De1~ware, - assisted so ably by the senior Senator from Ohio in interrogation, covered sev- eral of the tax favoritism amendments so ably and concisely that I am per- 1952 PAGENO="0801" suaded to begin my address by a discus- sion of this part of the bill which, ac- cording to the junior Senator from Florida, constitutes the most important part of the bill. In the beginning, I state that I recog- nize that I believe the suggestion of the use of public funds to defray the cost of the conduct of our elections merits care- ful consideration. I have suggested in previous speeches modes of such consideration. I have always felt though, Mr. Presi- dent, that the provision of public funds for campaign expenses must be tied closely and intimately with amendment of the Corrupt Practices Act and with a carefully considered bill for election reform. Indeed, Mr. President, I doubt if any Member of either body of the Congress has devoted the time and study to the question of clean elections that the sen- ior Senator from Tennessee has. I wish to approach the subject on this basis. It is said that money is the root of all evil. Money is the root of political corruption. Money is the root of polit- ical influence. The use and volume of that money constitute the greatest danger in our elective system. *There is nothing evil per se about the expenditure of funds on elections. In- deed, if the electorate is to make a wise choice, then the issues, the records, and views of opposing candidates in a con- test should receive wide dissemination. This requires money in increasing amounts as our population increases and as mass communication media for hire become more widely used. The evil which threatens our elective processes arises from the improper use of money, money in excessive ~tmounts, sometimes from questionable sources and heavily in favor of special interest candidates or without full disclosure to the public. If we are to eliminate or even mini- mize this evil and danger, then existing law affecting the use of money in Federal elections must, in my view, be substan- tially revised. Existing law is wholly in- adequate, outmoded, and unrealistic. For the most part, it was enacted more than 40 years ago. The inadequacies of existing law were fully illustrated by the report of the elec- tions subcommittee on the 1956 general election campaign. Earlier today reference was made to the investigation of that subcommittee, of which I was chairman, and the report which was filed. I have a copy of. the report. Copies are no longer available. More than 1,000 requests for copies came after the supply was exhausted. It is the largest committee report that the Government Printing Office has ever printed, and it is factual. We tabulated $33 million, the source of the money, the recipient of the money, and the purposes for which the money was expended. So, Mr. President, I speak on this sub- ject with some experience and knowl- edge and, even more, with conviction that reform of our election laws, amend- ment of our Corrupt Practices Act, now more than 40 years old, is urgent. The freedom and the sanctity of the ballot box is at the very heart of our system of self-government. One of our goals in world affairs is to assure to people the right of self-de- termination. . We had better look about ourselves and assure our own people of ~ right of untrammeled determination without the undue influence of money. The need for election law reform is widely recognized. The senior Senator from Tennessee is by no means the only one who recognizes this. While there is substantial agreement as to the need for election reform, there are differing views as to the details of what should or can be done. In view of the failure of Congress to act in this field in more than a quarter of a century, I think it fair to say that the sense of urgency for measures to pro- tect our elective process from corrupt practices, which I feel so keenly, must not be shared by all. As I see it, the cause of clean elections is a very impor- tant cause, indeed. Mr. President, despite the studies that have been made, despite the fact that a clean elections bill is now dying on the calendar, we are here on Saturday after- noon, October 22, asked finally to ap- prove, to take the last step, and to send to the White House, a bill containing a provision on which there has not been one day of hearings, on which not one witness testified, but which, instead of being accompanied with safeguards and protection, adequate amendment of the Corrupt Practices Act, merely pours more millions of dollars into the political pot. Does this make for clean elections? Mr. SMATHERS. Mr. President, will the Senator yield, to straighten out the record? Mr. GORE. I yield. Mr. SMATHERS. Would the Senator not agree that there was a public hearing on this particular proposal, on which the Under Secretary of the Treasury testi- fied, and on which several Senators testi- fied with respect to their own proposals? I offered one proposal. The matter was pretty well discussed. There was con- siderable public discussion about it. Mr. GORE. I agree that the Commit- tee on Finance had a day of hearing on the general subject of campaign contri- butions and election reform. Indeed, there have been many such hearings, one of which, as I have said, I conducted over a period of months. Mr. SMATHERS. I should like to commend the Senator. I stated earlier that I think that the most thorough 1953 7 1-297 0-67-pt. 2-51 PAGENO="0802" hearing I have heard about on this par- ticular subject was that conducted by the Senator in 1956, and I think that the recommendations that he made at that time are excellent. The Senator knows a great deal about this subject. The point is that that was 10 years ago. I am afraid that if we do not pass some sort of legislation which all of us will agree is at least a step in the right direction, we will be debating for another 10 years on this matter, before we will ever get it enacted into law. Ten years later, after the Senator's thorough and lengthy and excellent hearings, we still do not have anything. I. think we have to take this as a step in the right direction, hoping that after we have tried it for some time, we might be able to steer it forward, if it needs to be steered to a higher ground. Mr. GORE. I thank the Senator for his generous comments. I must say that I cannot feel, after careful consideration, that this would be taking a step in the right direction, if this is the only step we take. Indeed, [P. 27599) this step, taken without safeguards, In my opinion would be a very bad step. It would make the situation far worse. Just as tax reform, from a practical standpoint, can only successfully be coupled with tax reduction, I think that `if we provide Government funds for cam- paign expenses, without tying to those benefits to our political process the nec- essary safeguards and protection, then protection is out the window, the benefits are in hand,- and the cause of election reform and clean elections will have been dealt a death blow. Mr. CLARK. Mr. President, will the Senator yield? Mr. GORE. I yield. Mr. CLARK. I, too, have a great deal of sympathy with the point of view which has just been expressed by the Senator from Tennessee with respect to election reform. I, too, should like to assure that the RECORD is straight. While I do not purport to be the expert on the subject that the Senator from Tennessee is, I have, nonetheless, done a good deal of research work on the sub- ject. Election reform, to be adequate, requires the collaboration of three com- mittees of the Senate. The first is the Committee on Finance,. where provisions must be passed which, unfortunately, must originate in the House or, in the alternative, be tacked onto some other bill, as was dons with the currentS proposal, by which the fi- nancing aspects of campaigns, insofar as there may be any participation by the Government, must be worked out and de- termined. With regard to that, there was at least 1 full day of hearings, I think, before the Committee on Finance. - Some time ago, the President of the United States did me the great honor of asking me to introduce his bill dealing with clean elections and campaign fi-. nancing, and I did so. The bill was re- ferred to the Committee on Rules~and Administration, the second committee concerned. For reasons best known to themselves, that committee refused to hold hearings on the President's bill, and I must say that I can find little favor with their decision. Instead, they re- ported to the calendar an utterly made.. quate bill, on which no hearings have been held for 6 years, and which was clearly obsolete, inadequate, and inappro- priate for the purpose. That is the bill which is now on the calendar, to which the Senator referred. It was not brought up on the floor, and I rather regret-that, because, inadequate as the bill is, it would have given us the opportunity to amend it on the floor and provide some kind of decent vehicle for campaign financing and election reform. However, the leadership, in its wisdom, did not see fit to bring that bill up. A third aspect of campaign reform and financing, in my opinion, is in the jurisdiction of the Committee on Com- merce. That has to do with the extent to which the communications media, pri- - manly radio and television, should be called upon to contribute some part of the cost to conduct an honorable finan- cial campaign. Next year, I propose to Introduce separate bills: - First, a bill which will be referred to the Committee on Finance, for financing along the lines which the Senator from Tennessee is now discussing. Second, a bill to be referred to the Committee on Rules and Administration, which will deal with the administrative aspects of campaign practices, the Cor- rupt Practices Act, and the other aspects of campaign financing which are within the jurisdiction of the Committee on Rules and Administration under our rule~ 25. - Third, a bill to be referred to the Com- mittee on Commerce, which will deal with the part that radio and television should be called upon to play in this area. The reason why I make these state- ments is that I was a witness before the Committee on Finance on this measure and said in substance what I have said just now on the' floor of the Senate in this regard. - When the bill that is now under con- sideration first came before the Senate for consideration, I felt that it was a half-baked measure. I still think it is a half-baked measure. But I voted for it. Why did I vote for It? Because it seemed to me that it was one foot in the door in an area where many honorable Senators, including particularly the senior Sena- tor from Tennessee [Mr. GORE], had been laboring for 10 gears, and we had not got to first base. We had not, as the Senator from Florida [Mr. SMATHERSI said, come to the point where Congress had serious- ly considered how to remedy one of the great failures In our democracy. 1954 PAGENO="0803" So I felt, under the circumstances- and I honor the Senator from Tennessee for his differing view-that it was better to vote for this measure and get some- thing started than not to vote for it at all. I apologize to the Senator from Ten- nessee for this interjection, but I wanted the RECORD to show the current status of the problem. It is a problem we must deal with, and I hope we shall deal with it at the next session of Congress. We must seek a method of comprehensive election reform and a revision of the Corrupt Practices Act, through some sensible approach provided by the legis- lature, with the aid of the executive, to deal with a vexing problem which is one of the great failures in our American democracy. Mr. GORE. Mr. President, the distin- guished senior Senator from Pennsylva~ nia need not apologize for his interjec- tion. I appreciate it. It is an able ob- servation. The Senator has devoted. much time and study to the subject. He has confessed that he considered this a half-baked measure when he voted for it on the floor of the Senate. I wish to make a confession. When the proposal came to a vote in committee, out of love and respect for the chairman, against whose amendment we naturally did not like to vote, I did not vote on the first roilcall; but then when I discovered that all Democrats except me had voted for it and that all Republicans had voted against It, I suppose that a little partisan spirit of the occasion arose and I made a statement. I said, "Mr. Chairman, I wish now to be recorded, but before do- Ing so I wish to state my reasons." I expressed the view then that this was not a measure of which I could fully approve but that it had the merit, I thought, of provoking discussion upon a very vital problem of our Republic. On that basis I voted to bring it to the floor of the Senate with no thought whatsoever that the Senate would seriously consider its adoption without other provisions being added. But here we are. I was perfectly astounded by the vote in the Senate. I was more astounded when the cpnference committee accepted it. Now, we are asked to take the last act before this really revolutionary political concept in our body politic becomes law. Mr. President, I say that the measure needs reconsideration. "Half-baked" is not a sufficient adjective to describe the measure. Before I go into the measure in detail, which I shall now do, I wish to say, while the distinguished majority leader is on the floor, that I am grateful that several Senators have been listen- ing to the debate and within a reason- able, but fairly brief period of time, after he is able to assure me of a yea-and-nay vote, I shall ask for a vote on a motion which I shall then present. Mr. MANSFIELD. Mr. President, will the Senator yield? Mr. GORE. I yield. Mr. MANSFIELD. I cannot begin to express my deep appreciation to the Sen- ator for what he has just said, because I had no idea what the situation would be. Therefore, I am all the more grate- ful, especially for notifying the Senate in advance. Mr. GORE. Throughout our years of service, I have kept the Senator advised of my attitudes and moves. Although he has not always found himself in agree- ment, he has always been advised of them. I want to be explicit. This may not be the last vote we will have, but I shall be prepared to ask for a vote. Mr. MANSFIELD. Would the Senator from Tennessee want the Senator from Montana to state a specific time? Mr. GORE. I would prefer to proceed. Is the Senator prepared to do so? Mr. MANSFIELD. Yes. Mr. MONRONEY. Mr. President, will the Senator yield? Mr. GORE. I yield. Mr. MONRONJ~Y. Before the Senator leaves the matter of financial presiden- tial campaigns- Mr. GORE. I am only now coming to it. Mr. MONRONEY. In the Senator's discussion thus far, no mention has been made of the inadequacy of the bill with respect to preconvention activities of presidential candidates. Is this not one of the wide open areas: Influence of large sums of money unac- counted for, unreported, not required to be reported for participation in captur- ing delegates of various States, or even in the act of campaigning in presiden- tial primaries which are conducted in many States? It seems to me that had hearings been held there would have been a greater [P. 27600] focus on the full aspects of the financing of presidential campaigns instead of only November elections and the general elec- tions. Mr. GORE. I was going to point that out. I appreciate the suggestion of the able Senator from Oklahoma tMr. MONRONEY]. Not only does the measure omit any reference to conventions, party caucuses, or primaries for presidential campaigns, it also omits any reference to senatorial or congressional campaigns. Yet most of us are members of one of the two major political parties. That brings up a point I had not in- tended to mention at this time, but let us consider the question of parties. Suppose Senator STROM THURMOND wants to run for President again. After all, he ran at one time on the Dixicrat ticket and I believe he won a majority in seven States. Now, should Senator THURM0ND, or Governor Wallace, or some 1955 PAGENO="0804" other public figure wish -to run for Presi- dent again In 1968 on the Dixiecrat ticket, or some other ticket, there would be this situation: Whoever is the nominee of the Republican Party, and President Johnson, If he be the nominee of the Democratic Party, I assume would be the beneficiaries of this vast amount of money. But the other candidate or can- didates would be penniless except for de-. pendence upon private sources. I do not wish to be sectional In this presentation. Suppose there Is a Bull Moose move- ment in the Republican Party. I think it would be a good thing for the Republi.. can Party. They need a little new life. At least, they had such a movement at one time, and a candidate for President on that ticket. Suppose there is another Burton K. Wheeler from the Senate, from the Rocky Mountain region, who wants to run for President. But he will find we have passed a bill to finance the cam- paigns of President Johnson and Mr. Romney or Mr. Nixon, but which would render penniless and place at great dis- advantage any other man who might aspire to the Presidency of our country. Is this the kind of immobility that we wish to freeze Into our political system? What do we think the Supreme Court would hold in this regard? Is this fair protection of the laws, or is this dis- crimination? I say to the Senate that we are dealing with something funda- mental to the Republic, something basic to the conduct of our system of govern- ment. We are asked to pass this bill on a Saturday afternoon just before adjourn- ment. I have not suggested the absence of a quorum, and under the arrange- ments I have worked out with the ma- jority leader, it is going to be unneces- sary for me to do that, I think. At least, this subject deserves careful and serious consideration because once the step is taken, it may be irreversible except by the Supreme Court. That brings up several questions, to one of which I have already referred, the equal protection of the laws. We would protect two candidates for Presi- dent, with all the millions of dollars of a political slush fund out of the public Treasury, but we would deny any sup- port at all to the candidate of a new party or of an independent group. How can a liberal support that political phi- losophy? How can a conservative? How can a Republican who believes in the republican form of government? How can a Democrat, dedicated to the tenets of our society? Equal opportunity for political ad-. vancernent is as fundamental to our po- litical system as is equality of oppor- tunity for employment, education, or other rights and privileges which we seek to promote. I started to refer to one other of the several questions of legality and consti- tutionality that come to mind with re- spect to this unusual proposal. This amendment proposes to permit a private citizen to appropriate public funds for a purpose of his own choosing. I hold in my hand a tax form. For years we have sought to simplify the in- come tax return. Now we propose to start on a course which would surely complicate it further. To get to the question of appropriation, here is a tax return, and let us make it simple--suppose that John Doe owes $1 of income tax to the U.S. Government. That is his total tax liability, but it is his liability and he owes it. He attaches $1 in currency to his tax form and posts it to the Internal Revenue Service. Is that his dollar, or is that the prop- erty of the U.S. Government? That is a dollar owed the U.S. Treas- ury, and constitutes public funds. Yet by this amendment he would have the privilege of appropriating that dollar for a political purpose. Under the Constitution, the appropri- ation of funds is the responsibility of Congress. * Mr. LAUSCHE. Mr. President, will the Senator from Tennessee yield? Mr. GORE. I am happy to yield to the Senator from Ohio. Mr. LAUSCHE. If a taxpayer is given the right by statute to designate how his dollars shall be spent, and has the right to direct that it shall be spent in political operations, would it not follow that at some subsequent time Congress would enact a law giving the taxpayer the right to designate how his money shall be spent for other purposes? Therefore, if we em- bark upon that kind of program, where are we likely to end? Assume someone comes into the Senate next year and proposes a similar pro- cedure to designate how his tax money shall be spent, not related to elections but related to some other operation of the Government. The Senator from Okla- homa {Mr. MONRONEY] mentions desig- nating that the money should be applied to retirement on the national debt. I ask, what is the danger of establish- ing this kind of precedent? Mr. GORE. If the precedent should be held constitutional, which I doubt, then it would be a dangerous one and, ere long, this tax form . which we have sought to simplify would have a number of boxes on it. Suppose we had a box giving a taxpayer the election of whether any part of his funds could be used In the Vietnam war? There are a number of pacifists in this country who stoutly contend that it is Immoral and illegal to require them to pay taxes to support a war which is contrary to their religious or their moral concepts, The Senator from Vermont [Mr. 1956 PAGENO="0805" AIKEN] made, I thought, a novel sugges- tion, that the way to end the Vietnam war was for the Senate to pass a resolu- tion declaring that the United States had won the war. This may not be without merit but, at least, I found it amusing, as I am sure the author did, with his fine sense of humor; but I do not think it would be humorous at all to have `a referendum of American tax- payers declaring whether their funds should be used in support of the Viet- nam war. But my point is, which the Senator from Ohio has brought up- and his point, too-that if we can give the taxpayer an election in one respect, then we can give him an* election in many other respects. Mr. LAUSCHE. Yes. That is, if~ It Is constitutional to allow him to specify that one dollar of his tax money shall be used to promote political campaigns, then It would follow that It is constitu- tional, too, to declare that he may designate what part, if any, of his money shall be used for the payment of the national debt, participation in the Vietnam war, earmarking money for the help of the aged, earmarking money fcft education, and every other aspect of governmental operations. I do not believe that can be done. Mr. GORE. Well, if it can, then this Is a very dangerous precedent. Mr. LAUSCHE. Yes, that is, even if it can. Mr. GORE. If it can, then the pre- cedent is all the more dangerous. Mr. SMATHERS. Mr. President, will the Senator from Tennessee yield? Mr. GORE. I yield. Mr. SMATHERS. I congratulate the Senator on the comprehensive and light manner in which he is discussing this proposal. Is it not a fact, however, that the proposal which was made by the President to permit a $100 tax incentive for the purposes of financing the po- litical campaigns of both parties, and others-the one I had was for $50-was calculated to encourage the taxpayer to give money so that the financing of political campaigns could be re- moved from the charge that too many wealthy people and too many wealthy organizations were putting up all the money? We are trying to make It possible to distribute the costs of campaigns over as wide a group as is possible, so that, in truth and fact, nobody, or no one group, or no one segment of our econ- omy, can say, "We are the ones who fi- nanced the campaign," thereby having a hold on the one who got elected. Is it not a fact that these proposals start out with the idea that there is going to be a benefit to the taxpayer if he makes the deduction? He gets a cer- tain amount of reduction in his taxes. -Is that not a fact? [P. 2760Tj Mr. GORE. Mr. President, there is a vital and a legal difference between funds remaining in the hands of the taxpayer as a result of a legal deduction against his taxable income or against his tax liability, which Congress could by law provide and, on the other hand, money which legally belongs to and becomes a part of the U.S. Treasury. The sums from which the taxpayer is allowed a deduction or a credit against his tax liability are still his. They never be- come public funds. The reverse is true in the instance provided here. These are public funds over which the tax- payer is given an election to appropri- ate for a specific purpose, or to deny the appropriation for a specific purpose-a very vital and legal distinction. It has been suggested that this provi- sion is copied after the procedure involv- ing funds earmarked for the highway trust fund. I want to draw a clear line of differentiation there. When I drive up to a filling station and buy gasoline, I pay taxes on that gasoline. I have no choice. There is an excise tax upon- my purchase. The Congress has passed a law which earmarks the receipts from those taxes into a highway trust fund. Here, however, the taxpayer does the earmarking, not the Government. There is a delegation of appropriating responsi- bility which I do not think can meet the test of legality and constitutionality. But even if it does meet it, as I said earlier, then the precedent is the more danger- ous. If this amendment is enacted into law, It will add an estimated $60 million to the sums available to the major political parties for use in presidential campaigns without any provision whatsoever to safe- guard funds from corrupt practices. While a clean elections bill dies on the calendar, we have this measure, as I said, to pour many millions of public funds into the political pot. The bill pro- vides no protection against fraud or mis- appropriation of these public funds, to say- nothing of inadequate safeguards surrounding the use of additional funds which the parties would continue to be free to raise and spend. A great deal has been said on the floor of the Senate about how this is a clean elections bill. By what right is this called a clean elections bill? How does it clean the elections? Is there any provision here to safeguard the use of the money? Is there any inhibition therein as to the receipt and expenditure of other money from questionable sources? Not on your life, Mr. President. Indeed, the sItua- tion is made worse and the identity of the money is made more difficult because there is provided the commingling of public money with private money, good money with bad money. - I think it makes more difficult the accomplishment of election reform, and yet this is called a 1957 PAGENO="0806" step in the right direction. I say it would be a dangerous step ~to our elective process. Mr. LAUSCHE. Mr. President, will the Senator yield? Mr.GORE. Iyield. Mr. LAUSCHE. Does this bill guar- antee at all that there will be less money spent privately to win an election? Mr. GORE. Not at all. Mr. LAUSCHE. All that it does is state that the Federal Government shall provide about $70 million a year, $35 mil- lion for each of the parties, to conduct a presidential election after the parties have nominated their candidates In June or July of the election year. Is that cor- rect? Mr. GORE. That is correct. Mr. LAiJSCHE. Does it in any man- ner prohibit the parties that have re- ceived the $35 million each in the elec- tion year from continuing the solicita- tion of contributions from private sources? Mr. GORE. That subject has not even been touched. I believe it will re- sult in pouring many millions of dollars into the major political parties' pots. Mr. LAUSCHE. And if money im- piledly wins elections, all this bill will do is give to the parties $35 million in an election year and allow them to go out ,and solicit~ with all their ardor and efforts, additional private contributions. Is that correct? Mr. GORE. That is true, and there are no safeguards as to its use. Suppose we were in a presidential year now and these funds were available and the Democratic Party felt very strongly that a candidate for Governor on the Re- publican ticket, in a pivotal State, must be defeated, or that the Republican Par- ty felt that a Democratic candidate for Governor, who had great prospect for being President in the future, or that a particular Senator, must be defeated. They could spend the entire amount of the slush fund in one State. Mr. LAUSCHE. I concur in what the Senator has stated. His description of what might be done is an illustration of the lack of consideration and study which has been given to the broad rami- fications involved in such a program. Mr. GORE. It illustrates the need for careful consideration of the enactment of a measure so new and revolutionary as this is and so big and important as this is. Mr. LAUSCHE. Is it not a fact that the proponents of this measure state, "Allow us to spend about $70 million of the taxypayers' money in an election year, and take our word that we will sup- port needed reforms at a later time"? Is it the thought of the Senator that the reforms ought to be adopted con- currently with the proposai that we spend $70 million of the taxpayers' money be- fore we go forward? Mr. GORE. If we do not achieve re- forms and protection concurrently with the extension of the use of public funds for our elections, then the difficulty of achieving reforms is increased, if not made almost impossible. I am one who believes in the principle Df one man, one vote. I have resisted amendments here to overturn the re- apportionment decision, even though my State legislature passed resolutions ask- ing me to vote the other way. I believe in the dignity of man and in the equality of man, the equality of opportunity, rights, and privileges. One of the rights which I believe should be equal is the right to aspire to political preferment, to which I have already referred. Another is the right to have an equal influence on the selection of public officials.. We know, of course, that a man with vast financial means, under our present system, can exercise far more influence upon the outcome of an election by the use of his pocketbook than can the lowly citizen by the use of his one ballot. I think that argues well for the use of pub- lic funds. But, ah, Mr. President, when we but add public funds to and com- mingle them with the campaign money now obtained from special Interest sources, we make the situation worse in- stead of better, and we will lose, perhaps, the opportunity of making necessary cor- rections. In my view, this Congress has not dealt with a subject more fundamental to our society and to our system of gov- ernment than that which is under con- sideration now. I trust that this ex- pression on my part will indicate to my fellow Senators why I have insisted upon the right to debate this subject, and the right to have the Senate-well, it Is not my right to have the Senate reconsider, I suppose, but it is my right to seek re- consideration, on the part of the Sen- ate, of a measure on which I think it acted too hastily, and a measure which received no public hearings in the House of Representatives, but was carried there in a conference report to be voted up or down. If this provision is enacted, I do not know just how one conflict is to be re- solved. We have an existing law which limits the Republican National Commit- tee or the Democratic National Commit- tee to an expenditure of $3 million. Yet we are asked here to write into law a provision that will give each of them an estimated $30 million to $35 million in a presidential year. How can the Senate do that? How can we do so .without amending the Cor- rupt Practices Act, unless by so .doing we condone illegal practices, and encourage and entice our two major political parties to violate the Corrupt Practices Act? Of course, $3 million Is Inadequate; we recognize that. I have said It many times. But it is the law. We condemn 1958 PAGENO="0807" violations of law and order. But now we would provide $35 million to the Dem- ocratic National Committee, and leave untouched a law which limits its ex- penditures to $3 million. Mr. President, I am advised by the majority leader that in his opinion, a quorum of the Senate is available for a yea and nay vote. Therefore, I shall con- clude with a few summary paragraphs, and then present to the Senate a motion. Mr. MANSFIELD. I thank the Sen- ator very much. Mr. GORE. Money is a threat to clean elections, a threat to our entire elective process. Money is used to manipulate elections, to thwart public will, and to defeat worthy purposes, as well as to elect good candidates and to promote worthy causes. The lack of proper con- trols over the raising. and spending of money in political campaigns poses the greatest danger to the democratic elec- tive process. This danger arises from the sources from which such money is ob- [P. 27602] tamed and the uses for which it is ob- tained, and also from the amount of money spent in an election. It is said that this measure would provide a clean source of campaign funds, free from the taint of special in- terest. Perhaps that is so. But the availability of large sums of Federal tax money for political campaigns would do nothing at all to restrict parties and can- didates from raising additional sums, in whatever amounts and from whatever sources they see fit, however question- able. Indeed, as I have said, good money would be commingled with bad money. Federal tax money would merely be added to what is otherwise available. Thus, the bill would increase rather than decrease the influence of money in Fed- eral elections, multiply Its abuses, and make more difficult the enactment pf a clean elections bill. Mr. President, the Foreign Investors Tax Act, as proposed by the administra- tion and as passed by the House of Rep- resentatives, was a good bill, designed to improve the U.S. balance-of-payments situation by attracting more foreign cap- ital to this country, Unfortunately and unwisely, as I have said at some length, the Senate Finance Committee and the Senate itself added numerous nongermane amendments, which converted a good bill into a grab bag special interest tax measure, which in my opinion was unworthy of the Sen- ate. The bill as approved by the con- ference committee, I wish in fairness to say, represents some improvement over the bill as passed by the Senate, but It is still a bad bill, and should not be enacted into law. The bill still contains a large number of provisions which grant tax favoritism to certain types of income and to certain special-interest groups. As I said in the beginning, this has been ably discussed in part already. Un- less the motion I shall soon make is car- ried, I shall wish to discuss other points in the bill. I note, In passing, that the part of the bill which had wide appeal to Senators, which would provide aid to many needy old people, was dropped from the bill. Their voices, the voices of the needy, went unheeded. In this respect, the bill is a less meritorious measure. I plead with the Senate to take a course of action which would bring to enactment the one feature of the bill that is in the public Interest, in my view, that part of the bill which deals with foreign investors, contained in title I of the bill. How can that be done? That can be accomplished by tabling the con- ference report and quickly calling up for consideration a minor revenue measure already passed by the House and on the calendar of the Senate, and attaching title I to that bill as an amendment and dispatching it to the House. No conference would be necessary. In addition to the other strictures under which we operate, we are advised by our majority leader that the other body will have no more conferences with the Sen- ate. However, here Is a bill that will not require a conference. All that the House must do is accept a noncontroversial measure which has already passed the House without objections, along with title I of the bill, to which no objection was raised during the consideration of the bill by the other body. Mr. President, the senior Senator from Delaware and the senior Senator from Tennessee, instead of being obstruction- ists and trying to prevent public interest legislation, have offered to cooperate in this respect and in many other respects. Here is a method and procedure that could bring the foreign investors portion of the bill to enactment within an hour's time, and the Senate and the House could adjourn and go to the people be- fore sundown on this Saturday after- noon. I ask how the country would be ill served by postponing until January for further study this bizarre- Mr. LAUSCHE. Monstrosity. Mr. GORE. Amendment with re- spect to campaign expenditures out of the Public Treasury. Mr. HICKENLOOPER. Mr. Presi- dent, will the Senator yield? Mr. GORE. I yield. Mr. HICKENLOOPER. Mr. Presi- dent, not being on the committee, I am not too familiar with the ramifications of this legislation, but from the slight exposure that I have had, I think it is the most odoriferous bill I have seen in many years. I think it is utterly indefensible. I think It stinks to high heaven. The bill contains various ramifications, and much log rolling has gone Into the legislation. 1959 PAGENO="0808" I commend the Senator from Tennes- see for his valiant fight. I do not know that anything can be done now, but this legislation is not good in the interest of reliable or honest public legislation. Mr. GORE. Mr. President, I thank the Senator for his encouragement. Mr. HICKENLOOPER. My encour- agement will not do the Senator any good. Mr. GORE. It may. Mr. HICKENLOOPER. I merely com- mend him for his fight on this measure. This bill has many facets. I do not see how it could be consented to by any stretch of legislative Imagination. Mr. GORE. Does the Senator concur that the procedure I have suggested, and which was previously suggested by the senior Senator from Delaware, offers an acceptable and a rapid way to achieve the worthy purposes here sought? Mr. HICKENLOOPER. I think so, in the main. I think the facets of the bill are worthy, but it is, like many other bills, a pork barrel bill. Certain things are worthy, but certain other things can- not stand the light of analysis. Mr. GORE. If we must take it all or leave it all, I think we should leave it all on the table of the Senate. Mr. HICKENLOOPER. That is the way I will vote, for the information of the Senator, but I am not sure that we have any leeway in the matter now. I think we are handicapped. I thing we are cir- cumscribed. Mr. GORE. We are. It is a difficult circumstance under which to wage a par- liamentary fight or legislaTtive battle. Mr. HICKENLOOPER. I congratu- late the Senator on his worthy fight. Mr. GORE. I thank the Senator. I hope that the motion which I shall soon offer will receive a rollcall vote and be approved. If not, I shall prooee~ to dis- cuss some of the other features of the bill to which I have not had time to make reference. Mr. LAUSCHE. Mr. President, will the Senator yield? Mr. GORE. I yield. Mr. LAIJSCHE. Mr. President, when the bill was originally before the Senate, the Senator from Delaware [Mr. WIL- LIAMS] offered an amendment to strike all but title I from the bill. I remind the Senator from Tennessee that he suggested to the Senator from Delaware that the amendment be modi- fied so as to permit the retention in the bill of the aid contemplated for the old. The Senator from Delaware responded to the suggestion made by the Senator from Tennessee. The Senator from Tennessee is aware that that most vital provision-the provision which would help the old-which was argued vigor- ously when the bill was before us a few weeks ago, is no longer contained in the bill. Mr. GORE. The Senator is correct. I regret that it is not. Mr. LAUSCHE. Mr. President, the Senator stated a moment ago that cer- tain provisions in the bill are good. However, it seems to me that the pro- ponents of this logrolling, pork-barrel bill used the bait of aid to the old and got the bill passed. They have since stricken from the bill the provision for aid to the old and have in the bill nothing but unjustified tax grants to privileged groups.. Mr. GORE. Mr. President, I wish to modify the observations of the senior Senator from Ohio to this extent: I am sure that members of the Senate confer- ence committee were earnestly and sin- cerely in favor of the provisions that would have been so beneficial to many needy, old people. It was the conferees representing the other body who would not accept it, and the Senate conferees yielded. Mr. LAUSCHE. Yes, they yielded; but does not that mean that if we thought aid to the old was the only amendment that should be added to the objective of imposing equitable taxes on foreign in- vestors, the bill ilad better be defeated in its whole, rather than to go along with what it now contains? Mr. GORE. I regret that that provi- sion is out of the bill; and when measured as a whole, if that must be the measure- ment, then the bill is bad. It has good features, but the bad features outweigh the good, and the bill should be defeated. But there is a way-and I have suggested it-to accomplish the worthy purposes. Mr. LAUSCHE. And I agree with the Senator. I have one further question. Thus far we have established, I think, about six instances in which special- privilege tax relief is given to special groups. No extended discussion has been had about H.R. 10, which contem- plates giving to lawyers, doctors, and other self-employed individuals certain tax privileges. My question is: If H.R. 10 is contained in the final version of the bill, will it give to the self-employed- [P. 27603) that is, lawyers, dentists, doctors, and others-greater tax privileges than are accorded to the members of the social security system? Mr. GORE. Oh, yes; va,stly greater. They are given the unusual privilege- and it is a privilege which only the well- to-to, people having substantial income, will find attractive-of deducting from their otherwise taxable income $2,500 a year to be invested in a pension plan for their own personal benefit. In other words, the Treasury of the United States will be paying part of their insurance premiums. I shall not discuss this point at length now. Mr. LAUSCHE. But the fact is that members of the social security system 1960 PAGENO="0809" will have to pay a greater tax percent- age than will members of the H.R. 10 program. Mr. GORE. The most eloquent speech made in opposition to this proposal was made by the distinguished majority lead- er [Mr. MANSFIELD] on October 12. I shall not take the time of the Senate, since I am advised that a quorum is in town, to read it. However, I ask unani- mous consent that the speech against H.R. 10, delivered by the distinguished Senator from Montana [Mr. MANSFIELD] be printed at this point in the RECORD. There being no objection, the speech was ordered to be printed in the RECORD, as follows: Mr. MANSFIELD. This amendment would double the tax benefits now available for the retirement savings of doctors, lawyers, and other self-employed individuals. Under pres- ent law, a self-employed Individual may con- tribute 10 percent of his earnings-up to $2,500-to his pension plan and take a tax deduction for one-half of this contribution. The proposal-which was the main purpose of HR. 10 passed by the House In June- would make the full contribution tax de- ductible. This amendment would result in an esti- mated revenue loss for the first year it is effective of up to $30 million. For the sec- ond year, the estimated revenue loss would be increased to about $50 million. This amendment would divert substantial Federal tax revenue to provide tax reductions for a very narrow group of highly paid pro- fessional people, at a time when the possi- bilities of a general tax increase are very much in the public mind. Revenue-losing measures such as this could well push the President and Congress closer to such a gen- eral tax increase. In more detail- The experience to date clearly indicates that self-employed pension plans represent a tax reduction arrangement for the better-off professional man, with doctors heading the list. Over 75 percent of the revenue loss in- volved in the amendment would go to doc- tore, lawyers, and dentists. Indeed, one-half of the total revenue loss would go to indi- viduals in these professions with Incomes over $25,000. The amendment would represent an auto- matic tax reduction for those self employed already making pension contributions since, without any change in their contributions, their tax deductions will double. Two-thirds of the revenue loss-about $20 million-for the first year would be directed to this auto- matic tax reduction--of which $15 million would go to better-off professional people. For the future, it is likely that the In- creased tax benefits will only serve to attract more of the same class of high income self- employed into pension plans. These plans by their very nature can have only limited * value to the plumber, .the small shopkeeper, or the farmer-the savings of these people are needed for their businesses, to meet the social security tax on their self-employment income, and for their family obligations- and therefore are not generally available to be set aside in private retirement plans, and none at all for the ordinary laborer, the fellow we used to call the "working stiff;" It is apparent that self-employed pension plans are attractive only to a class with liquid assets and already pdssessing sufficient se- curity so that some assets can be set aside permanently until retirement. The only class meeting these conditions Is the better- off professional group. This has been borne out by the Canadian experience over more than 6 years under a similar pension ar- rangement for the self-employed. The bene- fits of this arrangement have been highly concentrated in the upper income groups. I would suggest, with no disrespect to the distinguished Senator from Indiana, that if he wishes to pursue H.R. 10 as such, It ought to be considered separately, and not as a part of the measure pending before us. Mr. LAUSCHE. As I understand, HR. 10 now is fully in the bill. Mr. GORE. H.R. 10 now is fully in the bill. I might say, In conclusion, that as this bill worked its tortuous way through the Senate, It became increas- ingly bad, and finally became so bad that both the majority leader and the minority leader voted against it. Mr. President, I am advised by the distinguished and able majority leader, whom I have found most cooperative in this battle, that he is now prepared to ask for yeas and nays on a motion which I send to the desk and ask to be stated. The PRESIDING OFFICER. The clerk will state the motion. The LEGISLATIVE CLERK. The Senator from Tennessee [Mr. GORE] moves that the conference report on HR. 13103 be laid on the table. Mr. MANSFIELD. Mr. President, I ask for the yeas and nays.. The yeas and nays were ordered. The PRESIDING OFFICER. The clerk will call the roll. The legislative clerk called the roll. Mr. LONG of Louisiana. I announce that the Senator from Nevada [Mr. BIBLE], the Senator from Idaho [Mr. CHURCH], the Senator from Alaska [Mr. GRUENING], the Senator from Washing- ton [Mr. JACKSON], the Senator from New York [Mr. KENNEDY], the Senator from Missouri [Mr. LONG], and the Senator from Washington [Mr. MAGNUSON] are absent on official business. I also announce that the Senator from Virginia [Mr. BYRD] IS absent because of the death of his father. I further announce that the Senator from Alaska [Mr. BARTLETT], the Senator from Tennessee [Mr. BAss], the Senator from Nevada [Mr. CANNON], the Senator from Illinois [Mr. DOUGLAS], the Senator from Mississippi [Mr. EASTLAND], the Senator from North Carolina [Mr. ERvIN], the Senator from North Caro- lina [Mr. JORDAN], the Senator from South Dakota [Mr. MCGOVERN], the Sen- ator from~New Hampshire [Mr. MCIN- TYRE], the Senator from Minnesota [Mr. MONDALE], the Senator from Utah [Mr. Moss], the Senator from Oregon [Mrs. NEUBERGER], the Senator from West Vir- ginia [Mr. RANDOLPH], the Senator from Connecticut [Mr. RIBICOFF], the Senator from Georgia [Mr. RUSSELL], the Sena- tor from Alabama [Mr. SPARKMAN], the 1961 PAGENO="0810" * Senator from MISSOUri [Mr. SYMINGTON]; and the Senator front Georgia [Mr. TALMADGE] are necessarily absent. On this vote, the Senator from Idaho [Mr. CHURCH] is paired with the Senator from Mississippi [Mr. EASTLAND]. If present and voting, the Senator from Idaho would vOte "nay" and the Senator from Mississippi would vote "yea." On this vote, the Senator from New York [Mr. KENNEDY] is paired with the Senator from West Virginia [Mr. RANDOLPH]. If present and voting, the Senator from New York would vote "yea" and the Senator from West Virginia would vote "nay." Mr. KUCHEL. I announce that the Senator from Vermont [Mr. AIKEN], the Senators from Colorado [Mr. ALLOTT and Mr. DOMINICK], the Senator from Dela- ware [Mr. Bocos], the Senators from Kansas [Mr. CARLSON and Mr. PEARSON], the Senator from New Jersey [Mr. CASE], the Senator from Kentucky [Mr. COOPER], the Senator from New Hamp- shire [Mr. COTTON], the Senators from Nebraska [Mr. CURTIS and Mr. HRUSKA], the Senator from Hawaii [Mr. FONG], Ithe Senator from Michigan [Mr. GRIF- FIN], the Senator from New York [Mr. JAVITS], the Senator from Idaho [Mr. JORDAN], the Senator from Iowa [Mr. MILLER], the Senator from South Da- kota [Mr. MUNDT], the Senator from Massachusetts [Mr. SALTONSTALL], the Senator from Pennsylvania [Mr. SCOTT], and the Senator from Texas [Mr. TOWER] are~ necessarily absent. The Senator from Illinois [Mr. DIRK- sEN] and the Senator from Vermont [Mr. PROUTY] are absent because of illness. If present and voting, the Senator from New York [Mr. JAVITS] and the Senator from Hawaii [Mr. FONG] would each vote "nay." On this vote, the Senator from Ne- braska [Mr. CURTIS] is paired with the Senator from Idaho [Mr. JORDAN]. If present and voting, the Senator from Nebraska would vote "nay" and the Sen- ator from Idaho would vote "yea." On this vote, the Senator from Iowa [Mr. MILLER] is paired with the Senator from Nebraska [Mr. HRUSKA] - If pres- ent and voting, the Senator from Iowa would vote "nay" and the Senator from Nebraska would vote "yea." On this vote, the Senator from Ver- mont [Mr. AIKEN] is paired with the Senator from Kentucky [Mr. COOPER]; If present and voting, the Senator from Vermont would vote "yea" and the Sena- tor from Kentucky would vote "nay." On this vote, the Senator from Penn- sylvania [Mr. SCOTT] is paired with the Senator from Texas [Mr. TOWER]. If present and voting, the Senator from Pennsylvania would vote "yea" and the Senator from Texas would vote "nay." On this vote, the Senator from Colo- rado [Mr. DoMINICK] is paired with the Senator from New Jersey [Mr. CASE]. If present and voting, the Senator from Colorado would vote "yea" and the Sen.. ator from New Jersey would vote "nay" On this vote, the Senator from Mas- sacuhsetts [Mr. SALTONSTALL] is paired with the Senator from Michigan [Mr. [P. 27604] GRIFFIN]. If present and voting, the Senator from Massachusetts would vote "yea" and the Senator from Michigan would vote "nay." The result was announced-yeas 15, nays 37, as follows: [No. 309 Leg.] YEAS-15 So the motion to lay on the table was rejected. Mr. LONG of Louisiana obtained the floor. Mr. MANSFIELD. Mr. President, will the Senator yield? Mr. LONG of Louisiana. I yield. Mr. MANSFIELD. Mr. President, may we have order? And, most impor- tant, will Senators please remain within shouting distance? The PRES]DILNG OFFICER (Mr. TYDINGS in the chair.) The Senate will be in order. Mr. LONG of Louisiana. Mr. Presi- dent, I should like to explain what the conference report contains. The Sen- ate voted to adopt 49 amendments, when the floor amendments accepted by this body are included. Of the 49, the Treasury felt that only 5 were not good amendments. The rest of the amendments were recommended by or subscribed to by the Treasury. The bill passed the Senate by a vote of 58 to 18. Every agreement between Fannin Lausche Simpson Gore McClellan Stennis Harris Monroney Thurmond Hickenlooper Morse Williams, Del. Kennedy, Mass. Murphy Young, Ohio NAYS-37 Anderson Hill Pastore Bayh Holland Pell Bennett Inouye Proxmire Brewster Kuchel Robertson Burdick Long, La. Russell, SC?. Byrd, W. Va. Mansfield Sinathers Clark McCarthy Smith Dodd McGee Tydings Ellender Metcalf Williams, N.J. Fuibright Montoya Yarborough Hart Morton Young, N. Dak. Hartke Muskie Hayden Nelson NOT VOTING-48 Alken Douglas Miller Allott Eastland Mondale Bartlett Ervin Moss Bass Fong Mundt Bible Griffin Neuberger Boggs Gruening Pearson Byrd, Va. Eruska Prouty Cannon Jackson Randolph Car]son Javlts Ribicoff Case - Jordan, NC. Russell, Ga. Church Jordan, Idaho Saltonstall Cooper Kennedy, N.Y. Scott Cotton Long, Mo. Sparkman Curtis Magnuson Symington Dlrksen McGovern Talmadge Dominick McIntyre Tower 1962 PAGENO="0811" Senate and House in the conference moved the bill more toward the position favored by the Treasury and the posi- tion of those who had at first objected to the bill. So from the point of view of those who objected at first, the bill is a much better bill. The revenue loss Is reduced by 85 percent. Of the amendments that the Treasury objected to, four were drastically modi- fied or dropped completely, and the only one we could not modify drastically was HR. 10, which happened to be an amendment adopted unanimously by the House. It was a Senate amend- ment; therefore, we had no power to reverse the judgment of the House on that matter. Mr. President, this is a good bill. The President thinks it Is a good bill. The House by its vote thinks it is a good bill. When the House voted to take 49 Senate amendments and agree to the confer- ence report, it seems to me that it is a report that can be agreed to. Mr. GORE. Mr. President, I wish to express appreciation to the leadership and the membership of the Senate for the consideration which this issue has been given. I do not aspire to be the conscience of the Senate nor thus to hold myself out. I, and other* Members of this body, felt very deeply about this issue-so deep- ly that we felt in duty conscience bound to make a fight against the final con- gressional step In passage of a bill which, in one instance, provides numer- ous examples of stark tax favoritism, and In the other, a bizarre, unwise, and, I think, dangerous innovation of the use of public money for political campaigns and the commingling of public money with private money, at the election of private citizens, in the appropriation of public funds. But I feel that with this brief state- ment I have performed my duty. I am still convinced that had the senior Sen- ator from Delaware [Mr. WILLIAMs) and I had the audience of the Senate, which now seems impossible, this measure would be defeated. But this is not the last day in the history of our Republic. Congress will be back soon to correct mistakes that may have been made, or perhaps make others, as well as to ac- complish good. I know that there are present, in or- order to achieve a quorum, Senators whose health is not well served by this exercise. I am advised that other Members of the Senate have deaths in their families, that loved ones are in critical condition. I shall not personalize, but I feel for those friends. So, with appreciation, I wish to make a brief statement and then ask for the yea and nays on adoption or rejection of the conference report. It shall be divided into two parts, but I assure Sen- ators again it will be brief. The distinguished junior Senator from Louisiana [Mr. LoNG) spoke of certain provisions which the Treasury favors. I wish to suggest to Senators, not all of the instances of rank, stark favoritism, but just two or three to il- lustrate the point. The senior Senator from Delaware [Mr. WILLIAMS] referred to one at some length earlier. Let me just read from page 7 of the conference report: The Senate amendment (in proposed sec- tion 201) amends section 48(a) (2) (B) to in- clude among the exceptions from the general rule with respect to property used pre- dominantly outside the U.S. property which Is owned by a domestic corporation (other than a corporation entitled to the benefits of section 931 or 934(b)) or by a U.S. citizen (other than a citizen entitled to the benefits of sec. 931, 932, 933, or 934(c)) and which Is med predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or or- ganized in, or under the law of, a possession of the United States. Under the Senate amendment, this provision was effective with respect to property placed in service on or after January 1, 1966 (but no carryback of an investment credit attributable to this provision was permitted). I read this language to illustrate how difficult it is for Senators, and more par- ticularly citizens unlearned in tax law, to read the technical terms of conditions set forth in a committee report or con- ference report and detect what has been done. Now, what, in laymen's language, does this provide? It provides a tax benefit retroactively to one large United States corporation, in excess of $2 million. What is its justification? There is none, in my view, it extends the invest- ment credit retroactively for a large aluminum plant, already constructed and already under operation, in the Virgin Islands. When we passed the Investment Credit Act, it was for the stated purpose of en- couraging development in the United States-modernization of our plants, Senators will remember-in order to meet competition from overseas. We did not extend it beyond the limits of the United States proper. So this company built its plant there, in the full aware- ness that it was to be built with no ex- pectation of receiving the benefit of the investment credit. As I said, the investment is already made, and the plant is already operating. This amendment which has been at- tached to the bill is, as has been stated, one of the Christmas packages, because it gives more than $2 million for no pur- pose in which there is a public interest. That is the first point. I could discuss It more fully, but let me go to another. I refer now to another amendment. I shall not undertake to read the tech- nicalities of it. It is even more technical 1963 PAGENO="0812" than the one I have just referred to, but what does it do? It provides for a swap, a merging of a diversity of assets, with- out the payment of the capital gains tax. Several organizations are already under- way. They have made their applica- tions. They have filed their plans with the Securities and Exchange Commis- sion. The Treasury Department issued a reg- ulation which would have outlawed- maybe that is the wrong term; would have closed a glaring loophole, from which concerns sought to obtain benefit. And what did the Senate committee do? It put in an amendment outlawing the Treasury regulation. Why? I do not know why. The Treasury was opposed to it. The Under Secretary of the Treasury was there. He referred to the provision as one of the most glaring loop- holes that he had ever seen. The conference committee enlarged the loophole, in a sense. It opened it wide in the amendment now before the Senate, in which the conference report repeals the Secretary of the Treasury's regulation, thus taking the course of those who sought to take advantage of the loophole, which the Treasury sought to close, giving them a free ticket and [P. 27605J permitting them to say, "Let us move be- fore it is too late." Any company that qualifies between now and January 1 can have free entry into the loophole. What is the justification for that? I do not think there is any, in good con- science. I could detain the Senate from now until midnight with a discussion of the inequities and the unfairness of the tax amendments that are tacked onto this bill. I shall resist the temptation to do so. I should like to refer to H.R. 10 just briefly. For years the House of Repre- sentatives has passed this bill. The Sen- ate has resisted. But when this grab bag comes along, providing a 150-percent increase in the depletion for the proces- sors of oyster shells and clam shells, pro- viding all these unwarranted benefits, the temptation is great for the Senate to vote to extend benefits to the high- income doctors, dentists, and lawyers, who, as stated in the majority leader's speech, will receive 70 percent of the benefits under the HR. 10 amendment. Mr. President, this is no bill for the benefit of the average workingman. This is a special interest bill insofar as the taxpayers are concerned. Yet we are one vote from sending it to the White House. I would now like to make some brief references to the provision with respect to campaign financing. Unfortunately, I was unable to talk to several Senators who are now here. I wish to suggest to those to whom I did not have the privi- lege of speaking earlier that this is not a clean elections bill. This makes the situation worse. The danger to our elective process is the use of money, the volume of money, and the sources of the money. Granted this comes from a good source, it is commingled with all the private financing. How will you differentiate? It permits private citizens to appropriate public funds for purposes of their own choosing. Is not that unusual? I am not sure that Congress can dele- gate such a responsibility, under the Con- stitution. If it can, the precedent is all the more dangerous. Because if a citi- zen can, by a checkmark on his tax re- turn, appropriate money for political campaigns or deny it to a political cam- paigri, he can deny it for the war in Vietnam; he can deny it for the war on poverty; or he can appropriate it for another particular purpose. So I say if this is constitutional-which I challenge-then it is all the more dan- gerous. Because once we are on this road, the tax forms which we sought to simplify will have one more option after another. It may be that consumers will want the right to deny the use of their tax money for a farm programs or that farmers will want to deny the use of their tax funds for urban renewal. What are we doing at a quarter to 3 on Saturday afternoon, October 22, when, after Herculean efforts, we have man- aged to obtain a quorum? I plead with the leadership of the Sen- ate, and more particularly with the lead- ership of the Senate Finance Committee and the House Ways and Means Commit- tee, to stop this annual practice of bring- ing sugar bills and technical tax bills be- fore Congress in the closing hours, when there is no time for adequate considera- tion. This is when unworthy purposes can most easily be accomplished. But we are not here to accomplish un- worthy purposes, though admittedly there are differences of opinion as to what purposes are worthy or unworthy. Mr. President, I am prepared to ask for the yeas and nays. The yeas and nays were ordered. Mr. MANSFIELD. Mr. President, the Senator has made a good argument about the lateness of the hour on these bills coming into the Senate, and I assure him that I intend to do everything I can from now on to insure that that practice is discontinued. Mr. LONG of Louisiana. Mr. Presi- dent, I can respond in 1 minute to cer- tain statements which have been made which I think reflect on the honor of my committee, and I believe that I should. Reference has been made to the fact that the amendment dealing with invest- ment credit in U.S. possessions would be retroactive to a January date. Mr. Pres- ident, when we first put the investment tax credit in the law, we had a January 1 date, though the investment tax credit 1964 PAGENO="0813" law went into effect about the following August. As a practical matter, it was retroactive, and it went into effect the same day for every corporation in America. All the amendment says is that corn-. panies doing business in American pos- sessions such as the Virgin Islands, Puerto Rico, Guam, and American Samoa receive the same treatment as companies doing business in the United States. We have negotiated tax treaties with first one underdeveloped nation and then another, saying that American people doing business there get the same tax treatment which this amendment pro- vides for our own island possessions. It is customary, when you pass a tax bill, to make its effective date either January 1 or the end of the fiscal year. The PRESIDING OFFICER. The Sen- ate will be in order. Mr. LONG of Louisiana. Mr. Presi- dent, I have explained these other items in great detail, and I shall not go Into them now, because Senators wish to vote. I am prepared to explain it in greater detail after the vote is over. Mr. WILLIAMS of Delaware. Mr. President, may I have 2 minutes? The PRESIDING OFFICER. The Senator from Delaware. Mr. WILLIAMS of Delaware. I do not wish to leave the RECORD confused. The effective date, as applied to the Virgin Islands refers to buildings completed after December 31, 1965, but the tax credit is allowed on machinery which went into the buildings in 1963 and 1964, or prior to that date. This bill provides a retroactive $2 million tax re- duction for one company only-Harvey Aluminum Co. Why? In that connection, I ask unanimous consent to have printed in the RECORD at this point a list of contributions officers of this company made to the President's Club. In addition, the record shows that Harvey Aluminum was the purchaser of a $15,000 full-page ad in the 1965 Demo- cratic ad book. There being no objection, the list was ordered to be printed in the RECORD, as follows: Sept. 1-Dec. 31, 1965: H. Harvey, 19200 Southwest Ave., Torrence, Calif $1, 000 L. M. Harvey. 19200 Southwest Ave., Torrence, Calif 1, 000 L. A. Harvey, 19200 Southwest Ave., Torrence, Calif 1, 000 Mr. WILLIAMS of Delaware. Mr. President, I wish to read into the RECORD a short quotation which seems to be particularly appropriate at this time when Congress seems to be in such an* extravagant mood. This statement was made 175 years ago by Dr. Alexander Tytler, professor of general history, of the University of Edinburgh. I think it would be. well for Senators to take heed to these words. This statement was made at the time when our Government was first established, and was Dr. Tyt- ler's comment upon this new democracy: A Democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote them- selves largess out of the public treasury. From that moment on the majority always votes for the candidate promising the most benefits from the public treasury, with the result that a' democracy will always collapse from a loose fiscal policy (burden of large public debt), always to be followed by a dic- tatorship. Mr. President, I hope Congress will take heed to this statement before we go too far down the road of taking care of special interests in special interest legislation on the eve of elections. It would be well to remember that as Mem- bers of the Senate `we are supposed to pass tax legislation which benefits the American people as a whole and not just the few who happen to have a special pipeline into the Treasury. Mr. MURPHY. Mr. President, all Americans are concerned about the as- tronomical cost of presidential elections. Private citizens, journalists, legislators, historians, political scientists, and other students of government have all recog- nized that presidential campaign costs have gotten out of line and that ways must be found to reduce them. A great deal of this added cost has resulted from the use of television. It seems clear that unless Congress acts, the already astronomical campaign costs of television and radio will continue to soar. The Federal Communications Commission estimated that the total campaign exepnditures for local, State, and national offices amounted to $200 million in 1964. This figure represents a 25 percent increase from 1960. For tele- vision and radio alone, the Federal Com- munications Commission estimated for 1964 a cost that amounted to $35 mil- lion, and the Broadcasting magazine esti- mated that the combined radio and tele- vision costs for 1964 was $40 million, of which approximately one-half was for presidential election. Mr. President, there is little question that the networks and stations using the airways occupy a special trust and owe {P. 27606] a special duty to the American people. They are issued a license by the Federal Communications Commission and must serve the general public. In my judg- ment, both the Congress and the FCC should explore the possibility of requir- ing networks and stations to make avail- able free time to the major parties on an equal time basis. I am convinced that the networks would be willing to do this and by so doing not only will they help to reduce the astronomical campaign costs but also would help to formalize the presentation of candidates and issues 1965 PAGENO="0814" to the American people. Donated time for presidential elections should help to elevate the campaign dialog, clarify the issues, better inform the American people and, hopefully, eliminate some of the bad judgment and poor taste that have appeared In political advertise- ments over the past years. Mr. President, I, as much as any Mem- ber of this body, would hope that the Congress would focus its attention on the increasing cost of financing campaigns. I speak from experience. In represent- ing the great and large State of Cali- fornia and having had to campaign on a shoestring, I fully realize the urgency of the problem and the need for immediate reform. Yet, I do not approve of the hasty manner in which we approved of the new method of financing campaign elections as an amendment to a bill that had nothing to do with campaign ex- penditures. Most Members of the body, I feel certain, did not have an opportunity to study and reflect on this issue as much as we would like. The end of a session, when legislation is coming out of corn- mittees so rapidly and it is almost im- possible- to study completely all of the hearings, reports, and bills, is not the time to pass a measure dealing with a subject that is so important. Mr. SMATHERS. Mr. President, for 12 years the very able and distinguished Congressman from New York [Mr. KEOGH) and myself have worked dili- gently to bring about an effective retire- ment plan for some 18 million self-em- ployed and their employees. We were successful in bringing about the enactment of what is known as the Self-Employed Individuals Tax Retire- ment Act in 1962. This was progress, but not progress enough. The act fell short of providing equality of treatment compared to that accorded corporate em- ployees in the same income bracket. This year the House of Representatives by a unanimous vote passed an amend- ment that would permit the self-em- ployed to deduct 100 percent of their pension fund contributions for them- selves and their employees for the pur- pose of putting these individuals on a parity with others. - The Senate adopted an amendment to the Foreign Investors Tax Act containing the same provisions as passed. by the House with one exception, and that is that the plan would become effective after the taxable year ending December 31, 1967. Because Congressman KEOGH and myself have served long enough in Congress to become conferees we were successful in getting the conference com- mittee to accept this amendment. Our hopes and dreams over the years have now been realized because the ob- jective for which we worked has been achieved. - I sincerely trust that the President will waste no time in signing the Foreign Investors Tax Act-with this amendment - which now provides equality of treatment to those who have been discriminated against over the years. This measure will be helpful to the farmer, the small businessman, doctors, lawyers, certified public accountants and many others, together with their em- ployees and the Treasury will suffer only a modest loss of revenue that it will re- coup to a major extent when the self- employed and their employees draw their retirement. I urge the adoption of the ccnference report. - The PRESIDING OFFICER. The question is on agreeing to the confer- ence report. On this question, the yeas and nays have been ordered, and - the clerk will call the roll. The legislative clerk called the roll. - Mr. LONG of Louisiana. I announce that the Senator from Nevada [Mr. BIBLE], the Senator from Idaho [Mr. CHURCH], the Senator from Alaska [Mr. GRUENING], the Senator from Washing- ton - [Mr. JACKSON], the Senator from New York [Mr. KENNEDY], the Senator from Missouri [Mr. LONG], and the Sen- ator from Washington [Mr. MAGNUSON], are absent on official business. I also announce that the Senator from Virginia [Mr. BYRD], is absent because of the death of his father. I further announce that the Senator from Alaska [Mr. BARTLETT], the Senator from Tennessee [Mr. BAss], the Senator from Nevada [Mr. CANNON]. the Senator from fllinois [Mr. DOUGLAS], the Sena- tor from Missississippi [Mr. EASTLAND], the Senator from North Carolina [Mr. - ERvIN], the Senator from North Carolina. [Mr. JORDAN], the Senator from South Dakota [Mr. MCGOVERN], the Senator from Minnesota [Mr. MONDALE], the Sen- ator from Utah [Mr. Moss], the Senator - from Oregon [Mrs. NEUBERGER], the Sen- ator from West Virginia [Mr. RANDOLPH], - the Senator from Connecticut [Mr. RIBI- C0FF], the Senator from Georgia [Mr. RUSSELL], the Senator from Alabama [Mr. SPARKMAN], the Senator from Mis- souri [Mr. SYMINGTON], and the Senator from Georgia [Mr. TALMADGE], are nec- essarily absent. I further announce that, if present and voting, the Senator from Idaho [Mr. ~CHURCH], and the Senator from West Virginia [Mr. RANDOLPH], would each vote "yea." On this vote, the Senator from Missis- sippi [Mr. EASTLAND] is paired with the Senator from New York [Mr. KENNEDY]. if present and voting, the Senator from Mississippi would vote "yea" and the Senator from New York would vote "nay." 1966 PAGENO="0815" Mr. KUCHEL. I announce that the Senator from Vermont [Mr. AIKEN], the Senators from Colorado [Mr. ALLOTT and Mr. DoMINIcK], the Senator from Delaware [Mr. BOGGS], the Senators from Kansas [Mr~ CARLSON and Mr. PEARSON], the Senator from New Jersey [Mr. CASE], the Senator from Kentucky [Mr. COOPER], the Senator from New Hampshire [Mr. COTTON], the Senators from Nebraska [Mr. CuRTIs and Mr. HRUSKA], the Senator from Hawaii [Mr. FONG], the Senator from Michigan [Mr. GRIFFIN], the Senator from New York [Mr. JAvIT5], the Senator from Idaho [Mr. JORDAN], the Senator from Iowa [Mr. MILLER], the Senator from South Dakota [Mr. MUNDT], the Senator from Massachusetts [Mr. SALTONSTALL], the Senator from Pennsylvania [Mr. SCOTT] and the Senator from Texas [Mr. TOWER] are necessarily absent. The Senator from Illinois [Mr. DIRK- 5EN] and the Senator from Vermont [Mr. PROTJTY] are absent because of illness. If present and voting, the Senator from Kansas [Mr. CARL5ON], the Senator from New York [Mr. JAVITS] and the Senator from Hawaii [Mr. FONG] and the Senator from Kansas [Mr. PEARSON] would each vote "yea." On this vote, the Senator from Nebraska [Mr. CuRTIs] is paired with the Senator from Idaho [Mr. JORDAN]. If present and voting, the Senator from Nebraska would vote "yea" and the Sen- ator from Idaho would vote "nay." On this vote, the Senator frcim Iowa [Mr. MILLER] is paired with the Senator from Nebraska [Mr. HRUSKA]. If present and voting, the Senator from Iowa would vote "yea" and the Senator from Nebraska would vote "nay." On this vote, the Senator from New Jersey [Mr. CASE] iS paired with the Senator from Colorado [Mr. DossnncK]. If present and voting, the Senator from New Jersey would vote "yea" and the Senator from Colorado would vote "nay." On this vote, the Senator from Ken- tucky [Mr. COOPER] Is paired with the Senator from Vermont [Mr. AIKEN]. If present and voting, the Senator from Kentucky would vote "yea" and the Sen- ator from Vermont would vote "nay." On this vote, the Senator from Mich- igan [Mr. Gam'ii'mr] is paired with the Senator from Massachusetts [Mr. SAL- TON5TALL]. If present and voting, the Senator from Michigan would vote "yea" and the Senator from Massachu- setts would vote "nay." * On this vote, the Senator from Texas * [Mr. TOWER] is paired with the Senator from Pennsylvania [Mr. SCOTT]. If present and voting, the Senator from Texas would vote "yea" and the Senator from Pennsylvania would vote "nay." The result was announced-yeas 31, nays 22, as follows: So the conference report was agreed to. Mr. BYRD of West Virginia. Mr. President, I ask unanimous consent that I may be permitted to read a statement entitled "Private Pension Plans for the Self-Employed," prepared by my distin- guished colleague [Mr. RANDOLPH], who could not be present in the Chamber this afternoon. The PRESIDING OFFICER. Without objection, it is so ordered. STATEMENT BY SENATOR RANDOLPH READ BY * SENATOR BYRD OF WEST VIRGINIA Mr. RANDOLPH. Mr. President, it is pleasing that the Senate has seized an opportunity to help many of our fellow countrymen make more adequate provi- sion for th~ir financial security in retire- ment. The Self-Employed Individuals Tax Retirement Act has been liberalized and will stimulate and assist self-em- ployed individuals in establishing private pension plans for their own benefit as well as for that of their employees. As Chairman of the Subcommittee on Employment and Retirement Incomes of the Senate Special Committee on Aging, I have been deeply interested in ade- quacy of retirement incomes. During the early part of 1965, our subcommittee held a series of hearings and issued a report on the subject of extending pri- vate pension coverage. In our report, we noted that during the past 30 years there has been a remarkable increase in the number of active workers covered by private pension plans and in the amounts ~f annual benefits paid under such plans. lNo.31o Leg.] YEAS-31 Anderson Holland Bayh Inouye Bennett Long, La. Brewster Mansfield Burdick McCarthy Byrd, W. Va. McGee Dodd Metcalf Ellender Montoya Hart Morton Hartke Muskie Hayden Pastore NAYS-22 Clark Kuchel Fannin Lausche Fulbright McClellan Gore McIntyre Harris Monroney Hickenlooper Morse Hill Murphy Kennedy, Mass. Nelson Pell Proxmire Robertson Russell, S.C. Smathers Stennis Tydings Williams, N.J. Yarborough Simpson Smith Thurmond Williams, Del. Young, N. Dak. Young, Ohio [P. 27607) Aiken Allott Bartlett Bass Bible Boggs Byrd, Va. Cannon Garison Case Church Cooper Cotton Curtis Dlrksen Dominick NOT VOTING-47 Douglas Mondale Eastland Moss Ervin Mundt Fong Neuberger Griffin Pearson Gruening Prouty Hruska Randolph Jackson Ribicoff Javits Russell, Ga. Jordan, NC. Saltonstall Jordan, Idaho Scott Kennedy, N.Y. Sparkman Long, Mo. Symlngton Magnuson Talmadge McGovern Tower Miller 1967 PAGENO="0816" Between 1930 and 1962, the number of workers covered increased from 2,700,000 to 23 million, an increase of almost ten- fold. Annual benefits paid moved up from about $90 million in 1930 to approx- imately $2,160 million in 1962. However, we found that the least progress in pro- viding private pension coverage has been made in businesses and professional units with the fewest employees, most of which are owned and managed by those who are self-employed. At our hearings, we were told that very few private pension plans have been adopted as a result of the Self-Employed Individuals Tax Retirement Act of 1962, due principally to the restrictions in that act which make pension plans unattrac- tive to self-employed individuals. One witness testified that only 15,000 persons have been covered by plans under that act, compared with the 7 million which the Treasury Department estimated could be covered by such plans. Today, we have an opportunity to remove those restrictions and to make it possible for millions of self-employed persons and their employees to have the benefit of private pensions. The only logical argument which can be presented against the progressive amendments to the Self-Employed Tax Retirement Act is that it would entail some revenue loss. We of the Subcom- mittee on Employment and Retirement Incomes believe it is more accurate to consider this not as a revenue loss, but as a wise investment in the material well- being of America's elderly and in the prosperity and health of the Nation's economy as it affects Americans of all ages. A pension expert testified at our hearing that each dollar of Federal reve- nue loss from funding private pensions contributes to the production of a mini- mum of $5.50 and a maximum of $12.20 of pension income in retirement. If any of us had an opportunity to buy a piece of land or purchase stock with the assur- ance that each dollar invested would be transformed into at least $5.50, we cer- tainly would not consider that we were wasting dollars without anyreturn. We would consider that we were making a wise and sound investment. And that is how we should regard the so-called reve- nue loss. By stimulating the adoption of private pension plans, we not only help the elder- ly who will receive the supplementary re- tirement income. We improve economic conditions for Americans of all ages. We do so, first, by encouraging the savings which go into pension plans, which fi- nances an expansion of productive ca- pacity. This, in turn, raises the stand- ard of living. Furthermore, we make the Nation's elderly a buoyant influence upon the economy. This is especially helpful in times of depression and economic dis- tress, when enhanced purchasing power of the Nation's elderly can help to un- prove the economy. On the other hand, in times like the present when inflation threatens, contributions to pension plans can prevent overheating the economy. In these ways, there is an improvement in the health of the economy as it affects Americans of all ages. [P. A5724) [Jv'ovember 10, 1966j Foreign Investors Tax Act-H.R. 13103 EXTENSION OF REMARKS OF HON. RUSSELL B. LONG OF LOUISIANA IN THE SENATE OF THE UNITED STATES Saturday, October 22, 1966 Mr. LONG of Louisiana. Mr. Presi- dent, at the end of the debate on the Foreign Investors Tax Act, I indicated that I had forgone making a speech in rebuttal to the statements of the Sena- tor from Tennessee [Mr. GORE] and the Senator from Delaware [Mr. WILLIAMs] because the majority leader had urged that if I did so, we might lose the quorum then available on, or near, the Senate floor. At that time, however, I indicated that I would insert such a rebuttal in the CONGRESSIONAL RECORD. This Is that reply. The portion of the conference report on the Foreign Investors Tax Act to which both the Senator from Tennessee [Mr. GORE] and the Senator from Dela- ware [Mr. WILLIAMS] objected has been called the "Christmas tree" bill or the "grab bag" bill. Since these are quick and catchy names, these descriptions of the bill have also appeared frequently in the press. Of course, a description of this type is likely to be believed, or ac- cepted as true, if repeated often enough. This is a well-known technique used to undermine a bill or provision, but that, of course, does not mean that the description is accurate. It must have occurred to my many col- leagues who voted with me on this con- ference report that If the opponents- who referred to It as being full of special Interest provisions-can cite only three or four cases no matter how hard they try, their case must be questionable. Let us examine the conference report from that point of view. First, as to title I of the bill which accounts for the first 10 sections and 100 pages of the bill, no questions have been raised. This is the Foreign Investors Tax Act portion of the bill and both the Senator from Ten- nessee [Mr. GORE] and the Senator from Delaware [Mr. WILLIAMSI agree that this is good, desirable legislation. It will both help our balance of payments and im- prove the equity of the tax system as it applies to nonresident aliens and foreign ~rporatAons. 1968 PAGENO="0817" - Problems have been raised as to the Long Act; namely, title III of the bill which deals with the Presidential Elec- tion Campaign Fund Act-and I shall discuss them In just a moment-but I certainly do not believe that anyone can say that this represents special Interest legislation. I realize that both of the Senators who led the attack on the bill have raised questions with respect to this portion of the bill, but these certainly are five more sections that cannot in any sense of the word be categorized as spe- cial interest provisions. The remaining titles to the bill, title II and title IV as agreed to by the con- ferees, contain 18 sections. As near as I can tell, the entire discussion of special interest legislation as it is described re- volves around four topics, accounting for seven sections of the bill. In other words, 11 more sections, make good structural changes in the law to which no question has been raised. Moreover, a review of these 11 sections discloses that in all cases they were either specifically en- dorsed by the Treasury Department or no objection was raised with respect to them. I shall attach to the end of my statement a brief description of these 11 clearly good structural changes. Let us now examine the four remain- ing Issues which apparently are respon- sible for the moniker which has been at- tached to this bill. INVESTMENT CREDIT IN U.S. POSSESSIONS One of these is the provision dealing with the investment credit in U.S. posses- sions. This amendment merely extends the application of the investment credit, now applicable to domestic investments, to investments in U.S. possessions for 1966 and subsequent years, on the same basis as the credit has been available here in the continental United States from 1962 forward. There have been statements to the effect that the Virgin Islands or Puerto Rico or some other pos- sessions are already providing tax benefits with respect to their tax systems and, as a result, further tax benefits are not needed. This view represents a mis- understanding as to how the provision works. The tax credit provided by the bill Is not available to offset Virgin Islands or Puerto Rican taxes. The in- vestment credit can only be taken with respect to investments made by domes- tic corporations or U.S. citizens with re- spect to their U.S. tax-not on any tax which may be due a possession. In addi- tion, this provision was carefully cir- cumscribed so that it would not be avail- able to any U.S. corporation or citizen already receiving special tax treatment under U.S. law with respect to invest- ments in the possessions. This primarily is the exclusion for such income pro- vided by section 931. Corporations which receive the benefit of this provision will be domestic cor- porations with investments in posses-' sions. They also must be corporations which are paying U.S. Income tax with respect to those investments. The Finance Committee could not see why we should discriminate against invest- ments of this type in our possessions. The committee could not see why these investments should be treated less favor- ably than investments herein the United States. I might add that Investments made in possessions during the period when the domestic credit is suspended will not be eligible for the investment credit. The principal objections which have been raised to this provision are that It [P. A5725) is "retroactive" and also that it is "tailor made" for the Harvey Aluminum Co. First, let me say that this provision applies only to assets, the use of which has begun in the current year, 1966. In the past when practically any amend- ment beneficial to taxpayers has been enacted, it has been made effective as of the year in which the legislative action was taken. In other words, making this provision effective with respect to assets the use of which began in 1966 is wholly consistent with what has been almost the universal practice in this regard in the past. Moreover, when the domestic investment credit was first provided, it, too, was made effective back to the first of the year 1962 although this act did not become law until October 16, 1962. I see very little difference in the circum- stances involving the two provisions, yet I heard no complaint about the domestic investment credit applying as of the first of the year in which enacted. As to this provision being tailor made for one company, let me say that it should be obvious that in all of the var- ious possessions of the United States cer- tainly more than one company made in- vestments during the calendar year 1966. It is ridiculous to assume that this pro- vision will have application to only one company, and when tax returns for 1966 are filed, I am sure it will be shown that this charge is not true. A bill to accomplish the objectives of the Senate amendment had been intro- duced in the House on August 24, 1965, giving everyone plenty of time to re- view its merits. The Finance Committee agreed to the amendment this year- only after the Treasury Department advised the committee that it was consistent with administration policy. SWAP FUND PROVISION Let me now turn to the so-called swap fund amendment. The misunderstand- ing of the "possession" provision is only exceeded by the misunderstanding of the swap fund provision. Section 351 of the Internal Revenue Code provides that gain or loss is not to be recognized if property is transferred to a corporation 1969 7 1-297 0-67-pt. 2-52 PAGENO="0818" by one person, or a group of persons, solely in exchange for stock or securities in the corporation, and immediately after the exchange the persons, or group of persons, is in control of the corporation. In 195T9 and 1960 and in the forepart of 1961 the Internal Revenue Service ruled that a group of persons holding stock in various companies could con- tribute this stock to a newly formed mutual fund corporation and receive in exchange for their contribution shares of this mutual fund. These are the so- called swap funds and the Service in these years ruled in 11 cases that there were no tax consequences iesulting from the formation of one of these swap funds. It is true that beginning in 1961 the Service has not issued rulings on the tax status of the formation of swap funds. However, many private tax lawyers con- sidered the formation of these funds to be a nontaxable transaction and operat- ing on their advice a number of funds have been formed since that time. Then, on July 14, 1966, the Treasury for the first time published regulations holding that the formation of these swap funds constituted a taxable transaction. At the time the Treasury took this posi- tion it offered closing agreements to existing swap funds which would provide that for past transactions, for all pur- poses of the tax laws, the formation of these funds would not constitute taxable transactions. In other words, for the fu- ture the Treasury applied its position as to what the law said, but because of the uncertainty which had previously existed it did not apply this position for the past. The effect of what Treasury did was to say that for the past, exchanges. with swap funds were tax free, but for the future they were taxable. - Those concerned with swap funds ini- tially made representations to members of the Finance Committee to the effect that the new regulations reversed the effect of the law even though there had been no change in the wording of the law. In other words, their position was that the Treasury was legislating by regula- tion. The majority of the Finance Com- mittee voted to make it clear that swap funds were covered by section 351. I voted against this amendment in com- mittee because I considered swap funds to be a loophole. While I understand the Treasury's opinion, nevertheless, I per- sonally believe the Treasury's regula- tions do not reflect the clear wording of the law. In my opinion the tax-free formation of swap funds was provided for by the language of section 351. I am glad to say that the conferees on the Foreign Investors Tax Act completely reversed the position on the Senate Fi- nance Committee amendment. The ac- tion taken by the conferees makes it per- fectly clear that the formation of swap funds will be viewed as a taxable trans- action in all cases where exchanges are made on or after July 1, 1967. More~ over, in the case of funds requiring registration with the Securities and Ex- change Commission, registration state- ments must be filed by December 31 of this year and the stock of prospective shareholders must be on deposit with the funds by May 1, 1967. It was the view of the conference that the various tax-free exchange provisions of the code should not permit the tax-free diversification of investment assets. In other words, the conference com- mittee action in this case completely con- firms what the Treasury sought to do by regulation. Moreover, it provides a sta- utory basis for this action which, in my opinion, the regulations of the Treasury did not have. It is true that this will cover funds where registration state- ments are filed with the SEC up to the end of this year. However, this, too, is in keeping with the concept in the Treas- - ury regulations which provided tax-free treatment for all funds in certain stages of process up to the time of the issuance of the regulations. This provides essen- tially the same treatment for funds which have been started before the end of this year. It is also worth pointing out that the conference committee action not only gives a statutory base for the Treasury regulations but that it in several respects provides a tighter rule than did the regu- lations. For example. ui~ier the C~n~r- ence committee action tax-free trcat- ment is denied real estate swap funds and investment companies which have too few shareholders to be required to leg- ister with the SEC and the denial app~ics whether or not brokers or other inter- mediaries organize the fund wher3 ~iare- holders have rights to redeem their hold- ings at their option. The conference committee action ie- suits in a much more restrictive provi- sion than the Treasury regulations sought. As a result, it seems clear to me that what we have here is a "loop- hole closer" instead of~ a "loophole opener." HR. 10 Let us now turn to the third area of complaint with the Foreign Investors Tax Act. I refer here to the so-called HR. 10 amendment, or tiie amendment which enlarges the deductions available to self-employed persons where amounts are set aside for their retirement years. I cannot say that I personally like this amendment. After all, the main thing that this amendment does is provide that when these self-employed persons set aside amounts for their retirement, they can deduct the full 10 percent of their wages up to a total of $2,500, rather than one-half of this amount. I do not like this amendment because the principal provision it repeals was my own amend- ment several years ago, which I fought for and obtained on the floor of the Sen- 1970 PAGENO="0819" ate. The thrust of my amendment was to treat contributions for self-employed persons' retirement essentially like con- tributions are treated under the social security and railroad retirement sys- tem. In both of these instances-and in those instances where private pension plans are provided on a contributory basis-the employer's share of the total contribution is deductible for tax pur- poses but the employee's share is not deductible. Since we were dealing with self-employed persons in a dual capac- ity, I felt, and the Congress agreed with me in 1962, that giving a deduction for half the contribution would place self- employed persons on a par with em- ployees. However, this year H.R. 10, repealing my amendment, was passed by the House by a vote of 291 to 0. The provision as an amendment to the For- eign Investors Tax Act was also sepa- rately acted upon, on a favorable basis, by the Senate. I think it is clear-al- though I personally disagree-that the majority of both the House and the Senate favor this amendment. I am not one to believe, even when I am in the minority, that minority rule in this re- spect should govern. In all fairness to the advocates of this amendment I must admit that there are many cases under the prior law where self-employed individuals are much- more severely limited in the amounts they may set aside for their own retirement than is true of many of the well-paid employ- ees and managers of many of our largest companies. Many of their plans are not contributory and, therefore, if one were to equate the self-employed individual with these persons, then the 50 percent deduction should not be required. Actu- - [P. A5726] ally, In my judgment, the whole area of the tax treatment of private pension plans needed reconsideration before this amendment was acted upon, and will still need reconsideration after the adoption of this amendment. in some cases self- employed individuals will have advan- tages over employees and in other cases they will be at a disadvantage. In my view, we probably will eventually want to see whether it is possible to more nearly equalize the treatment. in the mean- while, however, I see no reason why we should insist upon a minority view pre- vailing over the majority view. PERCENTAGE DEPLETION The fourth area of complaint is con- cerned with the provisions relating to percentage depletion. Of course, there are people who fundamentally disap- prove of percentage depletion, as such. To them any amendment in the area of percentage depletion is automatically wrong if it gives one cent more of deduc- tion to anyone, simply because they do not agree with the underlying principle Involved in percentage depletion. It seems to me that as long as we have percentage depletion in our tax sys- tem-and parenthetically I might add from my point of view this is something I hope is here for a long time to come- it Is entirely appropriate that the per- centage depletion rates be adjusted in a manner which allows for the competitive nature of the products. In other words, where two or more products are used for essentially the same purpose, good tax treatment-namely, the considerations of equity and fair competition-demands that they receive approximately the same percentage depletion deduction. This is no new, radical doctrine I am proposing here. This is, instead, the fundamental basis on which most of our percentage depletion rates are based at the present time. Let us look now at the specific areas where the percentage depletion rates were changed, and I should point out that as a result of the conference committee action it is only a change in rates which occurred. No additional processes were classified as mining processes for any mineral. This is the area that the Sen- ator from Tennessee [Mr. GORE] was so concerned with a number of years ago. We have not in the slightest modified the concepts of the mining processes, on which percentage depletion is based, from the concepts in present law which remains as he provided by legislation in 1960. The first area in which a percentage depletion rate was made was in the case of domestic deposits of clay, laterite, and nephelite syenite, but only to the extent that they are used for the extraction of alumina or aluminum compounds. The percentage depletion rate for these minerals was raised from 15 to 23 per- cent. This only seems fair since this is the percentage depletion rate which presently applies to domestic deposits of bauxite, the principal source of alumina and aluminum. It also is the rate which applies to another site to the extent that alumina and aluminum compounds are extracted from it. The Finance Com- mittee believed that a good case could be made not only for these percentage de- pletion rate increases but also for more liberal treatment with respect to mining processes. However, the House confer- ees would not agree to any changes in mining processes. Nevertheless, it Is hard for me to see how anyone could ob- ject to treating these different sources for alumina and aluminum the same as we already treat the principal source for alumina and aluminum. The second percentage depletion rate change applies in the case of clam and oyster shells. Now I am aware of the fact that percentage depletion for clam and oyster shells is a source of amuse- ment for many who are unacquainted with the extent to which clam and oyster shells In the entire gulf area are used 1971 PAGENO="0820" as a substitute for limestone. The clam and oyster shells referred to In this act are those which have lain at the bottom of the sea for many hundreds or thou- sands of years. The ownership in these shells is in either the Federal or a State Government. The Government leases to private parties the right to remove these shells from certain ~pecifled areas. This gives them a right to property which is exhaustible and which is, therefore, eligible for percentage depletion. This is exactly the same concept which applies generally with respect to percentage depletion. Clam and oyster shells of the type I have referred to already receive percent- age depletion at the rate of 5 percent. However, clam and oyster shells in many cases are ground up and used for their calcium carbonate content in making cement. Limestone-which also is essentially calcium carbonate-in other areas of the country is used for almost the identical purposes for which clam and oyster shells are used, yet limestone, except when used for road material or similar purposes,. receives a 15-percent depletion rate. When it is used as gravel for making roads, the depletion rate is limited to 5 percent. All this amendment does is to give precisely the same treatment to clam and oyster shells which is already available in the other areas of the coun- try where limestone is used for the same purposes. In other words, where clam and oyster shells are used as a substitute for gravel in making roads, the 5-percent depletion rate as at present will con- tinue, but when clam and oyster shells are used for making cement, as in the case of limestone, the 15-percent rate will be available. Realistically, this does no more than give the same treatment to deposits of calcium carbonate found un- der water as is already accorded deposits of calcium carbonate found on land. This merely removes a competitive dis- crimination. The final two percentage depletion rate changes represent very small changes indeed. The Senate action would have added sintering or burning to the processes classified as mining processes in the case of clay, shale, and slate used or sold as lightweight aggre- gates. These frequently are used for this purpose in concrete or in making cinder blocks. The Senate action, as a result of a floor amendment, would also have increased from 5 to 15 percent the perCentage depletion rate applicable for clay and shale used in making sewer pipe and brick. In these cases the primary conulderation was that other products used for similar purposes received a higher percentage depletion rate, or re- ceived more favorable treatment in the processes classified as mining processes. Iii the case of clay used for sewer pipe, for example, this pipe is in competition with concrete sewer pipe and the mate- rials used in making the cement which goes into the latter is eligible for 15- percent depletion rate. It was on this basis that the increase in the rate from 5 to 15 percent was justified on the Sen- ate floor. In the conference committee consideration of this, however, it was noted that contrary to a clay sewer pipe, only 15 to 20 percent of a concrete sewer pipe consists of cement. The remaining aggregates are sand and gravel which receive a 5-percent depletion rate. Be- cause of this additional information available to the conferees, which was not available at the time this matter was considered on the floor of the Senate, the Senate conferees agreed that the deple- tion rate should be adjusted upward by merely 2 Y2 percent, rather than by the 10 percent which would have been pro- vided by the Senate amendment. As I have suggested, this was agreed to be- ca~use of the realization that in the case of the clay pipe, the area of competitive discrimination is limited to 15 to 20 per- cent of the total value of the pipe. This represents a modest change in the deple- tion rates and one which is justified on the basis of the present competitive sit- uation. The Senate amendment relating to lightweight aggregates dealt with the treatment processes which were to be considered part of the cost of mining in working out the percentage deple- tion allowance. The House conferees, as I have indicated, were not willing to make any change in the treatment proc- ess provisions but they could see the merit of a larger deduction for these products when used as lightweight ag- gregates. The conferees decided to take the direct approach of giving a slightly larger depletion allowance rather than the indirect approach of increasing the base on which the present depletion al- lowance would be based. THE LONG PRESIDENTIAL ELECTION CAMPAIGN FUND ACT It seems that the charges of special interest legislation which have been so freely flung at this bill evaporate into thin air once the facts are examined. Let me turn now to the area of political campaign contributions. First, let me make it clear that this is an area on which the Senate Finance Committee has held hearings. An ear- lier version of the amendment adopted by the committee was presented in these hearings for consideration by the com- mittee. This is also true of various other plans, including the tax deduction plan favored by the Senator from Dela- ware [Mr. WILLIAMS). I might also add that the problem of political campaign contributions has been discussed on the [P. A5727J Senate floor not merely in connection with this bill but also in connection with 1972 PAGENO="0821" earlier legislation. At the time we last raised the debt limitation the Senator from Delaware {Mr. WILLIAMs] sought to amend that bill with his provision providing for political contribution de- ductions. The matter was extensively considered by the Senate at that time and rejected. However, this proposal was analyzed in hearings on political con- tributions held by the committee as I promised at the time. This is a matter which has been con- sidered extensively, not only in the cur- rent year but in past years as well. As the Senator from Tennessee [Mr. GoRE] indicated, this is a problem which he had under study some 10 years ago. The problem with these past studies, how- ever, is that they were just studies-no action was taken. I can well understand this, because the area of political cam- paign contributions is a multiple prob- lem. It Is a problem which, in part, is appropriately considered by one com- mittee and, in part, by other committees. In the past it has been difficult to ob- tain action on this problem because of the feeling that it was impossible to act on any one of these problems until action had been completed on the others. This, in turn, prevented action by all of the committees. Senator CLARK made this aspect of the situation quite clear in his discussion of the Presidential Election Campaign Fund Act. I should make it clear that I do not consider the Long Act as a full answer to all of the problems in connection with political campaign contributions. First of all, this deals only with presidential campaigns. It may well be that after we see how this provision works in the case of presidential campaigns we may want to extend either this provision or some modified version of it, to cover congres- sional elections. I do not know the an- swer to this, and I think it would be unfortunate for us to reach an Inflexible position in this regard until after we have tried this provision for a period of time in the case of presidential cam- paigns. Second, I want to make it clear that in my view this bill does not replace the need for additional legislation regulat- ing political contributions or requiring disclosure of the source of political cam- paign contributions. Moreover, this does not deal with other issues which we may have to face with respect to the division of television time or what orga- nizations can properly make campaign expenditures. These are all issues, how- ever, as to which it will be easier to come up with specific answers after my amendment is a part of the law, because it will give assurance of adequate financ- ing for the most important of all politi- cal campaigns. Nor do I contend that my provision itself even in the limited area in which it is intended to operate is, in all respects, necesarily a perfect answer to the prob- lem. I am sure that modifications will be necessary as we gain experience un- der this provision. Nevertheless, I view the Long Act as major legislation which will give assurance that presidenti~, candidates are not necessarily obligated to any financial interests as a result of the necessity to raise funds to finance their campaigns. There are sizable groups of citizens in our country who suspect that these financial contribu- tions have influenced governmental de- cisions. We should remove this shadow and prevent the possibility of anything like this in the future. To me this is the most important aspect of my amend- ment. I realize that some say, "But you haven't prevented the other campaign contributions from being made in addi- tion to the funds provided by your bill." I have two answers to this: first, as I have already indicated, this is not the last time that I expect legislation to be passed with respect to political campaign contributions. I will be prepared to sup- port limitations to outlaw private con- tributions to presidential campaigns when such legislation is before the Sen- ate, and now that we have assurance of adequate financing for presidential cam- paigns, it will, for the first time from a practical point of view, really be pos- sible to consider limitations such as I have referred to. Obtaining funds on a very small basis from a very wide group of our citizens is the best possible way of being sure that no financial group can be said to have gained undue influence. Others have tried to find a way of obtaining this broad participation through tax deductions or credits. However, the effort which would be required to obtain these contributions In amounts as small as $1 from so many people raises the collection costs under these other devices to such an extent as to make them impractical. Moreover, a tax deduction or even a tax credit tends to provide more of an incentive for those In the higher Income groups to make contributions than for taxpayers of more modest means. This is a kind of selection that I think is undesirable in attempting to influence political contributions. Some have objected to my plan be- cause it requires individuals to check a box on their tax return. What are the alternatives that we most frequently hear? The suggestions most usually made are for a tax deduction or tax credit. These involve not merely a check- mark on the tax return but also the recording of specific contributions made, and still leaves us with the auditing problem of determining whether, in fact, the contributions were made. The tax problems in these alternative solutions are much more complex and difficult than the simple checkmark on the tax return which the amendment provides. 1973 PAGENO="0822" Moreover, a tax deduction or credit to be verified must be checked with the party to whom the contribution was given. Who wants the internal revenue agents in examining his return to obtain in- formation on his political affiliation? In the absence of finding any other basis for objection to the Long Act, it is sometimes claimed that this is unde- sirable because individuals under this system are, in effect, designating how governmental funds are to be spent. To me the interesting thing about this argu- ment is that those who make this charge fail to recognize that a deduction or tax credit for political contributions just as effectively takes money which would Dtherwise go into the Public Treasury and diverts It to another purpose. The only difference I can see in this regard is that the tax deduction or tax credit schemes iivert the money just before it reaches the Treasury. Moreover, instead of di- verting the money to the political cam- )aigns, these deductions or credits merely ~ecompense the taxpayer for part of the ~ontribution he has already made. More- )ver, frequently they repay the taxpayer ieedlessly for contributions he would ~ave made in any case. There is no such vaste under the amendment in this bill. I have explained the mechanics of the aong Act previously, so I see no need to epeat it here. However, there are a ew points that I would like to em- thasize. First, this amendment treats qually all parties receiving 15 million otes or more. As a result, this will not avor the party in power. Second. Provision is made for minor- ;y parties under this bill. Any party eceiving 5 million votes or more-a 5 ililion deduction is provided not only for linority parties but for major parties s well-receives political campaign inds based upon its vote over 5 million, nd if it reaches the 15 million vote level, is treated equally with the major par- es. This is an honest attempt to give roper recognition to minority parties this area of political contributions but It at the same time be unrealistic and eat fragment parties on the same basis major parties. I believe that this rep- sents a fair solution to this problem, it I am certainly willing to consider odifications in the future should the ed to do so be established. Third. This amendment is limited in veral respects. Major parties cannot ceive more than an equal share of the nds based upon the vote in the last esidential election. Therefore, even if xpayers should check their tax re- ms freely in this regard, only limited ads would be available for expendi- re The funds are available only for Isidential campaigns, and the Comp- ~ller General is specifically authorized examine the statements presented to a and to audit the books of the polit- .1 parties to be sure that the contribu- tions are spent for presidential cam- paigns and not for congressional or gu- bernatorial campaigns, and not for per- sonal use, distinct from political pur- poses. Fourth. It has been said that this pro- vision runs contrary to the limitation in present law limiting contributions to po- litical committees to $3 million in any year. Those who say this cannot have examined the bill or present law very closely. Present law refers to contribu- tions to political committees. The bill actually has nothing to do with con- tributions. The term "contribute" means to give or supply in common with others; to share in a joint effort. The financing by the Government after the passage of this bill is not a voluntary, joint effort to give funds. Rather, it Is an appropriation of funds to which the parties have a right. Moreover, it [P. A5728) Is not part of a joint effort. As a re- sult, It is not a contribution and, there- fore, does not come under the limitation of present law. Moreover, it involves a payment to political "parties" not pay- ments to political "committees." As a result, it should be clear the present $3 million limitation does not apply. Fifth. Some have objected to the fact that the contribution in this case is di- vided between, or among, the major parties. Some have indicated that they would prefer making all of their con- tribution to one party or the other. This, of course, is not the way to assure good government. It may be a way of elect- ing one party over another-by supply- ing it with a better financial base-but it does not assure good government. The way to assure good government is to be sure that sufficient campaign funds are available to both, or all, major parties, so that their positions can be fully understood by the electorate. It is only a well-informed electorate that can assure the continuation of our rep- resentative form of government. Sixth. It has been suggested that there are no safeguards to prevent misuse of the funds made available to the political parties by this provision. Actually pres- ent law provides about as strict a fraud statute as can be imagined. Section 1001 of title 18 of the code specifies: Whoever, in any matter within the juris- diction of any department or agency of the United States knowingly and willfully falsi- fies, conceals or covers up by any trick, scheme, or device a material fact, or makes any false, fictitious or fraudulent state- ments or representations, or makes or uses any false writing or documents knowing the same to contain any false, fictitious or fraudulent statement or entry shall be fined not more than $10,000 or imprisoned not more than five years, or both. Certainly I would not object to other safeguards being written into the law to prescribe even more definitively how 1974 PAGENO="0823" these funds may be used and how they many not be used, but I do feel that those who say there presently are no safe- guards have overstated their case. Contrary to the general impression that some have tried to create, this is not a hastily concocted scheme. It has long been suggested that Gov- ernment should find, some way to help finance the cost of these campaigns. Theodore Roosevelt suggested nearly 60 years ago that this should be done with public funds. Later the Special Com- mittee To Investigate Campaign Expend- itures of presidential, .vice-presidential, and senatorial candidates in 1936 sug- gested that private contributions to po- litical campaigns be prohibited entirely and that instead all election expenses should be defrayed from public funds. In 1959, Jasper B. Shannon, professor of political science at the University of Nebraska, recommended a similar plan in'his book "Money and Politics." Earlier this year Prof. John Kenneth Gaibraith suggested, in connection with State of- fices, that the Government "provide every regularly nominated candidate with a public grant of sufficient size to enable him to get his name, merit If any, and platform before the people. These grants would be available to candidates for statewide office, the general court and for the senate and house of rep- resentatives." I introduced a bill on June 15 of this year to provide funds from the Treasury to help defray the cost of presidential campaigns. In doing this I was largely implementing a thought which had been before the people for discusion for nearly six decades. This is a matter which I have been studying for over a year and It Is a matter which has been thoroughly analyzed by the Senate Finance Commit- tee. The best minds of the staff of the Finance Committee and the staff of the Joint Committee on Internal Revenue Taxation, the Senate Legislative Coun- sel, the experts of Treasury, as well as other advisors to the President and the senior members of the House Committee on Ways and Means have all contributed meaningfully to the effort to find a proper answer. This is an important building block on which we can build a proper system for controlling political campaign contributions. Moreover, it is the first answer to this problem of fi- nancing political campaigns for which it ihas been possible to obtain majority support from Congress. This in itself is an Important achievement in such a controversial field as this. Let me conclude my comments on the presidential political campaign financing by saying that I consider this one of the most important and constructive pieces of legislation passed by Congress this year. I believe time will show that what I have said is true. ELEVEN NONCONTROVERSIAL STRUCTURAL CHANGES As I indicated previously, the bill in- cludes 11 structural changes not relat- ing to the Foreign Investors Tax Act but about which no questions have been raised. These are not hastily put-to- gether provisions. For the most part they represent provisions which have been carefully studied by the tax com- mittees and their staffs. Three of `these provisions, for example, had been con- sidered and were reported favorably by the House Committee on Ways and Means. Moreover, the provision relat- ing to "straddles" had been the subject of an extensive technical study by the staff of the Joint Committee on Internal Revenue Taxation in cooperation with the Treasury Department staff. The provision relating to per unit retain allo- cations of cooperatives is a matter studied over a long period of time both by the affected industries and also by the technical staffs of Congress and the Treasury Department. Three of the structural changes constitute improve- ments in the interest equalization tax which have been carefully studied by the staffs. Another of the amendments provides for an annual report on con- tingent liabilities and assets available to cover them. This report is one Senator SALTONSTALL has sought for some time and is one which should aid all of us in getting a better insight of the Gov- ernment's financial status. The Fi- nance Committee had recommended the Saltonstall amendment to the Senate back in the 88th Congress and again in the 1st session of the 89th Congress. On both occasions the Senate approved the bill without objection. These 11 amendments can be sum- marized, as follows: First. Corporate acquisition of assets of another corporation: Under present income tax law;' the purchase from an unrelated party by one corporation of at least 80 percent of the stock of another corporation followed by the liquidation of the acquired corporation within 2 years is treated as a purchase of the as- sets of `the acquired corporation. This amendment expands the definition of "purchase" to include the purchase of stock from a 50-percent owned sub- sidiary if stock in the 50-percent owned subsidiary was also acquired by pur- chase. The change is to be effective with respect to acquisitions of stock made after December 31, 1965. Second. Self-employed' persons retire- ment plans-certain income of authors, inventors, and so forth: This amend- ment modifies present income tax law relating to self-employed individuais' `retirement plans to permit authors, in- ventors, and so forth, to include gains- other than capital gains-from sales and other transfers of `their works in their earned income base for the purpose of 1975 PAGENO="0824" computing deductions for contributions to such plans. This change will be ef- fective for taxable years ending after the date of enactment of the act. Third. Exclusion of certain rents from personal holding company income: This amendment provides, for taxable years beginning after the date of enactment of the act-and certain earlier years at the election of the taxpayer-that rent re- ceived from the lease of tangible per- sonal property manufactured by a tax- payer is not to be treated as personal holding company income. Fourth. Straddles: This amendment provides that, with respect to straddle transactions entered into after January 25, 1965, the income from the lapse of an option which originated as part of a straddle is to be treated as a short-term capital gain-instead of ordinary in- come. This permits it to be netted against any capital loss which may re- suit from the exercise of the other option in the straddle while retaining what in most respects is ordinary income treat- ment for any excess of net short-term capital gain over net long-term capital loss. Fifth. The taxation of per-unit retain allocations of cooperatives: This amend- ment clarifies present law dealing with the taxation of cooperatives and patrons to assure that a current single tax is paid, at either the cooperative or patron level, with respect to per-unit retain certificates. In so doing, the amendment makes the treatment of these certificates generally comparable to the treatment of patronage dividends under present law. Sixth. The excise tax on hearses: This amendment provides that the sale of an amublance, hearse, or combination am- bulance-hearse vehicle is to be considered to be the saleof an automobile chassis or automobile body-rather than a truck [P. A5729J chassis or body-for purposes of deter- mining the manufacturers excise tax on motor vehicles. This change applies with respect to articles sold after the date of enactment of the act. Seventh. Interest equalization tax- raw material source loans: Subsequent transfers of debt obligations to. assure raw material sources are to be exempt from the interest equalization tax where the indebtedness is acquired without an intent on the part of the purchaser to sell it to other U.S. persons. This change is to be effective with respect to acquisi- tions of debt obligations made after the date of enactment. Eighth. Interest equalization tax- certain acquisitions by insurance com- panies in developed countries: The pres- ent exemption for reverse asset pools of U.S. insurance companies is extended to allow the establishment of reserve asset pools where a U.S. insurance company commences activities in a developed country or where a less-developed coun- try is designated as a developed country. This amendment is to take effect on the day after the date of enactment. Ninth. Interest equalization tax- Euro-dollars: The President Is given the authority to exempt from the interest equalization tax U.S. dollar loans of more than 1 year made by the foreign branches of U.S. banks. This change is to apply to acquisitions of debt obligations made after the date of enactment. Tenth. Treasury bonds or certificates payable in foreign currency: This amendment expands the debt manage- ment authority of the Secretary of the Treasury to permit the issuance of U.S. notes payable in foreign currencies. This authority already exists in the case of bonds and certificates of indebtedness. Eleventh. Reports on Federal contin- gent liabilities and assets: This amend- ment-as modified in conference-re- quires the Secretary of the Treasury to submit a report to the Congress each year indicating the full contingent liabilities of the Federal Government and the as- sets of the Federal Government which might be made available to liquidate such liabilities. The report is to be made on the first day of each regular session of the Congress with respect to the close of the preceding June 30-beginning with June 30, 1967. 1976 PAGENO="0825" SECTION 31 SENATE COMMITTEE ON FINANCE SUMMARY OF PRESIDENTIAL ELECTION CAMPAIGN FUND ACT OF 1966 (TITLE III OF PUBLIC LAW 89-809) 1977 PAGENO="0826" PAGENO="0827" (COMMITTEE PRINT] * L `~JCnztc»=~ ,~ta~fes ~~enc4e PRESIDENTIAL ELECTION CAMPAIGN FUND ACT OF 1966 (Title Ill of Public Law 89-809) Background In the past, political campaigns for the Presidency (and the Vice Presidency) have been financed generally through voluntary contributions by individuals and corporations. In some instances devices have been perfected to disguise these voluntary contributions as trade or business expenses in order to obtain a tax deduction for the amounts involved. Each time one of these devices has been detected Congress has acted to prevent its continuation, and, conversely, each time Congress has acted it has made political campaign financing more difficult. Against this background, it has become increasingly clear that new methods of financing political campaigns must be found. General Description The Presidential Election Campaign Fund Act of 1966 authorizes individual taxpayers to designate on their annual tax returns that $1 of their income tax may be placed in a presidential election campaign fund for the purpose of defraying expenses incurred by political parties in running candidates for Presi- dent and Vice President. Under the act, only political parties whose candidates received at least 5 mil- lion votes in the preceding presidential election are eligible for payments from the fund. The reimbursement rules are different under the act for major parties and minor parties, but they have three common features. First, all parties are to be subject to a $5 million floor, for which no re- imbursement is to be allowed. Second, payments to any political party are to be limited solely to reim- bursement of presidential (and vice-presidential) campaign expenses actually incurred by the party in connection with a current election. Third, payments in every case are calculated on the basis of votes cast in the prior presidential election. A minor party (one whose candidate for President polled more than 5 million but less than 15 mil- lion votes in the prior election) is to be eligible for reimbursements from the fund up to $1 for each vote in excess of 5 million that its candidate received in the preceding presidential election. A major party (one whose candidate polled 15 million votes or more in the preceding presidential election) is to be eligible for reimbursement from the fund of up to $1 times the number of votes cast for the presidential candidates of all the major parties in the preceding election, divided by the number of major parties. As in the case of minor parties, the amount actually paid over to any major party is to be reduced by $5 million. On the basis of the 1964 presidential election, only two major parties would be entitled to reimburse- ments with respect to their 1968 campaigns. Approximately 70 million votes were cast for their candi- dates in 1964, and after a reduction of $5 million for each major party, the maximum reimbursable amount would be fixed at approximately $60 million. Each party would be eligible for reimbursement of up to $30 million of expenses it actually incurs during the 1968 presidential campaign. The Comptroller General of the United States is authorized to determine tlie campaign expenses of the political parties and to determine the amounts which may be paid to them. An advisory board is established to advise and assist the Comptroller General with his duties under this act. Transfers to the Fund Space will be provided on the income tax return forms to permit each individual taxpayer (other than a nonresident alien or an estate or trust) to designate, if he so desires, that $1 of his tax is to be paid into the Presidential Election Campaign Fund. The voluntary act of a taxpayer will thus deter- mine the size of the fund; and, unless he chooses to have a portion of his tax used for financing political campaigns, none of his tax will go into the fund. Any taxpayer who shows an income tax liability of at least $1 on his return for the year may make an assignment. On joint returns, both husband and wife may designate provided the tax liability shown on the return is at least $2. The election is to be made at the time of filing the return or at such later time as may be provided in regulations (such as at the time of making a claim for refund of an over- payment of tax). 1979 PAGENO="0828" Payments From Fund Under the act the amount to be available for reimbursing a political party for its presidential (and vice-presidential) campaign expenditures will be determined by the number of votes cast in the immedi- ately preceding presidential election. The votes cast in the current election will determine the account to be available for these purposes in the next presidential election. The rules for payments from the fund differ for major parties and minor parties. Minor Party.-A political party whose candidate for President received more than 5 million votes in the preceding presidential election but less than 15 million votes will be reimbursed from the fund an amount equal to the lesser of (a) its actual campaign expenses, or (b) $1 times the number of votes in excess of 5 million that its candidate received in the preceding election. Major Party.-A political party whose candidate for President received 15 million votes or more in the preceding election is to be reimbursed on a different basis. An amount equal to $1 for each vote received by all major parties in the last election reduced by $5 million for each such major party, is to be divided equally between (or aniong) them. However, payments to any one party cannot exceed the expenses it incurs in the current campaign. Example-The preceding rules can be illustrated by assuming that 80 million popular votes are cast for candidates for President in the 1972 elections. These votes fix the amount in the fund to be available during the 1976 presidential campaign. The votes are divided in this manner: 40 million for the candidate of party A; 30 million for the candidate of party B; and 10 million for the candidate of party C. Under the law parties A and B are "major parties," while party C is a "minor party." In 1976, party C would be eligible to receive from the Presidential Election Campaign Fund $5 million-$1 per vote in excess of 5 million votes cast for its candidate in 1972. In 1976, parties A and B would each be eligible to receive $30 million from the fund. This is calculated by dividing (a) the total votes cast for major party candidates in the 1972 presidential election (70 million) by (b) the number of major parties (2) and then subtracting $5 million from the amount for each of the major parties. Administrative-The payments will be made at times to be determined by Treasury regulations, but no payment for a given presidential election campaign can be made before September 1 of the year the election is held. Nor will there be any reimbursement for expenses related to a presidential primary cam- paign or to seeking nomination as a presidential candidate. The Comptroller General is charged with the responsibility for certifying to the Secretary of the Treasury the amounts payable to eligible political parties, and the Secretary will disburse these amounts. In this certification the Comptroller General will take into account information supplied him by the treasurers of each political party regarding presidential campaign expenses incurred. Reimbursement may not be made for any item related to a candidate for any office other than President or Vice President. Nor will the expenses of a joint appearance with a candidate for another office be allowed if a principal purpose of the joint appearance is to further the campaign of the other candidate. The Comptroller General is also to certify the total vote received by each party in the preceding presidential election and his decision in this respect is to be final. If, at the time payments are made, there is an insufficient amount in the fund to reimburse the parties for their allowable expenses, payments to all entitled parties will be reduced pro rata, and the additional amounts will be paid out in later years as the fund is replenished by new assignments. Conversely, if an amount remains in the fund after all authorized payments have been made with respect to a presidential election, or if the fund exceeds the maximum amount which maybe authorized for payment, the excess amount is to be returned to the general fund of the Treasury. Advisory Board A Presidential Election Campaign Fund Advisory Board is established to advise and assist the Comptroller General in connection with his duties under this act. The Board is to consist of two members from each major political party, to be appointed by the Comptroller General upon recommendations submitted by the parties, and three additional members selected by a majority of the Board's political party members. The first Board is to serve until 60 days after the 1968 presidential election. Subsequent Boards will be appointed to serve for 4-year terms ending 60 days after each succeeding presidential election. Board members will be compensated at the rate of $75 a day for the period they are actually engaged in performing the duties and functions of the Board. They will also receive travel expenses and a per diem in lieu of subsistence (at rates authorized for persons in intermittent Government service) when engaged in work away from their homes or regular places of business. Effective Date The designation is to be permitted with respect to income tax liability for each taxable year begin- ning after December 31, 1966. For most taxpayers this means calendar year 1967. Accordingly, income tax returns which must be filed on or before April 15, 1968, will be the first to contain a space in which the taxpayer may indicate whether he chooses to have $1 of his tax used for presidential campaign purposes. 1980 PAGENO="0829" STATEMENT ON THE CONFERENCE REPORT Novembei~ 10,1966 RUSSELL B. LONG, Chairman Let me turn now to the area of political campaign contributions. First, let me make it clear that this is an area on which the Senate Finance Committee has held hearings. An earlier version of the amendment adopted by the committee was presented in these hear- ings for consideration by the committee. This is also true of various other plans, including the tax deduction plan favored by the Senator from Delaware (Mr. Williams). I might also add that the prob- lem of political campaign contributions has been discussed on the Senate floor not merely in connection with this bill, but also in connection with earlier legislation. At the time we last raised the debt hmsta- tion, the Senator from Delaware (Mr. Williams) sought to amend that bill with his provision providing for political contribution deductions. The matter was extensively considered by the Senate at that time and rejected. However, this proposal was analyzed in hearings on political contributions held by the committee as I promised at the time. This is a matter which has been considered extensively, not only in the current year, but in past years as well. As the Senator from Tennessee (Mr. Gore) indicated, this is a problem which he had under study some 10 years ago. The problem with these past studies, however, is that they were just studies-no action was taken. I can well understand this, because the area of political campaign contri- butions is a multiple problem. It is a problem which, in part, is appropriately considered by one com- mittee and, in pai-t, by other committees. In the past it has been difficult to obtain action on this problem because of the feeling that it was impossible to act on any one of these problems until action had been completed on the others. This, in turn, prevented action by all of the committees. Senator Clark made this aspect of the situation quite clear in his discussion of the Presidential Election Cam- paign Fund Act. I should make it clear that I do not consider the Long Act as a full answer to all of the problems in connection with political campaign contributions. First of all, this deals only with presidential cam- paigns. It may well be that after we see how this provision works in the case of presidential campaigns we may want to extend either this provision or some modified version of it, to cover congressional elec- tions: I do not know the answer to this, and I think it would be unfortunate for us to reach an inflexible position in this regard until after we have tried this provision for a period of time in the case of presi- dential campaigns. Second, I want to make it clear that in my view this bill does not replace the need for additional legislation regulating political contributions or requiring disclosure of the source of political campaign contributions. Moreover, this does not deal with other issues which we may have to face with respect to the division of television time or what organizations can properly make campaign expenditures. These are all issues, however, as to which it will be easier to come up with specific answers after my amend- ment is a part of the law, because it will give assurance of adequate financing for the most important of all political campaigns. Nor do I contend that my provision itself even in the limited area in which it is intended to operate is, in all respects, necessarily a perfect answer to the problem. I am sure that modifications will be necessary as we gain experience under this provision. Nevertheless, I view the Long Act as major legis- lation which will give assurance that presidential candidates are not necessarily obligated to any fi- nancial interests as a result of the necessity to raise funds to finance their campaigns. There are sizable groups of citizens in our country who suspect that these financial contributions have influenced gov- ernmental decisions. We should remove this shadow and prevent the possibility of anything like this in the future. To me this is the most important aspect of my amendment. I realize that some say, "But you haven't prevented the other campaign contributions from being made in addition to the funds provided by your bill." I have two answers to this: first, as I have already indicated, this is not the last time that I expect legislation to be passed with respect to political campaign contributions. I will be prepared to support limitations to outlaw private contributions to presidential cam- paigns when such legislation is before the Senate, and now that we have assurance of adequate lInanc- sag for presidential campaigns, it will, for the flu-st time from a practical point of view, really be possible to consider limitations such as I have referred to. Obtaining funds on a very small basis from a very wide group of our citizens is the best possible way of being sure that no financial group can be said to have gained undue influence. Others have tried to find a way of obtaining this broad participation through tax deductions or credits. However, the effort which would be required to obtain these contributions in amounts as small as $1 from so many people raises the collection costs under these other devices to such an extent as to make them impracti- cal. Moreover, a tax deduction or even a tax credit tends to provide more of an incentive for those m the higher income grouns to make contributions than for taxpayers of more modest means. This is a kind of selection that I think is undesirable in attempting to influence political contributions. 1981 PAGENO="0830" Some have objected to my plan because it requires individuals to check a box on their tax return. What are the alternatives that we most frequently hear? The suggestions most usually made are for a tax deduction or tax credit. These involve not merely a checkmark on the tax return but also the recording of specific contributions made, and still leaves us with the auditing problem of determining whether, in fact, the contributions were made. The tax problems in these alternative solutions are much more complex and difficult than the simple checkmark on the tax return which the amendment provides. Moreover, a tax deduction or credit to be verified must be checked with the party to whom the contribu- tion was given. Who wants the internal revenue agents in examining his return to obtain information on his political affiliation? In the absence of finding any other basis for objection to the Long Act, it is sometimes claimed that this is undesirable because individuals under this system are, in effect, designating how governmental funds are to be spent. To me the interesting thing about this argument is that those who make this charge fail to recognize that deduction or tax credit for political contributions just as effectively takes money which would otherwise go into the Public Treasury and diverts it to another purpose. The only difference I can see in this regard is that the tax deduction or tax credit schemes divert the money just before it reaches the Treasury. Moreover, instead of diverting the money to the political campaigns, these deductions or credits merely recompense the taxpayer for part of the contribution he has already made. Moreover, frequently they repay the taxpayer needlessly for contributions he would have made in any case. There is no such waste under the amendment in this bill. I have explained the mechanics of the Long Act previously, so I see no need to repeat it here. How- ever, there are a few points that I would like to emphasize: First. This amendment treats equally all parties receiving 15 million votes or more. As a result, this will not favor the party in power. Second. Provision is made for minority parties under this bill. Any party receiving 5 million votes or more-a 5 million deduction is provided not only for minority parties but for major parties as well-receives political campaign funds based upon its vote over 5 million, and if it reaches the 15 million vote level, it is treated equally with the major parties. This is an honest attempt to give proper recognition to minority parties in this area of political contributions but not at the same time be un- realistic and treat fragment parties on the same basis as major parties. I believe that this represents a fair solution to this problem, but I am certainly willing to consider modifications in the future should the need to do so be established. - Third. This amendment is limited in several respects. Major parties cannot receive more than an equal share of the funds based upon the vote in the last presidential election. Therefore, even if tax- payers should check their tax returns freely in this regard, only limited funds would be available for expenditure. The funds are available only for presidential campaigns, and the Comptroller General is specifically authorized to examine the statements presented to him and to audit the books of the poltical parties to be sure that the contributions are spent for presidential campaigns and not for congressional or gubernatorial campaigns, and not for personal use, distinct from political purposes. Fourth. It has been said that this provision runs contrary to the limitation in present law limiting contributions to political committees to $3 million in any year. Those who say this cannot have ex- amined the bill or present law very closely. Present law refers to contributions to political commit- tees. The bill actually has nothing to do with contributions. The term "contribute" means to give or supply in common with others; to share in a joint effort. The financing by the Government after the passage of this bill is not a voluntary, joint effort to give funds. Rather, it is an appropriation of funds. Rather, it is an appropriation of funds to which the parties have a right. Moreover, it is not part of a joint effort. As a result, it is not a contribution and, therefore, does not come under the limi- tation of present law. Moreover, it involves a payment to political "parties" not payments to political "committees." As a result, it should be clear the present $3 million limitation does not apply. Fifth. Some have objected to the fact that the contribution in this case is divided between, or among, the major parties. Some have indicated that they would prefer making all of their contribu- tion to one party or the other. This, of course, is not the way to assure good government. It may be a way of electing one party over another-by supplying it with a better financial base-but it does not as- sure good government. The way to assure good government is to be sure that sufficient campaign funds are available to both, or all, major parties, so that their positions can be fully understood by the elec- torate. It is only a well-informed electorate that can assure the continuation of our representative form of government. Sixth. It has been suggested that there are no safeguards to prevent misuse of the funds made available to the political parties by this provision. Actually, present law provides about as strict a fraud statute as can be imagined. Section 1001 of title 18 of the code specifies: Whoever, in any matter within the jurisdiction of any department or agency of the United States knowingly and willfully falsifies, conceals or covers up by any trick, scheme, or device a material fact, or makes any false, fictitious or fraudulent statements or representations, or makes or uses any false writing or documents knowing the same to contain any false, fictitious or fraudulent statement or entry shall be fined not more than $10,000 or imprisoned not more than five years, or both. 1982 PAGENO="0831" Certainly I would not object to other safeguards being written into the law to prescribe even more definitely how these funds may be used and how they may not be used, but I do feel that those who say there presently are no safeguards have overstated their case. Contrary to the general impression that some have tried to create, this is not a hastily concocted scheme. It has long been suggested that Government should find some way to help finance the cost of these campaigns. Theodore Roosevelt suggested nearly 60 years ago that this should be done with public funds. Later the Special Committee To Investigate Campaign Expenditures of presidential, vice-presi- dential, and senatorial candidates in 1936 suggested that private contributions to political campaigns be prohibited entirely and that instead all election expenses should be defrayed from public funds. In 1959, Jasper B. Shannon, professor of political science at the University of Nebraska, recommended a similar plan in his book "Money and Politics." Earlier this year Prof. John Kenneth Galbraith sug- gested, in connection with State offices, that the Government "provide every regularly nominated can- didate with a public grant of sufficient size to enable him to get his name, merit if any, and platform before the people. These grants would be available to candidates for statewide office, the general court and for the senate and house of representatives." I introduced a bill on June 15 of this year to provide funds from the Treasury to help defray the cost of presidential campaigns. In doing this I was largely implementing a thought which had been before the people for discussion for nearly 6 decades. This is a matter which I have been studying for over a year, and it is a matter which has been thoroughly analyzed by the Senate Finance Committee. The best minds of the staff of the Finance Committee and the staff of the Joint Committee on Internal Revenue Taxation, the Senate Legislative Counsel, the experts of Treasury, as well as other advisors to the President and the senior members of the House Committee on Ways and Means have all contri- buted meaningfully to the effort to find a proper answer. This is an important building block on which we can build a proper system for controlling political campaign contributions. Moreover, it is the first answer to this problem of financing political campaigns for which it has been possible to obtain ma- jority support from Congress. This in itself is an important achievement in such a controversial field as this. Let me conclude my comments on the presidential political campaign financing by saying that I consider this one of the most important and constructive pieces of legislation passed by Congress this year. I believe time will show that what I have said is true. 1983 PAGENO="0832" APPENDIX TEXT-PRESIDENTIAL ELECTION CAMPAIGN FUND ACT (Title III of Public Law 89-809) Sec. 301. SHORT TITLE. This title may be cited as the "Presidential Election Campaign Fund Act of 1966." Sec. 302. AUTHORITY FOR DESIGNATION OF $1 OF INCOME TAX PAYMENTS TO PRESIDEN~FIAL ELECTION CAMPAIGN FUND. (a) Subchapter A of chapter 61 of the Internal Revenue Code of 1954 (relating to returns and records) is amended by adding at the eiid thereof the following new part: "Part \`III-Designation of Income Tax Payments to Presidential Election Campaign Fund "SEC. 6096. Designation by individuals. "Sec. 6096. DESIGNATION BY INDIViDUALS. "(a) IN GENERAL-Every individual (other than a nonresident alien) whose income tax liability for any taxable year is $1 or more may designate that $1 shall he paid into the Presidential Election Cam- paign Fund established by section 303 of the Presidential Election Campaign Fund Act of 1966. "(b) INCOME TAX LIABILITY.-For purposes of subsection (a), the income tax liability of an indi- vidual for any taxable year is the amount of the tax imposed by chapter 1 on such individual for such taxable year (as shown on his return), reduced by the sum of the credits (as shown in his return) allowable under sections 32(2), 33, 35, 37, and 38. "(c) MANNER AND TIME OF DESIGNATION-A designation under subsection (a) may be made with respect to any taxable year, in such manner as the Secretary or his delegate may prescribe by regulations- "(1) at the time of filing the return of the tax imposed by chapter 1 for such taxable year, or "(2) at any other time (after the time of filing the return of the tax imposed by chapter 1 for such taxable year) specified in regulations prescribed by the Secretary or his delegate." (b) The table of parts for subchapter A of chapter 61 of such Code is amended by adding at the end thereof the following new item: "Part VIII. Designation of income tax payments to Presidential Election Campaign Fund." (c) The amendments made by this section shall apply with respect to income tax liability for taxable years beginning after December 31, 1966. Sec. 303. PRESIDENTIAL ELECTION CAMPAIGN FUND. (a) ESTABLISHMENT-There is hereby established on the books of the Treasury of the United States a special fund to be known as the "Presidential Election Campaign Fund" (hereafter in this section referred to as the "Fund"). The Fund shall consist of amounts transferredto it as provided in this section. (b) TRANSFERS TO THE FUND-The Secretary of the Treasury shall, from time to time, transfer to the Fund an amount equal to the sum of the amounts designated by individuals under section 6096 of the Internal Revenue Code of 1954 for payment into the Fund. (c) PAYMENTS FROM FUND.- (1) IN GENERAL-The Secretary of the Treasury shall, with respect to each presidential cam- paign, pay out of the Fund, as authorized by appropriation Acts, into the treasury of each political party which has complied with the provisions of paragraph (3) an amount (subject to the limitation in paragraph (3) (B)) determined under paragraph (2). (2) DETERMINATION OF AMOUNTS.- (A) Each political party whose candidate for President at the preceding presidential election received 15,000,000 or more popular votes as the candidate of such political party shall be entitled to payments under paragraph (1) with respect to a presidential campaign equal to the excess over $5,000,000 of- (i) $1 multiplied by the total number of popular votes cast in the preceding presi- dential election for candidates of political parties whose candidates received 15,000,000 or more popular votes as the candidates of such political parties, divided by (ii) the number of political parties whose candidates in the preceding presidential election received 15,000,000 or more popular votes as the candidates of such political parties. (B) Each political party whose candidate for President at the preceding presidential election received more than 5,000,000, but less than 15,000,000, popular votes as the candidate of such political party shall be entitled to payments under paragraph (1) with respect to a 1984 PAGENO="0833" presidential campaign equal to $1 multiplied by the number of popular votes in excess, of 5,000,000 received by such candidate as the candidate of such political party in the preceding presidential election. (C) Payments under paragraph (1) shall be made with respect to each presidential cam- paign at such times as the Secretary of the Treasury may prescribe by regulations, except that no payment with respect to any presidential campaign shall be made before September 1 of the year of the presidential election with respect to which such campaign is conducted. If at the time so prescribed for any such payments, the moneys in the~Fund are insufficient for the Secretary to pay into the treasury of each political party which is entitled to a payment under paragraph (1) the amount to which such party is entitled, the payment to all such parties at such time shall be reduced pro rata, and the amounts not paid at such time shall be paid when there are sufficient moneys in the Fund. (3) LIMITATIoNS.- (A) No payment shall be made under paragraph (1) into the treasury of a political party with respect to any presidential campaign unless the treasurer of such party has certified to the Comptroller General the total amount spent or incurred (prior to the date of the certifica- tion) by such party in carrying on such presidential campaign, and has furnished such records and other information as may be requested by the Comptroller General. (B) No payment shall be made under paragraph (1) into the treasury of a political party with respect to any presidential campaign in an amount which, when added to previous payments made to such party, exceeds the amount spent or incurred by such party in carrying on such presidential campaign. (4) The Comptroller General shall certify to the Secretary of the Treasury the amounts pay- able to any political party under paragraph (1). The Comptroller General's determination as to the popular vote received by any candidate of any political party shall be final and not subject to review. The Comptroller General is authorized to prescribe such rules and regulations, and to conduct such examinations and investigations, as he determines necessary to carry out his duties and functions under this subsection. (5) DEFINITIONS-For purposes of this subsection- (A) The term "political party" means any political party which presents a candidate for election to the office of President of the United States. (B) The term "presidential campaign" means the political campaign held every fourth year for the election of presidential and vice presidential electors. (C) The term "presidential election" means the election of presidential electors. (d) TRANSFERS TO GENERAL FUND-If, after any presidential campaign and after all political parties which are entitled to payments under subsection (c) with respect to such presidential campaign have been paid the amounts to which they are entitled under subsection (c), there are moneys remaining in the Fund, the Secretary of the Treasury shall transfer the moneys so remaining to the general fund of the Treasury. Sec. 304. ESTABLISHMENT OF ADVISORY BOARD. (a) There is hereby established an advisory board to be known as the Presidential Election Cam- paign Fund Advisory Board (hereafter in this section referred to as the "Board"). It shall be the duty and function of the Board to counsel and assist the Comptroller General in the performance of the duties imposed on him under section 303 of this Act. (b) The Board shall be composed of two members representing each political party whose candidate for President at the last presidential election received 15,000,000 or more popular votes as the candidate of such political party, which members shall be appointed by the Comptroller General from recommenda- tions submitted by each such political party, and of three additional members selected by the members so appointed by the Comptroller General. The term of the first members of the Board shall expire on the 60th day after the date of the first presidential election following the date of the enactment of this Act and the term of subsequent members of the Board shall begin on the 61st day after the date of a presi- dential election and expire on the 60th day following the date of the subsequent presidential election. The Board shall select a Chairman from among its members. (c) Members of the Board shall receive compensation at the rate of $75 a day for each day they are engaged in performing duties and functions as such members, including travel time, and, while away from their homes or regular places of business, shall be allowed travel expenses, including per diem in lieu of subsistence, as authorized by law for persons in the Government service employed intermittently. (d) Service by an individual as a member of the Board shall not, for purposes of any other law of the United States, be considered as service as an officer or employee of the United States. Sec. 305. APPROPRIATIONS AUTHORIZED. There are authorized to be appropriated, out of the Presidential Election Campaign Fund such sums as may be necessary to enable the Secretary of the Treasury to make payments under section 303 of this Act. 1985 71-297 0-67-pt. 2-53 PAGENO="0834" PAGENO="0835" SECTION 32 SUMMARY OF THE FOREIGN INVESTORS TAX ACT OF 1966; PRESIDENTIAL ELECTION CAMPAIGN FUND ACT; AND OTHER AMENDMENTS 1987 PAGENO="0836" PAGENO="0837" SUMMARY OF THE FOREIGN INVESTORS TAX ACT OF 1966; PRESIDENTIAL ELECTION CAMPAIGN FUND ACT; AND OTHER AMENDMENTS (H.R. 13103; 89th Congress, Public Law 89-809) PREPARED BY THE STAFF OF THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION DECEMBER 31, 1966 U.S. GOVERNMENT PRINTING OFFICE 74-2690 WASHINGTON 1967 JCS-17-66 1989 PAGENO="0838" JOINT COMMIPTEE ON INTERNAL REVENUE TAXATION RUSSELL B. LONG, Louisiana, Chairman WILBUR D. MILLS, Arkansas, Vice Chairman GEORGE A. SMATHERS, Florida CECIL R. KING, California CLINTON P. ANDERSON, New Mexico HALE BOGGS, Louisiana JOHN J. WILLIAMS, Delaware JOHN W. BYRNES, Wisconsin FRANK CARLSON, Kansas THOMAS B. CURTIIS, Missouri LAURENCE N. WOODWOETH, Chief of Staff LINCOLN ARNOLD, As8istant Chief of Staff II 1990 PAGENO="0839" CONTENTS Page Summary 1 I. Explanation of provisions 9 A. Foreign Investors Tax Act 9 1. Income tax source rules 9 a. Rules for determining source of certain interest payments 9 b. Interest on deposits in foreign branch banks of domestic corporations and partnerships 10 c. Foreign central banks and the Bank for Inter- national Settlements 10 d. Rules for determining the sources of dividends and interest from foreign corporations 11 e. Compensation for personal services 11 2. Definitions used in determining taxable status of income 12 a. Trading in stocks or securities or in commodi- ties 12 b. Income effectively connected with the conduct of a trade or business in the United States- 13 3. Taxation of nonresident aliens 16 a. Income tax on nonresident alien individuals - - 16 b. Deductions 20 c. Expatriation to avoid tax 21 d. Partial exclusion of dividends from gross income 22 e. Withholding of tax on nonresident alien indi- viduals 22 f. Withheld taxes and declarations of estimated income tax 23 g. Foreign estates or trusts 24 h. Citizens of possessions of the United States___ 24 4. Taxation of foreign corporations 24 a. Income tax on foreign corporations 24 b. Withholding of tax on foreign corporations~ ~_ 26 c. Deduction for dividends received from foreign corporations 26 d. Unrelated business taxable income of certain foreign charitable organizations 27 e. Foreign corporations subject to personal holding company tax 27 f. Foreign corporations carrying on insurance busi- ness in the United States 28 g. Subpart F income 29 h. Gain from certain sales or exchanges of stock in certain foreign corporations 29 5. Miscellaneous income tax provisions, etc 30 a. Income affected by treaty 30 b. Adjustment of tax on nationals, residents, and corporations of certain foreign countries 31 c. Foreign community property income 32 d. Foreign tax credit-foreign corporations and nonresident aliens 33 e. Similar credit requirement 34 f. Separate foreign tax credit limitation 34 g. Amendment to preserve existing law on deduc- tions undei section 931 35 III 1991 PAGENO="0840" IV CONTENTS Summary-Continued I. Explanation of provisions-Continued A. Foreign Investors Tax Act-Continued Page 6. Estate tax provisions 35 a. Estate tax rates 35 b. Limitation on credit for State death taxes 37 C. Bond situs rule 37 d. Deposits in U.S. banks or foreign branch banks of U.S. corporations 38 e. Definition of taxable estate 38 f. Expatriation to avoid tax 38 g. Application of pre-1967 estate tax provisions.._ 40 h. Estate tax returns 41 7. Gift tax provisions 41 a. Tax on gifts of nonresidents not citizens 41 b. Situs of bonds given by expatriates 42 8. Treaty obligations 42 B. Other amendments to the Internal Revenue Code 42 1. Application of investment credit to property used .in U.S. possessions 42 2. Basis of property received in the liquidation of sub- sidiary 42 3. "Swap funds" 44 4. Removal of certain limitations on deductibility of contributions to self-employed individuals pension plans 44 5. Treatment of certain income of authors, inventors, etc., as earned income for retirement plan purposes. 45 6. Exclusion of certain rents from personal holding com- pany income 46 7. Percentage depletion rate for certain clay bearing alumina 47 8. Percentage depletion rate for clam and oyster shells_ - - 47 9. Percentage depletion rate for certain clay, shale, and slate 47 10. Income from the lapse of straddle options 47 11. Tax treatment of per-unit retain allocations 50 12. Excise tax rate on hearses 52 13. Interest equalization tax; loans to insure raw material sources 52 14. Interest equalization tat; insurance company reserve funds 53 15. Interest equalization tax; dollar loans of foreign branches of U.S. banks 53 C. Presidential Election Campaign Fund Act 54 1. Designation of income tax payments to Presidential Election Campaign Fund 54 2. The Presidential Election Campaign Fund and pay- ments therefrom 54 3. The Advisory Board 55 D. Miscellaneous provisions 56 1. Treasury notes payable in foreign currency 56 2. Reports on Government contingent liabilities and assets 56 II. Revenue effect 57 1992 PAGENO="0841" SUMMARY OF THE FOREIGN INVESTORS TAX ACT OF 1966; PRESIDENTIAL ELECTION CAMPAIGN FUND ACT; AND OTHER AMENDMENTS (H.R. 13103, 89TH CONG., PUBLIC LAW 89-809) The four titles of H.R. 13103, as enacted, contain provisions dealing with the tax treatment of nonresident aliens and foreign corporations, the establishment of a presidential election campaign fund, the amend- ment of various other tax provisions, and amendments for other pur- poses. The more important provisions of the act are summarized as follows: A. The Foreign Investors Taw Act Interest on deposits in foreign branch banks of domestic corpora- tions and partnerships.-Interest on deposits with foreign branch banks of U.S. corporations or partnerships is to be treated as foreign source income, and thus is to be free of U.S. income tax when paid to nonresident aliens and foreign corporations. Source rules for bank deposit interest and similar income.- After December 31, 1972, all interest on U.S. bank deposits (other than those described above), whether or not effectively connected with a U.S. business, is to be treated as U.S. source income (and subject to U.S. income tax) in the case of nonresident aliens and foreign corporations. Until then, this interest on bank deposits, interest paid on accounts with mutual savings banks, domestic building and loan associations, etc., and interest on amounts held by insurance companies on deposit also are to be treated as foreign source income (unless effectively connected with a U.S. business) and thereby free of U.S. income tax. Rules for determining the source of dividends and interest from foreign corporations.-The source rules with respect to dividends and interest paid by foreign corporations are amended to provide that dividends and interest received from a foreign corporation are to be considered as having a U.S. source only if 50 percent of the corpo- ration's gross income for the prior 3 years was effectively connected with the conduct of a trade or business in the United States. Compensation for personal services.-The existing special source rule, providing that certain payments of compensation for services performed in the United States by a nonresident alien are treated as foreign source income (and therefore free of U.S. tax) if the services are performed for certain, foreign persons or a foreign office of a U.S. corporation, is extended to services performed for a foreign office of a proprietor who is a citizen or resident of the United States or for the foreign office of a domestic partnership. Trading in stocks or securzties or in commodities.-Except in the case ~ dealers and certain investment companies, trading in stocks or securities in the United States for one's own account, whether by a foreign investor physically present in the United States, through an 1 1993 PAGENO="0842" 2 FOREIGN INVESTORS TAX ACT OF 1966 employee located here, or through a resident agent (whether or not the agent has discretionary authority) is not to constitute a trade or business in the United States for income tax purposes. A parallel rule is provided for those trading in commodities. Income effectively connected with the condvct of a trade or business in the United States.-The benchmark to be used in determining whether income is to be subject to a* fiat 30-percent rate or taxed sub- stantially the same as income earned here by a U.S. citizen or domestic corporation is whether or not the income is effectively connected with a U.S. business. In the case of investment and other fixed or determin- able income and capital gains from U.S. sources the income is to be treated as effectively connected with a U.S business if the income is derived from assets used or held for use in the conduct of a U.S. busi- ness or if the activities of the U.S. business are a material factor in the realization of the income. All other types of U.S. source income are to be considered to be effectively connected if there is a U.S. busi- ness. Income from sources without the United States is not to be treated as effectively connected with a U.S. business unless the nonresi- dent alien or foreign corporation has a fixed place of business in the United States and the income is attributable to that place of busi- ness. Moreover, in general only rents and royalties from licensing, certain income from banking and so forth, and sales income are to be taken into account for this purpose and only to the extent the income is not "subpart F" income or income derived from a foreign corpora- tion 50 percent owned by the nonresident alien or foreign corporation receiving the income. Also excluded from the definition of "effectively connected" foreign source income is (a) income derived from a trans- action in which the U.S. office was not a material factor, (b) income not derived from the usual business activities of the U.S. office, and (c) income not properly allocable to the U.S. office. Additionally, a U.S. office is defined to exclude the office of certain agents. See also the related foreign tax credit provision. Income tax on nonresident alien individuals.-The income of non- resident aliens which is effectively connected with a U.S. business is to be taxed at the regular graduated rates applicable to individuals and all income not so connected is to be taxed at a flat 30-percent rate (or lower applicable treaty rate). U.S. source capital gains of a non- resident alien not engaged in business in the United States are to be taxed only if the alien was in the United States for 183 days or more during the year. Deductions are allowable only to the extent allocable to income which is effectively connected to a U.S. business. Also, an election is provided which allows an alien to treat income from real property as U.S. business income in order to take deductions allocable to it. Expatriation to avoid income tax.-U.S. source income and the effectively connected income of a citizen received for 10 years after expatriation is, in most cases, to be taxed at the regular U.s. tax rates if a principal purpose of the expatriation was the avoidance of U.S. income, estate, or gift taxes. TVithheid taxes and declarations of estimated income tax.-The Treasury Department is authorized to require payment of amounts withheld from nonresident aliens and foreign corporations on a more current basis, rather than the annual basis previously provided. Non- resident aliens who receive income which is effectively connected with 1994 PAGENO="0843" FOREIGN INVESTORS TAX ACT OF 1966 3 the conduct of a U.S. business are to be required to file declarations of estimated tax. Income tax on foreign corporations.-The regular corporate in- come tax is to apply to income of foreign corporations which is effec- tively connected with a U.S. business. U.S. source income which is not so connected is taxable at a flat 30-percent rate (or at a lower treaty rate). Foreign corporations are given an election to treat real prop- erty income as business income snnilar to that afforded nonresident aliens. Foreign corporations carrying on insurance business in the United States.-A foreign corporation carrying on a life insurance business within the United States is to be taxed under the existing special insurance company provisions on its income effectively connected with a U.S. business. The remainder of the income of this type of corpora- tion from sources within the United States is to be taxed in the same manner as income of other corporations which is not effectively con- nected; that is, at a flat 30-percent rate. An adjustment also is made to avoid double taxation which might result from the interaction of the minimum surplus provision for life insurance companies under existing law and the new method of taxing foreign life insurance companies. Discrimination and more burdensome taxes by foreign countries.- The act authorizes the President to reinstate the income, estate, or gift tax provisions in effect prior to the enactment of this act with respect to foreigners upon a determination that the foreign country in which they are residents or were incorporated is imposing more bur- densome taxes on U.S. citizens or domestic corporations on income from sources within the foreign country than the U.S. tax on similar U.S. source income of foreigners. An additional amendmentprovides the President with authority in the case of discrimination by a for- eign government against U.S. persons, to take such action as is neces- sary to raise the effective rate of U.S. tax on income received by na- tionals or corporations of that other country to substantially the same effective rates as are applied in the other country on income of U.S. citizens or corporations. Foreign community property income.-A U.S. citizen who is married to a nonresident alien and resident in foreign country with community property laws, is to have an election for post-1966 years to treat the community income of the husband and wife as income of the person who earns it or, in the case of trade or business income, as income of the husband unless the wife manages the business. Income from separate property is to be treated as income of the person owning the property. All other community income is to be governed by the applicable foreign community property law. For open pre-1967 years, an election may also be made and the rules set forth above govern ex- cept that the other community income is to be treated as the income of the person who had the greater income from the other community income categories plus separate income. Foreign tax credit.-A foreign tax credit is to be allowed non- resident aliens and foreign corporations with respect to foreign taxes on foreign source income which is effectively connected to the conduct of a U.S. business. This provision includes, as creditable taxes, both income taxes imposed by the country of the source of the income and the country of the residence of the business. 1995 PAGENO="0844" 4 FOREIGN INVESTORS TAX ACT OF 1966 Similar income tax credit reguirement.-Under prior law a for- eign tax credit has been denied to citizens of a foreign country who were resident in the United States if the foreign country did not allow a similar credit to U.S. citizens who were resident in the foreign coun- try. In the future the credit is to be denied only where the President finds that this is in the public interest and the foreign country refuses to grant U.S. citizens such a credit when requested to do so. Separate foreign tax credit limitation.-The 10-percent exception to the separate application of the limitation on the foreign tax credit for interest income was amended so as to apply to a U.S. corporation which directly or indirectly owns 10 percent of the foreign corpora- tion from which the interest is derived, or is a member of an affiliated group of corporations which has such ownership. State tax rates, exemptions~ and return~.-A separate schedule of estate tax rates is made applicable to estates of nonresident aliens. The rates are graduated from 5 percent on the first $100,000 of a tax- able estate to 25 percent on the portion which exceeds $2 million. The exemption also is raised from $2,000 to $30,000. These two meas- ures accord approximately the same tax treatment in the case of the estate of a nonresident alien as is accorded a similarsized estate of a citizen eligible for a marital deduction. The filing requirement for returns for the estates of these nonresident aliens also is raised from $2,000 to $30,000. Situs rule for bonds.-For purposes of the tax imposed on the estates of nonresident aliens, bonds of a U.S. person, the United States, a State, or political subdivision owned by a nonresident not a citizen of the United States, are to be considered property within the United States and therefore subject to U.S. estate tax. This rule al- ready applies in the case of other forms of debt obligations. Situs rule for bank deposits.-U.S. bank deposits of nonresident aliens are to be treated as property within the United States and therefore subject to U.S. estate tax after 1972. Situs rule for deposits in foreign branch banks.-Deposits in a foreign branch bank of a U.S. corporation or partnership are to be treated as property without the United States and therefore not includible in a foreigner's U.S. estate tax base. Expatriation to avoid estate tax.-The estate of a nonresident alien is to be taxed at the regular U.S. estate tax rates if, within 10 years of his death, the alien has expatriated from the United States with a principal purpose of avoiding U.S. taxes. Tax on gifts of nonresident aliens.-Transfers of intangible prop- erty by nonresident aliens are not to be subject to gift tax whether or not they are engaged in business in the United States. However, gifts of intangibles made by citizens who become expatriates within 10 years of making the gift are to be subject to gift tax if the avoidance of income, estate or gift taxes was a principal purpose for their becom- ing an expatriate. In the case of a person who expatriated for tax avoidance reasons, debt obligations of a U.S. person, or of the United States or a State or political, subdivision, are to be treated as having a situs in the United States. Treaty obligations.-No amendment made by this act is to apply in any case where its application would be contrary to any treaty obli- imtion of the United States. However, the granting of a benefit pro- 1996 PAGENO="0845" FOREIGN INVESTORS TAX ACT OF 1966 5 vided by an amendment made by this act is not to be considered to be contrary to a treaty obligation. Thus, even though a nonresident alien or foreign corporation has a permanent establishment in the United States, income which is not effectively connected with this busi- ness is to be taxed at the applicable treaty rate rather than at the regular individual or corporate rate. B. Other amendments to the Internal Revenue Code Application of the investment credit to certain property in U.S. possessions.-The investment credit is extended to property located in U.S. possessions provided the property is owned by a U.S. com- pany or citizen, subject to U.S. tax on its income from possessions, would otherwise have qualified for the investment credit, and is not owned or used by U.S. persons who are presently exempt, from U.S. tax under certain sections of the code. This amendment is effective with respect to property placed in service after December 31, 1965. Corporate acgui~ition of assets of another corporation.- (a) Pur- chase of stock.-Under existing law, the purchase from an unrelated party by one corporation of at least 80 percen't of the stock of another corporation followed by the liquidation of the acquired corporation within 2 years is treated as a purchase of the assets of the acquired corporation. The definition of "purchase" in this provision is extended to include the purchase of stock from a 50-percent owned subsidiary if stock in the 50-percent owned subsidiary was also acquired by purchase. The change is to be effective with respect to acquisitions of stock made after December 31, 1965. (b) Installment notes.-When installment notes are transferred in the type of purchase and liquidation described above, gain is to be recognized to the distributing corporation in the same manner as if it had sold the notes. Swap funds, etc.-The act provides that no gain or loss is to be recognized with respect to property that is transferred to an invest- ment company in what constitutes an exchange of investment interests on or before June 30, 1967, if the registration statements of the in- vestment company (where such statements are required) are filed with the SEC before January 1, 1967, and the property is deposited with the investment fund before May 1, 1967. Removal of certain limitations to the deductibility of contributions to self-employed individuals' pension plans.-The act repeals the pro- vision which limited the deduction from gross income which self- employed individuals could take with respect to contributions on their own behalf to a retirement plan to 50 percent of the contributions. Thus, self~employed persons may deduct the entire amount of their contributions subject to the limitation that the contributions cannot exceed the lesser of 10 percent of earned income or $2,500. This pro- vision is to be effective for taxable years beginning after December 31, 1967. The act also permits a self-employed individual to include in his earned income all of his net profits (rather than not over 30 percent) when his income is derived from a business in which both the per- formance of personal services and capital are material income-produc- ing factors. In such cases, however, the personal services provided by the self-employed person must clearly be a material income-producing factor. 1997 PAGENO="0846" 6 FOREIGN INVESTORS TAX ACT OF 1966 Self-employed persons retirement plans: certain income of authors, investors, and so forth.-The act amends prior law relating to self- employed individuals' retirement plans to permit authors, inventors, and so forth, to include gains (other than capital gains) from sales and other transfers of their works in their earned income base for the purpose of computing deductions for contributions to such plans. Exclusion of certain rents, from~ personal holding company in- come.-This amendment provides, for taxable years beginning after the date of enactment (and certain earlier years at the election of the taxpayer), that rent received from the lease of tangible personal property manufactured by a taxpayer (where he still is manufacturing similar property) is not to be treated as personal holding company income. Percentage depletion in the case of certain clay-bearing alumina.- A. percentage depletion rate of 23 percent (rather than 15 percent) is to be allowed for alumina and aluminum compounds extracted from domestic deposits of clay, laterite, and nenhelite syenite. Percentage depletion rate for clam and oyster shells.-Mollusk shells (including clam and oyster shells) are to be allowed percentage depletion at the rate of 15 percent unless they are used as riprap, ballast, road materiai, concrete aggregate, etc., in which case the per- centage depletion rate is to remain 5 percent. Percentage depletion rate for shale, clay, and slate.-The depletion rate is raised from 5 percent to ~½ percent for clay or shale used in making sewerpipe and brick and for clay, shale, or slate sintered or burned and used as light-weight aggregates. Straddles.-With respect to straddle transactions entered into after January 25, 1965, the income from the lapse of an option which orig- inated as part of a straddle is to be treated as a short-term capital gain (instead of ordinary income). This permits this income to be netted against any capital loss which may result from the exercise of the other option in the straddle while retaining what in most respects is ordinary income treatment for any excess of net short-term capital gain over net long-term capital loss. The taxation of per-unit retain allocations of coo peratives.-The act clarifies existing law dealing with the taxation of cooperatives and patrons to insure that a current single tax is paid, at either the cooperative or patron level, with respect to per-unit retain certificates. In so doing, the amendment makes the treatment of these certificates generaaly comparable to the treatment of patronage dividends. The excise tax on hearses.-This act provides that the sale of a hearse or combination ambulance-hearse vehicle is to be considered to be the sale of an automobile chassis or automobile body (rather than a truck chassis or body) for purposes of determining the manu- facturers' excise tax on motor vehicles. Interest equalization tax: raw material source loans.-Subse- quent transfers of debt obligations to assure raw material source~s are to be exempt from the interest equalization tax where the indebtedness is acquired without an intent on the part of the purchaser to sell it to other U.S. persons. This change is to be effective with respect to acquisitions of debt obligations made after the date of enactment. Interest equalization tax: certain acquisitions by insurance com- panies in developed countries.-The existing exemption for reserve 1998 PAGENO="0847" FOREIGN INVESTORS TAX ACT OF 1966 7 asset pools of U.S. insurance companies is extended to allow the estab- lishment of reserve asset pools where a U.S. insurance company commences activities in a developed country or where a less-developed country is designated as a developed country. This amendment is to take effect on the day after the date of enactment. Interest equalisation tax: Euro-dollars.-The President is given the authority to exempt from the interest equalization tax U.S. dollar loans of more than 1 year made by the foreign branches of U.S. banks. This change is to apply to acquisitions of debt obligations made after the date of enactment. U. Presidential Election Campaign Fund Act This title provides for public support of presidential election cam- paign financing. Individual taxpayers are to be able to designate on their annual tax returns that $1 of their income tax liability is to be placed in a presidential election campaign fund. The amounts in the fund are to be made available to defray the expenses incurred by political parties in presenting candidates for President and Vice President. Amounts will only be paid to those political parties whose candidates received at least 5 million votes in the preceding presidential election. Any major political party (one whose candidate polled 15 million votes or more in the preceding presidential election) is to be eligible to receive a payment from the fund computed on the following basis: $1 times the number of votes cast for the presidential candidates of the major political parties in the preceding presidential election divided by the number of such major political parties and the result then re- duced by $5 million. A minor party (one whose candidate polled more than 5 million but less than 15 million votes) is to be eligible to receive a payment from the fund equal to $1 for each vote in excess of 5 million votes that its candidate received in the preceding presiden- tial election. The payment received by any political party is to be limited, however, to reimbursement of presidential campaign expenses actually incurred by the party in connection with the current presiden- tial election. The Comptroller General is authorized to determine the campaign expenses of the political parties and to determine the amounts which may be paid to such parties. An advisory board is established to :tdvise and assist the Comptroller General with his duties under this act. D. Miscellaneous provisious Treasury bonds or certificates payable in foreign curreney.-This amendment expands the debt mangament authority of the Secre- tary of the Treasury to permit the issuance of U.S. notes denominated in foreign currencies. This authority already exists in the case of bonds and certificates of indebtedness. Reports on Federal contingent liabilities and assets.-This amend- ment requires the Secretary of the Treasury to submit, on the first day of each regular session of the Congress, a report to the Congress indi- cating the full contingent liabilities of the Federal Government and the assets of the Federal Government which might be made available to liquidate such liabilities, as of the preceding June 30. The first such report to be submitted is the report as of June 30, 1967. 1999 PAGENO="0848" PAGENO="0849" I. EXPLANATION OF PROVISIONS A. FOREIGN INVESTORS TAX ACT 1. INCOME TAX SOURCE RULES a. Rules for determining source of certain interest payments (sec. 102(a) (1) of the act and secs. 861 (a) and (c) of the code) Prior law.-Prior law provided that interest on deposits paid to foreign persons not engaged in trade or business in the United States was to be treated as income from sources without the United States and therefore not subject to U.S. tax if the interest was paid by a U.S. bank. The Internal Revenue Service interpreted this rule to apply, in addition to banks, to certain deposits with some types of State-chartered savings and loan associations. However, the Serv- ice did not interpret this provision as extending to interest paid on deposits with all savings and loan associations or all types of deposits. Additionally, interest on similar deposits with insurance companies was not accorded the benefits of this special rule. Explanation of provision.-The act amends prior law to provide that after December 31, 1972, interest on deposits with U.S. banks paid to nonresident alien individuals or foreign corporations is to be treated as income from sources within the United States and there- fore subject to U.S. tax. A provision was also added which subjects interest on deposits with U.S. branch banks of foreign corporations to these provisions. Therefore, until 1973 only bank interest received by nonresident aliens or foreign corporations which is effectively con- nected with the conduct of a trade or business in the United States will be subject to U.S. tax.' In addition, during the intervening 6- year period the act extends the application of the foreign source rule of prior law to interest (or so-called dividends) paid on deposits (or withdrawable accounts) with all chartered and supervised savings and loan associations or smilar institutions, to the extent these amounts are deductible (determined without regard to section 265) in com- puting t.he taxable income of these institutions. Similar institutions for this purpose include mutual savings banks, cooperative banks, and domestic building and loan associations. Also, during this 6- year period, this special foreign source rule is to be applicable to in- terest on amounts held by insurance companies under an agreement to pay interest. The amounts paid by insurance companies to which this rule is extended include: (1) interest paid on policyholder divi- dends left with the company to accumulate; (2) interest paid on pre- paid insurance premiums; (3) interest paid on proceeds of policies left on deposit; and (4) interest paid on overcharges of premiums. Effective date.-Except for the provision repealing the special for- eign source rule for certain interest as of December 31, 1972, these `The term "effectively connected" is explained subsequently in No. 2(b) below. 9 2001 7 1-297 0-67--pt. 2--54 PAGENO="0850" 10 FOREIGN INVESTORS TAX ACT OF 1966 amendments are effective with respect to taxable years beginning after December 31, 1966. b. Interest on deposits in foreign branch banks of domestic corpora- tions and partnerships (sec. 102(a) (2) of the act, sec. 861 (a) (1) (F) of the code) Prior law.-Prior law provided that interest paid to nonresident alien individuals or foreign corporations on deposits with foreign branches of U.S. banks, although paid by the foreign branch situated abroad, is treated as from sources within the United States if the recipient of the interest was engaged in a trade or business in the United States. Explanation of provision.-The act provides that the interest on deposits paid by foreign branch banks of U.S. corporations and partnerships is to be treated as foreign source income. Thus, non- resident aliens and foreign corporations will not be subject to U.S. tax on this type of interest income. Effective date.-This amendment is effective with respect to taxable years beginning after December 31, 1966. c. Foreign central banks and the Bank for International Settlements (sec. 102(a) (4) (A) of the act and sec. 895 of the code) Prior law.-Under existing law interest received by a foreign cen- tral bank of issue from obligations of the U.S. Government is exempt from U.S. tax unless the obligations are used by the central bank in commercial transactions. In addition foreign central banks of issue and the Bank for International Settlements are not subject to tax on interest income from their U.S. bank deposits since bank-deposit inter- est received by nonresident aliens and foreign corporations not en- gaged in a trade or business within the United States is deemed to be from sources without the United States. The central banks of issue are generally the custodians of the bank- ing reserves of their countries and usually carry on most of the mone- tary functions of their countries in much the same way as our Federal Reserve Board. The Bank for International Settlements is an inter- national organization, in practice used primarily to aid European cen- tral banks of issue in their international financial operations, to promote cooperation among these central banks and to act as trustee in regard to certain international financial settlements. At present, all the central banks of Europe, except that of the Soviet Union, be- long to the Bank for International Settlements and over 90 percent of the Bank's deposits are owned by these central banks. Explanation of provision.-The act specifically exempts from U.S. tax interest received by foreign central banks of issue and the Bank for Internationai Settlements from U.S. bank deposits unless the de- posits are held in connection with commercial transactions of these banks. Therefore, after 1972, this will distinguish their tax treatment for interest on bank deposits from that accorded other foreign persons. Amendments were also made which would exempt interest received by the Bank for International Settlements from U.S. Government obligations. In addition, an amendment was adopted extending the governmental obligation rule to include obligations of agencies or instrumentalities of the United States (including beneficial interests, participations, and other instruments issued under sec. 302(c) of the Federal National Mortgage Association Charter Act). 2002 PAGENO="0851" FOREIGN INVESTORS TAX ACT OF 1966 11 Effective date.-These amendments are effective with respect to tax- able years begmning after December 31, 1966. d. Rules for determining the sources of divide'nds and interest from foreign corporations (secs. 102 (a) (2), (a) (3), and (b) of the Act and secs. 861 (a) (1) (B), (C), and (D), and (2) (B) of the code) Prior law.-Prior law provided that all, or a portion of dividends paid by a foreign corporation to nonresident aliens or foreign corpora- tions was considered to be from U.S. sources and therefore subject to U.S. tax if 50 percent or more of the income of the foreign corporation making the distribution was derived from sources within the United States during the preceding 3-year period. A similar rule provided that all the interest paid by a foreign corporation engaged in trade or business in the United States was considered to be U.S. source income and therefore subject to U.S. tax if 20 percent or more of the income of the foreign corporation paying the interest was from U.S. sources during the preceding 3-year period. The portion of the dividend treated as being from U.S. sources, where the 50-percent test referred to above was met, was equal to that proportion of gross income from all sources that was derived from U.S. sources during the immediately prior 3-year period. However, in the case of this type of interest income there was no apportionment provision and therefore all of the interest paid by a foreign corpora- tion meeting the 20 percent rule was treated as being from U.S. sources notwithstanding the proportion of the corporation's income which was from U.S. sources. Explanation of provision.-The act amends the source rules with respect to dividends and interest paid by corporations to provide that no portion of the dividend or interest received from a foreign corpo- ration is to be considered to be from U.S. sources unless 50 percent or more of the corporation's gross income for the 3-year period preced- ing the year in which the dividends or interest payments are made was effectively connected with the conduct of a trade or business in the United States. Also, the portion of the dividend or interest treated as being from U.S. sources is to be the same proportion of the dividend or interest which the effectively connected income of the foreign corporation during the immediately prior 3-year period is of its gross income from all sources for that period. Thus, when com- pared to prior law, the effect of these amendments is to decrease the amount of dividends and interest likely to remain subject to U.S. tax. The act also contains a transitional rule providing that, in applying the new 50-percent test, any gross income of the foreign corporation from U.S. sources, for any period before the first taxable year begin- ning after December31, 1966, is treated as effectively connected income. A special rule for determining the source of interest or dividends paid by newly incorporated corporations was also added. Effective date.-These amendments are effective with respect to dividends received after December 31, 1966. e. Compensation for personal services (secs. 102(c) and (d) of the act and secs. 861 (a) (3) (C) (ii) and 864(b) (1) of the code) Prior iaw.-Existing law provides that payments of compensation for services performed in the United States generally are treated as TT.S. source income. An exception to this rule is provided for corn- pensation received by a nonresident alien where certain conditions are 2003 PAGENO="0852" 12 FOREIGN INVESTORS TAX ACT OF 1966 met. Thus, payments for personal services received by a nonresident alien are treated as foreign source income if (1) he was temporarily present in the United States for not over 90 days during the year; (2) the compensation does not exceed $3,000; and (3) the services are per- formed for a foreign employer not engaged in a trade or business in the United States or for a domestic corporation if the services are performed for an office or place of business it maintains in a foreign country or U.S. possession. Also, existing law provides that the rendering of personal services in the cases described above is not to constitute engaging in a trade or business in the Ui~ited States. Explanation of provision.-The act amends the source rule of exist- ing law relating to personal service income to provide that income from services performed by a nonresident alien temporarily present in the United States for not over 90 days in a year, if not in excess of $3,000, is to be treated as foreign source income (and not subject to U.S. tax) not only in cases where the employer with the foreign office is a foreign person or a domestic corporation but a'so where such an employer is a U.S. citizen or resident or a domestic partnership. Similar changes are also made in the definition of a "trade or business within the United States" to provide that this term does not include personal services performed for employers who are U.S. citizens or residents or for domestic partnerships where the conditions set forth above are met. Effective date.-These amendments are app1icable with respect to taxable years beginning after December 31, 1966. 2. DEFINITIONS USED IN DETERMINING TAXABLE STATUS OF INCOME a. Trading in stocks or securities or in commodities (sec. 102(d) of the act and sec. 864(b) (2) of the code) Prior law.-Prior law specifically excluded from the activities which constitute engaging in a trade or business within the United States the trading activities conducted by a nonresident alien in stocks, secu- rities, or commodities in the United States through a resident broker, commission agent, or custodian. This rule also applied with respect to foreign corporations. However, under prior law, the granting of dis- cretionary authority to the broker or agent may have prevented a non- resident alien or foreign corporation from qualifying for this exclu- sion, with the result that income arising from these transactions and all other U.S. source income was subject to U.S. tax at the regular in- dividual or corporate rates (based on a determination that such ac- tivities constitute carrying on a trade or business in the United States). Explanation of provision.-Prior law was amended to provide specifically that the trading in stocks, securities, or commodities in the United States, for one's own account, whether by a foreign person physically present in the United States, through an employee located here, or through a resident broker, commission agent, custodian, or other agent-whether or not that agent has discretionary authority- does not constitute a trade or business in the United States. This treatment, hbwever, does not apply to dealers in stocks, securities, or commodities or to a foreign investment corporation if it has its prin- cipal office here. It is not intended that as a result of this provision a foreign invest- ment company (other than a corporation which is, or but for section 2004 PAGENO="0853" FOREIGN INVESTORS TAX ACT OF 1966 13 542(c) (7) or 543(b) (1) (C) would be, a personal holding company) is to be permitted to locate its general business activities in the United States and avoid taxation at the regular corporate rates on its income and gains effectively connected with its business in this country. How- ever, a foreign investment company conducting its general business activities in a foreign country (i.e., having its principal office there) can conduct trading activities in the United States through an agent with discretionary authority, without being considered as conducting a trade or business in the United States. Whether a corporation's principal office is in the United States is to be determined by comparing the activities (other than trading in securities) which the corporation conducts from an office located in the United States with the activities it conducts from offices located out- side the United States. For example, a corporation which carries on most or all of its stock and securities transactions through an agent with discretionary authority in the United States but maintains a gen- eral business office outside the United States in which its management is located and from which it communicates with its shareholders and the general public, solicits sales of its own stock, and maintains its corporate records and books of accounts, is not to be considered as having its principal office in the United States. Although, under this provision, a dealer is specifically excluded from those who may grant discretionary authority and not be deemed to be conducting a business in the United States, he may trade in securities or commodities, for his own account, `through an independent U.S. `agent without being considere'd to be conducting a business in the United States. However, this rule does not apply if at `any time dur- ing the year he has an office or place of business in the United States through which, or by the direction of which, transactions in stocks, securities, or commodities are effected. Even though this provision does not free some dealers in stocks, se- curities, or commodities, `and investment companies from the possi- bility that they may be considered as engaged in a trade or business in `the United States, this does not mean th'at all such dealers or invest- ment companies are so engaged. In such a situation, the question of whether a dealer or investment company is conducting a trade or business in the United States remains a question of fact to be deter- mined under the rules of existing law. Effective date.-These amendments apply with respect to taxable years beginning after December 31, 1966. b. Income effectively connected with the conduct of a trade or business in the United States (sec. 1O~3(d) of the act and sec. 864(c) of the code) Prior law.-Under prior law nonresident aliens and foreign corpo- rations were generally `taxable at the regular individual or corporate rates on all their U.S. source income if they were ~ngaged in trade or business in the United States and were taxable at a fiat 30-percent rate (or lower treaty rate) on all fixed or determinable income if not so engaged. This difference in treatment applied whether or not there was any relationship between the different types of incomes (business and investment) derived from the United States. Explanation of provision.-As a general rule, the act provides that income of a nonresident alien or foreign corporation will be subject 2005 PAGENO="0854" 14 FOREIGN INVESTORS TAX ACT OF 1966 to the flat 30-percent (or lower treaty) rate if it is not effectively connected with the conduct of a trade or business within the United States. The regular individual or corporate rates apply to income which is effectively connected to the conduct of a U.S. trade or busi- ness. A foreigner may elect to treat real property income as if it were income effectively connected with a U.S. business so that the deduc- tions attributable to this real property income can be deducted from it. The application of the effectively connected concept to different types of income is set forth below. (i) Income from U.S. sources treated as "effectivei~j connected."- In determining whether periodical income such as interest, dividends, rents and wages, and capital gains is effectively connected with the conduct of a trade or business within the United States two principal factors are to be taken into account.. First, is the income derived from assets used or held for use in the conduct of the trade or business in the United States? Thus, for example, are the assets being held for fu- ture, or remittant, use in the business? In this regard, particular at- tention will be given to the relationship between the asset and the needs of the business. Second, were the activities of the trade or business a material factor in the realization of the income? Thus, in the case of this second factor, is there an immediate relationship between the income in question and the U.S. business activities of the foreign cor- poration? Also to be taken into account in weighing the relationship of the investment income to the trade or business, but not to be a con- trolling factor by itself, is whether or not the assets or income are accounted for through the U.S. trade or business. All other income from sources within the United States (that is, other than the periodical income and capital gains described above) is to be treated as "effectively connected." (ii) Income from sources without the United States.-(A) Gen- eral Rules.-Incorne from sources without the United States is not to be treated as "effectively connected" with the conduct of a trade or business within the United States unless the nonresident alien or for- eign corporation has a fixed place of business in the United States and the income, gain or loss is attributable to that place of business. Also, this provision applies to only three types of income from sources with- out the United States. A foreign corporation which to a. minimal extent., or occasionally, uses the U.S. office of a related corporation will not be treated as hav- ing a fixed place of business here. Moreover, the fact that top man- agement decisions are made in the United States will not of itself mean that the foreign corporation has an office or fixed place of busi- ness here. For example, a foreign sales corporation which is a wholly owned subsidiary of a domestic corporation will not be considered to have a U.S. office because of the presence here of the officers of its domestic parent who are generally responsible only for its policy decisions, provided the foreign sales corporation has a managing di- rector that conducts its day-to-day business from a foreign office. This person may or may not be an officer of the U.S. corporation. Also, in such a case, the managing director could regularly confer with the officers of the domestic parent and if necessary occasionally visit the U.S. offices of the domestic parent and, during such visits, temporarily conduct the business of the foreign subsidiary out of the domestic parent's office without thereby establishing a U.S. office. 2006 PAGENO="0855" FOREIGN INVESTORS TAX ACT OF 1966 15 As indicated above, this provision applies only to three specific types of income from without the United States. Furthermore, in no event does it apply with respect to income which is "subpart F" income or to dividend, interest or royalty income derived from a foreign corpora- tion more than 50 percent owned by a nonresident alien or foreign corporation receiving the income. Of course, the subpart F income exception extends to income which is subpart F income but is ex- cepted from its taxing provisions by the minimum distribution and export trade exceptions. The three types of income w-ith respect to which this provision applies are: (i) Rents and royalties derived from the active conduct of a licensing business; (ii) Dividends, interest, or gain from stock or bond or debt obligations derived in the active conduct of a banking, financing or similar business; and (iii) Certain sales income attributable to a U.S. sales office. The sales income referred to above is not to be considered as "effec- tively connected" to a U.S. trade or business if the property is sold for use outside the United States and an office of the foreign person out- side the United States contributes materially to the sale. In the case of foreign source income where the products are destined for the Unite'd States, the income will be treated a.s effectively connected with a U.S. business to the extent the sales activity is carried on by the U.S. office. (B) Determining Factors.-This provision also contains rules re- garding what is to be considered `a sufficient nexus for assertion of U.S. tax jurisdiction as `well as what foreign source income is to be subject to U.S. tax. In general, for purposes of determining whether a for- eign corporation or nonresident alien has an office, the office or other fixed place of business of an agent is to be disregarded unless the agent is other than `an independent agent operating in the ordinary course of his trade or business and unless he either has authority (`regularly exercised) to negotiate binding contracts or has a stock of merchandise from w-hich he regularly fills orders. This agency concept regarding the degree `of economic `activities which will subject a foreign corpora- tion or nonresident alien to U.S. taxation on foreign source income is substantially similar to the permanent establishment concept present in many of the existing income tax treaties. It is not intended, how- `ever, that the interpretation of this provision be limited by the judicial decisions of foreign governments regarding such treaty provisions. With respect to the determination of the income to `be subject to U.S. tax, the rules provide that foreign source income will not `be considered to be effectively connected with a U.S. business of a foreign corpora-S tion or nonresident alien if (a) a U.S. office of that business was not a material factor in the production of the income, (b) the income was not derived from the usual business activities of the U.S. business or (e) the income was not properly allocable to, the activities of the U.S. business. These rules delimit the application of the general rules of this pro- vision, thereby subjecting to U.S. tax only income which has its eco- nomic genesis in the United States. For purposes of this provision, the activities of the U.S. office will not be considered to constitute a "material factor" unless it provides a significant contribution to the production of the income. Thus, the activities of the U.S. office must be an essential economic element in the production of the income. 2007 PAGENO="0856" 16 FOREIGN INVESTORS TAX ACT OF 1966 Therefore, the fact that the board of directors of the foreign corpora- tion meets in the U.S. office will not subject the worldwide sales income of that foreign corporation to U.S. taxation. On the other hand, the activities of the U.S. office need not necessarily be a major factor in the production of the income. The requirement that the income must be derived from the usual business activities of the U.S. office, in effect, provides a de minimus exception. It is intended that this rule will exclude from U.S. tax jurisdiction all foreign income derived from casual sales. Thus, if the foreign corporation is engaged solely in a manufacturing business in the United States, the income derived by the U.S. plant as a result of an occasional foreign sale will not come within the ambit of the foreign source effectively connected rule where the sales operations for the products of the U.S. plant are located outside the United States. On the other hand, if a foreign corporation establishes a U.S. sales office to sell goods produced in Africa in the Western Hemisphere, occasional sales income derived from parts of the world other than the Western Hemisphere would not be excluded under this casual sales rule. In other words, the nature of the U.S. business would be the primary determinative factor for purposes of this exception. (C) Foreign Tax Credit.-The act extends a foreign tax credit (sec. 906) to foreign source effectively connected income but only with respect to foreign taxes paid on non-U.S. source. A further dis- cussion of this amendment is provided in the foreign tax credit portion of this summary. (D) Foreign Insurance Companies.-In the case of a foreign cor- poration having a life insurance business in the United States, the act provides that income from sources without the United States is to be treated as effectively connected with the conduct of the business within the United States if the income is attributable to its U.S. life insurance business. This rule merely continues the treatment of existing law under which income of a foreign corporation from its U.S. life insur- ance business is subject to tax whether the income is from sources within or without the United States. Effective date.-This amendment applies with respect to taxable years beginning after December 31, 1966. For purposes of determin- ing whether foreign source sales income from a binding contract, entered into on or before February 24, 1966, is attributable to a U.S. office, none of the activities in the United States on or before that date, which were related to the negotiation or effectuation of the binding contract are to be taken into account. As a result in many cases the sales income from foreign sources under binding contracts entered into before February 25, 1966, will not come within the ambit of this provision. * 3. TAXATION OF NONRESIDENT ALIENS a. Income tax on ino*nresident alien individuals (Sec. 103(a) of the act and sec 871 of the code) Prior law.-Prior law provided different tax treatment for non- resident alien individuals according to whether they were, or were not, engaged in a trade or business in the United States. Also, those not engaged in a trade or business in the United States were provided 2008 PAGENO="0857" FOREIGN INVESTORS TAX ACT OF 1966 17 different treatment according to whether their income was under or over $21,200. Nonresident alien individuals not engaged in trade or business in the United States whose annual U.S. source income of the types specified below was $21,200 or less were taxed at a flat rate of 30 percent (or lower applicable treaty rate), on certain specified items of U.S. source income. This tax was in lieu of the regular U.S. graduated rates applicable to individuals. The items of income in- cluded were interest, dividends, rents, salaries, wages, and othe~r fixed or determinable annual or periodical gains, profits, and income. Also specifically included in the income taxable at the flat 30-percent rate were certain amounts otherwise treated in the same manner as capital gains; namely, lump-sum distributions from exempt em- ployees' trusts (sec. 402~(a) (2)); amounts paid to beneficiaries under qualified annuity plans (sec. 403(a) (2)); timber, coal, and iron ore royalities (sec. 631 (b) and (c)); and amounts received on transfers of patent rights (sec. 1235). Nonresident alien individuals not engaged in trade or business in the United States but with an annual U.S. source income of the types indicated above, of more than $21,200, were taxed under prior law (in the absence of an applicable treaty provision) at whichever of the following produced the higher total tax; the regular U.S. rates appli- cable to individuals, or the flat 30-percent rate. In computing the tax at the regular graduated rates, such a nonresident alien was allowed d~ductions to the extent they were properly allocable to the income on which he was taxable. Nonresident aliens not engaged in a trade or business in the United States-whether their income was over or under $21,200-were subject to tax on regular capital gains only if one of two conditions existed: (1) if they were physically present in the United States at the time the capital gain was realized or (2) if they were present in the United States for a period or periods totaling 90 days or more during the year. These capital gains were taxed at the fiat 30-percent rate if the indi- vidual's income from U.S. sources was $21,200 or less. If his income from U.S. sources exceeded this amount, the regular capital gains tax rate applied, but only if the regular individual income tax rates (in- cludingthe capital gains tax) on all the taxpayer's U.S. source income resulted in a higher tax than the flat 30-percent tax. Nonresident alien individuals engaged in trade or business in the United States were taxable at the regular U.S. graduated (and capital gains) rates on their incomc derived from sources within the United States. In computing the tax, an alien in this category was allowed deductions to the extent attributable to his U.S. source income. Explanation of provi8ion.-The act substantially revises the prior income tax treatment of nonresident alien individuals by dividing their income, for tax purposes, into two basic categories according to wheth- er or not the income is effectively connected with a U.S. trade or business. (A) Income not effectively connected with the conduct of a U.S. b~iness.-Income of a nonresident alien individual which is fixed or determinable (substantially the same categories referred to under prior law) and which is not effectively connected with the conduct of a trade or business in the United States is to be taxed at a flat 30-percent rate (or lower treaty rate). 2009 PAGENO="0858" 18 FOREIGN INVESTORS TAX ACT OF 1966 Generally, the fixed or determinable income referred to here, as under prior law, includes such income as interest, dividends, rents, salaries, annuities, and certain income accorded capital gain treatment. The act adds two items not included in the list contained in prior law and has slightly modified the language of prior law so as to clarify this pro- vision as it relates to certain amounts received from pensions or an- nuity plans, and certain timber, iron ore, and coal royalties. The two new items added to the list by the act are (1) certain gains with respect to the sale of a patent or other intangible property and (2) amounts received on retirement or exchange of bonds and other evidences of in- debtedness issued after September 28, 1965, which are treated as gams from the sale of property which is not a capital asset. The reference in the act to section 1232 refers only to original issue discount on ev1- dences of indebtedness held by a taxpayer for more than 6 months. Also, income constituting original issue discount received on the re- tirement or sale or exchange of bonds is to be considered as having the same source as interest paid by the corporation issuing the bonds. The provision of the act regarding gains realized on the sale of a patent or other intangible property provides that gains realized on the sale of a patent or other intangible property, where the income from the sale is derived as a result of the use of such property in the United States, is not to be subject to U.S. tax as "fixed and determinable in- come" (taxed at 30 percent or lower treaty rate) unless a part of the income derived from the sale is contingent. If part of the profits from such sale are contingent, the amount subject to U.S. tax in any year would be the contingent amount, or if this contingent amount exceeds 50 percent of the total amount paid in any 1 year, the total amount will be taxed to the extent this amount represented gain realized on the sale of the property. For purposes of determining the source of this income the source rule for rentals, royalties, or other intangible property is to be used. This provision is to apply to gains derived from sales made after October 4, 1966. The provisions of prior law will continue to apply to transfers of patents made before that date. In the case of a nonresident alien's net U.S. source capital gains (other than those specifically included in the list as taxable at the 30-percent rate) which are not effectively connected with the conduct of a trade or business within the United States, the act provides that no U.S. tax is to be imposed unless the nonresident alien has been present in the United States for at least 183 days during the taxable year. Prior law provided a 90-day test. For purposes of applying the 183-day test an alien will be treated as being on a calendar year basis unless he has previously established a different taxable year. The requirement of prior law which taxed capital gains when the alien was physically present in the TJnited States at the time of realization w-as dropped entirely. (B) Income effectively connected with the conduct of U.S. bwsi- ne$8.-Income of a nonresident alien individual that is effectively connected with the conduct of a trade or business in the United States, is taxable at the regular U.S. graduated rates applicable to individuals. Thus, this income is taxed the same as under prior law although the category itself is more limited since it only applies to income which is effectively connected to a U.S. trade or business instead of including all U.S. source income of an alien with such a trade or business. For 2010 PAGENO="0859" FOREIGN INVESTORS TAX ACT OF 1966 19 purposes of determining whether or not income is effectively connected with the conduct of a trade or business in the United States, the rules discussed above in connection with the definition of effectively con- nected income apply. (U) 2lliscellaneons types of income receiving special treatment.- Under prior law certain types of income were provided special treat- ment. The act revises and extends these categories as indicated below. (i) Participants `in exchange programs.-The act retains the rule in prior law which treated nonresident aliens temporarily in the Un1ted States as part of a cultural exchange or training program as engaged in a trade oi. business in the United States even though they are actually not so engaged. The provision was modified by the act, how- ever, to provide in such cases that this type of income is effectively connected to a U.S. trade or business. The effect of treating these cate- gories of income as effectively connected to a U.S. trade or business (or under prior law as derived from a U.S. trade or business) is to impose the regular U.S. income tax on these aliens on the taxable portion of their scholarship or fellowship grants and certain other amounts incident to these grants. In this computation one exemption (except in the case of residents or contiguous countries) and the deductions allocable to this income are allowed. In the absence of this special provision, these aliens would be taxed on these grant~ (and amounts incident thereto) at the flat 30 percent rate. In most cases the 30 percent tax would substantially exceed the regular tax on this income. The types of income referred to under. prior law and the act as scholarship or fellowship grants, if received by a nonresident alien individual temporarily present in the United States as a nonimmi- grant (under subpar. (F) or (J) of sec. 101 (a) (15) of the Immigra- tion and Nationality Act) or received by a citizen or resident, are, sub- ject to a dollar limitation, exempt from U.S. tax. Prior law also excluded from gross income compensation paid by a foreign employer to a nonresident alien for the period he was temporarily present in the United States as a nonimmigrant for the purposes of participating in a cultural or training program. Under prior law this was available where the "foreign employer" was a for- eign person or a domestic corporation with an office in a foreign coun- try or U.S. possession. The act extends this provision to cover an employee of a domestic partnership or a U.S. citizen or resident with such a foreign office. (ii) Income from real property.-Uiider prior law, it was not clear what situations or arrangements for the ownership by a nonresident alien of real property located in the United States would cause the nonresident alien to be considered as engaging in a trade or business within this country. This, of course, was important since the ques- tion of whether or not the alien was engaged in a trade or business in the United States determined whether his U.S. source capital gains were subject to U.S. tax and whether his other U.S. source income was taxable at the regular individual income rates, with allocable deduc- tions, or at the flat 30-percent rate on the gross amount.. Taxing in- come on real property at a flat 30-percent rate without the allowance of allocable deductions-which in the case of this type ~f income may be relatively large-may have resulted in quite heavy tax burdens on this type of income. 2011 PAGENO="0860" 20 FOREIGN INVESTORS TAX ACT OF 1966 The act deals with the problem described above by providing that nonresident aliens deriving income from real property held for the production ~f income and located in this country, or from an interest in this type of real property located in this country, may elect to treat all the income as effectively connected to the conduct of a U.S. trade or business. This permits the nonresident alien to utilize the deduc- tions attributable to this real estate income and be taxed on only his net income from these sources. The election is applicable with respect to gains from the sale or exchange of real property held for the production of income (or an interest therein) and rents or royalties from mines, wells, or other natural deposits, as well as certain timber, iron ore, and coal royalties. The election is not applicable to income not specifically covered by these provisions, such as distributions by real estate investment trusts. If the election is made, it applies to all the alien's income from U.S. real property for the taxable year which is not otherwise "effec- tively connected" with the conduct of a trade or business in this coun- try. The election applies for all subsequent taxable years until revoked and can be revoked only with the consent of the Secretary of the Treasury or his delegate. If the election is revoked, a new election may not be made for 5 years unless the Secretary of the Treasury or his delegate consents to an earlier reelection. (iii) Certain pension income.-Under prior law a nonresident alien receiving pension or annuity income from a plan located in the United States was subject to U.S. tax (flat 30 percent or lower treaty rate) on the interest portion of the pension income notwithstanding the fact that the services qualifying the nonresident alien for the pen- sion were entirely rendered outside the United States. This amend- ment exempts from U.S. tax the type of pension income described above if 90 percent of the persons under the plan are U.S. citizens. It is the understanding of the Congress that in general the regulations will provide that the plan paying the pension will be entitled to rely upon information presented by the annuitant or employer to deter- mine whether or not the annuitant qualifies under this provision. (iv) Bond income of residents of the Ryukyu Islands, etc.-At the present time the Ryukyu Islands (including Okinawa) are governed by the United States and large numbers of the individuals of these islands are in the employ of the U.S. Military Establishment. As such, their savings have frequently been invested in series E or H IJ.S. savings bonds. Interest income on U.S. savings bonds is, of course, U.S. source income. As a result, under prior law the resi- dents of the Ryukyu Islands, as well as the Trust Territory of the Pacific Islands, were subject to a flat 30-percent tax on the income from these bonds. The act excludes from gross income subject to U.S. tax, income derived by nonresident aliens from U.S. savings bonds (series E or H) if the alien at the time of acquiring the bonds was a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands. Effective date.-These amendments apply with respect to taxable years beginning after December 31, 1966. b. Deductions (sec. 103(c) of the act and sec. 873 of the code) Prior law.-In the case of a nonresident alien individual, prior law generally allowed deductions to the extent they were properly al- 2012 PAGENO="0861" FOREIGN INVESTORS TAX ACT OF 1966 21 locable to income from sources within the United States but only if the alien's U.S. income was subject to the regular income tax. How- ever,where the regular income tax applied, the deduction of losses was allowed even though they were not connected with a U.S. trade or business if they were incurred in transactions entered into for profit provided that the transaction, had it resulted in a profit, would have been subject to U.S. tax. Also allowed were property losses not con- nected with a trade or business arising from certain casualties or thefts if the loss was of property located within the United States. Explanation of provision.-The act generally limits the allowance of deductions in case of a nonresident alien individual to deductions allocable to income which is effectively connected with the conduct of a trade or business in the United States. The allowance of deduc- tions is limited in this manner, since it is only effectively connected in- come which under the act is subject to the regular income tax. In addition, the act deletes the provision relating to the deduction of losses not connected with a trade or business but incurred in trans- actions entered into for profit since the criteria for the allowance of deductions under the act is whether or not they are effectively con- nected with the conduct of a trade or business in the United States. However, the casualty loss deduction is to be available even if the property which gives rise to the loss is not effectively connected with the conduct of a trade or business in the United States if the property is located in this country. Also, the charitable contribution deduc- tion is available even though not related to the trade or business. Effective date.-These amendments apply with respect to taxable years beginning after December 31, 1966. c. Expatriation to avoid tax (sec. 103(f) of the act and new sec. 877 of the code) Prior law.-The U.S. individual income tax applies to U.S. citi- zens, U.S. residents, and to nonresident aliens, but in this latter case, generally only with respect to income derived from sources within the United States. Under prior law, if an individual who had been a U.S. citizen gave up this citizenship and became a nonresident, no tax was then imposed with respect to income he derived from sources without the United States. Moreover, under prior law the regular graduated rates applicable `to a citizen applied in the case of an expa- triate only if he was engaged in a trade or business in the United States or his income exceeded $21,200. Explanation of provision.-The act added a new section to the code which, in general, taxes both effectively connected income and any other U.S. source income of an expatriate at regular income tax rates, if he surrendered his citizenship within 10 years of the taxable year in question (and after March 8, 1965) and if one of the principal pur- poses of the expatriation was the avoidance of U.S. income, estate, or gift taxes. This treatment is not to apply if it results in a smaller U.S. income tax than would otherwise be imposed. In addition, the new section contains special source rules to be used in determining an expatriate's U.S. source income. These rules pro- vide that gams from the sale or exchange of property (other than stock or debt obligations) located in the United States, and gains on the sale or exchange of stock of a domestic corporation or debt obligations of U.S. persons or of the United States, a State or political subdivision, 2013 PAGENO="0862" 22 FOREIGN INVESTORS TAX ACT OF 1966 r the District of Columbia are to be treated as income from sources ~vithin the United States regardless of where the sale or exchange occurs or title is transferred. Deductions are to be allowed only to the extent they are properly allocable to the gross income of the expatriate, determined under the above described provisions (except that the capital loss carryover provision is not to apply). The new section contains a special ruie with respect to the burden of proving the existence or nonexistence of U.S. tax avoidance as one of the principal purposes of the expatriation. TJnder this provision, the Secretary of the Treasury or his delegate must first establish that it, is reasonable to believe that the expatriate's loss of U.S. citizenship would (but for the application of these special provisions) result in a substantial reduction in his taxes based on the expatriate's probable income for the taxable year. If this is established, then the expatriate must carry the burden of proving that the loss of citizenship did not have, for one of its prin- cipal purposes, the avoidance of U.S. income, estate, or gift taxes. However, the new section excepts persons whose loss of citizenship occurs under circumstances where it is unlikely that tax avoidance was a principal purpose. For example, this provision does not apply where the person acquired dual citizenship at birth and loses his U.S. citizenship by residing, for a certain period, in the foreign country of which he is also a citizen by birth. Effective date.-This amendment applies for taxable years begin- ning after December 31, 1966. d. Partial exclusion of dividends from~ gross income (sec. 103(g) of the act and sec. 116(d) of the code) Prior law allowed a nonresident alien the $100 dividends received exclusion only if the individual was taxable on U.S. source dividends at the regular graduated rates applicable to individuals. The act amends this provision, effective for taxable years* beginning after December 31, 1966, by limiting the availability of the exclusion to dividends which are effectively connected with the conduct of a trade or business in the United States. The exclusion is also allowed in the case of an expatriate subject to tax under new section 877. e. Withholding of tax on nonresident alien individuals (sees. 103(h) and (k) of the act and sees. 1441 and 3401 of the code) Prior law.-Prior law generally required the withholding of tax in the case of a nonresident alien on U.S. source fixed or determinable income from U.S. sources (of the types previously described). The withholding was at a 30-percent rate (except in the case of certain treaty rates) and applied whether or not the flat 30-percent tax ap- plied to the individual. 2 Thus it applied not only in the case of a nonresident alien with a gross income of $21,200 or less who was not engaged in a trade or business in the United States but also in the case of a nonresident alien with a larger gross income or to one who was engaged in a trade or business in the United States. Explanation of provi~ions.-The act adds a new provision to the existmg nonresident alien withholding provisions. Under the new provision, withholding is not required on payments to nonresident 2For a limited category of scholarship and fellowship income and related Income the withholding rate was 14 percent. 2014 PAGENO="0863" FOREIGN INVESTORS TAX ACT OF 1966 23 alien individuals with respect to any item of income (other than com- pensation for services) which is effectively connected with the conduct of a trade or business within the United States. It is the understand- ing of the Congress that the person required to withhold will `be relieved of any liability for failure to withhold if the failure was in reliance upon information as to whether or not the income was effec- tively connected, furnished (in accordance with regulations to be issued) by the person entitled to the receipt of the income. The act specifically provides for withholding on the following additional types of income: (1) the contingent income derived from the sale of patents and other intangibles; (2) a foreign partner's share of the U.S. income of a domestic partnership which is not effectively connected with the partnership's business; and (3) amounts received on retirement or exchange of bonds issued after September 28, 1965, which are treated as gains from the sale of property which is not a capital asset (sec. 1232). In the case of salary and wage income, the act also correlates the 30-percent-withholding rate applicable to nonresidents aliens with the domestic graduated withholding rates. Thus, the act amends present law to provide that the Secretary of the Treasury or his delegate may, by regulations, exempt compensation for services performed by non- resident aliens from the 30-percent withholding and require with- holding at the domestic. graduated withholding rates. The `act also makes `amendments of a technical nature to conform the language of the withholding provisions to the language used in the other taxing provisions. Effective date.-The amendment relating to the 30-percent with- holding rule applies with respect to payments. made in taxable years beginning after December 31, 1966. The amendment relating to domestic wage withholding applies with respect to remuneration paid after December 31, 1966. f. Withheld taxi~es and declarations of estimated income tax (sees. 103 (i) and (j) of the act and sees. 1461 and 6015 of the code) Under prior law, persons who were required to withhold on amounts paid to nonresident aliens and foreign corporations were required to file a return and remit the taxes withheld during any calendar year by March 15 of the following year. This procedure was unusual since all other withheld taxes, such as the employees' social security taxes and domestic wage withholding, are required to be remitted (together with the return) at least quarterly. The act amends prior law to provide the Treasury Department with the authority to require more current remittance of the taxes withheld on nonresident aliens and foreign corporations. This amendment is effective with respect to payments made after December 31, 1966. The act also amends the provisions of prior law which require indi- viduals to file declarations of estimated tax. The amendment con- tinues prior law which includes nonresident aliens within the category of individuals required to file these declarations. However, the application of this provision to nonresident aliens is limited to those who receive income which is effectively connected with the conduct of a trade or business within the United States. These amendments are effective with respect to taxable years begin- ning after December 31, 1966. 2015 PAGENO="0864" 24 FOREIGN INVESTORS TAX ACT OF 1966 g. Foreign estates or trusts (sec. 103 (e) and (1) of the act and sees. 875 and 7701a(a) (31) of the code) Prior law defined the terms "foreign trust" and "foreign estate" to mean a trust or estate whose income from sources without the United States was not included in gross income for U.S. income tax purposes. The act amends this definition to conform it to the effectively connected concept. As amended, the terms refer to estate or trusts whose income from sources without the United States, other than income which is effectively connected with the conduct of a trade or business within the United States, is not included in gross income for U.S. income tax purposes. This amendment applies for taxable years beginning after December 31, 1966. Another amendment imputes the business activities of a trust or estate to its beneficiaries. In other words, if a trust, whether a foreign or a domestic trust, is engaged in a trade or business in the United States, its beneficiaries are deemed to also be engaged in that trade or business. h. Citizens of possessions of the United States (sec. 103(n'b) of the act and sec. 932(a) of the code) Under prior law, individuals who were citizens of possessions of the United States but not otherwise citizens of the United States, were taxed as nonresident aliens on their U.S. source income. This provi- sion was amended by the act, effective for taxable years beginning after December 31, 1966, to conform to the changes made to the taxation of nonresident aliens generally. 4. TAXATION OF FOREIGN CORPORATIONS a. Income tax on foreign corporations (sees. 104 (a) and (b) of the act and sees. 881 and 882 of the code) Prior law.-Prior law taxed foreign corporations not engaged in a trade or business in the United States at a flat rate of 30 percent on fixed or determinable income from sources within the United States. These items, which, with a few exceptions were the same as those pre- viously taxed at the 30-percent rate to nonresident alien individual's not engaged in a trade or business in the United States, included: interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable annual or periodical gains, profits, and income (including certain timber, coal, and iron ore royalties). The U.S. source income of a foreign corporation engaged in business in the United States was taxed at the regular corporate rates. In computing the tax, deductions generally were allowed to the extent that they were properly allocable to the U.S. source income if a true and accurate return was filed by the corporation. Explanation of provision.-The act substantially revises the income tax treatment of foreign corporations. Under the act the income of a foreign corporation is divided into two classifications. (A) Income not effectively connected.-Fixed or determinable in- come of a foreign corporation from sources within the United States which is not effectively connected with the conduct of a trade or busi- ness within the United States is taxable at a flat 30-percent rate (or lower treaty rate). The types of fixed or determinable income speci- 2016 PAGENO="0865" FOREIGN INVESTORS TAX ACT OF 1966 25 fled are the same as under prior law with the same two additions pro- vided in the case of nonresident aliens: (1) contingent income received from the sale of patents and other intangibles, and (2) amounts of original issue discount which are treated as ordinary income received on retirement or sale or exchange of bonds or other evidences of indebt- edness issued after September 28, 1965. As indica.ted in the case of the taxation of nonresident aliens, the source of this original issue dis- count is to be determined by the same rules as those applicable to interest income. As a result, if the corporation with respect to whose bonds the original issue discount arises is a domestic corporation which for the 3-year period preceding the year of redemption' derives 80 percent or more of its income from foreign sources, then the original issue discount (interest), at the time of the retirement or sale or ex- change of the bonds, also will be considered as foreign source income. The act also clarifies the language of existing law which includes certain timber, coal, and iron ore royalties in the 30-percent list. (B) Income effectively connected.-Income of a foreign corpora- tion which is effectively connected with the conduct of a trade or busi- ness within the United States is taxable, under the act, at the regular corporate income tax rates. In determining "taxable income" for this purpose, gross income includes only gross income which is "effectively connected" with the conduct of `the trade or business within the United States. (C) Income from real property.-Under prior law (as explained with respect to nonresident alien individuals) it was not clear what situations or arrangements for the ownership by a foreign corpora'tion of real property located in the United States would cause the foreign corporation to be considered as engaging in a trade or business within the United States. This was important `because if a foreign corpora- tion not engaged in a trade or `business in the United `States received rents from U.S. real property, this rental income was taxable at the flat 30-percent rate (or applicable treaty rate) on the gross amount of such rents, without the allowance of any deductions attributable to the rental income. Consequently, the tax liability generated by this rental income might have exceeded the net rental income the corporation received. Since the provisions of this amendment parallel the amendment pro- vided in the case of real estate income of nonresident alien individuals, the explanation is not repeated here (see No. 3(a) (C) (ii)). (ID) Certain interest received by banks in U.S. possessions.-The act provides `that interest received by banks located in a U.S. posses- sion from U.S. Government obligations will be treated as effectively connected with a U.S. trade or business whether or not the bank has such a business. Consequently, the interest received by a bank in a possession from U.S. Government obligations will be taxed on a net basis-gross interest income less allocable expenses. (E) Deductions.-Deductions are allowed in computing the tax imposed at the regular corporate rates only to the extent that they are properly attributable `to income which is effectively connected with, the conduct of a trade or business within the United States. The deduction for charitable contributions, however, is allowed whether or not attributable to income which is effectively connected. Gen- erally~ as under prior law, deductions are permitted only if a true and accurate income tax return is filed. 71-297 0-67-pt. 2-55 2017 PAGENO="0866" 26 FOREIGN INVESTORS TAX ACT OF 1966 Effective date.-These amendments apply with respect to taxable years beginning after December 31, 1966. b. Withholding of tax on foreign corporations (sec. 104(c) of the act and sec. 1442 of code) Under prior law, the fixed or determinable U.S. source income of a. foreign corporation not engaged in trade or business in the United States, like that of a nonresident alien not engaged in a trade or busi- ness in the United States, was subject to a withholding tax of 30 percent. However, foreign corporations engaged in trade or business in the United States were not subject to the withholding tax. The act amends the withholding provisions of prior law to con- form to the effectively connected concept. Thus, under the act a withholding tax at the 30-percent rate will apply in the case of a foreign corporation to items of fixed or determinable U.S. source income which are not effectively connected with the conduct of a trade or business in the United States. It is the understanding of the Congress that the person required to withhold will be relieved of any liability for failure to withhold if the failure is due to reliance upon information (as to whether or not the income was effectively connected) furnished (in accordance with regulations to be issued) by the foreign corporation entitled to the receipt of the income. This 30-percent withholding provision is not to be applied if the Secretary of the Treasury determines that the withholding requiremeiits impose an undue administrative burden and that the collection of the tax will not be jeopardized by an exemption. c. Deduction for dividends received frorn~ foreign corporations (sec. 104 (d) and (e) of the act and sec. 245 (a) and (b) of the code) Prior law.-In genera:l, existing law allows corporations an 85-per- cent dividend-received deduction for dividends received from domestic corporations. Under prior law, in order for this deduction to have been available in the case of dividends from a foreign corporation, the latter must have been engaged in a trade or business in the United States for an irninterrupted period of at least 3 years and 50 percent of its gross income must have been from U.S. sources during that period. Where these conditions existed, an 85-percent dividend-re- ceived deduction was available for the same proportion of the dividend as the corporation's gross income, which was from U.S. sources, was of its total gross income. Explanation of the provision.-The act substantially conforms the dividends-received deduction to the effectively connected concept. Under the act 50 percent or more of the foreign corporation's gross income for the uninterrupted period must be from income effectively connected with the conduct of a trade or business within the United States for the deduction to be available. Also, the deduction is lim- ited to 85 percent of the same proportion of the dividend as the foreign corporation's gross income, which is effectively connected with a U.S. trade or business, is of that corporation's total gross income from all sources. In addition, a ~100 percent dividends-received deduction is pro- vided to a domestic corporation for dividends received from a wholly owned foreign subsidiary which has a 100 percent effectively con- nected income. In such a situation a foreign corporation is subject to U.S. tax on all of its income, just as is a domestic corporation. 2018 PAGENO="0867" FOREIGN INVESTORS TAX ACT OF 1966 27 The act also contains a transitional rule which makes it unnecessary to apply the effectively connected income concept when any of the years which is taken into account for the 50-percent test is a pre-1967 year. This rule provides that, for purposes of computing this deduc- tion, all of a foreign corporation's U.S. source income, for any period before its first taxable year beginning after December 31, 1966, is to be considered to be effectively connected income. Effective date.-These amendments apply for taxable years be- ginning after December 31, 1966. d. Unrelated business taxable income of certain foreign charitable organizations (sec. 104(g) of the act and sec. 512(a) of the code) Under prior law the unrelated business taxable income of foreign charities was subject to tax if it was derived from sources within the United States. The act conforms this provision to the effectively connected con- cept by providing that the unrelated business taxable income of a for- eign charity is to be subject to tax only if it is effectively connected with the conduct of a trade or business in the United States. This amendment applies for taxable years beginning after Decem- ber 31, 1966. e. Foreign corporations subject to personal holding company tax (sec. 104(h) of the act and sec. 542(c), 543(b), and 545 (a) and (d) of the code) Prior iaw.-Under prior law any foreign corporation with U.S. investment income, whether or not doing business here, could be taxed as a personal holding company unless all its outstanding stock was owned (directly and indirectly) by nonresident alien individuals and its U.S. source gross income was less than 50 percent of its total gross income for that year. If taxable as a j?ersonal holding company the foreign corporation was subject to a special 70-percent tax on its un- distributed U.S. source personal holding company income in addition to the flat rate 30-percent tax (or possibly the regular corporate tax). Also, if a foreign corporation was determined to constitute a personal holding company and the foreign corporation had not filed a return or had not filed a true and accurate return, the 70-percent personal holding company tax was assessed without allowance of the dividends paid deduction. In such cases, the combination of the regular 30- percent tax and the 70-percent personal holding company tax could have constituted a tax of about 80 percent of the income of the foreign corporation. Explanation of provision.-The act modifies the provision in prior law excluding from the personal holding company definition only those foreign corporations whose U.S. source gross income was less than 50 percent of their total gross income and all of whose stock was held di- rectly or indirectly by nonresident aliens. It substitutes a broader exemption which applies to any foreign corporation all of whose out- standing stock during the last half of its taxable year is owned by non- resident alien individuals (directly or indirectly through foreign estates, trusts, partnerships, or other foreign corporations). This general rule contains three refinements. The first provides that the general exclusion from the personal holding company provision is not to be available to a foreign personal holding company if it has income from personal services which is personal holding company 2019 PAGENO="0868" 28 FOREIGN INVESTORS TAX ACT OF 1966 income described in section 543 (a) (7). In such a case the personal holding company tax is to be assessed on that personal service income. The second provides a deminimus rule under which foreign corpora- tions with only 10 percent or less U.S. ownership are to be assessed the personal holding company tax only on the corporation's undis- tributed personal holding company income attributable to the U.S. shareholders' interest. The final refinement provides that a foreign corporation can claim all appropriate deductions in computing its personal holding company tax notwithstanding the general rule dis- allowing deductions where no return is filed. However, a 10-percent addition to taxes otherwise due is t.o be assessed. Effective date.-This amendment applies with respect to taxable years beginning after December 31, 1966. f. Foreign corporation$ carrying on insurance business in the United States (sec. 104(i) of the act and sees. 819,821, 822, 831, 832, 841 and 842 of the code) Prior law.-Prior law taxed a foreign life insurance company carrying on a life insurance business in the United States on all its income attributable to that business in substantially the same manner as a domestic life insurance company.3 Foreign insurance companies carrying on life insurance businesses in the United States generally interpreted this as providing they were not taxable on U.S. source income which was not income of the U.S. life insurance business of the company. However, a special rule was provided where the sur- plus of a foreign life insurance company held in the United States was less than a specified minimum figure. This figure was expressed as the same percent of the foreign life insurance company's liabilities on U.S. business as the average surplus of domestic corporations was of their total liabilities. The Secretary of the Treasury determined this ratio each year. If the foreign insurance company's surplus held in the United States was less than this proportion of the taxpayer's total insurance liabilities on U.S. business, then the policy and other con- tract liability requirements, and the required interest for computing gain from operations, were reduced by this deficiency multiplied by the rate of earnings on investments. This provision was designed to prevent foreign insurance companies doing business in the United States from avoiding tax that they would otherwise have had to pay to the United States merely by not holding a sufficient amount of surplus attributable to the U.S. business. E~p7anation of provisions.-The act provides that a foreign corpo- ration carrying on an insurance business within the United States is to be taxable in the same manner as domestic companies carrying on a similar business with respect to its income which is effectively con- nected with the conduct of a trade or business within the United States. The remainder of the U.S. source income of this type of a corporation is to be taxed in the same manner as income of other foreign corporations which is not effectively connected with a U.S. trade or business; that is, at a flat 30 percent (or lower treaty) rate. The determination of whether a foreign insurance company qualifies for the special domestic insurance treatment is to be made by con- sidering only the income of the corporation wihch is effectively con- A forei~n life insurance company that is not carrying on a life Insurance business in the United States is taxable under the provisions applicable to foreign corporations generall~#. 2020 PAGENO="0869" FOREIGN INVESTORS TAX ACT OF 1966 29 nected with the conduct of its insurance business carried on in the United States. For purposes of determining whether or not income of a foreign life insurance company is effectively connected wit.h the conduct of its U.S. life insurance business, the annual statement of its U.S. busi- ness on the form approved by the National Association of Insurance Commissioners will usually be followed. Also, certain foreign casualty insurance companies use this form to indicate their U.S. business connected investment income, and it is expected that this statement will continue to be utilized to reflect the effectively connected income of these companies. It is noted that all the income effectively con- nected with the foreign life insurance company's U.S. life insurance business, from whatever source derived, comes within the ambit of this provision. This a continuation of existing law. It has been pointed out that the special rule in prior law referred to above with respect to foreign life insurance companies-where these companies held a lower ratio of surplus for their U.S. business than that held by the average domestic companies-could have lead to what in effect would have been a double tax. To meet this problem the act adds a paragraph to the provision described above which has the effect of reducing the income subject to the flat 30-percent. tax (or lower treaty rate) by the amount by which the deductions under this special provision are reduced as the result of the application of the Secretary's ratio. This is accomplished by allowing a credit against the 30-percent tax (or lower treaty rate) for t.he tax levied on the hypo- thetical income attributed to the U.S. life insurance company business. Effective date.-These amendments apply with respect to taxable years beginning after December 31, 1966. g. Subpart F income (sec. 104(j) of the act and sec. 95~2(b) of the code) Prior law.-Under existing law certain portions of the undistrib- uted income of a controlled foreign corporation are taxed currently to its U.S. shareholders having a 10 percent or greater voting in- terest. This undistributed income so taxed is termed "subpart F in- come." In determining "subpart F income," there was, under prior law, an exclusion for income of a foreign corporation from U.S. sources which already was taxed by the United States because the cor- poration was engaged in trade or business in the United States. Prior law was interpreted in the income tax regulations as not excluding from "subpart F" income, income exempt from U.S. tax, or subject to a reduced rate of tax, in accordance with a treaty. Explanation of prov'Lsion.-The act amends prior law to provide that in determining "subpart F income" there is to be excluded only those items of income effectively connected with the conduct of a trade or business within the United States. It also makes it clear that "sub- part F income" includes items exempt from U.S. tax or subject to a reduced rate of tax pursuant to a treaty. Effective date.-This amendment applies with respect to taxable years beginning after December 31, 1966. h. Gain from certain sales or exchanges of stock in certain foreign corporations (sec. 104(k) of the act and sec. 1248(d) of the code) Prior law.-Prior law treated the gain realized by a 10-percent U.S. shareholder from the sale or exchange of stock of certain for- 2021 PAGENO="0870" 30 FOREIGN INVESTORS TAX ACT OF 1966 eign corporations as a dividend, to the extent the post-1962 earnings and profits of the corporationwere attributable to the shares being sold or exchanged. In determining the earnings and profits to be taken into account in determining this gain, prior law excluded U.S. source income of a foreign corporation engaged in a U.S. trade or business. Consistent with the interpretation of similar language ap- plicable to the determination of "subpart F income" explained above, these earnings and profits have been construed by the regulations as including income exempt from U.S~ tax or subject to a reduced rate by treaty. Explanation of provision.-This amendment provides that for tax- able years beginning on or after January 1, 1967, the earnings and profits of the foreign corporation (for purposes of sec. 1248) are not to include income effectively connected with the conduct of a trade or business within the United States. In addition, the amendment makes it clear that the exclusion does not apply to income which is exempt from tax, or subject to a reduced rate of tax, pursuant to a treaty. Effective date.-This amendment applies to sales or exchanges oc- curring after December 31, 1966. ~. MISCELLANEOUS INCOME TAX PROVISIONS, ETC. a. Income affected by treaty (sec. 105 (a) of the act and sec. 894 of the code) Prior law.-Existing income tax treaties generally provide tlma~ the exemptions from tax, or the reduction in rates of tax, provided for in their provisions apply only to persons who do not have a permanent establishment in the United States. The "permanent establishment" concept of the treaties serves a purpose similar to the "engaged in a trade or business in the United States" concept of U.S. tax law. The effect of such a provision in a treaty, therefore, is to deny the benefits of a treaty exemption or reduced rate to a nonresident alien individual, or a foreign corporation, engaged in a trade or business in the United States through a permanent establishment. Explanation of provision.-TJnder the tax treatment provided for such persons by the act, the "engaged in trade or business in the United States" criterion is no longer the sole determinant of the method of taxing particular items of a nonresident alien individual's, or a foreign corporation's, U.S. source income. The act seeks to tax all such persons alike on their noneffectively connected U.S. source income whether or not they also are engaged in a trade or business in the United States. This result would not be achieved under treaty provisions if some aliens or foreign corporations, because they have a permanent establishment in the United States, are denied the benefits of treaty rates or exemptions. The act adds to the code a new subsection providing that for purposes of applying any exemption from, or any reduced rate of, tax granted by a treaty to which the United States is a party, with respect to in- come which is not effectively connected with the conduct of a trade or business within the United States, a nonresident alien individual or foreign corporation shall be deemed not to have a permanent establish- ment in the United States at any time during the taxable year. In other words, with respect to investment income not effectively con- nected with a trade or business, a nonresident alien or foreign cor- 2022 PAGENO="0871" FOREIGN INVESTORS TAX ACT OF 1966 31 poration will be taxed at the lower treaty rate if one is provided. This provision does not apply in computing the special tax applicable to U.S. citizens who become expatriates with a primary purpose of avoiding tax. Effective date.-This new provision is effective for taxable years beginning after December 31, 1966. ~. Ad~justment of tax on nationals, residents, and corporations of certain foreign countries (sec. 105(b) of the act and new sec. 896 of the code) Explanation of provisions.- (A) Imposition of more burdensome taxes.-To prevent a deterioration in our position in negotiating treaties as a consequence of revising these statutory provisions, the act has added a provision to the tax laws which generally grants to the President the authority to apply the income tax law without regard to the amendments which this or later acts make to the provisions relating to the taxation of foreigners (including corporations) in the case of any country which imposes more burdensome taxes on U.S. citizens and corporations than the United States does on nonresident aliens and foreign corporations. The new section gives special authority to the President where lie finds that- (1) under the laws of any foreign country, citizens of the United States (not residents of the foreign country) or U.S. cor- porations are being subject to more burdensome taxes on any item of income from sources within the foreign country than those im- posed by the United States on similar U.S. source income of resi- dents or corporations of the foreign country; (2) the foreign country has not acted upon a request to revise or reduce its taxes to eliminate this condition; and (3) it is in the public interest to ieimpose the pre-1967 income tax provisions. Where these conditions exist, the President may proclaim that the tax on similar income derived from U.S. sources by residents or corpora- tions of the foreign country for taxable years beginning after the proc- lamation is to be determined by disregarding the amendments to the income tax law, as it relates to nonresident aliens and foreign corpora- tions, made by this act or by subsequent acts. If, after such a proclamation, the foreign country modifies the offending provisions of its tax law so that the President finds they are no longer more burdensome, he may proclaim that the U.S. t.ax on similar items of income derived from. U.S. sources by residents or corporations of the foreign country, for taxable years beginning after such proclamation, is to be determined by taking into account the amendments made to the income tax provisions of the code relating to nonresident aliens and foreign corporations by this and later acts. Before the President makes a proclamation under this new provision he is to give the Congress 30 days notice of his intention so to do. (B) Imposition of discriminatory taxes by foreign country.-This provision granting the President the authority to take such action as is necessary to raise the effective rate of U.S. tax on income received by nationals, residents, or corporations of a discriminating country to substantially the same rates as are applied in the other country was added. 2023 PAGENO="0872" 32 FOREIGN INVESTORS TAX ACT OF 1966 Effective date.-These provisions are effective for taxable years be- ginning after December 31, 1966~ c. Foreign community property income (s~c. 105(e) of the act and new sec. 981 of the code) Prior law.-The general income tax provisions provide, in effect, that the worldwide income of a U.S. citizen is subject to tax from whatever source derived. In a recent case,4 it was held `that an Ameri- can citizen who acquired residence in a foreign country with com- munity property laws, and who married a nonresident alien, had a sufficient interest in one-half of the marital partnership income- even though earned by the husband foreigner-to render her subject to U.S. taxation on that income. Explanation of provisions.-The act provides U.S. citizens who are, during the periods involved, married to nonresident aliens with two separate elections, one for post-1966 years and one for pre-1966 years. If an election is made for post-1966 years, the community income of husband and wife are to be treated as follows: (1) Earned income (sec. 911(b)) is to be treated as income of the spouse who rendered the personal services. (2) Trade or business income is to be treated as income of the husband unless the wife exercises substantially all the manage- ment and control over the business. Also, a partner's distributive share of income is to be wholly attributed to him (same as self- employment rules under section 1402 (a) (5)). (3) Other community income which is derived from separate property of one spouse is to be treated as income of that spouse. `What is "separate property" for this purpose is to be determined under the applicable foreign community property law. (4) All other community income is to be treated as provided in applicable foreign community property law. For pre-1967 years the treatment of income of the types set forth in categories (1), (2), and (3) above is to be the same as described above, but the income described in category (4) above is to be treated as income of the spouse who, for the year involved, had the greater amount of income described in (1), (2), and (3) plus separate income. Thus, category (4) income is attributed to the marital partner whose earnings or property were most likely to have given rise to this income. For purposes of this provision, the treatment of deductions is to `be compatible with that accorded the income to which the deductions are attributable. In other words dedudtions are to follow the income they generate. This provision provides qualified taxpayers with two elections, one for pre-1967 years and one for future years. Either election can be made for any year, at any time, so long as the year is still open. How- ever, these elections are binding-if the election is exercised for any post-1967 year the treatment provided by this provision applies not only to the year of election but also to all years subsequent which are open and, if made for pre-1967 years, this provision a~phes for all open years prior to that date. It should be noted that either election can be made separately. 4Katruslika J. Parsons V. Commissioner, 43 P.C. 331 (1964). 2024 PAGENO="0873" FOREIGN INVESTORS TAX ACT OF 1966 33 Generally, the election rnu~t be made by both spouses. However, with respect to the pre-1967 election, the foreign spouse need not join if the Secretary of the Treasury determines that (1) an electi1on would not affect the U.S. tax liability of the foreign spouse for any taxable year, or (2) that the foreign spouse's U.S. tax liability for pre- 1967 years cannot `be ascertained and that to deny the election to the U.S. citizen would be inequitable and cause undue hardship. If either election is made, a period of 1 year is provided with respect to all open years for the making of assessments and the claiming of refunds. However, this 1-year period applies only if the deficiency or refund is att~ibutable to the election. Also, no interest is due on a deficiency or refund resulting from the election for any period up `to 1 year after the filing of the election. d. Foreign tax credit-foreign corporations and nonresident aliens (sec. 106(a) of the act and sees. 874, 901, and new sec. 906 of the code) Prior law.-Prior law did n~t grant a foreign tax credit to foreign corporations or nonresident aliens since such persons were subject to U.S. tax only on their U.S. source income. However, the code did provide a tax credit to U.S. persons with respect t.o foreign taxes on foreign income subject to U.S. tax. Explanation of provision.-The act adds a. new section to the code (sec. 906) to allow a foreign tax credit to nonresident aliens and for- eign corporations with respect to foreign source income which is sub- ject to tax in the United States because it is effectively connected with the conduct of a trade or business in the United States. The credit is allowed under the existing foreign tax credit provision and is subject to the existing "per country" or "overall" limitation. The "per country" limitation restrict.s the credit to the proportion of the U.S. tax which the taxpayer's taxable income from sources within the particular country bears to his entire taxable income for the year. Similarly the "overall" limitation restricts the credit to the proportion of the U.S. tax which the taxpayer's taxable income, from sources without the United States, bears to his entire taxable income for the year. In determining the credit allowable to a nonresident alien indi- vidual or a foreign corporation under these limitations, the individ- ual's or corporation's taxable income is to include only the taxable income effectively connected with the taxpayer's conduct of a trade or business within the United States.. The credit is not allowable against U.S. taxes imposed at the fiat 30-percent rate on income not effectively connected with the conduct of a trade or business in the United States. Under some circumstances, existing law treats a portion of the for- eign taxes paid by certain foreign subsidiaries of a domestic corpora- tion as having been paid by the domestic corporation for purposes of computing its foreign tax credit. The act accords this same treat- ment to foreign corporations, but its application is limited to income effectively connected with the conduct of a trade or business within the United Stfttes. Effective date.-These amendments apply for taxable years begin- fling after December 31, 1966. In applying the foreign tax credit carryback and carryover provisions of present law to nonresident aliens and foreign corporations no amount may be carried to or from a taxable year beginning before January 1, 1967. 2025 PAGENO="0874" 34 FOREIGN INVESTORS TAX ACT OF 1966 e. Similar credit requirement (sec. 106(b) (2) and (3) of the act and secs. 901 (c) and 2104(a) and new (h) of the code) Prior la'w.-Under prior law, the foreign tax credit for income, etc., or death taxes are allowable to an alien who is a resident of the United States (or Puerto Rico) oniy if the foreign country in which the alien is a citizen or subject, in imposing its income, etc., or death taxes, al- lows a similar credit to citizens of the United States residing in such country. Explanation of provision.-The act modifies the provision of prior law which in all cases denies a credit for citizens of a foreign country if it does not provide reciprocity for U.S. citizens residing there. Tjnder the act the President is given some discret.ion as to the disallowance of the credits in such cases. The act provides that the President is to deny a foreign tax credit to residents who are sub- jects of a foreign country if he finds: (1) That a foreign country, in imposing income, war profits, and excess profits taxes or death taxes does not allow U.S. citizens residing in that country a credit for any taxes paid or accrued to the United States or any foreign country, similar to the foreign tax credit allowed by the United States to sub- jects of that foreign country residing in the Unit.ed States; (2) that the foreign country, when requested to do so, has not acted to provide a similar credit to U.S. citizens residing in that foreign country; and (3) that it is in the public interest to allow the U.S. foreign tax credit to citizens or subjects of the foreign country who reside in the United States only if the foreign country allows such a similar credit to citi- zens of the United States residing in the foreign country. The disallowance of the credit in any such case is to apply for tax- able years beginning while a Presidential proclamation denying the credit is in effect. f. Separate foreign tax credit limitation (see. 106(c) of the act and sec. 904(f) of the code) Prior law.-Generally, under existing law the limitation on the al- lowaible foreign tax credit must be computed separately for all interest income on a "per country" basis. Prior to this act, the exceptions to this general rule were: (1) Interest derived from any transactions directly related to the active conduct of a trade or business in a foreign country or U.S. possession; (2) Interest derived in the conduct of a banking, financing, or similar business (such as an insurance company business); (3) Interest received from a corporation in which the taxpayer owned at least 10 percent of the voting stock; and (4) Interest received on obligations acquired as the result of the disposition of a trade or business actively conducted by a taxpayer in a foreign country or as a result of a disposition of stock or obli- gations of a corporation in which the taxpayer owned at least 10 percent of the voting stock. Explanation of provision.-The Act amends the 10-percent excep- tion in (3) above to provide that the special liniitation on interest from foreign corporations is not to apply with respect to interest income re- ceived by a U.S. lending corporation which directly or indirectly owns at least 10 percent of the foreign corporation from which the interest is derived. For purposes of this provision stock owned directly or 2026 PAGENO="0875" FOREIGN INVESTORS TAX ACT OF 1966 35 indirectly by or for a foreign corporation is to be considered as owned proportionately by its shareholders. Effective date.-The amendments made by this provision apply to interest received after December 31, 1965, in taxable years ending after that date. g. Amendment to preserve existing law on deduetions under section 931 (sec. 107 of the act and sec. 931 (d) of the code) Under existing law, U.S. citizens or domestic corporations earning income in possessions of the United States generally are taxable only on their U.S. source income (plus amounts received in the United States) if they meet certain requirements.5 In general, these require- ment~s are that the citizen or corporation derive 80 percent of its gross income from sources within such a possession and 50 percent of its gross income from the active conduct of a trade or business within such a possession (both of these tests being applied with respect to income received in the prior 3 years). A U.S. citizen or domestic corporation which qualifies for this treat- ment may exclude from its U.S. tax base gross income from sources without the United States (in the same way as nonresident aliens and foreign corporations not engaged in trade or business within the United States). The deductions allowed a U.S. person who qualifies for this exclusion are those which were allowable under prior law to nonresi- dent aliens and foreign corporations engaged in trade or business in the United States. In general, these deductions were: (1) Those con- nected with U.S. source income, (2) those allocated or apportioned under regulations with respect to deductions related to income which is partially from within and without the United States, (3) losses not connected with the trade or business but incurred in transactions entered into for profit (if the profit, had the transaction resulted in a profit, would have been taxable by the United States), (4) casualty losses (if the loss is of property within the United States), and (5) the charitable contribution deduction. Explanation of provision.-The act does not change the tax treat- ment of income qualifying for the exclusion relating to income from U.S. possessions but because it allows deductions to nonresident aliens and foreign corporations engaged in a trade or business in the United States only where the deductions are allocable to income effectively connected with this trade or business, it is now necessary in this provi- sion to specify the deductions which may be taken. The act therefore makes applicable to U.S. citizens and domestic corporations engaged in trade or business in possessions, who qualify for the special tax treatment under existing law, the provisions of prior law which allow deductions to nonresident aliens or foreign corporations engaged in trade or business in the United States. This amendment is effective for taxable years beginning after De- cember31, 1966. 6. ESTATE TAX PROVISIONS a. Estate tax rates (sec. 108(a) of the act and sec. p101(a) of the code) Prior law.-Under existing law and that in effect prior to this act, the estate of a nonresident alien is taxed only on the transfer of prop- Possession for purposes of this provision does not Include the Virgin Islands or, in the case of U.S. citizens does not include Puerto Rico. 2027 PAGENO="0876" 36 FOREIGN INVESTORS TAX ACT OF 1966 erty situated or deemed to be situated in the United States at the time of his death. While under prior law, the tax rates were the same as for citizens and residents of the United States, the deductions, credits, and exemptions were different: No martial deduction was allowed with respect to the estate of a nonresident alien; the specific exemption in determining the taxable estate was $2,000 instead of the $60,000 applicable in the case of U.S. citizens; no credit was allowed for for- eign death taxes paid; and deductible expenses, losses, etc., were gen- erally limited to the same proportion of these expenses which the alien's gross estate situated within the United States was of his entire gross estate. Eaiplanation of provi8ion.-~-The act establishes a new schedule of graduated estate tax rates applicable to estate of nonresident aliens which will impose a tax on the U.S. estates of these persons in an amount which is generally equivalent to the tax imposed on an estate of similar value of a U.S. citizen with the maximum marital deduc- tion. (As is explained subsequently the act also increases the specific exemption available with respect to estates of nonresident aliens.) The new schedule of rates applicable to estates of nonresidents not citizens is as follows: If the taxable estate is: The tax shall be: Not over $100,000 _ 5 percent of the taxable estate. Over $100,000 but not over $500,000_.__ $5,000, plus 10 percent of excess over $100,000. Over $500,000 but not over $1,000,000__ $45,000, plus 15 percent of excess over $500,000. Over $1,000,000 but not over $2,000,000__ $120,000, plus 20 percent of excess over $1,000,000. Over $2,000,000 $320,000, plus 25 percent of excess over $2,000,000. Table 1 shows a comparison of the effective rates for estates of non- resident aliens provided by this new schedule with the effective rates under prior law for nonresident aliens and U.S. citizens with and without a marital deduction. It will be noted that the effective rates resulting from the new schedule closely approximate those applicable in the case of the estate of a U.S. citizen with a marital deduction. TABLE 1.-Effective rates of U.5(. tax on U.~S. estates of nonresident aliens under prior law and under the act and on U.s. citizens under existing law U.S. gross estate' Effective rate of tax Prior treatment of nonresident alien Tax treatment of nonresident alien provided by act 2 U.S. citizen With marital deduction Without marital deduction $2,000 $10,000 $30,000 $60,000 $100,000 $500,000 $1,000,000 $5,000,000 $10,000,000 2.9 7.7 12.5 17.3 25. 8 28.8 43. 0 53.3 2.0 3.0 7.4 10. 1 17.8 20. 6 8. 0 11. 1 16. 9 21. 2 3.0 22. 1 26.7 42.3 52.8 I For purposes of these computations it is assumed 10 percent of gross estate is deducted for funeral and other expenses both in the case of U.S. citizens and nonresident aliens. 2 Takes into account the increase in the exemption from $2,000 to $30,000. 2028 PAGENO="0877" FOREIGN INVESTORS TAX ACT OF 1966 37 Effective date.-The,se new rates are to be effective with respect to estates of decedents dying after November 13, 1966. b. Limitation on credit for State death taxes (sec. 108(b) of the act and sec. 210~ of the code) Prior law.-Under prior law, the estate of a nonresident alien was allowed a credit against its U.S. estate tax for death taxes it paid to any of the States of the United States. The only death tax some of the States impose is a so-called pickup tax, that is, a tax equal to the maximum credit for State death taxes allowable against the Federal estate tax. Other States impose a pickup tax in addition to their regular death taxes. Explanation of provisions.-The act amends prior law to provide that the maximum credit for State death taxes allowable against the Federal estate tax imposed on estates of nonresidents not citizens is to be an amount which bears the same ratio to the credit (computed with- out regard to this limitation) as the value of the property upon which the State death taxes are paid (and which is includible in the gross estate) bears to the total gross estate for Federal tax purposes. Effective date.-This amendment applies with respect to estates of decedents dying after November 13, 1966. c. Bond situs rule (sec. 108(c) of the act and sec. ~2104 of the code) Prior law.-Under existing law, a nonresident alien is subject to the U.S. estate tax only with respect to property which is situated in the United States at the time of his death. The code provides so-called situs rules for determining under what conditions various types of property are to be considered as having a U.S. situs and therefore includible in the estate tax base of a decedent. Under these rules stock of a domestic corporation owned by a nonresident alien is considered to be property within the United States regardless of the location of the share certificates. In the case of bonds issued by U.S. corporations, no such statutory situs rule exists. Instead, under prior law, for Federal estate tax purposes, the debt represented by a bond of a domestic corporation was considered to be situated at the location where the certificate was held. Other intangible debt obligations of U.S. obligors have been treate.d as being situated within the United States. Eq~planatiom of provision.-The act adds a new provision to the law providing that for purposes of the tax imposed on the estates of nonresidents not citizens, all debt obligations (including bonds) of a U.S. person, the United States, a State or political subdivision of a State, or of the District of Columbia owned and held by a nonresident not a citizen of the United States are to be deemed to be property situated within the United States. An exception to this rule is provided for debt obligations of U.S. corporations which have derived less than 20 percent of their gross income from U.S. sources for the 3 years prior to the nonresident's death. In such cases these debt obligations are to be considered as having a foreign situs. For purposes of this provision U.S. currency is not to be considered a debt obligation of the United States. Effective date.-This amendment applies with respect to estates of~ decedents dying after November 13, 1966. 2029 PAGENO="0878" 38 FOREIGN INVESTORS TAX ACT OF 1966 d. Deposits in U.S. banks or foreign branch banks of U.S. corpora- tions (sec. 108(d) of the act and sec. 2105 of the code) Prior law.-Prior law provided that, for purposes of estate tax, the deposits of nonresident aliens with U.S. persons carrying on the banking business were not considered to have had a situs within the United States if the decedent was not engaged in a trade or business in the United States at the time of his death. This rule applied to deposits in foreign branch banks of U.S. corporations as well as to deposits in domestic branches. Explanation of provision.-The act provides that after 1972 deposits of nonresident aliens and foreign corporations with U.S. persons car- rying on the banking business will be considered to have a situs within the United States. The 1973 effective date conforms this estate tax provision to the effective date of the income tax provision which taxes the interest, derived from these deposits beginning after 1972. Also, the new situs rule provides that for purposes of the U.S. estate tax on estates of nonresident aliens, deposits in a foreign branch bank of a U.S. corporation or partnership, if the branch is engaged in the corn- mercial banking business, are not to be deemed to be property within the United States. Therefore these deposits will nc~t be included in the foreigner's taxable U.S. estate. Effective date.-This amendment is applicable to the estates of decedents dying after November 13, 1966. e. Definition of taxable estate (sec. 108(e) of the act and sec. 2106 (a) (3) of the code) Prior iaw.-Under existing estate tax law, the estate of a citizen of the United States is entitled to a $60,000 exemption. In the case of the e~t.ate of a nonresident alien, however, prior law allowed only a $2,000 exemption. In the case of decedents who were residents of U.S. possessions at the time of death and were citizens of the United States solely by reason of being a citizen of the possession, or by reason of birth or residence in the possession, the exemption provided by prior law was the greater of $2,000, or the proportion of the $60,000 exemp- tion which the value of that part of the decedent's gross estate which was situated in the United States bore to the value of his entire gross estate. Explanation of provis'ion.-Under the act, the estate of a nonresi- dent not a citizen is allowed to deduct a $30,000 exemption in comput- ing the taxable estate. The exemption which the estate of a resident of a U.S. possession to which the special rule applies is allowed, under the act, is to be the greater of $30,000 or the proportion of the $60,000 exemption allowable under existing law. Effective date.-These amendments apply to estates of decedents dying after November 13, 1966. f. Expatriation to avoid tax (sec. 708(f) of the act and new sec. 2107 of the code) Prior law.-The U.S. estate tax applies to U.S. citizens and U.S. residents with respect to their estate no matter where situated. How- ever, a foreign estate tax credit is allowable with respect to foreign death taxes paid in the case of property having a situs outside of the United States. In the case of nonresident aliens, prior law pro- vided that the U.S. estate tax applied but only with respect to prop- erty having a U.S. sit.us. Under prior law, if an individual who had 2030 PAGENO="0879" FOREIGN INVESTORS TAX ACT OF 1966 39 been a U.S. citizen gave up this citizenship and became a nonresident alien, no tax was imposed with respect to his estate to the extent the property was situated outside of the United States. Explanation of provi~sion.-The act adds a new section to the code which imposes the regular U.S. estate tax rates on the U.S. estate of a nonresident alien dying within 10 years after losing U.S. citizenship if one of the principal purposes of the loss of citizenship was the avoidance of U.S. income, estate, or gift taxes. This provision is not to apply to those who lost their citizenship on or before March 8, 1965. It also does not apply in the case of decedents dying on or before November 13, 1966. In determining the value of the gross estate of such an expatriate (as in the case of nonresident aliens generally) only property situated in the Uni'ted States that was owned by him at the `time of his death is included. However, the U.S. estate tax base of these expatriate decedents is expanded in certain respects to prevent him from avoiding U.S. tax on his estate by transferring assets with a U.S. situs `to a foreign corporation in exchange for its stock. Such a transfer by a nonresident alien would reduce the portion of his gross estate hav- ing a U.S. situs, since the stock of a foreign corporation `has a foreigii situs even though the assets of the foreign corporation are situated in the United States. The new provision specifies, if certain stock ownership tests are met, that the value of the expatriate's gross U.S. estate is to include the same proportion of the value of the stock- holdings of the expatriate in the foreign corporation as its property having a U.S. situs bears to all its property. The ownership tests that must be met for this special provis'ioi~ to apply are: (i) The decedent must have owned at the time of his death 10 percent or more of the voting power of all classes of stock of the foreign corporation. Ownership for this test includes direct ownership and indirect ownership through another foreign cor- poration or through a foreign partnership, trust, or estate. (ii) The decedent must have owned, at the time of his death, more than 50 percent of the total voting power of all classes of stock of the foreign corporation. Ownership for purposes of this test is `ownership as described in (`i) above plus ownership attrib- uted to the expatriate under certain attribution rules of existing law (sec. 958(b) of the code). In general, these rules attribute to an individual ownership of stock held by members of his family, as well as by partnerships, trusts, estates, or `corporations in whici) the individual has certain interests. In addition, in determining whether the ownership tests are met, and in determining the portion of the U.S. situs property owned `by the foreign corporation that must be included in computing the value of his gross estate, the expatriate is treated as owning the stock of a foreign corporation (at the time of his death) which he transferred during his life but which under U.S. estate tax law generally is not effective in excluding property from a gross estate. There transfers are: (i) Transfers in contemplation of death (sec. 2035). (ii) Transfers with retained life estate (sec. 2036). (iii) Transfers taking effect at death (sec. 2037). (iv) Revocable transfers (sec. 2038). 2031 PAGENO="0880" 40 FOREIGN INVESTORS TAX ACT OF 1966 In computing the estate tax under this new provision the expatriate's estate is allowed the credit for State death taxes, the credit for gift tax, and the credit for tax on prior transfers. The new section excepts from its application certain expatriates whose loss of U.S. citizenship occurs under circumstances which would make the application of the special taxing provisions inappropriate. These are the same exceptions provided with respect to the income tax expatriation provision (see No. 3(c) above). The new provision, like the comparable income tax provision, con- tains a special rule dealing with the burden of proving the existence or nonexistence of U.S. tax avoidance as one of the principal purposes of the expatriation. Under this provision, the Secretary of the Treasury or his delegate must establish that it is reasonable to believe that the expatriate's loss of U.S. citizenship would (but for the appli- cation of this new provision) result in a substantial reduction in the estate, inheritance, legacy, and succession taxes. If this is established, then the administrator of the expatriate's estate must carry the burden of proving that the loss of citizenship did not have ~as one of its principal purposes the avoidance of U.S. income, estate, or gift taxes. Effective date.-This new provision is effective with respect to estates of decedents dying after November 13, 1966. It does not apply, however, to expatriates who lost their citizenship on or before March 8, 1965. g. Application of pre-1967 estate taw provisions (sec. 108(f) of the act and new sec. 2108 of the code) The unilateral reduction of estate tax rates applicable to nonresident aliens by this act may have the effect of making it more difficult to negotiate estate tax treaties. This is comparable to the similar prob- lem arising from the revision of the income tax provisions applicable to nonresident aliens. A~ in the case of the income tax provisions therefore, the act has added a new provision which gives authority to the President to apply certain provisions of the estate tax law relating to estates of nonresidents not citizens without regard to the amend- ments made to these provisions by this, or any subsequent, act in the case of estates of residents of any country which imposes more bur- densome death taxes with respect to estates of U.S. citizen decedents, not residents of that country, than does the United States on estates of residents of such a country, not citizens of the United States. The new provision gives special authority to the President where he finds that: (1) Under the laws of a foreign country a more burdensome tax is imposed on the estates of U.S. citizens, not residents of th~ country, than is imposed on the estates of residents of that country by the United States; (2) The foreign country, when requested so to do, has not re- vised its taxes to eliminate this extra burden; and (3) It is in the public interest to reimpose the pre-1967 estate tax provisions. Where these conditions exist the President may proclaim that the U.S. tax on estates of residents of the foreign country is to be determined under certain provisions of U.S. estate tax laws (secs. 2101, 2102, 2106, 2032 PAGENO="0881" FOREIGN INVESTORS TAX ACT OF 1966 41 and 6018) as in effect prior to amendment by this or any subsequent act. Such a proclamation is to apply to the estates of decedents dying after the date of the proclamation. If after making such a proclamation the President finds that the laws of the foreign country have been revised to alleviate the excess burden on the estates of U.S. citizens he may proclaim that the tax on the estates of residents of the country is to be determined by taking into account the amendments made by this act, and any subsequent act. Such a proclamation is, to be effective with respect to estates of de- cedents dying after its date. Before issuing a proclamation under the new provision the President is required to give 30 days notice of his intent so to do to the Senate and the House of Representatives. This new section is applicable with respect to estates of decedents dying after November 13, 1966. h. Estate tax returns (sec. 108(g) of the act and sec. 6018 of the code) Under prior law the executor of the estate of a nonresident alien was required to file a U.S. estate tax return if the U.S. estate exceeded $2,000. The filing of returns with respect to these estates of over $2,000 was required because only a $2,000 exemption was granted to the estates of nonresident aliens. Since the act has increased the $2,000 exemption to $30,000, the return filing requirement is likewise increased by the act from $2,000 to $30,000. This amendment applies with re- spect to estates of decedents dying after November 13, 1966. 7. GIFT TAX PROVISIONS a. Tax on gifts of nonresidents not citizens (sec. 109(a) of the act and sec. 2501 of the code) Under prior law a gift of intangible property having a U.S. situs by a nonresident `alien who was engaged in trade or business in the United States was subject to U.S. gift tax. In practice this rule proved to be impossible to enforce, since there was no practical way for the Internal Revenue Service to find out when these gifts were made. Moreover, it did not occur to many non resident aliens that these transfers were subject to U.S. gift tax. Thus the revenue significance of this provision was minimal. The act amends prior law to provide that gifts of intangible prop- erty by nonresident aliens are not to be subject to the U.S. gift tax. To prevent this new rule from becoming a means of tax avoidance by U.S. citizens, the act `also provides that the rule is not to apply to gifts by donors who within the 10 years immediately before the gift became expatriates of the United States with a principal purpose of avoiding U.S. income, estate, or gift taxes. As in the case of similar amendments with respect to the income and estate taxes, the new provision provides a special rule relating to the burden of proof. Under this rule if the Secretary of the Treasury or his .delegate establishes that it is reasonable to believe that the in- dividual's loss of U.S. citizenship will result in a substantial reduction in the gift tax payable by the donor, the burden of proving that tax avoidance was not one of the principal purposes rests with the donor. Certain types of losses of citizenship, as in the case of similar income 71-297 0-67-pt. 2-56 2033 PAGENO="0882" 42 FOREIGN INVESTORS TAX ACT OF 1966 and estate tax provisions, are not to result in the application of this provision. This amendment applies with respect to the calendar year 1967 and all calendar years thereafter. b. Situs of bonds given by expatriates (sec. 109(b) of the act and sec. 2511 of the code) Under prior law bonds issued by U.S. persons, unlike other debt thligations, were considered to be situated where the instrument was located for purposes of the gift tax applicable to nonresident aliens. Under that rule, a citizen who became an expatriate with a principal purpose of avoiding U.S. taxes escaped U.S. gift taxation. To pre- vent this result, the act amends the present gift tax laws to provide that debt obligations of a U.S. person, or of the United States, a State or political subdivision thereof, or the District of Columbia which are owned by such expatriates are deemed to be situated in the United States. This amendment applies with respect to the calendar year 1967 and all calendar years thereafter. 8. TREATY OBLIGATIONS No amendment made by this act is to apply in any case where its application would be contrary to any treaty obligation of t.he United Staites. However, for purposes of this provision, the granting of a benefit provided by any amendment made by this act will not be con- sidered to `be contrary to `a treaty obligation. B. OTHER AMENDMENTS TO THE INTERNAL REVENUE CODE 1. Application of investment credit to property used in U.S. posses- sions (sec. 201 of the act and sec. 48(a)(2) of the code) In general, under prior law the investment credit was not available for property located outside the United `States. Therefore, with lim- ited exceptions, property used in a possession was not eligible for the investment credit. This `amendment extends the application of the investment credit provision to property used in a possession by a U.S. person, or by a corporation organized in a possession, provided the property would otherwise have qualified for the investment credit. `This rule is not extended if the property is owned or used in the possession `by U.S. persons who are presently exempt frpm U.S. tax due to the application of the special provisions of the code which exempt U.S. persons who derive substantially all their income from a U.S. possession (secs. 931, 932, 933, or 934(b)). This `amendment is effective with respect to taxable years ending after December 31, 1965, but only with respect to property placed in service `after that date. Additionally, for purposes of computing a carryback of investment credit, the amount `of any investment credit generated by this provision is to be disregarded. 2. Basis of property received in liquidation of subsidiary (sec. 202 of the act and sec. 334(b) (2) and (3) and sec. 453(d) of the code) (a) Purchase of stock.-Under existing law, if one corporation pur- chases 80 percent or more of the stock of another within a 12-month period and then causes the corporation acquired to be liquidated within 2034 PAGENO="0883" FOREIGN INVESTORS TAX ACT OF 1966 43 2 years pf the last purchase, the basis of all the assets received is the amount paid for the stock. Under prior law, however, in order to prevent manipulation, stock purchased from a person related to the buyer by the attribution rules (under section 318) was not treated as stock "purchased." Cases have been cited where it is necessary to acquire control of one corporation in order to obtain an 80 percent or greater stock interest in another corporation. For example, assume that one corporation desires to purchase the stock of a second corporation and does in fact purchase 45 percent of its stock directly. However, 40 percent of the stock of the second corporation is owned by a third corporation, and the third corporation does not wish tp sell the stock of the second cor- poration. In order to acquire the stock of the second corporation, therefore, the first corporation purchases over 50 percent of the third corporation's stock and then causes this third corporation to sell to it the 40 percent of the stock of second corporation owned by the third. Under prior law, since at the time of the sale the first corporation owns more than 50 percent of the stock of the third corporation, the two corporations would have~been classified as related under the attri- bution rules (sec. 318) and the first corporation would not have been treated as the purchaser of more than 80 percent of the stock of the second although it acquired directly or indirectly all of this stock for cash within a 12-month period. The act amends present law to provide that stock purchased from a related corporation (after control of it is acquired) is to be treated as purchased if the stock of the related corporation (representing a controlling interest) was purchased within the specified period. The amendment provides that *the 12-month period within which the desired stock must be acquired begins with the date of the first direct acquisition by purchase of such stock, or the date on which 50 percent of the stock of the corporation holding such stock was acquired, whichever is earlier. The new definition of purchase applies with respect to acquisitions of stock after December 31, 1965. The provision for measuring the time period of stock acquisition applies with respect to distributions made after November 13, 1966. (b) Installment notes.-When one corporation buys more than 80 percent of the stock of another within 12 months and causes the cor- poration acquired to be li9uidated within 2 years of the last acquisition of stock, generally no gain is recognized to the distributing corpora- tion (unless it is a corporation which elected sec. 341 (f) treatment to avoid danger of being treated as a collapsible corporation, or unless the sections dealing with the recapture of depreciation apply). Under prior law, if the property received on a liquidation of the type described above (to which sec. 334(b) (2) applies) consisted of installment notes, then the gain which would normally be taxed on the sale or collection of such notes might, in part or in whole, perma- nently escape income taxation. This resulted where the basis of such notes were raised to the amount paid for them by the acquiring cor- poration even though no gain was recognized to the distributing corporation. The act provides that installment notes transferred in a liquidation of the type described above are to be treated as "disposed of" for purposes of the installment sale provision (sec. 453(d)). As a result, 2035 PAGENO="0884" 44 FOREIGN INVESTORS TAX ACT OF 1966 gain is to be recognized to the distributing corporation, in the same manner as if it had sold the notes. This amendment is effective with respect to distributions made after November 13, 1966. 3. "Swap funds" (sec. 203 of the act and sec. 351 of the code) Prior law.-TJnder section 351 of the Internal Revenue Code, the transfer of property to a. corporation by one or more persons in ex- change for stock in the corporation is not to result in gain or loss if, immediately after the exchange, the person or persons in question are "in control" of the corporation. In 1960 the Internal Revenue Service issued a limited number of rulings to the effect that no tax resulted from the exchange of appreci- ated stock for shares in an investment fund where, immediately after the exchange, the persons who transferred the stock to the corporation were in control of the corporation. Investment funds organized in this way have become known as "swap funds." In 1961, the Service stopped issuing these rulings and subsequently (in Rev. Proc. 62-32) announced that it would not issue rulings in this area. Notwith- standing this change in position, new swap funds continued to be formed, relying on the advice of private tax counsel that the exchange of stock for stock in these cases was nontaxable. On July 14, 1966, the Treasury issued a proposed regulation to the effect that this type of exchange would be taxable. At the same time it offered to enter into closing agreements with existing swap funds which would provide that section 351 would be applied to past trans- fers for all purposes under the code, including the determination of basis. Explanation of provision.-The act provides that no gain or loss is to be recognized with respect to property that is transferred to an investment company on or before June 30, 1967, if the transfer is solely in exchange for stock or securities in the investment company and im- mediately after the exchange the transferor or transferors are in con- trol of the corporation. Gain or loss will be recognized, however, with respect to such transfers made after June 30, 1967. For the purposes of this provision a transfer of property will only be considered as made on or before June 30, 1967, if- (i) The registration statement of the investment company is filed with the Securities and Exchange Commission before Janu- ary 1, 1967, and the aggregate issue price of the stock and securi- ties of the company which are issued in the transaction does not exceed the amount specified in the registration statement as of the close of December 31, 1966, (ii) The transfer of property to the investment company in- cludes only property deposited before May 1, 1967, and (iii) The transfer itself is made on or before June 30, 1967. Effective date.-This provision applies with respect to transfers of property to investment companies made before, on, or after the date of enactment. 4. Removal of certain limitations to deductibility of contributions to self-employed individuals' pension plans (eec. 204 of the act and sees. 401 and 404 of the code) Prior law.-Self-employed individuals may establish retirement plans and may deduct from their gross incomes contributions made to 2036 PAGENO="0885" FOREIGN INVESTORS TAX ACT OF 1966 45 these plans. Employees with more than 3 years of service must be covered, and contributions on their behalf are fully deductible. Under prior law, a self-employed individual could deduct from his gross income 50 percent of the contribution on his own behalf, and the contribution was limited to the smaller of 10 percent of his earned income or $2,500. Accordingly, the maximum deduction allowed to a self-employed person with respect to his own contribution was $1,250. Earned income for this purpose was defined as the income received from the performance of personal services. When capital as well as personal services was a material factor in the production of the income, earned income could not exceed 30 percent of the net profits from the business (except that where an individual rendered personal services on a substantially full-time basis, this 30-percent rule could not reduce the net profits considered as earned income below $2,500). Explanation of provisions.-The act removes two limitations to the deduction. First, the limitation of the deduction on behalf of a self-employed person to 50 percent of the contribution (10 percent of earned income up to a maximum of $2,500) is repealed. This will permit the self- employed individual to deduct from his gross income the full amount of this contribution toward his own retirement, in the same manner as he does the full contribution he makes for his employees eligible for coverage. No change, however, is made in the limitation on the size of his contribution for himself; it remains at 10 percent of his earned income or $2,500, whichever is smaller. Second, the restriction is removed which limited the share of income considered "earned," where both personal services and capital are important income-producing factors. The entire amount of net profits in such cases may be considered "earned." It is provided, however, that in such cases the net profits involved with respect to any self- employed person are to be treated as earned income only in the case of a trade or business in which the personal services of the particular self-employed individual involved are a material income-producing factor. By this, it is contemplated that substantially full-time em- ployment will be treated as a material income-producing factor. In the case of less than full-time employment, in determining whether the personal services of `the taxpayer are a material income-producing factor there is to be taken into account the respective contribution made by his personal services and by his capital. Effective dates.-The removal of the 50-percent limitation on the deductibility of contributions is to be effective with respect to taxable years beginning after December 31, 1967. No specific effective date was provided in the act for the provision regarding the treatment of earned income. 5. Treatment of certain income of authors, inventors, etc., as earned income for retirement plan purposes (sec. 205 of the act and sec. 401(c) (2) of the code) Prior law.-Under the provisions which permit self-employed per- sons to deduct contributions (within specified limits) made to pension or profit-sharing plans for the benefit of themselves and other em- ployees covered by a voluntary retirement plan, coverage depends on "earned income," and such income isthe basis for computing deductible contributions. This term includes professional fees and other com- 2037 PAGENO="0886" 46 FOREIGN INVESTORS TAX ACT OF 1966 pensation for personal services from a trade or business (but does not include amounts which constitute a return on capital invested in the trade or business). With respect to authors, the Internal Revenue Service took the. position that if an author contracted to write articles for a given period or a book for a publisher who copyrighted the literary material and paid the author a stipulated amount of cash, plus a percentage of the income derived from the material, the consideration was for the author's personal services and constituted earned income. However, where the consideration received by an author was derived either from the sale, leasing, or renting of the author's writing, the consideration was held to be paid for the use or sale of property and not to constitute earned income. A similar position was taken by the Service with respect to inventors and others who created property through the application of their personal efforts. Explanation of provision.-The act amends the self-employed in- dividuals retirement plan provisions to provide that "earned income" includes gains (other than capital gains) and net earnings derived from the sale or other disposition of, the transfer of any interest in, or the licensing of the use of property (other than good will) by an individual whose personal efforts created the property. Effective date.-This amendment applies to taxable years ending after November 13, 1966. 6. Exclusion of certain rents from personal holding company income (sec. 206 of the act and sec. 843 of the code) Under prior law, if a company manufactured property and leased it to customers, the rents were treated as personal holding company income (unless the adjusted income from rents from all sources con- stituted 50 percent or more of the adjusted ordinary gross income and unless the sum of the dividends paid during the year had reduced the other personal holding company income below 10 percent of the ordi- nary gross income). However, where the property manufactured by the taxpayer was sold instead of leased, the income from the sale was not treated as personal holding company income. The act provides that compensation for the use of any tangible per- sonal property manufactured or produced by the taxpayer is not to be treated as rental income under the personal holding company provi- sions if the taxpayer during the taxable year is engaged in manufac- turing the same type of property from which he is receiving the rents. The effect of this is to treat this income (after it is reduced by appli- cable depreciation, taxes, rent, and interest paid) as ordinary busi- ness income in determining whether or not the corporation is a per- sonal holding company. It is intended, in order for the provision to be applicable, that the manufacturing or production activity be sub- stantial and more than minor assembly processes. (Tangible personal property here has the same meaning as in the case of the investment credit provision.) The amendments apply to taxable years beginning after date of enactment, but taxpayers may elect to have the amendments apply to years beginning on or before that date if such years end after Decem- ber 31, 1965. 2038 PAGENO="0887" FOREIGN INVESTORS TAX ACT OF 1966 47 7. Percentage depletion rate for certain clay bearing alumina (sec. 207 of the act and sec. 613 of the code) This provision raises the percentage depletion rate from 15 to 23 percent in the case of domestic deposits of clay, laterite, and nephelite syenite (to the extent alumina or aluminum compounds are extracted therefrom). This is the same rate of percentage depletion which is now allowed to domestic deposits of bauxite. This provision is applicable oniy to taxable years beginning after November 13, 1966. 8. Percentage depletion rate for clam and oyster shells (sec. 208 of the act and sec. 613 of the code) The act provides that in the case of clam shells and oyster shells (as well as other mollusk shells), a percentage depletion rate of 15 per- cent generally is to apply (rather than the 5 percent rate of prior law). However, as is true under existing law in the case of limestone and other calcium carbonates, a 5-percent rate is applicable if the shells are used, or sold for use, as riprap, ballast, road material, rubble, concrete aggregates, or for similar purposes. The provision is applicable to taxable years beginning after Novem- ber 13, 1966. 9. Percentage depletion rate for certain clay, shale, and slate (sec. 209 of the act and sec. 613 of the code) Under prior law a 5 percent depletion rate was provided for clay used or sold for use in the manufacture of brick or sewerpipe, for shale, and for clay or slate used or sold for use as concrete aggregate or for similar purposes. The act raises the depletion rate to 71/2 percent for clay or shale used or sold for use in the manufacture of sewerpipe and brick, and for clay, shale or slate used or sold for use as sintered or burned light- weight aggregates. This provision applies to taxable years beginning after Novem- ber 13, 1966. 10. Income froim the lapse of straddle options (sec. 210 of the act and sec. 1234(c) of the code) Nature of straddles.6-Straddles are one form of an option; namely, an offer both to purchase and to sell a specified `amount of property at a stated price for a limited period of time. Options to sell securities are known as "puts"-i.e., the purchaser of the option can "put" his shares to the writer or issuer of the option at the stated price. Options to purchase are known as "calls"-i.e., the purchaser of the option can "call" the shares from the writer at the stated price. A "straddle" is a combination of a put and call, with respect to the same security, for the same quantity, at the same purchase or sale price and available for the same period of time. Straddles are likely to be written by persons with holdings of a security who believe that in the long run, the price of the stock will not vary greatly from its present price. Their inducement for writing the straddle is the receipt of a premium. Straddles generally are 8 Much of the material presented in this part was derived from the "Report on Put and call Options," a report published in August 1961 by the Securities and Exchange com- mission, on the basis of an extensive study by the `SEC's Division of Trading and Exchanges. 2039 PAGENO="0888" 48 FOREIGN INVESTORS TAX ACT OF 1966 granted to brokers or dealers who, in turn, customarily sell the put and call components to different purchasers. The majority of puts and calls originate in straddles. While the use of puts and calls is not a new development in the securities markets, their significance is relatively limited; for example, the total number of shares covered by options sold in recent years on the New York Stock Exchange has rarely exceeded 1 percent of the total shares sold. Normally either (not both) the put or the call component of the straddle is exercised by the purchaser shortly before the end of the term for which the straddle is written. Frequently this is 6 months and 10 days after the straddle is issued. Which component of the straddle is exercised depends upon the market conditions at the time of exercise vis-a-vis market conditions at the time the straddle was written. If the market in that security has risen, the securities are likely to be "called" from the writer; if the market has fallen, the stock is likely to be "put" to the writer. While in the great majority of the cases, one component of the straddle is exercised and the other is allowed to lapse, occasionally (perhaps 10 to 15 percent of the time) neither option is exercised and in a few other cases (less than 1 percent of the cases) both components of the straddle are exercised. Although options are purchased for hedging and other similar pur- poses by some investors, their primary use probably is as a method of investing by individuals with small amounts of money. Prior law.-Under the 1939 code, premium income received from the writing of an option which lapsed without either the put or call being exercised was treated as a short-term capital gain (sec. 117(g) (2) of the 1939 code). When one component of the straddle was exercised, however, straddle writers generally allocated the entire straddle pre- mium to the component option which was exercised. This practice ap- parently was not challenged by the Internal Revenue Service prior to the issuance of a revenue ruling in 1965 (Revenue Ruling 65-31). Since one component or the other of a straddle is exercised in the bulk of the cases, the fact that the premium in the case of the lapse of an option was treated as short-term capital gain was of relatively little significance. The important aspect was the treatment of the premium in connection with the portion of the straddle which was exercised. When all of the premium is allocated to the component which is exercised and this is the "put," the premium decreases the cost or basis of the stock put to the writer of the straddle. As a result, it increases his capital gain only when he disposes of the stock put to him. Gen- erally, this results in a long-term capital gain (unless he holds the stock for less than 6 months). Where the call component is exercised and all of the straddle premium is allocated to it, the premium increases the income received by the writer at the time the stock is called from (i.e., sold by) him. As a result in this cases also, the total premium increases the writer's capital gain (or decreases his capital loss) and if the writer has held the stock for more than 6 months, the gain (or loss) is long term. The 1939 code provision treating income from the lapse of an option as a short-term capital gain was not included in the 1954 code. As a result, where both options were permitted to lapse, the total straddle premium was reported as ordinary income. However, in the usual case where one option lapsed and the other was exercised, the practice 2040 PAGENO="0889" FOREIGN INVESTORS TAX ACT OF 1966 49 of allocating the straddle premium income to the side exercised was continued. In the ruling (Revenue Ruling 65-31) issued on January 22, 1965, the Internal Revenue Service held that the premium for a straddle must be allocated between its put and call components on the basis of the relative market values of each. In a later technical information release, the Service announced that it would accept allocations of 55 percent of each straddle premium to the call component and 45 percent to the put component.7 Under the ruling, the part of the premium which arose from the writing of a single straddle could result in ordinary income (the por- tion of the premium allocated to the lapsed component) while the remaining portion of the premium could result in either a capital gain or a capital loss, which in the usual case would be a long-term gain or loss. The manner in which prior law was applied under the ruling can be illustrated by the following example. Assume that a straddle writer issued a straddle for a stock when its price was $100 a share and this was the option price. Assume that the straddle premium was $8 per share. Assume further that the put component of the straddle was exercised by the purchaser when the price of the stock was $80 per share. As a result, the writer of the straddle had to buy stock at a price of $100 per share when its market value was $80 per share. If the straddle premium allocable to the put component was $3.60 per share, the short-term capital loss for the writer of the straddle was $16.40 per share if he disposed of the stock shortly after receipt, when the market price was still $80 per share. At the same time, the re- mainder of the straddle premium, $4.40 a share, was allocated to the call component, which in such a case presumably was allowed to lapse. The $4.40 per share was ordinary income while the capital loss of $16.40 a share attributable to the put side of the optiomi resulted in a short-term capital loss, which, except to the extent of the $1,000 a year, could not be netted with the ordinary income attributable to the premium income of the other side of the straddle. Explanation of' provision.-The amendment adds a new subsec- tion (c) to section 1234 of the code which provides that gain derived from the lapse of an option written as a part of a straddle (as defined in new section 1234(c) (3)) is, in effect, to be short-term capital gain. Thus, such gains will be added to any other short-term capital gains, to be netted against short-term capital losses, with the excess to be netted against any net long-term capital losses. Any remaining short- term capital gains will generally be taxed as ordinary income. This provision does not apply to a person who holds securities (including opt.ions to acquire or sell securities) for sale to customers in the ordi- nary course of his trade or business. The new subsection defines a "straddle" as a simultaneously granted combination of an option to buy (a "call") and an option to sell (a `Rev. Proc. 65-29, issued on Nov. iS, 1965. This 55-45 ratio was selected because it represented a rounded approximation of relative market prices of separately written "puts" and calls of the same length for securities of approximately equal price. The revenue procedure concluded with the statement that "If a taxpayer does not use this method for a taxable year, then the allocation based on relative market values required by Revenue Ruling 65-31 must be used." 2041 PAGENO="0890" 50 FOREIGN INVESTORS TAX ACT OF 1966 "put") the same quantity of a security at the same price during the same period of time. If a person grants a multiple option (a put plus a call plus one or more additional puts or calls) it is intended that the grantor of the multiple option must identify in his records which two of the compo- nent options constitute the straddle, if it is not clear from the options themselves. It is contemplated that the method of identification will be specified in regulations issued by the Secretary of the Treasury or his delegate. If there is no identification by the writer, this provision relating to straddles is not to apply. As a result, in such a case the gain on the lapsed option (or options) would result in ordinary in- come. A corporate security for purposes of the definition of a straddle is the same as defined in section 1236 (c) of the code-i.e., stocks, bonds, notes, etc. Accordingly, the term securities does not include com- modity futures. Effective date.-The amendments described above are to apply to straddles written after January 25, 1965, in taxable years ending after such date. 11. Tax treatment of per-unit retain allocatio'n~ (sec. 211 of the act and sees. 1382,1383, 1385, 1388, and 6044 of the code) Prior law.-Although the practices of cooperatives are not uni- form in this regard, generally a per-unit retain certificate is issued by a cooperative to a patron to reflect the retention by the coopera- tive of a portion of the proceeds from the marketing of products for the patron. These amounts are retained pursuant to an authorization (usually in the bylaws of the cooperative) and are computed on the basis of units of products marketed. Prior to 1962, the Internal Revenue Code permitted cooperatives to deduct amounts paid to patrons as patronage dividends. Patron- age dividends are limited by definition to amounts which are "deter- mined with reference to the net earnings" of the cooperative. The treatment of per-unit retains, however, was not specifically dealt with in the code. The Revenue Act of 1962 substantially revised the income tax treatment of cooperatives and their patrons but the new provisions by their terms were applicable oniy to "patronage divi- dends." Because per-unit retain allocations are determined on the basis of units of products marketed for the patrons rather than with reference to net earnings, the new provisions were generally considered as not being applicable to them. However by regulations issued on Oc- tober 14, 1965, the Treasury Department provided for the income tax treatment of per-unit retain certificates in a manner that was in many respects parallel to the treatment prescribed in the Revenue Act of 1962 with respect to patronage dividends. The per-unit retains may be considered as contributions to capital by patrons. For this to be true they first must have been considered as paid out by the cooperative. However, because the per-unit retain certificates issued by cooperatives may have a fair market value con siderably less than their face amount, and in some cases have only a negligible fair market value, it was questioned whether they may be considered as paid out by the cooperatives and whether the patrons can be required to include them in their gross income. 2042 PAGENO="0891" FOREIGN INVESTORS TAX ACT OF 1966 51 Explanation of provi$ions.-Thè bill amends present law to provide tax treatment with respect to per-unit retain certificates which paral- lels, in general, the tax treatment applicable with respect to patronage dividends. Providing essentially the same treatment for per-unit re- tain certificates means, generally, that they are to be treated as income to the patron in the year in which the certificates are issued, if the pa- trons give their consent in writing to the inclusion of the face amount of these certificates in their income or if there is a provision in the by- laws or charter of the cooperative indicating that membership in the cooperative represents consent to such treatment. Under the amend- ment, the cooperative is permitted to take a deduction in arriving at gross income for a per-unit retain certificate when issued, but only when the certificate qualifies for the treatment specified above in the hands of the patron. Otherwise, the amount involved is deductible by the cooperative only at the time the certificate is redeemed. Adoption of this provision is not intended to reflect on the validity of the regulations recently issued by the Treasury Department with respect to per-unit retain certificates, nor is it intended to reflect on the deductibility in the past of per-unit retain certificates to coopera- tives or the includibility in the past of such certificates in the income of patrons. (i) Treatment of per-unit r/eiains by ~ooperatives.-The amendment provides that no decrease is"to be made in the gross income of a co- operative because of per-unit retain allocations to patrons except for amounts paid in "qualified per-unit retain certificates" or in redemp- tion of "nonqualified per-unit retain certificates." (Both of these terms are explained subsequently.) 8 If a cooperative has no taxable income for the year in which it redeems nonqualified per-unit retain certificates, the cooperative will, in effect, be permitted to carry back the deduction or exclusion to the year in which the certificate was issued. (ii) Treatment of per-unit retains by pat~ron~.-TJnder the amend- ment, a patron is required `to include in his gross income the amount paid to him in qualified per-unit retain certificates and the amount received by him on the redemption, sale, or other disposition of non- qualified per-unit retain certificates. (iii) Definitions and special provisions.-The amendment provides definitions of the terms used in providing for the treatment of per-unit retains. Under the first of these, the amount considered paid by a cooperative and received by a patron as a result of the issuance of a qualified per-unit retain certificate is to be the certificate's stated dol- lar amount. The term "per-unit retain allocation" is defined, in gen- eral, as an amount paid (except amounts paid in money or other prop- erty) to patrons with respect to products marketed for them which is fixed without regard to the net earnings of the cooperative. The term "per-unit retain certificate" is defined `to mean any written notice which discloses to the recipient the stated dollar amount of. a per-unit retain allocation. The term "qualified per-unit retain certificate" is defined to mean a per-unit retain certificate which the patron has agreed to include in his income at the stated dollar amount. For this purpose, a 8 A special rule permits cooperatives to continue their existing practices with respect to the timing of the Issuance of per-unit retain certificates for products marketed under a pooling arrangement and to take the tax deduction at the time the certificates are issued. 2043 PAGENO="0892" 52 FOREIGN INVESTORS TAX ACT OF 1966 cooperative may enter into individual agreements with each of its patrons, or the agreement may be contained in a bylaw, a written notice and copy of which is given to each of the members. In general, agree- ments once made are effective for all subsequent years until revoked. A "nonqualified per-unit retain certificate" is defined to be any per- unit retain certificate other than one which is "qualified." The amendment also requires the reporting by the cooperative of information with respect to per-unit retain allocations comparable to the reporting requirements with respect to patronage dividends under present law. Effective dates and transition rule.-The amendments which relate to the substantive tax treatment of per-unit retains are to apply, gen- erally, for taxable years of cooperatives beginning after April 30, 1966, and the information reporting provisions are to apply for cal- endar years after 1966. If a cooperative has entered into individual agreements with its patrons with respect to per-unit retain allocations in compliance with the existing income tax regulations, new agreements would not .be required under the amendment. Existing bylaw agreements with re- spect to per-unit retain allocations adopted under the Treasury regu- lations are to be effective for taxable years beginning befor.e May 1, 1967. For years beginning after that date, a bylaw agreement which conforms to the new statutory provisions is required. 12. Excise tax rate on hearses (sec. 212 of the act and sec. 4062 of the code) A 10 percent excise tax is imposed on the sale by the manufacturer, importer, or producer of bodies and chassis of trucks. A rate of 7 percent is imposed on automobiles.9 Tinder prior law there was no statutory classification of hearses, ambulances, or combination ambulance-hearse vehicles for purposes of this excise tax. However, since 1921 the Internal Revenue Service, by administrative interpretation, had classified hearses as trucks while treating ambulances and combination ambulance-hearse vehicles as automobiles for the purpose of determining the appropriate excise tax rate. The act classifies hearses, ambulances, and combination ambulance- hearses as automobiles (and not as trucks) for purposes of the excise tax on the sale of these vehicles by the manufacturer, producer, or im- porter. This amendment is effective with respect to vehicles sold after November 13, 1966. 13. Interest equali~ation tax; loans to insure raw material sources (sec. 213 of the act and sec. 4914 of the code) The interest equalization tax, in general, is a tax imposed on Ameri- cans with respect to the purchase of foreign securities. In the case of debt the tax rate varies with the period of time to maturity; in the case of stock the tax rate is 15 percent. The tax is designed to increase capital costs in the United States for foreigners by about 1 percent a year. `This 7-percent rate is scheduled for reduction to 2 percent effective Apr. 1, i968, and to 1 percent effective Jan. 1, 1969. The 10-percent tax on trucks and hearses is a pernia- nent ra~te. 2044 PAGENO="0893" FOREIGN INVESTORS TAX ACT OF 1966 53 Presently there is an exemption from the interest equalization tax- as the equivalent to a direct investment-for loans made by U.S. lenders to foreign subsidiaries of U.S. corporations producing foreign ores and minerals in short supply in the United States where the financing is secured by a so-called "take or pay" contract entered into between the foreign subsidiaries and the U.S. parent. However, under prior law these loans became subject to the interest equalization tax when and if they were subsequently transferred by the lender to another U.S. person, regardless of the intent of the investor at the time of acquisition. This amendment provides that transfers by the original lender, sub- sequent to the original acquisition of the indebtedness which is ex- empted under this provision, will not be subject to tax where the indebtedness `was originally acquired by the lender without an intent to sell the indebtedness to other U.S. persons (such as a bona fide in- vestment representation). However, where in fact more than one sale of the indebtedness occurs after the debt is held by the initial lender, then for each such sale to be exempt the indebtedness must be purchased without any intent to resell. This amendment is to be effective with respect to debt obligations acquired after November 13, 1966. 14. Interest equalization tax; insurance company reserve funds (sec. 214 of the act and sec. 4914(e) of the code) The interest equalization tax provisions presently provide a limited exception for acquisitions of otherwise taxable securities made to maintain the reserve assets of a U.S. insurance company doing an in- surance business in foreign currencies abroad in developed countries. In addition, an exception for investments generally is provided with respect to those in "less developed countries." Under prior law, in order to claim the exemption for life insurance companies operating in developed countries a company must "establish" a fund of assets for each developed country for which it does business without exception. However, the establishment of such a fund could only be made under prior law during the "initial" designation period which was the 30-day period between the enactment of the act, September 2, 1964, to October 2, 1964. This amendment permits a U.S. insurance company commencing activities in a developed country to establish a fund with respect to that country provided it was ineligible to make an initial designation prior to October 2, 1964. The amendment also permits the establish- ment of a fund for a country if the status of that country was changed from a less developed country by an Executive order. 15. Interest equalization tax; dollar loans of foreign branches of U.S. banks (sec. 215 of the act and sec. 4931(a) of the code) Prior to this act only foreign currency loans and dollar loans of less than one year made by foreign branches of U.S. banks were exempt from the application of the interest equalization tax. This amendment authorizes the President to exempt from the in- terest equalization tax U.S. dollar loans made by the foreign branches of U.S. banks (regardless of the maturities involved). To the extent that this authority is exercised, the President subsequently may with- draw or modify the exemption in the event he determines such with- 2045 PAGENO="0894" 54 FOREIGN INVESTORS TAX ACT OF 1966 drawal or modification is necessary to preserve the effectiveness of the interest equalization tax. This amendment is to be effective with respect to acquisitions of debt obligations after November 13, 1966. C. PRESIDENTIAL ELECTION CAMPAIGN FUND ACT Under prior law no provision was made for taxpayers to set aside any portion of their tax payments as a contribution to a political party. Nor was there any provision for an income tax deduction for political campaign contributions. The act under certain conditions, described below, provides taxpayers the opportunity to have limited amounts of their income tax payments set aside for the use by the political parties in presidential campaigns. 1. Designation of income tax payments to presidential election cam- paign fund (sec. 3O~ of tile act and sec. 6096 of the code) Space is to be provided on the income tax return forms to permit each individual taxpayer (other than a nonresident alien or an estate or trust) to designate, if he so desires, that $1 of his income tax pay- ment be appropriated from general revenues and paid into the presi- dential election campaign fund. All taxpayers who show an income tax liability of at least ~1 for the year are to be permitted to make a designation. On joint returns, both husband and wife are to be per- mitted to make a designation provided the tax liability shown on the return is at least $2. The designation is to be made at the time of filing the return or at such later time as may be provided in regulations (such as at the time of making a claim for refund of an overpayment of tax). The designation is to be permitted with respect to income tax liability for each taxable year beginning after December 31, 1966. ~. The presidential election campaign fund and payments there- from (sec. 303 of the act) Amounts are only to be paid out of the presidential election cam- paign fund to reimburse certain political parties for expenses in- curred in presenting candidates for President and Vice President in presidential elections. - Only those political parties whose candidates for President received at least 5,000,000 votes in the preceding presidential election will be eligible to receive payments from the fund. A political party whose candidate received more than 5,000,000 votes in the preceding presidential election but less than 10 million votes will be authorized to receive from the fund an amount equal to the lesser of its actual campaign expenses or an amount equal to $1 times the number of votes in excess of 5,000,000 that its candidate received in the last presidential election. A political party whose candidate for President received 15 million votes or more in the preceding presidential election is to be reimbursed on a different basis. An amount equal to $1 for each vote in excess of 5,000,000 received by each major party in the last election is to be divided equally between (or among) them, with the limitation that payments to any one party cannot exceed the expenses incurred by the party in the current campaign. 2046 PAGENO="0895" FOREIGN INVESTORS TAX ACT OF 1966 55 Expenses will only be reimbursed to the extent that they are in- curred for political purposes. Personal expenses will not be reim- * bursed. Furthermore, the expenses must be incurred predominantly for the purpose of furthering the candidacy of the presidential and vice presidential nominees. Expenses incurred predominantly to sup- port candidates for other offices will not be reimbursed, even if in- curred by these nominees. This rule is not intended, however, to pre- clude the endorsement by presidential and vice-presidential candidates of candidates for other offices as long as the primary purpose of their appearance is to further their own candidacies. Finally, expenses will not be reimbursed unless sufficient proof is supplied to establish that they were actually made. * The Comptroller General is charged with the responsibility for cer- tifying to the Secretary of the Treasury the amounts payable to eligible political parties. In this certification he will take into account in- formation supplied him by the treasurers of each political party re- garding campaign expenses incurred and on the basis of the votes cast in the preceding presidential election. The Comptroller General's decisions are to be final. The payments will be ñaade at times to be determined by Treasury regulations, but no payment for a given presidential election campaign can be made before September 1 of the year the election is held. If at the time payments are made, there are insufficient moneys in the fund to meet the amounts specified under the rules set forth, payments to all entitled parties will be reduced pro rata, and the additional amounts paid out of later additions to the fund. If any moneys remain in the fund after all the payments authorized have been made with respect to a given presidential election, or if the fund exceeds the maximum payments which may be authorized, the amount remaining is to be returned to the general fund of the Treasury. 3. The Advisory Board (sec. 304 of the act) The bill establishes the Presidential Election Campaign Fund Ad- visory Board to advise and assist the Comptroller General in con- nection with his duties under this act. The board is to consist of two members from each political party whose candidate received 15 million or more votes in the last presidential election plus three addi- tional members selected by a majority of the political party members. The first members of the board are to be appointed by the Comptroller General after the date of enactment of this act and their term will expire 60 days after the date of the first presidential election held after the date of enactment of this act. The next and succeeding boards will then serve 4-year terms ending 60 days after the date of each succeeding presidential election. Board members will be com- pensated at the rate of $75 a day for each day they serve and will re- ceive travel expenses and a per diem in lieu of subsistence (at rates authorized for persons in intermittent Government service) when engaged in work away from their homes or regular places of business. 2047 PAGENO="0896" 56 FOREIGN INVESTORS TAX ACT OF 1966 D. MISCELLANEOuS PROVISIONS 1. Treasu'ry notes payable in foreign currency (sec. 401 of the act) Bonds or certificates of indebtedness may be issued by the Secretary of the Treasury payable both as to principal and interest in any for- eign currency. However, under prior law there was no authorization for the Secretary of the Treasury to issue notes in foreign currency (31 U.S.C. 766). The act contains an amendment to the Second Liberty Bond Act authorizing the Secretary of the Treasury to issue notes as well as bonds and certificates of indebtedness in foreign currencies. Notes are evidences of indebtedness issued by the Treasury Department with a maturity of from 1 to 5 years from date of issue. 2. Reports on Government contingent liabilities and assets (see. 402 of the act) This amendment requires the Secretary of the Treasury to submit, on the first day of each regular session of the Congress, a report to the Congress showing the amount (both on an aggregate and on an indi- vidual basis) of the contingent liabilities and the unfunded liabilities of the Federal Government, determined as of the close of the preceding June 30. The contingent liabilities referred to by the amendment include (1) liability of the Government under, its various trust funds (such as the old age and survivors insurance trust fund and the highway trust fund); (2) liabilities of Government-sponsored corporations (for example, the Commodity Credit Corporation); (3) indirect liabilities of the Federal Government not included as part of the pub- lic debt, such as Federal Housing Administration debentures; and (4) liabilities of Federal insurance and, annuity programs. Data with respect to these insurance an4 annuity programs (which include the civil service retirement system, veterans' pension, and war risk insurance programs) are to include information regarding their actuarial status. . The report is also to indicate, the, ~oal ;pledged~ or the assets available (or to be realized) ~ s'ë~iri~y for't~hë~ specified liabilities. Thus, for example, in the case of federally insured home mortgages the assets available on foreclosures may, under favorable circum- stances, offset the potential Federal liability. But the reporting of assets is not to stop with a recording of assets related to the liabilities. Under the amendment the Secretary of the Treasury is to set forth all other assets which would be available to liquidate liabilities of the Federal Government. In order to provide flexibility and to pi~event data included in the report from being misconstrued or misleading, the amendment pro- vides that the Secretary of the Treasury may set forth such explana- tory material (including such analysis of the significance of the liabili- ties in terms of past experience and probable risk) as he determines to be necessary or desirable. Under this provision, if he believes particular data `are likely to lead to improper conclusions he may qualify these data sufficiently to negate such conclusions. 2048 PAGENO="0897" Item As reported by the Ways and Means Committee, Apr. 26, 1966, and passed by the House of Represent- atives, June 15, 1966 As reported by the Senate Finance Committee, Oct. 11, 1966 As passed by the Senate, Oct. 13, 1966 As reported by the conference, Oct. 19, 1966' A. FOREIGN INVESTORS TAX ACT OF 1966 1. Elimination of progressive taxation of U.S. source income of nonresident alien indi- viduals not engaged in trade or business in the United Statts -$1 -$1 -$1 -$1 2. Estate tax at top rate of 25 percent on tan- gibles and intangibles with $30,000 ex- emption -~ 3 -3 -3 3. 1. Tax on excluded bank deposits --- +(`) +(2) +(2) +(2) 4. Taxation of foreign life insurance company income from nontrusted investments in the United States +3 +3 +3 +3 5. Saving in interest cost to U.S. Government resulting from quarterly payment of withheld taxes8 +2 +2 +2 +2 6. Tax on canital gains - _(4) (4) - (4) (4) Total B. PRESIDENTIAL ELECTION CAMFAIGN FUND ACT OF 1966 8. Payments to political parties, for incurred Presidential election expenses, out of a fund Into which Individuals have desig- nated that $1 of their income tax liability be naid -4-1 +1 +1 +1 ~-7O ~-7O ~-60 9. Increasing from 5 to 15 percent the percent- age depletion rate for clay or shale used In the manufacture of sewer pipe and brick ~3 (6) 10. MinIng process designation for sintering and burning of shale, clay, and slate to produce lightweight aggregates (6) 11. Mining process designation for processesde- riving alumina or aluminum compounds from clay, laterite, and nephelite syenlte 12. IncreasIng from 5 to 15 percent the percent- -i -1 age depletion rate for clam and oyster shells used for their calcium carbonate content -~- (7) 13. Increasing from 15 to 23 percent the percent- age depletion rate for alumina-yielding clay, laterite, and nephelite syenlte 14. Increasing from 5 to 7~ percent the percent- age depletion rate for clay and shale used In the manufacture of sewer pipe and brick and for clay, shale, or slate sintered or burned to produce lightweight aggre- nates 15. Total See footnotes at end of table. - -1 -4 -1 FOREIGN INVESTORS TAX ACT OF 1966 57 II. REVENUE EFFECT The following table presents estimates of the revenue effect, based on current income levels, of various provisions of the Foreign Inves- tors Tax Act of 1966: Estimated revenue increase (+), revenue decrease (-), and expenditure increase (-) in the first full year under H.R. 13103 as reported by the Ways and Means Com- mittee and passed by the House of Representatives, as reported by the Senate Finance Committee, as passed by the Senate, and as reported by the conference [Millions] C. PROVISIONS REGARDING PERCENTAGE DEPLE- TION AND MINING TREATMENT PROCESSES 2049 7 1-297 0-67-pt. 2-57 PAGENO="0898" 58 FOREIGN INVESTORS TAX ACT OF 1966 Item As reported by the Ways and Means Committee, Apr 26, 1966, and passed by the Hobse of Represent- atives, June 15, 1966 D.. OTHER PROVISIONS 16. Removal of special limitations regarding deductibility of contributions to pension plans by self-employed individuals (H.R. 10) 17. Elimination of 3 percent and 1 percent floors under medical and drug expense deduc- tions of the aged for taxable years be- ginning after Dec. 31, 1966 18. Coverage of certain drug expenses under supplementary medical insurance bene- fits 19. Preservation from reduction of certain widows' benefits under, title II of Social Security Act 20. Increasing from $2,500 to $6,600 the mini- mum amount treated as earned income for retirement plans of self-employed persons 21. Application of investment credit to prop- erty used in possessions of the United States 22. Amending the basis of property received on liquidation of subsidiary 23. Retention of tax-free status of transfers of stock and securities to corporations con- trolled by transferors 24. Treatment of certain income of authors, inventors, etc., as earned income forretire- ment plan purposes 25. Exclusion of `certain rents from personal holding company income 26. Treatment of income fromlapse of a straddle optIOn as a short-term capital gain 27. insuring that current single tax is paid with respect to per unit retain certificates of cooperatives ` 28. Treating, for purposes of manufacturers' excise tax, sale of hearse, ambulance, or ambulance-hearse as sale of automobile chassis and body (rather than truck chassis and body) 29. Applicability of exclusion from interest equalization tax of certain loans to assure raw material sources 30. Exclusion from interest equalization tax of certain acquisitions by insurance com- panies 31. Exclusion from interest equalization tax of certain acquisitions by foreign branches of domestic banks 32. Authorization of issuance of Treasury notes payable in foreign currency 33. Requiring Secretary of Treasury to submit an annual report to Congress setting forth the amount of contingent and of unfunded liabilities of the Federal Government 34. Total 35. Grand total +1 As reported by the Senate Finance Committee, Oct. 11, 1966 ` `As passed by the Senate, Oct. 13, 1966 As reported ` by the conference, Oct. 19, 19661 - -384 -414to-449 -34to-49 I And enacted into law on Nov. 13, 1966 (Public Law 89-809). 2 Less than $500,000. 3 Quarterly payment of withheld taxes is estimated to result in a revenue gain of $22,500,000 in fiscal year 1967. Negligible. I This is a quadrennial expenditure occurring in each presidential election year. 6 See item 14. 7 See items 9 and 10. S Other estimates have placed this figureat $100,000,000. Estimated revenue increase (+), revenue decrease (-), and expenditure increase (-) in the first full year under H.!?. 13103 as reported by the Ways and Means Com- mittee and passed by the House of Representatives, as reported by the Senate Finance Committee, as passed by the Senate, and as reported by the conference-Continued [Miilions} -180 8 -200 -$3Oto -$45 -$30 to -$45 -180 S -200 -4 -4 -4 -454 -487 to -502 -94 to -109 PAGENO="0899" SECTION 33 PRESS RELEASE, OFFICE OF THE WHITE HOUSE PRESS SECRETARY (FREDERICKSBURG, TEX.) DATED NO. VEMBER 13, 1966, STATEMENT BY THE PRESIDENT * UPON SIGNING THE FOREIGN INVESTORS TAX ACT OF 1966-H.R. 13103 2051 PAGENO="0900" PAGENO="0901" [For immediate release Nov. 13, 1966, Office of the White House Press Secretary (Fredericksburg, Tex.)] STATEMENT BY THE PRESIDENT UPON SIGNING THE FOREIGN INVESTORS TAX ACT OF 1966-H.R. 13103 I have today signed the. Foreign Investors Tax Act of 1966. This law ends the confusion and complexity that have long plagued our system of taxing the foreign investor. It makes our tax rules fairer and simpler, brings them up to date, and removes those tax roadblocks which have discouraged foreign investments in this country. The law will help to improve our balance-of-payments position and will thus strengthen our economy. The act is the first major revision of the foreign investors tax structure in more than 30 years. It is the product of a task force of distinguished bankers and businessmen headed by Secretary of the Treasury Henry H. Fowler. An important addition to this act breaks new ground in the financing of Presidential election campaigns. As a Nation, we have long been concerned with the way Presidential campaigns are financed. More than 60 years ago, Theodore Roosevelt observed that the Federal Government should help pay the expenses of a man running for the Presidency to eliminate the danger of undue influence by wealthy campaign contributors. In recent years, soaring political campaign costs have intensified our concern and our search for solutions. The approach adopted by this act allows the individual taxpayer- voluntarily-to have $1 of his tax payment placed into a Presidential campagin election fund. Congress has wisely chosen the Comptroller General and a bi- partisan advisory board to safeguard and supervise the fund, which is held in trust for all Americans. Presidential candidates will no longer have to rely on special interest groups and the rich to meet the heavy financial burden of a campaign. Instead, they will rely on all Americans from every walk of life- the ideal way in a free country. And thus our deeply rooted system of free elective government will benefit. The new law is only a beginning. It underscores the pressing need to reform our antiquated Federal laws on the disclosure and regulation of campaign financing. Indeed, that task must be pursued with even greater urgency. Last May I recommended that the Congress enact the Election Reform Act of 1966. That proposal was aimed at modernizing, correcting, and systematically overhauling our campaign financing laws-which are now more loophole than law. It sought full dis- closure by Members of Congress of gifts and income. Next year, I shall call upon Congress a~ain to consider these positive and corrective measures to insure public confidence in the elective 2053 PAGENO="0902" process. There is no higher duty of a democratic government than to insure that confidence. I am also asking a bipartisan group of our very, best political scientists and experts-headed by Prof. Richard Neustadt, of Har- vard-to see how the promise of the new Presidential campaign fund law can be fully realized and toreview the problems of election reforms and campaign financing in non-Presidential elections. The Foreign Investors Tax Act contains a variety of other amend- ments. Many of these are minor technical changes usually `dealt with by separate bifis. Others are more important. Several of these do not promote a fair and sound tax system. Instead they confer special tax windfalls and benefits upon certain groups. I deeply regret that these riders have been engrafted on this vital legislation. However, the act's comprehensive and long overdue revision of our system of taxing foreign investors (thus helping our balance of pay- ments position) and its precedent-setting provision for financing Presi- ential campaigns are far too important to all the people of America to be delayed until future years~ It is because these provisions are of overriding significance to the public interest that I have signed the act into law today 2054 PAGENO="0903" APPENDIX 2055 PAGENO="0904" PAGENO="0905" APPENDIX I H.R.1O TO AMEND THE INTERNAL REVENUE CODE OF 1954 TO PERMIT PENSION AND PROFIT-SHARING PLANS TO PROVIDE CONTRIBUTIONS OR BENEFITS ON A NONDISCRIMINATORY BASIS FOR CERTAIN SELF- EMPLOYED INDIVIDUALS WITHOUT SPECIAL LIMITA- TIONS ON THE AMOUNT OF CONTRIBUTIONS (Sec. 204 of Public Law 89-809) 2057 PAGENO="0906" PAGENO="0907" 89TH CONGRESS 1ST SESSION II. R. 1 0 IN THE HOUSE OF REPRESENTATIVES JANUARY 4, 1965 Mr. KEOGH introduced the following bill; which was referred to the Com- mittee on Ways and Means ABILL To amend the Internal Revenue Code of 1954 to permit pension arid profit-sharing plans to provide contributions or benefits on a nondiscriminatory basis for certain self-employed indi- viduals without special limitations on the amount of con- tributions. 1 Be it enacted by the Senate and Ilonse of Representa- 2 tives of the United States of America in Congress assembled, 3 That (a) paragraph (10) of section 404 (a) of the Internal 4 Revenue Code of 1954 (relating to special limitation on 5 amount allowed as deduction for self-employed individuals for 6 contributions to certain pension, etc., plans) is repealed. 7 (b) (1) Each of the following provisions of section 401 8 of such Code is amended by striking out "(determined 2059 PAGENO="0908" 2 1 without regard to section 404 (a) (10) ) " each place it 2 appears: 3 (A) Suhsection (a) (10) (A ) (ii) 4 (B) Subparagraphs (A) and (B) of sul)scCtion 5 (d) (5). (C) ~ul)p~11'agr;lp11 (A) of 5Uli~C(tiO11 (d) (6) 7 (D) Subpai'agiaplis (A ) ;iiid (B) (i) of subsec- 8 tion (e) (1). 9 (E) Suhparagraphs (B) and (C) and the last 10 sentence of SUl)SectiOll (e) (3) 1.1 (2) Subparagraph (A) of section 404 (e) (2) of such 12 Code is *aiiiended 1) strikmg OLIt `` (determined without re- 13 gard to stibsectioii (a) (1 0) ". 14 (3) Subparagraph (B) of scetioii 404 (e) (2) of such 15 Code is ameiidcd by striking out " (detemiiiied without ye- 16 gard to paragra~)h (.0) thereof) ``. 17 SEc. 2. (a) So much of suhseetioii (e) of section 404 18 of the Tiitenial Ikvciuie (ode of 1954 (relating to special 19 ha oitatioiis for sd t-ei 1 )loVcd iiidi vdua.ls) as precedes pa ia.- 20 nraphi (2) iS anIell(led to read as follows: 21 " (e) SPECIAL TJLM!TXnI1IONS FOR PI~oPiuEToi~ Wno 22 1)oi~s NOT hAVE EMPLOYEES.- 23 " (1) Ix cENEIIAL.-Tn the ca sc of a plan included 24 in subsection (a) (1), (2) oF (3) which provides 25 cOliti'IJ)Utions or benefits only for au individual who is 2060 PAGENO="0909" 3 1 an owner-employee within the meaning of section 2 401 (c) (3) (A) , time amounts deductible under sub- 3 section (a) in any taxable year ~vitii respect to con- 4 ti'ibutions on behalf of such owner-employee shall, Sill)- 5 J(b(.t to the provisionS of ~)al'agraplI (2), not exCee(l $2,500, 01' 1 () p(~1'C(11t of the ei11'lled illeonic (lCI1VC(l l)y 7 him from the ti'ade 01' l)ilSilleSS with respect to ~iiioii the 8 J)ilill iS CStal)lished, whichever is the lesser." 9 (b) Subparagraph (A) of section 404 (e) (2) of such 10 Code (relating to overall limitation in case of contributions 11 made tinder more than one p1mm) is amended by inserting 12 "referred to in paragraph (1) " after "individual". 13 (c) Section 401 (e) of such Code (relating to excess 14 (`oflti'il)IltiOflS Ofl l)eiIalf of owner-employees) is amended- 15 (1) by inserting "and" at the end of clause (i) and 16 at the end of clause (ii) of paragraph (1) (B) , and by 17 striking out (`muses (iii) and (iv) of such subparagraph, 18 muid it) (2) by striking out "sul)paragl'aphs (B) (ii) 20 (iii) and (iv) " Ui tile last sentence of paragraph (3) 21 and iimsertirig iii lieu thereof "subparagraph (B) (ii) ", 22 and by striking out "such subpai'agraphs" in such last. 23 sentence and inserting in lieu thereof "such Sill)- 24 paragnipli". 2061 PAGENO="0910" 4 1 SEC. 3. The amendments made by this Act shall apply 2 to taxable years beginning after December 31, 1963. 2062 PAGENO="0911" 89th ~~ss } COMNITTEE PRINT DATA ON SELF-EMPLOYED RETIREMENT DEDUCTION FOR TAXABLE YEAR 1964 REPORT SUBMITTED TO THE COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES BY THE DEPARTMENT OF THE TREASURY w. APRIL 18, 1966 NOTE: This report has not been considered or approved by the Committee on Ways and Means. It is being printed for informational purposes only. U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1966 2063 PAGENO="0912" CECIL R. KING, California HALE BOGGS, Louisiana EUGENE I. KEOGH, New York :FRANK M. KARSTEN, Missouri A. S. HERLONG, Ja., Florida JOHN C. WATTS, Kentucky AL ULLMAN, Oregon JAMES A. BURKE, Massachusetts CLARK W. THOMPSON, Texas MARTHA W. GRIFFITHS, Michigan W. PAT JENNINGS, Virginia GEORGE M. RHODES, Pennsylvania DAN ROSTENKOWSKI, Illinois PHIL M. LANDRUM, Georgia CHARLES A. VANIK, Ohio RICHARD H. FULTON, Tennessee Lxo H. IRwIN, Chief Counsel Jom~ M. MARTIN, Jr., Assistant Chief Counsel WILLIAM H. QTJEALY, Minority ~Jounsel COMMITTEE ON WAYS AND MEANS WILBUR D. MILLS, Arkansas, Chairman JOHN W. BYRNES, Wisconsin THOMAS B. CURTIS, Missouri JAMES B. UTP, California JACKSON E. BETTS, Ohio HERMAN T. SCHNEEBELI, Pennsylvania HAROLD R. COLLIER, Illinois JOEL T. BROYHILL, Virginia JAMES F. BATTIN, Montana U 2064 PAGENO="0913" SELF-EMPLOYED RETIREMENT DEDUCTION The following report was prepared by the Department of the Treasury in response to the request of the Committee on Ways and Means on September 30, 1965. DATA ON SELF-EMPLOYED RETIREMENT DEDUCTION FOR TAXABLE YEAR 1964 Under the provisions of Public Law 87-792, enacted in 1962, self- employed individuals may set up qualified retirement plans and deduct contributions (within specified limits) to the plans. A self-employed person establishing a plan for himself under this provision is required to provide comparable coverage in the plan for all his full-time em- ployees with more than 3 years of service. For a self-employed person, the contribution with respect to which a deduction may be claimed is limited to 10 percent of earned income, or $2,500, whichever is less. The annual deduction from gross income for amounts contributed on behalf of the self-employed person is limited to 50 percent of the contributions to such plans for himself up to a maximum of $1,250. Qualifying contributions for his em- ployees are deductible in full. 1. The present sti.tcly Preliminary data are available from individual tax returns for 1964, filed during 1965. This permits an estimate of the total use for 1964 of the self-employed retirement deduction (covered in section 2 and table 1). These data are based on the regular sample drawn for Statistics of Income (SOT) for 1964, to the extent the returns were available near the end of 1965. The coverage in the preliminary data is relatively reliable in middle- and low-income levels where an ade- quate sample can be drawn from returns on hand. The data are more subject to change in the high-income brackets where the regular SOT, when it appears, will be based on 100 percent coverage. A more detailed source of data on the self-employed retirement 4JedUction is available from those returns in the SOT sample which had the form 2950-SE attached. This form should have been filed by all persons claiming the self-employed retirement deduction. A copy is attached. Based on the preliminary data on tax returns, about 38,300 returns claimed self-employed retirement deductions in 1964 in an amount of ~26.3 million. The number submitting the form 2950-SE was only about 25,600 claiming deductions of $20.7 million. It should be kept in mind that the entire SOT tabulation is based upon unaudited data. It may be that some of the returns claiming the self-employed retirement deduction but not submitting the form 2950-SE will, on audit, prove to be ineligible for the deduction. There is no way to estimate this. 1 7 1-297 0-67-pt. 2-58 2065 PAGENO="0914" 2 SELF-EMPLOYED RETIREMENT DEDUCTION The various tables, other than table 1, are based upon analysis of a sample of returns which submitted form 2950-SE. In general, these figures understate the magnitudes involved because not all returns claiming the deduction filed a form 2950-SE. Most of the understatement occurs in the lower income brackets. This is illus- trated by the following comparison of the estimated distribution by income classes of returns which filed form 2950-SE with the estimated distribution of all returns with the deduction (reported on line 4, pt. III, p. 2 of the return): AOl class Returns with form 2950-SE Allreturns reporting deductions Number of returns Percent of total Number of returns Percent of total Under $5,000 $5,000 to $10,000 $10,000 to $25,000 $25,000 to $50,000 $50,000 and over Total 1 1,200 2,403 8,445 9,844 3,673 4.7 9.4 33. 0 38.5 14.4 14, 573 7,971 11,436 10,487 3,870 11.9 20.8 29.8 27.4 10.1 25,569 100. 0 38,337 100.0 ilncludes nontaxables. All data, particularly those based on the special tabulation from form 2950-SE, are subject to deficiencies resulting from omission of SOT sample returns which could not be obtained in time for this study. In many cases the actual number of returns used in the special tabu- lation to produce the frequency estimates was very small. The estimates of both number of returns and corresponding amounts are subject to high sampling variability. ~. Taxpayers benefiting and amount of deduction Preliminary data from individual income tax returns for 1964, ified during 1965, indicate that the self-employed retirement deduction was taken on 38,300 returns (table 1). (The number of self-employed indiviçluals benefiting from the deduction is somewhat greater than the number of returns, since on joint returns the spouse may also be covered as a separate self-employed person). Self-employed indi- viduals taking advantage of the retirement deduction cOnstituted only about one-half of 1 percent of the total number of self-eniployed. In 1964, the self-employment tax for social security purposes was reported on an estimated 6.3 million returns, and this did not include 0.2 million self-employed doctors who were not then covered by social security. As is indicated in table 1, the self-employed retirement deduction is not widely used by those in the lower income brackets. Only 30 percent of the taxable returns taking the deduction in 1964 had ad- justed gross income of less than $10,000, while 73 percent of returns with self-employment tax had incomes below this level. Almost 40 percent of the returns with the self-employed retirement deduction were in the $25,000 and over income class, while only 6 percent of the returns with self-employment tax are at this level. Of the total amount deducted for contributions to self-employed retirement plans in 1964, only 11 percent was accounted for by the under $10,000 income group, and more than 60 percent by the $25,000 and over group. 2066 PAGENO="0915" SELF-EMPLOYED RETIREMENT DEDUCTION 3 The special tabulation of forms 2950-SE shows for various occupa- tion groups the total amount of earned income reported by individuals using the self-employed retirement deduction in 1964. A compari- son of the average earned income of individuals in these occupation groups who use this deduction with the average net profit of all sole proprietorships in. these same groups indicates that those in the higher income brackets make more use of the deduction. Table 2 shows, for example, that the average earned income of physicians using the de- duction is $35,000 compared with average net profits of $20,000 for all physicians ffling business tax returns with net profit. For lawyers the average earned income of those using the deduction is $31,000 com- pared with average net profits of $9,000 for all lawyers filing business tax returns with net profit. In using these figures it should be kept in mind that they are based on forms 2950-SE. There were a relatively larger number of tax- payers in the low income brackets who took the self-employment retirement deduction but did not file a form 2950-SE. If these could be. allocated to occupation groups, the average incomes shown in the third column of table 2 might tend to be lower. 3. Extent to which occupation groups benefit The special tabulation indicates that in 1964 the largest group of taxpayers taking advantage of the self-employed retirement deduc- tion was "physicians, surgeons, optometrists, and other medicid services." This group accounted for 46 percent of the total returns with this deduction and 60 percent of the total amount deducted by all groups. The two next largest groups were (1) lawyers and (2) those engaged in retail, wholesale, and manufacturing trade, each of which accounted for about 10 percent of the returns with the deduction. The extent to which the various occupation groups made use of the deduction is summarized below: Returns with self-employed retirement deduction, 1964 Occupation Percent of returns with deduction Percent of deduction taken Physicians, surgeons, optometrists, and other medical services Legalservices Retail, wholesale, and manufacturing Dentists and dental surgeons Accounting and auditing Finance, insurance, and real estate All other occupations 46. 1 9.5 9.4 5.8 4.6 4.0 ~ 60.4 10.0 7.5 6.0 3.2 2.5 10.3 Totalreturns with deduction 100.0 100.0 The participation rates in self-employed retirement plans in various occupations cannot be calculated directly. Some evidence is sug- gested by table 2 which indicates participation by about 8 percent of self-employed physicians, 2 percent of self-employed dentists, 2 percent of self-employed lawyers, 1 percent of self-employed accountants, and one-quarter of 1 percent of self-employed individuals in finance, insur- ance, and real estate, etc. These numbers, it should be recalled, are based on the special tabulation of returns filing forms 2950-SE. They would be higher if the returns claiming a self-employed retire- ment deduction, but not ffling form 2950-SE, could be allocated to the 2067 PAGENO="0916" 4 SELF-EMPLOYED RETIREMENT DEDUCTION various professions. Available data provide no basis for allocating the returns of the nonfilers of form 2950-SE. 4. Type of plan and method of funding About 65 percent of the returns with self-employed retirement de- duction designated their plans as pension or annuity plans, 18 per- cent were profit-sharing plans, and the remaining 17 percent did not indicate the type of plan. A number of choices are available as to the manner in which a self- employed retirement plan can be funded. As is indicated in table 3, the most common, method of funding (used by approximately one- third of all plans) is a trust. Approximately 20 percent of the plans use custodial accounts, 15 percent are insured plans, and 10 percent invest in U.S. Government retirement plan bonds. Almost 20 per- cent of returns did not indicate the type of plan used. 5. Size of deduction Table 4 shows the size of deduction by income classes based upon the special tabulation of forms 2950-SE. This would tend to over- state the typical deduction claimed. On all returns claiming the deduction, the average size of deduction was $687. On the returns submitting form 2950-SE the average deduction was $808. As indicated by table 4, nearly 30 percent of the returns involved a deduction of less than $500, and one-third involved a deduction of $1,250, the maximum allowable. As income increases, the size of the deduction also increases. In the $25,000 and over classes, the vast majority of the returns took the maximum deduction of $1,250. The distribution by size of deduction for the various occupation groups is shown in table 5. This breakdown by occupational groups is subject to high sampling variability. For some of the groups the classification by size of deduction is based on a very small sample of returns. It is useful, however, as a general indication of the extent to which the maximum deduction is used by various occupational groups. Of the returns of physicians with a self-employed retirement deduction, 55 percent took the $1,250 maximum deduction, and these returns accounted for almost two-thirds of the total deduction taken by this group. More than one-third of the lawyers with the deduc- tion took the $1,250 maximum, and these returns accounted for more than half of the total deduction taken by this group. On the other hand, a deduction of less than $1,250 was taken by more than 75 percent of two groups: (1) dentists and dental surgeons, and (2) retail, wholesale, and manufacturing, and about 90 percent of those engaged in (1) accounting and auditing services and (2) finance, insurance, and real estate. Table 6 shows for returns with a retirement deduction of less than $1,250 the relationship of the deduction to earned income.' Under the law, the deduction may not exceed 5 percent of earned income. For 45 percent of these returns, the deduction was between 4 and 5 percent of eained income. For 13 percent of returns, it was between 3 and 4 percent of earned income, and for 33 percent of returns it was less than 3 percent of earned income. Table 7 shows by adjusted gross income classes th~e distributiQn of (1) returns with a deduction equal to 5 percent or more of earned income and (2) returns with a deduction of $1,250 and over. These 1 Where the deduction is $1,250 or more, the relation of the deduction to earned income is irrelevant because the $1,250 limitation applies at all income levels above $25,000. 2068 PAGENO="0917" SELF-EMPLOYED RETIREMENT DEDUCTION 5 two types of returns represent those which took the maximum allow- able retirement deduction. Because of high sampling variabffity, a detailed breakdown cannot be shown for income classes below $25,000. However, for three income groups between $5,000 and $25,000, a total of only 11 percent of the returns took the maximum allowable deduction. In the $25,000 to $50,000 group (which constitutes about 40 percent of the returns in the special tabulation), the maximum deduction was taken by 60 percent of the returns. In the $50,000 to $100,000 group, 79 percent took the maximum deduction. 6. Extent of coverage of employees The special tabulation indicates that self-employed retirement plans cover few employees. As is indicated in table 8, 20,000 of the 25,000 returns, or 80 percent of the total, had no covered employees. Con- tributions by the self-employed on behalf of covered employees amounted to less than 6 percent of the total contributions reflected in the returns. This total includes the actual amounts contributed on behalf of their covered employees plus the amounts (up to $2,500) contributed on behalf of themselves which serve as a basis for the 50 percent deduction. It does not include amounts in excess of $2,500 which may have been contributed by self-employed but which do not enter into the computation of the deduction. Plans are permitted to exclude employees with a period of employ- ment of less than 3 years and employees who are not full-time em- ployees. In the aggregate, sole proprietorships and partnerships in 1963 paid wages and salaries to employees of $44.3 bfflion. The aggregate proprietorship-partnership income was $50 billion. In terms of de- ductions, covered on forms 2950-SE, $20.7 mfflion was deducted with respect to self-employed individuals, and $2.4 million was deducted with respect to employees. In view of the rule that only 50 percent of the contributions of the self-employed on behalf of themselves are deductible, the fact that deductions for employees were about one- tenth of deductions for employers would suggest that contributions must have been 20 times larger for employers than for employees. This contrasts with the fact that the aggregate inèome of proprietors in the whole area of unincorporated business is only about 1.1 times larger than the aggregate compensation of employees, and part of the proprietor income is a property return which would not be eligible for use as a basis for a self~employed retirement deduction. In terms of numbers of employees, the aggregate wages and salaries of employees of sole proprietorships and partnerships would suggest that there must be about 9 million such employees in 1963, of which 6,700 were covered under self-employed retirement plans.' This represents about 0.07 of 1 percent of all employees of sole proprietor- ships and partnerships in 1963. The 25,000 employers claiming the deduction, however, represent about four-tenths of 1 percent of all of the individuals who filed self-employment tax returns in 1963. These data cited above cover all types of employees of all unincor- porated business. Under the law, full-time employees with at least 3 years of service must be covered if the self-employed person is to claim a deduction, and other employees may be excluded. The I There are no comparable data readily available on the number of employees of all unincorporated busi~ nesses that would permit direct comparison with the figures on covered employees. Aggregate data do permit some inferences. 2069 PAGENO="0918" 6 SELF-EMPLOYED RETIREMENT DEDUCTION data on forms 2950-SE suggest that these rules permitting exclusion of certain employees, where plans exist, result in exclusion of about 60 percent of employees of self-employed persons taking the retirement deduction. The covered and noncovered employees and their compensation as reported on the 1964 forms 2950-SE of self-employed taking the retire- ment deduction was as follows: Covered employees: Number of returns reporting covered employees 5, 059 Number of returns reporting compensation 4, 357 Number of employees 6, 719 Amount of compensation - $26, 384, 000 Noncovered employees: Number of returns reporting no covered employees 20, 510 Number of returns reporting compensation 3, 774 Number of empjoyees 10, 552 Amount of compensation $17, 177, 000 The reporting of employees, however, is clearly incomplete. Of the 26,000 returns, 5,000 reported covered employees, but only about 4,400 reported compensation of covered employees; 21,000 showed no covered employees, and only about 3,800 showed compensation of noncovered employees. This implies that 17,000 persons claiming the deduction had no employees. This seems unlikely. It appears that reporting of both noncovered employees and compensation `paid to them is incomplete. The total number of covered and noncovered employees, as reported, was 17,000 of which only about 40 percent were covered. The cov- erage percentage would be lower if there is more nonreporting of non- covered employees than there is of covered employees. The following table shows for selected occupations the reported coverage of employ-. ees of self-employed claiming the retirement deduction: Occupation of self-employed Percent of total number of employees reported on form 2950-SE Covered Noncovered Physicians Dentists Legal services 41 24 45 24 52 59 76 55 76 48 Finance, insurance, and real estate Retail, wholesale, and manufacturing Total 39 61 The table below indicates the average number of covered employees of the self-employed who take the deduction. ` ` Occupation ` Average number of employ. ees reported on form 2950-SE Covered Total Physicians Dentists 0.4 0.9 .3 1.2 .4 1.0 .2 .3 Legal services Accounting and auditing 2070 PAGENO="0919" SELF-EMPLOYED RETIREMENT DEDUCTION 7 Further information on the number of employees of self-employed in selected occupation groups is summarized in table 9. It indicates, on the basis of the 1962 Statistics Of Income, "Business Tax Returns," the number of self-employed (including sole proprietors plus the num- ber of partners) in various occupational groups. These totals can be compared with Bureau of the Census data on number of employees in these occupational groups. In the groups which make much use of the self-employed retitement deduction the average number of em- ployees is not much different for persons reporting on form 2950-SE than it is for the occupational group as a whole (see table 9). TABT~E 1.-Returns with self-employment tax1 and returns with self-employed retirement deduction for 1964; number of returns and amount of deduction by adjusted gross income classes AOl class ~ Returns with self- employment tax I Returns with self-employed retirement deduction Number ~ Percent of taxable returns Number ~ Amount of deduction Percent of taxable returns percent of total amount deducted Taxable returns: 0 to $5,000 $5,000 to $10,000 $10,000 to $25,000 $25,000 to $50,000 $50,000 and over - Total Nontaxable - Grand total 1,645,000 1,770, 000 1,010,000 220,000 55, 000 35. 0 37.7 21. 5 4. 7 1.2 3, 037 7,971 11,436 10,487 3,870 Thousands $529 2,416 7, 175 11, 204 4,733 8. 2 21.6 31.1 28.5 10.5 2. 0 9.3 27. 5 43. 0 18.2 4,700,000 1,800, 000 100. 0 36,801 1,536 26,057 291 100. 0 100. 0 6,500,000 38,337 26,348 1 The latest available data are for 1963. The figures given are an estimate for 1964, with provision made for coverage of approximately 170,000 self-employed physicians who are now subject to self-employment tax. 2 The number of sell-employed here shown is understated because It does not include (1) Individuals with self-employment Income who also have wages and salaries equal to or more than the $4,800 maximum base for social security withholding in 1963 and (2) individuals with a net loss from self-employment who are not liable for self-employment tax. Source: Statistics of Income 1963, and Advance Data from Individual Income Tax Returns for 1964, filed during 1965. The self-employed retirement deduction is reported on line 4, pt. III, p. 2 of form 1040. TABLE 2.-Average earned income of returns with self-employment retirement deduc- tion and average net profit on business tax returns of various occupation groups Occupation Returns with sell-employed retirement deduction, 1964 1 Returns of sole proprietorship with net profit, 1962 2 Number of returns Total earned income Average earned income Number of businesses Net profit Average net profit All returns Physicians Dentists Legal services Accounting and auditing Finance, insurance and real estate 25,569 11,809 1,475 2,438 1,180 1,017 Thousands $680, 490 419,428 37,257 76,532 22,563 16,631 $26, 614 35,518 25,259 31,412 19,125 16,353 143,747 80,620 121,149 90,385 391,224 Thousands $2, 905,699 1,094,996 1,100,007 347, 274 1,768,651 $20, 214 13, 581 9,080 3,842 4, 521 I Specialtabulationby Internal Revenue Servicebased on a sample of returns used in compiling "Advance Data from Individual Income Tax Returns for 1964, filed during 1965." The sample was drawn from returns which had the special form 2950-SE attached. 2 Statistics of Income, 1962, Business Tax Returns, table 3, Sole Proprietorships. Data for lator years are not available. 2071 PAGENO="0920" 8 SELF-EMPLOYED RETIREMENT DEDUCTION TABLE 3.-Self-employed retirement plans: Number of returns and amount of deduction-By type of plan and method of funding Number of returns Amount of deduction Percent of total returns Percent of deduction Type of plan: Pension or annuity....... - Profit sharing Not indicated Total Method of funding: Trust Custodial account Insured - U.S. Government Retirement Plan Bond Other Not indicated 16,646 4,670 4,254 Thousands $12,422 4,255 3,988 65. 10 18.26 16.64 60.11 20.59 19.30 25,569 20,664 100.00 100.00 8,278 5, 567 3,729 2,569 588 4,836 7,398 4,698 2,022 1,852 297 4,397 32.38 21.77 14.59 10.05 2.30 18.92 35.80 22. 74 9. 79 8.96 1.44 21.28 Total 25,569 20,664 100.00 100.00 Source: Special tabulation by Internal Revenue Service based on a sample of returns used in compiling "Advance Data from Individual Income Tax Returns for 1964, filed during 1965." The sample was drawn from returns which had the special form 2950-SE attached. NoTE-Detail may not add to total because of roundlng 2072 PAGENO="0921" TABLE 4.-Size of self-employed retirement deduction by adjusted gross income classes AGI classes Returns with self-employed retirement deduction Size of deduction Under $500 $500 to $1,000 $1,000 to $1,250 $1,250 Over $1,250 Total Under $500 $500 to $1,000 Percent of total $1,000 to $1,250 $1,250 Over $1,250 00 tTj C Total 171 * 1,200 0 0 0 0 1,200 100.0 0 0 0 0 100.0 ~ 2,403 0 0 0 0 2,403 100.0 0 0 0 0 100.0 ~ * 1,807 1,151 0 0 0 2, l~58 61.1 38.9 0 0 0 100.0 ~ * 1,443 2,821 1,150 (1) 0 5,486 26.3 51.4 21.0 (2) 0 100.0 573 1,886 1,625 5,710 f 9,843 5.8 19.2 16.5 58.0 1 f 100.0 98 154 480 2,575 5 ~. 3,362 2.9 4.6 14.3 76.6 5 1. 100.0 ~J ~iuo,uuu and ~ 14 35 35 220 8 312 4.5 11.2 11.2 70.5 2.6 100.0 ~4 Total 7,538 6,047 3,290 8,577 112 25,569 29. $ 23.6 12.9 33.6 .4 100.0 171 1 Estimate is not shown separately because of high sampling variability. However, Source: Special tabulation by Internal Revenue Service based on a sample of returns ~ the data are included In the appropriate totals. used in compiling "Advance Data from Individual Income Tax Returns for 1964, filed ci 2 Percent is not shown for the reason stated in footnote 1. during 1965." The samplo was drawn from returns which had the special form 2950- C~2 N0TE.-Detail may not add to total because of rounding. SE attached. z Under $5,000 - ~ $5,000 to $10,000 ~ $10,000 to $15,000 $15,000 to $25,000 $25,000 to $50,000 $50,000 to $100,000 PAGENO="0922" 10 SELF-EMPLOYED RETIREMENT DEDUCTION ,-4 0 0 ;~ c~5 e~ - - - CQ C~D ~`.,.4 ~4 ~ 0C~) ~ ~ g~ Co ~ c~ o ~ ~o ~ a~ ~ co co ~ oo ~ cO~ ~OOQO C- cc3 CO ~ C) C) co e~ t- cq ~ )O ~ 000o000 0 ~gggggg g 0 g 0000000 0 gggggg~ g 0 g C) C) C) *0 ~ 0 ~ ~ 0 ~ ~ c~ C) *t~ )-4 ~`j co C) C) C) C.. C) C) C) cc) C) C) itS ~c1 0 0 z 0 p4 !ll ~ o ~ ~ ~r~4 ~ o ~ ~ toEs I .. z 0 ~ .9 ~ `cc .9CC ~ `ci ~zo ~ ~ ~ `~ ~ :~ ~ ~ .0 4.) ~jO ~ cc ~ cc) 0 C icc `C C Q cc-. ~ ~ ~d~° ; 0) `~ ~ ~ ~ 0 .0 - C9 CO ~` *0 *0 C- 2074 PAGENO="0923" SELF-EMPLOYED RETIREMENT DEDUCTION 11 TABLE 6.-Self-employed retirement deduction as a percent of earned income where deduction is less than $1,250-Returns with self-employed retirement deduction under $1,250 Deduction as a percent of earned income Number of returns Earned Income Percent of total Amount of -- deduction Number Earned Amount of of returns Income deduction Under 2 2to3 3to4 4 to 5 5 and over Total 2,445 3,090 2,155 7,636 1,554 Thousands $68,424 66,728 35,412 106,088 11,008 Thousands $1, 040 1,665 1,229 5, 074 633 14.48 18.31 12.77 45. 24 9.21 23.79 23.20 12.31 36.88 3.83 10.79 17.27 12.75 52. 63 6.57 16,880 287,660 9, 641 100 100 100 Source: Special tabulations by Internal Revenue Service based on a sample of returns used in compiling "Advance Data From Individual Income Tax Returns for 1964, filed during 1965." The sample was drawn from those returns which had the special form 2950-SE attached. TABLE 7.-Returns with self-employed retirement deduction of 5 percent or over of earned income, or $1,250 or over, by adjusted gross income classes 1 AOl classes * ~ Returns with self-employed retirement deduction Total number of returns Returns with deduc- tion of 5 percent or over of earned income Returns with deduc- tion of $1,250 or over Total returns with the maximum allowable deduction Percent of returns with the maximum allowable deduction Under $5,000 ss,ooo to $10,000 $10,000to $15,000 $15,000 to $25,000 $25,000 to $50,000 $50,000 to $100,000 $100,000 and over - Grand total 1,200 2,403 2,968 5,487 9,844 3,362 311 (5) 1 1,227 J 194 (2) 1 (2) 5,759 2,630 228 (2) 1,299 5,953 2,642 229 (3) 11 60 79 74 25,689 1,554 8,689 10,243 40 iThis breakdown Is subject to high samplIng variability. Many of the income class figures are based on a sinalisample of returns. The table is useful only as a general indication of the Importance of the maxima. lEstimate is not shown separately because of high sampling variability. However, the data are included In the appropriate totals. Percent Is not shown for the reason stated in footnote 1. Norx.-Detall may not add to total because of rounding. Source: Special tabulation by Internal Revenue Service based on a sample ofreturnsused In compiling "Advance Data From Individual Income Tax Returns for 1964, filed during 1965." The sample was drawn from returns which had the special Form 2950-SE attached. 2075 PAGENO="0924" 12 SELF-EMPLOYED RETIREMENT DEDUCTION TABLE 8,-Extent to which employees of self-employed benefit under the self- employed retirement deduction-Returns with self-employed retirement deduction Number of returns Number of covered employees Contributions -~ Amount Percentage Self-employed: Total returns With no covered employees With covered employees 1 to 2 covered employees More than 2 covered employees Covered employees of self-employed Total 25,569 Thousands 1 $41, 328 94.4 20,510 5,059 1 30,963 1 10,365 4,728 331 6,719 32,461 &8 43,779 100.0 I This figure does not represent total contributions which sell-employed made themselves to retirement plans set up under this provision. It was obtained by doubling the amount of the retirement deduction shown on the returns of self-employed. The permissible annual deduction Is 50 percent of contributions up to $2,500. Sell-employed who are not owner-employees, however, are not subject to the $2,500 limit with respect to contributions (although the annual amount deductible may not exceed $1,250, or 50 percent of $2,500), and contributions which were made in excess of $2,500 are not taken into account here. 2 This amount represents the actual amount of the employer's contribution for covered employees in- cluded In the retirement plan. Source: Special tabulation by Internal Revenue Service based on a sample of returns used in compiling "Advanced Data From Individual Income Tax Returns for 1964, filed during 1965." The sample was drawn from returns which had the special form 2950-SE attached. TABLE 9.-Estimates of number of self-employed and employees of self-employed selected occupational groups, 1962 Occupation Number of self- employed 1 Number of employees of self- employed 2 Average number of employees Physicians Dentists Legal services Accounting, auditing and bookkeeping 180,000 86, 000 197, 000 123, 000 266,000 96, 000 159, 000 110, 000 1. 5 1. 1 .8 9 1 Sum of sole proprietors and partners, "Statistics of Income, Business Tax Returns," 1962. 2 Bureau of Census, "County Business Patterns," 1962. (Physicians, includes osteopaths and chiro- practors.) 2076 PAGENO="0925" 13 SELF-EMPLOYED flETIREMENT DEDUCTION FORM 2950 SE SELF-EMPLOYED RETIREMENT DEDUCTION U.S. Tensay ~ (Statement in support of deduction for payment to a qualified pension, tetssrut Ceneexs Sense proftt*sharing, annuity or bond purchase plan for self-employed individuals) 1964 Name and address (Please print or type) . 1. Name of plan 2. Is your plan past of a master or prototype plan? 3. Type of ploy D Yes D No. If "Yes," give IRS serial number 0 Pension or annuity Prot:tnhnrinq 4. Name and address of trustee, custodian, or insurance company 5. Effective date st your plan 6. If a favorable determination letter or Form 3673 has been received r.dicatir.q that this plus qcnt:tc's under section 401 of 11-se Code, give date of the most recent determination ond District Directors otitce. 7. Medium of funding: (A) Trust ... 0 Insurance 0 General investments o Other (B) Custodiat account o Mutual funds [J Insurance (C) Insured o Group contract o Individual contract (D) U.S. Government Retirement Plan Bonds 0 (El Other (specify) 0 . 8. COVERAGE: Self-employed Other Total number covered Number excluded because ` Years of service Port'time or temporary Other (specify) 9. COMPEI-syciTlON (or eurnea Income): (a) Covered S $ (b) Excluded Ic) TOTAL S S 10. (a) Employer contributions made on behalf of porticiponto vcho ore not self-employed (enter here and 10. (b) Dates paid on tine 20. Schedule C of Form 1040; or cal. 3, Part III, Schedule F of Form 1040; or line 24, Form 1065) S 11, CoT) Employer contributions made on behalf of self-employed Individual(s) $ II. (dl Dotes paid (b) Less amount allocable to insurance protection (see inslruction C) Cc) Net contributions S COMPUTATION OF ALLOWABLE DEDUCTION FOR EMPLOYER CONTRIBUTIONS MADE ON BEHALF OF SELF.EMPLOYEDINDIV1DUAL (If more fhon one plan is involved, combine amounts for line 12 for all plans and enter result on one form only) 12. (a) 50%of line 11(c) (b) Earned Income (see instruction Dl (c) 10% of line 12(b) (d) 50% of lIne 12(c) not to exceed $1,250 tel Amount allowable as a deduction lIme 12(o) or 12(d), whIchever is lesser). Enter hero and on line 4, Porf III, page 2, Form 1040 INFORMATION RELATING TO PRIOR YEARS Total accumulated contribu!lons in prior years made on behalf of self.employed individual Total accumulated deduclions on Form 1040 in prior years on behalf of sell-employed individual SCHEDULE A-SUMMARY OF TRUST OR CUSTODIA1~ ACCOUNT _________ 1, Balance at beginnIng of year 2. (a) Employer contributions during fhe year (b) Employee contributions durIng the year (c) Earnfngs (d) Adlusbsteests (attach schedule) S. TOTAL (add fInes 1 and 2) 4. L.a. dfafrfbutiona for the year Balance at end cf year _______ 2077 PAGENO="0926" * A. Who Must File-Self-employed individuals (in- cluding partners) and partnerships claiming a deduc- tion for contributions to a qualilied;pension, profit. sharing, annuity, or bond purchase plan where such plan includes self-employed isdividuals must file this form to substantiate the deduction. For plans which do not include self-employed individuals file Form 2950. A self-employed individual is an individual or part. ner who has earned income as described in instruction D from an unincorporated trade, business or profession. B. Filing of Return-File this form with your tax return for the taxable year in which a deduction is claimed. A separate Farm 2950 SE must be filed for each plan. However, where more than one form is required, the overall limitation in item 12 need be completed on only one form. If a favorable determination letter has not been re- ceived with respect to your plan and your plan is not part of a master or prototype plan, in addition to filing Form 2950 SE, you must submit the information required by Section 1 ,404(a)-2, Income Tax Regulations, to the extentopplicableforthefirstyeorodeduction is claimed. If your plan has been amended since the lost favor. able determination letter was received, and your plan is not part of a master or prototype plan, in addition to filing Form 2950 SE, you must submit the information required by paragraph (b)(l) of Section l,404(a)-2. Income Tax Regulations, Partnerships~-Partnerships need complete only items I through ll,andScheduleA. Partners-A partner who is covered only by a partnership plan need complete only items 1, 11 and 12. A partner who is covered by more than one plan must file a farm for each plan. Complete lines 1 and 11 far each partnership plan on&lines 1 through 11 and Schedule A for each individual plan. The overall limitation as computed on line 12 need only be sum- marized on one form for all the plans. C. Amount of Deduction-You may deduct con~ tributions tar employees, only to the extent that they are ordinary and hecèssary trade or business expensesand to the extent they are within the limitations of section 404. Contributions allocable to insurance protection-For purposes of determining the amount deductible with respect to contributions on h~hcs~ rd n self rmpieyecl indcviduol, amounts altccabc-' to he p;:rchosc' p1 life. occider.t, health, or other insurnnc-e p~ctcctton shrill not be taken into account. Enter soc-h amoor.ts on line 11(b). The amount of a contrihutton altocaisle to insurance shall be an amour,t equal to a reasonable net premium cost for such amount of insurance for the appropriate period. D. Earned Income.-In general, earned income means net earnings from self-employment if personal services are actually rendered. However, for this purpose doctors of medicine, and Christian Science practitioners; duly ordained, cam- ipissioned or licensed ministers of churches in the exercise of their ministry and members of religious orders; and certain individuals, excluded for sell. employment tax purposes under section 1402, shall compute their earned income in the same manner as if they were included under such section, (1) Personal .cersices onl~~.-Ifpersonal services are the only material factor in the production ot income from a trade or business, then, in general- Earned income is 100 percent of net earnings from self-employment. (2) Personal services and capital-If both personal services and capital are material factors in the pro- duction of income from a trade or business, then, earned income is; actual net profits $2500 - - not in excess of 30% of your share of net profits - (3) Personal servicvs plus personal services and cap- ital-If you are engaged in one or more trades or businesses in which only personal services are a ma- terial income-producing factor, and you are also en- gaged in one or more trades or businesses in which both perscnol services and capital ore material income- producing factors, then earned income ts determined und~r the provisions of section 40l(c)(2)(B) and the regulations thereunder. For a more detailed explanation of earned income. see section 401(c) and the regulations thereunoer. 14 SELF-EMPLOYED RETIREMENT DEDUCTION INSTRUCTIONS (References axe to the Internsc,1 Revenue Code) if total net profits ore: Oto $2500 $2500 to $8333.33 over $8333.33 2078 PAGENO="0927" Union Calendar No.698 89TH CONGRESS 2D SESSION Fl. R. 10 [Report No. 1557J IN THE HOUSE OF REPRESENTATIVES JANUARY 4, 1965 Mr. KEOGH introduced the following bill; which was referred to the Corn- mittee on Ways and Means MA~ 26, 1966 Reported with an amendment, committed to the Committee of the Whole House on the State of the Union, and ordered to be printed [Strike out all after the enacting clause and insert the part printed In italic] A BILL To amend the Internal Revenue Code of 1954 to permit pension and profit-sharing plans to provide contributions or benefits on a nondiscriminatory basis fOr certain self-employed indi- viduals without special limitations on the amouxit of con- tributions. Be it enacted by the Senate and House of Ilepresenta- 2 tives of the United States of America in Congress assembled, 3 That -fa3- paragraph (10) of seetiort 404 (a) of the ernof 4 Revenue Qode of 1954 (relating to special limitation oi~ 5 amount allowed as doduetion for self employed individuals fei? 6 contributions to certain pension, ete-5 plans) is repealed. 7 (1)- (-1-)- Eaeh of the following provisions of section 404- 8 of sash (~ot1e is amended by striking ont "(determined 2079 PAGENO="0928" 2 1 without regard to section 404 (a) ~10) )~&~ eaeh place it ap- 2pears- 3 -(4)-Section-fa3(10)(A)-(i43-~ 4 ~Br)- Subparagraphs -fA3- ~u4 +B)- of subscctiou 5 6 -fG)- Subparagraph -fA~- of subsection (d) ~(6}~ 7 `-(4)-)- Subparagraphs -(4)- and -(-~B)--(4)- of subsee 8 9 ~fE3- Subparagraphs -(433- and -fG3- and the last 10 sentence of subsection (c) (s)-. 11 -(2-)- Subparagraph -(4)- of section 404 (c) -(2) of sash 12 4~o4e is amended by striking out "(determined without re- 13 gard to subscct4on (4-(10) `p-. 14 4~* Subparagraph -(433- of section 404 (c) (2) of sash 15 ~o4e is amended by striking out "(determined without re- 16 gord to paragraph -(10) thereof)-". 17 2~ -(4 Se much of subsection -(4 of section 404 18 of the Internal ~Revenue Qe+le of 1954 -(relating to special 19 limitations for self employed individuals)- as precedes para~ 20 graph -(23- is amended to read as follows-~ 21 !~~(e3- SPECIAL LIMITATIONS ~en Pitornn~rom Wno 22 pp~ ~ ~ EMPLOYEES.- 23 ~ (-1)- 4N QENEILAL.-4n the ease of a plan included 24 in subsection -fa)-~ -(4-)-~ -(-2-)-~ or -(33-i which provides 25 contributions or benefits only for an individual who is 2080 PAGENO="0929" a 1 an owncr~cmployee wishin the meaning of seetAon 2 4Q1 (e) (3)1 (A)~, the amoun1~s deduetible under si±b- 3 section -(87)- in any taxable year with respeet to eon- 4 tributions on behalf of snob owner employee shall~ sub- 5 feet to the pro~4sions of paragraph -(-2-)-~ not exceed 6 $2-~5OO, or 4-4) pereent of the earned ineome derii~e4 by 7 h4m from the trade or business with respeet to whieh the 8 plan is established whichever is the less&~ 9 -(-b-)-- Subparagraph -(-A)- of section 404-(-e)--(-2-)- of such 10 Code -(relating to overall limitation in ease of contributions 11 made under more than one plan)- is amended by inserting 12 ~refcrre4 to in paragraph (47)-~ after ~ind4videal~ 13 -(-e)- Seetion 404-fe)- of such Code -(relating to excess 14 eontribuitons on behalf of owner employees) is amended- 15 -(4-)- by inserting ~and~ at the end of clause -(4)- and 16 at the end of clause -(ii)- of paragraph -f4-)-fI4-)-~ and by 17 striking out clauses ~4)- and -(-iv)- of such subparagraph 18 and 19 -(-27)- by striking out "subparagraphs -(-B7)- -(47)-i 20 -(-iii), and -(iv-)-~ in the last sentence of paragraph -(-3-)- 21 and inserting in lieu thereof ~subparagraph -(B) -(ii)-~ 22 and by striking out ~~sueh subparagraphs~ in such last 23 sentenee and inserting in lieu thereof ~sueh sub- 24 paragrapW~ 7 1-297 0-67-pt. 2-59 2081 PAGENO="0930" 4 1 & The amcndrncnte made by tl4s Aet thall app~Iy 2 to taxable yeai~s begim4~ig a4ter Deeembef ~ 4~9~G3~ 3 That (a) paragraph (10) of section 404(a) of the Internal 4 Revenue Code of 1954 (relating to special limitation on 5 amount allowed as deduction for self--employed individuals 6 for contributions to certain pension, etc., plans) is repealed. 7 (b) (1) Each of the following provisions of section 401 8 of such Code is amended by striking out "(determined with- 9 out regard to section 404(a) (10))" each place it appears: 10 (A) Subsection (a) (10) (A) (ii). 11 (B) Subparagraphs (A) and (B) of subsection 12 (d) (5). 13 (C) Subparagraph (A) of subsection (d) (6). 14 (D) Subparagraphs (A) and (B)(i) of subsec- 15 tion (e) (1). 16 *(E) Subparagraphs (B) and (C) and the last 17 sentence of subsection (e) (3). 18 (2) Subparagraph (4) of section 404(e) (2) of such 19 Code is amended by striking out "(determined without ye- 20 gard to subsection (a)*(10))". 21 (3) Paragraph (1) and subparagraph (B) of para- 22 graph (2) of section 404(e) of sue/i Code are each 23 amended by striking out "(determined without regard to ~ paragraph (10) thereof)". 2082 PAGENO="0931" 1 SEC. 2. Section 401 (c) (2) of the Internal Revenue 2 Code of 1954 (relating to definition of earned income for 3. certain pension and profit-sharing plans) is amended to read 4 as follows: 5 "(2) EARNED INCOME.-The term `earned income' 6 means the net earnings from self-employment (as de- 7 fined in section 1402(a)), but such net earnings shall 8 be determined- 9 "(A) only with respect to a trade or business 10 in which personal services of the taxpayer are a ma- 11 terial income-producing factor, 12 "(B) without regard to paragraphs (4) and 13 (5) of section 1402(c), 14 "(0) in the case of any indivi4ual who is 15 treated as an employee under sections 3121 (d) (3) 16 (A), (0), or (D), without regard to paragraph 17 (2) of section 1402(c), and 18 "(D) without regard to items which are not 19 included in gross income for purposes of this chapter, 20 and the deductions properly allocable to or charge- 21 able against such items. 22 For purposes of this paragraph, section 1402, as in 23 effect for a taxable year ending on December 31, 1962, 2083 PAGENO="0932" 6 1 shall be treated as having been in effect for all taxable 2 years ending before such date." 3 SEc. 3. The amendments made by this Act shall apply 4 with respect to taxable years beginning after December 31, 5 1965. 2084 PAGENO="0933" 89TH CoNoIu~és ~ HOUSE OF REPRESENTATIVES 5 REPORT 2d Session j ~ No. 1557 CONTRIBUTIONS BY SELF-EMPLOYED INDIVIDUALS TO PENSION PLANS, ETC. MAY 26, 1966.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed Mr. KEOGII, from the Committee on Ways and Means, submitted the following REPORT ~To accompany H.R. 10] The Committee on Ways and Means, to whom was referred the bill (H.R. 10) to amend the Internal Revenue Code of 1954 to permit pension and profit-sharing plans to provide contributions or benefits on a nondiscriminatory basis for certain self-employed individuals without special limitations on the amount of contributions, having considered the same, report favorably thereon with an amendment and recommend that the bill as amended do pass. The amendment is as follows: Strike out all after the enacting clause and insert: That (a) paragraph (10) of section 404(a) of the Internal Revenue Code of 1954 (relating to special limitation on amount allowed as deduction for self-employed individuals for contributions to certain pension, etc., plans) is repealed. (b)(1) Each of the following provisions of section 401 of such Code is amended by striking out "(determined without regard to section 404(a)(10))" each place it appears: (A) Subsection (a) (10) (A) (ii). (B) Subparagraphs (A) and (B) of subsection (d)(5). (C) Subparagraph (A) of subsection (d)(6). (D) Subparagraphs (A) and (B)(i) of subsection (e)(1). (E) Subparagraphs (B) and (C) and the last sentence of subsection (e)(3). (2) Subparagraph (A) of section 404(e) (2) of such Code is amended by striking out "(determined without regard to subsection (a)(10))". (3) Paragraph (1) and subparagraph (B) of paragraph (2) of section 404(e) of such Code are each amended by striking out "(determined without regard to paragraph (10) thereof)". SEC. 2. Section 401(c)(2) of the Internal Revenue Code of 1954 (relating to definition of earned income for certain pension and profit-sharing plans) is amended to read as follows: 2085 PAGENO="0934" 2 SELF-EMPLOYED PEIcSION PLANS "(2) EARNED INC0ME.-The term `earned income' means the net earnings from self-employment (as defined in section 1402(a)), but such net earnings shall be determined- "(A) only with respect .to a trade or business in which personal services of the taxpayer are a material income-producing factor. "(B) without regard to paragraphs (4) and (5) of section 1402(c), "(C) in the case of any individual who is treated as an employee under sections 3121(d) (3) (A), (C), or (D), without regard to paragraph (2) of section 1402(c), and "(D) without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items. For purposes of this paragraph, section 1402, as in effect for a taxable year ending on December 31, 1962, shall be treated as having been in effect for all taxable years ending before such date." SEC. 3. The amendments made by this Act shall apply with respect to taxable years beginning after December 31, 1965. I. SUMMARY Your committee's bill provides for the repeal of two limitations on the deduction from gross income a self-employed individual may take with respect to contributions on his own behalf to a retirement plan. First, the bifi repeals the provision which limits the deduction to 50 percent of the contribution. However, your committee has retained the provision restricting the contribution for self-employed persons to the lesser of 10 percent of earned income or $2,500. Second, the bifi also permits a self-employed individual to include in earned income all of his net profits when his income is earned from a business in which both the performance of personal services and capital are material income-producing factors. However, in such cases the personal services of the self-employed person involved must be material income-producing factors. The provisions of H.R. 10 are to be effective for taxable years beginning after December 31, 1965. II. BACKGROUND AND REASONS FOR THE BILL Under present law, self-employed individuals may establish retire- ment plans and may deduct from their gross incomes contributions made to these plans. Employees with more than 3 years of service must be covered, and contributions on their behalf are fully de- ductible. The self-employed mdividual may deduct from his gross mcome 50 percent of the contribution on his own behalf, but the contribution is limited to the smaller of 10 percent of his earned income or $2,500. Accordingly, the maximum deduction allowed to a self-employed person with respect to his own contribution is $1,250. Earned income for this purpose is defined as the income received from the performance of personal services. When capital, as well as personal services, is a material factor in the production of the income, earned income may not exceed 30 percent of the net profits from the business (except that where an individual renders personal services on a substantially full-time basis, this 30-percent rule cannot reduce the net profits considered as earned income below $2,500). The Self-Employed Individuals Tax Retirement Act of 1962 was enacted in order to give self-employed individuals an opportunity to defer tax on a portion of their income set aside for retirement purposes 2086 PAGENO="0935" SELF-~EMPL0YED PENSION PLANS 3 in much the same way as they and others could already do for their employees under the provisions of the then existing law. Congress provided this deferral for the self-employed individual at that time in order to remove this discrimination in tax treatment against the self- employed. However, the response of the self-employed to the tax deferral provided by this act has been exceedingly small so far. While, of course, to some extent this may occur because the deferral privilege for the self-employed stifi is relatively new (and, undoubtedly, the number covered by this will increase as more self-employed begin a plan of setting aside amounts for retirement), nevertheless, the extent to which this plan has been used to. date has been disappointing. A report by the Treasury Department with respect to the self- employed retirement deduction in the taxable year 1964 shows that only about one-half of 1 percent of the self-employed individuals took advantage of this deduction in that year. Your committee believes that Congress intended that this tax deferral should be available for self-employed individuals for their retirement in a comparable manner to that for employees. However, your committee has concluded that the two limitations described above are thwarting this objective of Congress. This is indicated by the fact that when the Self-Employed Individuals Tax Retirement Act of 1962 was enacted, the Treasury Department estimated that the cost of the act in the first full year of operation would be $115 million; yet, the actual cost as late as 1964 amounted to only $9 million. Certainly, this demonstrates that the act, as finally approved, did not carry out the objectives of the original act. The requirement that a self-employed individual must not only provide a pension plan for his employees of more than 3 years, but also must tie up twice as much for his own retirement as he receives a tax deduction for, has discouraged the self-employed from making provision for their, own retirement. The 50-percent requirement was added as a means of equating the tax treatment of the self- employed with employees covered by contributory plans. How- ever, in fact, most employees are not covered under contributory plans. In 1965, 25 million employees were covered under the 34,110 corporate pension plans filed with the Secretary of Labor. Nearly three-fourths of these-72.9 percent-were financed entirely by em- ployer contributions covering an estimated minimum of 18.5 mfflion employees. On the other hand, only an estimated 5.8 million em- ployees are covered under plans requiring contributions from employers and themselves. Moreover, over the' past several years. the trend has been away from contributory, pension plans. Thus, requiring self-employed pension plans to be contributory, in reality, creates discrimination against the self employed, vis-a-vis employees, rather than removing it. For this reason, your committee has concluded that the 50-percent requirement should be removed. Not only will this remove discrimination against the self-employed, but it should also encourage them to make provision for their own old age, which was a principal objective of the 1962 act. Your committee also believes that the 30-percent limitation on income derived from a mixture of capital and personal services repre- sented too restrictive a rule with respect to the income likely to be attributable to personal services. Therefore, this limitation also has tended to discourage small proprietors, and especially farmers, from 2087 PAGENO="0936" 4 SELF-EMPLOYED PENSION PLANS making provision for their retirement through the deduction for amounts set aside for their retirement plans. Therefore, your committee concluded that where both capital and personal services were material income-producing factors, it would be better to permit the self-employed individuals in most cases to treat the entire amount as earned income for purposes of deductions for these retirement plans. Your committee in arriving at this con- clusion took into account the fact that, in any event, only 10 per- cent of this earned income, not to exceed $2,500, would be available as a deduction. Your committee recognized, however, that in some cases there is a mixture of capital and personal services producing the income where the taxpayer contributes very little, if anything, to the income in the form of rendition of personal services. Situa- tions of this type are likely to arise, for example, in the case of silent partners, absentee landlords, etc. To forestall the treatment of what is essentially a return on capital from being used by these individuals as earned income giving rise to deductions for retirement plans, your committee has defined earned income for this purpose so as not to include those cases where personal services of the taxpayer were not a material income-producing factor. III. REVENUE EFFECT The revenue loss from enactment of this bill is estimated to be $20 to $30 million arising from income in 1966 and $35 to $60 million in 1967. The greater range of the estimates in 1967 and the increase over 1966 reflect the possibility of larger growth of self-employment retirement plans stimulated by the amendments in this bill as more time elapses after the adoption of these amendments and more self- employed come under the plan. The range in estimates for both years reflects varying assumptions as to the number who will avail them- selves of the deductions. The range of $20 to $30 million for 1966 income assumes coverage of 1 to 1.5 percent of the self-employed. The range of $35 to $60 million for 1967 income assumes coverage of 1.5 to 3 percent of the self-employed. Estimating the revenue loss from the provisions of this bill involves more uncertainty than usual. Presently, there is information avail- able concerning coverage under these retirement plans for 1963 and 1964. This is too brief a period to offer even a satisfactory base for projecting a normal rate of increase in coverage under the provisions of present law. In addition, neither this base of information nor the detailed information that it contains furnishes a very reliable starting point for estimates of the revenue effect of the amendments in the bill or the increased coverage that can follow its enactment. IV. GENERAL EXPLANATION For the reasons given above, the bifi as amended makes two amend- ments to the provisions of present law relating to retirement plans for the self-employed. The bifi removes from these provision two limitations which seriously discourage broader use of the deduction for amounts set aside for retirement. First, the present limitation of the deduction on behalf of a self- employed person to 50 percent of the contribution (10 percent of earned income up to a maximum 9f $2,500) is to be repealed. This 2088 PAGENO="0937" SELF-EMPLOYED PENSION PLANS 5 will permit the self-employed individual to deduct from his gross income the full amount of this contribution toward his own retirement, in the same manner as he does the full contribution he makes for his. employees eligible for coverage. No change, however, is made in the limitation on the size of his contribution for himself; it remains at 10 percent of his earned income or $2,500, whichever is smaller. Second, your committee has removed the restriction which limits the share of income considered "earned," where both personal serv- ices and capital are important income-producing factors. Presently, only 30 percent of net profits in such cases may be considered "earned" in determining the allowable size of the contribution except that the amount so treated is not to be less than $2,500 in the case of sub- stantially full-time employment. In removing the restriction which limits the share of income treated as earned where both personal services and capital are important income-producing factors, your committee's bill, nevertheless, imposes a restriction designed to pre- vent those who are not contributing significant personal services from receiving retirement plan deductions with respect to what is, in reality, income from their capital. This is accomplished by providing in such cases that the net profits involved with respect to any self- employed person are to be treated as earned income only in the case of a trade or business in which the personal services of the particular self-employed individual involved are a material income-producing factor. By this, it is contemplated that substantially full-time em- ployment will be treated as a material income-producing factor. In the case of less than full-time employment, in determining whether the personal services of the taxpayer are a material income-producing factor there is to be taken into account the respective contribution made by his personal services and by his capital. The provisions of this bill are to be effective for taxable years be- ginning after December 31, 1965. V. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED 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 is enclosed in black brackets, new matter is printed in italic, existing law in which no change is proposed is shown in roman): INTERNAL REVENUE CODE OF 1954 * .* * * * * * SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS. (a) REQUIREMENTS `FOR QuALIFICATI0N..-A trust created or orga- nized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of. his employees or their beneficiaries shall constitute a qualified trust under this section- * * * * * * * 2089 PAGENO="0938" 6 SELF-EMPLOYED PENSION PLANS (10) In the case of a plan which provides contributions or benefits for employees some or all of whom are owner-employees (as defined in subsection (c) (3))- (A) paragraph (3) and the first and second sentences of para- graph (5) shall not apply, but- (i) such plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the contribu- tions or benefits of or on behalf of employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of such employees, and (ii) such plan shall not be considered discriminatory within the meaning of paragraph (4) solely because under the plan contributions described in subsection (e)(3) (A) which are in excess of the amounts which may be deducted under section 404 ((determined without regard to section 404(a)(10))] for the taxable year may be made on behalf of any owner- employee; and (B) a trust forming a part of such plan shall constitute a qualified trust under this section only if the requirements in subsection (d) are also met. * * * * * * * (c) DEFINITIONS AND RULES RELATING TO SELF-EMPLOYED INDI- VIDUALS AND OWNER-EMPLOYEES.-FOr purposes of this section- (1) EMPLOYEE.-The term "employee" includes, for any tax- able year, an individual who has earned income (as defined in paragraph (2)) for the taxable year. To the extent provided in regulations prescribed by the Secretary or his delegate, such term also includes, for any taxable year- (A) an individual who would be an employee within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and (B) an individual who has been an employee within the meaning of the preceding sentence for any prior taxable year. ((2) EARNED INCOME.- ((A) IN GENERAL.-The term "earned income" means the net earn- ings from self-employment (as defined in section 1402(a) ) to the extent that such net earnings constitute earned income (as defined in section 911(b) but determined with the application of subparagraph (B) ), but such net earnings shall be determined- ((i) without regard to paragraphs (4) and (5) of section 1402(c), ((ii) in the case of any individual who is treated as an employee under sections 3121(d) (3) (A), (C), or (D), without regard to paragraph (2) of section 1402(c), and ((iii) without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items. For purposes of this subparagraph, sections 911(b) and 1402, as in effect for a taxable year ending on December 31, 1962, and subpara- graph (B), as in effect for a taxable year beginning on January 1, 1963, shall be treated as having been in effect for* all taxable years ending before such date. 2090 PAGENO="0939" SELF~EMPLOYED PENSION PLANS 7 ((B) EARNED INCOME WHEN BOTH PERSONAL SERYICES AND CAPITAL ARE MATERIAL INCOME-PRODUCING FACTORS.-Ifl applying section 911(b) for purposes of subparagraph (A), in the case of an individual who is an employee within the meaning of paragraph (1) and who is engaged in a trade or business in which both personal services and capital are material income-producing factors and with respect to which the individual actually renders personal services on a full-time, or substantially full-time, basis, so much of his share of the net profits of such trade or business as does not exceed $2,500 shall be considered as earned income. In the case of any such individual who is engaged in more than one trade or business with respect to which he actually renders substantial personal services, if with respect to all such trades or businesses he actually renders personal services on a full-time, or substantially full-time, basis, there shall be considered as earned income with respect to the trades or businesses in which both personal services and capital are material income-producing factors- [(i) so much of his share of the net profits of such trades or businesses as does not exceed $2,500, reduced by ((ii) his share of the net profits of any trade or business in which only personal services is a material income-producing factor. The preceding sentences shall not be construed to reduce the share of net profits of any trade or business which under the second sentence of section 911(b) would be considered as earned income of any such individual.] (2) EARNED INCOME.-The term "earned income" means the net earnings from self-employment (as defined `in section 1402(a)), but such net earnings shall be determined- (A) only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor, (B) without regard to paragraphs (4) and (5) of section 1402(c), (C) in the case of any individual who is treated as an employee under sections 3121(d) (3) (A), (C'), or (D), without regard to paragraph (2) of section 1402(c), and (D) without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items. For purposes of this paragraph, section 1402, as in effect for a taxable year ending on December 31, 1962, shall be treated as having been in effect for all taxable years ending before such date. (3) OWNER-EMPLOYEE.-The term "owner-employee" means an employee who- (A) owns the entire interest in an unincorporated trade or business, or (B) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership. To the extent provided in regulations prescribed by the Secretary or his delegate, such term also means an individual who has been an owner-employee within the meaning of the preceding sentence. (4) EMPLOYER.-An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (1). 2091 PAGENO="0940" 8 SELF-EMPLOYED PENSION PLANS (5) CONTRIBUTIONS ON BEHALF OF OwNER-EMPL0YEES.-The term "contribution on behalf of an owner-employee" includes, except as the context otherwise requires, a contribution under a plan- (A) by the employer for an owner-employee, and (B) by an owner-employee as an employee. (d) ADDITIONAL REQUIREMENTS FOR QUALIFICATION OF TRUSTS AND PLANS BENEFITING OWNER-EMPLOYEES.-A trust forming part of a pension or profit-sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees shall constitute a qualified trust under this section only if, in addition to meeting the requirements of subsection (a), the following require- ments of this subsection are met by the trust and by the plan of which such trust is a part: * * * * * * * (5) The plan does not permit- (A) contributions to be make by the employer on behalf of any owner-employee in excess of the amounts which may be deducted under section 404 ((determined without regard to section 404(a) (10))] for the taxable year; (B) in the case of a plan which provides contributions or benefits only for owner-employees, contributions to be made on behalf of any owner-employee in excess of the amounts which may be deducted under section 404 ((determined without regard to section 404(a) (10))] for the taxable year; and (C) if a distribution under the plan is made to any employee and if any portion of such distribution is an amount described in section 72(m)(5) (A) (i), contributions to be make on behalf of such employee for the 5 taxable years succeeding the taxable year in which such distribution is made. Subparagraphs (A) and (B) shall not apply to any contribution which is not considered to be an excess contribution (as defined in subsection (e)(1)) by reason of the application of subsection (e)(3). (6) Except as provided in this paragraph, the plan meets the requirements of subsection (a) (4) without taking into account for any purpose contributions or benefits under chapter 2 (relating to tax on self-employment income), chapter 21 (relating to Federal Insurance Contributions Act), title II of the Social Security Act, as amended, or any other Federal or State law. If- (A) of the contributions deductible under section 404 ((deter- mined without regard to section 404(a)(10))], not more than one-third is deductible by reason of contributions by the employer on behalf of owner-employees, and (B) taxes paid by the owner-employees under chapter 2 (relating to tax on self-employment income), and the taxes which would be payable under such chapter 2 by the owner-employees but for paragraphs (4) and (5) of secton 1402(c), are taken into account as contributions by the employer on behalf of such owner- employees, then taxes paid under section 3111 (relating to tax on employers) with respect to an employee may, for purposes of subsection (a) (4), be taken into account as contributions by the employer for such employee under the plan. * * * * * * * 2092 PAGENO="0941" SELF-EMPLOYED PENSION PLANS 9 (e) EXCESS CONTRIBUTIONS ON BEHALF OF OWNER-EMPLOYEES.- (1) EXCESS CONTRIBUTION DEFINED.-FOr purposes of this section, the term "excess contribution" means, except as provided in para- graph (3)- (A) if, in the taxable year, contributions are made under the plan only on behalf of owner-employees, the amount of any contribution made on behalf of any owner-employee which (without regard to this subsection) is not deductible under section 404 ((determined without regard to section 404 (a) (10))] for the taxable year; or (B) if, in the taxable year, contributions are made under the plan on behalf of employees other than owner-employees- (i) the amount of any contribution made by the employer on behalf of any owner-employee which (without regard to this subsection) is not deductible under section 404 ((deteimined without regard to section 404(a)(10))] for the taxable year; (ii) the amount of any contribution made by any owner- employee (as an employee) at a rate which exceeds the rate of contributions permitted to be made by employees other than owner-employees; (iii) the amount of any contribution made by any owner- employee (as an employee) which exceeds the lesser of $2,500 or 10 percent of the earned income for such taxable year derived by such. owner-employee from the trade or business with respect to which the plan is established; and (iv) in the case of any individual on whose behalf con- tributions are made under more than one plan as an owner- employee, the amount of any contribution made by such owner-employee (as an employee) under all such plans which exceeds $2,500; and (C) the amount of any contribution made on behalf of an owner-employee in any taxable year for which, under paragraph (2) (A) or (E), the plan does not (for purposes of section 404) meet the requirements of subsection (d) with respect to such owner-employee. For purposes of this subsection, the amount of any contribution which is allocable (determined in accordance with regulations pre- scribed by the Secretary or his delegate) to the purchase of life, accident, health, or other insurance shall not be taken into account. * * * * * * (3) CONTRIBUTIONS FOR PREMIUMS ON ANNUITY, ~TC., CONTRACTS. A contribution by the employer on behalf of an owner-employee shall not be considered to be an excess contribution within the meaning of paragraph (1), if- (A) under the plan such contribution is required to be applied (directly or through a t~rustee) to pay premiums or other con- sideration for one or more annuity, endowment, or life insurance contracts on the life of such owner-employee issued under the plan, (B) the amount of such contribution exceeds the amount de- ductible under section 404 ((determined without regard to sec- 2093 PAGENO="0942" 10 SELF-EMPLOYED PENSION PLANS tion 404(a)(10))] with respect to contributions made by the employer on behalf of such owner-employee under the plan, and (0) the amount of such contribution does not exceed the average of the amounts which were deductible under section 404 [(determined without regard to section 404(a) (10))], with respect to contributions made by the employer on behalf of such owner-employee under the plan (or which would have been de- ductible under such section if such section had been in effect) for the first 3 taxable years (i) preceding the year in which the last such annuity, endowment, or life insurance contract was issued under the plan and (ii) in which such owner-employee derived earned income from the trade or business with respect to which the plan is established, or for so many of such taxable years as such owner-employee was engaged in such trade or business and derived earned income therefrom. In the case of any individual on whose behalf contributions described in subparagraph (A) are made under more than one plan as an owner- employee during any taxable year, the preceding sentence shall not apply if the amount of such contributions under all such plans for such taxable year exceeds $2,500. Any contribution which is not considered to be an excess contribution by reason of the application of this paragraph shall, for purposes of subparagraphs (B) (ii), (iii), and (iv) of paragraph (1), be taken into account as a contribution made by such owner-employee as an employee to the extent that the amount of such contribution is not deductible under section 404 [(determined without regard to section 404(a) (10))] for the taxable year, but only for the purpose of applying such subparagraphs to other contributions made by such owner-employee as an employee. * * * * * * * SEC. 404. DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES' TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A DEFERRED-PAYMENT PLAN. (a) GENERAL RULE.-If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under section 162 (relating to trade or business expenses) or section 212 (relating to expenses for the production of income); but, if they satisfy the conditions of either of such sections, they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year: * * * * * * * [(10) SPECIAL LIMITATION ON AMOUNT ALLOWED AS DEDUCTION FOR SELF-EMPLOYED INDIVIDUALS.-Notwlthstanding any other pro- vision of this section, the amount allowable as a deduction under paragraphs (1), (2), (3), and (7) in any taxable year with respect to contributions made on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall be an amount equal to one-half of the contributions made on behalf of such individual in such taxable year which are deductible under such paragraphs (deter- mined with the application of paragraph (9) and of subsection (e) but without regard to this paragraph). For purposes of section 401, the 2094 PAGENO="0943" SELF-EMPLOYED PENSION PLANS 11 amount which may be deducted, or the amount deductible, under this section with respect to contributions made on behalf of such individual shall be determined without regard to the preceding sentence.] * * * * * * * (e) SPECIAL LIMITATIONS FOR SELF-EMPLOYED INDIVIDUALS.- (1) IN GENERAL.-In the case of a plan included in subsection (a) (1), (2), or (3), which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401(c) (1), the amounts deductible under subsection (a) ((determined without regard to paragraph (10) thereof)] in any taxable year with respect to contributions on behalf of any employee within the meaning of sec- tion 401(c)(1) shall, subj ect to the provisions of paragraph (2), not exceed $2,500, or 10 percent of the earned income derived by such employee from the trade or business with respect to which the plan is established, whichever is the lesser. (2) CONTRIBUTIONs MADE UNDER MORE THAN ONE PLAN.- (A) OVERALL LIMITATION.-In any taxable year which amounts are deductible with respect to contributions under two or more plans on behalf of an individual who is an employee within the * meaning of section 401 (c)(1) with respect to such~plans, the aggre- gate amount deductible for such taxable year under all such plans with respect to contributions on behalf of such employee ((deter- mined without regard to subsection (a)(10))] shall not exceed $2,500, or 10 percent of the earned income derived by such em- ployee from the trades or businesses with respect to which the plans are established, whichever is the lesser. (B) ALLOCATION OF AMOUNTS DEDuCTIBLE.-In any case in which the amounts deductible under subsection (a) (with the application of the limitations of this subsection) with respect to contributions made on behalf of an employee within the meaning of section 401 (c)(1) under two or more plans are, by reason of subparagraph (A), less than the amounts deductible under such subsection determined without regard to such subparagraph, the amount deductible under subsection (a) ((determined without regard to paragraph (10) thereof)] with respect to such contvi_ butions under each such plan shall be determined in accordar~ with regulations prescribed by the Secretary or his delegate. (3) CONTRIBUTIONS ALLOCABLE TO INSURANCE PR0TECTI0N.-For purposes of this subsection, contributions which are allocable (deter- mmed under regulations prescribed by the Secretary or his delegate) to the purchase of life, accident, health, or other insurance shall not be taken into account. * * * * * * * 2095 PAGENO="0944" VI. SUPPLEMENTAL VIEWS OF CONGRESSMAN THOMAS B. CURTIS Although I strongly support the bill and disagree with the conclu.- sions contained in the Treasury report on H.R. 10, I feel that it should be made a part of the official committee report. Therefore, I am set- ting it forth in my supplemental views. TREASURY DEPARTMENT, Washington, D.C., May 26, 1966. Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: This report sets forth the views of the Treas- ury Department on the bill, H.R. 10, which has been ordered reported by your committee. The Department strongly objects to this bill. H.R. 10, as amended and ordered reported by your committee, would liberalize the tax benefits applicable to self-employed pension and profit-sharing plans in two respects: (1) The present law permits a self-employed individual to contribute each year for himself up to 10 percent, or $2,500 (whichever is less) of his earnings to a pension or profit-sharing plan, but limits his tax deduction to one-half of his contribution. H.R. 10 would eliminate the one-half limitation and permit a tax deduction for the full con- tributions of the self-employed. (2) Under the basic framework of the present law, the 10-percent limitation on the amount a self-employed may contribute each year to a pension plan is applied against his earnings from personal services. If the individual is in a business where both personal services and capital are material factors, no more than 30 percent of the profits from the business, subject to a minimum of $2,500, may be treated as personal service earnings for this purpose. H.R. 10 would permit the individual in this situation to apply the 10-percent against the entire net~ profits from the business. The Treasury Department strongly opposes the enactment of H.R. 10 for the following basic reasons: (a) Revenue.-The bill would involve an estimated revenue loss for fiscal year 1967 of $20 to $30 million, of which $18 to $27 million would be attributable to the first amendment and $2 to $3 million to the second. For fiscal year 1968, the estimated revenue loss would increase to $35 to $60 million; with $30 to $50 million attributable to the first amendment and $5 to $10 million to the second. The upper end of the revenue loss range for fiscal year 1968 is based on the assumption that 3 percent of the self-employed will be participating in pension plans as of the end of 1967. The annual revenue loss could increase substantially if the amendments encourage a larger percentage of the self-employed to adopt pension plans. For instance, if 5 percent of the self-employed participate, the annual revenue loss would increase to an estimated $120 million. 12 2096 PAGENO="0945" SELF-EMPLOYED PENSION PLANS 13 The revenue loss from H.R. 10, especially for 1967, is completely inconsistent with the recent actions which have been taken in light of Vietnam and the economic situation. These include the postpone- ment of excise tax reductions and the adoption of graduated income tax withholding and the other provisions in the Tax Adjustment Act of 1966 which put the payment of individual and corporate taxes on a more current basis. In this regard, the President has stated: "Against a background calling for fiscal restraint, I cannot this year endorse any specific legislative measure, however meritorious, involving significant net tax reduction." Certainly the needs of the self-employed who would be benefited by H.R. 10 are not so pressing as to override the need for fiscal f~estraint. (b) Benefits would mainly go to high-paid doctors, dentists, and lawyers.-Most ($15 to $20 mfflion) of the 1967 revenue loss from the first amendment would represent an automatic tax reduction for the year 1966 for those self-employed already participating in pension plans since, without any change in their contributions, their tax deductions will double. Over 75 percent of this benefit-an automatic 1966 tax reduction of $11 to $15 million-will go to doctors, lawyers, and dentists, and, indeed, almost one-half of the total will go to indi- viduals in these professions with incomes over $25,000. Moreover, it is very likely that the liberalizations will only serve to attract more of the same class of high-income self-employed into pension plans. This is because, by its very nature, this type of pen- sion plan requires that the individual have savinga that he can afford to devote to a long-term nonliquid financial investment. Individuals in businesses that require capital, such as farmers and retailers, usually must reinvest much of their earnings in their businesses. In addition, many lower and middle income professional people will find that their social security tax payments are all they can afford to devote to their retirement; their remaining savings being necessary to meet other commitments, such as the education of their children, life insurance, and mortgage payments on their homes. The result will be that the additional revenue devoted to self-employed pension plans through this bill will accrue mainly to higher income professional people, a small minority of the total self-employed and an even smaller minority of all taxpayers. The fact that self-employed pension plans are attractive primarily to higher income people is clearly shown by the advance data for 1964. This data indicates that only 11.3 percent of self-employed pension deductions in 1964 were taken by individuals with adjusted gross incomes of $10,000 or less. On the other hand, almost 43 percent were taken by self-employed with adjusted gross incomes of between $25,000 and $50,000 and over 18 percent by individuals with incomes of $50,000 and over, making a total of 61 percent taken by those with incomes of $25,000 and over. Even aside from the current fiscal considerations, piecemeal legis- lation for this restricted group is highly undesirable. The matter of the tax treatment of self-employed pension plans should not be taken up except in the context of an overall reevaluation of the private retirement system where many basic issues are involved. (c) Removal of 30-percent rule permits contributions from investment income.-The special tax treatment for pensions has historically been limited to pension contributions out of wages and earnings from 71-297 0-67-pt. 2-60 2097 PAGENO="0946" 14 SELF-EMPLOYED PENSION PLANS personal services. It represents a method for deferring tax on part of an individual's earnings until after retirement. Where an individual invests both his time and capital in a business, the profits consist of both compensation for his services and a return on his investment. By permitting a self-employed individual to make pension contri- butions out of the entire net profits from his business, H.R. 10 in effect would allow him to defer tax on investment income. This is inconsistent with the basic concept of the pension provisions. If anything is to be done in this area, it should be to raise the minimum amount which may be treated as personal service earnings-perhaps from $2,500 to $6,600, the social security tax base for the self-employed. There is attached a memorandum which more fully discuss~s the amendments and the reasons for the Treasury's opposition to them. The Bureau of the Budget has advised the Treasury Department that there is no objection from the standpoint of the administration's program to the presentation of this report. Sincerely yours, STANLEY S. SURREY, Assistant Secretary. MAY 25, 1966. MEMORANDUM ON H.R. 10 H.R. 10,~ as ordered reported by the Ways and Means Committee, includes two liberalizing amendments to the tax provisions applicable to pension plans of the self-employed. These amendments are separately discussed below. I. REMOVAL OF 50-PERCENT DEDUCTION LIMITATION A. Description of amendment The first amendment would increase the amount which a self-employed individual may claim as a tax deduction with respect to his contributions to a qualified pension or profit- sharing plan. A self-employed individual who participates in a tax qualified pension or profit-sharing plan may, each year, contribute to the plan (on his own behalf) amounts up to 10 percent of his earned income or $2,500, whichever is the lesser. Under present law, only one-half of any such contribution is allowed as a tax deduction to the self- employed individual. This amendment would remove this "one-half" limitation, with the result that a self-employed individual would be allowed to deduct the full amount of his contribution within the above-described limits. In other words, under this amendment, a self-employed individual would be permitted a tax deduction for contributions up to 10 percent of his earned income or $2,500, whichever is the lesser, instead of 5 percent or $1,250, as under present law. The amendment would become applicable with respect to deductions for taxable years beginning after December 31, 1965. This revenue loss is entirely inconsistent with the recent actions which have been taken by both the Congress and the administration to meet the current fiscal and economic 2098 PAGENO="0947" SELF-EMPLOYED PENSION PLANS 15 situation. In this regard, Congress, on the recommendation of the administration, recently enacted the Tax Adjustment Act of 1966 which postponed certain excise tax reductions and instituted, a graduated income tax withholding system and other provisions to put the payment of individual and corporate taxes on a more current basis. A tax reduction for self-employed people-in the nature of larger tax de- ductions for their retirement savings-would seem clearly inappropriate in this context. It is important to note in this respect that, while the pur- pose of the amendment is to encourage increased participa- tion by the self-employed in retirement plans, most ($15 to $20 million) of the estimated 1967 revenue loss would be in the nature of an automatic tax reduction for those self- employed who are already participating in pension plans. This is because, without any change in their pension contri- butions, their tax deduction will automatically double. Ac- cording to the available data,' over 75 percent of the deduc- tions are now taken by professional doctors, lawyers, and dentists. Thus, this group would be the beneficiary of an immediate tax reduction of $11 to $15 million. Looking at individual cases, the amendment would result in an addi- tional $400 of tax savings in 1967 for a $25,000 a year married doctor with a pension plan; for a $50,000 a year doctor, the additional annual tax savings would be $625. B. Treasury Department position The Treasury Department is strongly opposed to this amendment for the following reasons: (1) Revenue loss inappropriate at this time.-It is estimated that this amendment would produce an $18 to $27 million revenue loss for fiscal year 1967 and a $30 to $50 million revenue loss for fiscal 1968. The lower end of the range for fiscal year 1967 assumes that 1 percent of the self-employed will participate while the upper end of the range assumes that 1.5 percent participate. In the case of the loss for fiscal year 1968, the lower end of the range assumes par- ticipation by 1.5 percent of the self-employed and the upper end of the range assumes participation by 3 percent of the self-employed. The annual revenue loss could increase substantially over the next few years if the liberalized tax benefits result in a higher percentage of the self-employed participating in pen- sion or profitsharing plans. If the participation rate rises to 5 percent, the annual loss would be $120 million; whereas, if 10 percent participate, the annual loss would jump to $260 mfflion. Finally, in his Economic Report, President Johnson stated: "Against a background calling for fiscal restraint I cannot this year endorse any specific legislative measure, however meri- torious, involving significant net tax reduction." Certainly, the needs of this high-income group are not so pressing as to override the need for fiscal restraint. 1 Data on Self-Employed Retirement Deduction for Taxable Year 1965, p.3. 2099 PAGENO="0948" 16 SELF-EMPLOYED PENSION PLANS (2) Benefits of amendment would accure primarily to high income professional people-The apparent purpose of the increased tax benefits under the amendment is to encourage broader participation by the self-employed in retirement programs. While the present provisions have not had the widespread attraction that was contemplated, the Treasury Department is of the opinion that increased tax deductions will not materially alter this situation. Rather, the basic frame- work of the self-employed pension provisions is such as to make them usable mainly by only a narrow class of high- income professional people with the result that the increased tax benefits will accrue primarily to this group. First, the existing provisions require that the self-employed place his savings in financial investments under what is intended to be a long-term, nonliquid retirement program. This immediately eliminates many self-employed individuals in businesses which require significant amounts of capital investment since they usually must reinvest their earnings to keep up with competition. For example, a farmer may have to reinvest all his earnings in his farm through buying land, buildings, and equipment. This, in turn, will give him an equity which he can lease or sell when he is ready to retire. This is one reason why it is so conspicuous in the data that the pension plan provisions appea.l to doctors, lawyers, and dentists and why there are so few retailers, wholesalers, and farmers covered. Because of this characteristic, removal of the deduction limitation will simply increase the inherent discrimination in these provisions rather than bring in new classes of the self-employed. Second, even among the professional group, pension plans of the type involved are, and will in all likelihood remain, attractive only to higher income people. For middle and lower income people, social security tax payments represent a significant financial outlay toward retirement. For example, a self-employed person with earnings of $6,600 must, in 1967 and 1968 pay 6.4 percent of his income toward social security and medicare. A $10,000 a year man must devote 4.2 percent of his income for this purpose. These percentages will rise to 7.1 and 4.7, respectively, in 1969. It is doubtful that many individuals at these income levels can afford to devote appreciably more to their retirement in the form of a long-term program. Moreover, at these income levels, total savings as a per- cent of income are much lower than they are for people with higher incomes. For example, according to computa- tions by the Survey Research Center, individuals at the $6,000 income level on the average devote only 8.8 percent of their income to savings while people with incomes of $15,000 and over save on the average of 23.8 percent of their income. Furthermore, much of these savings are, of course, not available for retirement plans of the type involved here. Instead, they must be used for other needs, such as insurance, mortgage payments, and college education of children. 2100 PAGENO="0949" SELF-EMPLOYED PENSION PLANS 17 Finally, as is generally the case, tax deductions for pension savings are per se more valuable to higher income people by virtue of their higher marginal tax brackets. Therefore, despite liberalized tax deductions, self-em-- ployed pension plans will undoubtedly remain a vehicle primarily for the retirement savings of only the high-paid professional class. This is a very narrow group and it seems highly inappropriate to devote substantial Federal tax revenues to it, especially at this time. Moreover, there are much broader issues that should be considered in the pension field as a whole. Instead of tak- ing piecemeal action at this time for a very limited group, the Treasury Department believes that any changes in the present self-employed pension provisions would best be considered in the context of congressional consideration of the overall pension recommendations outlined in the report of the President's Committee on Corporate Pension and Other Private Retirement and Welfare Programs. (3) Self-employed not comparable to corporate employees.- Supporters of the amendment contend that a professional who works for a corporation now has an advantage over the self-- employed professional in that, when the professional works for a corporation, the pension plan contributions made for him are entirely excludable from his income, whereas the equivalent pension provision by the self-employed profes- sional is only 50 percent deductible. This is given as a rationale for the removal of this 50-percent limitation. This comparison is not essentially valid. More often than not, the contribution for the corporate employee is not vested and may not become vested unless he remains with the com- pany until retirement. Thus, he may never get the pension or he may get the pension only at the cost of giving up highly attractive opportunities to change employment. On the other hand, when the self-employed individual makes a pension contribution he is investing his own money and has vested rights to it. He can invest it in any way that he wants. He can select the pension plan that he wants. For the employed professional, he can only take the pension plan that is already available whether or not it fits his needs. In the other words, for the self-employed, a pension plan is in many respects comparable to individual retirement sav- ings or employee contributions to a pension plan, neither of which are tax deductible. The present 50-percent deduc- tion rule treats a self-employed as both an employer and employee with respect to his pension contributions. It is comparable to the ratio in which the employer and employee contribute under the civil service retirement plan and the social security system. When viewed in this context, it is a rational rule. Removal of the 50-percent limitation would be inconsistent with this and cannot be justified on the grounds of equality with corporate employees. 2101 PAGENO="0950" 18 SELF-EMPLOYED PENSION PLANS Ii. REMOVAL OF LIMITATION ON COMPUTING EARNED INCOME A. Description of amendment This amendment would increase the amount which self- employed individuals in businesses involving both capital and services may contribute on their own behalf to qualified pension or profit-sharing plans. The 10-percent limitation on the amount a self-employed individual may contribute to a qualified pension or profit-sharing plan is applied against his "earned income." Section 401(c)(2) of the Internal Revenue Code presently defines the "earned income" of a self-employed individual for pension plan purposes to mean his net earnings from self-employment (as defined in section 1402(a)) to the extent that tuch net earnings constitute earned income (as defined in section 911(b)). The amend- ment would revise this definition of "earned income" to mean a self-employed individual's net earnings from self- employment without regard to what part of such net earnings constitutes earned income under section 911(b). The amendment would apply to taxable years beginning after December 31, 1965. The amendment would primarily concern self-employed individuals who are engaged in a trade or business in which both personal services and capital are material income-pro- ducing factors. At present, section 911(b) provides that such a self-employed individual may not treat more than 30 percent of the net profits from his trade or business as "earned income." Under a special provision, the 30-percent limitation does not operate, however, to reduce a self- employed individual's earned income below $2,500 for pen- sion plan purposes. The amendment would have the effect of removing this 30-percent limitation with the result that a self-employed individual could treat the entire net profits from his trade or business as earned income for purposes of computing the amount he may contribute to a qualified pension or profit-sharing plan. B. Treasury position The Treasury Department is opposed to the amendment in this form. Where both capital and personal services are material income-producing factors in a trade or business, it logically follows that a portion of the net profits from that trade or business represents a return on the individual's investment in the business. Historically, the primary purpose for the special tax provisions applying to pension and profit-sharing plans has been to permit individuals to defer tax on part of their wages or personal service income until after retirement. It would be inconsistent with this to permit self-employed individuals to contribute and take tax deductions with re- spect to amounts which represent a return on their invest- ment rather than compensation for personal services. More- over, such a provision would give self-employed people a decided tax advantage over corporate employees who cannot take their investment income into account under pension 2102 PAGENO="0951" SELF-EMPLOYED PENSION PLANS 19 plans. The amendment would not, therefore, be a desirable extension of the provisions applying to pension and profit- sharing plans of self-employed people. Moreover, the amendment would involve an estimated revenue loss of $2 to $3 million for fiscal year 1967 and $5 to $10 million for fiscal 1968. As indicated above, such a loss in Federal revenues is not appropriate at this time. It is our understanding that the primary purpose of this amendment is to permit self-employed individuals in small businesses to make significant contributions to pension plans. This objective could more appropriately be achieved by raising the present $2,500 minimum amount which may be treated as earned income. A reasonable figure might be $6,600, the present self-employment tax base for social security purposes. It is estimated that an amendment of this type would reduce the 1967 revenue loss to less than $0.3 million and the 1968 loss to less than $1 mfflion. OFFICE OF THE SECRETARY OF THE TREASURY. OFFICE OF TAX LEGISLATIVE COUNSEL. (Signed) THOMAS B. CURTIS. 2103 PAGENO="0952" [June 6, 1966) [P. 11672) CONTRIBUTIONS BY SELF-EMPLOY- ED INDIVIDUALS TO PENSION PLANS, ETC. Mr. KEOGH. Mr. Speaker, I move to suspend the rules and pass the bill (H.R. 10) to amend the Internal Revenue Code of 1954 to permit pension and profit- sharing plans to provide contributions or benefits on a nondiscriminatory basis for certain self-employed individuals without special limitations on the amount of contributions, with the committee amendment peinted In the bill. The Clerk read as follows: HR. 10 Be it enacted by the Senate and House of Representatives of the United States of Amer- ica in Congress assembled, That (a) para- graph (10) of section 404(a) of the Internal Revenue Code of 1954 (relating to special limitation on amount allowed as deduction for self-employed individuals for contribü- tioná to certain pension, etc., plans) Is repealed. (b) (1) Each of the following provisions of section 401 of such Code is amended by striking out "(determined without regard to section 404(a) (10))" each place it appears: (A) Subsection (a) (10) (A) (Ii). [P. 11673) (B) Subparagraphs (A) and (B) of sub- section (d)(5). (C) Subparagraph (A) of subsection (d) (6). (D) Subparagraphs (A) and (B) (i) of sub- section (e)(1). (B) Subparagrapha (B) and (C) and the last sentence of subsection (e) (3). (2) Subparagraph (A) of section 404(e) (2) of such Code as amended by striking out "(determined without regard to subsection (a) (10))". (3) Paragraph (1) and subparagraph (B) of paragraph (2) of section 404(e) of such Code are each amended by striking out "(de- termined without regard to paragraph (10) thereof) Sm. 2. Section 401(c) (2) of the Internal Revenue Code of 1954 (relating to definition of earned income for certain pension and profit-sharing plans) is amended to read as follows: "(2) (EARNED necoMn-The term `earned income' means the net earnings from self- employment (as defined in section 1402(a)), but such net earnings shall be determined- "(A) only with respect to a trade or busi- ness in which personal services of the tax- payer are a material income-producing factor, "(B) without regard to paragraphs (4) and (5) of section 1402(c). "(C) in the case of any individual who is treated as an employee under sections 3121 (d)(3) (A), (C), or (D), withoutregard to paragraph (2) of section 1402(c), and "(D) without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items. For purposes of this paragraph, section 1402, as in effect for a taxable year ending on De- cember 31, 1962, shall be treated as having been in effect for all taxable years ending be- fore such date." Szc. 3. The amendments made by this Act shall apply with respect to taxable years beginning after December 31, 1965. The SPEAKER pro tempore (Mr. BoGas). Is a second demanded? Mr. BYRNES of Wisconsin. Mr. Speaker, I demand a second. The SPEAKER pro tempore. With- out objection, a second will be considered as ordered. There was no objection. Mr. KEOGH. Mr. Speaker, I yield myself such time as I may consume. (Mr. KEOGH asked and was given permission to revise and extend his remarks.) GENERAL LEAVE TO EXTEND Mr. KEOGH. Mr. Speaker, I ask unanimous consent that all Members may have 5 legIslative days within which to extend their remarks on this bill. The SPEAKER pro tempore. Is there objection to the request of the gentle- man from New York. There was no objection. Mr. KEOGH. Mr. Speaker, the 6th day of the 6th month in the 66th year Is a rather appropriate day that, by your grace, the House considers the amend- ments to H.R. 10, for it will have been exactly 15 years ago tomorrow, from June 7 of 1951, when those who sought to achieve a degree of equity and justice for the self-employed professional and businessmen of the country caused to be Introduced the first form of the bifi which eventually became the Self- employed Individual's Tax Retirement Act of 1962. By your grace, Mr. Speaker, yes, it is today. I acknowledge dutifully my apprecia- tion to you for having scheduled this Im- portant bill today. Included in my ex- pressions of appreciation are the ma- jority leader; the majority whip, who Is a cosponsor of the bill; and, last but not least, the great and able chairman of the Committee on Ways and Means, without whose cooperation we would not here be marching forward taking an- other step in the direction of making the practice of one's private profession or the engaging in one's own business somethjng that I&truly American, some- thing that Is more constructive, and something that provides a greater in- centive for the maintenance of those 10 million people who with their approxi- mately 10 million employees constitute as they do the bulk of the great middle class of this country, the very existence of which distinguishes this great coun- try from so many others In the Western World and all of those in the Eastern World. The pending bill Is H.R. 10 amended, Mr. Speaker, but It might very well be any one of the following bills intro- duced by distinguished Members of this 2104 PAGENO="0953" body on both sides of the aisle. Those bills are: Bills introduced in the House of Representa- tives similar to the Keogh-Watts-Byrnes bill, H.R. 10 KEOGH (D.. New York) HR. 10. BYRNES (R., Wisconsin) H.R. 7588. WATTS (D., Kentucky) H.R. 8023. LOVE (D., Ohio) HR. 8247. C~xEY (D., New York) HR. 9162. FOGARTY (D., Rhode Island) HR. 9453. BROYHILL (R., Virginia) HR. 10033. LIPSCOMB (R., California) HR. 10070. HORTON (R., New York) HR. .10643. CRAMER (H., Florida) HR. 10777. Porr (R., Virginia) HIi. 11173. ABBITT (D., Virginia) HR. 11242. Burrs (R., Ohio) HJt. 11299. JENNINGS (D., Virginia) KR. 11326. ROSTENKOWSKI (D., IllinoIs) HR. 11337. STEEl) (D., Oklahoma) H.R. 11694. WYATT (R., Oregon).~ HR. 11786. RoGERS (D.. Colorado) HR. 12795. DERWINSHI (H.. Illinois) H.R. 12926. SCHNEESELI (R., Pennsylvania) -- H.K 12944. Msr (R.. Washington) HR. 14084. BOGGS (D., Louisiana) HR. 14452. Vs.unc (D., Ohio) HR. 14475. BtnucE (D., Massachusetts)~.. HR. 14670. KARSTEN (D., Missouri) ~H.R. 14686. FULTON (D., Tennessee) HR. 14729. HALL (R.. Missouri) HR. 15168. KUPFERMAN (H., New York) HR. 15246. This bill oomes to you with the active support of a long, distinguished list of national small business, professional and farm. associations. I do not intend to list them for fear of omitting and offend- ing the many who might unintention- ally not be included. During the past 15 years I have been privileged to have as cosponsors from the other side of the aisle, several of the finest gentlemen to ever grace the House of Representatives. I regret the absence today from our body of the late distin- guished members, Mr. Reed of New York, Mr. Jenkins of Ohio, and Mr. Simpson of Pennsylvania, all of whom contrib- uted immeasurably as pioneers in the sponsorship of this legislation. In the 87th Congre~, I was joined by the very able Congre~sman. front California [Mr. UTT]. The ranking minority member of our Committee on Ways and Means, the gen- tleman from Wisconsin [Mr. BYRNES], and the energetic committee member, the gentleman from Kentucky [Mr. WATTS], have added great prestige to this legislation by their sponsorship. I would be remiss in my duty if I did not at this time also pay tribute to the in- valuable assistance given me by the highly competent staff of the Committee on Ways and Means-Chief Counsel, Leo Irwin, Assistant Chief Counsel, John M. Martin, Jr. Mr. Sneaker, H.R. 10 is a familiar des- ignation to many in this chamber today who commenced with me over 15 years ago in an endeavor to do a modicum of justice to the self-employed people of this country with respect to their estab- lishment. of voluntary retirement plans. It will be recalled that in the course of that protracted and arduous effort, the House on three occasions passed legisla- tion to make available tax deferral bene- fits to self-employed individuals on a basis comparable to that afforded em- ployees. Our perserverance, persistence, and patience were finally rewarded, Mr. Speaker, when the other body~ ap- proved-with extensive amendments, however-H.R. 10 of the 87th Congress, the Self-Employed Individuals Tax Re- tirement Act of 1962." Members of the House will recall that the Senate version of that measure was far more restrictive than the bill as passed by the House. In the conference that followed the Senate passage, the House conferees, of which I was privi- leged to be a member, were only partially successful in removing some of the more controversial and confining Senate amendments. The measure that was finally approved admittedly fell short of measuring up to the relief that would have been provided in the House bill. It was the price that had to be paid, Mr. Speaker, to Initially insert in the tax statutes recognition and adoption of a policy that would seek to afford self-em- ployed citizens access to retirement plans on a basis similar to that given employees whose employers had established for their benefit pension, profit-sharing, or stock bonus plans. Many pf us in this Chamber were con- vinced at the time of the final enact- ment of H.R. 10 of the 87th Congress- and so stated on the floor of the House- that the amendments of the other body were unnecessarily restrictive and might effectively thwart the objectives of that legislation. Experience over the past 4 years has reinforced, substantiated and vindicated our convictions in this regard. Today we bring to the. floor of the House a bill, overwhelmingly approved by the Committee on Ways and Means, to remove two of these limitations from the law. Mr. Speaker, the bill, HR. 10, the bill before the House, as amended and re- ported by the Committee on Ways and Means, would repeal two limitations on the deduction from gross income that a [P. 11674] self-employed individual may take with respect to contributions on his own be- half to a retirement plan. The first of these limitations to which I refer is the provision of present law that limits the actual tax deductioti to 50 percent of the self-employed persons' contributions to his retirement plan. It will be re- called that a self-employed individual may contribute up to 10 percent of his earned income or $2,500, whichever is the lesser, to his retirement plan. His de- duction is limited to one-half of his con- tribution, however, and thus the maxi- 2105 PAGENO="0954" mum deduction allowed to a self-em- ployed person with respect to his own contribution is $1,250 under present law. H.R. 10 would remove this 50-percent limitation, and the deduction In such a case would under the bill simply be 10 percent of earned income or $2,500, whichever is the lesser. The second limitation that would be removed by the pending bill is that which restricts the amount of income that Is considered as earned income in situa- tions where both personal services and capital are material income producing factors In a business. Presently, only ao percent of net profits In such cases may be considered earned Income In de- termining the allowable size of the an- nual contribution, except that in thecase of substantially full-time employment, the amount so treated is not to be less than $2,500. H.R. 10 would remove this aO-percent limitation and would allow a self-employed Individual to Include In his earned income all of his net profits so long as his personal services are a material Income producing factor in his business. Mr. Speaker, the Self-Employed Indi- viduals Tax Retirement Act of 1962 was enacted in order to give self-employed individuals an opportunity to defer tax on a portion of their Income set aside for retirement purposes in much the same manner as they and others could already do for their employees under the provisipns of the then existing law. It was Intended to encourage the self-em- ployed to make adequate provision for their old age. That these objectives have been foiled and frustrated by certain limitations in that act, Including the two restrictive provisions that would be removed by the pending bill, Is beyond peradventure or question. A report of the Department of the Treasury with respect to the use of the self-employed retirement deduc-. tion In the taxable year 1964 shows that only about one-half of 1 percent of self- employed individuals took advantage of this deduction In that year. Moreover, when the 1962 legislation was originally enacted the Department estimated that the cost of the act in the first- full year of operation would be $115 million, whereas the s~ctual cost as late as 1964 turned out to be only $9 million. The Committee on Ways and Means, after careful study of the operation of this law and the statistical information furnished by the Department of the Treasury relative to its use, has concluded thAt there Is no justification for the two limitations which I have discussed and which would be removed by the pending bill. Furthermore the committee is con- vinced that these restrictive provisions have been major contributors to the dis- couragement of self-employed Individ- uals, particularly small proprietors and farmers, in claiming the tax benefits that were intended In the enactment of the 1962 legislation. I firmly believe that we have traveled too far down the road of the obviously sound, basic philosophical concept that the workers of this country should be able adequately to provide for their superannuation to turn back. No one can take exception to the oft-repeated statement that pension plans promote the general welfare not only by helping to meet the individual's material needs in old age, but also by making the Na- tion's elderly a positive force in the economy, rather than a negative force or - burden upon it. Millions of words have been said and written about this legislation both in and outside the Congress. One of the most articulate, yet briefest paragraphs on this subject appeared in the 1965.hear- ings of the Subcommittee on Employ- ment and Retirement incomes to the spe- cial Senate Committee on Aging: A private pension plan is attractive to an employee because it assures him of greater independence in his retirement years. He is assured of greater freedom of choice as to how he lives and spends his money. Pen- sion plans help employers to maintain an efficient work force with good morale and help to assure an effective market for goods and services among the retired population. Private pension plans advance the govern- ment's objective of a growing, yet stable pri- vate enterprise type of economy for the bene- fit of all citizens. In 1942, the 77th Congress enacted an amendment that gave use to the tre- mendous growth of qualified private pension plans apprdved by the Treasury Department. Prior to this step, there were approximately 4 million covered; today the figure is 25 millIon and as- cording to a recent Federal report the total by 1980 should be in the neighbor- hood of 42 million covered employees. We provided the Impetus in 1942 and the American business community respond- ed by approximately 1 million new faces annually. I was privileged to cast an affirmative vote on that momentous day In 1942. June 6, 1966, is an eventful day for the self-employed and their employees, be- cause today this distinguished body will extend to them aprivilege which is pres- ently enjoyed by over 25 million cor- porate employees. Recent Treasury statistics indicated that approximately 39,000 self-employed, or less than~one-haif of 1 percent, were covered in 1964. Today we have an op- portunity similar to the one we experi- enced in 1942; only this time we are go- ing to provide the impetus for the self- employed. Granted It is 24 years later and the beneficiaries of the future will be the sons and daughters of those who were unintentionally excluded in 1942. So, Mr. Speaker, joined as I am today by a distinguished roster of men and women in this body on both side of the 2106 PAGENO="0955" aisle, I say that these amendments are amendments that we contemplated would normally and naturally be neces- sary by reason of the restrirtive vote that the basic act took in 1962. It is doing no violence to the fiscal policies of the United States. It is not doing any more than just achieving a slight degree of equity for those who work proudly for themselves. The pending measure is just, mcii- torious, anti-inflationary, and a savings incentive. It removes an obvious in.. equity' and should receive the over- whelming support of this House. Mr. HORTON. Mr. Speaker, will the gentleman yield? Mr. KEOGH. I will be delighted to yield to the distinguished gentleman from New York. Mr. HORTON. Mr. Speaker, I want to commend the gentleman for his efforts In this Congress to get these amendments to the present act. I also want to commend him and the other members of the committee for institut- ing this program. I can tell him from the personal knowledge I have of my dis- trict and the many people I have talked to who have benefited from this present bill that they are indeed grateful for his personal efforts and the efforts of the others on this committee in order to make this program possible. Through- out my journeys in the 36th District of New York I have found there has been a real need for amendments to this act. I think the amendments proposed here today are good ones and that the gentle- man from New York [Mr. KEOGH] should be commended in the twilight of his career. in the House for providing these benefits for the self-employed. Mr. KEOGH. Mr. Speaker, if I may delay my taking my seat for just a moment, I appreciate my friend's obvi- ously able and astute evaluation of the commendation that I deserve, but I hasten to tell him that the form of the pending bill is one that combines the bills of the very able and distinguished minority member of the Committee on Ways and Means, the gentleman from Wisconsin [Mr. BYRNESI, and another bill by Representative WATTS of the Commonwealth of Kentucky. It is to them that the major portion of the com- mendation should go today. Without their able, active, and intelligent assist- ance in the committee, we would not have reached this point in the parlia- mentary process. Mr. HORTON. Mr. Speaker, will the gentleman yield further? Mr. KEOGH. I have no choice but to submit to yielding to the gentleman from New York. Mr. HORTON. Mr. Speaker, I cer- tainly would want to include in my re- marks the tribute that Is needed to be paid to the gentleman from Wisconsin [Mr. BYRNES] and all of those others who have worked on this bill. However, I want to emphasize again that I think the gentleman's diligence and willing- ness to spearhead these efforts has meant a great deal, first of all, to getting the program started and also toward making- these very vital amendments to the program. Again I want to say also, as one who sponsored legislation In this field for [P. 11675J amendments to this act, I am grateful to the gentleman and the others on the committee who have made it possible for us today to vote on this legislation. Mr. KEOGH. Mr. Speaker, I refuse further to resist the gentleman's insist- ence and I appreciate his kind remarks. (Mr. HORTON asked and was given permission to revise and extend his re- marks and include extraneous matter.) Mr. HORTON. Mr. Speaker, it is with a great sense of accomplishment that I participate today in approving H.R. 10, to eliminate the discriminatory effect of Internal Revenue laws on the retire- ment pension funds of self-employed persons. In 1962, Congress acted to allow pen- sion-fund deductions to self-employed Individuals. But the limitations imposed In the 1962 act were so stringent, that It Is estimated that less than one-half of 1 percent of self-employed individuals In the Nation have utilized the new law. Today, we are acting, in line with our original Intent, to encourage participa- tion in such plans by self-employed per- sons by removing some of these unat- tractive ~Imitations and restrictions. As the sponsor of H.R. 10643, a bill similar to that before us today, I am particu- larly pleased to remove the 50 percent deduction limitation so that 100 percent of funds contributed will be deductible from taxable gross income. Throughout my years in the House of Representatives, few proposals have won the wide-spread constituent support that has been given H.R. 10. WIth this sup- port behind me, coming from nearly every vocation from farming to law and medicine, I join with my colleagues In giving my unqualified approval to this measure. With the permission of my colleagues, I would like to insert the following sam- pling of correspondence on this measure into the CONGRESSIONAL RECORD: Hon. FRANK HORTON, Howse of Representatives, Rayburn Building, Washington, D.C. DEAR CONGRESSMAN: Our association in- itially sponsored and has continued to sup- port the principle of H.R~ 10. Understand this coming up for vote Mon- day, June 6. Sincerely urge your presence and support of bill on Monday. JOHN E. BERRY, Executive Director, New York State Bar Association. 2107 PAGENO="0956" AMERICAN BAR ASSOCIATION, Washington, D.C., October 29, 1965. Re HR. 10643. Congressman FRANK HORTON, Hon-se Office Building, Washington, D.C. DEAR Mit. HORTON: You may be interested In the enclosed copy of the ABA Washing- ton Letter which Is sent to several thousand bar leaders throughout the country. I call your attention particularly to page two regarding your legislation to Improve the opportunity for self-employed individuals to participate in retirement plans. The improvements which are being sought are of utmost concern to lawyers and other professional individuals as well as to small businessmen and farmers. Your active lead- ership on behalf of this legislation is greatly appreciated. Sincerely. DONALD E. CHANNELL. Enclosure. cc: New York State Bar Association, As- sociation of the Bar of the City of New York. NEW YoRK FARM BUREAU, Ithaca, N.Y., June 2, 1966. Hon. FRANK J. HORTON, House Office Building, Washington, D.C. DEAR Mit. HORTON: Knowing that you have introduced a bill relative to retirement pro- grams for self-employed persons which is similar to HR. 10, you will be interested in the enclosed copy of letter which is going to the entire New York State delegation. Yours sincerely, NEW YoRK FARM BUREAU, C. K. BuLLOcK, Director, Commodity Department. "NEW YORK FARM BUREAU. "Ithaca, N.Y., June 2, 1966. "Re: HR. 10. "To: New York Congressmen. "GENTLEMEN: It is our understanding that the above bill is scheduled for consideration on the floor of the House early next week. "The Self-Employed Individuals Tax Re- tirement Act of 1962 was aimed at correcting discrimination that had previously existed with regard to types of self-employed. How- ever, it has failed to correct inequities exist- ing with farmer `owner-employees' The earnings of such farmers are a joint product of personal services and invested capital, and under the 1962 Act earned income is con- sidered to be not more than the larger of $2,500 or 30% of the taxpayers' earnings from self-employment. "The 1962 Act also limits tax deferral to 50% of the contributions. This results in a serious inequity with respect to self-employed retirement programs with a consequence that very few retirement programs have been established. "We urge your support of H.R. 10 when it comes up for consideration on the House Floor. We believe It would correct major inequities in existing law and would result in self-employed farmers being able to estab- lish their own retirement system, which I am sure you will agree is highly desirable. "Yours sincerely, "NEW YORK FARM BUREAU. "C. K. BULLOCK, "Director, Commodity Department." MEDICAL Socxrrr OF THE COUNTY OF MONROE, INC., Rochester, N.Y., January 17, 1966, Hon. FRANK J. HORTON, New House Office Building, Washington, D.C. DEAR FRANK: Just a brief note on behalf of the Legislative Committee of the Medical So- ciety of the County of Monroe thanking you for your interest and your proposal to amend the Keogh Bill. We are, of course, heartily in, support of any endeavor which will place the self-em- ployed in a favorable tax position comparable to that enjoyed by corporate and institu- tional employees. If you have any sugges- tions by which we may be of assistance in obtaining this improved legislation, we would be most happy to cooperate. Sincerely yours, MEDICAL SOcIETY OF THE COUNTY OF MONROE, INC., DONALD M. IRISH, Executive Director. ROCHESTER, N.Y., June 1, 1966. Hon. FRANK J. HORTON, House of Representatives, Capitol Building, Washington, D.C. DEAR Sm: This is written to urge your ac- tive support for HR. 10 as recently reported by the House Ways and Means Committee. This bill would permit self-employed individ- uals a full deduction for amounts con- tributed to retirement plans established by them. Present law permits deduction for only one-half of contributions and is thus in- equitable to self-employed individuals. Proposed HR. 10 would remove this inequity and would encourage self-employed individ- uals to provide for their own retirement. Respectfully, D. ROBERT NICHOLSON. NEw Yoax, N.Y., May 27, 1966. FRANK J. HORTON, Senate Office Building, Washington, D.C.: On behalf of our State society membership of 15,000 certified public accountants in New York State respectfully urge your support of H.R. 10 as reported by House Ways and Means Committee. This amended version of HR. 10 calls for full deduction of allowable money contributed by self-employed Individuals. This bill is a further step toward establish- ing tax equity for hundreds of thousands of professional men and women and self-em- ployed individuals. It is squarely in the pub- lic interest and we urge your full support. WILLIAM P. STOWE, President, New York State Society of Certified Public Accountants. ROCHESTER, N.Y., May 31, 1966. Hon. Congressman FRANK HORTON, House of Representatives, Capitol Building, Washington, D.C. DEAR FRANK: This is written to urge your active support for HR. 10 as recently re- ported by the House Ways and Means Com- mittee. This bill would permit sell-employed 2108 PAGENO="0957" Individuals a full deduction for amounts contributed to retirement plans established by them. Present law permits deduction for only one-half of contributions and is thus in- equitable to self-employed individuals. Pro- posed HR. 10 would remove this Inequity and would encourage self-employed individuals to provide for their own retirement. Sincerely. Wn.LI&M D. GASSES. Mr. Speaker, at this point, I want to publicly express my gratitude to one of the leading attorneys in Rochester, N.Y., who worked tirelessly to bring the facts on H.R. 10 to the attention of his col- leagues, and to seek removal of the re- strictions I have spoken of. Scott Stew- art, Esq., of Nixon Hargrave, Devons & Doyle, deserves the thanks of all self- employed persons who will benefit from HR. 10. Mr. KEOGH. Mr. Speaker, I now yield to the Representative of the Common- wealth of Kentucky [Mr. WATr5]. Mr. WATrS. Mr. Speaker, I certainly rise in support of H.R. 10. I, too, would like to add my commendations to the gentleman from New York. This is a matter that has been very close to his heart for a number of years. He is to [P. 11676] be congratulated not only by the House but by the whole country for taking the attitude he has In trying to provide some type of retirement for folks who have been left out heretofore. I had a small portion of this bill which dealt with the inequity imposed on small business peo- ple and farmers. (Mr. WATI'S asked and was given permission to revise and extend his re- marks.) Mr. WATTS. Mr. Speaker, I believe its passage is ~ matter of urgent necessity if we are to remove basic injustices in our tax Jaws. An inequity existed as to the tax treat- ment accorded self-employed persons who desired to establish private retire- ment plans. Employer contributions to retirement plans have been tax deduc- tible for some time and nontaxable to the employees until retirement benefits are actually received. The law discriminated against self-employed persons by requir- ing them to pay taxes on income they set aside for retirement. Farmers, ranchers, and other small businessmen make up a large portion of this group. Congress recognized that discrimina- tion did exist and enacted the Self-Em- ployed Individuals Tax Retirement Act of 1962. This measure has tended to re- duce the discrimination, but it has fallen demonstrably short of achieving its ob- jective, especially with respect to farm- ers and other small businessmen. Under the Self-Employed Individuals Tax Retirement Act of 1962, most farm- ers are classified as "owner-employees." Owner employees are authorized to con- tribute up to 10 percent of their earned Income but not more than $2,500 per year, to a retirement plan and to claim a Federal tax deferral for 50 percent of such contributions. However, in the case of farmers, the benefits of this act are drastically limited by a restrictive definition of "earned in- come." If the earnings of an "owner- employee" are a joint product of personal services and invested capital, as is the case with most farmers, not more than the larger $2,500 or 30 percent of the taxpayer's earnings from self-employ- ment may be treated as "earned in- come." Limiting the deferral to 50 percent of the contributions has retained a serious Inequity with respect to self-employed retirement programs. Consequently, very few retirement programs have been established. The restriction that earned income must be arbitrarily computed at 30 percent of net earnings has made the program meaningless to farmers and other self-employed who must invest capital as well as labor in their enter- prises. I do not believe that7 farmers should be penalized because they must invest capital as well as labor into their f arm- ing operations. That is why I Introduced HR. 8023 during the first session of this Congress. The Ways and Means Committee has given careful consideration to this mat- ter, and I am pleased that the decision was made to Include the provisions which I Introduced in H.R. 10, as reported by the committee. The effect of these pro- visions quite simply is to permit-not force-farmers and others who must in- vest capital in their enterprises to par- ticipate in self-help retirement programs on the same basis as other self-employed. This law does not provide a subsidy; it does not provide tax abatement; it simply permits all self-employed to con- tribute 10 percent of their net earnings to a qualified retirement program and defer tax payments until the benefits of such a program are received. At last, we will be giving the self-employed the same opportunity as the employee of a Corporation. Mr. Speaker, some misinformed peo- ple have commented that the Self- Employed Individuals Tax Retirement Act has operated for the benefit of only those with very large incomes. The fact of the matter is that, because of the restrictive provisions In the act, the pro- gram has been virtually inaccessible to the average self-employed. It is by re- moving these arbitrary and unrealistic restrictions that we open the door of op- portunity to the individual with an average income so that he, too, can pre- Pare for his retirement years. H.R. 10, as reported by this committee, is a bill designed to help farmers and 2109 PAGENO="0958" other small businessmen; or more ac- curately-it is a bill to permit them to help themselves. I believe its passage will be a matter of pride for every Member of this Congress. Of special interest to' the House is the recommendation of the Subcommittee on Employment and Retirement Income to the Special Subeommitte on Aging of the U.S. Senate made just last June: Recommendation No. 3. The subcommit- tee recommends that the Internal Revenue Code be amended to eliminate or liberalize the provision specifying that where both capital and personal services are material income-producing factors in a trade or business, not more than 30 percent of the self-employed taxpayer's net income from the trade or business may qualify as "earned income" (Internal Revenue Code, sec- 401(c) (2) (B)). Where this provision is applicable, the self-employed individual's net earnings must be at least $83,333.33 for the year if he is to eaake the maximum pension contribution of $2,500 (30 percent of $83,333.33) is $25,000; 10 percent of $25,000 is $2,500). One of the largest occupational groups which are severely handicapped by this provision In taking advantage of the Smathers-Keogh Act are farmers. Testimony of the American Farm Bureau Federation showed how un- reasonable and inflexible the arbitrary 30-percent provision is with reference to American farms, on many if not most of which the percent of net income attributable to operator labor Is considerably over 30 percent. The subcommittee feels that this arbitrary concept' should be eliminated or that, at the very least, the inflexible percent- age should be raised to a more reasonable figure than 30 percent. Incidentally, making it po~sible for more farmers to obtain self-employment pension coverage would assist in solving the Nation's farm problems and in providing better op- portunities for younger farmers In a letter reproduced in the hearings record, Dr. John A. Schnittker, who was then Director of Agri- cultural Economics of the Department of Agriculture (now Under Secretary of Agri- culture), said: "the fact that many continue to farm past the age of 65 Indicates that more attractive plans are needed. Pensiçn plans based on voluntary contributions of farmers have promise. However, they probably could not be made sufficiently attractive to have much impact unless present tax laws were changed. Only small numbers take advan- tage of the present tax exemptions permitted for pension plans of the self-employed. If at- tractive to farmers, this type of plan could make a contribution to releasing resources to other farmers because there would likely be greatest participation among those farmers who have relatively high sales and who con- trol much land * * a program designed to be attractive to older farmers on larger farms would allow an impressive fraction of farm resources to become available to younger op- erators, including a small number of `new' farm operators. "Your committee might be interested in re- viewing the experience of the Netherlands, which relies on programs to induce early re- tirement of farmers as a major Instrument of achieving needed structural adjustments in the agriculture of the country." Further along this line, the American Farm Bureau Federation said in its testimony: "The technological revolution has combined with the initiative and accomplishments of American farmers to bring about the most efficient agriculture in the world, In order to cope with what many consider an over- expanding plant, numerous proposals have been and are being made for land retirement programs. While such programs can be help- ful, they require considerable Federal ex- penditures and deal with only one factor of agricultural production. As fewer and fewer farmers are capable of `producing a greater and greater amount of food and fiber, it seems obvious that we must make allow- ance for human retirement as well as land retirement," Needless to say, this improvement would also extend pension coverage in other oc- cupational groups in which both capital and personal services are material income-pro- ducing factors. The purposes of this recommendation would be accomplished by enacting either 8. 1939 (Talmadge) or HR. 8023 (Watts). Mr. KEOGH. Mr. Speaker, the gen- tleman from Kentucky had much more than a small portion of the pending bill. He has furnished a great deal of leader- ship in bringing us to the point on the road at which we have arrived. Now, Mr. Speaker, I hope I can reserve the balance of my time. Mr. BYRNES of Wisconsin. Mr. Speaker, I yield myself 5 minutes. Mr. Speaker, this bill merely car- ries out the basic intention of the House of Representatives when back in 1961 we passed HR. 10 to set up this system so that the self-employed would have an opportunity to provide for their own re- tirement and that of their employees on a basis somewhat analogous to the pen- sion plans that corporations could set up for their officers and employees. As originally enacted by the House, I think that purpose could more nearly have been accomplished than Is the situation to- day under the law as it was amended by the Senate. As a result of action in the other body there was adopted-and the conferees accepted it as a part of a com- promise-an amendment which not only adopted the $2,500 maximum amount that could be contributed by the em- ployer on his own behalf, but limited the deduction to one-half of the amount contributed. That Is the principal limitation which we seek to eliminate now by the passage of this legislation, because that amend.- [P. 11677] ment, adopted. In the other body and accepted by the conference, really left very little incentive in the bifi. Mr. Speaker, I pointed this fact out at the time the conference report came to the House, and subsequent events have confirmed this conclusion. Since that time there have been a number of plans developed. Some 40,000 self-employed employers have established plans but, in the. words of the committee report, tins has been a great disappointment. You will find that it Is only those with a high 2110 PAGENO="0959" income-and one or two employees-that have adopted these plans. The Individ- ual with a small business finds this limitation particularly onerous. Mr. Speaker, the bin which we are con- sidering today seeks to narrow the gap between what Is available to corpora- tions In making provisions for their of- ficers and employees and what Is avail- able to the self-employed In providing for the retirement of himself and his employees. Mr. Speaker, the bin would still retain the maximum limitation of $2,500 on the amount which the self-employed can contribute on his own behalf, a limita- tion which doea.not apply to corporate contributions on behalf of Its officers. However, the bin would permit the se.lf- employed to deduct the full amount of that contribution, just as he deducts the full amount of the contribution on be- half of his other employees. Mr. Speaker, in addition to removing the 50-percent limitation upon the amount the self-employed can deduct, the bin also amends the definition of "self-employed income," in order to con- form to the definition used in the social security law. Under existing law, where capital, as well as personal services, is a material income-producing factor, earned Income Is limited to 30 percent of the net profits of the business. This means that in addition to all other lim- itations, only 30 percent of the profits of such an unincorporated business can be treated as self-employment income. The remainIng 70 percent must be treat- ed as investment income, not subject to the provisions of H.R. 10. For all prac- tical purposes, unincorporated farmers were thus precluded from setting up pension plans for themselves and their employees. Adoption of the social secu- rity rule removes another Impediment to the more widespread use of self-employ- ment retirement plans. Mr. Speaker, also, let us not forget that whenever an employer adopts such a plan to protect himself against his old age and retirement, he Is also extending that same protection tO his employees. So by this method a large group of employees In this country who today are without this added protection can be brought In and given this protection. We are not talking just about the self-employed In- dividual himself. Now, Mr. Speaker, it should be quite clear to all the Members of the House that the Department of the Treasury op- poses this bill. The SPEAKER pro tempore (Mr. BOGGS). The time of the gentleman from Wisconsin has expired, Mr. BYRNES of Wisconsin. Mr. Speaker, I yield myself 3 additional minutes. The SPEAKER pro tempore. The gentleman from Wisconsin is recogn~ed for 3 additIonal minutes. Mr. BYRNES of Wisconsin. But, Mr. Speaker, let it be remembered that the Department of the Treasury has opposed legislation in this field from the very be- ginning. It opposed the original legis- lation when It was pending before the House of Representatives. It was the Department of the Treasury that suc- ceeded, In a sense, In almost gutting the bill when It was pending 4 years ago be- fore the other body. And, Mr. Speaker, I have no doubt that they will probably attempt to load the bill down with crip- pling amendments when It gets into the other body again. But this time, how- ever, I would hope that when the House of Representatives reiterates its positIon, as I fully expect it will today, that our conferees will stand firm and I think the other body should be on notice that the House of RepresentatIves does not intend to have these kind of limitations put upon this program. Of course, when one says the Treasury opposes the bill and did oppose It before, I do not think that should necessarily have an influence on this House In this instance. I would cite just a little exam- ple of a situation earlier this year when the Treasury and the administration fought almost to the dying end to pre- vent the inclusion Inthe Tax Adjustment Act of 1966 of a provision for social secu- rity payments to those people over 72 years of age under the Socia~ Security Act. But, when the bin got down to the White House to be signed, the President was all for It-and the administration claimed great credit for having that en- acted into law. Yet it was enacted into law only over the vigorous objection of the Treasury Department and of the ex- ecutive agencies concerned. So, I would hope that on this bill, we might have a similar experience-that although the Treasury opposes it today, when It goes to the President that then the administration win be all for it. Mr. Speaker, It Is indeed anomalous that this administration which purports to have such great interest In the aged, and we heard considerable about that over the weekend, should oppose this leg- islation when Its purpose is to provide a system whereby individuals can take care of themselves and take care of their em- ployees in their older age and In their retiremment. There has been and there must con- tinue to be expansion In the service trades. More and more of our workers will be in the service industries. It it in this area that the small businessman with a few employees-the self-em- ployed-can make the greatest contri- bution to our economy. We should en- courage them and not penalize them. We should encourage the skilled workers to prefer to run their own business rather than to work for the larger corporate establishments. 2111 PAGENO="0960" This is not exclusively, as the Treas- ury would have us believe, a doctor's and lawyer's bill. In a sense, Mr. Speaker, this can be considered a plumber's bill, and a painter's bill-a bill to help the an electrician's and a carpenter's bill, small shopkeeper and the small inde- pendent farmer-to help these people who are self-employed set aside some- thing for their old age and retirement, This Is good bifi and It deserves the unanimous support of the House of Rep- resentatives. The SPEAKER. The timeof the gen- tleman has expired. (Mr. DON H. CLAUSEN (at the request of Mr. KEOGH) was granted permission to extend his remarks at this point In the RECORD.) Mr. DON H. CLAUSEN. Mr. Speaker, we have before the House today H.R. 10, a bill to amend the Internal Revenue Code of 1954 to permit pension and profit- sharing plans to provide contributions or benefits on a nondiscriminatory basis for certain self-employed individuals. While this bill is on the consent calendar, indicating no substantial opposition to passage, I want to raise my voice, never- theless, to extol the virtues of this pro- posal. H.R. 10 is an attempt to do what the Congress tried to do in 1962, and I hope this time we will fully succeed. As the Members will recall, Mr. Speaker, the Congress passed the Self-Employed In- dividuals Tax Retirement Act of 1962 for the purpose of encouraging employers to set up retirement programs for them- selves In much the same way as they and others could already do for their em- ployees under provisions of the law, However, although these employees could defer profit taxes on the entire amount they set aside In retirement plans for their employees, they were restricted to deferring the tax on only half of the amount they set aside for their own re- tirement. The results, as indicated In Government reports, showed that less than 1 percent of self-employed individ- uals availed themselves of this new pro- vision and, as a result, we can only con- clude that the intent of the Congress was not successful. The amendments before us today would permit these self-employed individuals to defer the tax on all of the funds they set aside for their own retirement up to $2,- 500 per year, or 10 percent of their earned Income, whichever is smaller. In addi- tion, It permits self-employers whose in- come is derived from both services and capital to have the same deferment privi- lege providing they are contributing sig- nificant personal services In earning their income. It Is my hope, Mr. Speaker, that these amendments will encourage self-em- ployed persons to take advantage of the congressional intent to motivate self- employers in providing for their own retirement. The philosophy behind the 1962 act was very good, in my opinion, but it did not succeed in motivating self- employers to provide for their own fu- tures. This philosophy is most gratify- ing, Mr. Speaker, in that it does not take the hard line in requiring small business- men and other self-employers to shoulder an extra load imposed by the Govern- ment, via taxes, in order to provide for their own retirement. Instead, it per- mits them to defer the tax on the amount they pay in for their own retirement just as the tax is deferred on the amount they pay in for their employees. It has long been my own philosophy that the tax system of the United States can be used [P. 11678) as a most effective and donstructive tool to encourage taxpayers to meet their own responsibilities, rather than a destructive tool to weigh them down and discourage responsibility. The latter course can only hasten the day when the Govern- ment may have to be responsible for those things which a little encourage- ment now may solve. Mr. Speaker, this is a fine example of putting the tax structure to work for us and encouraging Individuals to meet their own responsibilities, and I whole- heartedly congratulate the Committee on Ways and Means and the gentleman from New York [Mr. KEOGH] for their fine work on this bill. Mr. KEOGH. Mr.iSpeaker, we have no further request for time. Mr. BYRNES of Wisconsin. Mr. Speaker, I yield 5 minutes to the gentle- man from Missouri [Mr. CTJRTISI. (Mr. CURTIS asked and was given per- mission to revise and extend his re- marks.) Mr. CURTIS. Mr. Speaker, this bill comes before the House under very Un- usual circumstances. First, I want to apologize to the House for the fact that the hearings in execu- tive session which were taken down are not available to the House. I think it is wrong not to have this material avail- able to the House. Incidentally, I feel these hearings should never have been In executive session. This has to do with some basic procedures. I am very concerned over the kind of procedures that we have been follow- ing and increasingly so here in the House of Representatives. I happen to favor this legislation and I am very strongly In favor of It. But I think it Is about time that those of us who favor some- thing recognize that If there is going to be honest deliberation and debate that those who disagree with us should be given an opporunity to have their dis- agreement considered. If the hearings were available, the membership would read some very strange remarks. For after the commit- 2112 PAGENO="0961" tee unanimously voted out the bill, and for the reasons that the gentleman from New York has given and for the reasons given by the gentleman from Wisconsin with which I agree-after this was done the Assistant Secretary of the Treasury, Mr. Stanley S. Surrey, sald~ "I want it to be known that the administration is strongly opposed to this bill." Of course, the administration spokes- men made their opposition quite clear as we developed these issues during the executive session. I think the gentleman from Wisconsin tMr. BYRNES] and I en- gaged In colloquy somewhat along the lines-well after all, the committee re- port accompanying the bill will contain the administration's point of view and the reasons for it opposing the bill. Then it was developed that this was not necessarily so, and apparently it is not the procedure in our committee neces- sarily to print the administration's views in opposition. I think it should be. It Is not, but I said in a half-Joking fashion, "Mr. Sec- retary, of the 17 Democrats on the com- mittee, all you have to do Is to get one of them to have supplemental views~ and even though he disagrees with you~ he will put the administration remark.i in the committee report." The statement was, Well, he was not quite sure whether he could get one of the 17 Democrat members to do this. Then he turned to me and asked me, Would I put the Treasury views in the committee report if he could not get one of the 17 Democrats to do so. This shocked me a little bit, but when I thought it over I said, "Yes?' To my amazement, I was taken up on this. I got a call from the Secretary of the Treasury asking me If I would do that. If Members will turn to page 12 of the committee report, they will find my sup- plemental views. I want to read them: Although I strongly support the bill and disagree with the conclusions contained in the Treasury report on HIt. 10. I feel that it should be made a part of the official com- mittee report. Therefore. I am setting it forth in my supplemental views. So that any of you who would be in- terested in knowing why the adminis- tration is opposed can have the benefit of their logic. I do not agree with their logic. Mr. KEOGH. Mr. Speaker, will the gentleman yield? Mr. CURTIS. I yield to the gentle- man from New York. Mr. KEOGH. I simply wanted to say that this is another example of the great service which the gentleman from Mis- souri performs. What you have done has been done in the regular, orderly way. If anyone should inquire of you as to why you took that action, I suppose the best answer would be that when one has no one on his side, he will take help from wherever he can get it. Mr. CURTIS. I think the gentleman has stated it correctly. The issue I wanted to point out stated by the administration In Its views is that the revenue loss from H.R. 10-talking about $30 million and $35 million in fiscal year 1966 to $60 million In fiscal 1968-the revenue loss, especially from 1967, is "completely inconsistent with the recent actions which have been taken in light of Vietnam and the economic situation." There is no question that this revenue loss has not been budgeted. I have been trying to fight for the President's budget. In fact, I think it is too much and we need to cut it. This means a great deal to me. Therefore, I have to determine In my own thinking, in terms of priorities. What Is the sig- nificance of this $30 million in relation to other expenditure programs that we have? Does this assume a great priority In my judgment? Indeed it does. I think we have continued too long with this very serious imbalance that exists be- tween. the corporate form of doing busi- ness and the professional form of doing business and in respect to the self-em- ployed. It has been damaging to the professions; and to small business, farm- em and entrepreneurs. Every year this inbalance has been in the law corpora- tions have been able to deduct from taxes that which they put In their tip- proved pension plans for their employees, but private practitioners-lawyers, doc- tors, dentists and the self-employed- could not do this for themselves or their employees, and this has been an under- lying economic evil. This is a matter of tax equality. So my disagreement with the President is not the disagreement that we badly need every penny of revenue that we can get, and that we need to hold expenses down. My argument Is that this does take pri- ority over a great deal that is in the budget. The President should have budgeted this program, in my opinion. If this becomes law it will become neces- sary for the President to cut other ex- penditures out to make way for this par- ticular program because it should be given the highest priority. Mr. TEAGUE of California. Mr. Speaker, will the gentleman yield? Mr. CURTIS. I yield to the gentleman from California. Mr. TCAGUE of California. Mr, Speaker, I congratulate the gentleman from Missouri [Mr. CURTIS] for having been the recipient today in the Washing- ton Post of a highly complimentary and well deserved editorial, complimenting him on his attitude and his findings con- cerning our trade problems. It is not very often the Washington Post has a kind word to say about a Republican, particularly one who generally Is In the conservative camp. I congratulate the gentleman. Mr. CURTIS. I thank the gentleman. I hope I still am In the conservative camp. 71-297 0-67-pt. 2-61 2113 PAGENO="0962" Mrs. MAY. Mr. Speaker, will the gentleman yield? Mr. CURTIS. I yield to the gentle- woman from Washington. (Mrs. MAY asked and was given per- mission to revise and extend her re- marks.) Mrs. MAY. Mr. Speaker, I also add my congratulations to those of my col- league from California, to my good friend from Missouri. Also at this time I rise In support of H.R~ 10 and offer my commendation to the gentleman from New York [Mr. KEOGH] and to the gentleman from Wis- consin [Mr. BYRNES] and the gentleman from Missouri [Mr. CURTIS] and to all those who have had a part In bringing this legislation before us. As a long-time cosponsor of H.R. 10, I supported the original version of H.R. 10 when it passed the House In 1962. As you know, the Senate managed to weaken the legislation before It was sent to the President for signature, and the legisla- tion before us today, which I am also pleased to cosponsor, will correct this inequity. Today's version of HR. 10 wIll extend to an estimated 10 millIon of our citi- zens-many of them middle Income small businessmen-the chance to set aside retirement funds for themselves, the same as they are now required to do for their employees. This will be ac- complished by repeal of the two amend- ments added to the original 1962 ver- sion of H.R. 10 after It left the House. The amendments, as time has now proven, were of such nature that a very small number of self-employed individ- uals have chosen to make use of the pro- [P. 11679] visions enacted in 1962. The report be- fore us today, I believe, estimates that only about one-half of one percent of self-employed Individuals made use of the deduction In 1964. On the other hand, it is estimated that the bill before us today will greatly improve this dis- appointing situation by encouraging participation as much as sixfold by 1967. This is a good bill, worthy of the sup- port o~ the Congress, and one in which I am proud to be a cosponsor on behalf of the many, many small businessmen and farmers of my district. When the gentleman from Wisconsin was speaking, he pointed out that this was not just a bill for professional- pec- pie, that it certainly4~ a bill for elec- tricians and plumbers and small busi- ne~s employers, but he left out one very important group, and that Is our farmers. Mr. CURTIS. The gentlewoman is correct. Mr. BYRNES of Wisconsin. Mr. Speaker, I yield 1 minute to the gentle- man from Missouri [Mr. HALL]. (Mr. HALL asked and was given per- mission to revise and extend his re- marks.) Mr. HALL. Mr. Speaker, I want to join In the accolade to my colleague from Mis- souri, extended by the gntleman from [Mr. TEAGUE), and the gentlewoman from Washington [Mrs. MAY], concern- cerning the gentleman from Missouri [Mr. CURTIS], and his statement on our economy and our trade and his findings, as reported in the editorial in this morn- ing's Washington Post. ~Mr. Speaker, I rise in support of H.R. 10, ~o permit pension and profit-sharing plans to provide contributions or benefits on a nondiscriminatory basis, for certain self-employed Individuals, without spe- cial limitations on the amount of con- lributions. I speak of one who would be participating if still in professional prac- tice, but being here am not eligible. Earlier this year, I introduced similar legislation, HR. 15168, in recognition of the unequal tax treatment that exists today between self-employed persons and those who work for corporations. Thelegislatlon has two basic purposes: to eliminate the provision allowing de- duction of only 50 percent of the self- employed's contribution, and to remove the crippling 50-percent limitation on the maximum percentage of earned in- come which might be set aside annually. This bill is of particular significance to lawyers, accountants, engineers, archi- tects, doctors, dentists, and other self- employed people. This law is needed to correct the in- equities that were added in the Senate to the original Keogh bill, and which urn- ited annual contributions on behalf of the self-employed to one-half of 10 per- cent of earned income, or $2,500, which- ever was less. Recently, the American Bar Associa- tion reported that less than 1 percent of its members have elected to participate in that association's retirement plan. Other professions have had similar ex- periences, and it surely is time to correct these inequitable and unfounded limita- tions that are frustrating the worthwhile goal of the Self-Employed Individuals Retirement Act. This bill provides that an owner-employee may deduct the full amount of such contributions, up to a maximum of 10 percent of his earned in- come, but not to exceed $2,500 in any one year. Thus, within that limitation, the tax incentive for him to establish retire- ment plans for himself and his employees would be increased twofold, as compared with existing law. The self-employed and the owner-em- ployed will be called upon to a greater and greater degree to provide additional jobs for our growing work force. At a time when there is a growing trend on the part of young people to go to work for others, I think it is important that we do everything we can to encourage the independent entrepreneur to strike out 2114 PAGENO="0963" on his own. Their independence is a valuable asset to our society. The self-employed individual, as an employer of his own services, occupies the same position as the manager of a small business owned by a corporation. There is no reason, as a matter of equity, why that portion of his compensation, which is committed for the provision of retirement income, should not be treated exactly alike in both cases. Removal of the present inequitable treatment would do much to encourage the extension of pension coverage to both the self-em- ployed and their employees. The list of associations endorsing this legislation includes: The American Bar Association, the National Society of Pro- fessional Engineers, the National Milk Producers Association, National Society of Public Accountants, American Op- tometric Association, American Medical Association, American Dental Associa- tion, the American Hotel & Motel Asso- ciations, the National Livestock Tax Committee, and the Authors League of America, Inc. I commend the members of the Ways and Means Committee, on both sides of the aisle, for their hard work on this measure, and I urge its adoption. Mr. POFF. Mr. Speaker, I would like to underscore the need for this legisla- tion on the grounds of equity. Under legislation passed by the Con- gress In 1942, corporation employers and other_ ~employers who have purchased supplemental retirement programs for their workers are permitted to deduct the full amount of the premiums paid as business operating costs. Until 1962, self-employed people, such as farmers, lawyers, accountants, doctors, dentists, engineers and small businessmen, had no equivalent opportunity. In that year, Congress graciously granted them half a loaf. Although the House had passed legislation granting a whole loaf, the other body adopted an amendment which said in effect that a self-employed work- er could deduct only 50 percent of the amount he invested in a retirement pro- gram up to 10 percent of his earned in- come, or $2,500, whichever is less. Now, Mr. Speaker, if the Congress ac- knowledged the existence of an inequity, how can Congress remain content to ig- nore half the inequity? It Is time now to do a complete justice. The ~0-percent limitation must be lifted. It think It is important also to empha- size that this legislation can function as an Important weapon in the war against Inflation. Essentially, payments Into the type of retirement program eligible under this statute are the same as depos- its In savings accounts. They have the effect of reducing total currency in cir- culation and this tends to bring the sup- ply of goods and services into better bal- ance with the supply of money. This in turn helps to promote the integrity of the dollar and stabilize the purchas- ing power of the paycheck. Accordingly, I earnestly trust that this legislation will be promptly approved here and In the other body. Mr. ABERNETHY. Mr. Speaker, there are a great many farmers and-small busi- nessmen in my congressional district and State who come under the category of self-employed persons. They will benefit from this bill. Under the Self-Employed Individuals Tax Retirement Act of 1962 most farm- ers are classified as "owner-employees." As such they are authorized to contribute up to 10 percent of their earned income, but not more than $2,500 per year, to a retirement plan and claim a Federal tax deferral for 50 percent of such contribu- tions. However, in the case of farmers, the benefits of this act are drastically limited by a restrictive definition of "earned income." If the earnings of an "owner-employee" are a joint product of personal services and invested capital, as is the case with most farmers, not more than the larger of $2,500 or 30 percent of the taxpayer's earnings from self- employment may be treated as "earned income." Limiting the deferral to 50 percent of the contributions has retained a serious Inequity with respect to self-employed retirement programs. The restriction that earned income must be arbitrarily computed at 30 percent of net earnings has made the program meaningless to farmers and other self-employed who must Invest capital as well as labor in their enterprises. This bill removes both the 50-percent and 30-percent limitations. I have long felt that this inequity should be elim- inated and want to commend the Com- mittee on Ways and Means for reporting H.R. 10, which will be a major step in assisting the self-employed, particularly our farmers and small businessmen, to set up retirement programs. Mr. KUPFERMAN. Mr. Speaker, lam pleased to support this bill, H.R. 10, based upon legislation originally Intro- duced by the gentleman from New York [Mr. KEoGH] as a beneficial and neces- sary change In our present tax law and designed to encourage the self-employed individual. Mr. Speaker, In 1942 our tax laws were changed to offer substantial tax benefits to corporations and their employees In the field of pension and profit-sharing plans. Corporate k-employers were al- lowed 100-percent tax deductions for contributions when made to retirement plans. As a result of the 1942 legisla- tIon, self-employed persons and their employees were discriminated against. [P. 11680] In 1962,-the original H.R. 10 was passed by Congress-Public Law 87-792,76 Stat. 2115 PAGENO="0964" 809-and, for the first time, recognition was given to the problem of tax discrim- ination and unfair treatment offered the self-~mployed Individual. The Self-employed Individual's Tax Retirement Act of 1962 was a substan- tial step in the right direction, but It did not fully accomplish the needed tax encouragement of the many professional persons, small businessmen and even farmers which come within the scope and meaning of self-employed persons. For example, under existing law-sub- section 404 (a) (10) Internal Revenue Code of 1954-the deduction which may be taken for amounts contributed to a qualified retirement plan by any self- employed individual for his own benefit Is limited to 50 percent of such contribu- tion, Mr. Speaker, I have introduced HR. 15246, which would amend the Internal Revenue Code of 1954 to remove the 50- percent limitation and would permit the self-employed person to deduct the en- tire amount of the contribution made In his behalf to a retirement plan. In addition, my bill would change the definition of "earned income" applicable with respect to the retirement plan so as to eliminate the ceiling on deductible contributions that could be placed in the retirement plan. Mr. Speaker, among those individuals who would benefit most from the legis- lation which I have Introduced, HR. 15246, and from the substantially sim- ilar bill-H.R. 10-before us today, are the members of the medical and dental profession. As self-employed individuals, they are presently permitted by our tax laws to deduct. only 50 percent of the contributions made In their behalf to a retirement plan. In addition to repealing the limita- tions upon the contribution made by the self-employed, the legislation being con- sidered today would permit a self-em- ployed Individual to include In earned income all of his net profits when his Income is earned from a business In which both the performance of personal services and capital are material income- producing factors. In this way, medical and other professional and self-employed persons would be given the same or equal treatment as our tax laws presently af- ford corporations and their employees. Mr. Speaker, I fully support HR. 10, and hope that my colleagues will give every consideration to Its passage. Mr. Speaker, I would like at this point In the CO~sGRESSIONAL RECORD to include a statement regarding H.R. 10, written by the Honorable Edward W. Kuhn, pres- Ident of the American Bar Association, which appeared in the February 1966 issue of the American Bar Journal, and which In a thorough and scholarly man- ner sets forth the history behind H.R. 10 and Illustrates the need for Its pas- sage: THE PaxswEN'r's PAGE (By Edward W. Kuhn) A recent Senate report emphasizes the need for changes in our tax laws to encourage professional persons to participate in private pension plans. Twenty-five million Amer- icana are now covered under private plans; they constitute an estimated half of the persons in private nonf arm employment. The largest segment of our population not participating Is composed of persons In the professions, small business and agriculture. In only fifteen years, It Is estimated, three out of five employees, a total of 42000,000 persons, will be covered under private plans, but unless there is a change in our tax laws, the participation Is likely to include very few professional Individuals In private practice. The practicing lawyer has a peak earning period of about twenty years, generally be- tween 45 and 65 years of age. The average income In 1962 for those in Individual prac- tice was about $8,200 and for those In part- nerships $18,000. Some 200,000 lawyers are engaged In private practice but are denied a deferral of federal income taxes on the full amount of retirement savings because they have a self-employed status. The number of lawyers employed In private concerns, primarily industry, has increased 127 per cent since 1951. Studies Indicate that a major factor has been the attractive retirement benefits offered to corporate em- ployees. In 1942, our tax laws were changed to offer substantial tax benefit to corporations and their employees In the establishment of pension plans, supplementing social security. The tax effects of these plans are: First, the contributions by the employer for the employee, although in the nature of additional compensation, are not taxable to the employee until the retirement benefits are recetved in later years. Second, the employer gets a tax deduction for the contributions when made. Third, the earnings from the retirement fund are tax exempt until distributed. Fourth, the retirement benefits are dis- tributed at a time when the employee would normally be In a lower tax bracket. The result of the legislation enacted In 1942 was to discriminate in favor of employed persons and against all self-employed persons and their employees. To correct this obvious Inequity, the American Bar Association led an effort In Congress to secure a measure of equality with corporate officers and em- ployees in respect to the tax treatment of earnings set aside for retirement purposes. Finally, in 1962, the Smathers-Keogh Bill (HR. 10) was passed by Congress and, for the first time, recognition was given to the problem of the self-employed In this field. Although the Self-Employed Individuals Tax Retirement Act of 1962 was a step for- ward, It by no means provides an adequate method for the average self-employed in- dividual to save for retirement. During the long struggle for passage, the legislation was weakened considerably. In the final days of the 87th Congress, an amendment to HR. 10 was added on the Senate floor; It substan- tially diminished the intended value of the legislation by limiting the self-employed in- dividual to a deduction of only one half the amount that he contributes In his behalf to a noncontrlbutory plan. This limitation Is even more severe In a contributory plan and results in possibly a deduction of only 25 per cent. 2116 PAGENO="0965" Sinqe the enactment of the 1962 act, the Association's Committee on Retirement Benefits Legislation has given careful scru- tiny to the new law to ascertain its short- comings with an eye towards supporting remedial legislation. Although there are several defects in the 1962 act, this Association is concentrating its support on the two most needed amend- ments. H.R. 10, introduced by Representa- tive EUGENE KEOGH (Democrat of New York), would permit the self-employed person to deduct the entire amount of the contribu- tion made in his behalf to a retirement plan. It also would eliminate the ceiling on de- ductible contributions that could be placed in such plans, provided, of course, that em- ployees are covered. Seventeen bills to im- prove the 1962 act are pending before the Ways and Means Committee, including spon- sorship by the ranking minority member, JOHN BYRNES (Republican of Wisconsin). The following hypothetical case points out the reason that the 50 percent limitation is serving as a major deterrent to participation in retirement plans under the 1962 act: "Assume a lawyer at age 40 with a wife and two children filing a joint' return has an income of $15,000 and has $2,000 in deducti- ble expenses. Under the Keogh Act, he could contribute to a retirement plan 10 per cent of his income, which would be $1,500. Be- cause of the 50 percent limitation, he would have a reduction of only $750 which would in this case leave him a taxable income of $9,850 and his tax would be $1,787. If the full deduction were permitted, he would have a taxable income of $9,100, paying, a tax of $1,622. The savings of $165 per year in taxes Invested at 6 per cent over a 25-year period would amount to $9,052. If the lawyer did not participate in the plan at all, he would pay a tax of $1,952, which is $330 more in taxes than if he had a plan permitting a full deduction. This $330 invested for a period of 25 years at 6 per cent would total $18,105." It is apparent by this illustration that al- though the 1962 act provide some induce- ment to the private practitioner, it falls far short of providing him comparable tax treatment with a lawyer under a corporate plan. Because of the inadequacy of the 1962 act, there has been increasing agitation by many professional persons to seek another ap- proach to the problem by forming profes- sional corporations or associations. Although some thirty states have enacted laws author- izing members of the various professions to form corporations, the Treasury Department has indicated that it did not recognize such professional associations as corporations for income tax purposes under the Internal Re- venue Code. Therefore, this avenue has been virtually closed to the professional indivi- dual. HR. 8347 and several bills are pending In the Ways and Means Committee that would require that such professional corpora- tions be treated as corporations for income tax purposes. In addition to individual or firm plans un- der H.R. 10 type legislation and the use of professional corporations, a third possible avenue for the self-employed person and his employees would be to participate in asso- ciation or other group plans. The American Bar Association after careful study estab- lished a plan In 1963 for its members, but be- cause of the severe restrictions in the 1982 act, the participation in this plan is extreme- ly limited. In fact, of the 120,000 members of the American Bar Association, fewer than 1,000 persons, including lawyers and their employees, are now participating In the As- sociation's plan. Undoubtedly, participation In such group plans would be greatly en- hanced by passage of legislation like the new HR. 10. A report of the Senate Special Committee on Aging, issued in June, 1965, recommends enactment of provisions included in HR. 10. It also recommends legislation "clarifying and reaffirming Congressional intent that professional corporations and associations are corporations within the meaning of that term as used In the Internal Revenue Code." This Association, with the support of the state and local bar groups, and other or- ganizations, Is giving priority attention to bringing about much needed Improvements in our tax laws to correct further an inequity which has existed for more than two decades. This should be of direct concern to every practicing lawyer, Mr. KEITH. Mr. Speaker, in consider" ing this bill it seems reasonable that an individual who Is self-employed-who [P. 11681] baz had the courage to go out in the business world and makehis own way- should be given the same tax break on his retirement plan as are the employees who work for him-and as are those holding similar positions of responsibility in corporate enterprise. By refusing to allow the sole proprietor, the partner, or the self-employed law- yer, accountant, or doctor to provide for his own future in the same way that he provides for his employees is, in my view, an inequity that should be corrected. The legislation authorizing pensions for the self-employed which we approved in 1962 was intended to give him a fair break. According to the estimates made by the Treasury Department, though, this-for the most part-did not occur. Apparently, a majority of self-employed business and professional men and women have been forced to choose there- fore not to provide adequately for their owii retirement. The amendments which we are consid- ering here today will overcome this in- equity. Hopefully, they will encourage the small businessman to establish pen- sion plans in which they themselves can participate. I hope that the Senate will concur in our action and that the President will in turn approve the legislation. If these amendments become law, the small busi- nessman will have an opportunity for security-which is long overdue. Mr. ROGERS of Florida, Mr. Speaker, today we have a chance to encourage self-employed citizens to help themselves through passage of the amendment to the Internal Revenue Code of 1954. The self-employed individual has been given only a small chance to make proper plans for his financial security after re- tirement in the 1954 code and the amend- ment of 1962. The amendment now standing before the House offers self- 2117 PAGENO="0966" employed individuals incentive to save for their ~ful~ure through a more reason- able tax allowance. The fact that only one-half of 1 per- cent of all sell-employed individuals took advantage of the ll)62 amendment is wit- ness to the inequities of the bill. They have shown that under this bill they have been burdened with unfair financial contributions. I urge that we encourage these citizens to help themselves by allowing a fair tax deduction which will be more attractive to them and more beneficial to the entire social security structure. Mr. SCHMIDHAUSER. Mr. Speaker, I support H.R. 10 because it is my belief that this tax reform measure will help establish parity of tax treatment on re- tirement programs for self-employed per- sons in small businesses and on the farms, and in the professions. For many years in the past, self-employed people in those categories were not allowed deduc- tions for contributions to their own re- tirement funds. This bill, H.R. 10, will end discrimina- tion against the self-employed farmer and small businessman. At the present time, self-employed persons whose in- come comes from capital and labor are at a great disadvantage; they can only use 30 percent of their total income un- der the retirement law, and therefore are at a great disadvantage. The old law was particularly hard on farmers; for example, our farm producers earn their income `from both their hard work and the money they have invested In land, equipment, and so forth. If a farm producer earns $9,(}00, only $3,000 of his income is considered for the pur- pose of computing the deduction of $150, in spite of the fact he probably is con- tributing much more toward his ret,ire- ment. Under the provision of H.R. 10, the farmer or small businessman will be eligible for a full 10-percent deduction of his earned income of $9,000 or $900. I believe this legislation will contribute much to the strengthening and develop- ment of our free enterprise system. I also believe the Federal Government should encourage small employers and professional people to set aside retire- ment funds for themselves as well as for their employees. Passage of this bill will end the discrimination of the old law, strengthen our free enterprise system, and help our family farm producers and our small businessmen, and I strongly support its approval. The SPEAKER. The question is on the motion of the gentleman from New York [Mr. KEOGH] that the House sus- pend the rules and pass the bill H.R. 10, as amended. The question was taken; and the Speaker announced that it appeared that two-thirds of the Members present had voted in favor thereof. Mr. YOUNGER. Mr. Speaker, I ob- ject to the vote on the ground that a quorum is not present, and make the point of order that a quorum Is not present. The SPEAKER. Evidently a quorum is not present. The Doorkeeper will close the doors, the Sergeant at Arms will notify absent Members, and the Clerk will call the roll. The question was taken; and there were-yeas 291, nays 0, not voting 141, as follows: [Roll No. 125} Abbitt Adair Adams Addabbo Albert Anderson, fll. Andermn. Tenn. Andrews, George W. Andrews, Glenn Andrews, N. Dak. Arends Ashbrook Ashmore Aspinall Ayres Bandstra Baring Barrett Bates Battin Beckworth Belcher Bennett Betts Boggs Boland Bow Brademas Bray Brock Broomfield Brown, Clar- ence J., Jr. Bro~rhlll, Va. Buchanan Burke Byrne, Pa. Byrnes, Wis. Cahill Callan Carey Carter Casey Ceclerberg Chamberlain Chelf Clancy Clark Cleveland Collier Conable Conte Cooley Cpllbett Corman Craley Cramer Culver Cunningham Curtin Curtis Daddarlo Dague Davis. Ga. Davis, Wis. Dawson Delaney Denton Derwinskl Devine Dlggs Dole YEAS-291 Donohue Keogh Dowdy King, Calif. Downing King, N.Y. Dulski King, Utah Duncan, Tenn. Kirwan Edwards, Calif. Kluczynskl Edwards, La. Kunkel Erlenborn Kupferman Evans, Cob. Laird Farnsley Langen Fascell Latta Feighan Lennon Findley Lipscomb Fisher Long, La. Flood Long, Md. Ford, McCarthy William D. McClory Fountain McCulboch Friedel McDade Fulton, Pa. McEwen Fult.on, Tenn. McFall Fuqua McGrath Gallagher MacGregor Garmatz Machen Gathings Mackie Gettys Madden Gibbons Mahon Gilligan Mailliard Gonzalez Marsh Goodell Matthews Gray May Green, Oreg. Meeds Green, Pa. Michel Griffiths Mills Gross Minshall Grover Mize Gubser Moeller Hagen, Calif. Monagan Haley Moore Hall Moorhead Halleck Morgan Halpern Morris Hamilton Mosher Hanley Murphy, fll. Hansen, Idaho Murphy, N.Y. Hansen, Iowa Natcher Hansen, Wash. Nedzi Harsha Nelsen Harvey, md. O'Brien Harvey, Mich. O'Hara, Ill. Hathaway O'Hara, Mich. Hays O'Konski Hechler Olsen, Mont. Henderson Olson, Minn. Herlong Ottinger Hicks* Passman Horton Patman Hull Patten Hungate Pepper Huot Perkins Ichord Philbin Jacobs Pickle Joelson Pike Johnson, Calif. Pirnie Johnson, Okla. Poage Johnson, Pa. Poff Jonas Price Jones, Ala, Pucinski Jones, Mo. Race Jones, N.C. Randall Karsten Redlin Karth Rees Kastenmeier Reid, Ill. Kee Reid, N.Y. Keith Reuss Kelly Rhodes, Axis. 2118 PAGENO="0967" Shriver Tuck Sikes Tunney Sisk Tuten Skubitz Uclall Slack tfllman Smith, Calif. Utt Smith, Iowa Vanik Smith, N.Y. Vigorito Smith, Va. Vivian Stafford Waggonner Staggers Walker, N. Mex. Stanton Watts Stephens Weltner Stratton White, Idaho Stubblefleld White, Tex. Sullivan Whitener Taylor Widnall Teague, Calif. Wolff Teague, Tex. Wright Tenzer Wydler Thompson, Tex. Yates Thomson, Wis. Young Todd Younger NAYS-0 NOT VOTING-141 Ford, Gerald R. O'Neal, Ga. Fraser O'Neill, Mass. Frellnghuysefl Pelly Glaimo Pool Gilbert Powell Grabowski Purcell Greigg Quie Grider Quillen Gurney Reifel Hagan, Ga. Reinecke Hanna Resnick Hardy Rivers, S.C. Hawkins [P. 11682] Heletoski Roberts Holifield Rooney, N.Y. Holland Rostenkowski Hosmer Roybal Howard St Geflflaifl HutchlnsOfl St. Onge Irwin Sa~ilor Jarman Scheuer Jennings Scott Kornegay Senner Krebs Sickles Landrum Springer" Leggett Stalbaum Love Steed McDowell Sweeney McMillan Talcott McVicker Thomas Macdonald Thompson, N.J. Mackay Toll Martin, Ala. Trimble Martin, Mass. Tupper Martin. Nebr. Van Deerlin Mathias Walker. Miss. Matsunaga Watkins Miller Watson Minish Whalley Mink Whitten Morrison Williams Morse Willis Morton Wilson, Bob Moss Wilson, Multer Charles H. Murray Wyatt Nix Zablocki So (two-thirds having voted in favor thereof) the rules were suspendezl and the bill was passed. The Clerk announced the following pairs: Mr. Rooney of New York with Mrs. Bolton. Mr. Multer with Mr. Fino. Mr. Fogarty with Mr. Gerald R. Ford. Mr. Miller with Mr. Don H. Clausen. Mr. Cohelan with Mr. Talcott. M~. Annunzio with Mr. Pelly. Mi5~ Griegg with Mr. Broyhill of North Carotlna. Mr. Love with Mr. Callaway. Mr. Gilbert with Mr. Tupper. Mr. O'NeiU of Massachusetts with Mr. Morse. Mr. Matsunaga with Mr. Gurney. Mr. Dyal with Mr. Bob Wilson. Mr. Morrison with Mr. Martin of Massa- chusetts. Mr. Holifleld with Mr. Hosmer. Mr. Thompson of New Jersey with Mrs. Dwyer. Mr. Leggett with Mr. Reinecke. Mr. Cameron with Mr. Del Clawson. Mr. Burton of California with Mr. Bell. Mr. Brown of California with Mr. Saylor. Mr. Giaimo with Mr. Walker of Mississippi. Mr. Roybal with Mr. Reifel. Mr. Charles H. Wilson with Mr. Wyatt. Mr. Hanna with Mr. Nix. Mr. Moss with Mr. Mathias. Mr. Macdonald with Mr. Conyers. Mr. St. Onge with Mr. Frelinghuysen. Mr. O'Neal of Georgia with Mr. Watson. Mr. Fraser with Mr. Quie. Mr. Grabowskl with Mr. Morton. Mrs. Mink with .Mr. Rivers of South Caro- lina. Mr. Whitten with Mr. Steed. Mr. Williams with Mr. Scheuer. Mr. Colmer with Mr. Resnick. Mr. Abernethy with Mr. Dorn. Mr. Burleson with Mr. Berry. Mr. Stalbaum with Mr. Hawkins. Mr. Jennings with Mr. Flynt. Mr. Brooks with Mr. Holland. Mr. Howard with Mr. Springer. Mr. HSbert with Mr. Quillen. Mr. Kornegay with Mr. Hutchinson; Mr. Grider with Mr. Whalley. Mr. VanDeerlin with Mr. Burton of Utah. Mr. Trimble with Mr. Watkins. Mr. Zablocki with Mr. Martin of Nebraska. Mrs. Thomas with Mr. Edwards of Alabama. Mr. Senner with Mr. Ellsworth. Mr. Roberts with Mr. Martin of Alabama. Mr. Ashley with Mr. Binghani. Mr. Jarman with Mr. Helstoski. Mr. Rostenkowski with Mr. Scott. Mr. Sickles with Mr. Sweeney. Mr. McDowell with Mr. Toll. Mr. Pool with Mr. Farnum. Mr. Evins of TennesseC with Mr. Farbstein. Mr. Edmondson with Mr. Dow. Mr. Dent with Mr. Dingell. Mr. Celler with Mr. Clevenger. Mr. Daniels with Mr. Powell. Mr. Purcell with Mr. Minlsh. Mr. Everett with Mr. Fallon. Mr. Foley with Mr. de la Garza. Mr. Cabell with Mr. Irwin. Mr. Blatnik with Mr. St Germain. Mr. Mackay with Mr. McMillan. Mr. Landrum with Mr. Krebs. Mr. McVicker with Mr. Willis. Mr. Duncan of Oregon with Mr. Hardy, The result of the vote was announced as above recorded. The doors were opened. A motion to reconsider was laid on the table. Rhodes, Pa. Rivers, Alaska Robison Rodino Rogers, Cob. Rogers, Fla. Rogers, Tex. Ronan Roncalio Rooney. Pa. Rosenthal Roudebush Roush Rumsfeld Ryan Satterfield Schisler Schmidhauser Schneebell Schweiker Secrest Selden Shipley Abernethy Annunzio Ashley Bell Berry Bingham Blatnik Bolling Bolton Brooks Brown, Calif. Broyhill, N.C. Burleson Burton, Calif. Cabell Burton, Utah Callaway Cameron Caller Clausen, Don H. Clawson, Del Clevenger Cohelan Colmer Conyers Daniels de la Garza Dent Dickinson Dingell Dora Dow Duncan, Oreg. Dwyer Dyal Edmondson Edwards, Ala. Elisworth Everett Evins, Tenn. Fallon Farbstein Farnum Fino Flynt Fogarty Foley 2119 PAGENO="0968" PAGENO="0969" APPENDIX II H.R. 11765 INCOME TAX TREATMENT OF CERTAIN STRADDLE TRANSACTIONS (Sec. 210 of Public Law 89-809) 2121 PAGENO="0970" PAGENO="0971" 89TH CONGRESS T T 1~ 1ST SESSION ri. K. 11 765 IN THE HOUSE OF REPRESENTATIVES OCTOBER 2~2, 1965 Mr. KEoGH introduced the followii~g bill; whicli was referred to the Com- mittee on Ways and Means A BILL To amend section 1234 of the Internal Revenue Code of 1954. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 That section 1234 of the Internal Revenue Code of 1954, 4 relating to options, is amended as follows: 5 Subsection (c) is redesignated as subsection (d) and 6 the following new subsection (c) is added at the end of sub- 7 section (b) 8 "(c) SPECIAL RULE FOR CREATORS OF STRADDLES.- 9 "(1) GATN ON T~APSE.--In the case of gain on lapse 10 of an option that was granted as part of a straddle (as 11 defined in paragraph 2) , the gain shall be deemed to 2123 PAGENO="0972" 2 1 be gain from the sale or exchange of a capital asset held 2 for less than six months on the day that the option 3 expires. 4 "(2) DnFINITI0N5.- 5 " (A) For purposes of this section a `straddle' 6 is defined as a combination of au option to buy and 7 an option to sell, giving the holder the right to both 8 buy and sell a specified quantity of a security at a 9 fixed price for a stated period of time. 10 " (B) For purposes of this paragraph `security' ii shall not include contracts to buy or sell commod- 12 ities. 13 "(3) EXCLUSION OF DEALE1IS.-Th15 subsection 14 shall not apply to any person who holds securities for 15 sale to customers in the ordinary course of his trade or 16 business." 17 EFFECTIVE DATE 18 SEc. 2. This Act shall apply to options granted after 19 January 25, 1965. 2124 PAGENO="0973" STAFF REPORT ON INCOME TAX TREATMENT OF INCOME RESULTING FROM LAPSE OF OPTIONS WRITTEN AS PARTS OF STRADDLES FOR THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION DECEMBER 28, 1965 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON: 1966 JCS-13-65 2125 PAGENO="0974" PAGENO="0975" STAFF REPORT ON INCOME TAX TREATMENT OF INCOME RESULTING FROM LAPSE OF OPTIONS WRITTEN AS PARTS OF STRADDLES PART ONE-INTRODUCTION A "straddle" is a combination of an option to buy (a "call") and an option to sell (a "put") a specified amount of a certain security at a fixed price for a stated period of time. In a ruling (Rev. Rul. 65-31) issued on January 22, 1965, the Internal Revenue Service held that the premium for a straddle must be allocated between its component parts on the basis of relative market values. Under the ruling, the portion of the premium received by the writer (the person who grants the options) for the component that is exercised is to be taken into account by him as a reduction in his basis for the security purchased ("put" to the option writer) or as a part of the amount realized on the security sold ("called" from him). As a result, this portion of the premium can either increase the capital gain or decrease the capital loss realized upon the sale or exchange of the security.1 This can be either a long- or short-term gain or loss depending upon the period of time the security was held. Under the revenue ruling, the remaining portion of the premium, attributable to the expired component of the straddle, constitutes ordinary income. This ruling, which applied prospectively only, to straddle transactions entered into on or after January 26, 1965, is set forth as appendix I to this report. In a technical information release (TJR-778) issued on Novena- ber 15, 1965, the Internal Revenue Service determined that in the case of straddle contracts involving corporate stock, 55 percent of the premium may be allocated to the "call" and 45 percent to the "put." 2 However, if this allocation is used, it must be used by the taxpayer in allocating premiums on all straddle contracts issued on dr after January 26, 1965.~ Those who do so must attach a statement to their Federal income tax returns so indicating. This release is set forth as appendix II to this report. On January 27, 1965, Congres~man Wilbur D. Mifis, chairman, and Senator Harry F. Byrd, vice chairman, of the Joint Committee on Internal Revenue Taxation, instructed the staff of the joint committee to study any problems raised with respect to the January ruling. on straddles and to present comments and suggestions to the committee with respect to it. The public announcement of these instructions is `Ifthe taxpayerisadealerlnsecurities,the gain will be an ordinary gain unless the provisions of section 1236 of the code are complied with. See section 1236(b) for treatment of losses. `Internal Revenue Service indicated that since the market values of "puts" and "calls" are subject to price fluctuations, it may be necessary for the Service to adjust this allocation ratio periodically. Although PIR-778 is not clearon this point, itseenis that this election Is to be made for 1 tarable year at a time. 1 2127 PAGENO="0976" 2 INCOME TAX TREATMENT set forth as appendix III to this report. More recently, at its meetin on October 21, 1965, the committee directed the staff to prepare an release a report on this subject. In compliance with these directions, the staff has prepared this report setting forth comments and sugges- tlQfls for legislation on the. tax treatment of stiaddles. The Treasury Department staff has worked with the Joint Committee staff on this report but the Treasury Department has as yet taken no official position on the suggestions contained herein. 2128 PAGENO="0977" PART TWO-BACKGROUND: FACTUAL SETTING4 AND PRIOR LAW AND PRACTICE The option to purchase or sell specified property at a stated prh~e for a given period of time has long been used for planning in many fields of endeavor. One variation of this device which has become standard in the securities field is the combination of an option to buy and an option to sell a specified amount of a certain security at a fixed price for a stated period of time. This combination of an option to buy and an option to sell is known as a "straddle".5 Nor- mally, the price at which either or both of the options in a straddle may be exercised is the market price of the stock at the time the straddle is written.6 The person who issues (or grants) a straddle is known as the "writer." Straddles are normally granted to brokers or dealers who specialize in such transactions and who almost always sell the component parts of the straddles to different purchasers.7 The rights granted in each option are normally exercised, if at all, shortly before the end of the term for which the straddle is written.8 Which component option is exercised will depend upon the market conditions at the time of exercise vis-a-vis market conditions at the time the straddle was written.9 The "call" (the option to purchase from the straddle writer) is likely to be exercised if the market in that security has risen, while the "put" (the option to sell to the straddle writer) is likely to be exercised if the market has fallen. In rare cases,'° where the price of a security has fluctuated to a great extent, both com- ponent options may be exercised. Where the market price of the security at the end of the option term is approximately the same as the price for which the option was granted, it may happen that neither component of the straddle will be exercised. The majority of puts and calls originate as straddles.'1 Although the use of p.uts and calls is not a new development in the securities field,'2 the total number of shares covered by options sold in any one year from 1937 through 1960 rarely exceeded 1 percent of the total number of shares sold on the New York Stock Exchange that year.'3 The number of shares covered by options sold in June 1959 consti- tuted only 2.2 percent of the total number of shares sold on the New York and American Stock Exchanges of the 50 issues as to which the most options were written in June i959.'~ Options appear to be an even smaller factor in the market for less active issues.'5 4 of the material presented In this part was derived from the "Report on Put and Call Options," a report published in August 1961 by the Securities and Exchange Commission, on the basis of an extensive study by the SEC's Division of Trading and Exchang~s; hereinafter referred to as "SEC Report." `During June 1959, the period selected in the SEC Report for its intensive study, "more straddles were written thanany other type of option." SEC Report, p. 6; see pp. 15, 31, 32, 33. 6 SEC Report, p. 9. `SEC Report, pp. 6, 10-14, 15-17, 56, 59, 65. 8 Report, pp. 6, 47-49, 51. SEC Report, pp. 47, 50. 10 Less than 1 percent, according to SEC Report, p. 52. (See p. 15.) 11 Straddles supplied 66 percent of the puts and 60 percent of the calls during June 1959. SEC Report, pp. 31-33. 12 use of puts and calls originated In ~Europe more than 200 years ago. SEC Report, p. 9. U SEC Report, pp. 19, 20, 22. 14 Report, p. 35-37. 11 In June 1959 the 87 most active issues on the New York Stock Exchange accounted for 57.2 percent of the option volume in NYSE stocks but only 39.7 percent of the total trading volume. In cositrast, the 500 least native issues accounted for only 3.6 percent of the option volume, but 9.7 percent of thb total trading volume. SEC Report pp. 43-44. .3 7 1-297 0-67-pt. 2-62 2129 PAGENO="0978" 4 INCOME TAX TREATMENT It is clear that, although options have a number of possible uses by sophisticated investors, they are in fact used primarily as a method of investing by individuals with small amounts of money.16 Before 1954, income from the writing of an option that lapsed was treated as short-term capital gain. The statutory provision (sec. 117(g)(2) of the 1939 Code)'7 requiring such treatment was not in- cluded in the 1954 Code.'8 It is understood that, before 1954, however, straddle writers gen- erally allocated the entire straddle premium to the component option that was exercised. This meant that, in practice, the gain from the lapse of one option in a straddle was often treated as long-term capital gain and many times was not recognized until a later taxable year. In the case of "calls," the total straddle premium was treated as increasing the amount received by the writer when the stock was called from, i.e., sold by, him (and the "put" was allowed to lapse). The total premium thereby increased his capital gain (or decreased his capital loss, depending upon the circumstances of the individual case). If the writer had held the stock more than 6 months, the gain (or loss) would be long-term. When the "put" was exercised (and the "call" was allowed to lapse), the total straddle premium was treated as reducing the basis of the stock put to (i.e., sold to) the writer. He could transform the total straddle premium . into long-term capital gain by holding the stock for more than 6 months. If he sold the stock after the end of the taxable year, he could thereby postpone taxation of the entire straddle premium.1' This practice of allocating the entire premium to the option that was exercised apparently was not then challenged by the Internal Revenue Service. It is understood that from 1954 until the issuance of Rev. Rul. 65-3 1, straddle writers continued to allocate the entire premium to the side ~f the straddle that was exercised.2° The practical effect of this was to continue essentially the same treatment for straddles under~ the 1954 Code up to 1964 as existed in practice under the 1939 Code.2' It should be noted that prior to the issuance of Rev. Rul. 65-31, neither the statute nor the regulations or rulings indicated whether the premium for a straddle should be allocated between the two options or allocated entirely to the option which was exercised. As has been indicated., however, writers apparently did allocate the entire premium to the option exercised and there is no evidence that, prior to the ruling, the Treasury Department objected to allocations of this type. 16 SEC Report, pp. 42, 76-77. "SEC. 117. CAPITAL GAINS AND LOSSES. * * * * * * S (g) GAINS AND LOSSES FROSISHORT SALES, E~rc.-For the purpose of this chapter- (2) gains and losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as short-term capital gains or losses; * * * "However, sec. 1234 (a) and (b) of the 1954 Code provide that, where an optionlapses, the purchaser of the option is deemed to have sold property (the option) on the day the option lapsed. So, if the optionis a capital 9.sset in the hands of the purchaser, be has a capital loss from the lapse and this loss may be either long-term or short-term, depending upon his holding period for the option. "See Lucey and Bradley, "lilcome Tax Consequences of Investing in Puts and Calls," 50 ABAJ 494, 496 (1964). "Ibid. 21 The only difference between the early 1954 Code treatment and the 1939Code treatment exists In the relativelyrare case where both the "put" and "call" are allowed to lapse. In this case, since there is nobasis adjustment to make, the entire amount of the premium under the 1954 Code results In ordinary Income instead of the short-term capital gain treatment accorded under the 1939 Code. 2130 PAGENO="0979" PART THREE-EFFECTS OF REVENUE RULING 65-3 1 Rev. Rul. 65-3 1 requires that the premium paid for a straddle be allocated between its two component parts. This allocation is to be made on the basis of the relative market values of the "put" and the "call". The portion of the premium allocated to the straddle component that lapses becomes ordinary income. This result flows from the following portion of the ruling: However, a "straddle," although commonly referred to as one contract embody- ing both a "put" and a "call," is, in fact, two separate option contracts. Each, neither, or both may be sold or exercised, by the same or different persons. The holder of a "put" or a "call" written pursuant to a "straddle" contract has rights and liabilities no greater or less than he would have had if a "put" and "call" were purchased separately but simultaneously on the same terms. A "straddle" con- tract, accordingly, contains two separately identifiable options. See Bertha Silver- man v. Alfons Landa et al., 200 Fed. Supp. 193 (1961), affirmed, 306 Fed. (2d) 422 (1962), where the court describes a "straddle" at page 195 as follows: "A `straddle' consists of two separate options, one a `call' and one a `put.' Both the `put' and `call' are identical as to stock, contract price and time expira- tion." The ruling gave rise to two problems: (1) the method of allocating a straddle premium. between the put and the call element and (2) the likelihood that, with any allocation, the writing of a single straddle could well result in producing both ordinary income and capital loss to the writer. A problem arises in allocating the straddle premium between the put and the call elements because "puts" and "calls" are not traded on stock exchanges. The price a put and call dealer will pay the writer of a straddle is an individually negotiated price.22 Similarly the price at which the dealer resells is a negotiated price. In addition, to the writer, a straddle has certain characteristics which are different from the characteristics of a simple "put" plus a simple "call". The negotiation between the straddle writer and the broker is influenced by, but does not equal, what each imagines to be the current fair value of an option to purchase and the current fair value of an option to sell.23 The difficulties in apportioning the straddle premium between its two elements were recognized by the Treasury Department, and, on November 15, 1965, the Internal Revenue Service, in TIR-778, pub- lished Revenue Procedure 65-29. In this revenue procedure the Internal Revenue Service announced that it would accept allocations of straddle premiums in the ratio of 55 percent to the call and 45 percent to the put. This 55-45 ratio was selected because it repre- sented a rounded approximation of relative market prices of separately written "puts" and "calls" of the same length on securities of approxi- mately equal price. The procedure concluded with the statement that "If a taxpttyer does not use this method for a taxable year, then 22 SEC Report, pp. 80, 83-95. 23 The SEC Report, pp.8,83, indicates that the average premium received by writers was $404 for a call, $239 for a put, and $572 for a stradd1e. See example at p. 16. (See pp. 86,87.) 5 2131 PAGENO="0980" 6 INCOME TAX TREATMENT the allocation based on relative market values required by Revenue Ruling 65-31 must be used." This "rule of thumb" seems to be an acceptable solution to the first problem. The second of the problems which have arisen as a result of the ruling does not seem susceptible to an administrative resolution. This stems from the fact that the writer of a straddle normally receives different kinds of income or loss from his writing of straddles. To illustrate these various types of income or loss assume first that the market rises after the straddle is written and that the "call" is exercised. If the straddle writer purchases stock to cover the "call" at the time of exercise, he will then suffer a loss to the extent the market price (and his cost for the stock) exceeds the call price. This loss is reduced (or possibly eliminated), however, by the straddle premium. That part of the premium allocated to the "call" is treated as an additional receipt from the sale of the called stock. Thus, this income is taken into account in determining the loss on the called stock. The result, in this case, may well be a short-term loss. However, the portion of the premium resulting from the lapsed option, is ordinary income under the 1954 Code.24 Thus, the straddle writer could have ordinary income and capital loss resulting from the writing of one straddle. The same result would obtain if the market fell and the "put" was exercised. If the market price falls more than the premium allocable to the "put", then the writer of the straddle who is required to pur- chase stock at the price of the market when the straddle was written, would be holding stock with a "built-in" capital loss. If he sells the stock and thereby realizes this loss, in this case also he would have both a capital loss and ordinary income arising from the writing of one straddle. Apart from the $1,000 per year deduction against income for capital losses (sec. 1211(b) of the code), the capital loss could not be used to offset ordinary income. Thus, even though the straddle writer may suffer a net economic loss, he may nevertheless be required to pay taxes on ordinary income derived from the straddle transaction. ~~As indicated above, It would have been short-term capital gain under the 1939 Code, and so could have been netted against the other two types of straddle income. 2132 PAGENO="0981" PART FOUR-POSSIBLE `SOLUTION It would appear that, in general, what originates as one transaction should re~ult in either a single taxable consequence or a set of taxable consequences that may be netted against' each other if some of those consequences are profits and some are losses. Accordingly, the staff explored the possibility of identifying the profits and losses attribu- table to the writing of any one straddle. It was hoped that a method could be provided for setting off such profits and losses against each other. It soon became apparent that difficulties would arise in determining the portion of gain or loss attributable to a straddle in the event of the~ exercise of one component of the straddle. Difficulties would arise in determining the price of a stock at the moment the option was exercised; extensive records would have to be kept; and a new category of income would be added to the existing categories of ordinary income, long-term capital gains, short-term capital gains, and section 1231 income. On the other hand, it was concluded that an approach which moth- fled the treatment of only the income resulting from lapse of an option would present few of these difficulties. Much of the desired netting effect could be accomplished by treating all the types of receipts from the writing of straddles (premium income from lapsed options, premium income from exercised options, and gain or loss from the purchase or sale of securities at other than the current market price) as ordinary income or as capital gains or losses. The capital gains or losses alternative appears preferable because (1) it has long been accepted that purchase and sale of securities by one who does not hold securities for sale to customers in the ordinary course of his trade or business are capital transactions; (2) it is similarly accepted that premium income from exercised options result in adjustments to capital asset transactions; (3) a change in these rules with respect to the gain or loss attributable to the straddle element that is exercised (even if otherwise desirable) would result in substantial problems in distinguishing, in the gain or loss from a sale or purchase, between the straddle elements and the nonstraddlle capital elements; (4) purchasers of options are treated as sustaining capital losses when they permit options to expire (sec. 1234, I.R.C. 1954); and (5) the 1939 Code (sec. 1 17(g)(2)) provided for capital gain treatment of option lapse income. The joint committee staff concluded that the problem described above could probably best be dealt with by providing that income derived from the lapse of an option written as a part of a straddle is to be taxed as a short-term capital gain. Insofar as straddles are con- cerned, this is similar to the treatment provided in section 1 17(g)(2) of the 1939 Code. This treatment achieves the primary purpose of permitting the netting of different kinds of income or losses arising from a straddle, since short-term capital gains are first offset against short-term capital losses, and, to the extent of any excess stifi remaining, are next offset against net long-term capital losses. Thus, should the portion of the straddle premium~ allocated to the part of' the straddle exercised give 7 2133 PAGENO="0982" 8 INCO&t~ TAX TREATME~P rise to either short- or long-term capital losses, there will be an oppor- tunity for netting against this loss any income obtained from the side of the straddle allowed to lapse. In addition, treating the premium income attributable to the lapse as a short-term. capital gain will stifi mean that after netting against capital losses-either short-term or long-term-any excess gain stifi remaining wifi be treated in the same manner as ordinary income since this is the treatment uniformly accorded any such excess of short-term capital gains over capital losses. This, therefore, while generally providing for the netting with respect to the two sides of the straddle, stifi maintains the position of the Internal Revenue Service (as reflected in its ruling) that income from the lapse of a portion of a straddle option represents ordinary income. By comparison with the practice prior to January 1965, this sugges- tion (combined with allocation of premiums between the components of straddles) would result in some shifting from long-term capital gain to short-term capital gain and in earlier recognition (and therefore earlier subjection to tax) of option-lapse income. By comparison with the rules in effect since January 1965, this proposal would result in some earlier effective recognition of capital losses and their use ~o offset option-lapse income otherwise taxable at ordinary rates. The proposed treatment of straddle option lapse income as short- term capital gains would not apply to dealers-i.e., persons who hold securities for sale to customers in the ordinary course of their trades or businesses. Since the problem that gave rise to the study-a single transaction resulting in ordinary income which cannot be netted against a possible capital loss from the same straddle-does not arise in the case of the writing of separate options to buy or sell, it is suggested that any such change be limited to income from the lapse of options that originate as parts of straddles. The problem which gave rise to this study centered about straddles in issued stocks. However, such option devices are occasionally used in bonds and, perhaps, convertible debentures, when issued stocks, warrants, and similar securities. The same considerations would seem to apply in the case of such property and it is believed that the proposed treatment of straddle option lapse income probably should apply to securities generally. It is not clear whether the term "securities" includes commodities futures.'5 Since we have received no suggestion that Rev, Rul. 65-3 1 has created any problems regarding commodities futures, no need is seen for applying proposed change to options on contracts to buy such items. Since Rev. Rul. 65-3 1 applies only to transactions entered into after January 25, 1965, and since the staff study of the problems arising out of the ruling began at about that time, it is suggested that any legislation along the lines suggested probably should apply to straddles written after January 25, 1965. This will minimize the number of changes in applicable law. "There appears to be a conflict on this point within the context of the "wash sales" provisions of section 1091 of the 1954 Code, the successor to section 118 of the 1939 Code. Compare Trenton Cotton Oil Co. v. Corn. missioner, 147 F. 2d 33, 36-37, 33 AFTR 610 (C.C.A. 6, 1945), holding that commodities futures are securities for these purposes, with Corn Products Refining Co. v. Commissioner, 215 F. 2d 513, 516-517, 46 AFTR 528 (C.A. 2, 1954), affirmed on another point, 350 U.S. 46 (1955), holding that they are not. 2134 PAGENO="0983" APPENDIX APPENDIX I-REVENUE RULING 65-31 * For immediate release, Friday, January 22, 1965. TIR-683 The U.S. Internal Revenue Service today announced that the following revenue ruling relating to the treatment of premiums received by taxpayers who write "straddle" options will appear in Internal Revenue Bulletin No. 1965-9, dated March 1, 1965: Rev. Rul. 65-31 Since a "straddle" contains two options (a "put" option and a "call" option) each of value, it is necessary to allocate the premium received by the writer thereof to each option. The allocation of the premium should be made on the baiss of the relative market value of the "put" and "call" options contained therein, at the time of the issuance of the "straddle." A portion of the premium received by the writer for the option oontained in the "straddle" that was exercised is to be taken into account in determining gain or loss on that transaction, while the portion of the premium which is attributable to the expired option will be treated as ordinary income. The Internal Revenue Service has been requested to state its position with respect to the treatment for Federal income tax purposes of premiums received by a taxpayer who writes "straddle" options where only one of the options con- tained therein is exercised. A "straddle" is a combination of a "put" and a "call" option on the same stock or commodity, both options describing the same quantity at the same price that the stock or commodity may be "called" from or "put" to the writer thereof. A-"put" is an option t~ sell certain property, usually stock or commodities, to the writer thereof at a designated price within a designated time. If a "put" is exercised, the premium the writer has received decreases his basis in the property purchased ("put" to him) from the optionee. (See Rev. Rul. 58-234, C.B. 1958-i, 279.) A "call" is an option to buy certain property, usually stock or commodities, from the writer thereof at a designated price within a designated time. If a "call" is exercised, the premium the writer has received for writing the "call" is added to the amount realized on sale of the "called" property to the optionee. (See Rev. Rul. 58-234.) If the optionee permits a "put" or a "call" to expire without exercise, the premium the writer has received for the privilege of keeping an obligation open is considered ordinary income (Sec. 1.1234-1(b) of the Income Tax Regulations). The question presented is whether the premium received by the writer of a "straddle" should be allocated by him wholly to the exercised option under circumstances where one option is exercised and the other is not. If the correct rule were that it should be allocated wholly to the exercised option and, for example, the optionee exercised only the "put," the entire premium received for writing the "straddle" would reduce the writer's cost basis in the property "put" to him. Conversely, if the "call" were the only option exercised, the premium received for writing the "straddle" would be added to the amount realized on the property "called" from him. However, a "straddle," although commonly referred to as one contract embodying both a "put" and a "call," is, in fact, two separate option contracts. Each, neither, or both may be sold or exercised, by the same or different persons. The holder of a "put" or a "call" written pursuant to a "straddle" contract has rights and liabilities no greater orless than he would have had if a "put" and "call" were purchased separately but simultaneously on the same terms. A "straddle" contract, accordingly, contains two separately identifiable options. See Bertha Silverman v. Alfons Landa et al., 200 Fed. Supp. 193 (1961), affirmed, *pri~ed at 1965-1 Cumulative Bulletin 365. 9 2135 PAGENO="0984" 10 INCOME TAX TREATMENT 306 Fed. (2d) 422 (1962), where the court describes a "straddle" at page 195 as follows: "A `straddle' consists of two separate options, one a `call' and one a `put.' Both the `put' and `call' are identical as to stock, contract price and time expira-~ tion." In view of the above, it is necessary to allocate the premium received for writing the "straddle" contract to the "put" option and to the "call" option. The allocation of the premium should be made on the basis of the relative market values, at the time of the issuance of the "straddle," of the "put" and "call" options contained therein. Accordingly, if the "call" is exercised and the "put" is not, the amount of the premium properly allocable to the "put" would be considered ordinary income to the writer; conversely, if the "put" were exercised and the "call" were not, the amount of premium properly allocable to the "call" would be considered ordinary income to the writer. Naturally, if both options are exercised the amount of the premium allocated to the "call" option would be added to the amount realized on the sale of the property "called" from the writer, and the amount of the premium allocated to the "put" option would reduce the cost basis of the property purchased by ("put" to) the writer. Also, if neither option is exercised the amount of premium received by the writer constitutes ordinary income. Pursuant to the authority contained in section 7805(b) of the Internal Revenue Code of 1954, this revenue ruling will be applied prospectively only with respect to a "straddle" transaction entered into on or after Tuesday, January 26, 1965. 2136 PAGENO="0985" APPENDIX II-.REvENuE PROCEDURE 65-29 I For release Monday, November 15, .1965 TIR-778 The U.S. Internal Revenue Service today announced that the following revenue procedure will appear in Internal Revenue Bulletin 1965-48, dated November 29, 1965: Rev. Proc. 65-29 Guidelines for allocating the premium received by writers of "straddle" con- tracts with respect to corporate stock. SECTION 1. PURPOSE The purpose of this revenue procedure is to furnish taxpayers with a guide for allocating the premium received by writers of "straddle" contracts with respect to corporate stock. SECTION 2. BACKGROUND Revenue Ruling 65-31, I.R.B. 1965-9, 26, requires that the premium received by a writer of a "straddle" with respect to corporate stock be allocated between the :~cput~~ option and the "call" option contained therein, on the basis of the relative market values at the time of the issuance of the "straddle." SECTION 3. ALLOCATION OF PREMIUM .01. In the interest of uniform application of Revenue Ruling 65-31 the Reve- nue Service has determined with respect to "straddle" contracts involving corporate stock that 55 percent of the premium may be allocated to the "call" option and 45 percent of the premium to the "put" option. Since the market values of "puts" and "calls" are subject to price fluctuation, it may be neces- sary for. the. Revenue Service to adjust this allocation ratio periodically. .02 The Revenue Service will accept an allocation on this basis for all such "straddle" transactions entered into on or after January 26, 1965 (the effective date. of. Revenue Ruling 65-31), provided the ratio or ratios determined by the Revenue Service are used by the taxpayer in allocating premiums on all such "straddle" contracts issued on or after such date. .03. Option writers deciding to use the allocation method provided in this rev- ~nue. procedure must attach a statement to their Federal income tax returns so indicating. If a taxpayer does not use this method for a taxable year, then the allocation based on relative market values required by Revenue Ruling 65-31 must be used. U 2137 PAGENO="0986" APPENDIX 111-PREsS RELEASE OF JOINT COMMITTEE ON INTERNAL REvENu~ TAXATION For the press, for immediate release Wednesday, January 27, 1965 CHAIRMAN WILBUR D. MILLS AND VICE-CHAIRMAN HARRY F. BYRD ANNOUNCE THAT STAFF OF JOINT COMMITTEE ON INTERNAL REVENUE TAXATION WILL STUDY NEW IRS RELEASE ON TAX TREATMENT OF WRITERS OF "STRADDLE" OPTIONS Congressman Wilbur D. Mills, chairman of the Joint Committee on Internal Revenue Taxation, and Senator Harry F. Byrd, vice chairman, in a joint state- ment released today, state that questions have been raised with respect to a newly issued technical informabion release of the Internal Revenue Service dealing with the taxation of the income of writers of straddle options. The staff of the Joint Committee on Internal Revenue Taxation has been instructed to study the situa- tion created by the new TIR and to give comments and suggestions to the committee with respect to it. A "straddle" is a combination of an option to Sell stock (usually referred to as a "put") and an option to buy stock (usually referred to as a "call"). Under the new TIR, the taxpayers who grant (or "write") a straddle option must divide the premium they receive between the two parts of the option. One part of the option ordinarily expires unexercised and the premium assigned to this part of the option will be regarded as ordinary income under the TIR. The premium allocated to the other part of the option is treated as an adjustment to the basis of the stock sold or acquired pursuant to the option. Thus, if the put were exercised, this portion of the premium would reduce the cost to the writer of the stock sold tohim and if the call were exercised the premium allocated~to the call would increase the price he received on the sale of the stock. In either case, the other part of the premium would be regarded as ordinary income. If the stock subj ect to the straddle went down more than the amount of the premium allocated to the put, the taxpayer would have ordinary income from the expiration of the call and a potential capital loss on the stock that was put to him. In a series of such transactions, the taxpayer might have an overall loss but would be regarded as having ordinary income that could not be reduced by his capital 1Q55 in excess of $1,000. It has been the practice of m~ost taxpayers who write straddles to allocate their entire premium to the side of the option that was exercised so that the entire gain or loss on the transaction would be capital gain or loss. Whether the gain or loss was long term or short term would depend on how long the stock was held. 12 2138 PAGENO="0987" Union Calendar No.958 89Th CONGRESS 2D SEssIoN . 1 1 765 [Report No. 2174] IN THE HOUSE OF REPRESENTATIVES OCTOBER 22,1965 Mr. KEoGH introduced the followiiig bill; which was referred to the Com- mittee on Ways and Means OCTOBER 3, 1966 Reported with an amendineiit., committed to the Committee of the Whole House on the State of the Union, and ordered to be printed [Strike out all after the enacting clause and insert the part printed in italic] A BILL To amend section 1234 of the Internal Revenue Code of 1954. 1. Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 !4~ section 1234 of the Internal Revenue Code of ~954~ 4 relating to options, is a~mendecl as follows~ 5 Subsection -(-et-)- is redesignated as subsection Hfd~- and 6 the following new sithscction -(e3- is added at the end of sn-b- 7 section -fb~--~ 8 ~-(P*SPEOfM~ RULE Ff)J~ Q~ATORS OF S~PnAD1ThE.- 9 ~-~-f1~ (Lug ON LAPSE. In the ease of gain on lapse 10 of an option that was granted as part of a straddle -(as 11 defined in paragraph ~-)-~ the gain shall he deemed to 2139 PAGENO="0988" 2 1 be gain f~em the sale e~ exehange o~ a eapital asset held 2 fop less than th~ months on the day that the option 3 oxpires~ 4 ~-~2-)- P~+~+i~iows. 5 NA)- For purposes of this seetion a 1straddIe~ 6 ~dcmedu~mbina~qEtiOfltOb11yond 7 an option to sell~ gi'~4i~ig the holder the right to both 8 bay and sell a specified qi±an~tity of a seem~isy at a, 9 fixed pniee for a stated pored of timer 10 For purposes of this puragraph ~eeurit~ 11 ~1±a44 not inelude eontraets to buy or sell eommod 12 ities~ 13 ±!+3~)~ E~ci~tsfex 81~ ~ This stthsee4on 14 shall not apply to any person who holds securities for 15 sale to customers in the ordinary eonrse of his trade or 16' busincssT~" 17 BFHSGTIVB DATE 18 S~. 2- This Act shall apply to optk)ns granted a4ter 19 January 2~1965. 20 That section 1234 of the Internal Revenue Code of 1954 (re- 21 lating to options) is amended by redesignating subsection (c) *22 as subsection (d) and by inserting after subsection (b) the 23 following new subsection: 24 "(c) SPECIAL RULE FOR GRANTORS OF STRADDLES.- 25 "(1) GAIN ON LAPSE.-Ifl the case of gain on lapse 2140 PAGENO="0989" 3 1 of an option granted by the taxpayer as part of a straddle, 2 the gain shall be deemed to be gain from the sale or ex- 3 change of a capital asset held for not more than 6 months 4 on the day that the option expired. 5 "(2) ExcLusioN OF DEALERS.-This subsection 6 shall not apply to any person who holds securities for sale 7 to customers in the ordinary course of his trade or busi- 8 ness. 9 "(3) DEFINITI0NS.-For purposes of this subsec- 10 tion- 11 "(A) The term `straddle' means a simultane- 12 ously granted combination of an option to buy, and 13 an option to sell, the same quantity of a security at 14 the same price during the same period of time. 15 "(B) The term `security' has the meaning as- 16 signed to such term by section 1236(c)." 17 SEc. 2. The amendments made by the first section of this 18 Act shall apply to straddle transactions entered into after 19 January 25, 1965, in taxable years ending after such date. 2141 PAGENO="0990" I PAGENO="0991" 89TH CONGRESS ~ HOUSE OF REPRESENTATIVES J REPORT ~d iSe8sion f ~ No. 2174 INCOME TAX TREATMENT OF CERTAIN STRADDLE TRANSACTIONS OCTOBEE 3, 1966.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed Mr. MILLS, from the Committee on Ways and Means, submitted the following REPORT [To accompany H. R. 11765] The Committee on Ways and Means, to whom was referred the bill (H.R. 11765) to amend section 1234 of the Internal Revenue Code of 1954, having considered the same, report favorably thereon with an amendment and recommend that the bill as amended do pass. The amendment strikes out all after the enacting clause and inserts a substitute text which appears in the reported bill in italic type. I. SUMMARY A "straddle" is a combination of an option to buy and an option to sell a predetermined amount of a specified security at a fixed price for a limited period of time. The two component options are identical as to the security involved, the amount and price to which the options apply, and the length of time the options are available. The Internal Revenue Service requires the premium received for the straddle ~o be apportioned between these two component options. As a result, in the usual case where one option is exercised and the other is allowed to lapse, part of the premium (attributable to the lapsed option) gives rise to ordinary income, while the other part (attributable to the exercised option) becomes an adjustment in the cost or price of the security purchased or sold resulting in either an increase in a capital gain or a decrease in a capital loss. It is possible, therefore, for a single straddle transaction to give rise to both ordinary income and a capital loss, which it may not be possible to net against each other. This bill provides that the income from the lapse of an option which originated as part of a straddle is to be treated as a short-term capital 2143 PAGENO="0992" 2 TAX T9ATMENT OF - CERTAIN STRADDLE TRANSACTIONS gain (instead of ordinary income). This permits it to be netted against any capital loss which may result from the exercise of the other option in the straddle while retaining what in most respects is ordi- nary income treatment for any excess of net short-term capital gain over net long-term capital loss. This bifi is reported unanimously by your committee and the Treasury Department has indicated that it does not object to its enactment. II. NATURE OF STRADDLES' Straddles are one form of an option; namely, an offer both to pur- chase and to sell a specified amount of property at a stated price for a limited period of time. Options to sell securities are known as "puts"-i.e., the purchaser of the option can "put" his shares to the writer or issuer of the option at the stated price. Options to pur- chase are known as "calls"-i.e., the purchaser of the option can "call" the shares from the writer at the stated price. A "straddle" is a combination of a. put and call, with respect to the same security, for the same quantity, at the same purchase or sale price and avail- able for the same period of time. Straddles are likely to be written by persons with holdings of a security who believe that in the long run, the price of the stock will not vary greatly from its present price. Their inducement for writing the straddle is the receipt of a premium. Straddles generally are granted to brokers or dealers who, in turn, customarily sell the put and call components to different purchasers. The majority of puts and calls originate in straddles. While the use of puts and calls is not a new development in the securities markets, their significance in the securities markets is relatively limited; for example, the total number of shares covered by options sold in recent years on the New York Stock Exchange has rarely exceeded 1 percent of the total shares sold. Normally either (not both) the put or the call component of the straddle is exercised by the purchaser shortly before the end of the term for which the straddle is written. Frequently this is 6 months and 10 days after the straddle is issued. Which component of the straddle is exercised depends upon the market conditions at the time of exercise vis-a-vis market conditions at the time the straddle was written. If the market in that security has risen, the securities are likely to be "called" from the writer; if the market has fallen, the stock is likely to be "put" to the writer. While in the great majority of the cases, one component of the straddle is exercised and the other is allowed to lapse, occasionally (perhaps 10 to 15 percent of the time) neither option is exercised and in a few other cases (less than 1 perèent of the cases) both components of the straddle are exercised. Although options are purchased for hedging and other similar purposes by some investors, their primary use probably is as a method of investing by individuals with small amounts of money. 1 of the material presented in this part was derived from the "Report on Put and Call Options," a report published in August 1961 by the Securities and Exchange Commission, on the basis of an extensive study by the SEC's Division of Trading and Exchanges. 2144 PAGENO="0993" TAX TREATMENT OF CERTAIN STRADDLE TRANSACTIONS 3 III. DEVELOPMENT OF PRESENT TAX TREATMENT Under the 1939 code, premium income received from the writing of an option which had lapsed was treated as a short-term capital gain (sec. 1 17(g)(2) of the 1939 code). However, until the issuance of a revenue ruling in 1965 (Revenue Ruling 65-31) straddle writers generally allocated the entire straddle premium to the component option which was exercised, and this practice apparently was not challenged by the Internal Revenue Service prior to the issuance of the ruling. Since one component or the other of a straddle is exer- cised in the bulk of the cases, the fact that the premium in the case of the lapse of an option was treated as short-term capital gain was of relatively little significance. The important aspect was the treat- ment of the premium in connection with the portion of the straddle which was exercised. If all of the premium is allocated to the component which is exer- cised and this is the "put," the premium decreases the cost or basis of the stock put to the writer of the straddle. As a result, it would increase his capital gain only when he disposed of the stock put to him. Generally, this would result in a long-term capital gain (unless he held the stock for less than 6 months). Where the call component is exercised and all of the* straddle premium is allocated to it, the premium would increase the income received by the writer at the time the stock is called from (i.e., sold by) him. As a result in this case also, the total premium increases the writer's capital gain (or decreases his capital loss) and if the writer had held the stock for more than 6 months, the gain (or loss) would be long term. The 1939 code provision treating income from the lapse of an option as a short-term capital gain was not included in the 1954 code. As a result, where both options are permitted to lapse, the total straddle premium is now reported as ordinary income. However, in the usual case whe:e one option lapsed and the other was exercised, the treat- ment of allocating the straddle premium income to the side exercised in practice remained unchanged. In the ruling (Revenue Ruling 65-3 1) issued on January 22, 1965, the Internal Revenue Service held that the premium for a straddle must be allocated between its put and call components on the basis of the relative market values of each. In a later technical informa- tion release, the Service announced that it would accept allocations of 55 percent of each straddle premium to the call component and 45 percent to the put component.2 Under the ruling, part of the premium arising from the writing of a single straddle can result in ordinary income (the portion of the premium allocated to the lapsed component) while the remaining portion of the premium may result in either a capital gain or a capital loss, which in the usual case will be a long-term gain or loss. IV. REASONS FOR THE BILL The difficulty with the present tax treatment of premium income from the_writing of straddles lies in the fact that by dividing the pre- `Rev. Proc. 65-29, issued on Nov. 15, 1965. This 55-45 ratio was selected because it represented a rounded approximation of relative market prices of separately written "putt" and "calls" of the same length for securities of approximately equal price. The revenue procedure concluded with the statement that "If a taxpayer dOes not use this method for a taxable year, then the allocation based on relative market values required by Revenue Ruling 65-31 must be used." 71-297 0-67-pt. 2-63 2145 PAGENO="0994" 4 TAX TREATMENT OF CERTAIN STRADDLE TRANSACTIONS mium income into two parts, one part may be reported as ordinary income (the portion allocated to the lapsed option) while the other portion may merely decrease a capital loss. Your committee believes that it is hard to justify treating part of the transaction as resulting in ordinary income, while the other portion gives rise to a capital loss which cannot be offset (apart from the $1,000 per year deduction of net capital losses against ordinary income) against ordinary income. The problem can be illustrated by the following example. Assume that a straddle writer issues a straddle for a stock when its price is $100 a share and this is the option price. Assume that the straddle premium is $8 per share. Assume further that the put component of the straddle is exercised by the purchaser when the price of the stock is $80 per share. As a result, the writer of the straddle must buy stock at a price of $100 per share when its market value is $80 per share. If the straddle premium allocable to the put component is $3.60 per share, the short-term capital loss for the writer of the straddle will be $16.40 per share if he disposes of the stock shortly after receipt, when the market price is stifi $80 per share. At the same time, the remainder of the straddle premium, $4.40 a share, is allo- cated to the call component, which in such a case presumably was allowed to lapse. The $4.40 per share would be ordinary income while the capital loss of $16.40 a share attributable to the put side of the option would result in a short-term capital loss, which, except to the extent of the $1,000 a year, could not be netted with the ordinary income attributable to the premium income of the other side of the straddle. The writer of the straddle in these cases is, of course, entering the transaction in the hope of obtaining a profit; he naturally views the transaction as a single one and cannot see why he must pay ordinary income on a portion of the transaction while being denied full use of his capital loss attributable to the other component of the transaction (in those cases where he does not have capital gains sufficient to offset his capital losses and his losses exceed the $1,000 which may be offset against ordinary income). Moreover, the marketplace treats the straddle as a single transaction in that a smaller premium is paid for a straddle than for a separate put and call on the same stock, since the combined risk involved is less. Additionally, the writer of the straddle knows that in almost all cases, only one of the two options in the straddle will be exercised. He views this as the side for which he is being paid the premium. Your committee agrees that it is desirable to provide for this netting of a gain or loss arising from the two components of a straddle option. Nevertheless, it appears appropriate where the transaction on a net basis results in a gain, that the premium income result in ordinary income. The netting of the two components in a straddle can be achieved and still have any net premium gain result in what is essen- tially ordinary income, by treating the premium income allocated to the lapsed option as a short-term capital gain. Where this is done, any capital loss from the straddle transaction attributable to the side exercised (where the stock is disposed of in the same year in which the lapse of the option occurs) can be offset against the short-term capitai gain attributable to the premium income from the side of the option which lapsed. Should the short-term capital gain in such a case exceed the capital loss, it will still be treated in essentially the same manner as ordinary income. 2146 PAGENO="0995" TAX TREATMENT OF CERTAIN STRADDLE TRANSACTIONS 5 As a result, your committee's bill provides that any gain on the lapse of an option granted by a taxpayer as a part of the straddle is to be treated as a short-term capital gain. This treatment is not to be available, however, in the case of dealers (that is, persons who hold securities for sale to customers in the ordinary course of their trades or businesses). This treatment is made inapplicable in the case of dealers because their security transactions in any event are generally required to be treated as resulting in ordinary income. This treatment is applied to securities and not to commodity futures since there is no evidence that a problem has been created in this latter area. The change made by your committee's bill applies to all straddle transactions entered into after January 25, 1965, the effective date of the ruling which first required the allocation of the straddle pre- mium between the put and the call components. V. EXPLANATION OF PROVISIONS The bifi inserts a new subsection (c) to section 1234 of the code. The first paragraph of this new subsection provides that gain derived from the lapse of an option written as a part of a straddle (as defined in new section 1234(c) (3)) is, in effect, to be short-term capital gain, as defined in section 1222(1) of existing law. Thus, such gains will be added to any other short-term capital gains, to be netted against short- term capital losses, with the excess to be netted against any net long- term capital losses. Any remaining short-term capital gains will generally be taxed as ordinary income. Paragraph (2) of the new section 1234(c) provides that this provision does not apply to dealers. For this purpose, a dealer is a person who holds securities (including options to acquire or sell securities) for sale to customers in the ordinary course of his trade or business. Paragraph (3) of the new subsection defines a "straddle" as a simultaneously granted combination of an option to buy (a "call") and an option to sell (a "put") the same quantity of a security at the same price during the same period of time. if a person grants a multiple option (a put plus a call plus one or more additional puts or calls) it is intended that the grantor of the multiple option must identify in his records which two of the compo- nent options constitute the straddle, if it is not clear from the options themselves. It is contemplated that the method of identification will be specified in regulations issued by the Secretary of the Treasury or his delegate. If there is no identification by the writer, this provision relating to straddles is not to apply. As a result, in such a case the gain on the lapsed option (or options) would result in ordinary income.. A corporate security for purposes of the definition of a straddle is the same as defined in section 1236(c) of the code-i.e., stocks, bonds, notes, etc. Aecordingly, the term securities does not include com- modities futures. The amendments described above are to apply to straddles written after January 25, 1965, in taxable years ending after such date. 2147 PAGENO="0996" 6 TAX TREATMENT OF CERTAIN STRADDLE TRANSACTIONS VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED 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 re- ported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, existing law in which no change is proposed is shown in roman): SECTION 1234 OF THE INTERNAL REVENUE CODE OF 1954 SEC. 1234. OPTIONS TO BUY OR SELL (a) TREATMENT OF GAIN OR Loss.-Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, a privih~ge or option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same char- acter as the property to which the option or privilege relates has in the hands of the taxpayer (or would have in the hands of the tax- payer if acquired by him). (b) SPECIAL RULE FOR Loss ATTRIBUTABLE TO FAILURE To EXER- CISE OPTI0N.-For purposes of subsection (a), if loss is attributable to failure to exercise a privilege or option, the privilege or option shall be deemed to have been sold or exchanged on the day it expired. (c) SPECIAL RULE FOR GRANTORS OF STRADDLES.- (1) GAIN ow LAPSE.-In the case of gain on lapse of an option granted by the taxpayer as part of a straddle, the gain shall be deemed to be gain from the sale or exchange of a capital asset held for not more than 6 months on the day that the option expired. (~) EXCLUSION OF DEALERS.-This subsection shall not apply to any person who holds securities for sale to customers in the ordinary course of his trade or business. (3) DEFINITIONS.-FOr purposes of this subsection- (A) The term "straddle" means a simultaneously granted combination of an option to buy, and an option to sell, the same quantity of a security at the same price during the same period of time. (B) The term "security" has the meaning assigned to such term by section 1236(c). ((c)] (d) NON-APPLICATION OF SECTION.-This section shall not apply to- (1) a privilege or option which constitutes property described in paragraph (1) of section 1221; (2) in the case of gain attributable to the sale or exchange of a privilege or option, any income derived in connection with such priv- irege or option which, without regard to this section, is treated as other than gain from the sale or exchange of a capital asset; (3) a loss attributable to failure to exercise an option described in section 1233(c); or (4) gain attributable to the sale or exchange of a privilege or option acquired by the taxpayer before March 1, 1954, if in the hands of the taxpayer such privilege or option is a capital asset. 2148 PAGENO="0997" [October 11, 1966] [P. 25026) INCOME TAX TREATMENT OF CER- TAIN STRADDLE TRANSACTIONS Mi'. MrLLS. Mr. Speaker, I ask unan- imous consent that the Committee of the Whole House on the State of the Union be discharged from further considera- tion of the bill HR. 11765 to amend section 1234 of the Internal Revenue Code of 1954, which was reported to the House unanimously by the Committee on Ways and Means, ~nd ask for its immediate consic~e:'ation. TClerk read the title of the bill. The SPEAKER. Is there objection to the request of the gentleman from Ar- kansas? Mr. CURTIS. Mr. Speaker, reserving the right to object, and I shall nzt, I should like to ask - the chairman of the committee to explain briefly the bill. Mr. MILLS. Mr. Speaker, will the gen- tleman yield? Mr. CURTIS. I yield to the gentleman from Arkansas. Mr. MILLS. Mr. Speaker, this bill, H.R. 11765, is intended to permit the netting of gains and losses resulting from the granting of certain types of options to buy and sell corporate stock. The transactions I have referred to in stock market parlance are known as "straddles." Briefly, a straddle is a com- bination of an option to buy and an op- tion to sell the same quantity of a secu- rity at the same price during the same period of time. The option to buy is known as ~ "call." The option to sell is known as a "put." Typically, the com- bination-the straddle-is written by a person who owns the stock and does not believe that it is likely to fluctuate in value very much over the long run. The inducement to write the straddle is the receipt of a premium for it. A straddle is sold by the writer to a dealer, who then normally separates out the component options and sells the put-the option to sell to the writer-to one investor and the call-the option to purchase from the writer-to another investor. Nor- mally, if the market in that security moves upward, the call is exercised and the put option is allowed to lapse. If the market in that security moves down- ward, then the put is apt to be exercised and the call allowed to lapse. Some- times-generally about 10 to 15 percent of the time-the movement in the stock is so slight that neither option holder exercises his option. Rarely-less than 1 percent of the time-the stock fluctuates -so much that both component options are exercised. This bill is Intended to have its primary effect in the overwhelming majority of the cases-where one com- ponent optjon is exercised and the other is not. Under the 1939 Internal Revenue Code and under the 1954 code until January 1965, it was the usual practice for the writer of a straddle to treat the entire premium as either an increase in the amount received for the stock when the call was exercised, or as a decrease in the writer's cost of the stock when the put was exercised. As a result, the pre- mium merely increased a capital gain or decreased a capital loss. Under a ruling issued In January in 1965, the Internal Revenue Service has been requiring the writer of a straddle to apportion his premium between the put option and the call option. That part of the premium allocated to the option that ultimately is exercised would continue, as in the past, to either increase the writer's capital gain or decrease his capital loss. The part of the premium allocated to the option that ultimately lapses is treated as ordinary income. Consequent,ly, a single straddle transac- tion now might well result in the writer realizing both ordinary income and a capital loss. Since net capital losses can be used to offset ordinary income only to the extent of $1,000 a year, a writer's straddles transactions may well result In both ordinary income and capital losses which could not be netted against each other. Straddles are viewed by those who write them as giving rise to a single transaction. This seems to be borne out by the facts in these cases, for exam- ple, the premium received by the writer of the straddle is less than the premium received by the writer of an option to buy plus a completely separate option to sell. Also, the stock exchange com- pany that endorses the option-guaran- tees that it will be honored if it is ex- ercised-will require considerably less collateral from the writer of a straddle than it will from the writer of a sepa- rate option to buy and a separate option to sell. Because of this combination of char- acteristics, the Ways and Means Com- mittee concluded that some method ought to be found to permit the gains and losses resulting from the straddle transactions to be netted against each other. This bill permits just such netting by treating the option lapse income in these cases as short-term capital gains. Since all the gains and losses from a straddle would be capital gains and losses, they could be netted gainst each other. How- ever, any net profits would normally re- sult in short-term capital gains, and would be taxed generally as ordinary income. The problem giving rise to this bill was examined by the staff of the Joint Committee on Internal Revenue Taxa- tion at the request of former Senator Harry F. Byrd and myself, in our ca- pacities as vice chairman and chairman last year of the joint committee. The requested study was announced in a 2149 PAGENO="0998" press release dated January 27, 1965. This staff has consulted with Treasury staff on this bill. This bill, reported unanimously by the Ways and Means Committee, is consistent with the sug- gestions Of the joint committee staff; and the Treasury does not object to the bill. The joint committee staff report on this bill stated: Since Rcv. riul. 65-31 applies only to trans- actions entered Into after January 25, 1965, and since the staff study of the problems arising out of the ruling began at about that time, It Is suggested that any legisla- tion along the lines seuggested probably should apply to straddles written after Janu- ary 25, 1965. This will minimize the number of changes in applicable law. This bill specifically adopts that sug- gestion. This bill Is not expected to have any appreciable effect on revenues. How- ever, this bill' will bring the tax laws into g~ater co~ormity with the economic consideratior~s that move people to writo straddles and buy options. It wIll reni- edy an unfai: quirk In the tax Liws. It should be adopted. Mr. CURTIS. Mr. Speaker, I thank the gentleman. I withdraw my reserva- tion. [P. 2~27) The SPEAKER. Is there objection to the request of the gentleman from Arkansas? There was no objection. The Clerk read the bill, as follows: HR. 11765 Sc it enacted by the Senate and Hon~se of flcprcscntatwcs of the United States of America in Congress assembled, That section 1234 of the Internal Revenue Code of 1954, relating to options, Is amended as follows: Subsection (c) Is redesignated as subsec- tion (d) and the following new subsection (c) is added at the end of subsection (b). (C) SPECIAL RULE FOR CREATQRS OF STRADDLE.- `(1) GAIn ON LAPsE-In the case of gain on lapse of an option that was granted as part of a straddle (as defined In paragraph 2), the gain shall be deemed to be gain from the sale or exchange of a capital asset held f or less than six months on the day that.the option expires. "(2) D~~xNITIoNs.- "(A) For purposes of this section a `strad- dle' is defined as a combination of an option to buy and an option to sell, giving the holder the right to both buy and sell a speci- fled quantity of a security at a fixed price for a stated period of time. "(B) For purposes of this paragraph `secu- rity' shall not include contract,s to buy or sell commodities. (3) Excausion OF DEALERS-ThIS subsec- tion shall not apply to any person who holds securities for sale to customers in the ordi- nary course of his trade or businesi~" EFFECTIVE DATE Sac. 2. This Act shall apply to options granted after January 25, 1965. With the following committee amend- ment: Strike out all after the enacting clause and insert the following: "That section 1234 of the Internal Revenue. Code of 1054 (relatIng to options) is amend- ed by redesignating subsection (c) as subsec- tion (d) and by inserting after subsection (b) the following new subsection: ``(c) SPEcIAl, RULE FOIt GRANTORS OF STRADDLES.- `(1) GAIN ON LAPsE-In the case of gain on lapse of an option granted by the tax- payer as part of a straddle, the gain shall be deemed to be gain from the sale or exchange of a capital asset held for not more than 6 months on the day that the option expired. "`(2) ExcLusion or DEALER5.-'rhls subsec- tion shall not apply to any person who holds securities for sale to customers in the, ordi- nary course of his trade or business. "`(3) DEFINITIONs-For purposes of this sithsection- (A) The term "straddle" means a simul- taneously granted combination of an option to buy, and an option to sell, the same quan- tity of a security at the same price during the same period of time. "`(B)' The term "security" has the mean- ing assigned to such term by section 1236(c).' "SEC. 2. The amendments made by the first section of this Act shall apply to straddle transactions entered Into after January 25, 1965, in taxable years ending after such date." Mr. MILLS (interrupting the reading). Mr. Speaker, I ask unanimous consent that further reading of the amendment be dispensed with and that it be printed in the RECORD. The SPEAKER. Is there objection to the request of the gentleman from Ar- kansas? There was no objection. The committee amendment was agi'eed to. The bill was ordered to be engrossed and read a third time, was read the third time, and passed, and a motion to re- consider was laid on the table. 2150 PAGENO="0999" APPENDIX III S. 1013 TO CLARIFY THE COMPONENTS OF, AND TO ASSIST IN THE MANAGEMENT OF, THE NATIONAL DEBT AND THE TAX STRUCTURE (Sec. 402 of Public Law 89-809) 2151 PAGENO="1000" PAGENO="1001" Calendar No. 695 89TH CONGRESS 1ST SESSION S. 1 0 1 3 [Report No. 710] IN THE SENATE OF THE UNITED STATES FEBRUARY 8, 1965 Mr. SALTONSTALL iiitroduced the following bill; which was read twice and referred to the Coniinittee on Finance SEPTEMBER 14 (legislative day, SEPTEMBER 13), 1965 Reported by Mr. BYE!) of Virginia, with aineiidrneiits [Omit the part struck through and insert the part printed in italic] A BILL To clarify the components of, and to assist in the management of, the national debt and the tax structure. Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, ~ That the Secretary of the Treasury shaH, on or before 4 March 31 of each year (beginning with 1966), submit to the ~ Senate and the House of IRepresentatives a report setting 6 forth, as of the close of December 31 of the preceding year, ~ the aggregate and individual amount's of the contingent liabili- 8 ties and the unfunded liabilities of the Government, and of 9 each department, agency, and instrumentality thereof, in- 10 eluding, without limitation, trust fund liabilities, Govern- 11 ment-sponsored corporations' liabilities, indirect liabilites not 2153 PAGENO="1002" 2 1 inchided as a part of the public debt, and liabilities of insur- 2 a.iice and annuity programs, including their actuarial status 3 on both a balance sheet and projected source and application 4 of funds basis. The report shall also set forth the collateral 5 pledged, or the assets available (or to be realized), as secu- 6 rity for such liabilities (Government securities to be separately 7 noted), and an anaiysis of their significance in terms of past 8 experience and probable ~4sk risk, and shall also set forth all 9 other assets available to liquidate liabilities of the Government. 10 The report shall set forth the required data in a concise 11 form, with such explanatory material as the Secretary may 12 deteriiiiiie to 1)0 necessary or desirable, and shall include ~ total amounts of e:acli category according to the department, 14 agency, or iiistrument~ality involved. 2154 PAGENO="1003" Calendar No. 695 89TH CONGRESS ~ SENATE I REPORT 1st Session f No. 710 COMPONENTS OF THE NATIONAL DEBT SEPTEMBER 14 (legislative day, SEPTEMBER 13), 1965.-Ordered to be printed Mr. BYRD of Virginia, from the Committee on Finance, submitted the following REPORT [To accompany S. 1013} The Committee on Finance, to which was referred the bill (S. 1013) to clarify the components of, and to assist in the management of, the national debt and the tax structure, having considered the same, reports favorably thereon with amendments and recommends that the bifi as amended do pass. SUMMARY OF BILL This bill would require the Secretary of the Treasury to submit annually to the Congress a brief report setting forth the amounts of the contingent and .unfunded liabilities o~ the Federal Government, including those of agencies and instrumentalities of the Government. GENERAL STATEMENT In the past, it has been the practice of the Federal Government to determine its financial requirements on an annual basis. This bill soes not depart from this practice. However, an annual system of budgeting does not present a complete picture of the financial con- * dition of the United States because it fails to depict numerous cate- gories of Federal obligations and commitments which are subject to contingencies. Similarly, it fails to reveal fully those situations where Congress has enacted spending authorizations, but has not specifically appropriated the moneys needed to fulfill the statutory commitment. Moreover, by present methods, U.S. liability under many of its insurance and guarantee programs is difficult to measure and analyze. This is because sufficient information regarding these programs either is not available at all, or if it is available, it is inadequately presented. 2155 PAGENO="1004" 2 . COMPONENTS OF THE NATIONAL DEBT In many cases information with respect to contingent liabilities of specific governmental programs now is available only in reports of specific agencies or corporations. However, these data. frequently lose much of their usefulness because they are not combined with simi- lar data with respect to other programs. Thus, although part of this information may now be available it is'n~t published in one place or on a uniform basis, and does not facilitate understanding of the cur- rent financial condition of the United States. `tour committee believes that it .js. desirable to make available in a single. concise report~ pertinent information with respect to the cur- rent status of the contingent"lhthilities of the Federal Government, in- ~luding its long-range obligations and commitments. Indeed, the committee recognizes a responèibility to make available in such a report-as clear aiid complete as possible-the overall financial con- dition of our Government. Such a report, consolidating information now available only in part in many diverse reports with information which is not now available at all, will enable the Congress to have a better understanding of the current fiscal needs of the Federal Govern- V~S~t. &i, this reason, the committee has approved, and recommends eru~tment of a bill requiring the Seci'etary of the Treasury to submit to the Congress, by March 31 of each year, a report showing ` the amount (both on an aggregate and on an individual basis) of the contingent liabilities and. the unfunded liabilities of the Federal Government, determined as of December 31 of each year, commencing with 1966. `The. contingent liabilities referred to by the bill include (1) liability of the Government under its various trust funds, such as the old age and survivors insurance trust fund and the highway trust fund; (2) liabilities of Government-sponsored * corporations (for example, the Commodity Credit Corporation);. (3) indirect liabilities of the Federal Government not included as part of the public debt, such as Federal Housing Administration debentures; and (4) liabilities of Federal in- surance and annuity programs. Under the bill, data with respect to these insurance and annuity pro- grams (which include the civil service retirement system, veterans' pension, and war risk insurance, programs) is to include information regarding their actuarial status on both a balance-sheet basis and a projected source-and-application-of-funds basis. Where appropi~te~thi~ ~~rLJ.~lsq~to indicate the collateral ple~ed, or th~ assets available,'.as_securi~yfo~'~~s~edfi~d:li~jji~, a~ñd an a~I~is~TTh~ir si~~in terms of past experience and probable risks. Thus, fQr example, in the case of federally insured home mortgages `the assets available on foreclosure may, in favorable circumstances, offset the potential Federal liability. But the re- porting of assets is not to stop with a recording of assets related to the liabilities. Under a committee amendment the' Secretary of the Treasury is to set forth all other assets which would be available to liquidate liabilities of the Federal Government. In order to provide flexibility and to present data included in the report from being misconstrued or misleading, the bill provides, that the Secretary of the Treasury may set forth such explaiiatory material as he determines to be necessary or desirable. Under this provision, if he believes particular data are likely to lead to improper conclusions, he may qualify that data sufficiently to negate such conclusions. 2156 PAGENO="1005" COMPONENTS OF THE NATIONAL DEBT 3 Although the Bureau of the Budget does not favor the bill, in its report to the committee on a virtually identical bill in the 88th Congress (dated December 12, 1963), it indicated its agreement with the objectives of the bill as follows: We agree with the objective of S. 2281 that the Congress and its committees should have available whatever informa- tion they need with respect to the financial status of the Government. in accordance with this objective, the Treas- ury Department has been preparing, semiannually, for a number of years, a statement on long-range commitments and contingencies of the U.S~. Government.' The Bureau of the Budget has on occasion worked informally with Treas- ury staff on this matter, and consideration has been given to possible extensions and refinements of the data. I believe that more can be done in this respect and, together with the Treasury Department, we shall work with the responsible Government agencies to. this end. If, in addition, your committee or any other committee of the Congress would like to have particular tabulations, such as those described in S.. 2281, we believe it would be appro- priate to ask the Treasury Department to supply them when needed. However, we believe the nature of such tabulations should be left flexible, to he determined from time to time, rather than being fixed in a statute. It is the opinion of the Committee on Finance, as already indicated, that the bifi, as reported, preserves the flexibility of tabulations urged in the departmental report. Moreover, the committee fully recognizes the desirability of refining data now being compiled in order to make it more meaningful and useful, and the bill as reported permits this. By drawing together tabulations regarding contingent liabilities of various departments, agencies, and Government-sponsored corporations, no doubt the Treasury Department will find new ways by which statistical refine- ments can be made, and tabulating methods improved. This can only serve to increase the quality of the report required by the bill. The report; will fill a need which has been felt by the Congress for many years. APPENDIX The followmg data prepared by the Treasury Department indicates for the items mcluded therein the type -of information which would be presented on a Government-wide basis m the i eports called for by the bill. This data was -compiled as of December 31, 1962, and is the last uch report the Treasury has issued except in response to a special request made at the June 23, 1964,. hearing before the Committee on \ Finance on H.R. 11375, relating to a temporary increase in the public debt. The preliminary information submitted by the rfreasury `Dèpartment. in response - tct. this. special request (which appears on pp. 44-46 of the printed hearings) employs statistical and tabulation methods differeflt from those .pre.viouslyused by the Treasury Depart- ment and these new methods may replace the earlier procedures. 1 For statement prepared as of Dec. 31, 1962, see appendcx to this report. - 2157 PAGENO="1006" 4 COMPONENTS OF THE NATIONAL DEBT LONG-RANGE COMMITMENTS AND CONTINGENCIES OF THE U.S. GOVERNMENT, AS OF DECEMBER 31, 1962 The attached statement covers the major financial commitments of the U.S. Government, except the public debt outstanding and those involving recurring costs.~or which funds are regularly appropri- ated by the Congress and are iib~ yet obligated, such as aid to States for welfare programs and participation in employee retirement systems. The statement is segregated into four categories, namely (a) loans guaranteed and insured,. etc., by Government agencies; (b) insurance in force; (c) obligations issued on credit of the United States; and (d) undisbursec[ cOmmitments, etc. The items appearing in this statement are quite different from the direct debt of the United States. They are programs of a long-range nature that may or may not commit the Government to expend funds at a future time. The extent to which the Government may be called upon to meet these commitments varies widely. The liability of the Government and the ultimate disbursements to be made are of `a contingent nature and are dependent upon a variety of factors, including the nature of and value of the assets held as a reserve against the commitments, the trend of prices and employment, and other economic factors. Caution should be exercised in any attempt to combine the amounts in the statement with the public debt outstanding for that would involve not only duplication but would be combining things which are quite dissimilar. As indicated by the enclosed statement, there. are $118.1 billion of public debt securities held by Government and other agencies as part of the assets that would be available to meet future losses. The following examples illustrate the need for extreme caution in using data on the contingencies and other commitments of the U.S. Government. 1. The Federal Deposit Insurance Corporation had insurance outstanding as of December 28, 1962, estimated to be $179.1 billion. The experience of the Federal Deposit Insurance Corporation has been most favorable., During the period this Corporation has been in existence, premiums and other income have substantially exceeded losses which has permitted the retirement of Treasury and Federal. Reserve capital amounting to $289.3 mfflion (all repaid to Treasury), and the accumulation of $2.5 billion reserve as of December 31, 1962. The Corporation's holdings of public debt securities as of that date amounted to $2.6 billion which~already appears in the public ~debt total. `Out of $335.9 billion of assets in insured banks as'ofDeceinber 28, 1962, $70.6' billion are in public debt'securities `(also reflected in~ the puplic debt). The assets, both of `insured banks and' `the Federal Deposit Insurance Corporation,,~s well.as the continued income of the Corporation from assessments and other sources, stand between in- sured deposits and the Government's obligation to redeem `them. 2. The face value of life insurance policies issued to veterans and in force as of December 31, 1962~ amounted to $39.8 bfflion. This does not represent the Government's potential liabilities under these programs since some of these policies will probably be' permitted. to lapse and future premiums, interest, and the invested reserves amount- ing to $6.9 billion of public debt securities should cover the `normal mortality risk. 2158 PAGENO="1007" COMPONENTS OF THE NATIONAL DEBT 5 3. Under the Federal Reserve* Act of 1913, as amended, Federal Reserve notes are obligations of the United States which, as of De- cember 31, 1962, amounted to $29.4 bfflion. The full faith and credit of the United States is behind the Federal Reserve currency. These notes are a first lien against the $53.9 bfflion of assets of the issuing Federal Reserve banks which includes $30.8 bfflion of Govern- ment securities already included in the public debt. These notes are specifically secured by collateral deposited with the Federal Reserve agents which, as of December 31, 1962, amounted to $25.2 bfflion in Government securities and $7.6 billion in gold certfficates. Long-range commitments and contingencies of the U.s. Government, as of Dcc. 31, 1962 [In milliOns of dollars] Gross Public debt amount of securities Commitment or contigency and agency commitment or cOn- held by Government . tingency and other agencies Loans guaranteed, insured, etc., by Government agencies: Agriculture Department: Commodity Credit Corporation Farmers Home Administration: Agricultural credit insurance fund~.. . (~) 395 ~ 28 2435 652 398 39,506 903 3,256 957 ~ 1 149 23 ~ 104 589 Commerce Department: Office of the Secretary: Aircraft loan guarantees Maritime Administration: Federal ship mortgage insurance revolv- ing fund Export-Import Bank of Washington Housing and Home Finance Agency: Federal Housing Administration: Property improvement loans Mortgageloans Office of the Administrator: Urban renewal fund Public Housing Administration: Local housing authority bonds and notes (commitments covered by annual contributions) Local housing authority temporary notes Interior Department: Bureau of Commercial Fisheries: Federal ship mortgage insurance fund, fishing vessels Interstate Commerce Commission - Small Business Administration: Revolving fund Treasury Department: Reconstruction Finance Corporation liquidation fund Federal Civil Defense Act of 1950, as amended Veterans' Administration (67) 6 1 p16, 122 110 - Defense Production Act of 1950, as amended Total loans guaranteed, insured, etc., by Government agencies 62,936 702 Insurance and guarantees in force: - Agency for International Development: Industrial guarantees 916 Agriculture Department: Fderal Crop. Insurance Corporation.. 8358 Commerce Department: Marftime Adininistration: War risk insurance ---re~olvingfund ~ .. 39. . 3 Export-Import Bank of Washingtoli War risk and expropria~son insurance 2 urance on exports iSsued- thro'ugh ~orèign CreditXnstn'ance As- soCiat.lOn- ~ . 474 Federal Deposit Insurance Corporation . 10 1~9, 088 2,603 Held byTnsured commercial and mutual savings banks 70 606 * Federaf Home Loan Bank.Boani:: Federal savingsand -Josn Insurance Corporation 1077 349 641 -Held by insured institutions 5,302 ~J.S. InformationAgency: Informational media guarantees 4 Veterans' Administration: . . . : .- National service life insurance - 38,596 5,859 U.5. Government life insurance - 1,252 1,002 Total insurance and guarantees in force - 298,078 86,016 See footnotes at end of table, p. 7. 2159 PAGENO="1008" 6 COMPONENTS OF THE NATIONAL DEBT Long-range commitments and contingencies of tke U.*S. Government, as of Dec. 31, 1962-Continued Em millions of dollars] * Gross Public debt. . amount of securities Commitment or contigency and agency commitment or con- held by Government tingency and other agencies Loans guaranteed, insured: Obligations issued on the faith of the United States: Postal savings certificates: U.S. Postal Savings System Canal Zone Postal Savings System Total postal savings certificates 535 560 Other obligations: Federal Reserve notes (face amount) 20,378 1230,820 Undisbursed commitments, etc.: To make future loans: Agency for International Development: Development loans Affiance for Progress, development loans Development loan fund liquidation account Loans to U.S. firms and domestic or foreign countries Other U.S. dollar and foreign currency loans Agriculture Department: Commodity Credit Corporation Farmers Home Adm~inistration: Agricultural credit insurance fund Directloanaccount Emergency credit revolving fund Rural housing and other loans Rural Electrification Administration Export-Import Bank of Washington: Regular lending activities Housing and Home Finance Agency: Office of the Administrator: College housing loans Public facility loans Urban renewal fund Housing for the elderly Public Housing Administration Interior Department: Bureau of Commercial Fisheries: Fisheries loan fund Defense Minerals Exploration Administration: Defense Produc- tion Act of 1950, as amended Small Business Administration (revolving fund) Veterans' Administration (veterans' direct loan program) Total undisbursed commitments to make future loans 7,703 To purchase mortgages: Housing and Home Finance Agency: Federal National Mortgage Association: Secondary market operations Special assistance functions Total commitments to purchase mortgages To guarantee and insure loans; - Agriculture Department: Farmers Home Administration: Agri. cultu3'al credit insurance fund Commerce Department: Maritime Administration: Federal. ship mortgage insurance revolving fund Housing and Home Fingn~e Agency: Federal. Housing Administra- tion Defense Production Act of 1950 as amended Total commitments to guarantee and inSurance loans To purchase investment company debentures: SmSll Business Adminis- tration (revolving fund) See footnotes at end of table, p. 7. 2160 11 531 114 556 791 93 827 9 1,971 3 12 12 2 15 892 1,612 895 108 654 31 131 (7) (7) 108 37 28 .327 355 13 39 8,132. .22 6,206 37 PAGENO="1009" COMPONENTS OF THE NATIONAL DEBT 7 Long-range commitments and contingenoics of the U.s. Government, as of Dec. 81, 1962-Continued [In millions of dollars] . Gross Public debt amount of securities Commitment or contigency and agency commitment or con- tingency ~ held by Government and other agencies Loans guaranteed, Insured-Continued Unpaid subscriptions, etc.: International Bank for Reconstruction and Development 5,715 Inter-American Development Bank 200 International Development Association 123 6,038 `Guaranteed loans and certificates of Interest, amounting to $1,113,000,000 as of Dec. 31, 1962, are Included In the Corporation's balance sheet with the direct loans. Includes accrued Interest. `Includes political risk export guarantees amounting to $333,000,000. 4 Represents Administration's portion of insurance liability. Estimated amount of insurance In force and loan reports in process as of Dec. 31, 1962, Is $1,592,000,000. Loan insurance shall not exceed 10 percent of such loans. The full faith and credit of the United States is pledged to the payment of all amounts agreed to be paid as per sec. 302 of Public Law 87-70 approved June 30, 1961. Represents deferred participations. 7 Less than $500,000. 8 Represents the Veterans' Administration portion of insurance liability. The total amount of loans In the hands of private lenders Is estimated at $29,754,000,000; Represents estimated insurance coverage for the 1962 crop year. 15 EstImated Insurance liability. 11 Excludes accrued Interest. "Includes public debt securities amounting to $25,179,000,000 that have been deposited by the Federal Reserve bank system with the Federal Reserve agents ai specific collateral. NovE.-The above figures are subject to the limitations and precautionary remarks, as explained in the foreword to this statement. 7 1-297 0-67-pt. 2-64 2161 PAGENO="1010" [September 17, 1966] [P. 23320] THE MANAGEMENT OF THE NA- TIONAL DEBT AND TAX STRUCTURE The Senate proceeded to consider the bill (S. 1013) to clarify the components of and to assist in the management of the national debt and the tax structure which had been reported from the Com- mittee on Finance with amendments on page 1, line 8, after the word "~bilities," to insert "and the unfundec~ ~.abilities"; and, on page 2, line 8, after the word "probable", to strike out "risk" and in- sert "risk, and shall also set forth all other assets available to liquidate lia- bilities of the Government"; so as to make the bill read: Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the Secretary of the Treasury shall, on or before March 31 of each year (beginning with 1966), submit to the Senate and the House of Rep- resentatives a report setting forth, as of the close of December 31 of the preceding year, the aggregate and individual amounts of the contingent liabilities and the unfunded li- abilities of the Government, and of each de-~ partment, agency, and instrumentality there- of, including, without limitation, trust fund liabilities, Government-sponsored corpora- tions' liabilities, indirect liabilities not In- cluded as a part of the public debt, and U- abilities of insurance and annuity programs, including their actuarial status on both a balance sheet and projected eource and appli- cation of funds basis. The report shall also set forth the collateral pledged, or the assets available (or to be realized), as security for such liabilities (Government securities to be separately noted), and an analysis of their significance in terms of past experience and probable risk, and shall also set forth all other assets available to liquidate liabilities of the Government. The report shall set forth the required data -in a concise form, with such explanatory material as the Secretary may de- termine to be necessary or desirable, and shall Include total amounts of each category according to the department, agency, or In- strumentality involved. Mr. DIRKSEN. In the absence of the Senator from Massachusetts [Mr. SAL- TONSTALL], I think I should say, with respect to this bill, that what he pro- poses is to set up a complete balance sheet for every activity of government. That has never been done before, and I think it will prove to be one of the most useful documents that the Senate will ever have authorized. I may wish to amplify my remarks on it at some later time. Mr. SALTONSTALL subsequently said: Mr. President, while I was absent for a few minutes when Senator DIRKSEN spoke on this bill I would like to speak briefly on the need for better reporting of the Federal debt. I am very pleased that the Senate today passed my bill, S. 1013. We now have a statutory national debt of $318 billion, and also acknowledge in addition contingent debt and Federal guarantees of about $400 billion. Actual payments under guarantees will, of course, be much smaller than that, and many of the accounts are covered by ade- quate reserves. But, this bill is con- cerned with a growing area of Federal debt which is reported sporadically or not at all. The amount here may ap- proach a trillion dollars. At present we do not know. In 1957, I introduced legislation to re- quire the regular reduction of the statu- tory Federal debt in years when no na- tional emergency existed. Friends have pointed out to me that we have been in a state of continual national emergency and, furthermore, while our statutory debt has been increasing, our unreported Federal liabilities have been increasing even faster and are not even fully known. Realizing the importance of this area, in the next Congress, I included in my debt reduction bill, a requirement for reports on this unreported debt. In the 87tt1 Congress, when the international situ- ation continued to be difficult, I decided that it would be best to concentrate on the better reporting of the Federal debt, for all our debt has had to increase regu- larly in order to meet the growing liabili- ties of the 15ederal Government, We have many kinds of Federal oh- ligations-salaries, real estate leases---. at my suggestion a full report on these and real estate owned is now made each year to the Senate Appropriations Com- mittee, copies are available to those people interested-procurement of goods and services, and others including some of our international obligations. Re- ports are made on many of these items, while others are less well recognized. A very important area, however, which, as I say, is reported sporadically or not at all, is that of future payments for past services rendered, such as re- tirement funds, social security funds, and other types of payments with insur- ance characteristics, Both on an an- nual operating basis, and on a capital or balance sheet basis, the total amount of these Federal Government liabilities is very large. Some of these obligations are carried under separate trust funds, such as social security or civil service retirement, Others are provided for under annual appropriations, But, In all cases, the payee looks to the Federal Treasury for his security, and this we must guarantee. I believe strongly that under these circumstances we should know the size of these obligations and, more impor- tant, the public is entitled to know what the status of these funds is. If a special fund is assigned to make the payment, will tbe money be in the fund? If the money is to be appropriated on an an- nual basis, what will be the effect on the Federal budget? These are two vital questions which many household- 2162 PAGENO="1011" ers try to ascertain for themselves in their own affairs. We in the Federal Government should attempt to do like- wise. Recently, I asked the Treasury De- partment, which in past years during discussion of my earlier bills has offered to make statements available to Mem- >~,) c1~ ~- - .~ ~ ~v * ~P `~ ~ ~, bers of Congress, what figures they could give me. I attach the table they sent me in response. I ask unanimous con- sent that it be printed at this point in my remarks. There being no objection, the table was Ordered to be printed in the RECORD, as follows: Cs C~) 2163 PAGENO="1012" Mr. SALTONSTALL. You will note that the actuarial evaluations in cases such as social security and civil service have not been figured for a* number of years, and in other cases less important have not been figured at all. The fact that we have had several increases in retirement benefits since those evalua- tions were made only increases the prob- lem. Besides those mentioned in the above table, there are a number of other insur- ance-type programs such a.s FHA pro- grams, ship mortgage programs and FDIC. Payment forecasts for these are much more difficult than for the pension, for the actuarial calculations have more guesswork in them. But, better reports to the best of the Federal Government's ability, should also be made on. these. Category totals are now listed under the contingency statetnent, but not the pre- dicted payments. I am awfully pleased that the Finance Committee has seen fit to report my bill favorably and the Senate, has passed it unanimously. Last year following Sen- ate passage, the House was unable to take it up in the Ways and Means Committee due to the long hours spent on the tax cut. I hope that this year they will have an opp&tunity to act on it, and to send it to the President during this Congress. There is a need for better management of our budget in this area, and it is my hope that this bill will contribute to im- proved responsibility in our Federal Gov- ernnc~,'s affairs. The ACTING PRESmE~r pro tern- pore. The question is on agreeing to the committee amendment. The amendments were agreed to. The bill was ordered to be engrossed *for a third reading, was read the third time, and passed. EXCERPT FROM THE REPORT SETMMARY OF THE BILL This bill would require the Secretary of the Treasury to submit annually to the Con- gress a brief report setting forth the amounts of the contingent and unfunded liabilities of the Federal Government, in- cluding those or agencies and instrumentali- ties or the Government. GENERAL STATEMENT lathe past it has been the practice or the Federal Government to determine Its finan- cial requirements on an annual basis. This bill does not depart from this practice. How- ever, an annual system of budgeting does not present a complete picture of the financial condition of the United States because it falls to depict numerous categories of Fed- eral obligations and comrnitnients which are subject to contingencies. Similarly, it fails to reveal fully those situations where con- gress , has enacted spending authorizations, but . has, not specifically. appropriated the moneys needed to fulfill the statutory com- mitment. Moreover, by present ir~thods, U.S. ha- bility under many of its insurance and guar- antee programs is difficult to measure and analyze. This is because sufficient Informa- tion regardIng these programs eithe~ is not available at all, or if It Is available, It is inadequately preseuted. In many cases information with respect to contingent liabilities of specific govern- mental programs now Is available only in reports of specific agencies or corporations. However, these data frequently lose much of theii usefulness because they are not com- bined with similar data with respect to other programs. Thus, although part of this In- formation may now be available It Is not published in one place or on a uniform' basis, and does not facilitate understanding of the current financial condition of the United States. Your committee believes that It Is desir- able to make available In a single, concise report, pertinent Information with respect to the current status of the contingent lia- bilities of the Federal Government, Including Its long-range obligations and commitments. Indeed, the committee recognizes a responsi- bility to make available in such a report-as clear and complete as possible-the overall financial condition of our Government. Such a report, consolidating information now available only in part In many diverse reports with Information which Is' not now available `at all, will enable the Congress to have a better understanding of the current fiscal needs of the Federal Government. For this reason, the committee has ap- proved, and recommends enactment of a bill requiring the Secretary of the Treasury to submit to the Congress, by March 31 of each year, a report showing the amount (both on an aggregate and on an individual basis) of the contingent liabilities and the un- funded liabilities of the Federal Government determined as of December 31 of each year, commencing with 1966. The contingent liabilities referred to by the bill Include (1) liability of the Govern- ment under its various trust funds, such as the old age and survivors insurance trust fund and the highway trust fund; (2) liabili- ties of Government-sponscrecj corporations (for example, the Commodity. Credit Corpor- atIon); (3) IndIrect liabilities of the Federal Government not included as part of the pub- lic debt, such as Federal Housing Adminis- tration debentures; and (4) liabilitIes of Federal insurance and annuity programs. Under the bill, data with respect to these insurance and annuity'programs (which In- clude the civil service retirement system, vet- erans' pension, and war risk insurance pro- grams) Is to Include information regarding their actuarial status on both a balance- sheet basis and a projected source-and-ap- plication-of-funds basis. Where appropriate, the report is also to indicate the collateral pledged, or the assets available, as security for the specified lia- bilities, and an analysis of their significance in terms of past experience and probable risks. Thus, for example, In the case of federally Insured home mortgages the assets available on foreclosure may, In favorable circumstances, offset the potential Federal liability. But the reporting of assets is not [P. 233221 to stop with S recording of assets related to the liabilities. Under a committee amend- ment the Secretary of the Treasury is to set forth all other assets which would be avail- able to liquidate liabilities of the Federal Government; In order to provide flexibility and to pre- sent data included in the report from being misconstrued or misleading, the bill pro- 2164 PAGENO="1013" vides that the Secretary of the Treasury may set forth such explanatory material as he determines to be necessary Or desirable. Un- der this provision, if he believes particular data are likely to lead to improper conclu- sions, he may qualify that data sufficiently to negate such conclusions, Although the Bureau of the Budget does not favor the bill, in its report to the corn- mittee on a virtually identical bill in the 88th Congress (dated Dec. 12, 1963), it In- dicated its agreement with the objectives of the bill as follows: "We agree with the objectives of S. 2281 that the Congress and Its committees should have available whatever Information they need with resject to the financial status of the Government. In accordance with this objective, the Treasury Department has been preparing, semiannually, for a number of years, a statement on long-range commit- ments and contingencies of the U.S. Gov- ernment. The Bureau of the Budget has on occasion worked informally with Treasury staft on this matter, and consideration has been given to possible extensions and re- finements of the data. I believe that more can be done in this respect and, together with the Treasury Department, we shall worl~ with the responsible Government agencies to this end. "If, in addition, your committee or any other committee of the Congress would like to have particular tabulations, such as those described in S. 2281, we believe it would be appropriate to ask the Treasury Depart- ment to supply them when needed. How- ever, we believe the nature of such tabula- tions should be left flexible, to be determined from time to time, rather than being fixed in a statute." It is the opinion of the Committee on Finance, as already indicated, that the bill, as reported, preserves the flexibility of tabu- lations urged in the departmental report. Moreover, thOcomrnittee fully recognizes the desirability of refining data now being compiled in order to make it more mean- ingful and useful, and the bill as reported permits this. By drawing together tabula- tions regarding contingent liabilities of vari- ous departments, agencies, and Government- sponsored corporations, no doubt the Treas- ury Department will find new ways by which statistical refinements can be made, and tabulating methods improved. This can only serve to increase the quality of the report required by the bill. The report will fill a need which has been felt by the Congress for many years. 2165 PAGENO="1014" PAGENO="1015" 89Th CONGRESS 1ST SESSION . 1 0 1 3 IN THE HOUSE OF REPRESENTATIVES SEPThMBER 20, 1965 Referred to the Committee on Ways and Means AN ACT To clarify the components of, and to assist in the management of, the national debt and the tax straeture. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 That the Secretary of the Treasury shall, on or before 4 March 31 of each year (beginning with 196(3), submit to the 5 Senate and the House of Representatives a report setting 6 forth, as of the close of December 31 of the preceding year, 7 the aggregate and individual amounts of the contingent liabili- S ties and the unfunded liabilities of the Government, and of 9 each department, agency, and instrumentality thereof, in- 10 eluding, without limitation, trust fund liabilities, Govern- 11 rnent-spoiisored c~rporations' liabilities, indirect liabilities not 2167 PAGENO="1016" 2 1 included as a part of the public debt, and liabilities of insur- 2 ance and amiuity programs, including their actuarial status 3 on both a balance sheet and projected source and application 4 of funds basis. The report shall also set forth the collateral 5 pledged, or the assets available (or to be realized), as secu- 6 rity for such liabilities (Government securities to be sepa- 7 ratelv noted), and an analysis of their significance in terms 8 of past experience and probable risk, and shall also set forth 9 all other assets available to liquidate liabilities of the Govern- 10 ment. The report shall set forth the required data in a ii concise form, with such explanatory material as the Secre- 12 tary may determine to be necessary or desirable, and shall 13 include total amounts of each category according to the de- 14 partrnent, agency, or instrumentality involved. Passed the Senate September 17, 1965. Attest: FELTON M. JOHNSTON, Secretary. 2168 PAGENO="1017" Union Calendar No. 1026 ~i'ii CONGRESS S. 1013 [Report No. 2280] IN TilE HOUSE OF REPRESENTATIVES SE1"r1~rBEu 20. 1905 Referred to the Committee on Ways and Means (kioni~a 14, 1906 llel)ortecl with an ahIien(lnieilt (olnhulit rd to the (~oiniiiittre of the Whole I louse on I he State of the I flU)ll~ :uud ordered 10 he minted [Strike titit (11 1 IttI I lit (hilt nig ii;) !n ;uiitl lislil tbr Pi It iiiiutftd in italk] AN ACT To clarify the components of, and to assist in the management of, the national debt and the tax structure. 1 Be ?t enacted 1)1/ the Senate and house of Representa- 2 tires of the Unite(i States of America in Congress assembled, 3 Thtt~ the eereftt~y e~ the ~twury ~l÷ttl4-~ ei~ ~w hef~we 4 Mtu't4t ~4 ef et~th yetw ~i~i+4Hg with 4-9{44~)-~ sttb~ ~e the 5 Semt~e eel4 the T4trnse ±1~ ~ewese~4t~44~es ~ i~epei'1~ se144ng G ~ffl~t4~ e~ the f4~se ef 1~embe+' 4~4 ef the preceding yetw~ 7 the aggrega1~e eed h~4i~4thmh t~e~e~e4~ ef the eei÷th~gee~ hi~ffi- S th~s &n~ the ~mfee4e4 l~ef~i4i~ie~ of the ~ end of 9 ea4} deptn~fmei4~ egeiwy. end iieoi4ol4~ thei~oof~ in- 10 t4n4ing~ w4thoi÷~ l4mitation~ ~ send hitd~H-i~ies~ ~o~o'n- .11 n i~- 3}}S~+FOd ep tiens hiti-hi4if4es~ iu4ii~et4 I 4~hi44es no4~ 1 2169 PAGENO="1018" 1 ifte4{i4e4pfl444I*Ifll4ft~SftlIflSfff 2 ~w+~ a+~d t~n+Fu~iky ~i~i*~ inthi4h-ig th~4F t~4iit~4~4 41a1~n~ 3 ot~ ft ~ t4iee~ ~4 j~~o~ee1~e4 ~o+u~ee 4 of ~ ~ Th~ ~e~port ~4i~11 ft~O t~4 foi4h the ee11ate~a1 5 ~e1~je4- oi~ the t~4~ e~ailahIe -fei~ ~o 4~e e~3-~ t~ 6 i44~ fop t~+o4~ 44*i~ie~ o~omei4 t~eei+i4t~ie$ ~o be ~e~ft- 7 ft$e4~ ~4*~ ~ c'~ii ~ of theh~ ~4gei44e~i÷iee ii~i fei~i+e~ 8 ~ e~wi4ewe ~e~4 p~olit~4e ~4sk~ t~i4 ~4~t~ll ~ ~ forth 9 ft# ofb*~~ ffl*W~ ~et~i4a44e ~e 14~±i44e~e fi&~4aie~ of the (~o~em- 10 mei+t~- ~be i~ep*w~ ~1+a44 ~&4 f~I4~ the fe{fH1rC4 dftfft Ift ft 11 ~ fo~iT wi4~ ~±4+ e~p1en*t~ei~y ii+atci~ia1 &~ the ~ee~e- 12 ~wy may 4ee~n4ne 1~e be neeessa~y e~ 4e~i~abIc, aii4 ~tha11 13 +iekide ~o~4 ame~mf~ of eaeli eafegory aeeo~Edfflg ~e the 4e- 14 partrnent, tigeiw~ op ~i4~ ~÷vof~efb 15 That the Secretary of the ~i'rcasur!/ shall, on the first (lay 16 of each regular session of the Congress, submit to the Senate 17 and the house of Representatives a vcj)ort setting forth, aS 18 of 1/ic close of the preceding June 30 (beginning with the re- 19 port as of June 30, 1967), the aggregate and individual amounts of the contingent l'iabilthes arid 1/ic unfunded liabilt- 21 ties of the Government, and of each department, agency, coid 22 instruinentulitij thereof, including, so far as practicable, trust 2~ fund liabilities, Government corporations' liabilities, ?n(iirect 24 liabilities not included as a part of the J)llbliC debt, (111(1 liabili- ~ lies of insurance and annuity pi~ofpams, including their ac- 2170 PAGENO="1019" 1 tuarial status. The report shall also set forth the collateral 2 pled çjed, or the assets available (or to be realized), as security 3 for such liabilities (Government securities to be separately 4 noted), and shall also set forth all other assets specifically 5 available to lujuidate such liabilities of the Government. The (3 report shall set fort1~ I/ic required data in a concise fo'iin, 7 with such expi(lflator/J material (including such analysis of 8 the significance of the liabilities in terms of past experience 9 and probable risk) as the Secretary may determine to be nec- 10 essary or desirable, and shall include total amo?Ints of each ii category according to the department, aqeney, or. instrumen- 12 tality involved. Passed the Senate September 17, 19G5. Attest: FELTON M. JOHNSTON, Secretary. 2171 PAGENO="1020" PAGENO="1021" 89TH CoNam~ss ~ BOUSE OF REPRESENTATIVES ~ Rijpoi~r. ~dSession f ~ No. 2280 CONTINGENT LIABILITIES OF THE GOVERNMENT OCTOBER 14, 1966.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed Mr. MILLS, from the Committee on Ways and Means, submitted the following REPORT [To accompany S. 1013] The Committee on Ways and Means, to whom was referred the bill (S. 1013) to clarify the components of, and to assist in the management of, the national debt and the tax structure, having considered the same, report favorably thereon with an amendment and recommend that the bill as amended do pass. The amendment is as follows: Strike out all after the enacting clause and insert: That the Secretary of the Treasury shall, on the first day of each regular session of the Congress, submit to the Senate and the House of Representatives a report setting forth, as of the close of the preceding June 30 (beginning with the report as of June 30, 1967), the aggregate and individUal amounts of the contingent lia- bilities and the unfunded liabilities of the Government, and of each department, agency, and instrumentality thereof, including, so far as practicable, trust fund liabilities, Government corporations' liabilities, indirect liabilities not included as a part of the public debt, and liabilities of insurance and annuity programs, in- cluding their actuarial status. The report shall also set forth the collateral pledged, or the assets available (or to be realized), as security for such liabilities (Government securities to be separately noted), and shall also set forth all other assets specifically available to liquidate such liabilities of. the Government. The report shall set forth the required data in a concise form, with such explanatory material (including such analysis of the significance of the liabilities in terms of past experience and probable risk) as the Secretary may determine to be necessary or desirable, and shall include total amounts of each category according to the department, agency, or instrumentality involved. PURPOSE The purpose of S. 1013, as reported by your committee, is to re- quire the Secretary of the Treasury to submit annually to the Congress a brief report setting forth the amounts of the contingent and un.- 2173 PAGENO="1022" 2 CONTINGENT LIABILITIES OF THE GOVERNMENT funded liabilities of the Federal Government, including those of agencies and. instrumentalities ~f the Government. GENERAL STATEMENT There are nunierous categories of Federal financial commitments which are subject to contingencies. The moneys needed to meet such contingencies have not, in many cases, been specifically appropri- ated. Moreover,, by present methods, the potential U.S. liability under many of its insurance and guarantee programs is difficult to measure and analyze. Sufficient information regarding these financial commitments either is not available at all1 or if it is available, it is inadequately presented. In many cases mformation with respect to financial contingencies of specific governmental programs now is available only in reports of specific agencies. However, `these data frequently lose much of their usefulness because they are not combined with similar data with re- spect to, other programs. Thus, although part of this information may now be available it `is not published in one place or On a uniform basis. Your committee `believes that it is desirable to make available in a single, concise report, pertinent information with respect to the CUiTent status of the contingent and unfunded liabilities of the Federal Government. Such a report, consolidating information now available only in part in many diverse reports with information which is not now generally available, will enable the Congress to have a better understanding of the current fiscal needs of the Federal Government. For this reason, your committee has approved, and recommends enactment of this legislation, as amended, `to're'quire the Secretary of the Treasury to submit to the Congress, on the first, day of each regular: session, a report showing the amounts of the contingent liabilities and the unfunded liabilities of the Federal Government, determined as of June 30 of each year, commencing with a report as' of June 30, 1967. The report would include insofar as practicable (1) liabilities of the Government for its various trust funds; (2) liabilities of Government corporations; (3) indirect liabilities of the Federal Government not included as part of the public debt; and (4) liabilities of Federal insur- ance and annuity programs. Under the bill, data with respect to insurance and annuity pro-' grams (which include for example the civil service and military retire- ment systems, and veterans' programs) are to include information regarding their actuarial status. Where appropriate, the report is also to indicate the collateral' pledged, or the assets available, as security for the specified liabilities. Thus, for example, in the case of federally insured home mortgages, the assets available on foreclosure may, in favorable circumstances, offset the potential Federal liability. In order to provide flexibility and to prevent data included in the report from being misconstrued or misleading, the bill provides that the Secretary of the Treasury may set forth such explanatory mate- rial as he determines to be necessary or desirable., Under this provi- sion, if he believes particular data are likely to lead to improper con- clusiOns, he may qualify that data sufficiently to negate such con- clusions. Where possible, it is intended that the Secretary shall 2174 PAGENO="1023" CONTINGENT LIABILITIES OF THE GOVERNMENT 3 include in the explanatory material an analysis of the significance of liabilities in terms of past experience and probable risk. Although the Bureau of the Budget and the Treasury Department were opposed to the provisions of S. 1013, as passed by the Senate, they have subsequently advised your committ~ee that they would interpose no objection to the bifi's enactment provided certain tech- nical amendments were adopted to remove some of the operational difficulties which they felt would have been imposed under the Senate version of the measure. Your committee has incorporated in the bill, as reported, modifica- tions which it believes wifi reduce the cost of compiling the financial information required without impairing the usefulness of the report. Your committee is unanimousjn recommending enactment of this legislation. 2175 PAGENO="1024" APPENDIX The following data prepared by the Treasury Department indicates for the items included therein the type of information which would be presented on a gov~rnmentwide basis in the reports called for by S. .1013, as reported by your committee. This data was compiled as of June 30, 1965. FINANCIAL CONTINGENCIES OF THE U.S. GOVERNMENT AS OF JUNE 30, 1965 This statement deals with financial contingencies which are not recognized as legal obligations in terms of real liabilities on the central books of the Treasury or real liabilities and undelivered orders and contracts on the books of operating agencies. The statement is designed to supplement the Government's regular financial reports (e.g., the combined statement of receipts, expenditures, and balances of the U.S. Government) in order to disclose potential claims which are not otherwise reported in a single compilation. Readers are cautioned, however, against misuse of the data since contingencies differ sharply from legal obligations. Legal obligations fall into two categories: (1) "Liabilities," and (2) "undelivered orders." Liabilities are amounts owed, representing such things as borrowings, uninvested trust fund balances, and accounts payable for goods and services received. Undelivered orders, which include unfilled contracts, are commitments which will mature into liabilities as orders are filled by delivery of goods and services or per- formance is otherwise rendered under contracts. Contingencies, on the other hand, represent such things as loan guarantees and credit insurance which involve a risk of incurring liabilities, and a concomi- tant risk of loss, with a high degree of uncertainty as to time or amount. Whereas figures on liabilities and undelivered orders generally repre- sent valuations of firm commitments against Government funds, accurate within a narrow range of variation, figures on contingencies represent merely the upper limit of a wide range of possible future liabilities. The element of uncertainty is the primary basis for differentiating contingencies from legal obligations. In the case of legal obligations, ultimate payment by the Government is virtually certain or is contingent upon conditions which are likely to occur in the normal course of events. In the case of contingencies, the extent of ultimate payments, if any, and more importantly, the extent of ultimate losses, is contingent upon highly uncertain events such as widespread bank failures, defaults of borrowers, accelerated death rates, or war. Potential losses are further dependent upon the value of assets presently held as reserves against the contingency, the value of con- tingent assets which might be acquired, and future revenues generated by the existence of the contingency. Substantial losses can be pred- icated only on the basis of an abnormal course of events. 4 2176 PAGENO="1025" 5 CONTINGENT LIABIL ES OF THE GOER~MENT This statement is divided into three sectiOns: "A. Loirns guaranteed and insured"; "B. Other insurance and guarantees in force"; and "C. Other financial contingencies." The columns are arranged to show the monetary limit of the contingency or potential contingency and the amounts of public debt and U.S. agency securities held in connection with the prograIn~ giving rise to the contingencies. Certain insurance and guarantee items which are recognized as legal obligations in other reports, and therefore are not classifiable a contingencies, have been omitted from the body of this statement, but are disclosed in accom- panying notes in order to have complete coverage of these programs. * The different sections of this statement, and within the sections the different columns, represent essentially different things; consequently the section totals cannot be added together, nor can line items be added across, to arrive at valid and meaningful totals. Likewise, any attempt to add data on contingencies to figures on liabilities and Un- delivered orders to arrive at a figure. purporting to represent the Government's debt would be completely unwarranted. Not only would such a computation involve addition of unlike items; it would involve double counting through adding public debt liabilities to con- tingencies against which these same public debt items are held as reserves available to cover losses. A. Contingencies for loans guaranteed and insured lIst niillions of dollars) Agency and program * . Amount of contingency for guarantees or insurance In force Possible future contingency for commitments to guarantee or Insure loans Memorandum: Public debt and agency securities held Agency for International Development: Foreign In. vestment guarantee fund Agriculture Department: Farmers' Home Admlnis- tration: AgricultuEnl credit Insurance fund Commerce Department: .* Office of the Secretary: Aircraft loan guarantees Maritime Administration: Federal ship mortgage insurance fund Export-Import Bank of Washington Housing and Home Finance Agency: Federal Hausmg Administration Property improvement loans Mortgage loans Office of the Administrator: Urban renewal fund_~ 136 ~ 727 8 415 (1) , 2413 47,685 1,382 ~ 14,182 2 199. 1367 `16,594 29 ~. 15 . . 7 . 7,474 , . 1 ~ 34 553 11 . Public Housing Administration: Local housing authority bonds and notes (commitments coy- ered by annual contributions) Interior Department: Bureau of Commercial Fisheries: Federal ship mortgage insurance fund, fishing vessels~ Interstate Commerce Commission Small Business Administration: Revolving fund Veterans' Admhiisiratlon: Loan guarantee revolving funth Defense Production Act of 1950, as amended Total loans guaranteed or insured 71,839 * 7,507 596 8 7 1-297 0-67-pt. 2-65 2177 PAGENO="1026" CONTINGENT LIABILITIES OF.THL GOVERNMENT B. contingencies for other insurance and guarantees in force. [In millions of dollars]. - * Agency and program *. ~ . * Amount of contingency Memoran- dum: Public debt and agency securities held Agency for International Development Foreign investment guarantee fund Agriculture Department: Federal Crop Insurance Corporation CommerceDepartment: 0 * Maritime Administration: War risk insurance revolving fund Export-Import Bank of Washington: Medium term guarantees and insurance Consignment and Foreign CreditInsurance Association short-term'in- surance Federal Deposit InsuranceCorporation Held by insured commercial and mutual savings banks Federal Home Loan Bank Board: * Federal Savings and Loan Insurance Corporation Held by insured institutions Federal National Mortgage Association: Government mortgage liquidation fund U.S. Information Agency: Informational media guarantees Veterans' Administration: National service life insurance U S Government life insurance Total other insurance or guarantees In force 1 922 593 4 ~ 1441 *` 1 551 195, 596 : 102,483 300 (1) 38,099. 1 105 3 , 3,117 60,471 ~ 1,313 6,940 25 66,060 958 341 094 78 837 C. Other financial commitments [III millions of dollars] - - ~ Agency and program ~ ~ . Amount of contingency * Memoran- dum: Public debt and agency securities held Unpaid subscriptions, etc.: International Bank for Reconstruction and Development Inter-American Development Bank International Development Association Total unpaid subscriptions 5,715 1,112 312 7,139 1 Excludes insurance and guarantees in force which are reported as legal obligations under sec. 1311 of the Supplemental Appropriations Act of 1955, as follows: Export-Import Bank of Washington: In mill ions Loans sold with recourse 38 Medium term guarantees and insurance 147 Consignment and Foreign Credit Insurance Association short-term insurance 184 Housing and Home FinanceAgency: Public Housing Administration 855 Small Business Administration 22 U S Information Agency Informational media guarantees 5 3 Represents the estimated insurance coverage on loans aggregating $1,358,000,000. This amount, plus the related amount shown in footnote 1 represents the guaranteed portion of loans aggregating $102,000,000 4 Consists of mortgage loans amounting to $690,000,000 sold under a repurchase guaranty provision and ~15,904,000,000 representing the guaranteed portion of loans aggregating $30,361,000,000. = Represents estimated insurance ëoveràgè for the 1965 crop year. 6 Includes holdings of veterans~special term and veterans' reopened insurance funds. NOTE-Certificates of interest sold by Commodity Credit Corporàtión and participation certificates sold by the Export-Import Bank of Washington with outstanding amounts on June 30,1965, of $419,000,000 and $1,022,000,000, respectively, are reported by the corporations in the category of legal obligations and there- fore are not shown in this report of contingencies. 2178 PAGENO="1027" APPENDIX IV H.R. 18230 TO AMEND THE INTERNAL REVENUE CODE OF 1954 TO PROVIDE THAT THE TERM "PURCHASE" FOR PURPOSES OF SECTION 334(b)(2) IS TO INCLUDE CERTAIN INDIRECT PURCHASES OF STOCK THROUGH THE PURCHASE OF THE STOCK OF ANOTHER CORPORATION (Sec. 202 of Public Law 89-809) 2179 PAGENO="1028" PAGENO="1029" Union Calendar No.1023 89~rii CONGRESS ~D SESSION . 1 8230 [Report No. 2273} IN ~flu]~ 1IOFSE OF REPRESENTATIVES OcTonrR 6, 1966 Mr. Wvrrs ml ioduced the fo1kwin~ bill: wlilih was referred to the Com- mittee on Ways and Means Oc'ruwn P~, 1966 Reported with amendments, cammmO tei to the Comnni itt cc of the WT1io~e house on the State of the lniomi, and ordered to be priiited [Jnseit the part prmted in italicj A BILL To amend the Internal Reveitue (ode of 1934 to provide that the tenii "pni'eltase" fk~1' i~m'pus~ of section 334 (b) (2) is to include certain indirect purchases of stock through the purchase of the stock *~f another corporation. 1 Be it e)laCted b11 [lie Senate and house of i?epresentci- 2 lices of the United States of ~i 1)1CJW(l ill CongreSs assembled, 3 That (a) scctioii ~i34 (li) (3) of 1/ic Internal Revenue Code 4 of 1th4 (relating to definition of ptirc1i~tse) is amended by 5 adding' at tile end thereof the following new sentence: 6 "Notwitiistaiuliiig sul)palilgi'OpIl ((4) of this paragraph, 7 for purposes of ~)a1~g1apl1 (2) (B), the teriii `i)ulclulse' 8 also means an flC(1UisitiOll of stock fioni fl corporation the 9 ownership of stock by which would, under section 318 I 2181 PAGENO="1030" 2 1 (a.) , be. attributed to. the person acquiring such stock, if 2 the stock of such corporation by reason of which such 3 ownership would be attributed was acquired by purchase 4 (within the meaning of the precedmg sentence) ." 5 (b) SectiOn 334 (b) (2) (B) of such Code (relating 6 to exception) is amended by striking out "during a. period of 7 not more than 12 months," and inserting in lieu thereof 8 "during a 12-month period beginning with the earlier of- 9 " (i) the date of the first acquisition by 10 purchase of such stock, or 11 " (ii) if any of such stock was acquired in 12 an acquisition which is a. purchase within the 13 meaning of the second sentence of paragraph 14 (3) , the date on which the distribuI~ee is first 15 considered under section 318 (a) as owning 16 stock owned by the corpora.tion from which such 1_7 acquisition was made,". 18 (c) Section 453 (d) (4) (A) of such CO(le (relating 19 to distribution of installment obiigatioiis in certain liquida- 20 tions) is amended to read as follows: 21 "(A) LIQUIDATIoNs TO WhICh SECTION 332 22 APPLIES.-If- 23 " (i) an installment obligation is distributed 24 in a liquidation to which section 332 (relating 2182 PAGENO="1031" 1 to complete liquidations of subsidiaries) applies, 2 and 3 "(ii) the basis of such obligation in the 4 hands of the distributee is determined under 5 section 334(b) (1), 6 then no gain or loss with respect to the distribution 7 of such obligation shall be recognized by the dis- 8 tributing corporation." 9 (d) EFFECTIVE DATES.-The ameiidment made by sub- 10 sectiomi (a.) shall apply only with respect ,to acquisitioti of 1~1 stock after December 31, 1965. The amnemidments made by 12 subsections (b) and (c) shall apply omily with respect to dis- 13 tributions made after the date of the enactment of this Act. 2183 PAGENO="1032" ( PAGENO="1033" 89~m CONGRESS ~ HOUSE OF REPRESENTATIVES 5 REPORT 2d Session f ~ No. 2273 TAX TREATMENT OF CERTAIN INDIRECT PURCHASES OF STOCK OcToBER 13, 1966.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed * Mr. MILLS, from the Committee on Ways and Means, submitted the following REPORT [To accompany H.R. 182301 The Committee on Ways and Means, to whom was referred the bill (H.R. 18230) to amend the Internal Revenue Code of 1954 to provide that the term "purchase" for purposes of section 334(b)(2) is to include certain indirect purchases of stock through the purchase of the stock of another corporation, having considered the same, report favorably thereon with amendments t~nd recommend that the bill as amended do pass. The amendments are as follows: Page 1, line 3, after "334(b) (3)", insert "of the Internal Revenue Code of 1954". Page 2, line 5, after "334(b) (2) (B)", insert "of such Code". Page 2,~line 18, after "453(d) (4) (A)", insert "of such Code". I. SUMMARY This bill provides that in determining the basis of property received m the liquidation of a sub~ithary corporation, stock purchased by a corporation from a subsidiary is to be treated as purchased (irrespec- tive of the attribution rules under sec. 318), ii the stock was in fact purchased. The bill also eliminates an existing tax avoidance possi- bility by providing that installment notes are, under certain circum- stances, to be treated as "disposed of" for purposes of section 453(d) (the installment sale provision). This bill is reported unanimously by ycur committee and the Treasury Department has indicated that it has no objection to its enactment. 2185 PAGENO="1034" 2 TA~ TREATMENT OF INDIRECT PURCHASES OF STOCK II. GENERAL STATEMENT (a). Purchase of stock.-Under present law if one. corpOratioii pur- chases 80 percent or more of the stock of another within a 12-month period and then causes the corporation acquired to be liquidated within 2 years of the last purchase, the basis of the assets it receives is the amount it paid for the stock. However, in order to prevent manipulation, stock purchased from a person related to the buyer by the attribution rules (under sec. 318) is not treated as stock "purchased." Cases have been called to your committee's attention where it is necessary to acquire control of one corporation in order to obtain an 80 percent or greater stock interest in another corporation. For example, assume that one corporation desires to purchase the stock of a second corporation and does in fact purchase 45 percent of its stock directly. However, 40 percent of the stock Of the second corporation is owned by a third corporation, and the third corporation does not wish to sell the stock of the..second corporation. In order to acquire the stock of the second corporation, therefore, the first corporation purchases over 50 percent of the third corporation's stock and then causes this corporation to sell to it the 40 percent of the stock of second corporation owned by the third. However, since at the time of the sale, the first corporation owns more than 50 percent of the stock of the third corporation, the two corporations are classified as related under the attribution rules (sec. 318). Accordingly, under present law, the first corporation is not treated as* the purchaser of more than 80 percent of the stock of the second although it acquired directly or indirectly all of this stock for cash within a 12-month period. This bill eliminates the problem described above by amending present law so that it provides that stock purchased from a subsidiary is* to be treated as purchased, if a controlling interest in a subsidiary. was purchased within a 12-month period. The bill. also provides that the. 12-month period within which the desired stock must be acquired begins with the date of the first direct acquisition by purchase of such stock, or the date on which 50 percent of the stock of the cor- poration holding such stock was acquired, whichever is earlier. The new definition of "purchase" applies with respect to acquisitions of stock after December 31, 1965. The provision for measuring the time period of stock acquisition applies with respect to distributions made after the date of enactment of the bill. (b) Installment notes.-W hen one corporation buys more than 80 percent of the stock of another within 12 months and causes the corporation acquired to be liquidated within 2 years of the last acquisition of~ stock, the basis of the assets acquired is the amount paid for the stock (properly allocated). In such a case, generally no gain is recognized to the distributing corporation (unless it is a corporation which elected 341 (f) treatment to avoid danger of being treated as a collapsible corporation, or unless the sections dealing with the recapture of depreciation apply). If the property received on a liquidation of the type described above (to which sec. 334(b)(2) applies) consists of installment notes, then the gain which would normally be taxed on the sale or collection of such notes may, in whole or in part, permanently escape income taxation. This would result if the basis of such notes were raised to the amount paid for them by the acquiring corporation even though no gain were recognized to the distributing corporation. 2186 PAGENO="1035" TAX TREATMENT OF INDIRECT PURCHASES OF STOCK 3 This bifi eliminates the tax avoidance possibility under present law by providing that installment notes transferred in a liquidation of the type described above are to be treated as "disposed of" for purposes of the installment sale provision (sec. 453(d)). Accordingly, gain is to be recognized to the distributing corporation, in the same manner as if it had sold the notes. This provision is effective with respect to distributions made after the date of enactment HI. CHANGES IN EXISTING LAW MADE BY THE BILL: AS REPORTED 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 is enclosed in black brackets, new matter is printed in italic, existing law in which no change is proposed is shown in roman) SECTIONS 334 AND 453 OF THE INTERNAL REVENUE CODE OF 1954 SEC. 334. BASIS OF PROPERTY RECEIVED IN LIQUIDATIONS. * * *~ * * * (b) LIQUIDATION OF SUBSIDIARY.- (1) IN GENERAL.-If property is received by a corporation in a distribution in complete liquidation of another corporation (with- in the meaning of section 332(b)), then, except as provided in paragraph (2), the basis of the property in the hands of* the dis- tributee shall be the same as it would be in the hands of the transferor. If property is received by a corporation in a transfer to which section 332(c) applies, and if paragraph (2) of this sub- section does not apply, then the basis of the property in the hands of the transferee shall be the same as it would be in the hands of the transferor. (2) EXCEPTION -If property is received by a corpoiation in a distribution in complete liquidation of another corporation (within the meaning of section 332(b)), and if- (A) the distribution is pursuant to a plan of liquidation adopted- (i) on or after June 22, 1954, and (ii) not more than 2 years after the date of the trans- action described in subparagraph (B) (or, in the case of a series of transactions, the date of the last such trans- action); and (B) stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), was acquired by the distributee by purchase (as defined in paragraph (3)) (during a period of not more than 12 months,] during a 12-month period beginning with the earlier of- (i) the date of the first acquisition by purchase of such stock, or 2187 PAGENO="1036" 4 TAX TREATMENT OF INDIRECT PURCHASES OF STOCK (ii) if any of such stock was acquired in an acquisition which is a purchase within the meaning of the second sentence of paragraph (3), the date on which the distributee is first considered under section 318(a) as owning stock owned by the corporation from which such acquisition was made, then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made. For purposes of the preceding sentence, under regulations prescribed by the Secretary or his delegate, proper adjustment in the adjusted basis of any stock shall be made for any distribution made to the distributee with respect to such stock before the adoption of the plan of liquidation, for any money received, for any liabffities assumed or subject to which the property was received, and for other items. (3) PURCHASE DEFINED.-For purposes of paragraph (2) (B), the term "purchase" means any acquisition of stock, but only if- (A) the basis of the stock in the hands of the dlistributee is not determined (i) in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, or (ii) under section 1014(a) (relating to property acquired from a decedent), (B) the stock is not acquired in an exchange to which section 351 applies, and (C) the stock is not acquired from a person the ownership of whose stock would, under section 318(a), be attributed to the person acquiring such stock. Notwithstanding subparagraph (C) of this paragraph, for purposes of paragraph (2) (B), the term "purchase" also means an acquisition of stock from a corporation the ownership of stock by which would, under section 318 (a), be attributed to the person acquiring su'ch stock, if the stock. of such corporation by reason of which such owner- ship would be attributed was acquired by purchase (within the mean- ing of the preceding sentence). (4) DISTRIBUTEE DEFINED.-FOr purposes of this subsection, the term "distributee" means only the corporation which meets the 80 percent stock ownership requirements specified in sec- tion 332(b). * * ,* * * ,* * SEC. 453. INSTALLMENT METHOD. * * * * * * (d) GAIN OR Loss ON DISPOSITION OF INSTALLMENT OBLIGATIONS.- (1) GENERAL RULE.-If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and- (A) the amount realized, in the ease of satisfaction at other than face value or a sale or exchange, or (B) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange. 2188 PAGENO="1037" TAX TREATMENT OF INDIRECT PURCHASES OF STOCK 5 Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the install- inent obligation was received. (2) BAsis OF 0BLIGATION.-The basis of an installment obliga- tion shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full. (3) SPECIAL RULE FOR TRANSMISSION AT DEATH.-EXCept as provided in section 691 (relating to recipients of income in respect of . decedents), this subsection shall not apply to the transmis- sion of installment obligations at death. (4) EFFECT OF DISTRIBUTION IN CERTAIN LIQUIDATIONS.- ((A) LIQUIDATIONS TO WHICH SECTION 332 APPLIES.-If- ((i) an installment obligation is distributed by one corporation to another corporation in the course of a liquidation, and [(ii) under section 332 (relating t6 complete liqui~. dations of subsidiaries) no gain or loss with respect to the receipt of such obligation is recognized in the case of the recipient corporation, then no gain or loss with respect to the distribution of such obligation shall be recognized in the case of the distributing corporation. If the basis of the property of the liquidating corporation in the hands of the di~tributee is determined under section 334(b)(2) then the preceding sentence shall not apply to the extent that under paragraph (1) gain to the distributing corporation would be considered as gain to which section 341(f) or section 617(d)(1), 1245(a), or 1250(a) applies.] (A) LIQUIDATIONS TO WHICH SECTION S3~ APPLIES.-1f (i) an installment obligation is distributed in a liquid4- tion to which section 33~ (relating to complete liquidations of subsidiaries) applies, and (ii) the basis of such obligation in the hands of the distributee is determined under section 334(b) (1), then no gain or loss with respect to the distribution of such obligation shall be recognized by the distributing corporation. (B) LIQUIDATIONS TO WHICH SECTION 337 APPLIES.-1f (i) an installment obligation is distributed by a corpo- ration in the course of a liquidation, and (ii) under section .337 (relating to gain or loss on sales or exchanges in connection with certain liquida~~ tions) no gain or loss would have been recognized to the corporation if the corporation had sold or exchanged such installment obligation on the day of such distribution, then no gain or loss shall be recognized to such corporation by reason of such distribution. The preceding sentence shall not apply to the extent that under paragraph (1) gain to the distributing corporation would be considered as gain to which section 341(f) or section 617(d)(1), 1245(a), or 1250(a) applies. * * * . * * 2189 PAGENO="1038"