II. CORPORATION ORDINARY INCOME TAXES A. TAX RATES AND RELATED MATTERS 1. Overall rate reduction (pp. 35, 75, 501) Reduces general corporate rate from 52 percent to 50 percent in 1964 and to 47 percent in 1965. 2. Reversal of normal tax and surtax rates (pp. 35, 75, 501) In 1963 reduces rate on first $25,000 of corporate income from 30 percent to 22 percent. 3. Current payment of corporate taxes (pp. 39, 82, 184) Gradually, over a 5-year period starting in 1964, advances the timing of corporate income tax payments over $100,000 so that all four quarterly payments are made during year of liability rather than two such payments being made during that year and two being made following the year of liability as at present. 4. Limiting surtax exemptions of related corporations (pp. 36, 76, 158) For corporations where there is common control to the extent of 80 percent or more, the corporations involved are generally to be limited to one $25,000 surtax exemption for the group. 5. Consolidated returns (pp. 36, 81) Eliminates 2 percent tax on consolidated returns and provides a 100 percent, rather than 85 percent, deduction for dividends received from corporations with which the taxpayer could file a consolidated return. B. RESEARCH AND DEVELOPMENT DEDUCTION (PP. 37, 102) Provides that, subject to limitations, expenditures made for machinery and equipment used solely in research and development may be deducted as incurred instead of being capitalized and deducted gradually by depreciation. C. TAXATION OF NATURAL RESOURCES 1. Carryover of deductions for intangible drilling and development costs (pp. 37, 114, 278, 290) Percentage depletion is limited to 50 percent of the net income from the property. Solely for the purpose of applying this limitation, deductions not offset against income from the property in the year incurred are to be carried forward and reduce the net income in subsequent years, but only to the extent that depletion in those years is not reduced below one-half of what it otherwise would be. 2. Aggregation of oil and gas properties (pp. 38, 116, 278, 290) Restricts the aggregation of oil and gas properties to those under a single lease (or unitization agreement) instead of permitting the aggregation of some or all of properties in an "operating unit." 3. Limitation on capital gains on sale of mineral interests (see No. IIIE-1, p. 5) 4. Foreign operations (pp. 38, 118, 278, 290) Prohibits the deduction against domestic income of intangible drilling, development and exploration expenditures incurred in foreign operations. Prohibits the averaging of relatively highly taxed foreign natural resource income and foreign taxes with other foreign income and foreign taxes in determining the allowable foreign tax credit. D. PERSONAL HOLDING COMPANY TAX (PP. 52, 121, 351) Decreases from 80 percent to 60 percent the portion of a company's gross income which will result in its being classified as a personal holding company, provides for the deduction of certain expenses from rental income, income from oil and gas interests and mineral royalty income in determining how such income is to be taken into account in applying personal holding company income tests, excludes capital gains (other than those on stock, securities, or commodities) in applying the personal holding company income tests and provides that liquidating distributions are not to avoid personal holding company tax unless taxed as dividends to the recipients. III. TAXATION OF CAPITAL GAINS A. GENERAL PROVISIONS 1. Individuals (pp. 52, 126, 365) Decreases from 50 percent to 30 percent the portion of long-term capital gains included in taxable income, extends from 6 months to 1 year the holding period for assets resulting in long-term capital gains, and provides for an indefinite (instead of a 5-year) capital loss carryover. 2. Corporations (pp. 53, 127, 365) Reduces the tax on long-term capital gains from 25 percent to 22 percent and extends from 6 months to 1 year the holding period for assets resulting in long-term capital gains. B. GAINS ACCRUED ON CAPITAL ASSETS AT TIME OF GIFT OR DEATH (PP. 54, 128) Provides for capital gains tax_on_ appreciation in value of assets transferred by gift or at death. Exclusions are provided for ordinary personal and household effects, for the first $15,000 of gain, for up to half of the gain to the extent that up to half of the value of the property is transferred to the spouse, and at least to the extent of any gain on the personal residence of the decedent. C. STOCK OPTIONS (PP. 56, 147, 459) Repeals the restricted stock option provision effective for options granted after January 24, 1963. As a result, the spread between the option price and fair market value would be taxed to the employee at the time he exercises the option, but the payment of the tax attributable to this spread could be paid in installments over a 5-year period. D. SALE OR EXCHANGE OF REAL ESTATE (PP. 57, 140, 420) Limits depreciation on buildings to straightline method. Provides that gain on the sale of real estate (other than land) is to be ordinary, instead of capital gain, to the extent of depreciation deductions in 1963 and subsequent years, if property is sold within 6 years of purchase. If the property is sold in the period from 6 years to 14% years of purchase, a decreasing proportion of the gain (attributed to the depreciation deductions) is treated as ordinary income. If the property is held longer than 14 years no portion of any gain is treated as ordinary income. E. OTHER RECAPTURE AND DEFINITIONAL PROBLEMS 1. Sale of mineral properties (pp. 57, 142) Treats as ordinary income the gain on the sale of mineral properties to the extent of the deduction, after 1963, for percentage (or cost) depletion representing capital costs and for intangible drilling, development and exploration expenditures written off. 2. Lump-sum pension, profit-sharing, and stock-bonus payments (pp. 58, 148, 499) Provides that any gain on lump-sum pension, profit-sharing, and stock-bonus payments is to give rise to ordinary income instead of capital gain, to the extent attributable to amounts added (by employer) to the employee's accounts in the future or attributable to the employee's future earnings and service. A special 5-year averaging device is made available for the amounts to be treated as ordinary income, which omits from the base on which the tax is computed any wage or salary income received currently. 3. Timber (pp. 57, 151, 388) Provides that the sale, or cutting, of timber is to result in ordinary income, rather than capital gain, except that in the case of individuals the first $5,000 of income from timber in any year will remain capital gains. Also provides for the expensing of reforestation costs. 4. Coal leases (p. 151) Coal royalty payments are to be taxed as ordinary income, rather than as capital gains, for leases entered into in the future. 5. Capital gains from farming (pp. 58, 144, 451) Net losses on farming operations, for those who also have at least $15,000 of nonfarm income, are to be used, to the extent of these losses, to characterize as ordinary income any gains from farming operations in subsequent years which under present law would be capital gains. 6. Patents (pp. 59, 150) Income of inventors from the sale of patents is to be treated as ordinary income rather than capital gains. 96562-68 7. Disposition of assets for deferred payments (pp. 59, 152) Where assets are sold on an installment basis and either no, or inadequate, interest is provided, a portion of the gain (generally equal to 5 percent on the unpaid balance) is to be treated as interest income to the seller (and deductible to the buyer) rather than as a capital gain. In addition, where assets are sold with the price dependent on future income and with the installments spread over more than 5 years, the gain after 5 years is to be treated as ordinary income." 8. Life estates (pp. 59, 156) Where a person holding a life estate acquired by gift, bequest, or inheritance sells this estate, the amount received is to be treated as anticipated income and is to be taxed as ordinary income without decrease for any basis he may have in the property. |