only the amount of depreciation allowable under the straightline method. The Administration supports this provision.

22. Natural Resources (Sec. 501)

The bill puts an end to the tax benefits arising from carved out production payments and ABC transactions by treating these as loan transactions, a result which is in accord with their true nature. The bill also provides recapture rules for all hard mineral exploration costs. The Administration endorses these provisions.

The bill reduces the percentage depletion allowance for oil and gas from 27-1/2 percent to 20 percent and makes similar reductions for other minerals except copper, gold, silver, iron ore, and oil shale. While the Administration did not recommend these reductions, we do not oppose the decision of the House to increase the share of the national tax burden of the mineral industry.

However, the bill also extends the cut-off point for determining percentage depletion on oil shale to include certain non-mining processes. We oppose this provision because it would approximately double the effective depletion allowance on oil shale and would constitute an important breach in the principle that percentage depletion is to be computed on

gross income from mining, not manufacturing to any extent. As stated, the bill makes no reduction in the depletion rate for oil shale while reducing nearly all other rates. This would seem to provide a special incentive. If any additional incentive is to be provided, it should be granted in terms of the research and development objective, or at most in terms of the rate, not the cut-off point, or by some other means.

Finally, the bill eliminates percentage depletion with

respect to foreign oil and gas production.

Our analysis of

this provision indicates, in the light of our foreign tax credit provisions, that after a brief period it will probably result in foreign countries increasing their effective tax rates on income from oil and gas production to "sponge up" any additional tax revenue otherwise accruing to the United States. Thus the denial of foreign depletion will increase the effective U.S. rate of tax on such income, which tax the foreign governments will then offset by increasing their rates. The end result will be that the U. S. taxpayer will pay additional tax to those countries, but no additional tax to the United States.

For these reasons, the elimination of percentage depletion on foreign deposits of oil and gas is unlikely to increase

U. S. revenues significantly, and will merely increase the burden of foreign taxes on U. S. businesses.

We recommend, therefore,

that this provision be deleted from the bill. Our proposal with respect to the foreign tax credit, previously described, adequately deals with percentage depletion on foreign deposits by preventing the depletion allowance on foreign mineral production from being used to reduce U. S. tax on other income and will not induce the foreign country to raise its tax' on the American company.

23. Capital Gains and Losses of Individuals (Secs. 511-516)

The bill repeals the alternative capital gains tax rate of 25 percent and increases the holding period for long-term capital gains from 6 to 12 months. It also provides tnat net long-term capital losses are reduced by 50 percent before being available as an offset against ordinary income. The bill narrows the definition of a capital asset so that the sale of letters, papers, or memoranda by a person whose efforts created them, or by a person for whom they were produced, will give rise to ordinary income, The bill provides that an employer's contribution to a pension plan, when paid to the employee as part of

a lump sum distribution, is taxed as ordinary income.

Additional changes made by the bill include a provision . that life interests received by gift, bequest or inheritance, are not accorded a tax basis when sold. Under the bill, all casualty gains and losses on capital assets and section 1231 property are consolidated for the purposes of determining whether they give rise to an ordinary loss or to a gain which is consolidated with other section 1231 gains and losses.

Finally, the bill provides that transfers.of franchises will not give rise to capital gain treatment if the transferor retains any significant rights in connection with the transfer.

We are opposed to the complete elimination of the alternative tax and to the extension of the holding period. These changes in our judgment impose too great a burden on capital The effect of the bill would be to remove a large measure of the incentive for private capital to engage in new and expanded business ventures.

investment.

Present capital investments

would tend to be frozen and the economy as a whole would

suffer. We believe that the six months' holding period should

be maintained and that, in general, the alternative tax should be retained.

However, the 25' percent ceiling rate on long-term capital gains has been used regularly by some wealthy persons who at the same time have minimized their ordinary income. By this means they have reduced their over-all effective income tax rate well below that of other persons of comparable or lesser ability to pay. We recommend that a maximum limit be placed on the extent to which the 25 percent ceiling rate can be used in relation to the amount of ordinary income.

The inclusion of the omitted one-half of long-term capital gains in the list of preferences contained in the Limit on Tax Preferences (LTP) generally has no operative effect because the purpose of that provision is only to insure that preferences do not exceed one-half of a person's income determined without the preferences. Thus, for example, when a long-term capital gain of $50,000 is realized, 50 percent or $25,000 is included as a preference in the LTP calculation, but it has no effect on that calculation since LTP operates only to limit tax preferences to 50 percent of income. However, if a taxpayer has $1 million of capital gains which are taxed at 25 percent instead of the