Date September 1937
Author George (?) Haas
Title Tax Revision Studies: Tax Treatment of Capital Gains and Losses
Description Staff memo, Division of Tax Research, Treasury Department
Location Box 63; Tax Reform Programs and Studies; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.
 
VOLUME III

TAX REVISION STUDIES, 1937

TAX TREATMENT OF CAPITAL GAINS AND LOSSES


TAX TREATMENT OF CAPITAL GAINS AND LOSSES

Table Of Contents

Summary

Section I. Economic Justification for Taxing Capital Gains

Section II. Foreign Methods of Taxing Capital Gains

     A. Great Britain
     B. France
     C. Germany

Section III. Historical Summary of Our Treatment of Capital Gains

     Part I. Individuals
     Part II. Corporations

Section IV. Critical Analysis of Present Tax Treatment of Capital
            Gains and Losses of Individuals

     A. Equity with Respect to Gains
     B. Inequity with Respect to Losses
     C. Encouragement of Capital Gains as Source of Income
     D. Effect on Tax-Exempt Investment
     E. Variability in Revenue
     F. Effect on Securities Markets

          1. Postponement of Tax Liability
          2. Reduction in Tax Liability through Postponement of
             Realization
          3. Complete Avoidance of Capital Gains Taxes

     G. Tax Avoidance on Capital Gains Increments Included in
        Property Transferred at Death, by Inter Vivos Gifts and in
        Charitable Contributions

Section V. Capital Gains Taxation and the Securities Markets

     A. General Limitations upon the Tax Influence

          1. Immobility of Mass of Capital Assets
          2. Short-term Speculation not Greatly Affected
          3. Greater Importance of Business Factors to Investors
          4. Contingent Tax Liability of Unrealized Capital Gains
          5. Explanations of Concentration of Long-Held Assets Among
             the Wealthy
          6. Average of Stock Prices not Necessarily Affected by
             Realization of Gains

     B. Analysis of the Effects of Past Tax Treatment of Capital
        Gains and Losses on the Securities Market

          1. The Twenties

               a. Overshadowing Importance of Non-Tax Influences
               b. The Rising Stock Market
               c. Effect of Tax Treatment on Liquidation of
                  Securities
               d. Effect of Tax Treatment on Timing

          2. 1935-1937

               a. Improvement in Business and Profits
               b. Low Interest Rates
               c. Foreign Purchases of American Securities
               d. New Government Restrictions on Trading

Section VI. Corporations

     A. Market Effects
     B. Effect of Undistributed Profits Tax

Section VII. Recommendations

     A. Individuals

          1. Procedure for Individuals Reporting Capital Gains but
             no Capital Losses from Sales or Exchanges
          2. Procedure for Individuals Reporting Both Capital Gains
             and Capital Losses from Sales or Exchanges
          3. Treatment of Capital Gains and Losses of Partnerships
             and Fiduciaries
          4. Treatment of Capital Gains and Losses in Property
             Donated to Charitable Institutions
          5. Treatment of Capital Gains and Losses in Property
             Transferred by Inter Vivos Gifts

     B. Corporations

Section VIII. Alternative Tax Treatments of Capital Gains and Losses
              of Individuals

     A. Proposals Designed Primarily in the Interests of Expediency

          1. Complete Exclusion of Capital Gains and Losses from the
             Income-Tax Base
          2. Complete Segregation of Tax Treatment of Capital Gains
             and Losses
          3. Segregation of the Type in Force between 1922 and 1933
          4. Segregation with Respect to Capital Losses only
          5. Complete aggregation of capital gains with other income
             but only partial association for purpose of tax
             computation

     B. Proposals for Complete Association of Capital Gains with
        Other Income

          1. Procedure Followed under the Revenue Act of 1918
          2. Inventory Method

     C. Modification in Present Step-Down Provisions
     D. Proposals to Tax Capital Gains on an Average Basis

          1. Proposal to Average Total Income Including Capital
             Gains and Losses in Full
          2. Proposal to Average Capital Gains and Losses Separately
             from Other Sources of Income
          3. The Average Accrual Method (Recommended Plan)

Appendix A -- Tables

Appendix B -- Proposed Schedules and Examples

Appendix C -- Statements by Some Leaders in the Controversy
              Respecting Capital Gains

                                   DATE: AUG 31 1937

TO:      Mr. Magill
FROM:    Mr. Haas
Subject: TAX REVISION STUDIES, 1937 -- TAX TREATMENT OF CAPITAL
         GAINS AND LOSSES

Summary

1. The subjection of income derived from capital gains to the progressive income taxes is justifiable on economic, equitable and practical grounds. From the standpoint of taxation, the kind of income that is relevant and significant is the income that measures taxpaying ability. Capital gains constitute real taxpaying ability no less than equivalent income derived from other sources.

2. The tax treatment of capital gains and losses in Great Britain, France and Germany provides no satisfactory model on which to build a system for the United States. In each country, the differentiation of taxable from non-taxable gains is by a process so arbitrary as to create severe inequities between taxpayers of substantially identical circumstances but with unimportant differences in the form of income received. Moreover, there is a strong inducement to taxpayers to convert taxable income into non-taxable gains, thus making tax considerations an extremely important influence on investment activities and policies.

3. The tax treatment of capital gains and losses of individuals in the United States has ranged from the complete inclusion of capital gains and losses in the tax base in the years 1918-1921, to the present treatment which includes in taxable income certain percentages of capital gains and losses (subject to limitation) which vary with the years assets have been held. From 1922 to 1933, the taxpayer was allowed, at his option, to segregate from his ordinary income the gains from assets held more than two years, and subject them to a 12 1/2 percent flat rate. Losses from assets held more than two years could likewise be segregated, except for 1922 and 1923, and allowed a tax credit of 12 1/2 percent subject to certain limitations. Gains and losses from assets held two years or less were included in ordinary income.

4. The existing tax treatment of individuals is inequitable as respects both gains and losses. It is not intolerable as respects capital gains, however, and in this respect is greatly superior to the treatment that it displaced. The limitation on capital losses, however, is so unjust as to be indefensible.

Capital gains are now given decidedly preferential tax treatment as compared with other sources of individual income. Wealthy individuals, especially, are offered an extremely strong tax inducement to make their new investments in such manner as will permit their returns therefrom to take the form of capital gains.

The chief effect of the present system on the securities markets arises through the influence on timing. At the option of the taxpayer, income taxes on capital gains may be postponed by delaying the formal realization of gains, reduced by deferring formal realization until one or more of the four "step-down" intervals provided in the law has elapsed, and completely avoided by foregoing formal realization, leaving such realization to be accomplished by the taxpayer's heirs.

5. Although the influence of tax considerations is real, their effects upon the movements and volume of activity of the securities markets are far less substantial than is often contended. The bulk of capital assets is relatively insensitive to the character of our capital gains taxation. This is true of the part held quasi-permanently for purposes of control and income. It is also true of the part employed in the short-term operations of traders and speculators, operations which normally account for a large fraction of the total trading in listed securities. For intermediate-term speculators and investors, tax considerations necessarily operate among a welter of other factors which usually provide stronger incentives to action.

The available statistical evidence, though by no means conclusive, does not support the contention that the tax treatment of capital gains since 1922 has been of more than modest influence upon the level and activity of the securities markets. The underlying business situation and the related speculative temper of the times are primarily responsible for stock market booms and collapses.

6. The capital gains and losses of corporations have not created tax problems in any way similar to those of individuals. Special treatment was not needed as long as there was a relatively low flat corporation income tax; and the enactment of graduated rates beginning in 1936 created no practical problem, because the range of graduation is relatively narrow.

Imposition of the surtax on undistributed profits has raised a new problem for corporations with respect to the tax treatment of capital gains and losses. If the capital gains of good years must be paid out currently to avoid surtax liability, but no carry-forward of the capital losses of bad years is allowed, the tendency over a period of years will be to shrink the value of capital assets. The most practicable method of minimizing or eliminating this tendency appears to be that of allowing net capital losses in full as a deduction in computing adjusted net income, with a carry-forward for two years of any excess losses.

7. It is recommended that capital gains and losses of individuals be subjected to tax treatment on the basis of what may be called the average accrual method. According to this method the amounts of gain and loss realized are averaged separately over the number of years the assets were held, and taxed at rates determined on such average amounts when added to ordinary income. The increment of tax resulting on the average gain and tax credit on the average loss are multiplied by the average number of years respectively the assets were held, and the combined products represent the tax on capital gains. The objective of the plan is to recognize more adequately the fact that the realized gains and losses frequently accrue over several years.

In more detail the procedure under this method is as follows:

a. Capital gains are segregated from capital losses. The average investment period for gains and the average annual gain during this period are determined; and the average investment period for losses and the average annual loss during this period are determined.

b. The average annual gain and the average annual loss are combined to determine a net average gain or loss applicable to the shorter of the two investment periods. The tax or tax credit on the resulting figure is computed with reference to the surtax net income, and this tax or tax credit is multiplied by the number of years in the shorter average investment period to determine the tax or tax credit on capital gains and losses during this period.

c. The tax or tax credit on the average annual gain or the average annual loss, whichever accrued for the longer average investment period, is computed with reference to the surtax net income, and multiplied by the number of years by which the longer average investment period exceeds the shorter, to determine the tax or tax credit applicable to those years.

d. The taxes or tax credits thus obtained are combined, the result representing the total tax or tax credits on capital gains and losses. Any unused tax credit is carried forward for two years, to be allowed only as an offset against tax liability on capital gains realized in those years.

e. In computing the tax, no allowance is given for any portions of the personal exemption, credit for dependents, or minimum earned income credit not utilized in computing the ordinary income tax. If there is no surtax net income, the tax or tax credit is computed, assuming surtax net income to be zero rather than a negative quantity.

If legally feasible, contributions to charitable and similar institutions should be regarded as occasioning the realization of capital gains and losses by their donor; and such capital gains and losses should be included with other capital gains and losses for tax purposes. If this is not feasible, it is recommended, for purpose of determining the deduction for charitable contributions, that the value of such contributions in kind be fixed at the adjusted basis (Section 113) or market, whichever is lower.

If legally feasible, transfers by inter vivos gifts should be regarded as occasioning the realization of capital gains and losses by the donor. If this proposal is not deemed feasible, it is suggested that a supplementary gift tax be levied, measured by the capital gains and losses incorporated in such transfers. In the event that this should also be unacceptable, it is recommended that, for the purpose of determining both capital gains and losses, the basis for property acquired by gift be made either the base in the hands of the donor or market value at time of transfer, whichever is lower.

It is recommended that the capital gains and losses of corporations be included in ordinary income in full, except that for purposes of determining the normal-tax net income, capital losses be allowed only to the extent of capital gains. Any excess of capital losses not allowed in the current year in determining normal-tax net income is carried forward for two years to be credited against the capital gains of those years. In determining adjusted net income capital losses are allowed in full against income from any sources. Any excess of capital losses not so utilized is carried forward for two years for use as a deduction in determining adjusted net income of those years.

8. Next to the recommended average accrual plan, the most superior alternative would be a continuation of the present five-step system with an improved scale of percentages designed to approximate more closely the resulting taxes to taxes applicable to other sources of income; and with a liberalization of the present loss limitations.

All of the other alternative tax treatments of the capital gains and losses of individuals possess weaknesses which make their adoption unwise.

The undistributed profits tax will tend to diminish one important source of capital gains, but will leave a number of other sources unaffected. Hence it does not obviate the Justification for the tax on capital gains.


                                   DATE: AUG 31 1937

TO:      Mr. Magill
FROM:    Mr. Haas
Subject: TAX REVISION STUDIES, 1937 -- TAX TREATMENT OF CAPITAL
         GAINS AND LOSSES

I. Economic Justification For Taxing Capital Gains

Economists differ in their concepts of income; and such differences are valid and inevitable, in many cases, when the concept is employed for different purposes. From the standpoint of taxation, the kind of income that is relevant and significant is the income that measures tax-paying ability. This kind of income is not necessarily synonymous with any of the numerous concepts of income commonly used by economists. The law properly regards a gambler's income, for example, as taxpaying ability despite the fact that his income does not represent a net addition to the collective social income. In the same way, capital gains constitute real tax-paying ability to the recipient no less than equivalent income derived from other sources.

Professor Irving Fisher questions this view on the ground that capital gains do not conform to two tests which he has set up to determine what constitutes income; namely, (1) it must be susceptible to capitalization; and (2) it must yield psychic income (in Professor Fisher's view, psychic income results only from spending). It cannot be denied that capital gains do not represent income if one accepts these tests. Professor Haig's definition of income as". . . . . the money value of the net accretion to one's economic power between two points of time" /1/ provides a very different test which seems more appropriate for tax purposes.

Whether such taxation results in a diminution in the country's capital resources depends upon the uses made by the Government of the revenues so derived, and upon the indirect effects of such uses. If these revenues are employed for debt retirement, or for the construction of public works, or in ways that indirectly stimulate capital investment, no reduction in the country's capital resources results.

Further, the fact of the matter is that the great bulk of capital gains realized in the United States is realized in connection with transactions entered into for profit. This is true not only of gains realized by individuals and enterprises that make a primary business of trafficking in capital assets, but it is also true of a large proportion of casual gains realized by individuals whose primary income is derived from other sources. The sale of houses and farms which had previously been occupied or operated by their owners occasions many individual realizations of capital gains; but the great mass of even casual gains is derived from the sale of corporate securities, unimproved real estate, business properties, and other assets which had been acquired with a view to profitable investment.

Finally, it is important to emphasize that there is no clean separation, in practice, between capital gains and ordinary income; and that the complete exemption of capital gains from income taxes might well stimulate the conversion of other types of income into the form of capital gains. Second mortgages, land contracts, et cetera, are frequently sold at substantial discounts. From a legal standpoint, the difference between the principal amount and the purchase price is regarded as a capital gain; but from an economic standpoint the discount is merely the means whereby the effective annual yield of the instrument is raised from, say, 6 percent to 12 or 15 percent. A bond purchased at a premium results in a capital loss when redeemed at par, and a bond purchased at a discount, in a capital gain. Yet it is the everyday practice in investment circles to quote both these types of bonds in terms of their effective yields to maturity or call date. The sale of almost any capital asset on the installment plan can be so arranged as to convert a large part of the interest income into the form of a capital gain merely by reducing the nominal rate of interest and raising the principal price by a compensatory amount.

To some extent, at least, capital gains frequently reflect increases in the general price level rather than real increases in taxpaying ability. It has been suggested that a corrective factor for this may be obtained through the use of an index of prices in determining the volume of capital gains subject to taxation.

The wisdom and practicability of attempting to go behind pecuniary income for this purpose are extremely dubious. An adequate attempt to do so would involve innumerable complexities. The same rising price levels that may be responsible for some capital gains will also reduce the real purchasing power and wealth of individuals whose pecuniary incomes are derived from bonds, mortgages, leases, and other fixed contracts; and such individuals should properly be allowed deductions against their taxable incomes if fair allowance were to be made for changing price levels. Wages, profits, rents, and interest rates also tend to increase, but in uneven degree, during periods of rising price levels. Part of the capital gains realized by common stockholders and direct proprietors of tangible property during such periods are obtained at the expense of their creditors, whose monetary claims are fixed.

The adjustments that could feasibly be made in our tax structure to accommodate the diverse results of changes in the purchasing power of money would inevitably be arbitrary, inadequate, and inequitable. The proper place to attack the problem of monetary instability is on its own ground.

II. Foreign Methods Of Taxing Capital Gains /2/

A. Great Britain

The British formula for the taxation of capital gains is as follows: Capital gains and losses on assets are not included in the computation of net income except when the taxpayer makes transactions in such assets his trade or business. Annual profits, in the sense that such profits are likely to recur annually, are taxable; casual, non-recurring, or occasional profits arising from transactions that do not form part of the ordinary business of the person who makes them are non-taxable.

The inherent difficulty in this formula lies in the impossibility of arriving at a satisfactory definition of annual profits or gains, There is no simple test. The number of transactions consummated is not a reliable guide. A reading of British cases shows that the line dividing taxable and non-taxable profits or gains is thin, wavering and arbitrary. As a consequence, it must be expected that considerable inequity as between individuals in substantially similar circumstances will result.

A severe indictment of the British formula was made in 1920 by the latest Royal Commission to consider broad questions of income tax policy. The report of the Commission deplored the narrow scope of the existing charge and strongly recommended that the limitation of the taxability of capital gains to "annual" profits be removed. A definite recommendation was made that any profit on a "transaction in which the subject matter was acquired with a view to profit seeking" be taxed. British economists, officials and business men do not defend their formula on the grounds of economic principle or of equity. There is general acceptance of the Royal Commission's criticism. Defense of the formula consists, first, of an argument against change per so, and secondly, of an argument in favor of administrative simplicity. The British are not satisfied with their formula and they certainly do not regard it as a model for others to adopt.

The British formula tends to encourage various types of artificial transactions to transform taxable income into exempt profits. One way of accomplishing this end is to buy stocks for the rise and not for the dividends, inasmuch as casual transactions in stocks are exempt; whereas dividends are taxable. Secondly, a taxpayer may purchase bonds bearing a relatively low interest rate at a discount and sell such bonds at or near par just before maturity. The profit so made would not be taxable even though such profit merely represents interest in another form. In the third place, despite an effort to plug this loophole in the Finance Act of 1927, a taxpayer may sell stock "cum dividend" and buy it back "ex dividend". Such a transaction would result in a non-taxable gain in place of the receipt of taxable dividends. A fourth method utilized by British taxpayers to avoid the income tax on ordinary income has been the transfer of assets to a foreign corporation organized for the purpose, in order to convert taxable interest and dividends into non-taxable capital gains. Attention was given to this loophole in the Finance Act of 1936, but the effectiveness of the provision adopted to eliminate it is impaired by the necessity of proving the intent of the taxpayer to avoid taxes.

B. France

The French formula is in general similar to the British. In the case of strictly business enterprises, the net profit from the transfer of any kind of asset, whether in course or upon the termination of the undertaking, is included in the tax base. In the case of other taxpayers, gains from capital transactions are taxable if the activity giving rise to such gains is "habitual". Gains from casual capital transactions made by business enterprises are taxable, but gains from casual transactions made by other taxpayers are not taxable.

A narrow technical definition given the term "taxable speculator" aids the escape from taxation. Business enterprises escape the tax placed upon their gains from casual capital transactions by carrying through the transaction in the name of a third person, such third person acting in his capacity as an individual. French tax administration is lax, there being no serious risk that a corporation so evading the tax will be brought to account.

The French formula, like the British, runs an arbitrary line between taxable and non-taxable capital gains. The French do not resort to widespread use of devices designed to transform taxable income into non-taxable gains, largely because easier methods of avoiding the income tax are available to the French taxpayer. Two favorite methods of avoiding the tax are either to purchase bearer type securities in preference to the registered type when buying in a French market, or to trade in foreign markets. The Government has no adequate check on either bearer type securities or foreign market transactions. The taxpayer merely forgets to disclose such transactions. The chance that he will be discovered in his iniquity is negligible. Evasion is so easy, in fact, that no present use need be made of loopholes in the capital gains formula. The loopholes are present to be used at any time the tax administrators close presently utilized avenues of escape.

C. Germany

The German formula for the treatment of capital gains under the income tax includes gains on all transactions made by business concerns (whether or not incorporated) and also includes gains from speculative transactions made by taxpayers other than business concerns. Gains from investment made by taxpayers other than business concerns are exempt. An arbitrary time test is used to determine whether a given transaction is a speculation or an investment. The present law arbitrarily sets the dividing line between speculation and investment at two years for real estate transactions and one year for transactions in stocks; transactions in bonds are not considered to be speculation.

Under the German formula as it now stands, there are substantial tax-free areas to which taxpayers are tempted to gain access. To avoid taxation, the fruits of a transaction must first avoid inclusion in the accounts of a business enterprise. Secondly, the transaction must avoid classification as a speculation. The line separating speculation from investment is clear and definite but arbitrary to a high degree.

The present formula generates four working tendencies; (1) A tendency to favor transactions in bonds; (2) A tendency to favor long term rather than short-term stock transactions; (3) A tendency in favor of stock rather than real estate transactions; and (4) A tendency in favor of long-term rather than short-term real estate transactions

The formula offers a reward to the taxpayer who transforms taxable income into non-taxable capital gains. Stocks heavy with dividend can be sold "cum" and bought back "ex" with advantage, provided the security has been held a year or more. There is also an inducement to invest in stocks likely to appreciate in market value rather than in big dividend stocks.

The German formula automatically generates irresistible incentives to avoid and evade the tax. The time test as to investment versus speculation causes market transactions to be carried through at "unnatural" times; and the evasion and avoidance devices involve "unnatural" transactions and thereby create abnormal market conditions.

III. Historical Summary Of Our Treatment Of Capital Gains

From the enactment of the 1913 income tax law until 1921, capital gains realized by individuals, irrespective of the period held, were treated like any other source of income and subjected to the full normal and surtax rates in the year of realization.

Partly in order to eliminate the disproportionately high taxes on gains from long-held assets, but mainly because of a belief that high tax rates on capital gains were obstructing normal transactions in capital assets, Congress drastically altered the tax treatment of capital gains in the Revenue Act of 1921. It was provided that gains from assets held for two years or less must continue to be included in ordinary income in full; but, at the election of the taxpayer, "capital net gains," from the sale of assets held for more than two years, could be segregated from other income and subjected to a tax of 12 1/2 percent in lieu of normal and surtaxes; provided, if such election were made, the total tax, including the tax on capital net gains, could in no case be less than 12 1/2 percent of the total net income. The latter restriction was dropped in 1924; but in other respects this treatment of capital gains was continued unchanged through the Revenue Act of 1932.

The substantial increases in individual income-tax rates that were effected by the Revenue Act of 1932 greatly accentuated the disparity in the tax treatment of capital gains as compared with income derived from other sources. This disparity was substantially reduced by the adoption in the Revenue Act of 1934 of the prevailing plan where-under the income derived from capital gains is subjected to the ordinary income-tax schedule, but the proportion of capital gains made taxable varies inversely -- though somewhat arbitrarily -- with the number of years during which the asset is held.

The capital losses of individuals have received varying treatment in the several revenue acts. No allowance whatever was made for capital losses in the Revenue Act of 1913, and in the Acts of 1916 and 1917; they were allowed only to the extent of capital gains. The 1918 Act provided full allowance for capital losses against income of any kind.

In the 1921 Act the distinction between assets held two years or less and assets held more than two years was first introduced. Losses on assets held two years or less were allowed in full against other income but not against capital net gains; losses on assets held more than two years were allowed in full against income of any kind. In the Revenue Act of 1924, the limitation upon losses on assets held two years or less was removed so that such losses were allowed against income of any kind; with respect to the losses on assets held more than two years, the taxpayer was granted the option of segregating such losses from ordinary net income and taking a tax credit of 12 1/2 percent of the capital net loss, provided that the total tax could not be less than that derived by treating the capital net loss as a deduction from ordinary met income. This treatment remained in force through the Revenue Act of 1932, which added a limitation restricting the allowance of losses from sales or exchanges from stocks or bonds held two years or less to gains from such sales. Under the Revenue Act of 1934, the percentages for the step-down system were applicable to losses in the same manner as to gains, with the limitation that losses so determined could not be included for purposes of determining net income except to the amount of the included capital gains plus $2,000.

The capital gains of corporations throughout the period 1913 to date have consistently been treated in the same way as other sources of corporate income. Special treatment was not needed as long as there was a relatively low flat corporation income tax; and the enactment of graduated rates beginning in 1936 has created no practical problems, because the range of graduation is relatively narrow. The imposition of the surtax on undistributed profits has, however, created new problems.

The tax treatment of capital gains and losses, for both individuals and corporations, during the period 1913 to date is detailed in the following summary, to which there is appended an analysis of the historical treatment respecting the carry-forward of capital losses:


Historical Summary Of Tax Treatment Of Capital
Gains And Losses, 1913-1936, Inclusive

Part I. Individuals

                                      Treatment of:

                                  Gains                Losses
Revenue      Income            from sale or         from sale or
  Act         year          exchange of assets   exchange of assets

 1913     Mar. 1, 1913     Included with other      Not allowed
               to          income subject to
          Dec. 31, 1915    full normal and
                           surtax rates

1916          1916                 do            Allowed only to
                                                 the extent of the
                                                 gains from such
                                                 sales

1917          1917                 do                    do

1918       1918-19211              do            Allowed in full
                                                 against income of
                                                 any kind

1921      1992, 1923           Assets held 2 years or less

                           Included with other   Allowed in full
                           income subject to     against other
                           full normal and       income, but not
                           surtax rates          against capital
                                                 net gains.

                                Assets held over 2 years

                           At the election of    Allowed in full
                           the taxpayer,         against income
                           capital net gains     of any kind
                           were taxable at 12
                           1/2 percent in lieu
                           of the normal and
                           surtax rates, but if
                           such election were
                           made the total tax,
                           including the tax
                           on capital net
                           gains, could in no
                           case be less than
                           12 1/2 percent of
                           the total net income

1924          1924             Assets held 2 years or less

                           Same as 1921 Act      Allowed in full
                                                 against income
                                                 of any kind

                                Assets held over 2 years

                           At the election       Could be
                           of the taxpayer,      segregated from
                           capital net gains     ordinary net
                           were taxable at       income, and a tax
                           12 1/2 percent in     credit of 12 1/2
                           lieu of the normal    percent of the
                           and surtax rates      capital net loss
                                                 taken, but in no
                                                 case could the tax
                                                 be less than the
                                                 tax (computed at
                                                 normal and surtax
                                                 rates) would be if
                                                 the capital net
                                                 loss were deducted
                                                 from ordinary net
                                                 income

1926       1926-1927       Same as 1924 Act      Same as 1924 Act

1928       1928-1931               do                    do

1932          1932             Assets held 2 years or less

                           Same as 1924 Act      Losses from sales
                                                 or exchanges of
                                                 stocks and bonds
                                                 were limited to
                                                 the gains from
                                                 such sales. It was
                                                 provided, however,
                                                 that such losses
                                                 disallowed in one
                                                 year (to an amount
                                                 not in excess of
                                                 the net income)
                                                 could be carried
                                                 over and applied
                                                 against gains from
                                                 such transactions
                                                 in the succeeding
                                                 taxable year /1/

                                                 Other losses were
                                                 allowed in full
                                                 against income of
                                                 any kind

                                Assets held over 2 years

                           Same as 1924 Act      Same as 1924 Act

N.I.R.A.      1933             Assets held 2 years or less

                           Same as 1924 Act      Losses from sales
                                                 or exchanges of
                                                 stocks and bonds
                                                 were limited to
                                                 the gains from
                                                 such sales

                                                 Other losses were
                                                 allowed in full
                                                 against income of
                                                 any kind

                                Assets held over 2 years

                           Same as 1924 Act      Same as 1924 Act

1934-1936     1934        Percentages of gains or losses recognized

                             Period assets
                                are held            Percentages

                           1 year or less               100

                           Over 1 year but               80
                           not over 2 years

                           Over 2 years but              60
                           not over 5 years

                           Over 5 years but              40
                           not over 10 years

                           Over 10 years                 30

                           Capital gains so      Capital losses so
                           computed are          computed are
                           included in net       recognized in
                           income subject to     determining net
                           full normal and       income to the
                           surtax rates          amount of the
                                                 recognized capital
                                                 gains plus $2,000

                          FOOTNOTE TO TABLE

     /1/ The provision relating to the carry forward of disallowed
losses from sales or exchanges of stocks and bonds held two years or
less was repealed by the National Industrial Recovery Act before it
became effective.

                           END OF FOOTNOTE
 
[Next]