ment of this bill, but not unless the taxpayer consents in writing to the assessment of any resulting deficiency for any other taxable year. 4. Exemption from stock transfer axes

Section 4. of the bill amends section 1802 (b) of the Internal Revenue Code (relating to stamp taxes on transfers of stock) to exempt from tax transfers from a corporation to a registered nominee of such corporation, or from one such nominee to another such nominee, provided the shares of certificates are held by the nominee for the same purpose for which they would be held if retained by the corporation. Transfers by the nominee back to the corporation are also exempted from

tax.

The provision is considered desirable because, although the transfers described above represent changes in legal title. they do not represent a real change of interest. Corporations frequently find it convenient to make use of nominees in order to facilitate stock transfers. The use of nominees makes it unnecessary to obtain the vote of the board of directors before making a sale or transfer of stock. This method of achieving flexibility in handling investments is believed to be desirable since no real change in interest occurs.

Section 4 also provides that in the case of the death before the date of the enactment of this bill of a nominee of a corporation, no tax shall be imposed upon any transfer of stock from his executor or administrator to the corporation, if such transfer is made on or before the date of the enactment of this bill or within 1 year after such date. 5. Contributions to certain trusteed plans providing employee annuities. Section 5 of this bill adds a new subsection (d) to section 165 of the Internal Revenue Code to provide that contributions to certain employee annuity trusts by employers shall not be included in the income of the employees in the year in which the contributions were made, despite the fact that such trusts are not qualified under section 165 (a). The application of the provision is limited to trust agreements entered into prior to October 21, 1942, the effective date of the Revenue Act of 1942, which specified the present qualifications for employees' trusts under which contributions by employers are not taxable to employees as income in the year in which acquired by the trust. The application of the provision is further limited to trusts under which (1) the contributions are to be applied by the trustee for the purchase of annuity contracts for the benefit of employees, and (2) the employee, except with the consent of the trustee, is not entitled to any payments under the annuity contracts except annuity payments. Thus, under this provision, the employees are given essentially the same treatment as those covered by plans qualifying under section 165 (a). Your committee believes this is desirable, since these contributions are not currently available, without the consent of the trustee, to the employee (making it necessary for him to look to other sources for funds to pay the tax on the employer's contribution), and since the employee might not have been on notice at the time of entering into such a contract that employer contributions under the plan would represent income currently taxable to him.

This section of the bill also contemplates that the employer's contributions to such a trust will be taxable to the employee, when received in later years, as an annuity (pursuant to sec. 22 (b) (2) of the code). To this end it is provided that the amount contributed

to such a trust by an employer shall not constitute consideration paid by the employee for such annuity contract in determining the amount of annuity payments required to be included in his gross income under section 22 (b) (2). An exception to this rule will be applicable in cases where income tax for any taxable year beginning before January 1, 1949, has been paid by the employee with respect to a contribution made by the employer for such year and such tax is not credited or refunded to the employee. In such event, the amount contributed by the employer for such year shall constitute consideration paid by the employee for such annuity contract in determining the employee's tax liability under section 22 (b) (2).

The amendments are applicable to taxable years beginning after December 31, 1938. but have no application with respect to amounts contributed to a trust after June 1, 1949, if the trust on that date was exempt under section 165 (a) of the code. This latter provision is to prevent employers who have plans which have been amended to meet the requirements of section 165 (a) from removing the amendments and permitting the plans to revert to their former status. 6. Reciprocal trusts

Prior to 1940 certain reciprocal trusts were established with the apparent intent of minimizing estate taxes by what were then considered effective means. For example, an individual might establish a trust providing that the corpus of the trust would be payable to his children upon his death. Under the general plan followed, certain rights in the trust were also given to his wife. These rights might consist of a general power to invade the corpus, to change the beneficiaries or to change the amount which they would receive. At the same time or a short time after the husband set up the trust, his wife would also establish a trust with assets of a similar amount, vesting in him powers equivalent to those he had vested in her. this reciprocal device it was thought that two persons could transfer property to their heirs without diminishing effective control during life but still paying the gift tax rather than the estate tax.

The acceptance by the Treasury, prior to 1939, of the gift taxes paid (and, it is claimed, the assertion of occasional deficiencies) caused some taxpayers to believe this was a legitimate device.

In 1940 in the Lehman case, however, the Circuit Court of Appeals for the Second Circuit held that where trusts are found to have been created each in consideration of the other, the nominal grantors are to be interchanged for tax purposes. Thus, in the type of case discussed above, the husband would be considered the grantor of the trust created by the wife, and vice versa. This means that the husband is considered to have reserved powers in the trust nominally set up by his wife. This, under present law, is sufficient to require inclusion of the entire trust corpus in his gross estate upon his death. The court decisions in 1940 and subsequent years put taxpayers on notice as to the probable tax consequences of reciprocal trusts in the future. However, the situation is different with respect to trusts created before 1940, the year of the Lehman decision. If taxpayers release their powers, they become subject to the gift tax, although one gift tax may already have been paid. If they retain the powers, the trust property will be included in the gross estate upon their death, even though a gift tax may have been paid.

Section 6 of this bill removes hardship by extending relief to persons who created reciprocal trusts, vesting powers in each other, before January 1, 1940. It provides that the relinquishment of such a power on or before December 31, 1950, will (1) not be subject to the gift tax, and (2) not be considered, for the purpose of the estate tax, as having been made in contemplation of death. However, the relief provided from the estate tax would apply only if the person who relinquished the power died after December 31, 1939. Section 6 also provides that, if either grantor relinquishes his power, the other reciprocal trust created by him must, for all gift tax purposes, treated as a completed gift when made.

Section 6 does not apply, however, to a relinquishment by a person who made his reciprocal transfer while a gift tax law was in effect unless (1) gift tax was paid upon such reciprocal transfer and not credited or refunded, or (2) a timely gift tax return was made by such person on account of such reciprocal transfer but no gift tax was paid upon such transfer because of deductions and exclusions claimed on the return. It also does not apply to the assignment of a life estate or other interest (as distinguished from the relinquishment of a power) which has been created in a reciprocal trust.

1st Session

1 Part 2

AMENDING CERTAIN PROVISIONS OF THE INTERNAL

REVENUE CODE

JULY 6, 1949.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed

Mr. CAMP, from the Committee on Ways and Means, submitted the

following

REPORT

(To accompany H. R. 5268]

Since the filing of Report No. 920 on June 27, 1949, to accompany H. R. 5268, it has been noted that the report mentioned does not show changes in existing law.

Therefore, in compliance with paragraph 2a of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill, as introduced, 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):

INTERNAL REVENUE CODE

SECTION 60 (A)

(a) FARMERS.-In the case of an individual whose estimated gross income from farming for the taxable year is at least two-thirds of the total estimated gross income from all sources for the taxable year, in lieu of the time prescribed in section 58 (d), the declaration for the taxable year may be made at any time on or before January 15 of the succeeding taxable [year] year; and if such an individual files a return on or before January 31 of the succeeding taxable year, and pays in full the amount computed on the return as payable, such return shall have the same effect as that prescribed in section 58 (d) (S) in the case of a return filed on or before January 15.

SECTION 131 (c)

(c) ADJUSTMENTS ON PAYMENT OF ACCRUED TAXES.-If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 322. In the case of such a tax accrued but not paid, the

Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as the Commissioner may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require. In such redetermination by the Commissioner of the amount of tax due from the taxpayer for the year or years affected by a refund, the amount of the taxes refunded for which credit has been allowed under this section shall be reduced by the amount of any tax described in subsection (a) imposed by the foreign country or possession of the United States with respect to such refund; but no credit under this section, and no deduction under section 23, shall be allowed for any taxable year with respect to such tax imposed on the refund. No interest shall be assessed or collected on any amount of tax due upon any redetermination by the Commissioner, resulting from a refund to the taxpayer, for any period prior to the receipt of such refund, except to the extent interest was para by the foreign country or possession of the United States on such refund for such period.

SECTION 23 (q)

(q) CHARITABLE AND OTHER CONTRIBUTIONS BY CORPORATIONS.-In the case of a corporation, contributions or gifts payment of which is made within the taxable year to or for the use of:

(1) The United States, any State, Territory, or any political subdivision thereof or the District of Columbia, or any possession of the United States, for exclusively public purposes; or

(2) A corporation, trust, or community chest, fund, or foundation, created or organized in the United States or in any possession thereof or under the law of the United States, or of any State or Territory, or of the District of Columbia, or of any possession of the United States, organized and operated exclusively for religious, charitable, scientific, veteran rehabilitation service, literary, or educational purposes or for the prevention of cruelty to children (but in the case of contributions or gifts to a trust, chest, fund, or foundation, payment of which is made within a taxable year beginning after December 31, 1948, only if such contributions or gifts are to be used within the United States or any of its possessions exclusively for such purposes), no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propsganda, or otherwise attempting, to influence legislation; or

(3) Posts or organizations of war veterans, or auxiliary units of, or trusts or foundations for, any such posts or organizations, if such posts, organizations, units, trusts, or foundations are organized in the United States or any of its possessions, and if no part of their net earnings inure to the benefit of any private shareholder or individual; or

(4) The United Nations, but only if such contributions or gifts (A) are to be used exclusively for the acquisition of a site in the city of New York for its headquarters, and (B) are made after December 1. 1946, and before December 2, 1947:

to an amount which does not exceed o per centum of the taxpayer's net income as computed without the benefits of this subsection. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary

In the case of a corporation reporting its net income on the accrural basis, at the election of the taxpayer any contribution or gift payment of which is made after the close of the taxable year and on or before the 15th day of the third month following the close of such year shall, for the purposes of this subsection, be considered as paid during such taxable year if, during such year, the board of directors authorized such contribu tion or gift. Such election shall be made only at the time of the filing of the return for the taxable year, and shall be signified in such manner as the Commissioner, with the approval of the Secretary, shall by regulations prescribe.

SECTION 102 (D)

(d) DEFINITIONS.-As used in this chapter

(1) SECTION 102 NET INCOME.-The term "section 102 net income" means the net income, computed without the benefit of the capital loss carry-over provided in section 117 (e) from a taxable year which begins after December