There is inserted a new subsection (g), designed to place a ceiling upon the aggregate normal and surtax of an individual taxpayer in a manner similar to that of section 456 which has the effect of limiting the aggregate normal tax, surtax, and Victory tax. Since section 456, being a part of the Victory tax, is repealed by section 6 of the bill, this new subsection is made a part of section 12 of the code in order to limit the aggregate tax imposed by such section and section 11 to 90 percent of the net income of the individual. For the purpose of this limitation, the tax is to be computed without regard to the credits provided in section 31, relating to taxes of foreign countries, section 32, relating to taxes withheld at source, and section 35, relating to taxes withheld on wages.

SECTION 5. ALTERNATIVE TAX ON INDIVIDUALS WITH ADJUSTED GROSS INCOME OF LESS THAN $5,000

Under existing law certain individual taxpayers, in lieu of computing the regular normal tax, surtax, and Victory tax, may elect to pay the tax imposed under the tax table found in supplement T of the code. This supplement, comprising sections 400 to 404, inclusive, contains, among the conditions upon its applicability, the requirement that the taxpayer electing it have gross income under $3,000, consisting of salaries, wages, compensation for personal services, dividends, interest, or annuities. Section 5 of the bill recasts supplement T in keeping with the primary objective of simplification. In this connection the scope of the supplement is broadened so that any individual (other than a nonresident alien, a United States citizen entitled to the benefits of section 251, an estate or trust, or an individual making a return for a period of less than 12 months on account of a change in the accounting period) may elect to pay the tax under supplement T if his adjusted gross income for the taxable year is less than $5,000. The concept of "adjusted gross income" is the device employed for putting taxpayers with different types of income from varying sources in a position of substantial parity so that the simple tax table type of computation will hereafter be available to all persons with adjusted gross incomes under $5,000. The term "adjusted gross income" is defined in section 8 of the bill and will be discussed later.

Supplement T is amended by this section of the bill in the following respects:

(a) It is made applicable to adjusted gross incomes up to $5,000 instead of $3,000.

(b) Through the use of the concept of adjusted gross income, it is made applicable to individuals without regard to the source from which the income is derived. Hence it would apply to. individuals deriving income from the conduct of a business, from a partnership or trust, or from the sale or exchange of capital assets, as well as those under the scope of supplement T of existing law.

(c) Through the application of the provisions of section 10 of the bill, relating to credits against net income, the three tables found in supplement T of existing law are reduced to one table; and the references to marital status are eliminated, there being substituted therefor reference solely to the number of surtax exemptions.

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(d) The single tax table, which is to be incorporated in section 400, is constructed on brackets of $25 with respect to adjusted gross incomes from $550 to $3,000 and on brackets of $50 with respect to adjusted gross incomes of $3,000 or more. In determining the tax payable in each bracket, a standard deduction of 10 percent of the adjusted gross income at the midpoint of the bracket is allowed, as compared with the deduction of 6 percent of gross income used in the table found in existing law.

(e) Under existing law supplement T is not applicable to an individual married and living with husband or wife whose spouse files a return and pays tax without regard to supplement T. Under the bill such restriction would not apply, provided that the spouse elected to take the standard deduction. However, if the net income of one spouse is determined without regard to the standard deduction, the other spouse is not allowed the standard deduction and must itemize all deductions claimed. The restriction does not apply where husband and wife are not living together.

The tax table under supplement T automatically provides for one normal tax exemption in the computation of the amounts of tax for each bracket of adjusted gross income. Under section 10 of the bill, however, there is provided a normal tax exemption of $500, and in the case of a joint return where one spouse has less than $500 of adjusted gross income, the exemption is $500 plus the adjusted gross income of such spouse. Therefore, where a joint return is filed and both spouses have adjusted gross income, it is necessary to reduce the tax shown in the table by $15 (3 percent of $500) or, where the adjusted gross income of one spouse is less than $500, by 3 percent of the amount of such adjusted gross income. Thus, if husband and wife file a joint return showing an aggregate adjusted gross income of $4,000 of which $400 represents the adjusted gross income of the wife, there will be deducted from the tax appropriate to such case, as shown on the table, 3 percent of $400, or $12.

Section 401 of the code is amended to contain a definition of the term "surtax exemptions" which is used in the caption of the tax table found in section 400. The term "number of surtax exemptions" is defined to mean the number of exemptions allowed under section 25 (b) as a credit against net income for the purpose of the surtar imposed by section 12. Section 10 of the bill, in amending section 25 of the code, changes the system of personal exemptions and credits for dependents found in existing law to a system of per capita exemptions. This system provides for exemptions which are equal in amount. O any return a taxpayer may claim one exemption for himself, one for his spouse under certain conditions, and one each for the dependents for which he is entitled to credit. This per capita exemption system applies only with respect to the surtax. Thus, the table found i supplement T bears reference only to the number of surtax exemptions to which the taxpayer may be entitled.

Section 402, relating to the manner of election to pay the ta under supplement T, is amended to provide that the election shall b exercised in the manner prescribed by the Commissioner with the approval of the Secretary.

Section 403 is a cross reference to section 23 (aa) of the code, as added by section 9 of the bill, relating to the optional standard deduction.

Section 404 provides that supplement T has no application to a nonresident alien individual, to a citizen of the United States entitled to the benefits of section 251, to an estate or trust, or to an individual making a return for a period of less than 12 months on account of a change in the accounting period. Such provision is in keeping with existing law. Such taxpayers are subject to special provisions of the statute not adaptable to the method of taxation employed in supplement T.

SECTION 6. REPEAL OF VICTORY TAX

This section repeals subchapter D of chapter 1 of the code, which contains the provisions of law relating to the Victory tax. In addition it contains 11 technical amendments necessitated by the repeal of the Victory tax. For the most part these amendments eliminate references in other sections of the code to the repealed tax.

SECTION 7. SERVICES OF CHILDREN

Under existing law the compensation paid for the services of a minor child is taxable either as the income of the parent or of the child according to the rights conferred on the parent by the local law with respect to the services of his minor child. In most of the States, the general rule derived from the common law prevails to the effect that the parent is entitled to the services of the child and bence is entitled to his earnings. This rule is subject to numerous exceptions depending on the circumstances and, in many cases, the intent of the parties. In Louisiana, where the legal system stems from the French civil law, the parent has no right to the services of his child. Thus, for Federal income tax purposes, opposite results may obtain under the same set of facts depending upon the applicable State law. In addition, such variations in the facts as make applicable the exceptions to the general rule in each jurisdiction tend to produce additional uncertainty with respect to the tax treatment of the earnings of minor children. Section 7 of the bill incorporates a policy which will make for uniformity among the various States in taxation of the compensation for services performed by a minor child.

Subsection (a) of this section states the rule with respect to inclusion in gross income of the amounts received for the child's services. It amends section 22 (relating to gross income) to provide that such amounts shall be included in the gross income of the child. This is so even though the compensation is not received by the child. As a corollary it is provided that such amounts shall not be included in the gross income of the parent. Thus, even though the contract of employment is made directly by the parent and the parent receives the compensation for the services, for the purposes of the Federal income tax, the amounts would be considered to be taxable to the child because earned by him. This subsection likewise provides that expenditures, whether made by the parent or the child, which are attributable to the earnings of the child, shall be considered to have been paid or incurred by him. Thus, for the purposes of the Federal income

tax, regardless of the provisions of the local law, the child is deemed to be a separate taxpayer subject to the filing requirements as is any other taxpayer, entitled to a separate exemption for normal and surtax, and entitled to take as deductions the amounts paid out by him or on his behalf where the amounts are attributable to his earnings and are otherwise deductible from gross income for tax purposes. Under this provision, a child would be entitled to take as deductions not only expenditures made on his behalf by his parent which would commonly be considered as business expenses, but also such personal deductions as were made out of his earnings and in his name. For example, a contribution made by a parent in the name of a juvenile actor and out of his earnings to a charitable organization for indigent members of the acting profession would be deductible on the return of the child.

Under these provisions, it is contemplated that the parent or guardian of the child will cause to be made and filed, and will execute on behalf of the child, the required return where the child himself is unable to do so. The term "parent" is defined to mean, in this connection, an individual who under local law is entitled to the services of the child by reason of having parental rights and duties in respect of the child.

The policy of taxing compensation earned by a child to such child contemplates that the tax will be payable out of or charged upon such compensation. This result follows automatically to the extent the tax is withheld. With respect to any tax liability not satisfied through withholding, which is attributable to such compensation, the amendment provides that the parent is to be treated as having the rights and duties of a fiduciary, to the extent of his rights and privileges over such income. Though it is explicitly provided that the parent shall be considered as acting in a fiduciary capacity in cases where the income includible in the gross income of the child solely by reason of this section, this provision does not affect or relieve the parent or guardian from any existing liability.

SECTION 8. ADJUSTED GROSS INCOME

Subsection (a) of this section amends section 22 of the code by adding subsection (n) thereto for the purpose of defining the new concept "adjusted gross income," which is used in determining the tax under supplement T. The tax table provided in section 400 is divided into brackets representing amounts of adjusted gross income. Adjusted gross income also constitutes the base which determines whether the optional standard deduction of $500, as provided in section 9 of the bill, is applicable. The proposed section 22 (n) of the code provides that the term "adjusted gross income" shall mean the gross income computed under section 22 less the sum of the following deductions: (1) Deductions allowable under section 23 of the code, which are attributable to a trade or business carried on by the taxpayer not consisting of services performed as an employee; (2) deductions allowed by section 23 which constitute expenses of travel, meals, and lodging paid or incurred by the taxpayer while away from home in connection with the performance by him of services as an employee; (3) deductions allowed by section 23 (other than expenses of travel, meals, and lodging while away from home) which consist of expenses paid or incurred in connection with the performance of services as an employee under a

reimbursement or other expense-allowance arrangement with his employer; (4) deductions allowable under section 23 which are attributable to rents and royalties; (5) deductions not included in the deductions before mentioned, for depreciation and depletion allowed under section 23 (1) and (m) to a life tenant of property or to an income beneficiary of property held in trust; and (6) deductions (other than those which would be considered business losses) which are allowed by section 23 as losses from the sale or exchange of property. In the usual case, therefore, the deductions which are to be made from gross income in arriving at adjusted gross income are limited to certain business expenses and losses which are treated as losses from sales or exchanges of property. Thus taxes and interest are deductible in arriving at adjusted gross income only as they constitute expenditures attributable to a trade or business or to property from which rents or royalties are derived. The connection contemplated in this statute is a direct one rather than a remote one. For example, property taxes paid or incurred on real property used in the trade or business would be deductible, whereas State income taxes, though incurred as a result of business profits, would not be deductible.

This section creates no new deductions; the only deductions permitted are such of those allowed in chapter 1 of the code as are specified in any of the clauses (1) to (6) above. The circumstance that a particular item is specified in one of the clauses and is also includible in another does not enable the item to be twice subtracted in determining adjusted gross income.

The only expenses in connection with his employment which are deductible by an employee, as distinguished from an individual entrepreneur, are those which he incurs for travel, meals, and lodging while away from home, or those for which he is reimbursed directly by a separate payment by his employer. Thus, for example, an employee who incurs expenses for his employer for which he is reimbursed or for which he receives a per diem remuneration, would include in his gross income the amount of the per diem or reimbursement but would be entitled to deduct the amounts paid out by him for expenses.

Subsection (b) of this section contains an amendment to section 23 (o) of the code relating to the deduction for charitable contributions. This section is amended to allow as a deduction from gross income charitable contributions of an individual to the extent that the amount of such contributions does not exceed 15 percent of the taxpayer's adjusted gross income rather than 15 percent of the taxpayer's net income computed without the benefit of the deduction. The effect of this amendment is generally to enlarge the amount of tax benefit which may be received by an individual who makes large gifts to charity.

Subsection (c) of this section has a similar amendment to section 23 (x) of the code, relating to the deduction for medical expenses. Here, the effect of substituting adjusted gross income for net income computed without the benefit of the deduction is to increase slightly the amount of the medical expenses which must be incurred before deduction therefor will be allowed. The medical expense deduction. provision is also amended to correspond to the system of surtax exemptions which is introduced in section 10 of the bill. Under existing law, the limit to which medical expenses may be deducted is $1,250 in