(b) Copra. The present duty on Philippine copra is 1.87 cents per pound and on copra produced in other countries 3.12 cents per pound. These rates of duty were derived, respectively, from a 3-cent and a 5-cent processing tax formerly applicable. By virtue of temporary suspension of duty, Philippine copra is free of duty and other copra is dutiable at 1.25 cents per pound.

(c) Palm and palm kernels.-Historically palm nuts and palm nut kernels are duty free. The Philippine Trade Agreement does not include any preferential treatment with respect to them but the processing tax (now temporarily suspended) does apply. Thus, there is currently a statutory duty of 0.35 cent per pound applicable to palm nuts and of 1.35 cents per pound on palm nut kernels. In both cases this duty (currently suspended) is generally equivalent to the 3 cent-per-pound processing tax on the oil content of the nut or kernel. (d) Fatty acids, etc.-In addition to the historical tariffs on fatty acids, surface active agents, soaps, and detergents, a portion of the current duty is attributable to the processing tax on the oil content of the product, but this portion is temporarily suspended.

Because of the Philippine preference our imports of coconut and copra come almost exclusively from the Philippines. Our imported palm oil and palm kernel oil, on the other hand, generally originate in Africa-principally in Nigeria, the Congo, and Liberia.

Palm oil is used primarily in making soap and in coating thin sheet iron before it is tinned to prevent oxidation. Coconut oil and palm kernel oil have identical uses and are consumed largely in making soaps, fatty acid derivatives, confectionery, and bakery products such as biscuits and crackers.

Because prices of coconut oil and palm kernel oil have been high relative to U.S. produced oils (such as soybean and cottonseed oil), consumption of coconut and palm kernel oil in soaps and foods has declined. However, their use in producing fatty acid derivatives and in synthetic detergents has increased. Proponents of H.R. 6568 urge that permanent suspension of the processing tax will slow the substitution of petroleum-based oils for these purposes and thus will aid U.S. exports of U.S. soybean and cottonseed oils to Europe. They argue that if the U.S. market for coconut oil for inedible uses is reduced, greater quantities would be shipped to European markets where it would compete with U.S. oils for edible purposes.

5. H.R. 7502—CASUALTY LOSSES ATTRIBUTABLE TO MAJOR DISASTERS

(Passed the House on August 3, 1965)

A. Provisions in bill as passed by House (secs. 1 and 2 of bill).

Under present law (sec. 1231(a) of the code) the excess of gains over losses from the disposition of certain types of property held longer than 6 months is treated as long-term capital gain. On the other hand, if the losses exceed the gains, then the net loss is treated as an ordinary loss. This treatment generally is accorded to recognized gains and losses from:

(1) Sales or exchanges of depreciable property and real estate used in a trade or business, and

(2) Compulsory or involuntary conversions of such property and of capital assets.

However, as a result of the Technical Amendments Act of 1958, where an uninsured loss results from fire, storm, or other casualty, or from theft, the loss is not to be classified as a loss to be offset against capital gain if the property was used in the taxpayer's trade or business (or was a capital asset held for the production of income). Thus these losses are ordinary losses (under sec. 165) and need not be netted against the gains treated as long-term capital gains.

This bill provides the same treatment in the case of casualty losses attributable to Presidentially-designated major disasters if the recognized losses exceed the recognized gains.

This provision in the case of business property is to apply where the losses are in part compensated for by insurance. (Of course, the insurance compensation would reduce the amount of the recognized losses.) It would also apply to personal assets (as distinct from trade or business assets) whether or not insured.

The amendment described above is applicable to taxable years ending after November 30, 1964.

Some courts have held that casualty losses are not subject to the type of treatment described above unless the taxpayer receives some property or money as compensation for the losses. This bill, in section 2, makes it clear that section 1231 applies in such cases unless specific provision excludes the loss from section 1231. This applies to losses sustained after the date of enactment of the bill. B. Provisions added by committee

(a) Investment credit (similar to H.R. 10433).-Under present law (sec. 46(a)(2) of the code) the investment credit (allowed by sec. 38), generally 7 percent, may not exceed the tax liability if this is less than $25,000, or if the tax is over $25,000, may not exceed $25,000 plus 25 percent of the tax in excess of $25,000.

A committee amendment adding section 3 to this bill increases the maximum credit allowable in those cases where the tax is more than $25,000. In such cases, the new maximum credit is to be $25,000 plus 50 percent of the tax liability in excess of $25,000.

This provision is to apply to taxable years beginning on or after January 1, 1965. It also is to apply with respect to unused investment credit carryovers from prior years to calendar 1965 and subsequent years. Where a taxable year straddles the January 1, 1965, date, a proration will be made applying the new 50-percent limitation with respect to the portion of the year occurring on or after that date and the old 25-percent limitation with respect to the portion of the year occurring before that date.

Under present law (sec. 46(b) of the code), the investment credit, to the extent it exceeds the limitations referred to above, may be carried back to the 3 preceding taxable years and then, to the extent still unused, carried over to each of the 5 taxable years following the year of the investment. This section provides that, in the case of regulated transportation companies, the unused credit may be carried forward for 7 taxable years, instead of the 5 applicable to other taxpayers. (This is the same carryforward period regulated transportation companies have in the case of net operating losses.) This provision is to apply to taxable years beginning on or after January 1, 1965, with respect to carryovers from taxable years ending on or after January 1, 1962.

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(b) Unfunded annuities, etc.-Under present law employee retirement plans must (among other requirements) be funded in order to qualify for income tax deferment for the amount contributed by the employer and for the earnings on contributions prior to distribution. Other tax benefits are also available for qualifying plans, including exclusion from the the estate tax base of contributions of the employer and exclusion from the gift tax for the conversion of single annuities to joint and survivor annuities.

A committee amendment, which added section 4 to the bill, enables universities to treat unfunded employee retirement programs (where specified conditions are met) for tax purposes as if they were qualified plans. For this treatment to apply the employees of the university must have had the option to come under a retirement plan which was funded and the Secretary of the Treasury must have determined that the absence of funding has not materially jeopardized the ultimate payment of the benefits. The provision applies to taxable years beginning after December 31, 1964, insofar as it relates to the income. tax, to decedents dying after December 31, 1964, for estate tax purposes, and to transfers made after the calendar year 1964 for gift tax purposes.

This amendment also modifies the 20-percent limit in present law applicable in the case of nonqualified plans of tax-exempt educational, etc., organizations. This 20-percent limit under present law provides income tax deferment for amounts set aside under funded plans even though otherwise applicable antidiscriminatory coverage requirements are not met. In these cases, however, not over 20 percent of the compensation can be paid in this form. The amendment provides that for purposes of computing the 20-percent limit all of the employer's contributions to provide pension benefits for a teacher or professor are to be taken into account, and not merely the portion paid under a nonqualified pension plan. This amendment applies to taxable years beginning after December 31, 1965.

(c) Disaster losses $100 floor. Under present law (sec. 165(c) (3) of the code) casualty and theft losses of nonbusiness property may be deducted only to the extent that each such loss of a taxpayer exceeds $100. This limitation was added by the Revenue Act of 1964.

A committee amendment, adding section 5 to the bill, repeals the $100 floor on deduction of losses attributable to Presidentiallydesignated major disasters. This amendment applies to losses sustained after December 31, 1963.

(d) Soil and water conservation.-Present law (sec. 175 of the code) permits farmers to deduct currently certain expenditures for soil or water conservation or for the prevention of land erosion. These expenditures include amounts paid or incurred for the moving of earth, leveling, grading and terracing, contour furrowing, the construction of diversion channels, drainage ditches, earthen dams, etc. Deduction is allowed not only for expenditures made directly by the farmer but also for assessments paid by him levied by a soil or water conservation or drainage district to defray expenditures by the district which, if made by the farmer, would be deductible under this section.

A committee amendment, adding section 6 to the bill, permits, in addition, deduction of these assessments where they are for the purpose of acquiring machines, buildings, land, or any easement over land, or to relocate roads or powerlines or other obstructions, in connection with any of the existing deductible purposes. This provision

applies to amounts paid or incurred after December 31, 1963. In addition, where assessment payments were made between December 31, 1960, and January 1, 1964, to the extent those assessments could have been paid on an installment basis after December 31, 1963, the taxpayer is permitted to elect to deduct them.

A similar provision was added as section 3 to H.R. 8050 (S. Rept. 1602, 88th Cong., 2d sess., pp. 11-12 (Sept. 25, 1964)) and approved by the Senate on September 28, 1964. However, that bill was not enacted.

(e) Local 738, I.B.T.-National Tea Co. Employees' Retirement Fund (context of S. 1232).-The Local 738, I.B.T-National Tea Co. Employees' Retirement Fund has been held by the Internal Revenue Service to be an exempt employees' pension fund (under secs. 401(a) and 501 (a) of the code) for years ending on or after May 26, 1959. A committee amendment adding section 7 to this bill provides that this fund is to be considered to be a qualified exempt employee pension fund for the period beginning May 12, 1958, and ending May 25, 1959, but only if it is shown to the satisfaction of the Treasury Department that the trust has not in this period been operated in a manner which would jeopardize the interests of its beneficiaries.

(f) Foreign expropriation losses. This provision is the same as H.R. 6319 which was passed by the House at the end of the last session, and which is also pending before the committee. The provision is explained above under H.R. 6319.

(g) Subchapter R.-Under present law (sec. 1361 of the code) partnerships and proprietorships may elect to be taxed as corporations. A committee amendment, adding section 9 to the bill, repeals this provision of pres ent law, effective January 1, 1969. It also provides that, in the interval before the provision is repealed, an entity subject to the provisions of this section of the code may prospectively revoke its former election to become subject to the rules of subchapter R. Such a revocation would be treated as a complete liquidation of a corporation.

Ünder present law (sec. 1361 (m)) if a subchapter R partnership or proprietorship incorporates, this is treated as a liquidation and any gain is taxed. Another provision of the bill would repeal the subsection (sec. 1361 (m)) and thereby permit such an incorporation of a subchapter R business to be treated as a tax-free reorganization.

(h) Subchapter S corporations-distributions within 31⁄2 months after the close of a taxable year.-Under present law (sec. 1373 of the code) a corporation which has elected to be subject to the rules of subchapter S may distribute tax free its income which was previously taxed to its shareholders. (Such corporations are similar to partnerships in that the shareholders are taxed on the current income of the corporation whether or not such income is distributed to them.) Thus, current income of a subchapter S corporation, if distributed in the year earned, will only be taxed to the shareholders in that year. However, if it is distributed in the following year, it may, in some cases, be taxed to the shareholders again as a dividend. This would occur, for example, if in the following year the corporation has no taxable income or does not qualify as a subchapter S corporation. Also, in some cases where a shareholder has a different taxable year than the corporation, the shareholder may not qualify to receive tax free a distribution of the previous year's corporate income (even though the

corporation's year has ended) because he has not included the amount in his own income (since his taxable year has not yet ended).

A committee amendment, adding section 10 to the bill, treats distributions made within 32 months after the close of a taxable year as having been made out of the undistributed taxable income of the taxable year just completed. In general, this would mean that the distribution itself will not add to the taxable income of the shareholder. This provision would apply to distributions made on or after January 1, 1965.

(i) Subchapter S corporations-certain capital gains.-Under present law (sec. 1375 of the code) a subchapter S corporation's capital gains are treated as being passed through to the shareholders whether or not those gains are actually distributed.

A committee amendment, adding section 11 to the bill, would impose a tax on the capital gains at the corporation level under certain conditions where this election had not been in effect for prior years. The tax would apply only if the net gains are greater than the other taxable income of the corporation, and exceed $25,000. The taxable income of the corporation must also exceed $25,000.

This tax is not to apply if the corporation was subject to subchapter S for more than 3 years before the capital gain year. If the corporation was less than 3 years old at that time, the tax would not apply if the corporation was subject to subchapter S at all times since its incorporation.

The amount of the corporate tax on the net capital gains is to be the lesser of (1) 25 percent of the excess of the gains over $25,000 or (2) the regular tax imposed upon the taxable income of a corporation by section 11 of the code.

This provision is to apply to taxable years beginning after enactment of the bill.

(j) 1939 code estate tax fraud penalty.-Under present law, the fraud penalty is 50 percent of the deficiency in the case of estate taxes, the same as in the case of income and gift taxes. Under the 1939 code the estate tax fraud penalty was 50 percent of the entire tax. A committee amendment, adding section 12 to the bill, would bring the 1939 estate tax fraud provision into line with the 1954 code by making it 50 percent of the deficiency. This is to apply to all open years under the 1939 code.

(k) Joint Committee on Reduction of Nonessential Federal Expenditures. Until last year no more than $10,000 could be authorized for appropriation for the Joint Committee on the Reduction of Nonessential Federal Expenditures. A committee amendment, adding section 13 to the bill, would have eliminated this restriction. This is no longer necessary, however, because such an amendment was last year added to Public Law 89-283, the Canadian Auto Agreement.

(1) Self-employment retirement plans.-Under present law income derived from the sale or licensing of intangible property (other than goodwill) arising from the personal efforts of the taxpayer (such as copyright royalty income) is not included in the basis for determining the maximum deductible contributions to a self-employed plan (H.R. 10-type plan). A committee amendment, adding section 14 to the bill, would treat such income as "earned income" for measuring contributions to such plans and for this purpose would also consider it to be income from a trade or business.