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The CHAIRMAN. Thank you very much, Senator O*Mahoney, we are very glad to have had you with us.

Senator O'MAHONEY. Thank you.
The committee has been very patient.
(Memorandum accompanying the statement is as follows:)



The purpose of this memorandum is to explain the effects of the excessprofits-tax amendment to H. R. 4790 which was introduced today by Senator O'Mahoney.


Under section 122 (a) of the Revenue Act of 1945 the wartime excess-profits tax came to an end and did not apply to any taxable year beginning after December 31, 1945. However, the provisions of subchapter E of chapter 2 of the Internal Revenue Code, relating to the excess-profits tax, were not repealed by the 1945 act. They were merely put in inactive status. Under the proposed amendment the period of inactive status is terminated with respect to taxable years ending after December 31, 1947. Therefore, in reapplying the excess-profits tax it is not necessary to reenact all of the provisions of subchapter E of chapter 2.


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As in the case of the wartime excess-profits tax, the tax under the proposed amendment would be imposed upon the "adjusted excess-profits net income." This term means the excess-profits net income minus the specific exemption, the excess-profits credit, and the unused excess-profits credit adjustment (carryovers and carry-backs). Under the wartime excess-profits tax the specific exemption was $10,000. Under the amendment section 710 (b) (1) would be amended to increase the specific exemption to $50,000. The excess-profits credit would be 135 percent of the wartime excess-profits credit. The excess-profits credit is allowed by section 712 of the Internal Revenue Code and the increase in this credit is provided in an amendment to that section. As in the case of the wartime tax, the excess-profits credit may be computed either under the income method or the invested capital method. A taxpayer may elect the method which results in the greater credit.

Under the amendment there would be a graduated rate system. That portion of excess profits which is between 100 percent and 135 percent of the wartime excess-profits credit would not be taxed. That portion of excess profits which is in excess of 135 percent of the wartime credit but not in excess of 140 percent would be taxed at the rate of 50 percent. On the portion between 140 percent and 150 percent of the wartime credit the tax rate would be 75 percent, and on all excess profits in excess of 150 percent of the old wartime credit the new tax would be imposed at the rate of 100 percent.

In order to compute the tax in terms of these percentages of the wartime excess-profits credit, it is necessary to introduce a new concept; that is, “tentative excess-profits net income.” This term is defined in an amendment to be made to section 710 to mean the excess-profits net income, minus the new specific exemption of $50,000 and minus the unused excess-profits credit adjustment which is provided in section 710 (c). The graduated tax rates are applied to the portions of "tentative excess-profits net income” which are in excess of the specified percentages of the wartime credit. The aggregate of the amounts so computed represents the tax that is imposed on “adjusted excess-profits net income.”

Since the percentage is in terms of the old wartime credit, it is also necessary to introduce another new technical term, “tentative excess-profits credit,” which is the same as the wartime credit. In connection with the desired rate structure this term is necessary to avoid confusion with the new excess-profits credit which is the credit used in arriving at adjusted excess-profits net income. The term "tentative excess-profits credit” is defined in an amendment to section 710. Since it is the same as the wartime credit, it is defined simply as that proportion of the new excess-profits credit which 100 bears to 135.



Section 710 (c) (2) is amended so that there will be no carry-back or carryforward of any unused excess-profits credit from a taxable year in the interval during which the excess-profits tax was not imposed to a taxable year when the tax is imposed. The amendment also provides that an unused excess-profits credit for taxable year subject to the new excess-profits tax shall not be absorbed by a carry-back to a taxable year in the period when the excess-profits ta was not imposed. By adding a new paragraph (5) to section 710 (c) the amendment further prohibits the carry-back of an unused excess-profits credit from a taxable year in the new excess-profits tax period to a taxable year in the old excess-profits tax period.


The amendment also embraces certain minor technical amendments to the code which are necessary upon the restoration of the excess-profits, tax. The credit for normal tax and surtax purposes formerly provided in section 26 (e) of the Internal Revenue Code, relating to income subject to the excess-profits tax, has been restored. The definitions of “normal tax net income” in section 13 (a) (2), “corporation surtax net income” in section 15 (a) and the credit for dividends received in section 26 (b) have been restored to read as they did immediately prior to the enactment of the Revenue Act of 1945.


The amendment reimposes the excess-profits tax with respect to taxable years ending after December 31, 1947. With respect to taxable years beginning in 1947 and ending in 1948, it provides for a proration of the tax based on the proportion which the number of days in the taxable year after D ember 31, 1947, bears to the total number of days in such taxable year.

The CHAIRMAN. Our next witness is Senator Lodge.

Senator Lodge, we are glad to see you back in your old stamping ground. We miss you on this committee.



Senator LODGE. It is very nice to be back here, Mr. Chairman.

In order to save the time of the committee, I have had a statement prepared that I think is before you now which contains the amendment that I propose, and the part of the existing law to which it is to be offered.

If it is agreeable to you, I will read this, because it will save your time.

The CHAIRMAN. You may proceed.

Senator LODGE. Mr. Chairman and gentlemen of the committee, under the terms of the European recovery bill now pending in the Senate, assistance is to be extended to the nations of Europe, the cost of which will be borne by the American people. This legislation is rightly based on the premise that the people of Europe will do all in their power to help themselves. I assume that this means not only the people of Europe whose total livelihood is in Europe, but those whose assets may be in this country.

I think this was the view taken by the Foreign Relations Committee when it inserted a provision in the ERP bill directing that each recipient nation would make efficient use of and would locate and control whatever assets its nationals might have in the United States. That is one prong of the fork.

But the action which the Foreign Relations Committee took does not meet all the issues involved, and it is for that reason that I offer the amendment to the tax bill which is now before you.

That would be the second prong of the fork.

This amendment is suggested by the fact that at present certain classes of aliens are not taxed on capital gains arising from taxations in this country and certain other classes of aliens are able to make large_profits on our stock and commodity markets without paying any Federal income tax. This is, of course, highly discriminatory against American citizens who are required to pay such taxes.

The amendment which I offer simply provides that existing tax laws which apply to Americans shall also apply to nonresident aliens who are physically present in the United States for a period or periods aggregating 90 days or more. Not being a tax expert myself, I sought and obtained the help of the chief of staff of the Joint Committee on Internal Revenue Taxation, Mr. Stam, on this subject. He assures me that this amendment is workable and is also consistent with existing treaty obligations.

Senator CONNALLY. May I ask a question there?
Senator LODGE. Yes, sir.

Senator CONNALLY. In other words, if they are in this country as much as 90 days under your amendment they would pay this tax?

Senator LODGE. That is right. They would be taxed on their capital gains.

Senator CONNALLY. Why should they not be taxed on capital gains whether they spend 3 months here or not?

Senator LODGE. I think the 3-month period was taken as the one that would be most practical.

Senator CONNALLY. Suppose they do not come here at all. If they have property and are making gains, why should they not pay the tax?

Şenator LODGE. I think they should, but I think it would be much harder to reach them.

Senator CONNALLY. I was trying to get the facts.
Senator LODGE. I think you are right.

Senator CONNALLY. They can duck out in 90 days. They do not need to stay that long. They might stay 40 or 50 days and still make trades and profits and go back home.

Senator LODGE. I think it is a very good question. Let me say, as far as I am concerned, I would be willing to make as stringent a measure as you can and still have it work.

I tried to make it as simple and workable as I could.

I think you undoubtedly could catch more people than this amendment catches if you went at it with a lower term of residence.

Senator GEORGE. Senator Lodge, I do not think anybody would disagree with your objective in trying to get these earnings here taxed.

You say here that you are assured that this amendment is consistent with existing treaty obligations.

Senator LODGE. Yes.

Senator GEORGE. I think we would have to examine that rather carefully because I think the conventions

Senator LODGE. I am going to deal with that in this statement in a moment, Senator.

Senator GEORGE. All right.

Senator LODGE. I wanted to say that one does not have to be a tax expert to realize the injustice of requiring the mass of American people of moderate means to bear the burden of European recovery and not require well-to-do Europeans to do their full part as well.

I would now like to make a more detailed discussion of the proposal, based on the information which Mr. Stam procured for me.

Under existing law, nonresident aliens are taxed in the following manner:

1. Those having no office or place of business in the United States are taxed only on their income from dividends, rents, salaries, wages, et cetera, at a flat rate of 30 percent, except where such rate has been reduced by treaty. This rule applies where the gross income is $15,400 or less. If the nonresident alien having no office or place of business in the United States has a gross of income of more than $15,400, he is required to pay the full normal and surtax on his income from dividends, rents, annuities, et cetera, arising from sources within the United States, but is not required to pay any tax on capital gains from transactions made in this country. Thus, nonresident aliens having no office or place of business in the United States are not taxed on capital gains arising from transactions in this country.

2. If the nonresident alien is engaged in trade or business in the United States, he taxable on his income from sources within the United States, including capital gains. However, it is specifically provided in section 211 (b) of the Internal Revenue Code that a nonresident alien is not regarded as engaged in trade or business within the United States if he merely deals through a resident broker, commission agent, or custodian, in commodities or in stocks or securities. There is considerable complaint about nonresident aliens coming to this country and making large profits on our stock and commodity markets without paying any Federal income tax. To permit such a practice to continue is to discriminate against American citizens dealing on the same markets and who are required to pay income taxes on capital gains to the United States.

This amendment is an effort to remove this discrimination by deeming a nonresident alien individual to be "engaged in trade or business in the United States," if he is physically present in the United States for a period or periods aggregating a total of 90 days or more and if he enters into transactions within the United States during such taxable year. The amendment is not retroactive but applies only to transactions consummated in the United States in taxable years beginning after December 31, 1947.

As the committee undoubtedly knows better than I, tax conventions or treaties have been concluded with Canada, the United Kingdom, France, and Sweden. I have added language to my amendment that its provision shall not apply in any way which shall be contrary to any treaty obligation of the United States.

Let me say that I have done this solely to save time and argument, and not because I doubt the competence of the Finance Committee to legislate in the tax field.

The CHAIRMAN. Might I interrupt there. Mr. Stam, is there any principle of international law that may not be expressed in treaties tiat has any bearing on this?


Mr. Sram. Of course, you have got the decision of the Supreme Court that says that any statute, if later than than a treaty, that statute supersedes the treaty. But for international reasons, generally speaking, you keep the treaty from operation of conflicting statutes.

The CHAIRMAN. I am not talking about our domestic law or treaties. I am asking, Is there any principle of international law that may not be expressed in our treaties or in our domestic laws that might have a bearing on this subject?

Mr. STAM. I do not think so.
The CHAIRMAN. Will you please proceed.

Senator LODGE. I was going to say that as a former member of the Finance Committee I gladly give it full jurisdiction over the entire tax question, and as Mr. Stam just said, I do not question the power of Congress under the Constitution to pass whatever statutes it cares to enact regardless of treaty provisions. This is a matter for the committee to ponder.

As my amendment stands, citizens of Canada, the United Kingdom, France, and Sweden would be exempt, but all other nations of the world would be included.

I am advised that in the case of Canada and the United Kingdom, the amount of taxation which the United States is losing in this manner is very small. Also I understand that a new tax convention with France has been negotiated and is now pending in the Foreign Relations Committee.

The CHAIRMAX, Senator Lodge, may I ask what is the practice of countries other than the United Kingdom, France, Canada, and Sweden with respect to treating our nationals? What do they do to us under similar circumstances?

Senator LODGE. I could not give you the answer to that.

Senator CONNALLY. That is specified in the treaties you have with them.

The CHAIRMAN. I mean the nontreaty countries.
Senator CONNALLY. He named the treaty countries.

The CHAIRMAN. I say, outside of those countries, what do they do to us?

Senator GEORGE. The chairman was inquiring in regard to nontreaty countries.

Senator CONNALLY. Mr. Chairman, I want to observe here one thing. One thing Mr. Stam said I do not quite agree with.

He said the Supreme Court held that a statute subsequent to a treaty is effective. It is effective on our own citizens and our own people here, but it is still an obligation to the country with whom the treaty is made. That is not wiped out by a statute of the Congress.

A treaty has two aspects: It is a law, so far as our citizens are concerned, but the obligatory part of the treaty to a foreign country cannot be abrogated by a statute.

I just wanted to observe my own view on that thing. Insofar as it is a law, it does operate as such on our own citizens, but as an obligation to a foreign country, it cannot be abrogated unless in conformity with the terms of the treaty.

The CHAIRMAN. May I suggest, Senator, as far as the international incidents are concerned, they might still be litigated in, let us say, the international courts.

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