lations are issued, the Internal Revenue Service would administer the application of sections 61, (as it relates to cost of goods sold) 162, 174, 263 and 471 to the prepublication expenditures of both publishers and authors without regard to Rev. Rul. 73-395. In addition, as indicated above, the Service would administer these sections in the same manner as they were consistently applied by taxpayers prior to the issuance of Rev. Rul. 73–395. If a taxpayer did not consistently follow a specific tax accounting method, his returns would be treated by the Service in accord with usual administrative procedures. The Encyclopedia Britannica initially requested the amendment benefiting publishers. An ad hoc committee formed by some other members of the publishing industry has also supported this provision. Both the Encyclopedia Britannica and the ad hoc committee also sought administrative suspension of Rev. Rul. 73-395. The modifications added by the Senate Finance Committee were recommended by the "San Antonio Light," among others. Only publishers who have deducted prepublication expenses currently would benefit from the bar against IRS application and enforcement of the Service's interpretation that the law requires that such expenses be capitalized. Publishers who have capitalized such expenses would not benefit from this provision. The amendment affecting authors was requested by The Authors League of America, Inc., New York, New York. The authors' amendment would apply to all professional writers. Any regulations issued by the Service on publishers' or authors' prepublication expenditures after the date of enactment will apply prospectively only to taxable years beginning after their issuance. The provision will have little or no revenue effect because publishers and authors benefitted by the suspension of Rev. Rul. 73-395 would have neither reported nor paid the past tax liabilities assessed by the Service pursuant to its interpretation of the law as stated in that ruling. However, if the Service had not suspended audit and appellate activity in cases arising from its legal interpretation as evidenced in Rev. Rul. 73–395, and if no legislative bar on enforcement were enacted, publishers' past due tax liabilities could amount to several hundred million dollars. Any change in authors' liabilities probably would be negligible. 29. Treatment of Face Amount Certificates (sec. 1307 of the bill) Present law In general, present law (sec. 1232) provides that the amount of discount that arises where a corporation issues a bond, debenture, note, certificate or other evidence of indebtedness for a price less than the face amount payable at maturity is treated as ordinary income. The Tax Reform Act of 1969 amended this provision to provide that the discount attributable to a bond, note, certificate or other evidence of indebtedness issued by a corporation after May 27, 1969, is to be included in the holder's income on a ratable basis over the term of the obligation. In 1971, the Internal Revenue Service issued regulations under section 1232 interpreting the changes made by the Tax Reform Act of 1969. These regulations provided that certain deposit arrangements with financial institutions made on or after January 1, 1971, which arrangements provide that interest will be deferred until maturity (i.e., certain certificates of deposit, time deposits, bonus plans, etc. issues by banks and similar financial institutions) are subject to the ratable inclusion rules under section 1232. Under these regulations, the application of section 1232 to face-amount certificates (as defined in section 2(a) (15) of the Investment Company Act of 1940) was reserved.1 Subsequently, on October 9, 1973, the Internal Revenue Service proposed further regulations which provided that a face-amount certificate issued by a corporation after March 31, 1974, would be subject to the ratable inclusion rules under section 1232. These regulations were issued in final form on March 29, 1974, applicable to faceamount certificates issued after December 31, 1974. The application of these regulations was subsequently postponed by the Internal Revenue Service on two separate occasions in order to provide Congress an opportunity to clarify its views as to the appropriate tax treatment in these cases. Pursuant to the latest postponemnnt, a face-amount certificate issued by a corporation after December 31, 1975, is subject to the ratable rules under section 1232. Thus, under these regulations the amount of any original issued discount attributable to a faceamount certificate issued after December 31, 1975, must be included in the gross income of the holder on a pro rata basis over the term of the certificate. The amount that must be ratably included in gross income is the difference between the amount paid by the purchaser and the amount received by him at maturity. Further a corporation issuing a face-amount certificate after December 31, 1975, must amortize the discount over the life of the certificate. On November 26, 1975, Investors Syndicate of America (I.S.A.), a corporation that issues face-amount certificates, filed an action for a declaratory judgment that these regulations, relating to face-amount certificates be declared invalid. This suit is currently pending in the United States District Court for the District of Columbia. On December 23, 1975, an action seeking a temporary restraining order and a preliminary injunction to enjoin the enforcement of these regulations was filed by Huntoon Paige & Company, Inc., and Association for Investment in United States Guaranteed Assets, Inc., in the U.S. District Court for the Southern District of New York. On December 30, 1975, the Court denied the plantiff's request and dismissed the action. Issue The issue is whether original issue discount attributable to a faceamount certificate should be included in the gross income of the holder ratably over the term of the certificate or included at the time of actual receipt (usually at the maturity of the certificate). 1 Under section 2(a) (15) of the Investment Company Act of 1940, a "face-amount certificate means any certificate, investment contract. or other security which represents an obligation on the part of its issuer to pay a stated or determinable sum or sums at a fixed or determinable date or dates more than twenty-four months after the date of issuance, in consideration of the payment of periodic installments of a stated or determinable amount (which security shall be known as a face-amount certificate of the "installment type") or any security which represents a similar obligation on the part of a face-amount certificate company, the consideration for which is the payment of a single lump sum (which security shall be known as a "fully paid" face-amount certificate). Explanation of provision This provision was suggested by Senator Mondale. The provision amends present law (sec. 1232(d)) to provide that face-amount certificates are not subject to the rules under section 1232, but rather are to be taxed under section 72. As a result, the amount of discount attributable to a face-amount certificate would not be ratably included in the gross income of the holder over the term of the certificate. Instead, the amount of discount would be included in the gross income of the holder upon actual receipt by him either at maturity or upon a premature cancellation. If the holder exercises an option to take annual payments from the corporation in lieu of a lump sum at maturity, the payments will be taxed like annuities are presently taxed under section 72, i.e., a portion of each payment received would be included in gross income and the portion attributable to the consideration furnished would be excluded. The corporation issuing the certificate would be entitled to an interest deduction in each taxable year equal to the amount of discount accruing within that taxable year. The provisions apply to a face-amount certificate as defined in section 2 (a) (15) of the Investment Company Act of 1940. The amendment would apply to face-amount certificates issued after December 31, 1975. The provision primarily benefits Investors Diversified Syndicate. Revenue effect It is estimated that enactment of this provision will reduce tax liability by less than $100,000 in 1976, $150,000 in 1977, and about $500,000 in 1979. 30. Income From Lease of Intangible Property as Personal Holding Company Income (sec. 1308 of the bill) Present law Under present law, a corporation which is a personal holding company is taxed on its undistributed personal holding company income at a rate of 70 percent (sec. 541). A corporation is a personal holding company where five or fewer individuals own more than 50 percent in value of its outstanding stock and at least 60 percent of the corporation's adjusted ordinary gross income comes from certain types of income. Under present law, amounts which a corporation receives from renting or leasing corporate property to a 25 percent or larger shareholder are treated as personal holding income, but only if the corporation derives over 10 percent of its total income from other types of personal holding company income (sec. 543 (a) (6)). The Internal Revenue Service has published a revenue ruling holding that amounts which a corporation receives for leasing intangible property (such as a license to use or distribute a secret process or trade brand) to such a shareholder are to be treated as ordinary royalty income and not as income tested under section 543 (a) (6) (Rev. Rul. 71-596). Consequently, the full amount of the license payments becomes personal holding company income in the category of "royalties" (sec. 543(a)(1), regardless of how much income of other types the corporation may have. Issue The issue is whether, if intangible property is licensed to a shareholder and used in an active trade or business, the corporation's income is closer to a rental situation and should be governed by the rule relating to use of property by a shareholder rather than by the rule for ordinary royalties. In other words, should amounts received from a license of a patent or other intangible property to a 25 percent or greater shareholder be personal holding company income only if over 10 percent of the corporation's total income is derived from other personal holding company income sources? Explanation of provision This provision was presented by Senator Talmadge at the request of Senators Sparkman and Allen. The provision requires that amounts received under a lease of intangible personal property to a 25 percent or greater shareholder are to be governed by the rule that now applies to a corporate lease of tangible property to such a shareholder. Under this rule, the full amount received by the corporation for the shareholder's use of such property is not automatically treated as personal holding company income. Whether such income is treated as personal holding company income depends on whether the corporation derives more than 10 percent of its total income from other personal holding company sources. The provision imposes a limitation, however, so that payments received from a lease of intangible property to a shareholder are to be tested under section 543 (a) (6) only if the intangible assets are part of an integral group of assets consisting of tangible and intangible assets which the shareholder uses in actively carrying on his trade or business. If the shareholder does not use the license or other intangible asset (along with tangible assets) in carrying on his business, the license payments received by the corporation are to be treated as ordinary royalties governed by the present rules of section 543 (a) (1) or, if appropriate on the facts, under other rules relating to mineral, oil or gas royalties (sec. 543(a)(3)) or copyright royalties (sec. 543(a) (4)). The amendment to the general rule of section 543 (a) (6) relating to intangible property is effective for corporate taxable years ending after December 31, 1964. This provision affects the Montgomery Coca Cola Bottling Company. 31. Excise Tax on Parts for Light-Duty Trucks and Buses (sec. 1310 of the bill) Present law The Revenue Act of 1971 repealed the 10-percent excise tax on lightduty trucks and buses (those with gross vehicle weight of 10,000 pounds or less). As a result, truck and bus parts and accessories sold by the vehicle manufacturer as part of (or in connection with the sale thereof) a light-duty truck or bus are not subject to tax-neither the 10-percent tax that used to be imposed on the vehicle, nor the 8-percent tax on truck parts and accessories. Also, if a truck parts or accessories manufacturer sells parts or accessories to a manufacturer of light-duty trucks for use in "further manufacture" of those trucks, the parts and accessories are not subject to tax. However, if the truck parts manu facturer sells parts separate from the light-duty trucks and the installation of those parts by a retail truck dealer technically is not "further manufacture" of the trucks, then the manufacturer's excise tax of 8 percent applies. This is so even though the part or accessory is sold to the retail customer at the same time he purchases the taxexempt light-duty truck or bus. Issue The issue is whether truck or bus parts sold separately by a manufacturer to a retail dealer for installation on an exempt light-duty truck or bus at the time of its retail sale should bear the 8-percent excise tax when the sale of such a part would be exempt if made to a truck manufacturer for inclusion on a "light-duty" truck. Explanation of provision This provision was presented by Senator Talmadge. It provides that the 8-percent manufacturers excise tax on trucks or bus parts and accessories is to be refunded or credited to the manufacturer in the case of any part or accessory sold on or in connection with the first retail sale of a light-duty truck or bus. Thus, those parts and accessories are to be effectively treated the same as the parts and accessories that actually are a part of the tax-exempt truck as delivered from the manufacturer. The credit or refund is not intended to cover replacement parts even if ordered at the time of the purchase of the truck, but only those parts and accessories which are to have original use on the purchased truck. The House bill contains no comparable provision. This provision is to apply to parts and accessories sold after the date of enactment. (The Committee Report incorrectly states that it applies to parts sold on or after July 1, 1976.) The beneficiaries of this provision would be purchasers of light duty trucks and buses. Revenue effect This provision is estimated to result in annual revenue losses of about $3 million. This revenue would otherwise go into the Highway Trust Fund (through September 30, 1979). 32. Certain Franchise Transfers (sec. 1311 of the bill) Present law Section 1253, which was added to the Internal Revenue Code by the Tax Reform Act of 1969, provides generally that the transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or trade name. Gain which would be treated as ordinary income pursuant to section 1253 (unlike gain which would be treated as ordinary income. under other sections of the Code, e.g., sections 1245, 1250, 1251, and 1252), is not treated as an "unrealized receivable" of a partnership which would have the effect of causing ordinary income upon certain partnership distributions, payments in liquidation of a partnership interest, or sales of other dispositions of partnership interests. Section 1253 applies to all transfers taking place after December 31, 1969. Unlike certain other provisions of the 1969 Act, no exception was |