REVENUE ACT OF 1951

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP57-00384R001200010017-1
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 30
• Document Creation Date: December 20, 2016
• Sequence Number: 17
• Publication Date: January 1, 1951
• Content Type: REGULATION

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REVENUE ACT OF 1951 91
The excise-tax changes made by your committee's bill become effec-
tive on the first day of the first month which begins more than 10
days after the date of enactment of the bill. Your committee's bill
also provides that th.e excise-rate increases are to expire on De-
cember 31, 1953. No termination date was provided for the excise-
tax increases made by the House bill, but the same provision applied
with respect to the time when the excise-tax changes were first
to become effective, Assuming that November 1 is the effective
date for these changes, it is estimated that your committee's bill will
increase excise-tax revenues by $823 million in the fiscal year 1952
(this includes the floor stock taxes), raising total receipts for 1952
from excises to $9,383 million. With this same assumption, the House
bill would increase excise collections in 1952 by $811 million, raising
total excise receipts in 1952 to $9,371 million.
A. ALCOHOLIC BEVERAGES
The additional revenue estimated to be derived from the taxes
on alcoholic beverages in a full year of operation is distributed among
the various excises under both the House bill and your committee's
bill as follows:
[In millions]
Commit-
tee bill
Distilled spirits (including increased draw-back)_________________________________
$168
$168
Beer-----------------------------------------------------------------------------
68
68
Wines-------------------------------------------------------------------------
8
8
Occupational taxes on dealers in liquor__________________________________________
8
8
1. Distilled spirits
. Section 441 of your committee's bill increases the tax on distilled
spirits imposed by sections 1650 and 2800 of the Internal Revenue
Code from $9 to $10.50 per proof gallon. This is the same increase as
is made by the House bill. The increase of $1.50 per proof gallon
amounts to about 26 cents a fifth on the ordinary type of whisky
bottled at about 85 proof. Under present law the $9 per gallon tax
on distilled spirits averages about 40 percent of the retail price per.
bottle, including tax. The tax imposed by both your committee's and
the House bills would raise this figure to about 43 percent. This as-
sumes the addition in full of the tax to current prices, but no price
mark-up on the tax.
During World War II and the immediate postwar years consump-
tion of distilled spirits climbed almost continuously in spite of higher
liquor taxes and prices, reaching a peak consumption in 1946 when
consumers purchased more than 230 million wine gallons of distilled
spirits for which they spent $5 billion, or 3 percent of their total dis-
posable income. High income levels and the inability of consumers to
purchase scarce durable goods probably were the most important fac-
tors in accounting for this high consumption level. Although con-
sumption of liquor declined during the postwar years, since the out-
break of hostilities in Korea it has again been increasing, and the 1950
consumption of 190 million wine gallons was higher than in any prior
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years except 1945 and 1946. The acceleration of the defense program
presents the likelihood that income levels again will :rise and that con-
sumers again will have to cut down their purchases of durable goods.
Your committee believes that, under the conditions described above,
it does not appear the increase provided by the bill will seriously
affect the consumption level of liquor. Thus, it is not believed that
the tax increase provided here will have much effect on the industry.
From the standpoint of the consumer it is not believed that this tax
increase will prove to be particularly burdensome, since the limited
data available suggest that up to income levels of $5,000 this tax bears
about equally on the various income levels.
Your committee carefully reviewed the increase in the tax on distilled
spirits with reference to the problem of bootlegging. It found that
even under present tax rates there is a substantial financial incentive
to engage in illicit operations of this type, which had been held at a
relatively low level only as a result of enforcement measures. How-
ever, any increased financial incentive for illicit operations resulting
from the tax increase provided by your committee's bill is likely to be
more than offset by a tightening of the labor supply available for these
operations and by higher incomes on the part of consumers, which will
decrease the importance of the price differential between tax-paid and
non-tax-paid liquor. Nevertheless, it was recognized that too large an
increase in the tax on distilled spirits might well result in a sizable
increase in illicit operations.
At the present time, although the general tax rate on distilled spirits
is $9 a proof gallon, a draw-back of $6 per proof gallon is provided for
distilled spirits used for medicines, medicinal preparations, food prod-
ucts, flavors, leaving a net tax of $3 per proof gallon. in such cases.
Draw-backs are used rather than reducing the rate of tax, because a
lower rate might result in distilled spirits being diverted to beverage
purposes on which the higher rate of tax should be paid. Using these
medicines and nonbeverage food products as a source of revenue,
however, appears to be in contradicition to the policy generally fol-
lowed of not imposing excise taxes on medicines or food. In part
this principle is recognized under present law by providing a draw-back
of all but $3 of the tax per proof gallon. Both your committee'; and
the House bills recognize this principle in full by increasing these
draw-backs so that a net tax of only $1 per proof gallon, sufficient to
cover administrative costs, is finally paid. With the tax rate of
$10.50 per proof gallon this is gecomplished in section 452 of the bill
providing in section 3250 of the code a draw-back of $9.50 per proof
gallon.
It is estimated that in a full year of operation the changes made in
the tax on distilled spirits by both your committee's and the House bill
will increase revenues by $168 million.
2. Beer
Section 443 of the bill increases the tax imposed on fermented malt
liquor, or beer, by sections 3150 and 1650 of the code by $1 per barrel,
or from the $8 per barrel provided by present law to $9 per barrel.
This represents the same increase as is made by the House bill. This
is an increase in tax of 12'/2 percent as contrasted to an increase of 16%
percent provided in the case of distilled spirits. Under present law
the tax on beer represents about 15 percent of the average retail
Aft
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REVENUE ACT OF 1951 93
price and under both your committee's and the House bills this is
increased to between 16 and 17 percent. In the case of a 12-ounce
bottle of beer the tax increase represents an increase of about one-
third of 1 cent.
The increase provided for beer is smaller than that provided for
distilled spirits because your committee believes that beer to a greater
extent is consumed by the lower income groups and, therefore, that
an increase in this tax generally is more burdensome than the tax on
distilled spirits.
,With the present high income and consumption levels it appears
probable that much, if not all, of the tax increase provided for beer
can be shifted by the industry to the consumer without seriously
affecting the current level of consumption. Thus it is not anticipated.
that this tax increase will have any important effect on the industry..
In a full year of operations it is estimated that the $1 per barrel
increase in the tax on beer will raise revenues by about $68 million.
S. Wines
Section 442 of the bill amends soctio4s 3030 and 1.650 of the code
to provide for the same increase in the tax on wines as in the case of
beer, namely, an increase of approximately 12'/ percent. Thus, in
the case of still wines, including vermouth, the tax per gallon would
be--
(a) increased from 15 to 17 cents where the alcoholic content
of the wine is not more than 14 percent,
(b) increased from 60 to 67 cents where the .alcoholic content
of the wine is over 14 percent but not over 21 percent; and
(c) increased from $2 to $2.25 where the alcoholic content of
the wine is over 21 percent but not over 24 percent.r4
In the case of sparkling wines, liqueurs, and cordials the tax per half
pint would be:
(a) increased from 15 to 17 cents in the case of champagne or
sparkling wines; and
(b) increased from 10 to 12 cents in the case of liqueurs, cordials,
and artificially carbonated wines.
These are the same increases as are provided by the House bill.
Most of the wine consumption in the United States today is repre-
sented by the first two categories of still wines. Natural, or table,
wines with an alcoholic content not over 14 percent and including such
wines as sauterne, claret, and burgundy represent about one-quarter
of the total consumption. Sweet or dessert wines with an alcoholic
content between 14 and 21 percent and including such wines as port,
sherry, tokay, and muscatel represent approximately three-fourths
of the total consumption in the United States today. These wines
are fortified with brandy or alcohol before the natural fermentation is
completed. Sparkling wines account for most of the small remaining
consumption in the United States today and in large part represent
imports.
In terms of retail price the tax under present law represents about
4 percent of the retail price, including tax, in the case of table wines,
and would be increased by about one-half of 1 percent under both your
committee's and the House bills. The tax on sweet wines under pres-
ent law represents about 15 percent of the retail price and under both
bills this percentage would be increased by slightly more than 1 per-
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tentage point. The tax on sparkling wines represents about 25
percent of the retail price under present law and under both bills
this would be increased to about 26'2 percent. Thus the rate of tax
under the bills will continue to be graduated in accordance with
alcoholic content.
Your committee deemed it appropriate to make only a moderate
increase in the case of the taxes on wines because of the importance
of wines to the rape-growing industry. Between one-third and one-
half of the total grape crop is customarily absorbed by wine. The
demand for wine, therefore, also has an important effect on the prices
which can be obtained by producers for raisins and fresh grapes, the
two other important uses of grapes. Moreover, in view of the fact
that it has been necessary for the Department of Agriculture at times
since the end of World War II to support the price. of raisins, it would
appear inappropriate for your committee to make a substantial in-
'crease in the tax on wine which might have the effect of requiring
further price supports. In addition it should be pointed out that
wine consumption in the United States relative to consumption of
other forms of alcoholic beverages is relatively low when compared
to relationships generally established abroad. Moreover, the wine
industry is one of the few industries which has been classified under
the excess-profits tax as a depressed industry.
The effect of both your committee's bill and the House bill in the
case of the taxes on wines is to raise revenues by an estimated $8 mil-
lion in a year in which the increase is fully effective.
4. Occupational taxes on dealers in liquor
Retail dealers in liquor other than those dealing exclusively in wine
and beer are required under section 3250 of the code to pay a special
annual occupational tax of $27.50. Section. 451 of the bill raises this
occupational tax to $50 a year. This is the same increase as is made
by the House bill. Under present law the low tax has made it im-
practical from an administrative standpoint for the Bureau of Internal
Revenue to verify the names and addresses of persons paying this
special occupational tax. Attention has been called to many cases
where incorrect names and addresses have been given with the probable
intention of avoiding detection by State and local liquor authorities.
Your committee believes it feasible for the Bureau of Internal Revenue
to establish a verification system for all payees of this tax and it is
the intention of your committee that the Bureau of Internal Revenue
do so.' Severe penalties for fraudulent returns are already provided
under existing law. It is estimated that this provision will increase
collections by $7 million in a full year of operation.
Section 451 of your committee's bill also increases the occupational
taxes on wholesale dealers in liquors and wholesale dealers in malt
liquors. Section 3250 (a) (1) of the code imposes a special occupa-
tional tax of $110 on wholesale dealers in liquors. This includes
wholesale dealers in wines, as well as wholesale dealers in distilled
spirits. Both your committee's bill and the House bill raises this
tax to $200. Section 3250 (d) of the code provides an occupational
tax of $55 for wholesale dealers in malt liquor. This tax is raised to
X100 by both bills. It is estimated that in a full year of operation
the increase in these occupational taxes on wholesale dealers in
liquors and malt liquors will raise revenues by $1 million annually.
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REVENUE ACT OF 1951 95
B. TOBACCO PRODUCTS
The changes made in the excise taxes on tobacco are distributed
between small ("standard" and "king" sized) cigarettes and snuff,
fine-cut, scrap, plug and twist chewing tobacco as follows:
Small cigarettes ("standard" and "king" sized) ----------------------------------
Snuff and &ee-cut, scrap, plug, and twist chewing tobacco-----------------------
Total----------------------------------------------------------------------
House
bill
$177
0
Committee
bill
No changes are made in the present taxes on cigars and smoking
tobacco.
1. Small cigarettes
In the case of small cigarettes, section 421 of your committee's
bill increases the tax provided by section 2000 of the code from
$3.50 per thousand to $4 per thousand. This is the same increase
as is made by the House bill. In effect, this raises the tax on the
ordinary package of 20 cigarettes from 7 cents to 8 cents. The
present tax on cigarettes represents about 34 percent of the retail
price including tax. The increase would raise this to about 37 percent.
The increase provided by both bills is as large as the combined
increases made in this tax during and just before World War II. In
view of the importance of the sales of tobacco to. a large number of
farmers in the country, this is as large an increase in this tax as .your
committee believes it is appropriate to make.
It is estimated that in a full year of operation this action will increase
revenues by $177 million a year.
2. Snuff and fine-cut, scrap, plug, and twist chewing tobacco
In the case of snuff and fine-cut, scrap, plug, and twist chewing
tobacco, section 423 of your committee's bill reduces the tax from 18
cents per pound to 10 cents per pound. In the case of smoking
tobacco the tax remains at 18 cents per pound. No such reduction
was provided in the House bill. Your committee believes that this
reduction is desirable because the declining demand for snuff and
chewing tobacco has worked hardships on the manufacturers, and
also on the farmers raising these particular types of tobacco. More-
over, these tobacco.products are used primarily by the lower income
groups and, therefore, the present tax is believed to be highly
regressive.
It is estimated that in a full year of operation this action by your
committee will decrease revenues by about $10 million a year.
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C. MANUFACTURERS' EXCISES
The additional revenue it is estimated will be derived from manu-
facturers' excises is distributed among the various excises as follows:
[In millions]
House
bill
Committee
bill
Gasoline, and diesel fuel used by highway vehicles_______________________________
$220
$210
Passenger ears, motorcycles and house traitors ------------------------------
196
189
Automobile trucks, busses, and truck trailers -------------------------------------
61
61
Automotive parts and accessories ------------------ s------------ -----.------_---
56
56
Tires on toys, etc----------------------------------------------------------------
-1
-1
Electric, gas,and oil appliances________ ------------------------------
18
69
Navigation receivers sold to the U. S. Government------ -------------------
None
None
Refrigeration equipment---------------------------------------------------------
0
Negligible
Sporting goods------------------- --------------------------------------------
Negligible
Negligible
Photograpbic apparatus and film______________________________ ------------------
-23
Electrical energy----------------------------------------------------------------
-104
-104
Fountain pens, ball-point pens, and mechanical pencils ---------------------------
24
12
Cigarette, cigar, and pipe lighters------------------------------------------------
0
1
Total--------------- ----------------------------
447
488 Aft
1. Gasoline and diesel fuel
Section 479 of the bill provides for a one-half cent increase in the
gasoline tax, raising the Federal gasoline tax, provided by section 3412
of the code, from 1% to 2 cents per gallon. This is the same increase
as is provided by the House bill. Since the tax on gasoline is a specific
and not an ad Vvalorem tax, the percentage relationship of the tax
to the retail price will vary with the variation in the price of gasoline.
Thus, although in 1950 the tax was 6 percent of the retail price, includ-
ing tax, in 1940 it was 8% percent of the retail price. This is accounted
for by the rise in the average price of gasoline in the past 10 years.
The average price in 1939, for example, was 13.3 cents per gallon
before the State tax, while in 1950 the average price was 20 cents per
gallon. The action by your committee, which would result in a tax
equal to about 8. percent of the retail price of gasoline including. tax,
does not quite restore the relationship existing in. 1940.
The consumption of gasoline has shown one of the most consistent
patterns of increase over the last few decades. The production of
gasoline in 1940, for example, amounted to 615 million barrels and in
1950 this had increased to 1,024 million barrels. The domestic
demand for gasoline has grown at an average annual rate of 7 percent
since the end of War War II and appears to be increasing somewhat
more rapidly now. The 1950 demand for gasoline was 9 percent in
excess of the demand for 1949 and the Bureau of Mines has estimated
that the demand in 1951 will be 93z percent in excess of the demand in
1950. This substantial increase. can, of course, in large part be
accounted for by the increased numbers of passenger automobiles
and trucks on the road. For example, registration of automobiles
and trucks in the period 1945 to 1950 increased over 50 percent.
Under these conditions it appears probable that an increase in the
gasoline tax of the size provided by this bill can readily be passed on
to the consumers of gasoline. This appears especially likely in view
of the. fact that, in the case of gasoline, demand does not change
much with variations in price.
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REVENUE ACT OF 1951 97
Despite this strong demand, the increase in the gasoline tax is limited
to a half cent per gallon. Payments for gasoline represent costs of
doing business in the case of gasoline consumed by trucks and in the
case of an important segment of the gasoline used in passenger cars.
In addition to this, your committee recognizes that the gasoline tax
represents an important source of revenue to the States. The usual
State tax ranges from 4 to 5 cents per gallon but eight States have a
7 cents per gallon tax and one has a tax of 9 cents per gallon. Too
substantial an increase in the gasoline tax by the Federal Government
might affect the use of this revenue source by the States.
The House bill adds a new section 2450 to the code imposing a tax
of 2 cents per gallon on diesel fuel for diesel-powered highway vehicles.
The tax is imposed on the retailer selling the diesel fuel for highway
use and also on persons using the diesel fuel in highway vehicles if no
tax was collected from the retailer.
Your committee, although recognizing that the failure to tax
diesel fuel used on highways on the same basis as gasoline is dis-
criminatory against vehicles power by gasoline, does not include this
provision in its bill. As provided by the House bill, the tax would
be very difficult to collect. The retailer selling diesel fuel for highway
use also sells the same fuel for fuel-oil furnaces in homes. Moreover,
-experience with this tax at the State level. has also indicated a eon-
siderable amount of evasion where the tax is collected from the
persons using the fuel oil in the highway vehicles, the second alterna-
tive collection method provided by the House bill. Because of these
difficulties in the administration of this tax, your committee believes
that it is desirable to postpone the consideration of this problem
until it is possible to give it further study.
As a result of not imposing this tax on diesel fuel, the estimated
revenue which it is anticipated will be collected in a full year of
operation from the gasoline tax is $210 million instead of the $220
million estimated for the House bill.
.2. Passenger cars and motorcycles
Section 471 of the bill increases the tax, provided by section 3403 of
the code, on passenger cars and motorcycles from 7 to 10 percent of
the manufacturers' price. However, your committee's bill removes
the tax on house trailers. The increase provided for passenger auto=
mobiles and motorcycles is the same as that provided by the House
bill, but the House bill left the tax at 7 percent in the case of house
trailers instead of removing it. The present tax on passenger cars on
the average represents 5 percent of the retail price, including tax.
The increase provided by this bill will. raise this to somewhat over 7
percent.
The demand for new passenger cars has continued at a very high
level since the end of World War II not only because of the backlog
of demand from the war period when new cars were not available, but
also because high income levels have made the purchase of Wars
possible to many persons not formerly able to buy them. The unit
output in 1950, for example, represented 232 percent of the output in
1939. Moreover, the value of the 1950 rnitput was $8.8 billion, or
about five times .the value of the output i n 1939.
Despite the recent temporary decline in the sales of passenger ears,
it appears that the demand for them in the year 1951 as a whole will be
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98
at a very high level. However, it appears probable that the suppl,7 of
automobiles available will be cut because of their substantial use of
critical materials. Twenty percent of the total steel output, for
example, has been going to the production of automobiles. Steel
allocations for automobiles were reduced in the second and third
quarters of 1951 and at the present time shortages of copper and
stainless steel are affecting automobile production. The output of
passenger cars in calendar 1951 will probably be approximately the
1949 level which was slightly over 5 million, and is expected to be
substantially above the annual production in the 10 years prior to
World War H.
Under these conditions it appears probable that an increase in tax
of the size proposed by your committee can readily be passed forward'
to the consumer without any cut in the effective demand .for new
passenger cars. Since the tax is not imposed on second-hand cars,
which in large measure represent the purchases made by the lower-
income groups, it appears probable that the tax increase made by the
bill will not bear heavily on these groups.
However, your committee recognizes that cars represent a necessity
to a large segment of the population under present conditions and,
therefore, deemed it inappropriate to increase the rate above 10
percent on the manufacturer's price, the rate applying in the case of
most manufacturers' excises. Moreover, the purchase of a car repre-
sents a larger outlay on the part of the consumer than is true in the
case of most other durable consumption items, with the result that
the amount of the tax payment in these cases is larger than in the
purchase of other durable goods and, therefore, likely to be con-
sidered more burdensome.
Your committee's bill removes the tax on house trailers because it
recognizes that, during periods of emergency such as the present, the
bulk of these house trailers are used for housing by defense workers,
military personnel and others rather than as a means of transportation.
It is estimated that in a full year of operation this provision of the
bill will increase revenues by $189 million.
S. Automobile trucks, busses, and truck trailers
Section 471 of the bill also increases the tax on automobile trucks,
busses, and truck trailers, provided by section 3403 of the code, from
5 to 8 percent of the manufacturer's price. This increase is the same
as that provided by the House bill.
Since, as previously noted, the tax on passenger cars is increased to
10 percent, this maintains the traditionally lower tax for the types
of automotive transportation especially designed for business. Your
committee believes that it is desirable to retain a lower tax on trucks
and related types of automotive transportation because it recognizes
that these represent operating costs to businesses. A high rate of tax
in such cases would be likely to be passed on in the price of commodi-
ties generally. However, it is believed that the moderate increase pro-
vided by the bill is desirable on much the same grounds as the increase
provided in the case of passenger automobiles: namely, the anticipated
high demand for this type of automotive transportation coupled with
the likelihood of a curtailment in the supply available.
It is estimated that in a full year of operation this provision will
increase revenues by $61 million.
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1f. Automotive parts and accessories
Section 471 of the bill also increases the tax on automotive parts and
accessories, provided by section 3403 of the code, from. 5 to 8 percent
of the manufacturer's price. This increase is the same as that pro-
vided by the House bill. Since the tax on automotive trucks, busses,
and truck trailers likewise is raised to 8 percent, this will retain a uni-
form rate of tax for these two types of items, as is provided by present
law. Even though new cars are taxed at 10 percent, the parts and
accessories for them, when not purchased with the car, are included
in the base of this 8-percent tax, because in many cases the parts for
passenger cars and trucks are interchangeable. Morevoer, it is also
believed desirable to impose a lower rate of tax on parts and acces-
sories for passenger cars than on the new cars themselves, because the
bulk of the parts and accessories are purchased by owners of old or
second-hand cars who are largely in the lower-income groups.
With respect to reconditioned or rebuilt parts, where such sales are
subject to the parts and accessories tax under present law, section 471
of both your committee's bill and section 481 of the House bill pro-
vide an amendment which excludes from the tax base the fair market
value of any like part traded in for a reconditioned or rebuilt part.
Where an automotive part is not performing satisfactorily and the car
owner cannot afford a new one, he has the choice of either having the
old one reconditioned, usually in a local shop, or of trading in the old
part on a similar one which already has been reconditioned. The
first of these alternatives, having the old part reconditioned, is
not subject to the tax on automotive parts and accessories s nee
there is :no transfer of title. However, this alternative is not widely
availed of because the car owner is not able to use his car during
the reconditioning period. Under the second alternative, trading in
the old part on a similar one which already has been reconditioned,
there is a transfer of title and therefore such sales are subject to tax.
The amount subject to tax in these cases is the charge to the car
owner, plus the fair market value of the part he trades in. This not
only presents the difficult administrative problem of determining the
fair market value of the old part, but also is inequitable since trading
in the old part is a substitute for repairing the car owner's old part.
Only the value added in this case could be considered as new rftanau-
facturi.ng, since in effect the car owner already owned the portion of
the reconditioned part representing the value of the old part. To tax
him on the fair market value of the part lie turns in is to tax him on
something he already owns. The exclusion of the value of the trade-
in, as provided by your committee's amendment, removes this in-
equity. This also removes the difficult administrative problem of
determining the fair market value of the old part, since the tax base
will be limited to the cash payment required.
Section 471 of your committee's bill, like the House bill, also
amends section 3443 of the code to provide for a credit or refund of the
tax on automotive parts and accessories where the parts or accessories
are used or resold for the repair or replacement of farm equipment
parts. However, this crediting or refunding device is not made
available in the case of spark plugs, storage batteries, leaf springs, coils,
timers, and tire chains.
An exemption is already provided by existing regulations for auto-
motive parts and accessories sold to manufacturers for use on new
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farm equipment with the exception of the items specifically listed
above. The provision, therefore, merely applies the same policy to
sales of repair or replacement parts, making use, in this case, of a
crediting or refunding procedure. This appears desirable because it
is not believed that Congress ever intended to subject farm tractors
and equipn'tent generally to this tax. With the exception of the specific
items noted above on which the tax will still apply, it is believed that
these credits or refunds will present no serious administrative
problems.
It is estimated that the rate increase in the tax on automotive parts
and accessories, taken together with the changes in the base of the
tax, will increase revenues in a full year of operation by $56 million.,
5. Tires on toys, etc.
Section 471 of the bill also makes a minor revision in the 5-cent-per-
pound manufacturers' tax on tires. Section 3400 of the code is
amended to exclude from this tax tires which are not more than 20
inches in diameter and one and three-fourths of an inch in cross
section if the tires are of all-rubber construction. The bill also
excludes tires with internal wire fasteners, irrespective of size. This
exemption is the same as that provided by the House bill.
Under present law, the tax on tires is applicable to all tires regardless
of the use for which they are intended. Consequently, it applies in
the case of tires for baby buggies, lawn mowers, children's tricycles,
scooters, coaster wagons, etc. Since the manufacturer's price on
tires of these types is generally low, the 5-cent-per-pound tire tax
may account for as much as 25 to 50 percent of the price of the tires.
Thus, the tax on the tires of these toys, etc., appears unreasonably
high in terms of ad valorem rates. Moreover, it is not believed that
it is a primary purpose of the tax on tires to collect revenue with
respect to articles of these types.
It is estimated that in a full year of operation this change will result
in.a revenue loss of approximately $1 million a year.
6. Electric, gas, and oil appliances
Section 475 of the bill expands the base of the 10 percent manu-
facturers' tax on electric, gas, and oil appliances provided by section
3406 of the code to include the following household types of items not
subject to tax under present law:
AMA
1.
Electric vacuum cleaners.
10. Electric floor polishers and waxers.
2.
Electric washing machines.
It. Electric food choppers and grinders.
3.
Electric garbage disposal units.
12. Electric hedge trimmers.
4.
Exhaust blowers.
13. Electric ice cream freezers.
5.
Electric belt-driven fans.
14. Electric mangles.
6. Electric or gas clothes driers.
15. Electric motion- or still-picture pro-
6.
Electric door-chimes.
jectors.
8.
Electric dehumidifiers.
16. Electric pants pressers.
9.
Electric dishwashers.
17. Power lawn mowers.
18. Electric sheets and spreads.
It also deletes electric heating pads, industrial-type direct motor-
driven fans and electric heaters of the blower type from the items
presently subject to tax. The House bill did not impose a tax on
electric vacuum cleaners, electric washing machines, or electric gar-
bage disposal units, but did. impose a tax on electric shavers. T
House bill also did not delete industrial-type -direct motor-driven
fans from the base of the present tax.
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REVENUE ACT OF-1951 - 101
Of the items added to the base of the tax, by far the most important
in terms of revenue are the electric washing machines and vacuum
cleaners. Of the remaining items, power lawnmowers, electric dish-
washers, and electric and gas clothes driers are the most important
revenue producers.
The tax under present law applies to-
1. Electric, gas, and oil water heaters.
2. Electric, gas,'and oil appliances for cooking or warming food or bever-
ages for consumption on the premises.
3. Electric direct motor-driven fans and air circulators.
4. Electric flatirons.
5. Electric air heaters (but not furnaces).
6. Electric immersion heaters.
7. Electric heating pads and blankets.
8. Electric mixers, whippers, and juicers.
The items added to the base of this tax by your committee are
directly or indirectly competitive with many of the items now in the
base of the tax. An example of direct competition exists in the case
of the household-type direct motor-driven fans subject to tax under
present law and the household-type-belt-driven fans which are pres-
ently free of tax. Vacuum cleaners, washing machines, and garbage
disposal units were added by your committee because these are electri-
cal appliances of wide usage which are at least indirectly competitive
with a large number of the items already subject to the appliance tax
or made so by the House bill. However, sour committee did not
deem it appropriate to raise the rate of this tax in view of the fact
that a number of items in its base are generally considered to be
necessities.
As in the ease of passenger cars, it is anticipated that with the cur-
rent high income levels the demand for electric appliances will remain
strong, while the supply available is likely to decline somewhat as a
result of the shift of critical materials from civilian products to prod-
ucts needed for the defense effort. The steel used in electric appli
ances, for example, has been cut back by 30 percent for the third
quarter of 1951. In view of those factors, it appears unlikely that
expanding the base of this tax to include the new items listed above
will have any appreciable effect upon the sales of the electric appliances
industry..
From the standpoint of the consumer also, this tax does not appear
to be very burdensome. The data available indicate that this tax
tends to bear less heavily on the lower-income groups than most other.
excise taxes now-imposed. Moreover, this 10-percent manufacturers'.
tax, when expressed as a percentage of the retail price of the electric,
gas, and oil appliances, including tax, represents only about a 6-percent
tax.
Electric heating pads were removed from the base of the tax on
electric, gas, and oil appliances because these pads are extensively used
for medical purposes, and your c' mm.ittee does not believe that such
items are proper subjects for excise taxes. Electric shavers, although
included in the House bill, are excluded from your committee's bill
because they are . competitive with safety razors and blades and straight
razors which are not subject to excise tax. Industrial-type direct
motor-driven fans are excluded from the base of the tax both because
they are business, cost items and because they are competitive with
industrial-type belt-driven fans which are not subject to excise tax.
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102 REVENUE ACT OF 1951
Under present law where the manufacturer sells an electric, gas,
or oil appliance at retail, on consignment, or at less than the fair
market price, the Commissioner is required to determine the com-
petitive fair market price. In the case of one of the new items added
to the base of this tax, vacuum cleaners, another type of selling
arrangement is followed whereby the manufacturer negotiates the
sale on behalf of the retailer. Since the price charged in such cases
does not represent a fair price for purposes of a tax base, the Com-
missioner, under your committee's bill, is required to determine such
a price where these selling arrangements are used in the same manner
as where the manufacturer sells at retail or on a consignment basis.
It is estimated that in a full year of operation the new items added
to the base of the electric-, gas-, and oil-appliances tax will increase
revenues by about $71 million a year, while the exclusion of electric
heating pads, industrial-type direct motor-driven fans and electric
heaters of the blower type will reduce revenues by $2 million annually.
7. Navigation receivers sold to the United States Government
Section 472 of the bill makes a minor revision in the base of the 10-
percent manufacturers' excise tax on radio receiving sets, television
receiving sets, etc., imposed by section 3404 of the code. "A com-
munication, detection, or navigation receiver of the type used in com-
mercial, military, or marine installations," is exempted from this tax
under your committee's bill if sold to the United States for its exclusive
use. This change is the same as that provided by the House bill.
This exemption is granted to remove compliance problems. No
revenue is, of course, involved, since the tax in these cases today is
ultimately paid by the United States Government.
8. Refrigeration equipment
Under present law, a 10-percent manufacturers' tax is imposed on
household type mechanical refrigerators, quick-freeze units, and re-
frigerating and freezing apparatus. In the case of refrigerating and
freezing apparatus, present law provides that the tax does not apply
in the case of sales of refrigerator components to manufacturers of
refrigerators, quick-freeze units or refrigerating or cooling apparatus.
This latter provision prevents the double imposition of the refrigerator
tax where sales are made from one manufacturer to another. How-
ever, in many cases refrigerating apparatus is sold first to a wholesaler
or jobber, who in turn sells the apparatus to a manufacturer. Under
present law, a double imposition of the refrigerator tax occurs in such
cases unless the wholesaler is specifically registered with the Bureau
of Internal Revenue as a vendee of articles for resale to manufacturers.
Moreover, registration is limited to wholesalers who resell to manu-
facturers of taxable end products. Your committee believes that the
present tax treatment discriminates against wholesalers and that this
tax interferes with the normal channels of distribution. For these
reasons, your committee provides in section 473 of the bill that, under
regulations prescribed by the Secretary, the tax on refrigerating and
freezing apparatus is not to apply to sales of refrigerator components
to wholesalers or jobbers where the components are intended for resale
to manufacturers or producers of refrigeration and freezing equipment,
if the components are actually resold in this manner. This is accom-
plished by amending section 3405 (b) of thro code. No similar pro-
vision is contained in the House bill.
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REVENUE ACT OF 1951 103
It is estimated that the revenue effect of this provision of your com-
mittee's bill will be negligible.
9. Sporting goods
Section 474 of the bill makes two changes in the 10-percent manu-
facturers' tax imposed on sporting goods by section 3406 of the code.
Under present law this tax covers virtually all types of sporting
equipment although toy or children-sized items are exempted from this
tax in the case of certain types of sporting equipment. Also, a num-
ber of articles subject to the sporting goods tax are used largely as a
part of school and college athletic programs. Sale for use in the public
schools are exempt (as purchases by subdivisions of State govern-
ments) so that the net revenue from, taxing these articles is quite
small, although the administration of the exemption imposes a con-
siderable burden on the sporting goods dealers. Moreover, the
nonexempt sales of many of the taxed articles are made largely to
private schools, which has been objected to on the grounds that it is
discriminatory treatment. For these reasons, the first action of your
committee with respect to the sporting goods tax is to remove from the
application of the tax specific types of articles which are used pre-
dominantly for school sports and by children. This is the same as
was provided in the case of the House bill with the following excep-
tions: your committee's bill exempts baseballs and baseball equipment
while the House bill taxed them, and your committee's bill taxes cricket
balls and bats, lacrosse equipment, skates, and snow toboggans and
sleds while the House bill exempts these items.
The second action of your committee is to raise the rate of tax from
10 percent to 15 percent of the manufacturer's price with respect to
the items remaining in the tax base, except fishing equipment. In this
case your committee left the rate at 10 percent since the receipts from
this source are not available for general expenditures. The rate in-
crease from 10 to 15 percent provided by your committee is the same
as that provided by the House bill with the exception that the House
bill also raised the tax on fishing equipment to 15 percent. Under
present law the tax is about 6 percent of the retail price including tax
and under both bills will be between 10 percent and 11 percent of the
retail price.
It is estimated that these two actions taken together will not have
any effect on revenue collections, since it is believed that the addi-
tional revenue which will be derived from the higher rate of tax on
the items remaining in the base will be approximately equal to the .
revenue lost with respect to the items which are excluded from the
base.
10. Photographic apparatus and film
Section 3406 of the code imposes a 25-percent tax on sales at the
manufacturers' level of photographic apparatus, which is defined as
including cameras weighing 4 pounds or less, lenses, photographic
apparatus and equipment, and any apparatus or equipment designed
especially for photographic purposes. A 15-percent manufacturers'
tax is also imposed on photographic films (except X-ray films), photo-
graphic plates, and sensitized paper. Under present law, the tax on
film is about 9 percent, and tax on equipment is about 13 percent, of
the retail price.
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";104
Section 476 of your committee's bill reduces the tax. on photographic
apparatus from 25 to 15 percent of the manufacturer's price. No
change is made in the 15-percent tax now applying to film or in the
items included in the bases of either of these taxes. Thus, under
your committee's bill, the tax on film and equipment will be between
about 8 and 9 percent of the retail price of these items.
The House bill decreases the 25-percent tax on photographic appa-
ratus to 20 percent and increases the 15-percent tax on film to 20
percent. The House bill also revises the bases of these taxes so that
they are imposed only on. film, cameras, and lenses which, insofar as
is administratively possible, do not represent a cost of doing business.
In the case of the House bill, the tax on both film and equipment
would represent a tax of between 11 and 12 percent of the retail price.
Although your committee's bill provides a 15 percent rate of tax
for film and photographic equipment rather than the 20 percent
provided by the House bill, the revenue loss under your committee's
bill is much smaller because the business cost items are not deleted
from the bases of these taxes. Your committee believes that in view
of present revenue requirements it is not desirable to reduce the
revenue obtained from the photographic taxes by as much as would
be necessary in order to remove all of these business cost items from
tax.
It is estimated that the combined effect of your committee's action
with respect to these taxes is to reduce revenues in a full year of
operation by $5 million. The changes provided by the House bill
would. reduce revenues by $23 million annually.
Your committee's bill also makes an additional minor amendment
to the photographic tax providing that the tax on color positive print
film is not to be in excess of the tax on black and white positive print
film. This change is made to eliminate a discriminatory competitive
problem. In some cases under present law colored film is subject
to the photographic tax because the coloring is added to the film by
the photographic manufacturer. This results in arelatively large
tax base. In other cases the coloring is added to the film after it
leaves the hands of the photographic manufacturer with the result
that the tax base in this case is relatively small. Your committee's
bill removes this discrimination by placing no higher tax on color
film than on black and white film.
In the case of photoflash bulbs, the,House bill provides floor stock
refunds. That is, wholesalers, retailers and others having inventories
of photoflash bulbs intended for sale on the date the revision in the
tax becomes effective would be credited, or would receive a refund,
with respect to the tax paid on their inventories of photoflash. bulbs.
No such floor stock refund is provided in the case of your committee's
bill. Under, the House bill, the tax on these photoflash bulbs was
decreased. from 25 percent to zero. Under your committee's bill, the
tax is decreased from 25 to 15 percent. Your committee believes that
this smaller decrease in tax substantially, decreases the hardship
which would arise in the absence of a floor stock refund on these
photoflash bulbs. This, combined with the administrative problems
involved in making floor stock refunds, accounts. for the absence of
this.provision in your committee's bill. .
A^
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REVENUE ACT of 1951 105
11. Electrical energy
Section 3411 of the code imposes upon vendors of electrical energy
sold to. domestic or commercial consumers a tax equal to 3'/a percent
of the price charged. Section 478 of the bill repeals this tax. This
tax is also repealed by the House bill.
A tax on electrical energy is not believed to be a desirable part of
the excise-tax revenue system for several reasons. First, the tax is
.believed to be one of the more burdensome of the excise taxes with
respect to the lower-income groups, since amounts paid by consumers
for electrical energy tend to vary relatively little with variations in
income. Thus, the electrical-energy tax paid by the higher-income
groups does not generally represent as large a percentage of their
income as is true of the lower-income groups. Second, power com-
panies have found it difficult and burdensome to determine which
customers. are domestic or commercial consumers, and therefore tax-
able, and which are industrial consumers, and therefore exempt. This
has presented a particularly difficult problem in the case of businesses
engaged in both commercial and industrial activities. Third, the
tax under existing law does not apply to publicly owned electric
power plants or to systems owned and operated by cooperative or
nonprofit corporations engaged in rural electrification. Thus, since
there is general agreement that this tax is passed on to the consumers,
the present tax treatment has the effect of imposing a tax on persons
purchasing electrical energy from private utilities, while imposing no
tax on persons purchasing electrical energy from municipalities, the
Federal Government, or REA cooperatives. To impose the tax on
some. consumers and not on others is believed discriminatory, and
since your committee believed that it was not desirable to. extend this
tax to municipalities, the Federal Government, or REA cooperatives,
the bill repeals this tax.
It is estimated that in a full year of operation the repeal of this 33i-
percent electrical-energy tax will reduce revenues by $104 million
annually.
12. Fountain pens, ball-point pens, and mechanical pencils
Section 477 of your committee's bill adds a new section 3408 to the
code imposing a 10-percent manufacturers' tax on fountain pens, ball-
point pens, and mechanical pencils. The House bill also added this
tax but provided a 20-percent rate. At the present time some pens
and pencils are subject to the 20-percent retail tax on jewelry and
related items where they have nonessential parts which are orna-
mented with precious metals. To prevent double taxation, these pens
and pencils are not included in the base of the new manufacturers' tax.
Consideration was given to extending the tax on jewelry and related
items to all fountain pens, ball-point pens, and mechanical pencils,
but this was discarded because the inexpensive types of such items are
frequently sold in stores which are not accustomed to the collection
of the jewelry tax. Moreover, your committee lowered the rate of
tax provided by the house bill to 10 percent since an important seg-
ment of the cheaper pens and pencils are purchased by school children.
It is estimated that in a full year of operation this action by your
committee will increase revenues by $12 million annually The House
provision would have increased revenues by $24 million a year.
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106 REVENUE ACT OF 1951
18. Cigarettes, cigars, and pipe lighters
Section 477 of your committee's bill imposes a manufacturer's tax
on all mechanical lighters for cigarettes, cigars, and pipes which are
not now taxed as jewelry. The manufacturer's tax on mechanical
lighters is imposed at a 10-percent rate, the general rate at which most
manufacturers' taxes are imposed. The House bill provided a
20-percent tax at the retail level for these mechanical lighters. In view
of the large number of retail outlets selling mechanical lighters, your
committee believes that it is more desirable to impose this tax at the
manufacturer's level.
It is estimated that in a full year of operation this action by your
committee's bill will increase revenues by nearly $ 1 million a year.
It is estimated that the provision. in the House bill would increase
revenues by about $2 million in a full year of operation.
D. RETAIL EXCISES
The revenue effect of the bill in a full year of operation with respect
to retail taxes is as follows:
Cigarette, cigar, and pipe lighters--_--------------------------------_----------
Toilet preparations --------------------------------------------------------------
Total
House
bill
Committee
bill
1. Cigarette, cigar, and pipe lighters
The House bill extends the 20-percent tax on jewelry and related
items to cover all mechanical lighters for cigarettes, cigars, and pipes.
Your committee's bill applies a manufacturers' tax to all mechanical
lighters for cigarettes, cigars, and pipes not now taxed as jewelry and
for that reason the discussion of the tax is included above with the
manufacturers' excises.
2. Toilet preparations
Section 431 of your committee's bill makes two changes in the 20
percent retail tax on toilet preparations imposed by section 2402 of the
code. These are the same changes as are made by the House bill.
The first of these changes exempts from this Lax baby oils, powders,
lotions, and other toilet articles unless they are advertised or sold as
being usable by adults. Your committee believes that these items
fall within the category of necessities and should not be subject to tax.
The second change exempts toilet preparations purchased by barber
shops and beauty parlors for use in these establishments. Under
present law these items are subject to tax at the time they are pur-
chased by the barber shop or beauty parlor. However, toilet prepara-
tions purchased by a barber shop or beauty parlor for resale to cus-
tomers are not taxable until sold to the ultimate user. To distinguish
the purchases for resale made by the barber shop or beauty parlor
from the purchases for their own use, the establishment is required to
file a certificate, if no tax is paid at the time of purchase, indicating
that the items will not be used in the establishment. Such certificates
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REVENUE ACT OF 1951 107
a full year of operation on the transportation and communication ex-
cises is distributed among the various taxes as follows:
[In millions]
E. TRANSPORTATION AND COMMUNICATION EXCISES
The revenue effect of the House bill and your committee's bill in
are not presently required in the case of tax-paid purchases for use
in the establishment. This difference in treatment has resulted in
considerable confusion among the barber shop and beauty parlor
operators. Moreover, the taxing of the items used in the establish-
ment itself represents the taxing of business cost items. The bill
eliminates these problems by repealing the tax on toilet preparations
purchased by barber shops, beauty parlors, and similar establishments
if intended for use in such establishments. It is also intended by
the adoption of this amendment to eliminate the requirement of
exemption certificates in connection with sales of cosmetics to barber-
shops and beauty parlors either for professional use therein or for
resale once the businesses have established their nontaxable status
as barber shops or beauty parlors.
It is estimated that in a full year of operation the exclusions from
the base of the tax on toilet preparations made by this bill will reduce
revenues by $7 million annually.
Committee
bill
Domestic telegraph, cable, and radio messages-----------------------------------
-$8
-$14
Long-distance telephone charges ------------------------------------------------.
0
Negligible
Transportation of persons-------------------------------------------------------
Negligible
Negligible
Transportation of property------------------------------------------------------
3
Negligible
1. Domestic telegraph, cable, and radio messages
Sections 1650 and 3465 of the code impose a 25-percent tax on
amounts paid for domestic telegraph, cable, or radio dispatches of
messages. Section 481 of your committee's bill reduces the tax on
domestic telegraph, cable, or radio messages to 15 percent, instead
of to the 20 percent provided by the House bill.
Since World War II, telegraph service in the United States generally
has been carried on at a deficit. In the forepart of this year, the
service was operated at a profit, but wage adjustments which have
recently been made have again placed telegraph service in a deficit
position. By reducing this tax on telegraph service, your committee
anticipates that it will be possible to decrease the amount paid for
telegraph messages, and that as a result the volume of business done
will be increased and the profit position of the industry improved.
Telegraph service not only is essential to the civilian economy but
also is essential to national security. The 15-percent rate of tax
provided by your committee's bill for domestic telegraph, cable, and
radio dispatches is the same rate of tax as now applies to the major
portion of the business done by those corporations which were the
chief competitors of corporations rendering telegraph service.
In a full year of operation it is anticipated that reducing the
tax on domestic telegraph, cable, and radio messages from 25 to
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.15 percent of the charge will reduce revenues by $14 million, as con-
trasted to a loss of $8 million if the rate were reduced to only 20 percent
as provided by the House bill. In the long run, however, it is believed
.that much of the loss may be offset by an increased volume of tele-
graph business.
2. Long-distance telephone calls to ~or from members of the Armed Forces
in combat areas
Section 482 of your committee's bill provides that the 25-percent
tax on long-distance telephone calls is not to apply to calls from
combat zones initiated by members of the Armed Forces. It has
been brought to your committee's attention that the tax in these
cases frequently comprises a very sizable amount. It believes that
this tax should be removed in view of the morale significance of such
communications. The House bill contains no similar provision.
The revenue loss from this amendment will be negligible.
3. Transportation of persons
Your committee's bill makes two changes in the 15-percent tax on
amounts paid for the transportation of persons provided by sections
1650 and 3469 of the code. One of these exempts certain fishing trips
from 'the tax on the transportation of persons. This provision is the
same as that contained in the House bill. Under present law amounts
paid for transportation in boats where the transportation takes place
for the sole purpose of fishing from the boat have been held to be tax-
able under these sections. In the case of fishing-boat activities, it is
customary for the operators of >uch boats to m- ke a lump-sum charge
for a fishing trip, including not only the charge for the transportation,
but also charges for such services as the use of fishing tackle, a supply
of bait, food served on the boat, etc. The necessity of breaking down
this lump-sum charge to determine the proportion of the total which
represents the taxable charge for transportation has been a difficult
problem both for the fishing-boat operators and the Bureau of Internal
Revenue. Moreover, although fishing trips are technically defined
as transportation, they are not generally considered so by laymen.
As a result the tax on fishing trips has brought numerous complaints
from sportsmen and has also created troublesome collection and
compliance problems for the Government. Section 483 of the bill
exempts from the tax on the transportation of persons amounts paid
for transportation by boat for the purpose of fishing from such boat.
The second change made by your committee in the tax on the trans-
portation of persons excludes from the application of the tax amounts
paid in the case of certain types of transportation by vessels. This
provision is not contained in the House bill. In 1947 the tax on. the
transportation of persons was amended to exclude, from the applica-
tion of the tax, amounts paid for transportation outside of the north-
ern portion of the Western Hemisphere. However, amounts paid
for transportation partially within United States, Canada or Mexico,
and partially outside of the northern portion of the Western Hemi-
sphere, were continued under the tax with respect to that,part of the
transportation "which is from any port or station within the United
States, Canada, or Mexico to any other port or station within the
United States, Canada, or Mexico." This has tended to discriminate
against certain American, Canadian, and Mexican ports where vessels,
if it were not for this tax, would make intermediate stops for servicing
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REVENUE ACT OF 1951 109
and refueling, but presently do not do so because this would increase
the portion of the travel charge on which their passengers would
have to pay tax. For example, under present law a vessel leaving
New York for London is unlikely to stop at Boston for servicing or
refueling, since to do so would subject a part of the tickets purchased
by their passengers to the transportation " tax. For that reason
section 484 of your committee's bill provides that in the case of trans-
portation by vessels making intermediate stops at ports in United
States, Canada, or Mexico on voyages between United States and a
port outside of the northern portion of the Western Hemisphere, the
charge for the transportation between the intermediate stop and the
port in the United States, where the transportation begins or ends,
will not be subject to the transportation tax, if the vessels are not
authorized to discharge or take on passengers at the intermediate
stops. -
It is believed that the revenue loss from these changes in the tax
on the transportation of persons will be negligible.
4. Transportation of property
on amounts paid for the transportation of property (in the case of
coal the tax is 4 cents per short ton). In the case of building con-
tractors, hauling dirt, rocks and other excavation material to some
designated place the Bureau of Internal Revenue has held that a
charge is being made for the transportation of property and, there-
fore, that such hauls are subject to tax. (Where excavation material
has been removed without designating the place it is to be taken, no
tax has been applied, since the Bureau has considered this to be
merely the payment for removal of waste rather than a charge for the
transportation of property.) However, since March 13, 1951, the
Bureau of Internal Revenue has followed the rule laid down by the
Third Circuit Court of Appeals in Edward H. Ellis & Sons, Inc., v.
United States that where excavation material has been hauled from
one point on a construction project to another point on the same
project, no transportation tax is duo. However, tax still is imposed
where the excavation material is taken off the construction project
to some designated place, even though such place is adjacent to, or
near the construction project. Your committee believes that the
imposition of the tax in such cases, while no tax is imposed if the
excavation material is not removed from the site of the construction
project, represents too fine a line of distinction to be drawn. For
.that reason section 485 of your committee's bill exempts from this
tax charges made for the use of motor, vehicles by contractors for the
movement of earth, rock, or other excavated material from a con-
struction project to an adjacent area. No such exemption is pro-
vided by the House bill.
Your committee did not, however, accept the change made in the
tax on the transportation of property by the House bill. The House
bill extends the 3-percent tax on the transportation of property to the
"fair charge" where shippers are transporting their own oil and in other
cases where the amount paid for the transportation of oil is less than a
fair charge. The tax on the transportation of property at present
applies solely where property is transported for a charge. The House
amendment would represent an exception to this rule, and your
committee sees no more reason why a tax should be imposed where
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REVENUE ACT OF 1951
shippers are transporting their own oil than where an individual is
transporting his own property by truck. Since such a general
extension of the tax on the transportation of property is not adminis-
tratively feasible, your committee believes that it would be unde-
sirable to select the isolated case of the transportation of oil by owners
for the imposition of a tax.
It is believed that your committee's amendment with respect to the
hauling of excavation material will have a negligible effect on revenues.
However, since your committee's bill. does not contain the provision of
the House bill imposing the transportation tax where shippers are
transporting their own oil, it is estimated that revenue from the tax
on the transportation of property will be about $3 million less per year
than under the House bill, although there is no loss under your com-
mittee's bill as compared with present law.
F. EXCISES ON AMUSEMENTS OR RECREATION
It is estimated that the changes made in the excises on amusements
and recreation under the House bill and under your committee's bill
will result in a net loss in revenue in a full year of operation as
follows:
General admissions ----------------------------------------------------------
Cabaret. --------------------------------------------------------------------
Occupational tax on bowling alloys and billiard and pool tables--------------
House
bill
-$22
Negligible
1
Committee
bill
-$18
Negligible
0
1. General admissions
Sections 1650 and 1700 of the code impose a tax of 1 cent for each
5 cents or major fraction thereof charged for admission. Both the
House bill and your committee's bill make two changes in the applica-
tion of this tax.
Both your committee's bill and the House bill provide exemptions
from the admissions tax where the proceeds inure to certain types of
organizations. The exemptions provided by your committee's bill
are, however, more restrictive. Section 402 of your committee's bill
exempts from this tax admissions where all the proceeds inure to--
1. Churches or conventions of churches.
2. Educational organizations if such organizations normally
maintain regular faculties and curricula and normally have regu-
larly organized bodies of pupils or students in attendance at the
places where their educational activities are regularly carried on.
3. Charitable organizations if such organizations are supported
in whole or in part by funds contributed by the United States
or any State or political subdivision thereof, or are primarily
supported by contributions of the general public.
4. Societies or organizations conducted for the sole purpose of
maintaining symphony orchestras or operas and receiving sub-
stantial support from voluntary contributions.
5. National Guard organizations.
6. Reserve officers' organizations.
Aft
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REVENUE ACT. OF 1951. ill
7. Veterans' organizations.
8. Police or fire departments, pension or retirement funds set
up for the benefit of their members and funds set up for the
benefit of the heirs of members.
However, in the case of any of the above types of organizations, admis-
siorts are not exempt if they are to-
1. Motion-picture exhibitions.
2. Wrestling and boxing matches.
3. Carnivals, rodeos, or circuses where professionals participate
for compensation.
4. Athletic contests unless the proceeds inure exclusively to the
benefit of elementary or secondary schools.
Your committee's bill also exempts general admissions to nonprofit
agriculture fairs, admissions to concerts conducted by nonprofit civic
associations, admissions to swimming pools and other places providing
facilities for physical exercise operated by a governmental unit,
admissions to a home or garden which is temporarily opened to the
general public as a part of a program conducted. by a society or
organization to permit the inspection of historical homes and gardens
if no part of the proceeds inures to the benefit of any private person,
and admissions to historical sites, houses, and shrines, and-associated
museums if operated by an organization for the preservation of such
place and if no proceeds inure to any private person.
The exemptions as described above are, similar to the exemptions
provided in the House bill and the exemptions provided prior to the
passage of the Revenue Act of 1941. $owever, they are more, re-
strictive than either of these other two sets of exemptions in order to re-
move administrative problems, and also in an attempt to limit the
benefit of the exemption to activities which it appears appropriate
for the Government to encourage. Most of -the activities to which
these exemptions are applicable are a part of the legitimate functions
of organizations or institutions which frequently are Government-
supported or have been accorded tax exemption on their own income.
Because it appears inconsistent to tax admissions to activities which
are directly related to the legitimate functions of these organizations
or institutions, your committee reinstates these exemptions, limited
as provided above. However, your committee has attempted. to con-
tinue the tax in those cases where the organizations are carrying on
activities which are in direct competition with ordinary taxable busi-
nesses as is true, for example, in the case of motion picture exhibitions
and certain types of carnivals, rodeos or circuses. It is estimated that
these exemptions will result in a revenue loss of approximately $12
million in a full year of operation. It is estimated that the exemptions
provided by the house bill would decrease revenues by 816 million.
The second change in the admissions tax, made by section 401 of
this bill, deals with the amount paid for admission. This change is
the same as that made by the House bill. Under present law a per-
son admitted free or at reduced rates is required to pay the same
amount of tax as a person who is charged the regular admission price,
unless he is an employee, a municipal officer on official business, a
child under 12, or (if admission is free) a hospitalized serviceman or
veteran Your committee believes that requiring a person to pay a
tax based on a larger admission price than the amount actually charged
him is contrary to the general principal of an ad valorem tax. More-
f
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over, it does not appear that the administration of the tax is facilitated
by taxing free admissions at the established price, and it represents a
source of irritation to the public. Section 401 of your committee's
bill, therefore, exempts free admissions from tax and bases the tax on
amounts actually paid where persons are admitted at reduced rates.
It is estimated that the revenue loss from this change in the base on
which the admissions tax is paid will amount to $6 million in a full
year of operation.
2. Cabarets
Section 404 of your committee's bill relates to the application of
the 20-percent tax on cabarets to ballrooms and dancing halls. Some
courts have construed the cabaret tax to apply in the case of ballrooms
and dancing halls merely because it was possible to purchase inciden-
tal refreshments, services or merchandise in such places. Both your
committee's bill and the House bill amend section 1700 (e) of the
code to provide that the cabaret tax shall not apply in such cases. It
is estimated that the revenue effect of this provision will be negligible.
3. Bowling alleys and billiard and pool tables
Section 3268 of the Internal Revenue Code imposes a special
occupational tax on bowling alleys, billiard or pool tables, of $20 per
year per alley or table. The House bill raises this tax from $20 to $25,
but your committee's bill retains the tax of $20 provided by existing
law.
It is estimated that the House provision would have increased
revenues by $1 million annually. Your committee's action will not
change the revenues derived from this source under existing law.
G. EXCISES ON GAMBLING
The additional revenue estimated to be derived from the taxes on'
gambling in a full year of operation is distributed among the various
excises as follows:
Occupational tax on coin-operated gaming devices ------------------------------
Tax on wagers -------------------------------------------------------------------
()Wupational tax on the business of accepting wagers____________________________
Total
$7
400
Commit-
too bill
With respect to the estimate of $400 million from the two wagering
taxes, since this is a field of taxation with which the Federal Govern-
ment has had no previous experience and because there is uncertainty
as to the actual amount of the tax base, the committee recognizes that
it is difficult to estimate too closely the actual revenue which these
new taxes will yield.
Section 461 of your committee's bill adds a new chapter 27A to
the code which imposes a 10-percent excise tax upon wagers of. certain
types, principally those placed with bookmakers and lottery operators,
and a $50 per year occupational tax both upon persons engaged in
accepting such wagers and upon persons who receive wagers for the
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persons so engaged. This is the same as the provision contained in
the House bill.
Commercialized gambling holds the unique position of being a multi-
billion-dollar, Nation-wide business that has remained comparatively
free from taxation by either State or Federal Governments. This
relative immunity from taxation has persisted in spite of the fact that
wagering has many characteristics which make it particularly suitable
as a subject for taxation. Your committee is convinced that the con-
tinuance of this immunity is inconsistent with the present need for
increased revenue, especially at a time when many consumer items of
a seminecessity nature are being called upon to bear new or additional
tax burdens.
The committee recognizes that, while Federal law imposes no gen-
eral prohibition upon gambling, various forms of wagering are illegal
under the laws of most States. As a result, proposals for a Federal
tax on wagering are sometimes criticized as in effect sanctioning the
carrying on of gambling activities in violation of such laws. The
committee does not share this view. Since its inception, the Federal
income tax has applied without distinction to income from illegal as
well as legal sources, and it has never been generally supposed that
such application ' carried with it any implied. authorization to carry
on illegal activities. Moreover, in the field of excise taxes the tax
on coin-operated gambling devices has been applied without regard
to whether or not the operation of a particular machine is in violation
of State or local law. The present bill conforms to this pattern and
imposes tax without regard to the legality or illegality of the particular
wafer.
he bill specifically provides that payment of either the tax on
wagers or the occupational tax shall not serve to exempt any person
from any penalties provided under either State or Federal law with
respect to engaging in the taxed activities.
1.. Tax on wagers
The wagering tax which both your committee's bill and the House
bill imposes is placed upon wagers, without regard to the outcome of
individual bets. This method of taxation is comparable to State
taxation of pari-mutuel pools and is particularly appropriate with
respect to wagering with bookmakers and in lotteries, especially of
the type commonly known as the numbers game. The tax is limited
(1) to wagers on sports events or contests placed with a person engaged
in the business of accepting such wagers, (2) to wagers placed in a
wagering pool which involves a sports event or contest, if the pool is
conducted for profit, and (3) to wagers placed in a lottery conducted
for profit. It is believed that wagering transactions of these types
make up by far the largest proportion of the total gambling business.
While betting on horse races probably represents the largest single
category of gambling activity, other than in lotteries, the tax will
extend to wagers on any other sport, such as prizefights, basketball,
baseball, or football, including sports exhibitions and trials. More-
over, the event wagered upon need not be a sports activity but can
be any type of contest, such as an election or the outcome of primaries
and nominating conventions.
Wagers on sports events or contests, to be taxable, must be placed.
with a person engaged in the business of accepting such wagers. The
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114 REVENUE ACT OF 1951
purpose of this requirement is to exclude from tax the purely "social"
or "friendly" type of bet. A person is considered to be in the busi-
ness of accepting wagers if he is engaged as a principal who, in accept-
ing wagers, does so on his own account. The principals in such trans-
actions. are commonly referred to as "bookmakers," although it is not
intended that any. technical definition of "bookmaker," such as the
maintenance of a handbook or other device for the recording of wagers,
be required. It is intended that a wager be considered as "placed"
with a principal when it has been placed with another person acting
for him. Persons who receive bets for principals are sometimes
known as "bookmakers' agents" or as "runners." It is not intended
that to be. "engaged in the business of accepting such wagers" a per-
son must be either so engaged to the exclusion of all other activities
or even primarily so engaged. Thus, for example, an individual may
be primarily engaged as a salesman, and also, for the purposes of this
tax, be engaged in the business of accepting wagers.
As previously stated, wagers placed in a wagering pool with respect
to a sports event or a contest are taxable if the pool is conducted for AML
profit. The requirement, that the pool be operated for profit is designed
to eliminate from the tax base those pools which are occasionally
organized among friends or other associates, all of the contributions
being distributed to the winner or winners. A pool would be considered
as being operated for profit, if, for example, a person appropriated to
himself a percentage of the amount contributed to the pool or required
a fee for the privilege of contributing to the pool.
As in the case of bookmaking transactions, a wager will be con-
sidered as "placed" in a pool or in a lottery whether placed directly
with the person who conducts the pool or lottery or with another
person acting for such a person.
A contribution to a lottery will be considered a taxable wager only
if the lottery is conducted for profit, as is the case with respect to
wagering pools. Although the bill does not contain an all-inclusive
definition of the term "lottery," in general the term is intended to
mean any scheme for the distribution of property by chance among
persons who have paid or have agreed to pay a valuable consideration
for the chance, whether called a lottery, raffle, gift enterprise, or some
other name. The bill specifically provides that the term includes
"policy" or the so-called numbers game and similar types of wagering.
Policy, or its various derivatives, is usually a scheme wherein a player
selects a number, several numbers, or a series of numbers and pays or
agrees to pay a certain amount in consideration of which the person to
whom the money is paid engages to pay a prize if the number or
numbers selected. by the player appear or are published in combinations
which constitute a winning combination. (Conceivably the use of
letters or other symbols could be substituted for numbers, but this
would not alter the fundamental nature of the game as a lottery.)
The winning numbers in policy are usually based upon some regularly
published series of numbers such as weekly sales reports of a stock
exchange or commodity exchange, United States Treasury balance
reports, or the winning horses of a series of previously numbered horse
races. The above description. is not intended to be restrictive as your
committee is well aware of the possibility that existing methods of
play may be changed in an effort to escape the tax which the bill
imposes.
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Because the term "lottery" is intended to be broadly construed in
order to limit the opportunities for avoidance, your committee has
specifically excluded from the term certain types of gambling games
which might otherwise come within its technical meaning although
perhaps not commonly so considered. Thus, both bills exclude from
the term "lottery" any game of a type in which the wagers are usually
placed, the winner or winners are usually determined, and the dis-
tribution of prizes or other property is usually made, in the presence
of all persons placing wagers in the game. Among those games which
are within the scope of the exclusion would be card games such as
draw poker, stud poker, and blackjack, roulette games, dice games
such as craps, bingo, and keno games, and the gambling wheels fre-
quently. encountered at country fairs and charity bazaars. On the
other hand, punchboards would not normally be excluded under this
! definition.
Your committee has excluded the above types of gambling not be-
cause of any belief that they are not suitable subjects for taxation.
} However, the method of taxation provided, while particularly ap-
Tame
propriate to bookmaking and to policy operation does not appear
readily adaptable to those other forms of gambling. For example,
there are obvious practical difficulties in ascertaining the gross
amount of wagers made in the course of a dice game and other games
in which there is direct and continuous player participation. More-
over with respect to card games it is frequently difficult to ascertain
who, if anybody, is the person operating the game and what his tax
liability should be. In some cases, a person may operate the bank
directly. In other cases, he may take a percentage of, or impose a
flat charge on, each pot or may simply levy a charge for the use of
facilities such as a room. Moreover, many of these types of game-
are frequently engaged in on a friendly or social basis rather than pro-
fessionally. A differentiation for tax purposes between friendly and.
professional games would create serious statutory and :administrative
problems. It is not expected that this problem will exist to any seri-
ous extent in the areas within which the bill does impose tax. For
example, nonprofessional betting on horse races is probably insignifi-
cant in amount. Furthermore, while wagering games of the type
excluded from the tax may represent important aspects of Commercial-
ized gambling in certain localities, they constitute a relatively small
proportion of the total wagering transactions in the United States.
Moreover, only a portion of such professional games are in fact carried
on in gambling casinos or other permanent establishments which might
conceivably be indentifiable for tax purposes. It appears that a sub-
stantial and perhaps predominant part of such activities are in the
nature of "floating" games. That is, the operators of a game will
establish themselves in a locality, often in a hotel room, for a period
of time as short as 1 or 2 days, and then move on to another locality.
The transiency of such activities is not characteristic of the wagering
operations upon which the bill does impose tax. Bookmakers and
policy operators both depend upon an established clientele, which
requires a certain permanency of location. In any event, your com-
mittee believes that the tax provided will cover at least 90 percent
of total commercial wagering.
Both bills provide specifically that the tax shall not apply with
respect to wagers placed in pari-mutuel wagering enterprises licensed
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under State law. Such wagering is presently subject to substantial
State and, in some instances, local taxation, and to superimpose a
Federal tax upon these transactions would only serve to maintain the
existing advantage which bookmakers enjoy over pari-mutuel betting
by reason of their immunity from pari-mutuel taxes.
Also excluded from the tax are wagers placed in coin-operated
devices .with respect to which an occupational tax is imposed by
section 3267 of the code. Your committee believes that, for adminis-
trative reasons, the method of taxation which .is presently applied
with respect to such machines is preferable to an extension of the
wagering tax into this area..
The bills provide that, for the purposes of the tax, the term "lottery"
does not include any drawing conducted by organizations exempt
from tax under section 101 of the code where no part of the net pro-
ceeds derived from such drawing inures to the benefit of any private
shareholder or individual. It is, of course, contemplated that the
regulations will require the expenses of such a drawing, such as salaries
paid to the actual operators, to be reasonable in amount if the ex-
emption is to be allowed. Furthermore, any agreement to pay as
compensation a percentage of the amounts contributed would be a
clear indication that the drawing is not within the exempt category.
Liability for the wagering tax is placed upon the person who is
engaged in the business of accepting wagers or who conducts the pool
or lottery. Thus, the tax is to be collected from the bookmaker
proper or from the person who conducts the pool or lottery as the
principal. Monthly returns of tax are required.
A. credit is provided in the case of so-called lay-off money. Book-
makers and policy operators generally attempt to balance one bet
against another. A perfect mathematical booking of any race would
insure a profit regardless of the ultimate outcome. However, horse-
race bookmakers today seldom set their own odds but pay off winning
bets upon the basis of the actual pari-mutuel pay-off at the track
concerned. Furthermore, policy operators normally pay off on the
basis of fixed odds, such as 700 to 1, which remain constant from day
to day, although lower odds may be maintained with respect to
certain heavily played numbers. Because they are unable to vary
the odds in accordance with amounts wagered, bookmakers and
policy operators sometimes find that they have accepted a greater
amount of wagers upon a certain horse or number than they are
willing to carry on their own account. In order to avoid the risk
inherent in accepting such disproportionate amounts of wagers, the
bookmaker or policy operator "lays off" a portion of his bets with
another bookmaker or policy operator. In such cases it is the person
with whom the bet is laid off who bears the actual risk of the wager
even though it is the person with whom the bet was originally placed
that the bettor looks to for his winnings or to whom he pays his losses.
It is provided with respect to such laid-off wagers that the book-
maker or policy operator who originally accepts the wager shall be
liable for the 10-percent tax upon it but may claim a credit or refund
for the amount of the tax if the bet is laid off with another person who
also is liable to the wagering tax. Thus, if a bookmaker accepts a
$100 wager and lays off $60 of the wager with another bookmaker,
he is taxable upon the $100 wager but may claim a credit or refund
of tax with respect to the $60 laid off. In. this manner, multiple
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REVENUE "ACT OF 1951 117
taxation of the same wager is avoided. While certain "tracing"
difficulties may be anticipated as a result of this provision, it is
believed that the credit procedure will facilitate tax enforcement by
making available to the collection agencies information of large book-
making operations which might not otherwise be readily obtainable.
It is contemplated that the regulations will require the maintenance of
records which will insure that the person with whom the wager is
laid off is identifiable as a person also subject to the wagering tax.
The credit will be allowable only with respect to amounts. laid off
with persons also liable to the tax on wagers. As a result of this
limitation, no credit will be allowable with respect to amounts known
in betting parlance as. "come-back" money. Come-back money is es-
sentially a wager which a bookmaker lays off at a track rather than
with another bookmaker, and, as previously noted, wagers placed in
State-licensed pari-mutuel enterprises will not be taxable. Come-back
money serves the same purpose as a lay-off proper (that is, it provides
the bookmaker with a "Hedge") and, if made in large amounts, may
have the additional effect of depressing the odds on the particular
horse or horses wagered upon. The tax consequences of a combined
lay-off and come-back transaction are illustrated by the following ex-
ample: A bettor places a $1,000 wager with bookmaker A on horse X;
A holds $100 of the wager and lays off $900 with bookmaker B; B holds
$200 of the $900 and bets the remaining $700 at the track on the horse
X. Bookmaker A is taxable with respect to the entire $1,000 wager
but is allowed a credit with respect to the tax on the $900 laid off; B is
taxable on the entire $900 and is allowed no credit for the $700 he bets
at the track. Thus, cumulative tax liabilities arise of $190 (10 percent
of $1,900, the aggregate amount of wagers and lay-offs) but a credit is
allowable in the amount of $90 (10 percent of $900, the amount laid
off), leaving a net tax, of $100, or 10 percent of the original. $1,000
wager..
A wager is intended, of course, to be the amount risked by the
person placing the bet rather than the amount which bo stands to win.
Thus, if a person bets $5 against a bookmaker's $7 with respect to the
outcome of a prize fight, the wager, for the purpose of the tax, is $5.
It is provided that the amount subject to tax will include not only
the wager proper but also any charge incident to the placing of the
wager. An example of such an additional charge which is to be
included in the taxable amount would be so-called "insurance" money
paid bookmakers. Horse-race bookmakers normally place an arbi-
trary ceiling. on the odds upon which they are willing to base their pay-
offs, such as, for example, 20 to 1 for win bets, 8 to 1 for place bets,
and .4 to 1. for show bets. . These ceilings are maintained irrespective
of the actual pari-mutuel odds. Bookmakers may sometimes be will-
ing to guarantee the bettor a pay-off based on the actual track odds,
no matter how groat, in consideration of a small additional charge
paid by the bettor, usually 10 percent of the bet. This additional
charge is known as insurance. Another example of an amount which
would be included as part of a taxable wager would be a charge made
by a lottery operator for the privilege of contributing to the pool or
bank. On the other hand, the bills specifically provide that the taxable
amount shall not include an amount equal to the tax if it has been
collected as a separate charge from the bettor. This exclusion con-
forms to the pattern of the other excises and will avoid the difficult
administrative problems involved in collecting a tax on. a tax.
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The bills contain provisions designed to prevent avoidance of the
tax through transfer of wagering activities to points outside of the
United States.
Any person who willfully fails to pay the tax provided or to. make
a return or to keep required records (including a daily record of the
gross amount of wagers received) is made liable to criminal penalties
(in addition to the civil penalties) of up to 1 year's imprisonment and
a fine up to $10,000. Furthermore, a willful attempt to evade or
defeat the tax will be a felony punishable by rip to 5 years' imprison-
ment and up to $10,000 fine.
2. Occupational tax
In addition to the tax on wagers described above, both your com-
mittee's bill and the House bill impose an occupational tax of $50 per
year upon any person liable to the tax on wagers and upon any person
engaged in receiving wagers for or on behalf of such a person.
The committee conceives of the occupational tax as an integral part
of any plan for the taxation of wagers and as essential to the collec-
tion and enforcement of such a tax. Enforcement of a tax on wagers
frequently will necessitate the tracing of transactions through coin-
plex business relationships, thus requiring the identification of the
various steps involved. For this reason, the bills provide that a per-
son who pays the occupational tax must, as part of his registration,
identify those persons who are engaged in receiving wagers for or on
his behalf, and, in addition, identify the persons on whose behalf he
is engaged in receiving wagers.
In general, the provisions of the occupational tax follow the pattern
of the other occupational taxes imposed under the code and require
registration, posting of special tax stamp by the taxpayers, the mainte-
nance by the collector of a list of taxpayers, for public inspection, etc.
Special penalties are imposed for failure to pay the tax or to post
or exhibit the stamp. Furthermore, the penalties already described
with respect to the tax on wagers will also apply to willful failures to
pay the occupational tax. It should also be pointed out that, under
the general provisions of section 1001 of Title 18 of the United States
Code, any false or fictitious statement made knowingly with respect
to the payment of the occupational tax, such as the giving of a false
name or address, is subject to a fine of not more than $10,000 or
imprisonment of not more than 5 years, or both.
Past experience indicates that the size of tax collections is directly
related to adequacy of enforcement. Your. committee believes, with
respect to the wagering tax and the occupational tax on the acceptance
of wagers, energetic enforcement measures during the period immedi-
ately following the introduction of these taxes to be particularly im-
portant. Your committee realizes, of course, that the introduction
of any new taxes, such as those just described, which depend upon
hitherto untapped sources of revenue, inevitably add to the adminis-
trative burden of the Bureau of Internal Revenue. Therefore, the
Bureau should review the need for any additional administrative
requirements in the light of actual experience with the enforcement
of these taxes.
3. Coin-operated gaming devices
- Section 3267 (a) of the code provides an occupational tax of $150
per year in the case of coin-operated gaming devices. Section 453 of
the bill raises this to $250 per year. This is the same change as, is
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REVENUE ACT OF 1951 119
provided by the House bill. It is believed that the imposition of a
tax on wagering generally, from which coin-operated gaming devices
are specifically exempted, requires an increase in this tax to provide
equality of treatment. It is estimated that in a full year of operation
this will increase revenues by $7 million annually.
H. FLOOR STOCK TAXES AND REFUNDS
Both floor stock taxes and floor stock refunds are imposed or granted
one time only: a tax when an increase in rates occurs and. a refund
when a decrease in rates occurs. They are imposed or granted with
respect to inventories of items which arc beyond the point at which an
excise tax ordinarily is imposed at the' time the increase or decrease in
rates occurs. They are used only in the case of taxes imposed at the
manufacturers' level, since only in these cases are there any inventories
of items held by persons other than consumers which have not been
affected by recent changes in the excise rates. Floor stock taxes
and refunds have traditionally been imposed in the case of alcoholic
~rir+ beverages and occasionally with respect to other products.
Floor stock taxes have been imposed for three primary reasons:
(1) To prevent wholesalers and retailers from avoiding a tax increase
by stocking up on items before a tax increase or new tax becomes
effective, (2) to make the increase or new tax effective on items pro-
duced at an earlier date and thus increase revenues in the initial year
of imposition, and (3) to prevent competitive discrimination in cases
where some wholesalers and retailers have large stocks of items where
the new or additional tax has not been imposed and others do not.
In the case of floor stock refunds the primary reason for their provision
is to prevent discrimination which would exist where some retailers
and wholesalers have large tax-paid inventories, while their competi-
tors do not. This is particularly important where the tax rate de-
creases are large and where, through various business arrangements,
manufacturers are selling directly to consumers. However, in im-
posing floor stock taxes or granting floor stock refunds it is also neces-
sary to consider the large amount of work which these taxes or refunds
entail both for the taxpayer and the Government. The processing
of floor stock returns is an extensive task and their application at
both the wholesale and the retail levels affects hundreds of thousands
V of dealers. Because of these administrative considerations your com-
mittee's bill limits floor stock taxes refunds to those cases where there
appears to be a strong need for them.
Under both the House bill and your committee's bill floor stock
taxes are imposed with respect to the increases in the tax on distilled
spirits, beer, wine, and cigarettes. In the case of gasoline a floor stock
tax is also imposed but only with respect to stocks of gasoline held by
retailers other than at their retail establishments and with respect to
wholesalers. The rates of tax under these floor stock taxes are the
same as the increases in tax provided for these items. It is anticipated
that in the fiscal year 1952 these floor stock taxes will increase collec-
tions in that year, but only that year, by $120 million. Of this total,
$98 million is accounted for by the floor stock taxes on alcoholic bov-
erages, and the bulk of this is expected to be collected from distilled
spirits since inventories are largest in this case. About $22 million is
expected to be collected from the floor stock tax on cigarettes, but
only a nominal amount from the floor stock tax on gasoline. In the
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latter case the floor stock tax is imposed, not with the expectation of
receiving large revenues from it, but to give assurance that substantial
revenues will not be lost by an unusually large transfer of title to
gasoline prior to the effective date of the tax increase.
Consideration. was also given to the imposition of floor stock taxes
in the case of ,other manufacturers' excises. However, no action was
taken with respect to them largely because the items are likely to be in
relatively short supply when the excise taxes become effective, making
it difficult for dealers to avoid tax by increasing their inventories prior
to the effective date of the tax increase. Also, the large number of
retailers and items involved in many cases make the imposition of the
tax impractical in view of the size of the rate increases or the rates of
the new taxes.
Your committee's bill also provides for floor stock refunds at the
time of the termination, January 1, 1954, of the excise increases made
by this bill. The refunds are to be limited to the items on which floor
stock taxes are imposed at the effective date of the increase; that is,
they are limited to distilled spirits, beer, wine, and cigarettes and to
stocks of gasoline held by retailers at other than their retail establish-
ments. The refunds are to be granted only with respect to the increases
imposed by this bill, and only if the owner of the inventories can show
that for 3 months after the reduction date the prices charged for the
items reflect the tax decreases made.
X. TAX TREATMENT OF ILLEGAL ACTIVITIES
Several amendments have been proposed to the committee which
would affect the tax treatment of gamblers and other persons who
receive income from illegal sources. In summary, these amendments
would-
(a) Disallow as a deduction from gross income any expenses
incurred in illegal wagering and any losses resulting from illegal
wagering;
(b) Require the keeping of more detailed records by wagering
houses;
(c) Require the keeping of taxpayers' records for 7 years; and
(d) Require all individuals with a gross income during the
current or five preceding taxable years in excess of $2,500 from
illegal activities to file a net worth statement.
Your committee believes that additional time is necessary for
detailed study of these suggestions and therefore believes that action
on them should not be taken at this time. The committee is fully
aware of the importance of a strict enforcement of the income tax
laws in this area.
(The detailed discussion of the technical provisions of the bill will
be printed separately and will appear as a supplemental report.)
CHANGES IN EXISTING LAW
In the opinion of the committee, it is necessary, in order to expedite
the business of*the Senate, to dispense with the requirements of sub-
section (4) of rule XXIX of the Standing Rules of the Senate (relating
to the showing of changes in existing law made by the bill, as reported).
O
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