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4. THE TRANSITION YEAR

We have now covered two of the four joints of my discussion, I can reassure those who are weary by saying we are "halfway up the stairs." I come at this point of the stairs to the transition year -- 1943. with respect to what you and I and the other millions of taxpayers in the country will have to do and to pay in 1943, first of all let me emphasize that those of us who elected to pay our tax in installments, must pay our June 15th installment, just as if there had been no legislation changing our system. Then, as of September 1st, 1943, the payments made on account of the tax liability for the taxable year 1942 will be considered to be payments on account of the tax liability for the taxable year 1943.

On September 15th, individual taxpayers to whom the current system applies will file their declarations. For this transition year an additional group of wage-earners will be required to file declarations who, once the, transition is accomplished, will not be required to file declarations, I refer to persons who were required to file a return for 1942 and whose gross income from wages in 1942 was greater than that which can be expected for 1943 and whose wages are less than the $2700 or $3500 filing requirement. Filing by these persons is necessitated by the fact that the so-called first anti- windfall provision in effect provides that in no event will a taxpayer's tax for 1943 be less than his 1942 tax liability would have been had it not been discharged. These declarations will show the estimated total tax liability of the taxpayers for 1943 and will show the amount which the taxpayers estimate will have been withheld from them during the year, the amount which has already been paid by them on account of their 1943 tax as payments made originally on account of the 1942 tax, and will show the balance of the estimated tax required to be paid on September 15th and December 15th of this year.

This brings us to the consideration of what happens to the 1942 liability. As a technical legal matter the 1342 tax liability is completely discharged. In effect, however, the discharge of tax liability is in most cases 75 percent of the tax for 1942 or 1943, whichever is the lower. Thus, for 1943 the estimated tax may be something a little different than the estimated tax for subsequent years. Since the so-called first anti-windfall provision requires that the 1943 tax shall be increased by any excess of the 1942 tax over the 1943 tax, except in the case of members of the armed forces as I will explain later, the estimated tax in many cases may represent merely the 1942 liability decreased by the amounts estimated to be withheld during the year and may, therefore, have no relation to the income of the taxpayer during 1943.

In cases where the 1943 tax liability exceeds the 1942 tax liability 25 percent of the 1942 liability is added as a part of the tax for 1943. This 25 percent, however, is not a component of the estimated tax to be paid during the year 1943 but must be accounted for and paid either on March 15, 1944, in the case of a calendar year taxpayer or one-half on that date and one half a year from that date where an extension of time is applied for. Where, however, the 1942 tax liability exceeds the 1943 tax liability, the excess of 1942 liability is added to and becomes a part of the tax for 1943 and a part of the estimated tax which must be paid currently during 1943. In addition, there is added to the 1943 tax, 25 percent of the amount of the 1943 tax which must be accounted for and paid on March 15, 1944, or one-half, on March 15, 1944 and one-half a year from that date. The reason for the requirement that taxpayers must in any event pay the higher of the 1942 or 1943 tax liability is found in the fact that these taxpayers expected to and would have had to pay their 1942 liabilities if no change had been made in the law and it seemed unwise to relieve any of this expected liability merely to effect the change to the current payment system.

I have spoken of 75 percent forgiveness of tax for the lower of 1942 or 1943. The law increases that forgiveness to 100 percent in the case of taxpayers whose tax for the lower of the two years is $50 or less. In cases in which either the tax for 1942 or the tax for 1943 does not exceed $50 and the tax for the other year in the comparison is greater, no 25 percent amount is added to the tax for 1943, and by reason of a notch provision where the tax for the lower year only slightly exceeds $50, there is added to the 1943 tax 25 percent of the amount of the tax for the lower year of the difference between $50 and the amount of the tax, whichever is the lesser. For example, an individual whose tax liability for 1942 was $60 and whose tax liability for 1943 was $100 would have added to his 1943 tax payable on March 15th the sum of $10, since one-fourth of $60 is greater than the difference between $50 and $60.

The popularly-termed second anti-windfall provision which I will now attempt to explain to you seems to be the provision. which causes the greatest amount of confusion and misunderstanding. It is probably fortunate, therefore, that it will apply in comparatively few cases. This provision was designed to cut down the tax forgiveness where an individual's income is very substantially increased in the war years 1942 1943 over what it was in pre-war years. Although there may be imperfections and some taxpayers who are in no way receiving war profits may feel its impact, the Congress believed that this provision will substantially reduce, the tax-forgiveness of persons who are making, enormous profits out of war contracts. It will apply only in situations where the surtax net income of a taxpayer for both 1942 and 1943 is more than $20,000 greater than his highest surtax net income received in any of the years 1937 to 1940, inclusive. The year chosen out of these four is called the base year. A tentative tax for 1942 or 1943 whichever year is the lower in total tax liability without regard to the Current Tax Payment Act, will be computed on the amount of surtax net income for the base year plus $20,000. The amount of this tentative tax so computed acts as the upper limit of tax forgiveness. In other words, if the 25 percent amount added to the 1943 tax is less than the difference between the tentative tax and the total tax for the year, the excess of this difference over the 25 percent amount is further added to the 1943 tax. As in the case of the 25 percent amount, this addition is to be accounted for on the return filed for 1943 and is not a component of the estimated tax to be paid currently during 1943. Unlike the 25 percent amount, however, time for payment of this additional amount may be extended over a period of five years and the amount can be paid in four-equal installments commencing March 15, 1945 in the case of calendar year taxpayers and corresponding dates for fiscal year taxpayers. This extension, unlike the 25 percent extension which is without interest, carries interest at the rate of 4 percent per annum on the unpaid balance until the date of payment if within the period of extension or 6 percent if paid after the due date.

As a measure of relief to possible hardships that would arise under this second anti-windfall provision, there are two provisions of the law applicable to special situations. The first of these is the situation where the taxpayer is a partner in, or the individual owner of a business which during the base year was carried on by a corporation and subsequently was liquidated with the assets acquired and business carried on by the former stockholders after liquidation. In such a case the owner or partner may compute his surtax net income for the base year as if the earnings and profits for the taxable year of the corporation ending with or within the base year had all been distributed as dividends, However, the individual's distributive share of these hypothetical dividends can not exceed his interest in the partnership.

The second situation is that in which the taxpayer received dither in 1942 or 1943, whichever year is the measure of his tax forgiveness, compensation for personal services, which, under section 107 of the Internal Revenue Code, would be attributed to the base year. Here, in computing the surtax net income of the base year, the law provides that this type of income shall be included in the surtax net income of the base year and excluded from the year in which it was received.

Other provisions which affect tax forgiveness are as follows No amount of the 1942 tax liability is discharged in the case of an individual who dies in 1942. The liability will be collected in the same manner as if the Current Tax Payment Act had not been enacted. The reason for this policy is found in the fact that a dead person has no need of becoming current in his tax payments and since neither he nor his estate will be included in the current collection system, there is no need for tax forgiveness in his case. For the purposes of comparison off tax of a husband and wife where a joint return is made for 1942 and separate returns are made for 1943, or vice versa, the taxes of the spouses for the year in which a joint return is not made are required to be aggregated.

All this may sound very complicated to you, and I cannot deny. that it is complicated, but strangely enough the public seems to have a tremendous capacity for assimilating burdens and complications over a period of time. We can only hope that time will see the working out of these problems along with others.

At this point it might interest you to know something of the estimates of the revenue yield under the new Act. The net effect of the Act is to remit 6 billion 533 millions of dollars in tax liability or 66.6 percent of the 1942 liabilities. On the other side of the picture by reason of the accelerated payment of tax on 1943 incomes and by reason of the carry-over of the 25 percent unremitted, it is estimated that the Federal Government will receive in the fiscal year 1944, 3 billion 6 millions more than it would receive under the present law. Again, in 1945 the revenue yield to the Government will be increased by 1 billion 94 millions by reason of the fact that part of the 25 percent amount unforgiven will be paid in that year and an additional 49 million it is estimated will be received on account of the so-called second anti-windfall provision. This same provision will add 49 million to the receipts of the three ensuing fiscal years.

5. MISCELLANEOUS PROVISIONS

The provisions of the new Act relating to members of the armed forces in active service with the United States Army or Navy, or that of any of the United Nations, relate both to the year-in, year-out liability for income tax and also to the special situation created by the transition to current collection. In the first place, members of the armed forces are granted an exclusion from gross income for the taxable year 1943 and subsequent years of $1,500 per year of their service pay. This provision gives an increased exclusion from gross income over that granted under the Revenue Act of 1942. That Act provided that $250, in the case of a single person, and $300, in the case of a married person, should be excluded from the gross income of members of the armed forces below the rank of commissioned officer.

Further, it is provided that with respect to a member of the armed forces who dies in active service on or after December 7, 1941, any income tax liability which is unpaid at the date of his death shall not be collected, and, if it is collected from his estate, it shall be refunded as an overpayment. This abatement applies also to any interest or penalties added to the tax.

As far as the transition to the current payment system is concerned, members of the armed force are again given special consideration. Where, under the so-called first anti-windfall provision, the non-military taxpayer has added to his 1943 tax any excess of the 1942 tax over the 1943 tax, a taxpayer who is a member of the armed forces in either 1942 or 1943 will not have this excess of 1942 tax added to his 1943 tax to the extent that such excess results from the inclusion in his income of earned net income for the year. Earned net income which is thus excluded is that income as defined in section 25(a)(4) of the Code relating to the earned income credit. Thus a taxpayer who held a $10,000 a year job but had no outside income for 1942, and would, therefore, have a 1942 tax liability of $2,152, but who became a private in the Army early in 1943, and with his army pay exclusion would have no tax liability for 1943 would not be required to pay as his 1943 tax the sum of $2,152 as would a civilian in a comparable income situation.

Another miscellaneous provision, unrelated to the current payment system of the recent Act, provides for the appointment of two Assistant Commissioners of Internal Revenue. Formerly, there was one Assistant to the Commissioner. This position has been abolished. The Act also provides that time will be extended until February 29, 1944, for the release of powers of appointment.

I have attempted to give you all of the highlights and many of the details of the Current Tax Payment Act. The Act will be painful necessity become more and more familiar to you as the days go on. I can only hope that I have been of some aid in your initial understanding of it.