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1917

2007

Statistics of Income

A Collection of Historical Articles

SOI Trailblazers

Introduction

Statistics of Income: A History | Spring 2008

n 2007, the 90th anniversary of the Statistics of Income (SOI)

function, we looked back on a long and proud history filled

with dedicated staff, operational innovations, and significant

accomplishments. The 16th Amendment to the Constitution, which

gave Congress the power to levy taxes, became effective in 1913, and

the Revenue Act of 1916 included a requirement for the “preparation

and publication of statistics reasonably available with respect to the

operation of the income tax law.” A year later, in 1917, the predecessor

of SOI was created, and the first statistical report was published in the

following year.

Despite the many changes in people, methodologies, logistics, and

technologies, the mission of SOI has remained virtually the same: to

collect, analyze, and disseminate information on federal taxation for the

Treasury Department; Congressional Committees; the Internal Revenue

Service in its administration of the tax laws; other organizations

engaged in economic and financial analysis; and the general public.

As part of our anniversary celebration, beginning with the summer

2007 issue of the SOI Bulletin and ending with the winter 2008 issue,

we published a series of articles that present historic SOI data on a

variety of topics. These articles are assembled here for your enjoyment

and reference. While we look back in celebration, we also look

forward to a bright future for SOI – one of expanding data products and

statistical services, as well as extending our customer base. I hope you

will enjoy our celebratory articles, which are also available as part of

the SOI paper series on the Tax Stats Web site at www.irs.gov/taxstats,

click on "SOI Paper Series."

Tom Petska, Director

Contents



SOI Trailblazers by James Dalton

The Estate Tax: Ninety Years and Counting, by Darien

Jacobson, Brian Raub, and Barry Johnson

A History of Controlled Foreign Corporations and the

Foreign Tax Credit, by Melissa Redmiles and Jason

Wenrich

Celebrating Ninety Years of SOI: Selected Corporate Data,

1916-2004, by Marty Harris and Ken Szeflinski

A History of the Tax-Exempt Sector: An SOI Perspective,

by Paul Arnsberger, Melissa Ludlum, Margaret Riley, and

Mark Stanton

Ninety Years of Individual Income and Tax Statistics,

1916-2005, by Scott Hollenbeck and Maureen Keenan

Kahr

SOI Trailblazers

Statistics of Income Bulletin

by James Dalton

s SOI celebrates its 90th year of doing business

and meeting the needs of its many customers, it

is time to look back at the exceptional trailblazers who have made SOI products and services possible.

Dr. Edward White was the George Washington

of Statistics of Income. He arrived in 1918 at an

annual salary that today is less than one biweekly

paycheck for a journeyman mathematical statistician

at SOI—$2,000. Naturally, as the premier head of a

new organization, his resume is a list of firsts:

•

first SOI report on personal and corporate

income tax returns (for 1916 in 1918)

•

first data on sole proprietorships (for 1917 in

1919)

•

first data on estate tax returns (for 1916-1922

in 1925)

•

first complete income statements for corporations (for 1922 in 1925)

•

first gift tax return statistics (for 1925 in

1926)

•

first Source Book of corporation tax data (for

1926 in 1928)

•

first separate individual and corporation reports (for 1934 in 1936)

•

first fiduciary income statistics (for 1937 in

1940) and

•

first detailed partnership statistics (for 1939

in 1945).

Dr. White took SOI from nonelectric comptometers to punch cards and machine tabulation around

1928. Sampling of individual income tax returns

was introduced under his leadership, and, later in his

tenure, stratified systematic samples of individual

returns were also implemented. It is safe to say that

his 29-year tenure (1918-1946) will probably never

be surpassed.

James Turner, an IRS employee, replaced Dr.

White in 1946. But possibly no one could replace

Dr. White, for his successor had the shortest tenure of

any SOI Director to date. He served 3 years (19461949).

Turner’s elevation to Director was perhaps IRS

recognition of his greatest achievement, as he is credited with development of the standard deduction. In

IRS annals, this is quite an achievement. Today, all

Americans facing their tax responsibilities can say a

collective “thank you, Jim Turner” for the relief offered from their burden through the deduction.

Bryce Bratt, another IRS employee, took charge

in 1949 and extended sampling, previously limited

to individual returns, to corporation returns and then

to returns for other SOI programs. For the corporate

study, he achieved a sampling rate of 41.5 percent,

handling 285,000 returns out of a total population of

687,000. But his 4-year tenure (1949-1953) faced

backlogs of statistical reporting that could not be processed, finalized, or delivered due to World War II.

The task was overwhelming. Within 5 years, he

was gone. A new era was about to dawn, not only for

SOI but also for the Internal Revenue Service itself.

Ernest Enquist, the fourth Director of SOI, arrived in 1953 and brought about the IRS computer

age. In 1954, his second year as Director, he funded

half of the cost of a Remington Rand UNIVAC 1

purchased with the Census Bureau, where he had

been a statistician. The UNIVAC was IRS’s and, of

course, SOI’s first computer.

To achieve his vision, Enquist doubled SOI staffing and reassigned manual statistical processing to

the field. This transition allowed SOI to establish the

first quality control program to maintain integrity of

data and also enabled focus on specialized areas like

partnership returns, taxpayer usage studies, advance

tabulations of individual data, capital gains, corporate foreign tax credit, sales of capital assets, depletion, and depreciation. In 1962, Enquist saw to the

implementing of Public Law 87-870, which allowed

SOI to conduct special studies for reimbursement,

and, thus, it can be said that his 11-year tenure (19531964) laid the groundwork for most of what SOI now

delivers.

The fifth Director of SOI, Vito Natrella, was a

former Securities and Exchange Commission statistician. He took charge in 1964 and used the computer

to identify returns for sample selection (previously a

SOI Trailblazers

Statistics of Income Bulletin

manual process). This revitalized the individual program, among others.

Natrella also introduced integer weights, or

the rounding of weights to an integer value, to SOI

weighting procedures. This eased data review procedures and assured that publication totals added

evenly. But it was controversial.

Natrella finalized a one-time study on depletion

(for 1960 in 1966) and initiated the first SOI estimates of personal wealth based on estate tax returns

(for 1962 in 1967). These estimates involved use

of the estate multiplier concept. He then published

the first corporation report on the foreign tax credit

(for 1961 in 1967) and the first corporation supplement on controlled foreign corporations (for 1962 in

1969).

Natrella widened the focus of SOI studies to

include high-income taxpayers and the incomes of

U.S. citizens working abroad, as well as corporate

income from U.S. possessions, international boycott

participation, employee benefit plans, and private

foundations. He also implemented the use of Master

File data for individual income tax studies, which

previously relied on data that had been processed

independently. The Natrella Era (1964-1980) set the

stage for the sixth Director of SOI to create the organization widely known today.

Fritz Scheuren, former Social Security Administration chief statistician, became Director of SOI

in 1980. His passion for print led to the founding of

several publications that form the cornerstone of the

SOI mission “to collect, analyze, and disseminate

information on Federal taxation for the Treasury

Department’s Office of Tax Analysis, Congressional

committees, the Internal Revenue Service in its administration of the tax laws, other organizations engaged in economic and financial analysis, and for the

general public.” Scheuren published the first issue

of the quarterly Statistics of Income Bulletin in 1981

and the first issue of SOI’s methodological report

series in 1982, when the Statistical Division became

the Statistics of Income Division.

He then instituted an annual program on taxexempt organizations and published the only SOI

statistics to date on employee benefit plans (for 1977

in 1982). He published the first SOI compendiums

on international income and taxes (for 1979-1983)

and partnerships (for 1978-1982) in 1985. He also

established the estate tax return program as an annual

study in 1986.

One of the greatest innovations of his era (19801993) was convening the first meeting of the SOI

Advisory Panel to involve academics, business representatives, and tax policymakers in SOI work processes in 1986. Throughout his tenure, he invested in

human capital, seeing that economists and mathematical statisticians had the training necessary to meet

the computer programming needs of the Division.

Scheuren also spearheaded the TQO (Total Quality

Organization) initiative at SOI.

In 1989, he established SOI’s Statistical Information Services. Its mission to answer phone, walk-in,

and written requests, and later e-mail requests, for

SOI products and services continues to this day.

Scheuren’s mission to raise SOI visibility in any

form possible also led to the SOI electronic bulletin

board, which began disseminating data in 1992 and

today, as SOI’s Tax Stats Web site, contains an evergrowing wealth of material, including data tables

and the latest articles and papers developed by SOI

economists and mathematical statisticians, as well as

other researchers.

The seventh Director of SOI, Dan Skelly, was a

former economics instructor and pension fund manager, who combined both academic and corporate

experience when he came to SOI in 1983. He had

supervised the Foreign Statistics Branch, now known

as the Special Studies Branch, for 10 years and left

his mark on international, estate, nonprofit, and excise tax studies before taking the SOI helm in 1993.

He believed in the mantra that “people are the organization” and invested in a Divisionwide recruitment

effort to attract and hire the best and the brightest.

As much as a good resume impressed Skelly, he

knew that team spirit moves an organization, and so

he picked candidates who could work well together.

He hired many of SOI’s present staff members and

conducted most of the interviews himself. “Top of

the morning,” he used to say, and top of the candidates is what he got.

Skelly also emphasized training in order to keep

SOI competitive with other statistical organizations

and measured success not only in the number of annual studies conducted (60) but in the number of careers developed. “The quality of statistics,” he liked

to say, “depends on the quality of those you hire.”

SOI Trailblazers

Statistics of Income Bulletin

Toward that end, his recruitment tours and speaking

engagements at local colleges and universities were

well-known events.

He finetuned a number of SOI initiatives on his

watch, bolstered the estate and gift audit selection

program through estate and gift studies, and facilitated a separate audit program for exempt organizations through nonprofit studies. Perhaps for his most

tangible human capital achievement, Skelly was

instrumental in seeking and filling new senior technical positions throughout SOI, because he strongly

believed that SOI staff perform at a high level. Remembered for his people skills and the bright optimism he encouraged throughout the Division, as well

as for leading SOI into the Internet Age and the 21st

Century, the Skelly Era (1993-2001) set the stage for

its present Director.

Tom Petska, a former BEA and SSA economist

and Chief of SOI’s Special Studies Branch, became

Director of SOI in 2001 and used his influence from

day one to increase SOI standing in the statistical

community. He led the way in maintaining high

visibility as a world-class organization by encouraging staff to present papers at major conferences: the

American Accounting Association (AAA), the American Economic Association (AEA), the American

Statistical Association (ASA), and the National Tax

Association (NTA). He himself presented papers on

tax-exempt organizations, tax shelters, business organizational choice, individual income distributions, interagency data sharing, and the greater use of Master

File data and was inducted as an American Statistical

Association Fellow in 2004.

Petska does not believe that SOI should operate

in a Federal statistical vacuum and has re-established

the SOI Advisory Panel Meeting as a semiannual

event in 2001. Now in its 22nd year, this meeting

provides Government economists and statisticians

with much needed outside perspectives and views

from academia, nonprofit think tanks, and account-

ing firms. Under Petska’s leadership, SOI not only

reports on 130 projects and functions in semiannual

reports to Treasury’s Office of Tax Analysis (OTA)

and the Congressional Joint Committee on Taxation (JCT) but has finished virtually every one on or

ahead of schedule with some of the highest quality

levels it has ever achieved.

Petska also advocates the effective management

of “white space,” those often overlooked places

where areas of expertise intersect and where, as in

economic terms, common ground becomes a public

good. To share best practices across branches, he

has commissioned an inhouse team for Web modernization and subject-matter experts for publications

improvement. A Johnny Unitas fan, his management

philosophy comes straight from the gridiron, “Find

out where statistics are going, and move in those directions.”

Petska, who went as a Federal consultant to the

Republic of South Africa to help its government

restructure their revenue agency, is now shaping

SOI beyond his own tenure. He is leading efforts to

develop a strategic vision, SOI 2016, and is working

with RAS Director Mark Mazur, former Treasury

Deputy Assistant Secretary Bob Carroll, and OTA

Director Don Kiefer to project SOI to the future. He

has spared no effort to think and act “SOI-global” in

his agency’s move to Graphical User Interface (GUI)

systems, in its deployment of split-screen editing

technologies, and its successful contributions to the

Modernized e-File (MeF) initiatives.

When asked where SOI stops in building bridges

to the statistical community and its many customers

throughout the world, the Petska answer has always

been, “Why stop?” Petska believes that SOI’s future

lies in having more, not fewer, leaders and that by

joining the ranks of SOI’s “highest performers”—its

“All-Pros”—its starting lineup will be “All Stars” in

every sense of the word. SOI’s continued success is

thereby assured.

The Estate

Tax:Tax:

NinetyNinety

Years and Years

Countingand Counting

The

Estate

Statistics of Income Bulletin | Summer 2007

by Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson

or the past 90 years and at key points throughout American history, the Federal Government

has relied on estate and inheritance taxes as

sources of funding. Proponents have frequently

advocated that these taxes are effective tools for preventing the concentration of wealth in the hands of

a relatively few powerful families, while opponents

believe that transfer taxes discourage capital accumulation, curbing national economic growth. This tension, along with fiscal and other considerations, has

led to periodic revisions of Federal estate tax laws,

affecting both the size of the decedent population

subject to the tax and the revenue collected.

The Statistics of Income Division’s Estate Tax

Studies

The Statistics of Income Division (SOI) and its predecessor organizations have compiled statistics on

estates that file Federal estate tax returns since the inception of the tax in 1916. These data have been instrumental in both administering the tax and forming

a better understanding of the financial arrangements

employed by the nation’s wealthiest individuals.

Data from estate tax returns are regularly used

to estimate annual revenues and to project future receipts. These data have also been used to support the

analysis and debates that occurred in crafting the tax

law changes chronicled in this paper. In this context,

estate tax data have frequently been used to evaluate the effects of the tax laws on the economic and

social behavior of the very wealthy. For example,

the effects of estate taxation on the longevity of businesses and farms, as well as the effects of the tax on

a decedent’s propensity to make charitable bequests,

have been important considerations to policymakers

when debating changes in estate tax laws.

In addition to using estate tax data directly for

tax policy administration, these data have formed

the foundation for periodic estimates of personal

Darien B. Jacobson and Brian G. Raub are economists

with the Special Studies Special Projects Section. Barry W.

Johnson is Chief of the Special Projects Section.

wealth held by the living population. These wealth

estimates are produced from estate tax data using the

estate multiplier technique and are an important tool

for studying the U.S. macroeconomy, as well as a

valuable supplement to information collected through

surveys, which frequently underrepresent the very

wealthy.1 SOI first published estimates of personal

wealth derived from estate tax data for 1962, following in the footsteps of scholars like Horst Mendershausen and Robert Lampman, who had published

similar estimates for earlier decades using SOI tabulated data. SOI estate tax data have also been used to

study the transmission of wealth between generations,

and, combined with data from income tax returns

filed by decedents prior to death, to derive measures

of economic well-being.

Historical Overview

The term “death tax” has been used to describe a variety of different taxes related to the “power to transmit

or the transmission or receipt of property by death.”2

Stamp taxes or duties, are taxes on the recordation of

legal documents such as wills. Estate taxes are excise

taxes on the privilege of transferring property at death

and are usually graduated based on the size of the

decedent’s entire estate. An inheritance or legacy tax

is an excise tax levied on the privilege of receiving

property from the decedent. These taxes are usually

graduated based on the amount of property received

by each beneficiary and on each beneficiary’s relationship to the decedent.3

Taxation of property transfers at death can be

traced back to ancient Egypt as early as 700 B.C.4

Nearly 2,000 years ago, Roman Emperor Caesar Augustus imposed the Vicesina Hereditatium, a tax on

successions and legacies to all but close relatives.5

Taxes imposed at the death of a family member were

quite common in feudal Europe, often amounting to

a family’s annual property rent. By the 18th century,

stamp duties and registration fees on wills, inventories, and other documents related to property transfers

at death had been adopted by many nations, including

that of the newly formed United States of America.

1 For more detail on using the estate multiplier technique to estimate wealth, see: Johnson, B. and L. Woodburn (1993), “Estate Multiplier Technique, Recent Improvements

for 1989,” Compendium of Federal Estate Tax and Personal Wealth Studies, 391-400, Statistics of Income Division.

2 Silberstein, Debra Rahmin, (2003) “A History of the Death Tax—A Source of Revenue or Vehicle for Wealth Redistribution,” Brandeis Graduate Journal, Vol. 1, Issue 1

www.brandeis.edu/gradjournal, p. 1.

3 Bittker, Boris I, Elias Clark, and Grayson M.P. McCouch (2005) Federal Estate and Gift Taxation, 9th Ed., Thompson/ West, St. Paul, MN p. 9.

4 Paul, Randolph E. (1954), Taxation in the United States, Little, Brown, and Company, Boston, MA.

5 Smith, Adam (1913), An Inquiry into the Nature and Causes of the Wealth of Nations, E.P. Dutton, New York.

The Estate Tax: Ninety Years and Counting

Statistics of Income Bulletin | Summer 2007

The Stamp Tax of 1797

In 1797, the U.S. Congress chose a system of stamp

duties as a source of revenue in order to raise funds

for a Navy to defend the nation’s interests in response to an undeclared war with France that had begun in 1794. Federal stamps were required on wills

offered for probate, as well as on inventories and

letters of administration. Stamps also were required

on receipts and discharges from legacies and intestate

distributions of property.6 Taxes were levied as follows: 10 cents on the inventories of the effects of deceased persons, and 50 cents on the probate of wills

and letters of administration. The tax on the receipt

of legacies was levied on bequests larger than $50,

from which widows (but not widowers), children,

and grandchildren were exempt. Bequests between

$50 and $100 were taxed 25 cents; those between

$100 and $500 were taxed 50 cents; and an additional $1 was added for each subsequent $500 bequest.

In 1802, the crisis ended, and the tax was repealed.7

The Revenue Act of 1862

In the years immediately preceding the American

Civil War, revenue from tariffs and the sale of public

lands provided the bulk of the Federal budget. The

advent of the Civil War again forced the Federal

Government to seek additional sources of revenue,

and a Federal death tax was included in the Revenue

Act of 1862 (12 Stat. 432). However, the 1862 tax

differed from its predecessor, the stamp tax of 1797,

in that the 1862 tax package included a legacy or

inheritance tax in addition to a stamp tax on the probate of wills and letters of administration. Originally, the legacy tax only applied to personal property,

and tax rates were graduated based on the legatee’s

relationship to the decedent, not on the value of the

bequest or size of the estate. Rates ranged from 0.75

percent on bequests to ancestors, lineal descendants,

and siblings to 5 percent on bequests to distant relatives and those not related to the decedent. Estates

of less than $1,000 were exempted, as were bequests

to the surviving spouse. Bequests to charities were

taxed at the 5-percent rate, despite pleas from many

in Congress that the tax should be used to encourage

Figure A

1864 Death Tax Rates

Relationship

Lineal descendants, ancestors.............................

Siblings.................................................................

Descendants of siblings........................................

Uncle, aunt, and their descendants......................

Great uncle, aunt, and their descendants.............

Other relatives, unrelated individuals...................

Charities...............................................................

Rate on

property

(percent)

Rate on

legacies

(percent)

1.0

2.0

4.0

5.0

6.0

1.0

2.0

4.0

5.0

6.0

such gifts.8 The stamp tax was graduated and ranged

from 50 cents on estates valued at less than $2,500

to $20 on estates valued from $100,000 to $150,000,

with an additional $10 assessed on each $50,000 or

fraction thereof over $150,000.

By 1864, the mounting cost of the Civil War led

to the reenactment of the 1862 Act, with some modifications.9 These changes included the addition of a

succession tax—a tax on bequests of real estate—and

an increase in legacy tax rates (Figure A). In addition, the tax was applied to any transfers of real

estate made during the decedent’s life for less than

adequate consideration, except for wedding gifts,

thus establishing the nation’s first gift tax. Transfers

of real estate to charities, were taxed at the highest

rates. Bequests to widows, but not widowers, were

exempt from the succession tax, as were bequests of

less than $1,000 to minor children. The end of the

Civil War, and subsequent discharge of the debts associated with the war, gradually eliminated the need

for extra revenue provided by the 1864 Act. Therefore, in 1870, the legacy and succession taxes were

repealed.10 The stamp tax was repealed in 1872.11

Between 1863 and 1871, these taxes had contributed

a total of about $14.8 million to the Federal budget.

The War Revenue Act of 1898

Throughout the last half of the 19th century, the industrial revolution brought about profound changes

in the U.S. economy. Industry replaced agriculture

as the primary source of wealth and political power

6 Stamp Act of 1797, 1 Stat. 527.

7 Zaritsky, H. and T. Ripy (1984), Federal Estate, Gift, and Generation Skipping Taxes:

A Legislative History and Description of Current Law, Report No. 84-156A.

8 Office of Tax Analysis (1963), Legislative History of Death Taxes in the United States, unpublished manuscript.

9 Internal Revenue Law of 1864 §124-150, 13 Stat. 285.

10 Internal Taxes, Customs Duties Act of 1870 §27, 16 Stat. 269.

11 Internal Revenue Act of 1867, 14 Stat. 169, Customs Duties and Internal Revenue Taxes Act of 1872 §36, 17 Stat 256.

The Estate Tax: Ninety Years and Counting

Statistics of Income Bulletin | Summer 2007

Figure B

1898 Legacy Tax Rates

Rates by size of estate

Relationship

Lineal descendants, ancestors, siblings..................................

Descendants of siblings...........................................................

Uncle, aunt, and their descendants.........................................

Great uncle, aunt, and their descendants................................

All others..................................................................................

$10,000 under

$25,000 (percent)

$25,000 under

$100,000

(percent)

$100,000 under

$500,000

(percent)

(1)

(2)

(3)

(4)

(5)

1.500

3.000

6.000

8.000

10.000

1.875

3.750

7.500

10.000

12.500

2.250

4.500

9.000

12.000

15.000

0.750

1.500

3.000

4.000

5.000

1.125

2.250

4.500

6.000

7.500

$500,000 under

$1 million or more

$1 million

(percent)

NOTE: Estates under $10,000 were exempt from the tax.

in the United States. Tariffs and real estate taxes

had traditionally been the primary sources of Federal

revenue, both of which fell disproportionately on

farmers, leaving the wealth of industrialists relatively

untouched. Many social reformers advocated taxes

on the wealthy as a way of forcing the wealthy to

pay their fair share, while opponents argued that such

taxes would destroy incentives to accumulate wealth

and stunt the growth of capital markets.12

Against this backdrop, a Federal legacy tax was

proposed in 1898 as a means to raise revenue for the

Spanish-American War. Unlike the two previous

Federal death taxes levied in times of war, the 1898

tax proposal provoked heated debate. Despite strong

opposition, the legacy tax was made law.13 Although

called a legacy tax, it was a duty on the estate itself,

not on its beneficiaries, and served as a precursor

to the present Federal estate tax. Tax rates ranged

from 0.75 percent to 15 percent, depending both

on the size of the estate and on the relationship of a

legatee to the decedent (Figure B). Only personal

property was subject to taxation. A $10,000 exemption was provided to exclude small estates from the

tax; bequests to the surviving spouse also were excluded. In 1901, certain gifts were exempted from

tax, including gifts to charitable, religious, literary,

and educational organizations and gifts to organizations dedicated to the encouragement of the arts and

the prevention of cruelty to children.14 The end of

the Spanish-American War came in 1902, and the tax

was repealed later that year.15 Although short-lived,

the tax raised about $14.1 million.

12 Bittker, Clark and McCouch, p. 4.

13 War Revenue Act of 1898, 30 Stat. 448, 464.

14 War Revenue Reduction Act of 1901, 31 Stat. 956.

15 War Revenue Repeal Act of 1902, §7, 32 Stat. 92.

16 See, for example, Bittker, Clark, and McCouch

pp. 3-9.

The Modern Estate Tax

The years immediately following the repeal of the

inheritance tax were witness to an unprecedented

number of mergers in the manufacturing sector of

the economy, fueled by the development of a new

form of corporate ownership, the holding company.

This resulted in the concentration of wealth in a

relatively small number of powerful companies and

in the hands of the businessmen who headed them.

Along with such wealth came great political power,

fueling fears over the rise of an American plutocracy

and sparking the growth of the progressive movement. Progressives, including President Theodore

Roosevelt, advocated both an inheritance tax and a

graduated income tax as tools to address inequalities in wealth.16 This thinking eventually led to the

passage of the 16th Amendment to the Constitution

and the enactment of the Federal income tax. It was

not until the advent of another war, World War I, that

Congress would enact the Federal estate tax.

The Revenue Act of 1916 (39 Stat. 756) created

a tax on the transfer of wealth from an estate to its

beneficiaries, and thus was levied on the estate, as

opposed to an inheritance tax that is levied directly

on beneficiaries. It applied to net estates, defined

as the total property owned by a decedent, the gross

estate, less deductions. An exemption of $50,000

was allowed for residents; however nonresidents who

owned property in the United States received no exemption. Tax rates were graduated from 1 percent on

the first $50,000 to 10 percent on the portion exceeding $5 million. According to the act, taxes were due

The Estate Tax: Ninety Years and Counting

Statistics of Income Bulletin | Summer 2007

Figure C

Significant Estate Tax Law Changes: 1916 to Present

1916 - Estate tax enacted

1918 - Tax base expanded to include: spouse’s dower rights, exercised general powers of

appointment, and life insurance over $40,000 payable to estate; charitable deduction added

1924 - Gift tax enacted;

State death tax credit added;

revocable transfers included

in tax base

1926 - Gift tax repealed

1932 - Gift tax reintroduced

1935 - Alternate valuation

1942 - Tax base expanded to include: all insurance paid for by

decedent; most powers of appointment, and community property

(less spouse’s actual contribution to cost)

1948 - Marital deduction replaced 1942 community

property rules

1951 - Powers of appointment rule relaxed

1954 - Life insurance rules modified to exclude

insurance the decedent never owned

1976 - Unified estate and gift taxes; added generation-skipping transfer

tax (GST), orphan deduction, carryover basis rule, special valuation and

payment rules for small business and farms; increased marital deduction

1980 - Carryover basis rule repealed

retractively

1981 - Unlimited marital deduction; tax base changed; full value pension

benefits, ½ joint property automatically excluded; orphan deduction repealed

1986 - ESOP deduction

added and GST modified

1987 - Phaseout of graduated rates and unified credit for estates over $10 million

introduced

1988 - QTIP allowed for marital deduction; estate freeze and GST modified

1990 - Estate freeze rules replaced

1997- Qualified Family-owned Business deduction, conservation easement introduced; 1987 phaseout

of unified credit revoked.

1 year after the decedent’s death, and a discount of 5

percent of the amount due was allowed for payments

made within 1 year of death. A late payment penalty of 6 percent was assessed unless the delay was

deemed “unavoidable.”

Over the 9 decades since the inception of the

Federal estate tax, the U.S. Congress has enacted

important additions to, and revisions of, the estate

tax structure (Figure C). There have also been occa-

1989 - ESOP deduction

dropped

2001 - EGTRRA

sional adjustments to the filing thresholds, tax brackets, and marginal tax rates (Figure D). The history

of major changes to the estate tax structure can be

divided into two main eras: 1916 through 1948 and

1976 to the present.

Significant Tax Law Changes: 1916 through 1948

Following the enactment of the estate tax in 1916,

the first major change in structure was the addition

The Estate Tax: Ninety Years and Counting

Statistics of Income Bulletin | Summer 2007

Figure D

Estate Tax Exemptions and Tax Rates

Year

Exemption

(dollars)

Initial rate

(percent)

Top rate

(percent)

(1)

(2)

(3)

Top bracket

(dollars)

(4)

1916....................

50,000

1.0

10.0

5,000,000

1917....................

50,000

2.0

25.0

10,000,000

1918-1923...........

50,000

1.0

25.0

10,000,000

1924-1925...........

50,000

1.0

40.0

10,000,000

1926-1931...........

100,000

1.0

20.0

10,000,000

1932-1933...........

50,000

1.0

45.0

10,000,000

1934....................

50,000

1.0

60.0

10,000,000

1935-1939...........

40,000

2.0

70.0

50,000,000

1940 [1]...............

40,000

2.0

70.0

50,000,000

1941....................

40,000

3.0

77.0

10,000,000

1942-1976...........

60,000

3.0

77.0

10,000,000

1977 [2]...............

120,000

18.0

70.0

5,000,000

1978....................

134,000

18.0

70.0

5,000,000

1979....................

147,000

18.0

70.0

5,000,000

1980....................

161,000

18.0

70.0

5,000,000

1981....................

175,000

18.0

70.0

5,000,000

1982....................

225,000

18.0

65.0

4,000,000

1983....................

275,000

18.0

60.0

3,500,000

1984....................

325,000

18.0

55.0

3,000,000

1985....................

400,000

18.0

55.0

3,000,000

1986....................

500,000

18.0

55.0

3,000,000

1987-1997 [3]......

600,000

18.0

55.0

3,000,000

1998....................

625,000

18.0

55.0

3,000,000

1999....................

650,000

18.0

55.0

3,000,000

2000-2001...........

675,000

18.0

55.0

3,000,000

2002....................

1,000,000

18.0

50.0

3,000,000

2003....................

1,000,000

18.0

49.0

3,000,000

2004....................

1,500,000

18.0

48.0

3,000,000

2005....................

1,500,000

18.0

47.0

3,000,000

2006....................

2,000,000

18.0

46.0

3,000,000

2007....................

2,000,000

18.0

45.0

3,000,000

[1] 10-percent surtax was added.

[2] Unified credit replaces exemption.

[3] Graduated rates and unified credits phased out for estates greater than $10,000,000.

of a tax on inter vivos gifts, a gift tax, which became

a permanent feature of the transfer tax system in

1932.17 This tax was imposed because Congress

realized that wealthy individuals could avoid the estate tax by transferring wealth during their lifetimes.

Under the 1932 rules, a donor could transfer $50,000

free of tax during his or her lifetime with a $5,000

per donee annual exclusion from gift tax.

The Revenue Act of 1935 (49 Stat. 1014) introduced the optional valuation date election. While the

value of the gross estate at the date of death determined whether an estate tax return had to be filed, the

act allowed an estate to be valued, for tax purposes,

1 year after the decedent’s death. With this revision,

for example, if the value of a decedent’s gross estate

dropped significantly after the date of death—a situation faced by estates during the Great Depression of

1929—the executor could choose to value the estate

at its reduced value after the date of death. The optional valuation date, today referred to as the alternate valuation date, later was changed to 6 months

after the decedent’s date of death.

Most outstanding among the pre-1976 changes to

estate tax law was the establishment of estate and gift

tax marital deductions, introduced by the Revenue

Act of 1948 (62. Stat. 110). The estate tax marital

deduction, as enacted by the 1948 Act, permitted

a decedent’s estate to deduct the value of property

passing to a surviving spouse, whether passing under

the will or otherwise. However, the deduction was

limited to one-half of the decedent’s adjusted gross

estate—the gross estate less debts and administrative

expenses. The act also created a similar deduction

for inter vivos gifts to a spouse.

Significant Tax Law Changes: 1976 to the Present

After 1948, the Congressional Record remained relatively free of reference to the estate tax and the entire

transfer tax system until the enactment of the Tax

Reform Act (TRA) of 1976 (90 Stat 1521). This act

created a unified estate and gift tax framework that

consisted of a “single, graduated rate of tax imposed

on both lifetime gifts and testamentary dispositions.”18 Prior to the act, “it cost substantially more

to leave property at death than to give it away during

life,” due to the lower tax rate applied to gifts.19 The

Tax Reform Act of 1976 also merged the estate tax

exclusion and the lifetime gift tax exclusion into a

“single, unified estate and gift tax credit, which may

be used to offset gift tax liability during the donor’s

lifetime but which, if unused at death, is available

to offset the deceased donor’s estate tax liability.”20

An annual gift exclusion of $3,000 per donee was

17 This tax was first introduced in the Revenue Act of 1924, 43 Stat. 253, then repealed by the Revenue Act of 1926, 44 Stat. 9, and then reintroduced by the Revenue Act of

1932, 47 Stat. 169.

18 Zaritsky and Ripy, p. 18.

19 Bittker, Boris I., and Elias Clark (1990), Federal Estate and Gift Taxation, Little, Brown, and Company, Boston, MA, p. 20.

20 Zaritsky and Ripy, p. 18.

The Estate Tax: Ninety Years and Counting

Statistics of Income Bulletin | Summer 2007

retained. In addition, the act provided for annual increases in the estate tax filing exemption beginning

with an increase from $60,000 to $120,000 for 1977

decedents, resulting in a filing threshold of $175,625

for decedents dying after 1980.

The 1976 tax reform package also introduced a

tax on generation-skipping transfer trusts (GSTs).

Prior to passage of the act, a transferor, for example, could create a testamentary trust and direct

that the income from the trust be paid to his or

her children during their lives and then, upon the

children’s deaths, that the principal be paid to the

transferor’s grandchildren. The trust assets included

in the transferor’s estate would be taxed upon the

transferor’s death. Then, any trust assets included

in the grandchildren’s estates would be taxed at

their deaths. However, the intervening beneficiaries, the transferor’s children in this example, would

pay no estate tax on the trust assets, even though

they had enjoyed the income derived from those assets. Congress responded to the GST tax leakage

by creating a series of rules that were designed to

treat the termination of the intervening beneficiaries’

interests as a taxable event. Under these rules, a

grantor was allowed to transfer up to $1,000,000 to

a GST tax-free, with amounts over that taxed at the

highest marginal estate tax rate. As with the gift

tax exclusion, married persons may combine their

GST tax exemptions, allowing couples a $2-million

exemption. Overall, the GST tax “ensures that the

transmission of hereditary wealth is taxed at each

generation level.”21

The Economic Recovery Tax Act (ERTA) of

1981 (95 Stat. 172) brought several notable changes

to estate tax law. Prior to 1982, the marital deduction was permitted only for transfers of property in

which the decedent’s surviving spouse had a terminable interest—an interest that grants the surviving

spouse power to appoint beneficiaries of the property

at his or her own death. Such property is, ultimately,

included in the surviving spouse’s estate. However,

the ERTA of 1981 allowed the marital deduction for

life interests that were not terminable, as long as the

property was “qualified terminable interest property”

(QTIP), defined as property in which the (surviving)

spouse has sole right to all income during his or her

life, payable at least annually, but no power to transfer the property at death. To utilize the deduction,

21 Bittker and Clark, p. 30.

however, the QTIP must be included in the surviving

spouse’s gross estate. The 1981 Act also introduced

unlimited estate and gift tax marital deductions,

thereby eliminating quantitative limits on the amount

of estate and gift tax deductions available for spousal

transfers.

The ERTA of 1981 increased the unified transfer tax credit, the credit available against both the

gift and estate taxes. The increase, from $47,000

to $192,800, was to be phased in over 6 years, effectively raising the tax exemption from $175,625 to

$600,000 over the same period. The ERTA of 1981

also raised the annual gift tax exclusion to $10,000

per donee; an unlimited annual exclusion from gift

tax was allowed for the payment of a donee’s tuition

or medical expenses. Also, through ERTA, Congress

enacted a reduction in the top estate, gift, and generation-skipping transfer tax rates from 70 percent to 50

percent, applicable to transfers greater than $2.5 million. The reduction was to be phased in over a 4-year

period; however, subsequent legislation delayed this

decrease. The issue was resolved with the passage of

the Omnibus Budget Reconciliation Act of 1993 (107

Stat. 312). This act created a new marginal tax rate

of 53 percent on taxable transfers between $2.5 million and $3 million and set the maximum marginal

tax rate to 55 percent on taxable transfers exceeding

$3 million.

In 1997, the 105th Congress passed the Taxpayer

Relief Act of 1997 (111 Stat. 788). Among the most

significant changes to estate and gift tax laws included in this act was the incremental increase of the unified credit to $345,800 by 2006, effectively raising

the estate tax filing threshold to $1 million. There

was also legislation in the 1997 Act that added a family business deduction for estates in which a business

made up at least 50 percent of the total gross estate.

Also significant in the 1997 Act, a number of thresholds and limits were indexed for inflation. Among

these were the annual gift tax exclusion and the lifetime generation-skipping transfer tax exemption, as

well as the ceiling on the reduction in value allowed

under special rules for valuing real estate used by a

farm or business.

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 (115 Stat. 38) provided

for sweeping changes to the transfer tax system, the

most significant of which was the eventual repeal of

The Estate Tax: Ninety Years and Counting

Statistics of Income Bulletin | Summer 2007

Figure E

Federal Transfer Tax Rates and Exemptions, by Year of Transfer, 2005-2011

Year of transfer

2005..................................

2006..................................

2007..................................

2008..................................

2009..................................

2010..................................

2011..................................

Estate tax

exemption

(dollars)

(1)

1,500,000

2,000,000

3,500,000

Unlimited

1,000,000

Generation-skipping

transfer (GST) tax

exemption (dollars)

(2)

1,500,000

2,000,000

3,500,000

Unlimited

1,000,000

Gift tax

exemption

(dollars)

(3)

1,000,000

Maximum unified

credit

(dollars)

(4)

555,800

780,800

1,455,800

N/A

345,800

Highest estate

and GST tax rate

(percent)

(5)

47.0

46.0

45.0

N/A

55.0

N/A- Not applicable

the tax. Specifically, the law provided for periodic increases in the exemption amount for decedents who

die after December 31, 2001, so that the effective

filing threshold will be $3.5 million by 2009. The

tax is then repealed for decedents who die in 2010.22

The act also specified changes in the tax rate schedule, replaced the credit for death taxes paid to States

with a deduction, and increased the lifetime gift tax

exemption. Barring further Congressional action,

however, all of the provisions of EGTRRA will

expire in 2011, and all affected tax laws will revert

back to their 2001 status. As a result, the estate tax

would be reinstated for deaths occurring in 2011 and

later, with a $1 million exemption.

Current Estate Tax Law

Under current estate tax law, a Federal estate tax

return must be filed for every deceased U.S. citizen

whose gross estate, valued on the date of death,

combined with adjusted taxable gifts made by the

decedent after December 31, 1976, and total specific

exemptions allowed for gifts made after September

8, 1976, equals or exceeds the amount shown in

Figure E. The estates of nonresident aliens also must

file if property held in the United States exceeds

$60,000. All of a decedent’s assets, as well as the

decedent’s share of jointly owned and community

property assets, are included in the gross estate for

tax purposes. Also considered are most life insurance proceeds, property over which the decedent

possessed a general power of appointment, and certain transfers made during life that were revocable

or made for less than full consideration. An estate is

allowed to value assets on a date up to 6 months after a decedent’s death if the value of assets declined

during that period. Special valuation rules and a tax

deferment plan are available to an estate that is primarily comprised of a small business or farm.

Expenses and losses incurred in the administration of the estate, funeral costs, and the decedent’s

debts are allowed as deductions against the estate

for the purpose of calculating the tax liability. A

deduction is allowed for the full value of bequests to

the surviving spouse, including bequests in which

the spouse is given only a life interest, subject to

certain restrictions. Likewise, bequests to charities

and death taxes paid to States are fully deductible. A

unified tax credit, or applicable credit amount and a

credit for gift taxes the decedent may have paid during his or her lifetime are also allowed.23 The estate

tax return (Form 706) must be filed within 9 months

of the decedent’s death unless a 6-month extension

is requested. Taxes owed for generation-skipping

transfers in excess of the decedent’s exemption and

taxes on certain retirement fund accumulations are

due concurrent with any estate tax liability. Interest

accumulated on U.S. Treasury bonds redeemed to

pay these taxes is exempt from taxation.

Scope of the Transfer Tax System

The scope of the transfer tax system, as measured

by the size of the population directly affected by the

system, is quite narrow. The number of taxable estate

tax returns filed for selected years of death between

22 Under pre-EGTRRA law, capital gains on appreciated assets were not subject to income tax at death, and heirs who sold inherited assets paid taxes only on gains earned

after the decedent’s death. Under the provisions of EGTTRA, once the estate tax is repealed, this “step-up” in basis for inherited assets that have capital gains is repealed,

subject to an exemption.

23 The unified credit or applicable credit amount is equivalent to the estate tax calculated on the exemption amount applicable for a decedent’s year of death. The credit can

be used to offset both gift taxes incurred on lifetime transfers and estate taxes owed incurred at death.

The Estate Tax: Ninety Years and Counting

Statistics of Income Bulletin | Summer 2007

1916 and 2004 as a percentage of all adult deaths is

shown in Figure F. For most years during this period,

the number of taxable estate tax returns represented

less than 2 percent of all adult deaths. For deaths after 1954, a growing percentage of estates were taxed,

hitting a peak of nearly 8 percent in 1976, when more

than 139,000 taxable returns were filed. The Tax

Reform Act in 1976 doubled the effective exemption

of $60,000 that had stood unchanged since 1954. Periodic increases in the estate tax filing threshold in the

years that followed have kept the size of the affected

decedent population relatively small.

When compared to revenue generated by taxes

on individual or corporate income, the scope of the

transfer tax system is also narrow (Figure G). With

few exceptions, revenue from Federal estate and gift

taxes has lingered between 1 percent and 2 percent

of Federal budget receipts since World War II, reaching a post-war high of 2.6 percent in 1972. In recent

Figure F

Taxable Estate Tax Returns As a Percentage of All

Adult Deaths, 1916-2004

Percent

1916 1924 1932 1940 1948 1956 1964 1972 1980 1988 1996 2004

Year of death

NOTE: Adult deaths are U.S. residents, age 20 and older.

years, Federal estate and gift taxes have made up

about 1 percent of total budget receipts.

Figure H shows the total amount of gross estate

and net estate tax, in constant 2004 dollars, reported

on taxable returns between 1916 and 2004. Both

total gross estate and net estate tax increased significantly in real terms during this time period, a

product of changes in both the estate tax law and

the economy. The effect of the former can be seen

by comparing Figure H to Figures D and F, shown

above. During the period 1917 and 1950, the total

gross estate remained between $20 billion and $40

Figure G

Estate and Gift Receipts as a Percentage of Total

Revenue, 1917-2007

Percent

1917

1927

1937

1947

1957

1967

1977

1987

1997

2007

Fiscal year

NOTE: Data for 2006 and 2007 are estimates.

SOURCES: Joulfaian, David (1998),The Federal Estate and Gift Tax: Description,Profile of

Taxpayers, and Economic Consequences, OTA Paper 80; IRS Data Book, Fiscal Year 2007;

and Midsession Review Budget of the U.S. Government.

billion, in 2004 dollars. However, the total net estate

tax increased considerably, from less than $1 billion

in 1917 to more than $4 billion in 1950. This corresponds with the increasing tax rates during this

period. After 1950, the total gross estate and total

net estate tax increased rapidly, as the $60,000 exemption remained unchanged until 1977. Periodic

increases in the exemption amount and reductions in

the top tax rate after this date kept the total gross estate and total net estate tax below their 1976 high, in

real terms, until new peaks were reached during the

late 1990s. Real declines in both of these measures

after 1999 correspond with exemption increases and

Figure H

Total Gross Estate and Net Estate Tax Reported

on Taxable Returns, 1916-2004, in Constant 2004

Dollars

Billions of dollars

180

160

140

120

Total gross estate

100

Net estate tax

1916 1924 1932 1940 1948 1956 1964 1972 1980 1988 1996 2004

Year of death

NOTE: Money amounts converted to constant 2004 dollars using CPI-U.

The Estate Tax: Ninety Years and Counting

tax rate decreases resulting from the Taxpayer Relief

Act of 1997 and EGTRRA in 2001.

Charitable Giving

In addition to its direct economic and fiscal impacts,

some researchers have shown that estate tax rates can

influence both the incidence and level of charitable

giving, due to the availability of an unlimited charitable deduction provided by estate tax law. Figure I

shows the number of estates that claimed a deduction

for charitable bequests as a percentage of all filers,

between Filing Years 1976 and 2004, for all decedents whose gross estate was at least $1 million in

constant 2004 dollars. During this period, there was

a slight increase in the percentage of decedents who

made charitable bequests, increasing from a little

more than 20 percent of all decedents prior to 1983,

to an average of nearly 24 percent in more recent

years. Figure I also shows the share of gross estate

that these decedents bequeathed to charity. In general, the value of property bequeathed to charities, as

a percentage of total gross estate, was lower in the

years immediately following the passage of ERTA in

1981 than in 1976.24 ERTA included two provisions

that may have contributed to this difference. First,

the introduction of the unlimited marital deduction

may have induced some decedents to shift bequests

from charities to the surviving spouse, since, after

ERTA, gifts to charities no longer provided a tax advantage over bequests to a spouse. In such cases, it

is possible that some married couples may have simply altered the timing of their charitable gifts, either

by making larger lifetime donations or by deferring

charitable bequests until the death of the surviving

spouse. Second, under ERTA, the top marginal estate

tax rate was reduced from 77 percent to 55 percent,

and, according to some research, tax rates affect the

charitable giving at death in both the size of charitable bequests and the number of charitable organizations named as beneficiaries.25

Asset Composition

The asset composition of wealthy decedents as reported on estate tax returns is a topic of interest

to many researchers because of what it may reveal

about the U.S. economy and investment markets

Figure I

Charitable Giving, 1976-2004

Decedents with Total Gross Estates of $1 Million or More,

in Constant 2004 Dollars

Percent

Percentage of all estates that reported a charitable bequest

1976

Charitable bequests as a percentage of total gross

estate for those who made bequests

1980

1992

1996

2000

2004

NOTES: No data are available for filing years 1977-1981. Money amounts converted to

constant 2004 dollars using CPI-U.

over time. Figure J shows estates’ asset composition

reported for decedents with gross estates of at least

$1 million in constant 2004 dollars between Filing

Years 1976 and 2004. Total stock, including stock

held in mutual funds, made up the largest share of

assets for these decedents during most of this period,

comprising between 30 percent and 43 percent of

gross estate. Some of the variation in this percentage can be explained by movements in the overall

stock market. For instance, after 1995, the percentage of gross estate held in stock increased steadily

from 30 percent to a high of 43 percent in 1999,

when more than $84 billion in stock, in constant

2004 dollars, was reported. During these years, the

stock market as a whole experienced very strong

performance, reflected by an increase of more than

165 percent in the S&P 500 index between January

1994 and January 1999.26 By 2004, the percentage

of gross estate held in stocks declined to less than 31

percent, which is consistent with a drop of 34 percent in the S&P 500 index by January 2004 from its

peak in August 2000.

Total real estate, including commercial real estate and farm land, generally made up a higher percentage of total gross estate during the period 1976

through 1990 than in the years that followed, peaking

at a high of more than 32 percent in 1983. While the

25 Joulfaian, D. (1991), “Charitable Bequests and Estate Taxes,” National Tax Journal, 44(2), pp. 169-180.

26 See http://www2.standardandpoors.com.

1988

Filing year

24 SOI estate tax return data do not exist for 1977-1981.

126

1984

The Estate Tax: Ninety Years and Counting

Statistics of Income Bulletin | Summer 2007

Figure J

Asset Composition of Estates’ Tax Returns,

1976-2004

Decedents with Total Gross Estates of $1 Million or More,

in Constant 2004 Dollars

Percent

Total stock

Total real

estate

All other assets

Total business assets

Total bonds

1976

1980

1984

1988

1992

1996

2000

2004

Filing year

NOTES: Money amounts converted to constant 2004 dollars calculated using CPI-U. Total

stock includes publicly traded and closely held stock. Total business assets include small

businesses, limited partnerships, and farms, but exclude farm real estate.

portion of total gross estate held in stock increased

significantly during the late 1990s, the portion held in

real estate fell to less than 17 percent in 1999. After

1999, the portion of total gross estate held in real estate increased each year, reaching 23 percent in 2004,

when a record $46 billion in real estate was reported

for decedents with $1 million or more in gross estate.

This is consistent with both the rise in housing prices

—42 percent between the first quarter of 1999 and

the first quarter of 2004—and the decline in the overall stock market after 2000.27

During most years between 1976 and 2004, total

bonds, including those issued by corporations, Federal, State and local governments, and mutual funds

invested primarily in some type of bond, comprised

between 13 percent and 20 percent of gross estate

for decedents with total gross estate of at least $1

million in constant 2004 dollars. All other assets,

including cash and mortgages and notes, made up

between 18 percent and 27 percent of gross estate

during this period.

As shown in Figure J, total business assets, including small businesses, farms (but not farm land),

and limited partnerships, comprised 5 percent or less

of total gross estate during the period 1976-2004.

Despite making up a relatively small portion of the

total gross estate, these assets are of particular interest to many researchers and policymakers because of

concerns about the impact of the estate tax on small

farms and family businesses.

Figure K shows the real value of closely held

corporations and unincorporated business assets reported on estate tax returns with total gross estates of

at least $1 million, in constant 2004 dollars, between

1989 and 2004.28 Although the values reported in

each asset category show significant variance over

time, several trends emerge. The value of stock in

closely held corporations (included in the category

“total stock” shown in Figure J) tended to be lower

pre-1995 than in the years that followed. This trend

may be due, in part, to changes in the top individual

income tax rate during the period 1989-2004. Research has shown that tax rates can exert a significant

influence on a company’s choice of organizational

form.29 Income earned by firms that are organized as

Figure K

Closely Held Corporations and Noncorporate

Business Assets Reported on Estate Tax Returns,

1989-2004

Decedents with Total Gross Estates of $1 Million or More,

in Constant 2004 Dollars

Billions of dollars

Closely held stock

Noncorporate business assets

Limited partnerships

Farms

1989

1992

1995

1998

Filing year

2001

2004

NOTES: Money amounts converted constant 2004 dollars calculated using CPI-U. Noncorporate business assets include proprietorships, general partnerships, and unspecified

business interests. Farms exclude farm real estate.

27 Change in housing prices was calculated using the Office of Federal Housing Enterprise Oversight (OFHEO) House Price Index, http://www.ofheo.gov/HPI.asp.

28 Detailed data on business asset holdings are not available for filing years prior to 1989.

29 Caroll, R. and D. Joulfaian (1997), “Taxes and Corporate Choice of Organization Form,” Office of Tax Analysis working paper, http://www.ustreas.gov/offices/tax-policy/

library/ota73.pdf.

The Estate Tax: Ninety Years and Counting

Statistics of Income Bulletin | Summer 2007

C corporations is taxed under the corporate income

tax system, while income earned by businesses with

other organizational forms, such as sole proprietorships, partnerships, and S corporations, is taxed

under the individual income tax system. While the

top corporate tax rate changed only slightly during

this time period, from 34 percent for 1989-1992 to

35 percent after 1992, the top individual tax rate

increased from 28 percent for 1989 and 1990 to 31

percent for 1991 and 1992 and to 39.6 percent for

1993-2000. Thus, the trends shown in Figure K may

represent a shift from noncorporate to corporate organizational forms induced by the relatively higher

individual income tax rates after 1993. Another possible factor contributing to this trend may have been

the strong performance of the stock market during

the mid- to late- 1990s, as the factors that increased

the value of publicly traded corporations may have

done the same for closely held corporations. The

total reported value of limited partnerships increased

significantly in real terms, from $1.1 billion to $4.6

billion, between 1989 and 2004. Among the factors

likely contributing to this increase is the growth in

venture capital funds and hedge funds during this

period. Between 1995 and 2000, annual investments

by venture capital funds are estimated to have increased from $8 billion to $107 billion.30 Though the

level of these investments fell sharply in 2001 and

2002, they remained well above the levels reported

for the mid-1990s. Hedge funds experienced similar

dramatic growth during this time period. According

to one industry survey, total assets managed by hedge

funds increased from $35 billion in 1992 to $592 billion in 2003.31

The reported value of farm assets, excluding

farm real estate, experienced year-to-year fluctuations but remained relatively stable between 1989

and 2004. The lowest total was $340 million, in constant 2004 dollars, reported for 1990. The highest

total was reported for 1994, $1.2 billion.

Conclusion

Taxes on transfers of wealth and property at death

have been enacted throughout U.S. history. Originally used only as a source of revenue in times of crisis,

a Federal estate tax has been an enduring feature of

the U.S. tax code since 1916. The current tax, while

30 See National Venture Capital Association, http://www.nvca.org/ffax.html.

31 See Hennessey Group, LLC, http://www.hennesseegroup.com/information/index.html.

affecting a small fraction of estates, and raising a

small amount of revenue compared to the individual

and corporate income tax systems, has been the

subject of significant interest among policy makers,

researchers and the general public. Reasons for this

interest range from divergent views on the fairness

of the tax to interest in the effects of taxing transfers

at death on the overall U.S. economy. This paper

has provided a brief history of the estate tax and its

impact on the U.S. budget. It has also examined the

ways in which the economic behavior of the affected

population has changed over time in response to market, technological, and political stimuli.

Acknowledgments

The authors wish to express a special note of thanks

to Martha Eller Gangi, whose prior paper with Barry

W. Johnson, “Federal Taxation of Inheritance and

Wealth Transfers,” provided source material and inspiration for this article.

Data Sources and Limitations

The data used for this paper were collected by the

Statistics of Income Division of the Internal Revenue

Service (IRS), or its predecessor organizations, for

statistical purposes and made available to the general

public in tabulated form. Data were collected from

returns received and processed by the IRS during a

given calendar, the majority of which were filed for

decedents’ who had died during the previous calendar year. SOI collected data from the population of

returns filed annually from 1917 through 1951. Data

were also collected from the population of returns

filed during calendar years 1954, 1955, 1957, 1959,

1961 and 1963. For calendar years 1965, 1970,

1973, 1977 and 1982-2004, data were collected from

samples of returns. The populations were stratified

by size of gross estate for sampling purposes prior to

the 1982 study. Beginning in 1982, the population

was further stratified by age and year of death, and

the samples were designed to facilitate both calendar

year estimates and periodic estimates for specific

decedent cohorts. Estate tax statistics were collected

while returns were being processed for administrative purposes, and do not reflect any changes arising

from audit examination or those reported on amended returns.

A History

Controlled Foreign

Corporations

and the Foreign

Tax the

Credit

A History

ofofControlled

Foreign

Corporations

and

Foreign Tax Credit

Statistics of Income Bulletin | Summer 2007

by Melissa Redmiles and Jason Wenrich

s U.S. corporations have expanded their businesses overseas in the last several decades, the

United States Tax Code has been modified to

account for increasingly complex international corporate structures and transactions. Two important

international tax concepts that have emerged over

the years are the corporate foreign tax credit and

controlled foreign corporations. The corporate foreign tax credit was created to alleviate the burden of

double taxation. The income of controlled foreign

corporations has become increasingly subject to U.S.

tax after initially presenting a potential tax deferral

advantage over foreign branches. A brief history of

the foreign tax credit and controlled foreign corporations is presented below.1

Corporate Foreign Tax Credit

The United States generally taxes U.S. companies

on their worldwide incomes. Since other countries

may also impose a tax on income earned within their

borders, U. S. companies with foreign-source income

face potential double taxation. When the income

tax was first created, Congress addressed this issue

by allowing taxpayers to deduct their foreign taxes

when computing taxable income. In 1918, after the

cost of World War I pushed up both domestic and

many foreign tax rates, Congress passed the foreign

tax credit provisions to provide greater relief in cases

of double taxation. These provisions permit taxpayers the option of either deducting their foreign taxes

when computing their taxable incomes or taking a

dollar for dollar credit for them against their U.S. tax

liabilities. Corporations report the foreign income

and taxes related to the credit on Form 1118, Computation of Foreign Tax Credit—Corporations.

Creditable Taxes

To be eligible for the credit, the tax paid had to be a

foreign income tax. Although the precise definition

of a foreign income tax has changed somewhat over

the years, the basic idea remains today. Other taxes,

such as value-added taxes, excise, property, and

Melissa Redmiles and Jason Wenrich are economists with the

Special Studies Returns Analysis Section. This article was

prepared under the direction of Chris Carson, Chief.

Figure A

Corporate Foreign Tax Credit, in Constant 2004

Dollars, Selected Tax Years 1925-2002 [1]

[Money amounts are in millions of dollars]

Tax year

1925.....................

1930.....................

1940.....................

1950.....................

1960.....................

1970.....................

1980.....................

1990.....................

2000.....................

2004.....................

U.S. income tax

before credits

(1)

12,629

8,054

28,929

123,757

139,544

160,414

238,030

172,617

292,106

299,555

Foreign tax

credit

Percentage

(2)

(3)

216

328

783

3,637

7,811

22,147

57,037

36,115

53,210

56,872

1.7

4.1

2.7

2.9

5.6

13.8

24.0

20.9

18.2

19.0

[1] For comparability, money amounts have been adjusted for inflation to 2004 constant

dollars.

payroll taxes, can be deducted from foreign-source

income but not credited. Income taxes paid to a local authority, such as a province, are eligible for the

credit. Taxes paid for a specific right or service, like

a royalty payment for the right to mine, generally

cannot be credited. After the Technical Amendments

Act of 1958, taxpayers could carry their unused foreign taxes forward for 5 years or back for 2. Figure

A shows foreign tax credit amounts for select years

between 1925 and 2004, in constant 2004 dollars.

U.S. companies generally are not taxed on the

earnings of their foreign subsidiaries until those earnings are distributed to the parent company, and thus

cannot claim a direct credit for the foreign taxes paid

by the subsidiary. The foreign tax credit provisions,

however, allow taxpayers an indirect credit for the

foreign “taxes deemed paid.” Taxes deemed paid

are computed as a share of the foreign taxes on the

earnings out of which the distribution was made proportionate to the ratio of the distribution to the total

earnings. To be eligible for the indirect credit, the

U.S. company must own a certain percentage of the

foreign subsidiary’s voting stock. In 1962, the ownership percentage was lowered from the original 50

percent to 10 percent. Until 1976, taxpayers could

claim the credit down to the second tier of ownership, as long as the second tier corporation was at

least 50-percent owned by the first tier corporation.

1 For a more detailed description of international taxation, see Doernberg, Richard L. (1999), International Taxation, West Group, St. Paul, MN.

A History of Controlled Foreign Corporations and the Foreign Tax Credit

Statistics of Income Bulletin | Summer 2007

The Tax Reform Act of 1976 expanded the level of

ownership to three tiers and changed the percentage

requirements to 10 percent for all tiers, provided that

the combined percentage ownership of all tiers is at

least 5 percent. Congress gradually expanded the level of ownership down to six tiers, but the 5-percent

rule remains in effect.

Limitations and Reductions

As originally enacted, the foreign tax credit had a

major drawback. Since companies could credit an

unlimited amount of tax paid to countries with tax

rates that exceeded the U.S. rate, they could offset some of their tax on domestic income with the

credit for taxes on foreign income. To remedy this,

Congress added a limitation to the foreign tax credit

in the Revenue Act of 1921. The limitation essentially caps foreign taxes credited to the U.S. rate,

by limiting the amount of credit to a corporation’s

U.S. income tax liability multiplied by the ratio of

foreign-source income to worldwide income. When

first enacted, taxpayers computed the limitation using total foreign-source taxable income. A limitation

computed using this method later become known as

an overall limitation.

One problem with the limitation was that taxpayers could still offset some domestic tax liability by

combining amounts of income earned in high-tax

countries with income in low-tax countries, in their

computation of the credit limitation. What, if anything, should be done about this issue has been the

driving force behind much subsequent foreign tax

credit legislation. Beginning in 1932, Congress required taxpayers to compute the limitation on a per

country basis. In addition, the sum of all allowable

credits from all countries could not exceed the overall

limitation. The latter requirement was removed from

the Internal Revenue Code in 1954. Public Law 86780, enacted in 1960, granted taxpayers the ability

to elect either an overall limitation or a per country

limitation. In 1962, Congress introduced a separate

limitation for nonbusiness-related interest. This

prevented taxpayers from making interest-bearing

investments abroad to generate additional, low-taxed

foreign income that could be combined with higher

tax income.2

Congress placed further restrictions on the foreign tax credit in the Tax Reduction Act of 1975 and

the Tax Reform Act of 1976. These laws eliminated

the per country limitation option and added a new

limitation category, dividends from a Domestic International Sales Corporation (DISC).3 Income that

did not fit into the interest category or DISC dividend

category fell into an overall or general limitation category. This legislation also introduced a reduction in

credit for taxes paid on foreign oil and gas extraction

income equivalent to the amount of foreign taxes

paid, accrued, or deemed paid on foreign oil and gas

extraction income that exceeded a certain percentage

of foreign oil and gas extraction taxable income. The

percentage has changed over time and is currently

set at the highest rate of corporate tax, 35 percent for

Tax Year 2006. In addition, the 1976 Act included

boycott legislation. Now, taxpayers who agree to

participate in an unsanctioned boycott may need to

reduce their foreign credits or their foreign taxes eligible for credit.

Finally, these laws added an overall foreign loss

recapture. The intent of the overall loss recapture

was to limit the amount of domestic tax liability that

could be offset by foreign losses. Before this legislation, if a taxpayer had an overall foreign loss in one

year and an overall foreign gain in a subsequent year,

the taxpayer could use all of his or her foreign-source

taxable income in the year with the gain in computing the foreign tax credit limit. Since 1976, in the

years when taxpayers have an overall foreign gain,

they must treat the smaller of all overall losses from

previous years or 50 percent of their current foreignsource income as domestic source income.

In 1985, the Treasury Department recommended

reinstating the per country limitation. U.S. companies with substantial foreign-source income objected,

and Congress compromised by greatly expanding the

categories of income requiring a separate limitation

in the Tax Reform Act of 1986.4 Beginning with Tax

2 Andersen, Richard E. (1996), Foreign Tax Credits, Warren, Gorham & Lamont, Boston, MA.

3 Dividends from a DISC or former DISC refer to dividends from a Domestic International Sales Corporation (DISC) that are treated as foreign-source income.

A DISC is a

small domestic corporations whose activities are primarily exported-related. A portion of the DISC’s income was not subject to tax until it was distributed to shareholders.

Tax advantages of DISCs were repealed in 1984.

4 Gustafson, Charles H.; Robert J. Peroni; and Richard Crawford Pugh (2001), Taxation of International Transactions, Materials, Text and Problems, West Group, St. Paul, MN.

A History of Controlled Foreign Corporations and the Foreign Tax Credit

Statistics of Income Bulletin | Summer 2007

Year 1987, the limitation categories included: general

limitation income, passive income, high withholding

tax interest, financial services income, shipping income, dividends from a DISC, taxable income attributable to foreign trade income, certain distributions

from a Foreign Sales Corporation (FSC) or former

FSC, section 901(j) income, and dividends from each

noncontrolled foreign corporation.5

Passive income generally includes dividends,

net capital gains, interest, rents, royalties (except for

rents and royalties derived in an active trade or business from an unrelated person), annuities, and certain

commodities transactions. Passive income subject

to an effective foreign tax rate that is greater than the

highest U.S. corporate rate must be “kicked out” to

the general limitation category. High withholding tax

interest is interest income subject to a withholding

rate of 5 percent or more. (An exception exists for

interest received in the conduct of financing certain

export activities.) Financial services income pertains

to a company whose gross income is composed of

80 percent or more of financial services income. It

includes income derived from the active conduct

of banking, insurance or financing, export financing interest excluded by the exception from the high

withholding interest basket, and other income related

to financial services income. Shipping income is

income related to that industry. Taxpayers cannot

claim a credit for taxes paid or accrued by a Foreign

Sales Corporation (FSC) on its taxable income attributable to foreign trade, as defined by Internal Revenue Code section 923(b), and must compute a separate limitation on such income. Distributions from a

FSC include distributions from the earnings and profits of the FSC’s foreign trade income and interest and

carrying charges from transactions that create foreign

trade income. Section 901(j) countries are those considered hostile to the United States.6 Taxpayers must

calculate a separate limitation for each section 901(j)

country and may not credit any taxes paid to them.

Dividends from a noncontrolled foreign corporation were defined as dividends from foreign

subsidiaries of which the U.S. corporation owns

at least 10 percent of the voting stock and the U.S.

shareholders who own at least 10 percent of the vot-

ing stock together own 50 percent or more of either

the voting stock or the value of the stock. A separate

limitation had to be computed for each noncontrolled

corporation. If the foreign corporation did not meet

the definition of a 10/50 company, the dividends

were placed into a limitation category based on the

type of income that generated the dividends. These

provisions are often referred to as the look-through

rules. Congress has since phased out the separate

limitation on each noncontrolled corporation basket.

Now these dividends are categorized according to the

look-through rules.

In 1988, a new category, income resourced by

treaty, was added. It refers to income that would otherwise be considered domestic income that has been

resourced to foreign source per tax treaty provision.

Taxpayers must compute a separate limitation for

each occurrence where income has been resourced.

Recent Changes

The most recent major revision of the foreign tax

credit provisions was the American Jobs Creation

Act of 2004. The law adjusts how taxpayers calculate the foreign tax credit for the purposes of the

alternative minimum tax. It also modifies the rules

that govern how companies allocate their interest

expenses between foreign and domestic incomes so

that multinational corporations will be able to allocate less interest to their foreign-source incomes, and

thus increase their foreign tax credit limitations. The

new law adds an overall domestic loss recapture that

complements the rules on overall foreign loss. Now,

if a taxpayer is unable to take a foreign tax credit

during a year with foreign gains but an overall loss,

the taxpayer will be able to resource some of the

domestic income to foreign income in a subsequent

year, which will increase the foreign tax credit limitation. Next, the carryback period for foreign taxes

in excess of the limitation has been reduced to 1 year,

while the carryforward period has been increased to

10 years. Finally, the separate limitation categories

will be reduced to four: passive income, general

limitation income, section 901(j) income, and income

resourced by treaty. These provisions will be fully

implemented by Tax Year 2009.

5 A Foreign Sales Corporations (FSC) is a company incorporated abroad, created to promote U.S. exports and usually controlled by a U.S. person.

A portion of the FSC

“foreign trade income” was exempt from U.S. taxation. Congress repealed the FSC provisions in 1999 and the transition rules that permitted some FSC activity to continue

in 2006.

6 Current Section 901(j) countries include Cuba, Iran, North Korea, Sudan, and Syria.

A History of Controlled Foreign Corporations and the Foreign Tax Credit

Statistics of Income Bulletin | Summer 2007

Figure B

U.S. Corporations and Their Controlled Foreign Corporations, 1962-1980, Selected Years

(Money amounts are in thousands of dollars)

Controlled Foreign Corporations

Tax year

1962..................................

1965..................................

1966..................................

1980..................................

Number of domestic

corporation returns [1]

Number

of returns [2]

(1)

(2)

2,642

3,513

3,732

4,799

12,073

17,668

19,617

35,471

Net current earnings and

profits after taxes [3]

(3)

2,558,999

3,564,260

4,453,291

31,181,131

Foreign income

and profits taxes

(4)

1,622,282

2,168,369

2,533,206

16,440,451

Dividends paid to

domestic corporations

filing Form 2952

(5)

1,133,348

1,457,561

1,525,137

14,172,649

[1] For 1962, both active and inactive domestic corporation returns with Form 2952, Information Return with Respect to Controlled Foreign Corporations, are included. For 1965, 1966,

and 1980, only active domestic corporation returns are included.

[2] For 1962, domestic corporations were required to report for only two tiers of foreign ownership. For 1965, 1966, and 1980, the reporting requirement was for at least three tiers of

foreign ownership.

[3] For 1962, this was reported as "Net profit before taxes" on Form 2952. For 1965, 1966, and 1980, "current earnings and profits after foreign income and profits taxes" were required to

be reported on Form 2952.

Controlled Foreign Corporations

The history of controlled foreign corporations in

United States tax law is characterized by reduction of

the tax deferral advantages of United States corporations operating businesses overseas through foreign

corporations. Four major pieces of legislation have

defined and extended the concept of a controlled

foreign corporation and the mechanism by which foreign corporation earnings are includable in the U.S.

shareholder’s taxable income.

In the aftermath of World War II, political and

economic developments, such as the Marshall Plan,

encouraged international expansion by U.S. businesses. Congress enacted Public Law 86-780 in

1960 in part to obtain information on the overseas

activities of U.S. corporations. This law required

each U.S. corporation to provide, as a part of its tax

return, information on all foreign corporations directly-controlled by the U.S. corporation (“first-tier”

subsidiaries) and any foreign corporations controlled

by a directly-controlled foreign corporation (“second-tier” subsidiaries). A controlled foreign corporation (CFC) was defined as any foreign corporation

in which more than 50 percent of the voting stock

was directly owned by one or more U.S. corporations on any day of the taxable year of the foreign

corporation. A controlled “second tier” subsidiary

was defined as a foreign corporation in which more

than 50 percent of the voting stock was owned by a

directly-controlled foreign corporation. Information

on first- and second-tier CFCs was reported on Form

2952, Information Return by a Domestic Corporation

with Respect to Controlled Foreign Corporations.

The penalty for failing to timely file a Form 2952 for

each CFC was a 10-percent reduction of foreign tax

credits attributable to all foreign corporations or their

foreign subsidiaries.

Initially, foreign income earned by CFCs was not

taxable to the U.S. shareholder until it was repatriated to the United States in the form of a dividend.

This is in contrast to foreign operations conducted

through a foreign branch whose income was taxable

to the U.S. corporation when it was earned. U.S.

corporations could maximize the tax deferral opportunity of foreign corporations by organizing their

international structures and transactions with foreign

subsidiaries in such a way as to accumulate profits

in foreign corporations organized in low-tax countries and repatriate the earnings in years when the

U.S. parent corporation had losses or excess foreign

tax credits. Additionally, when U.S. corporations

disposed of their stock in CFCs the tax-deferred accumulated earnings and profits of the foreign corporation could be repatriated to the United States at the

lower capital gains tax rate.

The Revenue Act of 1962 reduced the tax deferral advantages of CFCs by refining the concept of a

“controlled” foreign corporation and by adding Subpart F to the Internal Revenue Code. The 1962 Act

redefined a foreign corporation as controlled if more

than 50 percent of the voting stock of the foreign corporation was owned by U.S. shareholders for an uninterrupted period of 30 days or more during the foreign

corporation’s tax year. For purposes of determining

control, the voting stock of only those U.S. shareholders owning at least 10 percent of the voting stock

A History of Controlled Foreign Corporations and the Foreign Tax Credit

Statistics of Income Bulletin | Summer 2007

Figure C

U.S. Corporations with Total Assets of $250 Million or More and Their Controlled Foreign Corporations,

1976-1984, Selected Years

(Money amounts are in thousands of dollars)

Tax year

1976......................

1982......................

1984......................

Controlled Foreign Corporations

Number of

U.S. corporation

returns

Number

of returns

(1)

(2)

757

1,034

1,103

21,071

26,993

27,008

Current earnings and

Foreign income taxes

profits (less deficit)

(net)

before taxes

(3)

23,478,736

36,696,077

48,591,785

of the foreign corporation was included. Attribution

rules were introduced in the 1962 Act to account for

various ownership structures that would otherwise

avoid the requirements for declaring a foreign corporation a controlled foreign corporation. For example,

if 6 individuals each wholly owned a separate U.S.

corporation, and, in turn, the individuals and their respective corporations each owned an equal amount of

voting stock of a foreign corporation, in the absence

of attribution rules, the foreign corporation would not

be a CFC. By attributing the voting stock of the foreign corporation owned by each U.S. corporation to

its individual owner, the 10-percent voting stock ownership threshold would be met for each U.S. shareholder, and, collectively, all U.S. shareholders would

own more than 50 percent of the voting stock of the

foreign corporation. The foreign corporation in this

example would be a “controlled” foreign corporation

and would be required to file Form 2952.

The 1962 legislation also increased the Form

2952 filing requirement by extending the definition

of a controlled foreign corporation to include any

foreign corporation within a chain of control. A U.S.

shareholder was “deemed” to control an unlimited

number of lower-tier foreign corporations when it

owned more than 50 percent of the voting stock of

a first-tier corporation which owned more than 50

percent of the voting stock of a second-tier corporation, and so forth. Additionally, the Form 2952 filing

requirement was extended to include not only U.S.

corporations but U.S. citizens and residents, domestic

partnerships, estates, and trusts, as well. The penalty

for failing to timely file Form 2952 was amended to

a reduction of the foreign tax credit in the amount of

the greater of $10,000 or the income of the foreign

corporation with respect to which the reporting failure occurred.

(4)

8,814,825

14,077,332

19,663,431

Total

distributions

(5)

6,569,018

14,650,375

17,429,494

Total Subpart F

income

(6)

822,674

4,466,139

4,420,024

The most significant effect of the Revenue Act

of 1962 for controlled foreign corporations was the

introduction of Subpart F to the Internal Revenue

Code. The Subpart F inclusion rules restricted U.S.

shareholders’ ability to defer taxes on certain types

of income by requiring the income to be included in

the U.S. shareholders’ current-year taxable incomes

regardless of their repatriation to the United States.

The pro rata share of foreign income includable in

the U.S. shareholder’s income consisted of Subpart F

income, previously excluded Subpart F income withdrawn from investments in less-developed countries,

increases in investment of earnings of CFCs in United States property, and previously excluded Subpart

F income withdrawn from export trade corporation

assets (these categories are collectively referred to as

“Subpart F income”). The majority of Subpart F income is made up of “passive” income like dividends,

interest, royalties, and rents and income derived from

insurance of United States risks. U.S. shareholders

were not required to include their pro rata shares of

Subpart F incomes in their taxable income if the Subpart F income accounted for 30 percent or less of the

CFCs gross income or if distributions of the CFCs

income were made so that the combined payment of

foreign and U.S. taxes were 90 percent or more of

the U.S. rate. Since Subpart F income is generally

includable in the U.S. shareholder’s taxable income

when it is earned, no additional U.S. tax is imposed

when it is repatriated to the United States. Finally,

the 1962 Act restricted the conversion of tax-deferred

earnings into capital gains for purposes of repatriating the income at the lower capital-gain tax rate.

The Tax Reduction Act of 1975 expanded what

constituted Subpart F income and increased the

likelihood that such income would be included in a

U.S. shareholder’s taxable income. Some types of

A History of Controlled Foreign Corporations and the Foreign Tax Credit

Statistics of Income Bulletin | Summer 2007

Figure D

U.S. Corporations with Total Assets of $500 Million or More and Their 7,500 Largest Controlled Foreign

Corporations, 1986-2002, Selected Years

(Money amounts are in thousands of dollars)

Controlled Foreign Corporations [1]

Tax year

Number of U.S.

corporation returns

(1)

1986...................................

1988...................................

1990...................................

1992...................................

1994...................................

1996...................................

1998...................................

2000...................................

2002...................................

714

744

731

749

801

890

996

1,087

1,079

Current earnings and

profits (less deficit) before

taxes

(2)

56,590,619

79,811,427

88,688,406

69,613,140

98,427,640

141,010,411

143,840,451

207,576,012

200,670,364

Foreign income

taxes (net)

(3)

19,229,025

23,929,652

23,936,971

18,471,643

23,267,744

32,394,527

34,744,726

43,143,111

38,610,284

Distributions from

earnings and profits

(4)

21,730,762

45,524,746

46,429,916

42,971,551

50,383,707

68,813,441

74,188,419

94,882,197

97,011,345

Subpart F

income

(5)

4,223,316

12,101,074

17,841,936

13,217,040

16,317,803

22,943,983

20,238,440

29,372,318

31,420,940

[1] This figure presents data for the largest 7,500 Controlled Foreign Corporations (CFCs) ranked by assets owned by U.S. corporations with $500 million or more in total assets. The largest

CFCs are selected independently for each tax year study.

shipping income received by CFCs were added to the

definition of Subpart F income. The 1975 Act also

lowered the Subpart F percentage of a CFCs gross

income necessary for Subpart F income to be taxable

to the U.S. shareholder from 30 percent to 10 percent. Minor amendments to the definition of Subpart

F income have occurred since 1975.

Form 2952 was replaced in 1983 by Form 5471,

Information Return with Respect to Certain Foreign

Corporations.7 Form 5471 significantly increased

the amount of information required to be reported for

each controlled foreign corporation, although not all

filers were required to complete all schedules. Form

5471 included an expanded income statement schedule, a cost of goods sold schedule, a foreign taxes

paid schedule, a balance sheet schedule, and earnings

and profit analysis schedules.

The Tax Reform Act of 1986 again refined the

controlled foreign corporation concept in part to address the issue of U.S. shareholders transferring 50

percent of the voting stock of a foreign corporation

to “friendly” foreign shareholders and avoiding the

“controlled foreign corporation” designation while

still maintaining 50-percent voting stock of the corporation and most of the value. The 1986 legislation

expanded the definition of a CFC to include foreign

corporations for which 50 percent or more of the voting power of all classes of stock entitled to vote or

the total value of all shares of stock is owned by one

or more U.S. persons (including U.S. corporations,

partnerships, trusts, and estates). Only the voting

stock of those U.S. persons directly, indirectly, or

constructively owning at least 10 percent of either

the voting stock or value of the voting stock of the

foreign corporation is considered for purposes of determining if the 50-percent threshold is met.

The American Job Creation Act of 2004 is the

most recent piece of legislation affecting controlled

foreign corporations. This act, in an effort to encourage U.S. corporations to repatriate their accumulated

foreign earnings and reinvest them in U.S. projects,

allowed for a one-time 85-percent dividends received

deduction for cash dividends received from controlled foreign corporations. To receive this deduction, the U.S. corporation must have had a qualified

reinvestment plan and receive the cash dividends in

the U.S. corporation’s last tax year beginning before

October 22, 2004, or the first tax year beginning in

the 1-year period after that date.

Statistics of Income (SOI) has collected data

on Forms 2952 and 5471 every other tax year since

1962. In Tax Year 1962, there were 12,073 Forms

2952 filed by 2,642 United States corporations.8 In

Tax Year 2002, there were 75,579 Forms 5471 filed

by 2,119 U.S. parent corporations with $500 million

or more in assets.9 Figures B, C, and D include

7 In addition to Form 2952, Form 5471 replaced Form 957, U.S. Information Return by an Officer, Director, or U.S. Shareholder of a Foreign Personal Holding Company,

Form 958, U.S. Annual Information Return by an Officer or Director of a Foreign Personal Holding Company, Form 959, Return by an Officer, Director, or Shareholder

With Respect to the Organization or Reorganization of a Foreign Corporation and Acquisition of Its Stock, and Form 3646, Income from Controlled Foreign Corporation.

8 Foreign Income and Taxes, Corporation Income Tax Returns (Publication 479), Statistics of Income, April 1973.

9 Based on unpublished data.

A History of Controlled Foreign Corporations and the Foreign Tax Credit

Statistics of Income Bulletin | Summer 2007

additional information from SOI studies covering

this period.

Data Sources and Limitations

Two of the largest studies of international income

and taxes conducted by Statistics of Income are the

Corporate Foreign Tax Credit and Controlled Foreign

Corporation studies. The foreign tax credit studies

are derived from returns in the corporation Statistics

of Income sample. The foreign tax credit is understated to the extent that it does not include foreign

taxes carried back.

The Controlled Foreign Corporation study, usually conducted every other tax year, has changed

since the first study conducted for Tax Year 1962.

Initially, population estimates were tabulated using

data collected from all Forms 2952 filed by U.S. parent corporations in the Statistics of Income corporate

sample. For Tax Years 1974, 1976, 1982, and 1984,

data were collected from Forms 2952 filed by U.S.

parent corporations with greater than $250 million in

total assets. Population estimates were again tabulated for Tax Year 1980. For Tax Years 1986 through

2002, data were collected for all Forms 5471 filed

by U.S. parent corporations with greater than $500

million in total assets. During these years, data were

published for the largest 7,500 controlled foreign

corporations ranked by assets.

Data for both studies do not include adjustments

made during audit. Data for recent study years can

be found on the Statistics of Income Web site

(www.irs.gov/taxstats).

Celebrating

Ninety Years

Years of SOI:

Selected

CorporateCorporate

Data, 1916-2004

Celebrating

Ninety

of SOI:

Selected

Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

by Marty Harris and Ken Szeflinski

he Statistics of Income Division of the Internal

Revenue Service has been collecting and publishing data on corporate business operations

and activity since 1916. The Revenue Act of 1916

required the annual publication of “facts deemed pertinent and valuable” with respect to income tax law.

The 1916 Statistics of Income report was released

in the summer of 1918 and was the first to fulfill the

new requirement. The SOI Division is in the midst

of its 90th anniversary of tax publications with the

2005 corporate data scheduled for publication in

early 2008. This article presents a brief look at the

history of corporate data published in the Statistics of

Income series.

Definitions

Returns—The Statistics of Income series includes

domestic corporations and foreign corporations subject to Federal income tax. The statistics also reflect

data from small corporations, including those taxed

at the shareholder level. Through 1950, information

was collected from the population of returns filed.

Beginning in 1951 and continuing to this day, a stratified sample has been selected. The stratification of

the sample has changed over time to include industry

(1951), size of business receipts (1952—1958), and

size of total assets (1952 and 1959—present).

Year—Each annual report consists of data from

corporate tax returns with accounting periods ending

from July of one year through June of the following

year. For example, the latest publication (for Tax

Year 2004) includes corporations with accounting periods that end at any time during the period from July

2004 through June 2005.

Industry—Industrial classification has always

been a prominent part of the corporate statistics. A

single industry code is assigned to each corporate

return based on the industrial activity that represents

the largest percentage of the total business receipts.

Although the list of industries has both increased and

changed many times since 1918, the Statistics of InMarty Harris and Ken Szeflinski are chiefs of the

Corporation Returns Analysis Section and Corporation

Research Section, respectively. Emily Shammas provided

technical assistance on tables. This article was written

under the direction of Doug Shearer, Chief, Corporation

Statistics Branch.

come reports have tried to maintain the year-to-year

comparability among the data classified by industrial

activity.

Data Items—Although the legal definitions may

have changed slightly over the years, there is a core

unit of corporate data that appears in every corporate

report. The items included in the annual reports are

Number of Returns, Gross Income, Total Deductions,

Net Income/Deficit, Income Tax, and Industry. Currently, there are over one thousand data items collected, with nearly 200 items published.

The Early Years

From 1916 through 1933, only one report was prepared annually, and it included data from both individual and corporate tax returns and, beginning in

1917, data from other types of returns. Beginning

in 1934, separate reports were published due to the

increased data collected and the growing number of

return types being processed.

In the earliest years, the published data for

corporations were very limited, consisting mainly

of the industrial activity, the State where the return

was filed, and a few financial entries such as gross

income, deductions, net income/deficit, and tax. In

the 1920s, size classifications and additional items

were added.

Major Changes to the Corporate Tables and

Publications

1917

1918

1919

1920

1922

1926

1928

Two income items and six deduction items

by industry.

Six net income-size classifications.

Invested capital by size of capital

investment.

Invested capital by industry.

Distributions to stockholders by industry and

by State.

Income statement items classified by 20

industries.

Balance sheet items classified by 20

industries.

Data on consolidated corporations by 20

industries.

The 1931 publication became the standard for 28

years. The four primary tables are described below.

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

1. Receipts (9 items) and deductions (10 items)

classified by major industrial groups for all

returns, returns with net income, and returns

with no net income.

2. Corporations submitting balance sheets, classified by major industrial groups for returns

with net income and returns with no net income: asset items (8), liability items (8), and

all items from Table 1.

3. Corporations submitting balance sheets,

classified by total asset-size classes for all

returns, returns with net income, and returns

with no net income: items were the same as

in Table 2.

4. Corporations submitting balance sheets

cross-classified by total asset classes and

major industrial groups for returns with net

income and without net income: 16 items of

assets, liabilities, income, and distributions

to shareholders.

Between 1932 and 1958, these four tables remained the basis for the corporate publication. In

1938, the number of major industries was increased

from 20 to over 60. In 1954, the number of total asset classes was increased to 14. By 1958, the number

of items published in the cross-classified Table 4 had

increased to 20.

Later Changes

In 1958, separate tables were produced for small

business corporations that filed the new form 1120-S.

By 1959, balance sheet items were available for

all active corporations. That year also saw the

introduction of size of business receipts as a new

measure of corporate business activity. For a brief

period, 1959-1965, financial ratios were produced

and published. A few of the ratios included were

net income to business receipts, business receipts to

total assets, business receipts to inventory, and net

worth to total assets.

By 1975, the corporate publication included

tables classified by total assets, size of business receipts, income tax before credits, income tax after

credits, investment credit, accounting period, and minor, major, and division industry levels. These classifications have remained fairly constant since 1975.

Current Publications

The Corporation Statistics Branch publishes two annual reports based on corporate tax return filings.

The Corporation Source Book is a 600-plus-page

report containing data classified by 12 total asset

categories and over 250 industrial activities. Separate data for S corporations are also included. The

Corporation Income Tax Returns report is a 350-page

publication with 31 tables and detailed sections on

the changes in the tax law, the sample design and

limitations, and an explanation of terms. The 31

tables are classified by assets, business receipts, income tax after credits, industry, and accounting period. Recent improvements have significantly reduced

the time necessary to prepare the publications for

printing. Within 3 months of the final file closeout

and data review, printed copies of the publications

will be available. Web versions of the data tables

will be available even earlier.

Introduction to Historical Data

This article presents selected data for corporations

included in the Statistics of Income sample for Tax

Years 1916 through 2004, with years earlier than

1980 described in 5-year intervals. The descriptive

analysis focuses on data prior to 1980 since the series

is appended to a previously published series.1 Some

key findings are framed and summarized within an

historical context and are presented in Table 1. Table

3 presents these same data in 1990 constant dollars,

and they are also represented in Figures A through F

for Total Receipts and Net Income (less Deficit). This

article also presents the same selected data for subchapter S corporations, partnerships, and sole proprietorships for 1960, 1965, 1970, and 1975 in Table

2. As with the overall corporation data, these have

been appended to the previously published series for

1980-2002 as cited above. In both cases, data for

1 From “An Analysis of Business Organizational Structure and Activity from Tax Data” presented at the 2005 National Tax Association Conference.

at http://www.irs.gov/pub/irs-soi/05petska.pdf.

The paper is available

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Figure A

Total Receipts of Corporations in 1990 Constant Dollars, Tax Years 1920-2004

Dollars (trillions)

1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Tax year

Figure B

Total Receipts of Corporations in 1990 Constant Dollars, Tax Years 1920-1945

Dollars (trillions)

1920

1925

1930

1935

Tax year

1940

1945

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Figure C

Total Receipts of Corporations in 1990 Constant Dollars, Tax Years 1945-1975

Dollars (trillions)

1945

1950

1955

1960

1965

1970

1975

Tax year

Figure D

Corporation Net Income (Less Deficit) in 1990 Constant Dollars, Tax Years 1916-2004

Dollars (billions)

800

700

600

500

400

300

200

100

1916 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Tax year

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Figure E

Corporation Net Income (Less Deficit) in 1990 Constant Dollars, Tax Years 1916-1945

Dollars (billions)

400

350

300

250

200

150

100

1916

1920

1925

1930

1935

1940

1945

Tax year

Figure F

Corporation Net Income (Less Deficit) in 1990 Constant Dollars, Tax Years 1945-1975

Dollars (billions)

400

350

300

250

200

150

100

1945

1950

1955

1960

Tax year

1965

1970

1975

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Tax Years 2003 and 2004 have now been included.

Figure G shows the growth in the number of reporting corporations from 1916 through 2004.

Highlights from the Early Years (1916-1945)

In the years characterized by industrialization and

leading up to the Depression of 1929, the number

of businesses classified as corporations grew from

341,253 in 1916 to 463,036 in 1930, a total increase

of approximately 33 percent. For the same time

period, income accruing to these business entities,

as measured by Total Receipts, grew from $93.8 billion beginning in 1920 to $136.6 billion, amounting

to an increase of nearly 45 percent. The measure

of current-day corporate profits, Net Income (less

deficit), declined at the outset, before turning up to

nearly $7.6 billion in 1925. It then declined significantly to about $1.5 billion in 1930, a decrease of

approximately 80 percent between 1925 and 1930.

This decline may have been due to a combination of

the capitalization costs associated with corporations

establishing themselves in the new industrialized era

along with the approaching Depression of 1929. In

comparing data between 1930 and 1935, the influence of the Depression years can be seen in the decreases in both Total and Business Receipts and Net

Income, though the decrease in Net Income was not

as pronounced as it was between 1925 and 1930. By

1945, however, the data in Table 1 reflect a strong

resurgence. Receipts, both Total and Business, for

example, more than doubled (61 percent in constant

terms) from 1935 levels, and Net Income (less deficit) grew from $1.6 billion in 1935 to $21.1 billion in

1945. The increase was approximately 500 percent

in constant terms. Between each of the years 1935,

1940, and 1945, Net Income approximately doubled,

while Net Deficit declined nearly two-thirds between

1935 and 1945. Meanwhile, the number of reporting

corporations declined by approximately 12 percent,

from 477,113 to 421,125 returns.

Highlights from the Years 1945-1975

The data in Table 1 also reflect that the post-World

War II years were growth periods. For example, Net

Figure G

Number of Corporations, Tax Years 1916-2004

Number of corporations (millions)

1916 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Tax year

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Income (less Deficit) more than tripled from $21.1

billion to over $73.9 billion from 1945 through 1965.

Total Receipts and Business Receipts grew more

than four times as reflected in the change in Total

Receipts from $.25 trillion to approximately $1.2 trillion between 1945 and 1965. Increases between 1945

and 1965 for total receipts, business receipts, and net

income (less deficit) were approximately 100 percent

in constant terms. Likewise, the number of reporting

corporations more than tripled from over 421,000 in

1945 to more than 1.4 million in 1965.

Between 1970 and 1975, there was an increase

of over 100 percent in Net Income (less deficit)

from $65.9 billion to approximately $142.6 billion. Though the component Net Deficit increased

between 1970 and 1975, the growth of Net Income

was such that it helped to drive the overall rise. The

growth in both Total and Business Receipts between

1970 and 1975 was approximately 83 percent (32

percent in constant terms), while the number of reporting corporations steadily grew.

Additional Data from Other Business Entity

Types

Table 2 shows the same items as Table 1 for S corporations, partnerships, and sole proprietorships for Tax

Years 1960 through 2004. The year 1960 was chosen

since it is the earliest year for which data for all three

of these business entities are consistently available.

The number of S corporations increased the most

between 1960 and 1975 compared to partnerships

and sole proprietorships, increasing from 90,221 to

358,413, due to the establishment of S corporations

as a new corporate entity. The number of partnerships and sole proprietorships surpasses the number

of S corporations historically, except that, beginning in Tax Year 1990, the number of S corporations

exceeds those of partnerships. Comparatively, the

amount of Receipts (both Total and Business), Net

Income (less deficit), and Net Income continued to be

greatest for sole proprietorships, partnerships, and S

corporations in that order throughout the years shown

1960-1975.

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Table 1. Corporations: Number of Businesses, Total Receipts, Business Receipts, Net Income (Less

Deficit), Net Income, Deficit, Selected Tax Years 1916-2004

[All figures are estimates based on samples—money amounts are in thousands of dollars]

Tax

year

1916.................................................

1920.................................................

1925.................................................

1930.................................................

1935.................................................

1940.................................................

1945.................................................

1950.................................................

1955.................................................

1960.................................................

1965.................................................

1970.................................................

1975.................................................

1980.................................................

1981.................................................

1982.................................................

1983.................................................

1984.................................................

1985.................................................

1986.................................................

1987.................................................

1988.................................................

1989.................................................

1990.................................................

1991.................................................

1992.................................................

1993.................................................

1994.................................................

1995.................................................

1996.................................................

1997.................................................

1998.................................................

1999.................................................

2000.................................................

2001.................................................

2002.................................................

2003.................................................

2004.................................................

Number of

businesses

Total

receipts [1]

Business

receipts [2]

(1)

(2)

(3)

N.A.

93,824,000

134,779,997

136,588,000

114,649,717

148,236,787

255,447,753

458,130,069

642,248,036

849,131,939

1,194,600,662

1,750,776,503

3,198,627,860

6,361,284,012

7,026,351,839

7,024,097,766

7,135,494,059

7,860,711,226

8,398,278,426

8,669,378,501

9,580,720,701

10,264,867,461

10,934,973,405

11,409,520,074

11,436,474,767

11,742,134,728

12,269,721,709

13,360,007,157

14,539,050,115

15,525,718,006

16,609,707,302

17,323,955,004

18,892,385,693

20,605,808,071

20,272,957,625

19,749,426,052

20,689,574,291

22,711,863,939

N.A.

106,832,147

123,208,000

105,121,226

139,124,352

244,030,015

439,881,532

612,682,730

802,790,920

1,120,381,727

1,620,886,576

2,961,729,640

5,731,616,337

6,244,678,064

6,156,994,009

6,334,602,711

6,948,481,893

7,369,538,953

7,535,482,221

8,414,537,647

8,949,846,244

9,427,277,533

9,860,441,633

9,965,628,799

10,360,428,795

10,865,542,520

11,883,614,940

12,785,797,708

13,659,470,309

14,460,928,696

15,010,264,802

16,313,971,384

17,636,551,348

17,504,288,630

17,297,125,146

18,264,393,898

19,975,875,761

341,253

345,595

430,072

463,036

477,113

473,042

421,125

629,314

807,000

1,140,574

1,423,980

1,665,477

2,023,647

2,710,538

2,547,410

2,925,933

2,999,071

3,170,743

3,277,219

3,428,515

3,612,133

3,562,789

3,627,863

3,716,650

3,802,788

3,869,024

3,964,629

4,342,369

4,474,167

4,631,369

4,710,083

4,848,887

4,935,904

5,045,273

5,135,591

5,266,607

5,401,237

5,557,965

Net income

(less deficit)

Net income

Deficit

(4)

(5)

(6)

8,109,005

5,873,231

7,621,056

1,551,218

1,695,949

8,919,429

21,138,956

42,613,304

47,478,271

43,505,174

73,889,821

65,901,614

142,636,826

253,678,291

213,648,962

154,334,143

188,313,928

232,900,596

240,119,020

269,530,240

334,089,233

423,115,815

401,320,146

383,213,763

360,529,974

414,130,453

510,258,780

595,002,432

736,423,014

838,591,644

956,736,971

895,152,469

985,363,334

986,952,279

648,758,089

596,524,023

779,988,635

1,111,692,655

8,765,909

7,902,655

9,583,684

6,428,813

5,164,723

11,203,224

22,165,206

44,140,741

52,511,158

50,382,345

80,796,801

83,710,924

169,483,336

311,497,470

301,440,778

274,352,942

296,932,146

349,179,415

363,867,384

408,860,760

468,631,779

561,646,539

563,402,110

N.A.

542,341,802

581,920,697

670,480,179

756,502,169

900,524,657

1,016,135,059

1,155,242,666

1,144,026,382

1,282,481,469

1,391,008,755

1,155,497,718

1,084,179,817

1,175,608,990

1,455,796,796

656,904

2,029,424

1,962,628

4,877,595

3,468,774

2,283,795

1,026,250

1,527,437

5,032,887

6,877,171

6,906,980

17,809,310

26,846,510

57,819,180

87,791,816

120,018,799

108,618,218

116,278,819

123,748,365

139,330,520

134,542,546

138,530,724

162,081,965

N.A.

181,811,828

167,790,244

160,221,400

161,499,736

164,101,644

177,543,415

198,505,695

248,873,914

297,118,135

404,056,474

506,739,630

487,655,794

395,620,355

344,104,141

N.A.—Not available.

[1] For years prior to 1960, Total Receipts are also referred to as Total Compiled Receipts.

[2] For years in which they are separately published, receipts from gross sales and gross receipts from operations comprise Business receipts.

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Table 2. Number of Businesses, Total Receipts, Business Receipts, Net Income, and Deficit:

S Corporations, Partnerships, and Sole Proprietorships, Selected Tax Years 1960-2004

[All figures are estimates based on samples—money amounts are in thousands of dollars]

Tax year

Form of business, item

1960

1965

1970

1975

1980

(1)

(2)

(3)

(4)

(5)

S Corporations

Number of businesses..................................................

Total receipts................................................................

Business receipts..........................................................

Total net income (less deficit) [1]..................................

Net income....................................................................

Deficit............................................................................

90,221

23,417,799

22,946,017

382,479

678,476

295,997

173,410

46,442,511

45,433,118

1,447,857

1,969,400

521,543

257,475

77,631,396

76,097,159

1,851,508

3,029,581

1,178,073

358,413

128,016,555

125,333,032

3,242,098

5,497,416

2,255,318

545,389

210,322,424

204,887,368

2,518,912

8,085,439

5,566,527

Partnerships

Number of businesses..................................................

Total receipts [2]...........................................................

Business receipts..........................................................

Net income (less deficit)...............................................

Net income....................................................................

Deficit............................................................................

940,560

74,307,629

72,894,735

8,360,373

9,373,289

1,012,916

914,215

75,258,639

73,588,349

9,699,145

11,267,913

1,568,768

936,133

93,348,080

90,208,834

9,790,396

14,419,124

4,628,728

1,073,094

148,417,529

142,505,781

7,737,570

22,431,931

14,694,361

1,379,654

291,998,115

271,108,832

8,248,655

45,061,756

36,813,100

Nonfarm Sole Proprietorships

Number of businesses..................................................

Total receipts................................................................

Business receipts..........................................................

Net income (less deficit)...............................................

Net income....................................................................

Deficit............................................................................

9,089,985

171,257,205

21,067,090

24,269,011

3,201,921

9,078,466

199,384,594

27,887,417

31,637,317

3,749,900

5,769,741

198,582,172

30,537,426

33,735,732

3,198,306

7,221,346

273,954,741

39,636,453

45,624,890

5,988,437

8,931,712

411,205,713

54,947,219

68,010,051

13,062,832

Tax year

Form of business, item

1981

1982

1983

1984

1985

(6)

(7)

(8)

(9)

(10)

541,489

212,514,030

206,357,914

1,870,746

8,454,022

6,583,276

564,219

243,056,569

235,010,755

3,047,943

10,992,022

7,944,079

648,267

300,248,422

290,764,938

5,075,351

14,575,149

9,499,798

701,339

385,026,843

372,732,439

6,906,667

18,706,344

11,799,677

724,749

430,641,781

416,041,188

7,602,450

21,159,865

13,557,415

Net income (less deficit)...............................................

Net income....................................................................

1,460,502

272,129,807

230,027,336

-2,734,897

50,567,190

1,514,212

296,690,303

251,608,987

-7,314,587

53,556,856

1,541,539

291,318,703

243,248,370

-2,610,041

60,308,114

1,643,581

375,192,511

318,342,380

-3,500,024

69,696,922

1,713,603

367,117,315

302,733,374

-8,883,674

77,044,693

Deficit............................................................................

53,302,086

60,871,442

62,918,155

73,196,946

85,928,367

Net income (less deficit)...............................................

Net income....................................................................

9,584,790

427,063,055

53,071,628

68,552,791

10,105,515

433,664,897

50,573,163

68,647,384

10,703,921

465,168,637

60,359,153

78,618,410

11,262,390

516,036,944

70,766,610

89,849,570

11,928,573

540,045,430

78,772,578

98,775,563

Deficit............................................................................

15,481,162

18,074,220

18,259,256

19,082,960

20,002,986

S Corporations

Number of businesses..................................................

Total receipts................................................................

Business receipts..........................................................

Total net income (less deficit) [1]..................................

Net income....................................................................

Deficit............................................................................

Partnerships

Number of businesses..................................................

Total receipts [2]...........................................................

Business receipts..........................................................

Nonfarm Sole Proprietorships

Number of businesses..................................................

Total receipts................................................................

Business receipts..........................................................

Footnotes at end of table.

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Table 2. Number of Businesses, Total Receipts, Business Receipts, Net Income, and Deficit:

S Corporations, Partnerships, and Sole Proprietorships, Selected Tax Years 1960-2004—Continued

[All figures are estimates based on samples—money amounts are in thousands of dollars]

Tax year

Form of business, item

1986

1987

1988

1989

1990

(11)

(12)

(13)

(14)

(15)

S Corporations

Number of businesses..................................................

Total receipts................................................................

Business receipts..........................................................

Total net income (less deficit) [1] .................................

Net income....................................................................

Deficit............................................................................

826,214

483,986,301

466,712,837

8,293,241

23,942,506

15,649,265

1,127,905

972,246,266

951,305,832

30,017,036

48,391,165

18,374,129

1,257,191

1,263,988,377

1,236,906,216

43,536,518

63,908,830

20,372,312

1,422,967

1,463,966,315

1,434,527,066

44,779,347

70,404,449

25,625,102

1,575,092

1,620,702,664

1,588,070,882

44,831,241

N.A.

Partnerships

Number of businesses..................................................

Total receipts [2]...........................................................

Business receipts..........................................................

Net income (less deficit)...............................................

Net income....................................................................

Deficit............................................................................

1,702,952

397,302,544

327,428,647

-17,370,860

80,214,873

97,585,733

1,648,032

442,802,234

411,457,126

-5,419,105

87,654,011

93,073,116

1,654,245

498,378,098

463,956,020

14,493,114

111,384,545

96,891,431

1,635,164

505,222,543

464,951,817

14,099,275

113,885,966

99,786,691

1,553,529

518,994,886

483,417,504

16,609,540

116,317,801

99,708,261

Nonfarm Sole Proprietorships

Number of businesses..................................................

Total receipts................................................................

Business receipts..........................................................

Net income (less deficit)...............................................

Net income....................................................................

Deficit............................................................................

12,393,700

559,384,259

90,423,763

110,496,952

20,073,189

13,091,132

610,822,732

105,460,627

123,782,540

18,321,913

13,679,302

671,969,931

126,323,251

145,517,755

19,194,505

14,297,558

692,810,938

132,737,680

152,416,377

19,678,697

14,782,738

730,606,020

141,430,193

161,657,252

20,227,059

Tax year

Form of business, item

1991

1992

1993

1994

1995

(16)

(17)

(18)

(19)

(20)

1,698,271

1,682,984,576

1,655,481,071

44,745,093

72,571,565

27,826,472

1,785,371

1,821,882,961

1,790,836,830

58,329,739

91,138,122

32,808,383

1,901,505

1,997,596,803

1,967,936,737

66,233,497

98,558,092

32,324,595

2,023,754

2,210,945,344

2,173,454,305

91,676,443

123,970,916

32,294,473

2,153,119

2,405,073,461

2,366,453,853

99,128,672

134,958,619

35,829,947

Net income (less deficit)...............................................

Net income....................................................................

1,515,345

515,461,121

483,164,395

21,406,607

113,408,221

1,484,752

551,548,871

514,827,003

42,916,649

121,834,358

1,467,567

606,190,516

560,999,120

66,652,288

137,440,684

1,493,963

703,827,410

656,158,602

82,183,076

150,927,743

1,580,900

814,704,090

760,617,695

106,829,196

178,650,950

Deficit............................................................................

92,001,615

78,917,710

70,788,396

68,744,668

71,821,755

Net income (less deficit)...............................................

Net income....................................................................

15,180,722

712,567,989

141,515,783

162,426,709

15,495,419

737,082,032

153,960,246

173,472,549

15,848,119

757,215,452

156,458,803

179,983,281

16,153,871

790,630,020

166,798,668

187,845,139

16,423,872

807,363,638

169,262,336

191,728,953

Deficit............................................................................

20,910,927

19,512,304

23,524,477

21,046,471

22,466,617

S Corporations

Number of businesses..................................................

Total receipts................................................................

Business receipts..........................................................

Total net income (less deficit) [1]..................................

Net income....................................................................

Deficit............................................................................

Partnerships

Number of businesses..................................................

Total receipts [2]...........................................................

Business receipts..........................................................

Nonfarm Sole Proprietorships

Number of businesses..................................................

Total receipts................................................................

Business receipts..........................................................

Footnotes at end of table.

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Table 2. Number of Businesses, Total Receipts, Business Receipts, Net Income, and Deficit:

S Corporations, Partnerships, and Sole Proprietorships, Selected Tax Years 1960-2004—Continued

[All figures are estimates based on samples—money amounts are in thousands of dollars]

Tax year

Form of business, item

1996

1997

1998

1999

2000

(21)

(22)

(23)

(24)

(25)

S Corporations

Number of businesses...................................................

Total receipts.................................................................

Business receipts...........................................................

Total net income (less deficit) [1]...................................

Net income.....................................................................

Deficit.............................................................................

2,304,416

2,618,094,172

2,571,988,996

125,245,496

161,896,380

36,650,884

2,452,254

2,895,237,519

2,840,623,943

153,063,011

192,122,074

39,059,063

2,588,088

3,061,133,169

3,004,118,934

181,788,303

223,972,910

42,184,607

2,725,775

3,300,868,762

3,242,797,429

193,756,411

240,561,633

46,805,222

2,860,478

3,617,477,105

3,557,650,166

198,535,888

254,216,205

55,680,317

Partnerships

Number of businesses...................................................

Total receipts [2]............................................................

Business receipts...........................................................

Net income (less deficit).................................................

Net income.....................................................................

Deficit.............................................................................

1,654,256

1,002,579,987

915,844,403

145,218,248

228,157,635

82,939,388

1,758,627

1,249,789,312

1,141,963,405

168,240,726

262,373,206

94,132,480

1,855,348

1,474,879,256

1,356,655,904

186,704,627

297,874,299

111,170,672

1,936,919

1,754,972,413

1,615,762,245

228,438,105

348,467,958

120,029,853

2,057,500

2,218,639,870

2,061,764,235

268,990,758

409,972,787

140,982,029

Nonfarm Sole Proprietorships

Number of businesses...................................................

Total receipts.................................................................

Business receipts...........................................................

Net income (less deficit).................................................

Net income.....................................................................

Deficit.............................................................................

16,955,023

843,233,843

176,755,693

200,123,896

23,368,202

17,176,487

870,392,286

186,643,910

210,464,545

23,820,635

17,408,809

918,268,196

202,274,720

226,189,570

23,914,850

17,575,643

969,347,038

207,946,977

233,404,991

25,458,013

17,904,731

1,020,957,283

214,715,298

245,230,626

30,515,328

Tax year

Form of business, item

2001

2002

2003

2004

(26)

(27)

(28)

(29)

2,986,486

3,761,512,350

3,691,120,151

187,686,917

248,863,846

61,176,929

3,154,377

3,910,926,701

3,841,281,106

183,478,933

246,533,627

63,054,694

3,341,606

4,232,565,964

4,152,365,102

213,681,780

276,531,538

62,849,757

3,518,334

4,737,162,166

4,645,693,720

275,398,651

339,948,836

64,550,185

Net income (less deficit)....................................................................................

Net income........................................................................................................

2,132,117

2,462,461,787

2,278,200,526

276,334,824

446,069,172

2,242,169

2,582,060,669

2,414,187,093

270,667,169

439,761,741

2,375,375

2,722,174,031

2,545,612,266

301,398,218

468,552,382

2,546,877

3,021,683,261

2,818,861,323

384,738,394

566,231,686

Deficit................................................................................................................

169,734,347

169,094,572

167,154,164

181,493,292

Net income (less deficit)....................................................................................

Net income........................................................................................................

18,338,190

1,016,834,678

217,385,116

250,178,322

18,925,517

1,029,691,760

221,113,286

257,292,855

19,710,079

1,050,202,446

230,308,100

269,089,168

20,590,691

1,139,523,760

247,567,189

290,486,159

Deficit................................................................................................................

32,793,206

36,179,568

38,781,068

42,918,970

S Corporations

Number of businesses.......................................................................................

Total receipts.....................................................................................................

Business receipts..............................................................................................

Total net income (less deficit) [1].......................................................................

Net income........................................................................................................

Deficit................................................................................................................

Partnerships

Number of businesses.......................................................................................

Total receipts [2]................................................................................................

Business receipts..............................................................................................

Nonfarm Sole Proprietorships

Number of businesses.......................................................................................

Total receipts.....................................................................................................

Business receipts..............................................................................................

N.A.—Not available.

[1] Prior to Tax Year 1987, "Total net income (less deficit)" from S Corporations only includes "Net income (less deficit)" from S Corporations and is not as comprehensive as data

in future years.

[2] For consistency purposes of this article, what Statistics of Income normally publishes as Partnership "Total income" is labeled as "Total receipts."

Celebrating Ninety Years of SOI: Selected Corporate Data, 1916-2004

Statistics of Income Bulletin | Fall 2007

Table 3. Corporations: Number of Businesses, Total Receipts, Business Receipts, Net Income (Less

Deficit), Net Income, Deficit, Selected Tax Years 1916-2004, in 1990 Constant Dollars [1]

[All figures are estimates based on samples—money amounts are in thousands of dollars]

Tax

year

Number of

businesses

Total

receipts [2]

Business

receipts [3]

(1)

Net income

(less deficit)

Net income

Deficit

(2)

(3)

(4)

(5)

(6)

1916...................................................

1920...................................................

1925...................................................

1930...................................................

1935...................................................

1940...................................................

1945...................................................

1950...................................................

1955...................................................

1960...................................................

1965...................................................

1970...................................................

1975...................................................

1980...................................................

1981...................................................

1982...................................................

1983...................................................

1984...................................................

1985...................................................

1986...................................................

1987...................................................

1988...................................................

1989...................................................

1990...................................................

1991...................................................

1992...................................................

1993...................................................

1994...................................................

1995...................................................

1996...................................................

1997...................................................

341,253

345,595

430,072

463,036

477,113

473,042

421,125

629,314

807,000

1,140,574

1,423,980

1,665,477

2,023,647

2,710,538

2,547,410

2,925,933

2,999,071

3,170,743

3,277,219

3,428,515

3,612,133

3,562,789

3,627,863

3,716,650

3,802,788

3,869,024

3,964,629

4,342,369

4,474,167

4,631,369

4,710,083

N.A.

613,139,840

1,006,614,035

1,068,985,126

1,093,775,037

1,383,896,290

1,854,834,518

2,484,547,719

3,132,157,399

3,749,376,501

4,956,644,652

5,897,589,921

7,770,644,262

10,090,046,364

10,102,796,319

9,513,467,130

9,363,544,915

9,888,305,652

10,201,254,556

10,338,392,063

11,022,889,046

11,340,812,994

11,525,814,710

11,409,520,074

10,974,649,428

10,938,681,461

11,097,942,058

11,782,408,471

12,468,857,284

12,933,150,691

13,525,786,569

N.A.

797,883,521

964,268,599

1,002,871,842

1,298,825,200

1,771,929,053

2,385,581,586

2,987,971,374

3,544,755,853

4,648,694,975

5,460,048,337

7,195,131,300

9,091,289,505

10,102,796,319

8,339,058,207

8,312,576,047

8,740,775,586

8,951,661,163

8,986,200,057

9,681,162,592

9,887,953,543

9,936,654,626

9,860,441,633

9,563,198,855

9,651,518,485

9,827,864,411

10,480,354,067

10,965,247,772

11,378,539,002

11,775,971,218

97,233,665

38,381,565

56,918,401

797,883,521

16,179,601

83,269,241

153,492,308

231,102,026

231,545,150

192,098,860

306,584,114

221,993,323

346,517,345

402,375,639

307,193,832

209,030,803

247,114,763

292,975,052

291,668,735

321,419,730

384,379,074

467,466,078

423,004,380

383,213,763

345,971,128

385,793,658

461,528,184

524,742,361

631,564,881

698,559,132

779,099,826

105,110,487

51,643,850

71,576,429

50,314,123

49,272,211

104,590,098

160,944,024

239,385,678

256,089,864

222,465,287

335,242,600

281,984,994

411,737,398

494,086,400

433,424,749

371,584,762

389,648,910

439,246,868

441,983,895

487,573,917

539,174,063

620,517,351

593,843,998

N.A.

520,441,068

542,102,887

606,448,162

667,171,616

772,300,346

846,455,400

940,749,012

7,876,821

13,262,286

14,658,027

38,173,752

33,092,610

21,320,858

7,451,715

8,283,652

24,544,714

30,366,427

28,658,485

59,991,671

65,220,053

91,710,762

126,230,917

162,553,959

142,534,148

146,271,816

150,315,161

166,154,188

154,794,989

153,051,273

170,839,620

N.A.

174,469,941

156,309,229

144,919,979

142,429,254

140,735,465

147,896,267

161,649,186

1998...................................................

1999...................................................

2000...................................................

2001...................................................

2002...................................................

2003...................................................

2004...................................................

4,848,887

4,935,904

5,045,273

5,135,591

5,266,607

5,401,237

5,557,965

13,891,048,583

14,821,337,395

15,639,832,258

14,910,948,574

14,348,248,944

14,696,344,347

15,714,349,480

12,035,838,096

12,798,535,774

13,386,162,957

12,874,566,820

12,566,616,212

12,973,675,448

13,821,317,956

717,769,495

773,031,139

749,097,926

477,167,598

433,383,490

554,046,275

769,180,678

917,326,676

1,006,124,418

1,055,777,261

849,879,301

787,672,607

835,065,734

1,007,266,497

199,557,181

233,093,279

306,679,333

372,711,703

354,289,118

281,019,459

238,085,819

N.A.—Not available.

[1] Based upon the Consumer Price Index as published by the U.S. Department of Commerce, Bureau of Economic Analysis.

[2] For years prior to 1960, Total Receipts are also referred to as Total Compiled Receipts.

A History of the Tax-Exempt Sector:

An SOI Perspective

by Paul Arnsberger, Melissa Ludlum, Margaret Riley, and Mark Stanton

he origins of the tax-exempt sector in the

United States predate the formation of the

republic. Absent an established Governmental

framework, the early settlers formed charitable and

other “voluntary” associations, such as hospitals, fire

departments, and orphanages, to confront a wide variety of issues and ills of the era. These types of voluntary organizations have continued to thrive in the

United States for centuries. In 1831, during his historic visit to the United States, Alexis de Tocqueville

observed:

“Americans of all ages, conditions, and dispositions constantly unite together. Not only

do they have commercial and industrial associations to which all belong but also a thousand other kinds, religious, moral, serious,

futile…Americans group together to hold

fetes, found seminaries, build inns, construct

churches, distribute books…They establish

prisons, schools by the same method…I have

frequently admired the endless skill with

which the inhabitants of the United States

manage to set a common aim to the efforts of

a great number of men and to persuade them

to pursue it voluntarily.”1

Voluntary associations comprised two distinct

types of organizations—public-serving and member-serving.2,3 Early public-serving, or charitable,

organizations included schools, churches, and other

voluntary organizations designed to provide services

to the public. The popularity of voluntary charitable

organizations in the United States, even in the midst

of strengthening State and Federal governments,

suggests that perhaps these organizations, with their

well-established structures and programs, were able

Paul Arnsberger and Margaret Riley are statisticians, and

Melissa Ludlum and Mark Stanton are economists, with the

Special Studies Special Projects Section. This article was

prepared under the direction of Barry W. Johnson, Chief.

to fill a gap in social welfare programs where the

young Government’s efforts proved insufficient.

Another suggestion is that many early Americans

embraced charitable organizations over Government

programs because they feared “the rebirth of monarchy, or bureaucracy.”4

By the end of the 19th century, private philanthropy, as typified by the modern private foundation,

had joined voluntary associations as an important

component of the public-serving charitable sector of

the United States. The foundation originated from

the charitable trust, a tool for giving that became

widely used in this period.5 In the early 20th century, a number of American industrialists, wishing

to direct their newly acquired wealth toward a broad

range of altruistic endeavors, created private foundations that remain prominent today. Unlike other

early charitable organizations, private foundations

generally were controlled and funded by a single

source, such as an individual, corporation, or family. Andrew Carnegie articulated the vision of these

early philanthropists in his essay, “The Gospel of

Wealth,” where he argued that a wealthy individual

should “consider all surplus revenues which come to

him simply as trust funds, which he is called upon to

administer, and strictly bound as a matter of duty to

administer in the manner which, in his judgment, is

best calculated to produce the most beneficial results

for the community…”6

Member-serving associations, including fraternal societies, were also popular among early Americans. The Freemasons, for example, have roots in

17th century England and count a number of this

Nation’s founding fathers as members. By the 19th

century, mutual benefit associations, serving members in areas such as banking and insurance, began

to flourish. Additionally, labor and agricultural organizations, established to promote the interests of

their members, started to take root across the Nation

around this time.

Voluntary associations and philanthropic vehicles

continue to coexist and forge a relationship with

1 Tocqueville, Alexis de, Democracy in America (2003), Penguin Books, London, England, p. 596

2 For the most part, public-serving organizations are those that are now described under section 501(c)(3) of the Internal Revenue Code.

Member-serving organizations are

those covered under other subsections of 501(c). Appendix A at the end of this article provides detailed information on organizations exempt under section 501(c).

3 See: Salamon, Lester M. (1992), America’s Nonprofit Sector: A Primer, The Foundation Center, New York, NY, p. 14.

4 Ibid., p. 7.

5 Chester, Ronald (1982), Inheritance, Wealth, and Society, Indiana University Press, Bloomington, Indiana, p. 95.

6 Carnegie, Andrew (2001), “The Gospel of Wealth,” The Nature of the Nonprofit Sector, editor J. Steven Ott. Westview Press, Boulder, CO, p. 68.

A History of the Tax-Exempt Sector: An SOI Perspective

Statistics of Income Bulletin | Winter 2008

Government that remains into the 21st century. A

significant component of this relationship is Government’s recognition of the importance of the charitable

and voluntary sector, and the support of its organizations in the form of an exemption from income and

certain other taxes. This article explores the legislative history of tax exemption and presents historical

data that highlight recent financial trends among taxexempt organizations.

Legislative History of the Tax-Exempt Sector

The structure of tax exemption granted to the charitable and voluntary sector outlined in the United

States Tax Code was developed through legislation

enacted between 1894 and 1969. Over that 75-year

period, Congress established the basic principles

and requirements of tax exemption, identified business activities of tax-exempt organizations that were

subject to taxation, and defined and regulated private

foundations as a subset of tax-exempt organizations.

Figure A shows a timeline of major legislative actions relevant to tax-exempt organizations, while a

more complete history can be found in Appendix B

at the end of this article.

Early Legislation, 1894-1936

The privileged tax treatment that the Government

grants to charitable and member-serving organizations can be traced to the earliest versions of United

States tax law. Early tax-exemption regulations

developed around three major principles. First, organizations that operated for charitable purposes

were granted exemption from the Federal income

tax. Second, charitable organizations were required

to be free of private inurement—that is, a charitable

organization’s income could not be used to benefit

an individual related to the organization. Finally, an

income tax deduction for contributions, designed to

encourage charitable giving, was developed.

The Wilson-Gorman Tariff Act of 1894, one of

the earliest statutory references to the tax-exempt status enjoyed by charitable organizations, established

the requirement that tax-exempt, charitable organizations operate for charitable purposes. While establishing a flat 2-percent tax on corporate income, the

act stated “nothing herein contained shall apply to…

corporations, companies, or associations organized

and conducted solely for charitable, religious, or

Figure A

Major Exempt Organization Legislation,

1894-Present

Tariff Act of 1894 - Earliest statutory reference to tax exemption for

certain organizations.

Revenue Act of 1909 - Introduced language prohibiting private

inurement.

Revenue Act of 1913 - Established income tax system with tax

exemption for certain organizations.

Revenue Act of 1917 - Introduced individual income tax deduction for

charitable donations.

Revenue Act of 1918 - Estate tax deduction for charitable bequests

added.

Revenue Act of 1934 - Set limits on lobbying activities by charitable

organizations.

Revenue Act of 1936 - Introduced corporate tax deduction for

charitable contributions.

Revenue Act of 1943 - Required first Forms 990 to be filed.

Revenue Act of 1950 - Established unrelated business income tax.

Revenue Act of 1954 - Modern tax code established, including section

501(c) for exempt organizations. Also, limits on political activities

established.

Revenue Act of 1964 - Raised the limitation on deduction for donations

to public charities to 30 percent of adjusted gross income (AGI).

Tax Reform Act of 1969 - Established private foundation rules,

including a minimum charitable payout requirement and a 4-percent

excise tax on net investment income, and raised the limitation on the

deduction for donations to operating private foundations and public

charities to 50 percent of AGI.

Revenue Act of 1978 - Reduced the net investment income excise tax

for private foundations to 2 percent.

Deficit Reduction Act of 1984 - Raised the limitation on the deduction

for donations to nonoperating private foundations to 30 percent of AGI

and introduced other more favorable rules for donors to these

organizations. Also, exempted certain operating foundations from the

net investment income tax and reduced the tax to 1 percent for

foundations meeting other requirements.

Revenue Reconciliation Act of 1993 - Imposed a proxy tax on certain

lobbying and political expenditures made by membership organizations.

Tax Payer Bill of Rights 2 (1996) - Introduced intermediate sanction

rules for excess benefit transactions.

Tax Payer Relief Act of 1997 - Revoked tax exemption of certain

organizations providing commercial-type insurance.

Pension Protection Act of 2006 - Required section 501(c)(3)

organizations to make their Forms 990-T available for public inspection.

NOTE: For more extensive information, see Appendix B.

A History of the Tax-Exempt Sector: An SOI Perspective

Statistics of Income Bulletin | Winter 2008

educational purposes, including fraternal beneficiary

associations.” Though the law was declared unconstitutional by the Supreme Court in 1895, the exemption language contained in the act would provide the

cornerstone for tax legislation involving charitable

organizations for the next century.

The Revenue Act of 1909 mirrored and expanded

the language from the 1894 act. Under this statute,

tax exemption was granted to “any corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of

the net income of which inures to the benefit of any

private stockholder or individual.” This important

addition set forth the idea that tax-exempt charitable

organizations should be free of private inurement—in

other words, nonprofit.

Ratification of the Sixteenth Amendment granted

Congress the power to levy income tax. The subsequent Revenue Act of 1913 established the modern

Federal income tax system. For charitable organizations, the act used identical language as that found in

the Tariff Acts of 1894 and 1909 with regard to charitable purpose and private inurement.

The Revenue Act of 1917 established, for the

first time, an individual income tax deduction for

contributions made to tax-exempt charitable organizations. This deduction was conceived as a way to

encourage charitable contributions at a time when

income tax rates were rising in order to fund World

War I. One year later, the Revenue Act of 1918

provided that charitable bequests were entitled to a

similar deduction on estate tax returns. Finally, corporations were able to claim the charitable deduction

beginning in 1936.

after December 31, 1950, UBIT was imposed on

the “unrelated business income” (UBI) of charitable

organizations (except churches); labor and agricultural organizations; chambers of commerce, business

leagues, and real estate boards; certain trusts; and

certain title holding companies.7

Income was considered UBI if it was produced

from an activity deemed a “trade or business” that

was “regularly carried on” and was not “substantially

related” to the organization’s exempt purpose(s),

regardless of whether or not the profits from the unrelated trade or business were used solely for exempt

purposes. Passive income and certain gains and

losses from the disposition of property were not subject to tax.

The Revenue Act of 1950 addressed several

other issues regarding the unrelated activities of taxexempt organizations. Tax exemption was no longer

permitted to “feeder” organizations, which did not

conduct any charitable activities, but rather operated commercial enterprises from which they passed

income to a charitable organization. In addition,

income from debt-financed real estate sale-leaseback activities was subject to UBIT. In these cases,

tax-exempt organizations purchased real estate with

borrowed funds, leased the property back to the

owner, and used the tax-free rental income to pay

off the debt.8

The Revenue Act of 1950, and additional changes made under the Tax Reform Act of 1969, discussed in the following section, formed the contemporary structure for the unrelated business taxation of

tax-exempt organizations.

The Revenue Act of 1950

By the 1960s, there was a growing perception among

lawmakers that private foundations, with their small

networks of financers and administrators, were less

accountable to the public than traditional charities.

These concerns were addressed with the Tax Reform

Act of 1969 (TRA69), which introduced sweeping

reforms to the charitable sector. TRA69 also significantly expanded the rules governing unrelated business income taxation of tax-exempt entities.

The first explicit definition of private foundations, for tax purposes, was included in TRA69. This

legislation defined a foundation as a charitable orga-

Before the 1950s, tax-exempt organizations could

earn tax-free income from both mission-related activities and commercial business activities that were unrelated to the purpose for which they were exempt, as

long as they used the net profits for exempt purposes.

However, in the 1940s, concerns grew in Congress

over the perception that tax-exempt organizations

were permitted an unfair competitive advantage over

taxable entities. As a result, Congress established

the “unrelated business income tax” (UBIT) as part

of the Revenue Act of 1950. For tax years beginning

Tax Reform Act of 1969

7 In 1951, Congress extended the UBIT to the unrelated business income of State and municipally owned colleges and universities, to correct for an omission from the 1950 act.

8 Staff report of the Joint Committee on Taxation, “Historical Development and Present Law of Federal Tax Exemption for Charities and Other Tax-Exempt Organizations”

(JCX-29-05) (April 19, 2005).

A History of the Tax-Exempt Sector: An SOI Perspective

Statistics of Income Bulletin | Winter 2008

nization that did not engage in inherently public activities, test for public safety, receive substantial support from a wide array of public sources, or operate

in support of any organization that met any of these

three requirements.9 Further, the legislation created

two subclasses of private foundations—nonoperating and operating. Nonoperating foundations, which

represented the majority of all private foundations,

were defined as primarily grantmaking organizations.

Conversely, operating foundations were those that

operated charitable programs in a manner similar to

that of public charities.

TRA69 established an array of more stringent

requirements specific to private foundations. These

“private foundation rules” outlined two annual requirements and a variety of “prohibited activities”

that were considered to be contrary to the public interest. First, TRA69 established an annual excise tax

on investment income. This provision was intended

to compel private foundations to “share some of the

burden of paying the cost of government,” particularly the enforcement of regulations related to the

tax-exempt sector.10 Second, nonoperating foundations were required to distribute a minimum amount

for charitable purposes each year. Further, private

foundations that failed to meet the minimum charitable distribution requirement or engaged in certain

prohibited activities were subject to taxes and other

sanctions.

TRA69 also increased the existing charitable

deduction limits for individual donors and sharpened

the definitions of the organizations to which contributions were deductible. Under the Revenue Act of

1964, individuals could deduct contributions made

to public charities up to 30 percent of adjusted gross

income (AGI). The new regulations enacted under

TRA69 increased the maximum deduction limitation

for cash and ordinary income contributions to 50 percent for public charities and operating foundations.

Most nonoperating private foundations remained

subject to a lower 20-percent limitation.11

TRA69 also expanded the tax on unrelated business income, extending the tax to all tax-exempt

organizations described in IRC sections 501(c) and

401(a) (except United States instrumentalities), and

including churches for the first time. Additionally,

TRA69 expanded the taxation of debt-financed income to include forms of income other than rents

from real estate sale-leaseback arrangements.12

Since 1969, Congress has made a number of changes

to the UBIT statutes. However, the rules on unrelated business taxation of tax-exempt organizations

established by the Revenue Act of 1950 and TRA69

have remained largely intact.

Other Legislation, 1970-2007

While the underlying structure of tax exemption for

the charitable and voluntary sector has changed little

since the passage of TRA69, subsequent legislation

has introduced a number of modifications. These

include adjustments to the private foundation net

investment income tax rates and to the excise tax

rates on charitable organizations that engage in prohibited activities. Further changes have provided

new exceptions to UBIT taxation for specified activities, tightened the rules pertaining to the taxation of

payments received from subsidiaries, and required

unrelated business income tax returns filed by IRC

section 501(c)(3) organizations to be made publicly

available.

Overview of the Statistics of Income Exempt

Organization Program

The Internal Revenue Service provides, by Congressional mandate, statistics and microdata derived from

information and tax returns filed with IRS. To fulfill

this requirement, the Statistics of Income (SOI) division has conducted annual studies of organizations

exempt under IRC section 501(c)(3) for every tax

year since 1985.13 Currently, SOI collects information from stratified random samples of Forms 990,

990-PF, 990-T, and the population of Forms 4720.

9 Organizations that conduct “inherently public activities” include churches, schools, hospitals, and Governmental units of the United States.

For additional information,

see Richardson, Virginia G. and John Francis Reilly, “Public Charity or Private Foundation Status Issues under 509(a)(1)-(4), 4942(j)(3), and 507, Fiscal Year 2003,” Exempt

Organizations Continuing Professional Education. This article is available at www.irs.gov/pub/irs-tege/eotopicb03.pdf.

10 Staff report of the Joint Committee on Taxation, “General Explanation of the Tax Reform Act of 1969” (JCS-16-70) (December 3, 1970), p. 29.

11 Deduction limitations for cash and ordinary income contributions to nonoperating foundations later were increased to 30 percent of AGI as part of the Deficit Reduction

Act of 1984.

12 TRA69 expanded taxable debt-financed income to include interest, dividends, other rents, royalties, and certain gains and losses from any type of property, if produced

from financial vehicles acquired with borrowed funds.

13 The first SOI exempt organization studies were based on Forms 990 filed by tax-exempt organizations for Tax Years 1943 and 1946. Data from Forms 990-PF filed by

private foundations were first collected for Tax Year 1974.

A History of the Tax-Exempt Sector: An SOI Perspective

Statistics of Income Bulletin | Winter 2008

ince 1918, Statistics of Income (SOI) has collected,

compiled, and published

information from tax returns

for its statistical research studies. Over the years, SOI has

made incremental improvements

in data processing methods to

keep pace with technological advances. The relatively small size

of the statistical samples used for

SOI’s exempt organization (EO)

research studies has made these

studies ideal for piloting major

innovations in return processing,

which have been subsequently

adopted by other SOI studies.

The first modern SOI exempt organization study was of

private foundation information

returns, Forms 990-PF, filed for

Tax Year 1974. Abstracting and

Keeping Pace with Technology

editing data from these information returns relied on a tedious

process. First, IRS tax examiners recorded data items from

the returns on preprinted forms,

called edit sheets. Next, data

from these edit sheets were transcribed, read into a mainframe

computer, and subjected to data

quality and consistency tests.

Items that failed the tests were

recorded on paper listings, called

error registers, which were returned to tax examiners. Based

on instructions provided by SOI

analysts, tax examiners made

handwritten corrections on the

listings. These corrections were

transcribed, and the data were

subjected to further testing. The

process was repeated until errors

were no longer present. These

Tax-exempt organizations, other than private

foundations, file Form 990, Return of Organization

Exempt from Income Tax; private foundations file

Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated

as a Private Foundation. Forms 990 and 990-PF are

used by these organizations to report standard financial information, as well as information regarding

compliance with the regulations that govern their taxexemption. Charitable and other types of tax-exempt

organizations report any unrelated business income

and taxes on Form 990-T, Exempt Organization Business Income Tax Return. Private foundations, public

charities, and split-interest and charitable trusts use

Form 4720, Return of Certain Excise Taxes on Charities and Other Persons under Chapters 41 and 42 of

the Internal Revenue Code, to calculate and pay taxes

procedures were quite time-consuming and costly compared to

present-day processing.

The Tax Year 1982 Form

990-PF study was a pilot for

developing a new online, interactive system of editing, testing, and error resolution. With

the new system, tax examiners

keyed return information directly

into a database via computer

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