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or domestic trust, or domestic community chest, fund, or foundation.” The reason for this change is set out in the report of the House Ways and Means Committee on the revenue bill of 1938 (C. B. 1939–1, pt. 2, p. 742), which states as follows:

“Under the 1936 act the deduction of charitable contributions by corporations is limited to contributions made to domestic institutions (sec. 23 (q)). The bill provides that the deduction allowed to taxpayers other than corporations be also restricted to contributions made to domestic institutions. The exemption from taxation of money or property devoted to charitable and other purposes is based upon the theory that the Government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare. The United States derives no such benefit from gifts to foreign institutions, and the proposed limitation is consistent with the above theory. If the recipient, however, is a domestic organization the fact that some portion of its funds is used in other countries for charitable and other purposes (such as missionary and educational purposes) will not affect the deductibility of the gift.” [Italic supplied.]

The committee report refers to the similar limitations in the case of corporate charitable contributions. It might be noted that the deduction of corporate charitable contributions was first added to the law by the Revenue Act of 1935 and that from the beginning this deduction was limited to contributions made to domestic organizations. The theory upon which the change as to individual contributions was based, according to the committee report, was that contributions to foreign charities did not relieve the Government from any financial burden and did not result in the promotion of the general welfare.

This provision of the 1938 Revenue Act was further amended by the Revenue Act of 1939 to allow deductions to organizations created or organized in, or under the laws of, any possession of the United States. No further amendments have been made to section 23 (0) (2) on this subject up to the present time.

In view of the relatively short time that this limitation to domestic charities has been a part of the law, it does not appear to be so firmly entrenched as to constitute an integral part of the United States tax law. It seems logical that the policy behind the limitation, a policy not especially surprising as a product of a decade considerably more isolationists and less enlightened than the current one, and a policy shown by the last sentence of the quotation to be inherently contradictory, might well be reexamined at this time—especially as to contributions made to charities in contiguous countries—at the very least when they are the countries of residence of the United States citizens in question.

The United States estate and gift taxes do not limit the deductibility of charitable contributions to bequests or gifts to charitable organizations created or organized in the United States. See section 812 (d) of the Internal Revenue Code (sec. 2055 of H. R. 8300) and section 1004 (a) of the Internal Revenue Code (sec. 2522 of H. R. 8300) for the estate and gift tax provisions, respectively. The income tax should be brought into line with them.

The rationale quoted above in connection with section 23 (0) (2) for distinguishing contributions to United States charities from contributions to other than United States charities—the theory that the Government is compensated for the loss of revenue by being relieved from the financial burden which would otherwise have to be met by appropriations from public funds—is largely fallacious. While this theory might have some validity in the case of orphanages, homes for the indigent, homes for old or disabled persons, or even hospitals and elementary schools, it certainly breaks down in the broad bulk of charitable organizations. In most cases, as a matter of fact, the charitable organizations exist for the specific purpose of performing a function which Government either definitely will not undertake at all or else will undertake on a deficient scale, and private citizens have banded together to fill a void which otherwise would remain empty. Examples could be multiplied almost without end merely by reference to the Internal Revenue Bureau's list of charities approved for tax deductibility purposes, but reference might be made to the Audubon Society, Naval Historical Foundation, the American Bar Foundation, National Geographic Society, scholarship funds, research organizations, and specific research campaigns (Cancer Fund, etc.), the March of Dimes, the various military relief societies (Navy Relief Society, etc.), the Seeing Eye Foundation, churches, museums, symphonies and other musical organizations, libraries, literary or artistic, groups, missionary societies, some schools of higher and professional and sectarian education, and countless others. Capital gains

1 The 1938 rationalization to the effect that the United States does not benefit by the operation of foreign charities has been belied by our whole multi-billion-dollar post-World War II program of loans, grants, etc. The major premise of that program has been that the health, wealth, happiness, and political solidarity of all free peoples are indispensable to the security of the United States.

45994—54—pt. 3—46

The inclusion of capital gains within section 117 of the Internal Revenue Code results in a double tax on such gains realized by a United States citizen resident in foreign countries that do not tax such gains. I would be happy to furnish the staff of the committee with drafts of several different alternative provisions which would cure this inequity and at the same time prevent any wholesale tax reduction in favor of investment income.

Taxation of capital gains under the United States tax laws puts United States citizens resident in foreign countries which do not tax capital gains in an unfavorable position as compared to both their neighbors and their fellow citizens at home. In Canada, for example, where capital gains are neither included in the definition of income nor separately taxed, it is obviously impossible for United States citizens to deal upon an equal tax basis with Canadian citizens. The solutions which I propose attempt to grant relief in this respect by eliminating the tax on capital gains realized outside the United States by nonresidents of the United States.

The United States citizen residing in Canada, for example, is subject to Canadian income tax upon all of his income regardless of whether such income is derived from Canadian sources or from United States sources. The Canadian income-tax law, however, does not impose any income tax on capital gains as such. Therefore, the United States citizen residing in Canada is required to pay Canadian income tax on all of his income but since capital gains are not included in gross income, they are not a part of the tax base for computing the tax credit.

In order to prevent the double taxation which would arise in cases such as that of a United States citizen residing in Canada, section 131 of the United States Internal Revenue Code (sec. 901-905 of H. R. 8300) was enacted to proride a credit against the United States income tax for income taxes paid to a foreign country. This credit, under section 131 (b) (sec. 904 of H. R. 8300) is limited to the proportion of the United States tax which the taxable income from the foreign sources bears to the entire net income for United States tax purposes. Since the Canadian income-tax law, for example, does not impose any tax on capital gains and since such capital gains are subject to income tax in the United States, the result of the proportionate limitation is ordinarily that a United States citizen residing in Canada will have to pay United States income tax on his capital gains both from Canada and the United States and will not obtain sufficient credit for the Canadian taxes which he pays upon his other income to cover the United States tax on the capital gains arising in the United States. This can be true even when the foreign tax is at a higher rate than the United States tax. In any case where the foreign tax does not specifically cover capital gains, the proportionate credit is changed and the result is that the taxpayer does not get the full credit for the foreign taxes which he has paid and, in addition, is required to pay the United States tax on his capital gains.

When one thinks of a United States citizen, resident for perhaps many years in Canada, who buys a share of stock in a Canadian company through a Canadian broker on a Canadian exchange, holds it in a Canadian safety-deposit box and subsequently sells it through a Canadian broker on a Canadian exchange, it is difficult to see what right the United States Government, which has contributed nothing to the transaction, has to tax the proceeds from it.

It seems logically inferable that in the case of foreign tax bases which do not include capital gains, the base consequently being narrower than if it did include them, the rates must correspondingly be higher. Thus, although the Canadian law theoretically does not tax capital gains, the result for a United States citizen is that the higher rate in practical effect taxes his capital gains by taking his earned income at a higher rate than otherwise in Canada even though the gains are not specifically mentioned in the Canadian law. The failure of the Canadian law to permit any credit for the United States tax on capital gains in practical effect permits Canada to collect a higher tax than it otherwise would and the result is that the United States citizens are subjected to double taxation on such capital gains.

Statute of limitations

It is presently possible for a taxpayer to be whipsawed between the varying periods of limitations in the United States and the country of his residence and thus to have a severe injustice visited upon him. Section 6511 (d) (3) of H. R. 8300 effectively remedies this situation and should be enacted.


Once again the best solution is logical justice to the estate-tax dilemma would be for a country to tax the descent of only the property located within its borders. We assume again, however, that any such solution is too far advanced for current acceptance and so proceed on the assumption that the present basic systems of estate and succession taxes and the bases for levying them will continue to be citizenship in the case of the United States and domicile in the case of other countries. The two criteria overlap in many cases.

The United States citizen domiciled in Canada, for example, finds it impossible to take advantage of the marital deduction which his fellow citizens domiciled in the United States can utilize in the distribution of their estates by will. Sulution

Modify sections 813 (c) and 936 (c) of the Internal Revenue Code so that the United States estate taxes collected will give credit to the estate for the additional taxes paid in a foreign country by virtue of the absence of any marital deduction there similar to that in the United States.

The 1948 Revenue Act provided for the deduction of up to 50 percent of the gross estate for property left to a surviving spouse if such property is left either outright or in a trust over which the spouse has what amounts to a general power of appointment. The effect of this deduction is to remove half of the decedent's estate from the application of Federal estate taxes. This half of the estate will be subject to United States estate taxes as a part of the spouse's estate on the spouse's death.

If the United States citizen resident in a foreign country shapes his will to take advantage of this tax benefit, his United States estate taxes will be substantially reduced since half of the estate will be taxed on his death and half on his wife's death; both estates are thus in lower tax brackets than if all the estate had been taxed on the death of the husband. In the foreign country, however, the entire estate may be taxed on the husband's death and all or part of it may be taxed again on the wife's death. This double tax on some or all of the estate more than offsets the advantage gained in the United States taxes by means of the marital deductions. Thus, instead of attempting to take advantage of the martial deduction available to his fellow citizens, it may be more advantageous for the United States citizen residing in a foreign country to leave a life estate to his wife and the remainder to his children or others and, thus, to subject the entire estate to death taxes in both countries on his death hut, thus, to eliminate any additional death taxes in either country on the death of the surviving spouse. Some provision should be made whereby the United States citizen residing in a foreign country could have the benefit of the United States martial deduction without subjecting all or part of his estate to a double tax.


At the present time a United States citizen resident in a foreign country must pay both a United States and a foreign tax on any gifts he chooses to make. Solution

An appropriate credit section, similar to the income-tax credit (I. R. C., sec. 131; secs. 901-905 of H. R. 8300) and the estate tax credit (I. R. C., secs. 813 (c) and 936 (c); sec. 2014 of H. R. 8300) sections, should be enacted.

The United States gift tax is part of an overall tax system applicable to the distribution of a man's assets either inter vivos or upon his death. The gift tax is closely integrated with the estate tax, and was originally enacted to supplement the estate tax and to prevent avoidance of estate taxes by the making of inter vivos gifts which had been up to that time tax free; actually the system is designed, by differences in tax rates and by offering certain other advantages, to encourage distribution, although not tax-free distribution, of an estate during the owner's lifetime. This whole fundamental objective, however, is frustrated by double taxation on any inter vivos gifts. Hardly could a more effective de terment to inter vivos distribution be practically imagined.

CONCLUSION In view of the present position of the United States in world affairs and in view of the importance attached to the political and economic strengthening of the nations of the free world, every effort should be made to make more rather than less favorable the tax position of United States citizens resident in foreign countries. This statement has endeavored to outline some of the existing problems and some proposed solutions to those problems, and we urge their immediate consideration and as prompt adoption as possible for the good of not only our own country but of the entire free world.




Section :

Subject 104, 105 and 106__

Sickness and Disability Benefits. 116

Partial Exclusion of Dividends Received by

Individuals. 165

Losses— Worthless Securities-Securities in

Affiliated Corporations. 171

Amortizable Bond Premium. 172

Net Operating Loss Deduction. 243

Deduction for Dividends Reveived by Corpora

tions. 247

Dividends Paid on Certain Preferred Stock of

Public Utilities. 248

Capital Stock Issuance Expense. 305

Distribution of Stock and Stock Rights. 309

Corporate Distributions—Tax on Transfers in

Redemption of Nonparticipating Stock. 331-336

Corporate Liquidations. 391

Effective Date of Subchapter C. 461

General Rule for Taxable Year of Deduction. 481

Adjustments Required by Changes in Method

of Accounting. 1341

Computation of Tax Where Taxpayer Restores

Substantial Amount Held Under Claim of

Right. 1505

Consolidated Returns for Subsequent Years. 1514

Elimination of 2-percent Penalty on Consoli

dated Returns. 1732

Consolidated Returns-Earnings and Profits. 6016, 6074, 6154, and 6655 Corporate Modified "Pay-As-You-Go” Proposal. Sections 104, 105, and 106Sickness and disability benefits

Most gas companies provide sick and disability pay for their employees. In some instances the sick pay is provided through accident or health insurance, with benefits paid to the employees and premiums paid by the employers. Under section 22 (b) (5) of the Internal Revenue Code, the benefits are excluded from gross income subject to tax.

Other companies pay sick benefits directly to their employees, without using an insurance company as an intermediary. In such cases, the benefits paid to employees have been held to be taxable by the Internal Revenue Service and the employer is obliged to withhold income tax on the sick pay.

The necessity to clarify the tax status of sickness and accident benefits, whether under an insured or noninsured plan, by providing a uniform set of rules was recognized by the House Ways and Means Committee and resulted in the inclusion of Sections 104, 105, and 106 in the Internal Revenue Code of 1954.

However, certain provisions of section 105 require further clarification in order to eliminate discrimination between different sick plans of various employers and the increased administrative difficulties of employers in connection with their withholding responsibilities. To eliminate such discrimination and

for further clarification it is recommended that favorable consideration be given to the following suggestions :

1. Distinguish by definition, “compensation for personal injuries or sickness" and “payment of compensation for loss of wages during a period of sickness.”

2. For the purpose of defining a qualified employer's accident, sickness or health plan, adopt a definition similar to that contained in subsection 1426 (a) (2) of the 1939 code (relating to the exclusion of such payments from the definition of wages for social-security-tax purposes).

3. No waiting period should be required in order to qualify an employer's plan. Section 116Partial exclusion of dividends received by individuals

In section 116 of H. R. 8300, resident individual taxpayers are allowed to exclude from gross income

(1) $50 of dividends received in the case of taxable years ending after July 31, 1954, and before August 1, 1955; and

(2) $100, in the case of taxable years ending after July 31, 1955. In addition to the income exclusions under section 116, credits are also provided under section 34 against individual income tax for percentages of dividends received and included in gross income, in taxable years ending after July 31, 1954, as follows:

(1) 5 percent of dividends received after July 31, 1954, and before August 1, 1955; and

(2) 10 percent of dividends received after July 31, 1955. It is believed that the provisions in sections 34 and 116 of H. R. 8300 constitute desirable steps in the direction of alleviation of double taxation of dividends. It is desired at this time to express appreciation for the earnest consideration given this matter and to urge, as a minimum, that these provisions be retained by the Senate Finance Committee in the bill. Section 165-Losses-worthless securitiessecurties in affiliated corporations

(capital gains and losses) An inequity in the existing code results from the nondeductibility by corporations of net long-term capital losses when they are in excess of net short-term capital gains for the current tax year. The fact that capital losses may be carried forward for a period of 5 years as an offset to net capital gains in those years does not relieve the inequity since gas companies ordinarily do not have substantial capital gains.

Such net losses are usually the result of transactions which are an integral and essential part of the corporation's operations. For example, investments have been made in corporations engaged in research for new products for natural gas and oil with the knowledge that partial or complete failures may result in some instances.

If the corporate taxpayer owns less than 80 percent (present law 95 percent) of each class of the capital stock of the corporation invested in, it will not meet the requirements of section 165 (g) (3) (A) of H. R. 8300 for an ordinary loss.

It is urged that in order to arrive at true corporate net income for any tax year, section 165 (g) (3) (A) of H. R. 8300 be amended so that all net losses of corporations in investments, when made for the purpose of advancing their main business, and which are incidental thereto, will be allowed in full as an ordinary loss in the year the loss occurs. Section 171Amortizable bond premium

Section 171 (b) (1) (B) restricts the holder of a bond the original call date of which is not more than 3 years from date of issue from amortizing the premium which he paid over a period shorter than that determined by the maturity date of the issue. The objective of such a restriction—to curb the

bus described in the House committee report on page 26–is commendable. However, the provision has a collateral effect on the issuer of the bond in that it will probably hamper flexibility of financing programs in the gas industry.

The effect of this provision will be to discourage new bond issues having a call date earlier than 3 years from date of issue. Largely at the behest of the Securities and Exchange Commission, recent bond flotations in the gas industry have been callable on 30 days' notice. The purpose of such a short call period is to permit the issuer to refund the bonds should changes in the money market so warrant. As a matter of fact, several issues sold last summer or fall at coupon rates ranging up to 4 percent or more are now in the process

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