years beginning after December 31, 1939, and before January 1, 1945. This is shown in the following table:

TABLE III.-Comparison of total tax burden, existing law and proposed bill, married persons, no dependents, all income earned

From the above table it will be noted a married man, without dependents, having a net income of $20,000 will pay in permanent taxes $2,124, an increase of $535 over existing law, and in addition he will pay a defense tax, under title II of the bill, of $212.40 for 5 years, making a total annual tax for such 5-year period of $2,336.40, or 11.68 percent of his net income as against 7.95 percent under existing law. One with $50,000 net income will pay $12,844 in permanent tax, and $1,284.40 defense tax, making a total of $14,128.40 as against $8,869 under existing law, or 28.26 percent of his net income as against 17.74 percent under existing law.

(d) Requirement for filing individual income-tax returns.-Under existing law, an individual, if single, is not required to file an incometax return unless his gross income is $5,000 or more or his net income is $1,000 or more. In the case of a married individual, no return is required under existing law, unless his gross income is $5,000 or more, or the net income is $2,500 or more. A return is also required if such individual and his spouse each has a gross income, and the aggregate gross income is $5,000 or more. The bill requires a return from a single

individual if his gross income is $800 or more and from a married individual if (1) such individual has a gross income of $2,000 or more and the other spouse has no gross income or (2) if such individual and his spouse each has for the taxable year a gross income and the aggregate gross income is $2,000 or over. Many persons have failed to file returns upon the assumption that their income was insufficient, when, in fact, they were liable for the filing of a return and the payment of a tax. This change will require approximately, 8,000,000 additional returns, and it is believed will result in the collection of substantial additional taxes. It is estimated that under existing law approximately 7,500,000 individual returns are filed.

SECTION 301. SPECIAL FUND

This section provides that the Secretary of the Treasury shall as soon as practicable after the end of each quarter determine the additional amount of taxes collected attributable to the increases in taxes made, and to the floor-stocks taxes imposed, by the amendments to the Internal Revenue Code in title II of the bill, and the amounts so determined shall be set aside as a special fund which shall be available only for the retirement of any of the national defense series obligations authorized by section 302 of the bill. In the amount to be set aside in the special fund there is not to be included the amount of taxes attributable solely to the extension of excise taxes and rates of excise taxes contained in section 209 of the bill, nor any amount collected under admissions taxes attributable to a basic admission charge of more than 40 cents. If at any time the amounts in the fund are not sufficient for the retirement of the obligations of the national defense series, the Secretary of the Treasury is authorized and directed to transfer to the fund moneys out of the general fund of the Treasury. Any amounts in the special fund not necessary for the retirement of the obligations shall be deposited in the general fund of the Treasury.

The revenues attributable to title II of the bill will be collected and paid into the Treasury in accordance with established procedures. Shortly after each quarter the Secretary of the Treasury, acting upon information obtained by the Bureau of Internal Revenue from the offices of collectors of internal revenue, will determine the amounts collected during the preceding quarter which under this section are required to be set aside in the special fund, and on the basis of such determination he will transfer the amount thereof to the special fund for the retirement of the national defense obligations outstanding. It will be obligatory upon the Treasury, beginning July 1, 1940, to retire the national defense obligations and charge the amount so retired to the special fund. The Secretary of the Treasury has stated before this committee that it is his intention to arrange the maturities of any national defense obligations issued under the authority contained in this bill, so as to insure as nearly as possible the application of the increased revenue from the enactment of title II to the retirement of national defense obligations during the year in which such revenue is received.

SECTION 302. NATIONAL-DEFENSE OBLIGATIONS

This section amends section 21 of the Second Liberty Bond Act, as amended. That section now provides that the face amount of bonds, certificates of indebtedness, Treasury bills and notes issued under the Second Liberty Bond Act, as amended, shall not exceed $45,000,000,000 outstanding at any one time. On June 30, 1940, there will be a margin under this limitation of only $1,700,000,000 which can be availed of by the Treasury to issue additional public-debt obligations for the purpose of obtaining funds in addition to $700,000,000 to be recovered from governmental corporations, to meet the increased deficit in the fiscal year 1941 if the President's defense recommendations are adopted by the Congress. More than $1,600,000,000 of this deficit will be due to additional emergency national-defense expenditures. On the basis of present recommendations, total national-defense expenditures will amount to about $3,250,000,000, the highest amount spent for this purpose in any year in our history, except for the 2 fiscal years when this country participated in the World War.

In order to finance national-defense expenditures after June 30, 1940, it is proposed to permit the Treasury to issue within the framework of current statutes relating to the public debt, $4,000,000,000 of shortterm public-debt obligations with maturities not exceeding 5 years, to be designated "national defense series." These obligations will be in addition to the $45,000,000,000 face amount of public-debt obligations permitted to be outstanding under the Second Liberty Bond Act, as amended. This additional $4,000,000,000 authorization for national-defense obligations permits only a temporary increase in the limitation on outstanding public-debt. obligations because, to the extent that such national-defense obligations are retired under the provisions of section 301, the authorization will be reduced.

76TH CONGRESS 3d Session

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SENATE

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REPORT No. 1857

PROVISIONS OF BANKRUPTCY ACT WITH RESPECT TO THE BASIS OF PROPERTY

JUNE 17 (legislative day, MAY 28), 1940.-Ordered to be printed

Mr. O'MAHONEY, from the Committee on the Judiciary, submitted the following

REPORT

[To accompany S. 4133)

The Committee on the Judiciary, to whom was referred the bill (S. 4133) amending the Bankruptcy Act with respect to the basis of property and excluding certain corporations from the provisions of chapter XI, after consideration, report favorably thereon with an amendment and recommend that the bill as amended do pass. The amendment is as follows:

Amend the title to read:

A bill amending the Bankruptcy Act with respect to the basis of property. The bill, as amended, is identical with the bill H. R. 9864, introduced by Mr. McLaughlin, as favorably reported, with amendments, by the Committee on the Judiciary of the House of Representatives on June 4, 1940.

Sections 1, 2, and 3 of the bill propose to amend sections 270, 396, and 522 of the Bankruptcy Act so as to prevent those sections from resulting in a decrease of the "basis" of a debtor's property to an amount less than the fair market value of such property. The present sections 270, 396, and 522, which are identical in their language, deal with the basis of property for income-tax purposes. Where a proceeding for "corporate reorganization" under chapter X, for an "arrangement" under chapter XI, or for a "real-property arrangement" under chapter XII results in a cancelation or reduction of indebtedness, those three sections require (with limited exceptions) that the basis of the debtor's property for income-tax purposes, State as well as Federal, be decreased by an amount equal to the amount of such cancelation or reduction.

The basis of property for income-tax purposes is important from at least two points of view: (1) The amount of depreciation (or depletion) which may be claimed annually in future income-tax returns,

and (2) the determination of gain or loss resulting from future sales or exchanges of the property in question.

The difficulty with sections 270, 396, and 522 is that there is nothing in any of the three sections to prevent their application from resulting in a decrease of the basis of the debtor's property to a figure substantially below its fair market value, or even to zero. Where the basis is reduced to zero, the result is that (i) the reorganized company cannot take any deduction for depreciation or depletion in future State or Federal income-tax returns, not even depreciation or depletion based on the present fair market value of its property, and (ii) if the property should be sold, the entire proceeds would constitute taxable income, even if the sale should be at a figure less than its present fair market value, which of course would be drastically less than its original cost. Where the basis is reduced to any other figure below the fair market value of the debtor's property the onerous consequences to the reorganized company are only less severe.

The bill proposes to remedy this situation by establishing a fair. market value "floor" below which the basis shall not be reduced. This result is to be accomplished by inserting at the end of the first sentence of section 270 (and by substantially identical insertions in secs. 396 and 522) the following:

but the basis of any particular property shall not be decreased to an amount less than the fair-market value of such property as of the date of entry of the order confirming the plan. Any determination of value in a proceeding under this chapter shall not be deemed a determination of fair-market value for the purposes of this section.

The possibility that the development of a fair and feasible plan may be prejudiced by the injection of an altogether extraneous consideration, that is, the undesirable tax consequences, is avoided under the proposed amendment by the provision which makes clear that a determination of value for reorganization purposes shall not be deemed a determination of value for the purposes of the "tax basis" sections.

In order to correct the inequity resulting from the application of sections 270, 396, and 522 to plans or arrangements already confirmed under sections 12, 74, and 77B and chapters X, XI, and XII, the bill proposes to make the amendments effective as of June 22, 1938, the date of approval of the act which first inserted those sections in the Bankruptcy Act. The amendments will thus take effect as if they were a part of such act as originally enacted.

The amendments proposed were favorably reported by the Treasury Department and by the Securities and Exchange Commission.

Your committee believes that the present provisions of section 270 are unfair to a substantial number of debtor corporations heretofore reorganized or now in the process of reorganization under chapter X; that those provisions are frequently a serious obstacle to the development of a fair and feasible plan, in that they provide an appealing argument for not reducing outstanding indebtedness even where a failure to do so would result in an unsound capital structure; and that sections 396 of chapter XI and 522 of chapter XII are open to the same criticisms. So long as sections 270, 396, and 522 continue in their present form, these unfair and undesirable consequences will continue to affect the substantial volume of proceedings under those chapters which are now in the courts or are hereafter instituted. For