B. Other amendments to the Internal Revenue Code (added by your committee)

1. Application of the investment credit to certain property in U.S. possessions. The investment credit is extended to property located in U.S. possessions provided the property is owned by a U.S. company or citizen, subject to U.S. tax on its income from possessions, would otherwise have qualified for the investment credit, and is not owned or used by U.S. persons who are presently exempt from U.S. tax. This amendment is effective with respect to property placed in service after December 31, 1965.

2. Medical expense deductions of persons 65 and over.-The amendment repeals the provisions with respect to a taxpayer age 65 or over, his spouse age 65 or over, and dependent mothers or fathers who are age 65 or over, which, beginning in 1967, would limit their medical deductions to medical care expenses in excess of 3 percent of adjusted gross income and define their medical care expenses to include only those medicine and drug expenses in excess of 1 percent of adjusted gross income.

3. Corporate acquisition of assets of another corporation.—(a) Purchase of stock.-Under present law, the purchase from an unrelated party by one corporation of at least 80 percent of the stock of another corporation followed by the liquidation of the acquired corporation within 2 years is treated as a purchase of the assets of the acquired corporation. These amendments expand the definition of "purchase" to include the purchase of stock from a 50-percent owned subsidiary if stock in the 50-percent owned subsidiary was also acquired by purchase. The change is to be effective with respect to acquisitions of stock made after December 31, 1965.

(b) Installment notes. This amendment provides that when installment notes are transferred in the type of purchase and liquidation described above, gain is to be recognized to the distributing corporation in the same manner as if it had sold the notes. This amendment is to be effective with respect to distributions made after the date of enactment of this act.

4. Swap funds.-The amendment sets aside certain Treasury regulations proposing to tax the exchange of appreciated securities for shares in a mutual investment fund.

5. Self-employed persons retirement plans: minimum amount treated as earned income.-This amendment raises from $2,500 to $6,600 the minimum amount of earnings from a trade or business, in which both personal services and capital are material income-producing factors, which a self-employed person may treat as earned income regardless of the general rule that only 30 percent of the net profits of the trade or business may be treated as a self-employed person's earned income. This amendment applies to taxable years beginning after December 31, 1965.

6. Self-employed persons retirement plans: certain income of authors, inventors, and so forth.-The bill amends present law relating to self-employed individuals' retirement plans to permit authors, inventors, and so forth, to include gains (other than capital gains) from sales and other transfers of their works in their earned income base for

the purpose of computing deductions for contributions to such plans. This change will be effective for taxable years ending after the date of enactment of this act.

7. Exclusion of certain rents from personal holding company income. This amendment provides, for taxable years beginning after the date of enactment of the act (and certain earlier years at the election of the taxpayer), that rent received from the lease of tangible personal property manufactured by a taxpayer is not to be treated as personal holding company income.

8. Percentage depletion in the case of certain clay-bearing alumina. This amendment provides, with respect to taxable years beginning after the date of enactment, a percentage depletion rate of 23 percent for alumina and aluminum compounds extracted from domestic deposits of clay, laterite, and nephelite syenite. It further provides that in computing gross income from mining all processes applied to derive alumina or aluminum compounds from such clay, laterite, and nephelite syenite are to be treated as mining processes.

9. Percentage depletion rate for clam and oyster shells.-This amendment provides that mollusk shells (including clam and oyster shells) are to be allowed percentage depletion at the same rate (15 percent) as is applicable in the case of limestone and other calcium carbonates. This change is applicable to taxable years beginning after the date of enactment.

10. Sintering and burning of shale, clay, and slate.-This amendment provides that for purposes of percentage depletion, the sintering or burning of shale, clay, and slate used or sold for use as lightweight aggregates is to be treated as a mining process. This amendment is applicable to taxable years beginning after the date of enactment.

11. Straddles.-This amendment provides that, with respect to straddle transactions entered into after January 25, 1965, the income from the lapse of an option which originated as part of a straddle is to be treated as a short-term capital gain (instead of ordinary income). This permits it to be netted against any capital loss which may result from the exercise of the other option in the straddle while retaining what in most respects is ordinary income treatment for any excess of net shortterm capital gain over net long-term capital loss.

12. The taxation of per-unit retain allocations of cooperatives.The bill clarifies present law dealing with the taxation of cooperatives and patrons to insure that a current single tax is paid, at either the cooperative or patron level, with respect to per-unit retain certificates. In so doing, the amendment makes the treatment of these certificates generally comparable to the treatment of patronage dividends under present law.

13. The excise tax on hearses.-This bill provides that the sale of an ambulance, hearse, or combination ambulance-hearse vehicle is to be considered to be the sale of an automobile chassis or automobile body (rather than a truck chassis or body) for purposes of determining the manufacturers' excise tax on motor vehicles. This change applies with respect to articles sold after the date of enactment of this bill.

14. Interest equalization tax: raw material source loans.-Subsequent transfers of debt obligations to assure raw material sources are

to be exempt from the interest equalization tax where the indebtedness is acquired without an intent on the part of the purchaser to sell it to other U.S. persons. This change is to be effective with respect to acquisitions of debt obligations made after the date of enactment.

15. Interest equalization tax: certain acquisitions by insurance companies in developed countries.-The present exemption for reserve asset pools of U.S. insurance companies is extended to allow the establishment of reserve asset pools where a U.S. insurance company commences activities in a developed country or where a less-developed country is designated as a developed country. This amendment is to take effect on the day after the date of enactment.

16. Interest equalization tax: Euro-dollars. The President is given the authority to exempt from the interest equalization tax U.S. dollar loans of more than 1 year made by the foreign branches of U.S. banks. This change is to apply to acquisitions of debt obligations made after the date of enactment.

C. Presidential Election Campaign Fund Act

This title provides for public support of presidential election campaign financing. Individual taxpayers are to be able to designate on their annual tax returns that $1 of their income tax liability is to be placed in a presidential election campaign fund. The amounts in the fund are to be made available to defray the expenses incurred by political parties in presenting candidates for President and Vice President. Amounts will only be paid to those political parties whose candidates received at least 1,500,000 votes in the preceding presidential election.

A major political party (one whose candidate polled 10 million votes or more in the preceding presidential election) is to be eligible to receive a payment from the fund equal to $1 times the number of votes cast for the presidential candidates of the major political parties in the preceding presidential election divided by the number of such major political parties. A minor party (one whose candidate polled more than 1,500,000 but less than 10 million votes) is to be eligible to receive a payment from the fund equal to $1 for each vote in excess of 1,500,000 votes that its candidate received in the preceding presidential election. The payment received by any political party is to be limited, however, to reimbursement of presidential campaign expenses actually incurred by the party in connection with the current presidential election.

The Comptroller General is authorized to determine the campaign expenses of the political parties and to determine the amounts which may be paid to such parties. An advisory board is established to advise and assist the Comptroller General with his duties under this

act.

D. Miscellaneous provisions

1. Treasury bonds or certificates payable in foreign currencyThis amendment expands the debt management authority of the Secretary of the Treasury to permit the issuance of U.S. notes denominated in foreign currencies. This authority already exists in the case of bonds and certificates of indebtedness.

2. Reports on Federal contingent liabilities and assets. This amendment requires the Secretary of the Treasury to submit a report to the Congress each year indicating the full contingent liabilities of the Federal Government and the assets of the Federal Government which might be made available to liquidate such liabilities. The first such report is to be submitted on or before March 31, 1967.

3. Medicare: Coverage of expenses for prescribed drugs.-This amendment authorizes payments for prescribed drugs under the Medicare Act. The estimated monthly cost of $1 per beneficiary will be shared equally by the Government and the beneficiary. Reimbursements will be made under a schedule of allowances based upon generic drug prices.

II. PURPOSE AND BACKGROUND OF FOREIGN

INVESTORS TAX ACT

On October 2, 1963, the President appointed a task force on "Promoting Increased Foreign Investment in U.S. Corporate Securities and Increased Foreign Financing for U.S. Corporations Operating Abroad." On April 27, 1964, a report of this task force was released. Among the recommendations of the task force were a series of proposals designed to modify the U.S. taxation of foreign investors. The Treasury Department studied the recommendations of the task force and on March 8, 1965, submitted to the Congress proposed tax legislation designed to increase foreign investment in the United States. At the request of the administration a bill was introduced at that time designed to carry out the recommendations of the Treasury Department. Subsequently, after holding hearings on this topic, the House passed a somewhat different version of this earlier bill; namely, H.R. 13103. Your committee has held hearings on this bill and modified it somewhat. Basically, however, the objectives remain the same as in the bill as passed by the House; that is, the two objectives of improving equity in the tax treatment of nonresident aliens and foreign corporations and providing, to the extent consistent with the first objective, increased incentives for investments by these persons and corporations in the United States.

This bill represents a substantial revision of the tax treatment of foreign corporations and nonresident aliens, an area which has not been substantially revised for some 30 years.

III. REVENUE ESTIMATES

It is expected that the Foreign Investors Tax Act, as presented here, will result in a revenue gain at current income and investment levels of slightly over $1 million a year. In addition, the provision calling for quarterly payments of withheld taxes, instead of annual payments, is expected to increase collections in the fiscal year 1967 alone by $22.5 million. Table 1 shows the revenue gain or loss attributable to the various Foreign Investors Tax Act provisions in the bill to the extent this can be quantified.

TABLE 1.-Estimated revenue changes resulting from the foreign investors tax bill

NOTE. Based on the most recently available withholding tax information, quarterly payment of withheld taxes will result in a revenue gain of $22,500,000 in the fiscal year 1967. Taxes will be collected for 5 quarters in the fiscal year 1967. All 1966 withholding, estimated at $90,000,000, will be collected on March 15, 1967, plus tax of $22,500,000 for the 1st quarter of 1967 on April 15, 1967.

The amendments added to the bill by your committee, other than those relating to the Foreign Investors Tax Act, are expected to result in an annual revenue loss (or expenditure increase) of slightly over $400 million. Two hundred million dollars of this is attributable to the medicare amendment making provision for drugs under the supplementary benefit program. The provision making medical expenses deductible in full with respect to most persons over age 65 is expected to result in an annual revenue loss of $180 million. An expenditure of approximately $70 million every 4 years also is expected from the Presidential Election Campaign Fund Act. The remaining provisions added by your committee are expected to result in a further revenue loss of approximately $10 million a year.

IV. GENERAL EXPLANATION

A. FOREIGN INVESTORS TAX ACT

I. INCOME TAX SOURCE RULES

a. Rules for determining source of certain interest payments (sec. 102 (a) (1) of the bill and secs. 861 (a) and (c) of the code) Present law. Present law provides that nonresident alien individuals and foreign corporations are subject to U.S. tax only on the income they derive from sources within the United States. For purposes of determining whether the income is from within or without the United States, the code specifically enumerates types of income treated as income from sources within and as income from sources without the United States.

One of the rules under present law provides that interest on deposits paid to foreign persons not engaged in trade or business in the United States is to be treated as income from sources without the United States if the interest is paid by a bank. The Internal Revenue Service in interpreting this rule has held that, in addition to banks, the provision applies to certain deposits with some types of State-chartered savings and loan associations. However, the Service has not interpreted this provision as extending to interest paid on deposits with all savings