Requirements for electing to file multiple surtax exemption returns.— For the component members of a controlled group to elect to claim multiple surtax exemptions, all component members of the group must join in the election. Such an election must be made within 3 years after the close of a taxable year. An election once made may be terminated by (1) consent of the members; (2) refusal of a new member of the controlled group to consent: (3) filing of a consolidated return by any component member of the group; or (4) termination of the group. Once an election is terminated, the bill provides that the group may not again elect multiple surtax exemptions until the expiration of 5 years. Amendments to section 1551 Under present law, if a corporation transfers all or part of its property (other than money) to a corporation which was created for the purpose of acquiring such property, or was not actively engaged in business at the time of the acquisition, the transferee corporation is not permitted the $25,000 surtax exemption or the $100,000 accumulated earnings credit if after the transfer the transferor or its shareholders, or both, are in control of the transferee, unless the transferee establishes by the clear preponderance of the evidence that the securing of the surtax exemption or the accumulated earnings credit was not a major purpose of the transfer. The House bill makes two basic changes to present section 1551. First, as presently interpreted, existing law applies only to direct transfers of property other than money. The House bill provides that section 1551 would also apply to indirect transfers of property other than money. The application of this change is illustrated by the following example: Example. On December 1, 1964, corporation X organizes corporation Y as a wholly owned subsidiary and transfers cash to such corporation which it then uses to purchase machinery from corporation X. Corporation X would be considered to have made an indirect transfer of property (other than money) to corporation Y. Second, present law applies only to transfers from one corporation to another corporation. The House bill extends the application of section 1551 to transfers of property (other than money) by an individual to a corporation which he and not more than four other individuals control. For purposes of determining whether the transferor is considered to be in control of the transferee corporation, the individual who makes the transfer, together with no more than four other individuals, must own at least 80 percent of the value or voting power of the stock in two or more corporations, one of which is the transferee corporation, and the same individuals must own more than 50 percent of the value or voting power of the stock in each corporation (only taking into account identical stockholdings) after the transfer. In determining ownership of stock, the attribution rules for determining if a controlled group exists are applicable. The application of this provision is illustrated by the following example: Example. On July 1, 1965, individual A owns 55 percent, and individual B owns 45 percent, of the stock of corporation X. On such date, A and B each transfer property (other than money) to a newly created corporation, corporation Y. A receives 45 percent, and B receives 55 percent, of the stock of corporation Y. The transfer of the property to corporation Y is subject to the provisions of section 1551 since corporations X and Y are each more than 80 percent owned by 5 or fewer individuals (A and B) and such individuals collectively owned more than 50 percent of the stock of both corporations by taking into account only their identical holdings. This provision applies to taxable years ending after December 31, 1963, except that the amendments relating to transfers to controlled corporations apply to transfers made after June 12, 1963. Revenue effect It is expected these provisions will increase revenues by about $35 million a year. To amend the Internal Revenue Code of 1954 to reduce indi vidual and corporate income taxes, to make certain structural changes with respect to the income tax, and for other purposes. 1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 SECTION 1. DECLARATION BY CONGRESS. 4 It is the sense of Congress that the tax reduction pro5 vided by this Act through stimulation of the economy, will, 6 after a brief transitional period, raise (rather than lower) 7 revenues and that such revenue increases should first be 8 used to eliminate the deficits in the administrative budgets 9 and then to reduce the public debt. To further the objective II |