# Statistics of Income > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3Ac14931d14a821a43 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 9 0 1917 2007 Statistics of Income A Collection of Historical Articles SOI Trailblazers Introduction Statistics of Income: A History | Spring 2008 I 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 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. A 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 F 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 2.0 4.0 5.0 6.0 6.0 1.0 1.0 2.0 4.0 5.0 6.0 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) (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 2,000,000 2,000,000 3,500,000 Unlimited 1,000,000 Generation-skipping transfer (GST) tax exemption (dollars) (2) 1,500,000 2,000,000 2,000,000 2,000,000 3,500,000 Unlimited 1,000,000 Gift tax exemption (dollars) (3) 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Maximum unified credit (dollars) (4) 555,800 780,800 780,800 780,800 1,455,800 N/A 345,800 Highest estate and GST tax rate (percent) (5) 47.0 46.0 45.0 45.0 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 9 8 7 6 5 4 3 2 1 0 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 10 9 8 7 6 5 4 3 2 1 0 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 80 60 Net estate tax 40 20 0 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 30 25 20 15 10 5 0 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 50 45 Total stock 40 35 30 Total real estate 25 20 15 All other assets Total business assets 10 5 Total bonds 0 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 18 16 Closely held stock 14 12 10 8 6 Noncorporate business assets Limited partnerships 4 2 Farms 0 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 A 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 T 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 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) 16 14 12 10 8 6 4 2 0 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) 8 7 6 5 4 3 2 1 0 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) 8 7 6 5 4 3 2 1 0 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 0 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 50 0 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 50 0 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) 6 5 4 3 2 1 0 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. 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............................................................................ 9,089,985 171,257,205 171,257,205 21,067,090 24,269,011 3,201,921 9,078,466 199,384,594 199,384,594 27,887,417 31,637,317 3,749,900 5,769,741 198,582,172 198,582,172 30,537,426 33,735,732 3,198,306 7,221,346 273,954,741 273,954,741 39,636,453 45,624,890 5,988,437 8,931,712 411,205,713 411,205,713 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.................................................................... 9,584,790 427,063,055 427,063,055 53,071,628 68,552,791 10,105,515 433,664,897 433,664,897 50,573,163 68,647,384 10,703,921 465,168,637 465,168,637 60,359,153 78,618,410 11,262,390 516,036,944 516,036,944 70,766,610 89,849,570 11,928,573 540,045,430 540,045,430 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, Partners [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Ac14931d14a821a43. Public record. Not legal advice.