TABLE 8.-Comparison of the tax treatment provided under present law and under the annuity and retirement provisions of H. R. 8300 for a retired single individual 65 years of age receiving an annual annuity of $3,000 with the individual's contributions amounting to $7,000, the cost of which will be recovered tax free in less than 3 years

1 Assuming individual has $900 of "work income" and balance from investments equaling the personal exemptions and deductions.

Maximum amount of tax credit allowable, 20 percent of $1,200.

$3 percent of consideration paid.

Total amount of annuity excluded until cost of annuity is recovered tax free.

Annuity Income of $3,000, less remaining cost of annuity not excluded in first 2 years.

It is estimated that the annuity rules will decrease revenues by $10 million in the fiscal year 1955.

C. Amounts which are not annuity payments, but received under annuity or endowment contracts (sec. 72 (e) and (h))

Individuals frequently receive under annuity contracts amounts which are not strictly speaking annuity payments, such as dividends and amounts received from the surrender, redemption, or maturity of the annuity contract. Under present law, such amounts are taxed to the extent that they exceed the portion of the consideration paid for the contract which has not previously been recovered free of tax.

The bill makes two changes in the present treatment. First, proceeds other than annuity payments which do not constitute a complete discharge of the carrier's obligation under the annuity contract (for example, dividends as contrasted with amounts received from the surrender of the contract) are to be taxed in full without any exclusions, if received on or after the date the annuity payments begin. Where the proceeds from the annuity contract are received either before the date annuity payments begin or in full discharge of the contractual obligation these proceeds will be taxed, as under existing law, only to the extent that they exceed the consideration.

A second change made by the bill deals with cases where such proceeds are received in a lump sum in one year. In such cases, the tax on the lump-sum proceeds cannot exceed the tax which would be

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payable if the proceeds had been received in 3 equal installments: 1 in the year of receipt, and the other 2 in the 2 preceding years.

D. Prizes and awards (sec. 74)

The tax treatment of prizes and awards under present law is uncertain although they have usually been held to be taxable.

The bill includes in income subject to tax all prizes and awards except those made in recognition of past achievements of a religious, charitable, scientific, educational, artistic, literary, or civic nature, where the recipient was selected without any action on his part and is not required to render substantial future services. This exception is intended to exempt such awards as the Nobel and Pulitzer prizes. "Giveaway" program prizes and essay contest prizes will be taxable in all cases despite some exceptions in case law (Pot O'Gold and Ross Essay Contest).

Scholarships and fellowships are not covered by the rules described above. The bill contains a specific provision dealing with them. (See sec. 117 in pt. VI-G.)

E. Discharge of indebtedness (secs. 76, 108, 1017)

Under present law, whether cancellation of indebtedness results in income to the debtor, and to what extent, is now a matter to be determined according to various rules developed by the courts. The bill provides that all discharges shall be included in income. of the debtor unless they fall within specified categories where income is deemed not to accrue. The specified exemptions are as follows: (1) Transactions having the character of a gift to the taxpayer; (2) Transactions having the character of a contribution to the capital of the taxpayer;

(3) Transactions effected as an adjustment of the purchase price of property acquired in connection with the assumption of the indebtedness discharged; or

(4) Any other transaction in which the discharge is attributable to the existence between the parties of a relationship other than that of debtor-creditor.

These specifications give recognition to the situations as they actually exist in day-to-day transactions. For example, a father interested in the financial welfare of his son may, without consideration, discharge the unpaid note his son had given to him. Such a discharge would ordinarily constitute a gift to the son. Even in cases where there is not such a close personal relationship, a creditor may settle a debt for less than full value to assure continued business relations with the debtor. In actual practice, the determination of whether discharge of indebtedness results in income or not will be dependent on the circumstances of individual cases.

These enumerated exceptions are to be inoperative where the indebtedness discharged is an accrued item which the debtor has deducted on his income-tax return and from which he has received a tax benefit, and the creditor has not accrued his claim as income. In such cases, the debtor will be required to include as income for the year of cancellation the amounts deducted for tax purposes but never paid out or counted as income by his creditor.

Under present law, where cancellation of indebtedness of a corporation, evidenced by a security, results in income which would otherwise

be taxable in the year of cancellation, such taxation may be avoided if the debtor corporation reduces the basis of its assets (in accordance with Treasury regulations) by the amount of the cancellation.

Under the bill this privilege is extended to an individual, if the indebtedness was incurred in connection with property used in his trade or business, and it is available (to such individuals and to corporations) whether or not the canceled indebtedness was evidenced by a security.

Present law permits railroads to exclude income arising from the cancellation of indebtedness, without any corresponding reduction in the basis of their properties, if the cancellation is pursuant to an order of the court in bankruptcy or receivership proceedings. This provision now inapplicable to taxable years beginning after December 31, 1954, has been extended to apply to cancellations in taxable years beginning before January 1, 1956.

VI. EXCLUSIONS FROM GROSS INCOME

A. Employee death benefits (sec. 101)

Present law provides that beneficiaries of a deceased employee are to receive a special exclusion of up to $5,000 for payments by an employer. Under existing law, this exclusion is available only where the employer is under a contractual obligation to pay the death benefits and is not available where an employee has a nonforfeitable right to the benefit before death.

The bill extends this exclusion to death benefits whether or not paid under a contract. It also extends the exclusion to distributions under a qualified profit-sharing plan even though the employee had a nonforfeitable right to the amount while living.

The $5,000 limit on the exclusion under present law applies to payments with respect to any one employer. The bill limits this exclusion to $5,000 with respect to the death of any employee. B. Interest element in life-insurance proceeds (sec. 101 (d))

Existing law exempts proceeds of life insurance paid by reason of death, even though the proceeds may be paid in installments so that a portion of the payments represent interest earned after the death of the insured.

The bill provides that the interest element in life insurance proceeds accruing after the death of the insured (after the date of enactment of the act) is to be included in the income of any beneficiaries, except that an exclusion of up to $500 a year is provided for the widow of a decedent and an exclusion of up to $250 a year is to be provided for each other beneficiary who is a child or lineal descendent or ancestor of the decedent. The change does not, however, affect the present taxation of interest received on proceeds left with an insurance company under an agreement to pay interest.

C. Payments for injury and sickness (secs. 104, 105, and 106)

Under present law, amounts received as accident or health benefits are exempt only if the benefits are paid under a contract of insurance. This results in a tax differential against plans which are self-insured by the employer. It also involves difficult questions as to whether or not an insurance contract is involved, for example, in a State with a

compulsory employer injury and sickness program which permits the employer to self-insure if he posts a bond with the State.

The bill applies the same exclusion rule to both insured and noninsured plans if the plans meet certain qualification tests. Sickness and accident benefits are (1) entirely excluded if received as compensation for injury or sickness (for example, for hospital bills), and (2) excluded up to $100 a week if received as compensation for loss of wages.

For a plan to qualify it must be for the exclusive benefit of employees and it must meet certain nondiscrimination tests similar to those applied to pension plans. Employees must have enforceable rights to benefits. Further, to qualify, the plan must provide a waiting period before payments to compensate for loss of wages begin. This will disqualify sick leave where no waiting period is provided.

If an employee under a qualified plan receives supplementary payments as compensation for loss of wages under a nonqualified plan (e. g., a direct payment from the employer's pocket) the nonqualified amount will be taxable and will also serve to reduce the limitation of $100 on the weekly exclusion.

The bill makes clear that employers' contributions to sickness and accident plans are not to be taxed to the employee at the time they are made.

D. Rental value of parsonages (sec. 107)

Under present law, the rental value of a home furnished a minister of the gospel as a part of his salary is not included in his gross income. The bill provides that the present exlusion also is to apply to rental allowances paid to ministers to the extent used by them to rent or provide a home.

E. Income taxes paid by lessee corporation (sec. 110).

Under some long-term leases, a lessee contracts to compensate the lessor for income taxes assessed on the rental payment.

Under present law the lessor is deemed to derive additional taxable income from the income tax paid on its behalf by the lessee. The lessee, in turn, is required to pay a tax on such income of the lessor, and so on. The lessee, however, is entitled to deduct such tax payments in computing its own income tax liability.

Under the bill, the income tax liability payable by the lessee on such rental income is to be excluded from the lessor's gross income and denied as a deduction to the lessee. This applies only to leases entered into before January 1, 1954, where both lessee and lessor are corporations. This provision has been in effect with respect to excess profits tax liabilities.

F. Combat pay of members of the Armed Forces (secs. 112, 692)

Present law provides an exclusion from gross income for members of the Armed Forces serving in combat zones or hospitalized as the result of wounds, disease, or injury incurred while serving in a combat zone. In the case of enlisted personnel, an exclusion from gross income is granted for all pay received for service in a combat zone or while hospitalized as a result of such service; for commissioned officers the exclusion is limited to the first $200 of pay received in a month. Under present law this exclusion is available only for service in a combat zone between June 24, 1950, and January 1, 1955.

The bill provides that this exclusion is to be available with respect to service in a combat zone after June 24, 1950, during an "induction period," that is, during a period when persons are generally subject to induction into the armed services under an act like the Universal Military Training and Service Act.

Present law also has a special tax-forgiveness provision applicable to an individual who dies after January 24, 1950, and before January 1, 1955, while in the Armed Forces if his death resulted from service in a combat zone. Any income tax he owes the Government at the time of his death is forgiven. As in the case of the exclusion, the bill extends this provision to apply to service in a combat zone after June 24, 1950, during an "induction period."

G. Scholarships and fellowship grants (sec. 117)

The present statute and regulations do not cover the tax treatment of scholarships and fellowship grants. The bill provides that the usual scholarship or fellowship paid to a candidate for a degree is to be nontaxable. A special rule is provided where the terms of the scholarship or fellowship require the rendering of teaching or research services. In this case a part of the grant will be taxable determined by applying the compensation rates for work of a similar nature to the particular work required. In this situation present law does not permit such an allocation but taxes the whole grant unless the services required are purely nominal.

In the case of a scholarship or fellowship for teaching or research where the individual is not a candidate for a degree, the grant will be taxable income if the grant (excluding expenses) plus any compensation from the previous employer, comes to more than 75 percent of the recipient's salary in the year preceding the grant. Thus a tax benefit is only extended to such fellowships if the individual has suffered a real income decline in order to accept the grant.

In all cases; amounts received to cover expenses (other than living expenses) connected with the scholarship or fellowship will not be included in taxable income if they are so expended.

H. Contributions to the capital of a corporation (secs. 118, 355)

The bill provides that in the case of a corporation, gross income is not to include any contribution to the capital of the taxpayer. This in effect places in the code the court decisions on this subject. This provision deals with cases where a contribution is made to a corporation by a governmental unit, chamber of commerce, or other association of individuals having no proprietary interest in the corporation. In many such cases because the contributor expects to derive indirect benefits, the contribution cannot be called a gift, yet the anticipated future benefits may be so intangible as not to warrant treating the contribution as a payment for future services.

In the corporate reorganization provisions of the bill, a corporation takes the basis of assets in the hands of the transferor where the contribution to capital is made by a shareholder but takes a zero basis for property contributed by a nonshareholder unless the property is received as a gift.