Specific corrective action, sometimes by basic amendment to the Internal Revenue Code and sometimes by enlargement or amendment of existing tax conventions or entering into new tax conventions, is suggested below. INCOME TAX Under existing law (and existing conventions) a United States citizen residing in a foreign country must pay income taxes to the United States on all of his income, except "earned income" in the foreign country within the definition of section 116 of the code (sec. 911 of H. R. 8300). He must normally also pay the income tax of the foreign country, because of his residence there, on his entire income both from that country and the United States. Tax conventions and the provisions of section 131 of the code (secs. 901-905 of H. R. 8300) allow a credit for taxes paid to the other country for the same income, but the credit is subject to a proportionate limitation. Even if the credit system worked perfectly, the result would be that the taxpayer would pay either the foreign or United States income tax, whichever is higher, but since each country normally allows different deductions and since each frequently taxes different types of income, the proportion does not always result in even the elimination of double taxation. The ideal solution in justice and logic would be for each country to tax only income arising from sources within its borders. On the assumption, however. that the millennium has not yet arrived, our suggestions below are less ideal but more practical. Charitable contributions The Internal Revenue Code, section 23 (o), provides for the deductibility of contributions or gifts to various political units, to certain war veteran organizations and fraternal societies, and to "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 any possession of the United States, organized and operated exclu sively for religious, charitable, scientific, literary, or educational purposes, or for ***"1 Suggested solution Amend section 23 (o) to read “*** created or organized in the United States or in any possession thereof or in the country in which the taxpayer is resident or under the law of the United States or of any State or Territory or of any possession of the United States or of the country, or any political subdivision thereof, in which the taxpayer is resident, ***" or make similar adjustments in the language of section 170 of H. R. 8300. United States citizens resident in a foreign country are naturally expected to contribute to charities in the country of their residence; they are expected to have, and should have, the same attitude toward the activities of the community in which they live as have their neighbors. It must be readily apparent that the motives which stimulate a contribution to the Canadian Red Cross are not much different from those that stimulate a contribution to the American Red Cross; similarly, the community chest of the foreign town in which the United States citizen is resident as compared to the community chest of his hometown contributions to the church in the foreign town in which he is resident as com pared to contributions to the church in the United States town in which he formerly resided; etc. The fact of the statutory 20 percent limitation on the deductibility of charitable contributions prevents any unlimited avoidance of income taxes via this route. At the same time, it must also be readily apparent that the same United States citizen will have many loyalties to charities back home to which he will want to continue contributing even after he has moved his residence to a foreign land. The provision in the present Internal Revenue Code limiting the charitable deductions to United States charities is of relatively recent origin, for it dates back only to 1938. Under the Revenue Act of 1936 and prior revenue acts, the deduction of charitable contributions by an individual taxpayer was permitted without being limited to United States organizations. Under the 1936 act, sec tion 23 (o) (2) merely provided for the deduction of specified charitable contributions in language similar to the present law but without making any reference to the country in which the organization was created or located. Section 23 (o) (2) was amended by the Revenue Act of 1938 to provide that such contributions should be deductible where made to "a domestic corporation er domestic trust, or domestic community chest, fund, or foundation." The reason for this change is set out in the report of the House Ways and Means Committee on the revenue bill of 1938 (C. B. 1939–1, pt. 2, p. 742), which states as follows: Under the 1936 act the deduction of charitable contributions by corporations Is limited to contributions made to domestic institutions (sec. 23 (q)). The bill provides that the deduction allowed to taxpayers other than corporations be also restricted to contributions made to domestic institutions. The exemption from taxation of money or property devoted to charitable and other purposes is based pon the theory that the Government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by aprations from public funds, and by the benefits resulting from the promotion if the general welfare. The United States derives no such benefit from gifts to foreign institutions, and the proposed limitation is consistent with the above Deory. If the recipient, however, is a domestic organization the fact that some tion of its funds is used in other countries for charitable and other purposes ch as missionary and educational purposes) will not affect the deductibility of the gift." [Italic supplied.] The committee report refers to the similar limitations in the case of corporate charitable contributions. It might be noted that the deduction of corporate aritable contributions was first added to the law by the Revenue Act of 1935 and that from the beginning this deduction was limited to contributions made domestic organizations. The theory upon which the change as to individual tributions was based, according to the committee report, was that contribus to foreign charities did not relieve the Government from any financial den and did not result in the promotion of the general welfare. This provision of the 1938 Revenue Act was further amended by the Revenue Art of 1939 to allow deductions to organizations created or organized in, or under the laws of, any possession of the United States. No further amendments have Seen made to section 23 (o) (2) on this subject up to the present time. In view of the relatively short time that this limitation to domestic charities has been a part of the law, it does not appear to be so firmly entrenched as to stitute an integral part of the United States tax law. It seems logical that the Jy behind the limitation, a policy not especially surprising as a product of a Leade considerably more isolationists and less enlightened than the current one, and a policy shown by the last sentence of the quotation to be inherently contraty, might well be reexamined at this time-especially as to contributions zade to charities in contiguous countries-at the very least when they are the entries of residence of the United States citizens in question. The United States estate and gift taxes do not limit the deductibility of charible contributions to bequests or gifts to charitable organizations created or ized in the United States. See section 812 (d) of the Internal Revenue desec. 2055 of H. R. 8300) and section 1004 (a) of the Internal Revenue Code 2522 of H. R. 8300) for the estate and gift tax provisions, respectively. The e tax should be brought into line with them. The rationale quoted above in connection with section 23 (o) (2) for distin ng contributions to United States charities from contributions to other United States charities-the theory that the Government is compensated for the loss of revenue by being relieved from the financial burden which would erwise have to be met by appropriations from public funds-is largely falla While this theory might have some validity in the case of orphanages, s for the indigent, homes for old or disabled persons, or even hospitals and elementary schools, it certainly breaks down in the broad bulk of charitable anizations. In most cases, as a matter of fact, the charitable organizations Ist for the specific purpose of performing a function which Government either efinitely will not undertake at all or else will undertake on a deficient scale, Id private citizens have banded together to fill a void which otherwise would erain empty. Examples could be multiplied almost without end merely by ference to the Internal Revenue Bureau's list of charities approved for tax deductibility purposes, but reference might be made to the Audubon Society, Naval Historical Foundation, the American Bar Foundation, National Geo The 1938 rationalization to the effect that the United States does not benefit by the tion of foreign charities has been belled by our whole multi-billion-dollar post-World Far II program of loans, grants, etc. The major premise of that program has been that Sealth, wealth, happiness, and political solidarity of all free peoples are indispensable So the security of the United States. graphic Society, scholarship funds, research organizations, and specific research campaigns (Cancer Fund, etc.), the March of Dimes, the various military relief societies (Navy Relief Society, etc.), the Seeing Eye Foundation, churches, museums, symphonies and other musical organizations, libraries, literary or artistic groups, missionary societies, some schools of higher and professional and sectarian education, and countless others. Capital gains The inclusion of capital gains within section 117 of the Internal Revenue Code results in a double tax on such gains realized by a United States citizen resident in foreign countries that do not tax such gains. I would be happy to furnish the staff of the committee with drafts of several different alternative provisions which would cure this inequity and at the same time prevent any wholesale tax reduction in favor of investment income. Taxation of capital gains under the United States tax laws puts United States citizens resident in foreign countries which do not tax capital gains in an unfavorable position as compared to both their neighbors and their fellow citizens at home. In Canada, for example, where capital gains are neither included in the definition of income nor separately taxed, it is obviously impossible for United States citizens to deal upon an equal tax basis with Canadian citizens. The solutions which I propose attempt to grant relief in this respect by eliminating the tax on capital gains realized outside the United States by nonresidents of the United States. The United States citizen residing in Canada, for example, is subject to Canadian income tax upon all of his income regardless of whether such income is derived from Canadian sources or from United States sources. The Canadian income-tax law, however, does not impose any income tax on capital gains as such. Therefore, the United States citizen residing in Canada is required to pay Canadian income tax on all of his income but since capital gains are not included in gross income, they are not a part of the tax base for computing the tax credit. In order to prevent the double taxation which would arise in cases such as that of a United States citizen residing in Canada, section 131 of the United States Internal Revenue Code (sec. 901-905 of H. R. 8300) was enacted to provide a credit against the United States income tax for income taxes paid to a foreign country. This credit, under section 131 (b) (sec. 904 of H. R. 8300) is limited to the proportion of the United States tax which the taxable income from the foreign sources bears to the entire net income for United States tax purposes. Since the Canadian income-tax law, for example, does not impose any tax on capital gains and since such capital gains are subject to income tax in the United States, the result of the proportionate limitation is ordinarily that a United States citizen residing in Canada will have to pay United States income tax on his capital gains both from Canada and the United States and will not obtain sufficient credit for the Canadian taxes which he pays upon his other income to cover the United States tax on the capital gains arising in the United States. This can be true even when the foreign tax is at a higher rate than the United States tax. In any case where the foreign tax does not specifically cover capital gains, the proportionate credit is changed and the result is that the taxpayer does not get the full credit for the foreign taxes which he has paid and, in addition, is required to pay the United States tax on his capital gains. When one thinks of a United States citizen, resident for perhaps many years in Canada, who buys a share of stock in a Canadian company through a Canadian broker on a Canadian exchange, holds it in a Canadian safety-deposit box and subsequently sells it through a Canadian broker on a Canadian exchange, it is difficult to see what right the United States Government, which has contributed nothing to the transaction, has to tax the proceeds from it. It seems logically inferable that in the case of foreign tax bases which do not include capital gains, the base consequently being narrower than if it did include them, the rates must correspondingly be higher. Thus, although the Canadian law theoretically does not tax capital gains, the result for a United States citizen is that the higher rate in practical effect taxes his capital gains by taking his earned income at a higher rate than otherwise in Canada even though the gains are not specifically mentioned in the Canadian law. The failure of the Canadian law to permit any credit for the United States tax on capital gains in practical effect permits Canada to collect a higher tax than it otherwise would and the result is that the United States citizens are subjected to double taxation on such capital gains. Statute of limitations It is presently possible for a taxpayer to be whipsawed between the varying periods of limitations in the United States and the country of his residence and thus to have a severe injustice visited upon him. Section 6511 (d) (3) of H. R. 8300 effectively remedies this situation and should be enacted. ESTATE TAXES Once again the best solution is logical justice to the estate-tax dilemma would be for a country to tax the descent of only the property located within its borders. We assume again, however, that any such solution is too far advanced for current acceptance and so proceed on the assumption that the present basic systems of estate and succession taxes and the bases for levying them will continue to be citizenship in the case of the United States and domicile in the case of other countries. The two criteria overlap in many cases. The United States citizen domiciled in Canada, for example, finds it impossible to take advantage of the marital deduction which his fellow citizens domiciled in the United States can utilize in the distribution of their estates by will. Solution Modify sections 813 (c) and 936 (c) of the Internal Revenue Code so that the United States estate taxes collected will give credit to the estate for the additional taxes paid in a foreign country by virtue of the absence of any marital deduction there similar to that in the United States. The 1948 Revenue Act provided for the deduction of up to 50 percent of the gross estate for property left to a surviving spouse if such property is left either outright or in a trust over which the spouse has what amounts to a general power of appointment. The effect of this deduction is to remove half of the decedent's estate from the application of Federal estate taxes. This half of the estate will be subject to United States estate taxes as a part of the spouse's estate on the spouse's death. If the United States citizen resident in a foreign country shapes his will to take advantage of this tax benefit, his United States estate taxes will be substantially reduced since half of the estate will be taxed on his death and half on his wife's death; both estates are thus in lower tax brackets than if all the estate had been taxed on the death of the husband. In the foreign country, however, the entire estate may be taxed on the husband's death and all or part of it may be taxed again on the wife's death. This double tax on some or all of the estate more than offsets the advantage gained in the United States taxes by means of the marital deductions. Thus, instead of attempting to take advantage of the martial deduction available to his fellow citizens, it may be more advantageous for the United States citizen residing in a foreign country to leave a life estate to his wife and the remainder to his children or others and, thus, to subject the entire estate to death taxes in both countries on his death but, thus, to eliminate any additional death taxes in either country on the death of the surviving spouse. Some provision should be made whereby the United States citizen residing in a foreign country could have the benefit of the United States martial deduction without subjecting all or part of his estate to a double tax. GIFT TAX At the present time a United States citizen resident in a foreign country must pay both a United States and a foreign tax on any gifts he chooses tc make. Solution An appropriate credit section, similar to the income-tax credit (I. R. C., sec. 131; secs. 901-905 of H. R. 8300) and the estate tax credit (I. R. C., secs. 813 (c) and 936 (c); sec. 2014 of H. R. 8300) sections, should be enacted. The United States gift tax is part of an overall tax system applicable to the distribution of a man's assets either inter vivos or upon his death. The gift tax is closely integrated with the estate tax, and was originally enacted to supplement the estate tax and to prevent avoidance of estate taxes by the making of inter vivos gifts which had been up to that time tax free; actually the system is designed, by differences in tax rates and by offering certain other advantages, to encourage distribution, although not tax-free distribution, of an estate during the owner's lifetime. This whole fundamental objective, however, i rated by double taxation on any inter vivos gifts. Hardly could a more effective determent to inter vivos distribution be practically imagined. CONCLUSION In view of the present position of the United States in world affairs and in view of the importance attached to the political and economic strengthening of the nations of the free world, every effort should be made to make more rather than less favorable the tax position of United States citizens resident in foreign countries. This statement has endeavored to outline some of the existing problems and some proposed solutions to those problems, and we urge their immediate consideration and as prompt adoption as possible for the good of not only our own country but of the entire free world. STATEMENT OF COMMITTEE OF EXECUTIVES ON TAXATION OF THE AMERICAN GAS ASSOCIATION, NEW YORK, N. Y. ON H. R. 8300 243 247 248 305 309 331-336 391 461 481 1341 1505 1514 1732 Sickness and Disability Benefits. Partial Exclusion of Dividends Received by Individuals. Losses-Worthless Securities-Securities Affiliated Corporations. Amortizable Bond Premium. Net Operating Loss Deduction. in Deduction for Dividends Reveived by Corpora- Dividends Paid on Certain Preferred Stock of Capital Stock Issuance Expense. Distribution of Stock and Stock Rights. Corporate Distributions-Tax on Transfers in Effective Date of Subchapter C. General Rule for Taxable Year of Deduction. Computation of Tax Where Taxpayer Restores Consolidated Returns for Subsequent Years. Consolidated Returns-Earnings and Profits. 6016, 6074, 6154, and 6655 -- Corporate Modified "Pay-As-You-Go" Proposal. Sections 104, 105, and 106-Sickness and disability benefits Most gas companies provide sick and disability pay for their employees. In some instances the sick pay is provided through accident or health insurance, with benefits paid to the employees and premiums paid by the employers. Under section 22 (b) (5) of the Internal Revenue Code, the benefits are excluded from gross income subject to tax. Other companies pay sick benefits directly to their employees, without using an insurance company as an intermediary. In such cases, the benefits paid to employees have been held to be taxable by the Internal Revenue Service and the employer is obliged to withhold income tax on the sick pay. The necessity to clarify the tax status of sickness and accident benefits, whether under an insured or noninsured plan, by providing a uniform set of rules was recognized by the House Ways and Means Committee and resulted in the inclusion of Sections 104, 105, and 106 in the Internal Revenue Code of 1954. However, certain provisions of section 105 require further clarification in order to eliminate discrimination between different sick plans of various employers and the increased administrative difficulties of employers in connection with their withholding responsibilities. To eliminate such discrimination and |