Mr. WEST. Just from those persons who are not now taxed under it because we have not got additional provision there with respect to unincorporated businesses.

Senator CAIN. For example, one of the gentlemen sitting on this side of the table-under this law we would come under its provisions for the first time.

Mr. WEST. No; you are exempt.

Mr. BATES. We are exempt by reason of the 7 months' residence provision?

Mr. WEST. You are also exempt by another provision in this which exempts elective officers and those appointed by the President and confirmed by the Senate, if not domiciled in the District of Columbia. Mr. BATES. Will you restate that figure, Mr. West?

Mr. WEST. The increase, aside from the increase of tax on unincorporated business, which is also incorporated in the bill, would be $2,250,000.

Mr. BATES. What was the 3 million plus figure you used?

Mr. WEST. That included the tax on unincorporated businesses, which it is estimated will produce $900,000.

Senator CAIN. The point I was getting at, if your bill fails in that latter connection, you are two and a quarter million dollars short of your anticipated income?

Mr. WEST. That is correct.

Mr. BATES. In other words, this will give you, this excess over and above what you now get, $2,250,000 from personal-income taxes; is that correct?

Mr. WEST. That is right.

Mr. BATES. Let me ask you again, what was the $3,250,000 figure you used there? Will you restate that, please?

Mr. WEST. In this bill we have also included an estimate of the tax on unincorporated business.

Mr. BATES. Yes.

Mr. WEST. At the present time an unincorporated business is subject only to the ordinary individual's income tax, and if one is running a business here and is living in some other State and is not domiciled here, he may be living here but if he claimed domicile in another State we get no revenue whatsoever from that business.

Mr. BATES. Yes.

Mr. WEST. Whereas, under this bill we tax unincorporated businesses just as though they were corporations, at 5 percent, with one exception, and that is that the first $10,000 of income is taxed only as individual income, so we give the unincorporated business that advantage over the incorporated business, thus aiding the smaller merchant.

Mr. BATES. Now, that will give you $900,000 more; is that correct? Mr. WEST. That is correct.

Mr. BATES. Over and above the $2,250,000.

Mr. WEST. That is correct.

Senator CAIN. It looks to me, as a practical matter sitting here, that you are talking about an increased revenue approximating $900,000, but you might not in fact, as it may turn out, be talking about your two and a quarter million dollars, which brings us back to your general fiscal structure, where is that going to leave you if you fall

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short two and a quarter million dollars that you anticipate in this bill?

Mr. WEST. Then, I imagine, that we will have to find other taxes. Mr. BATES. Now, Mr. West, what is the yield today from personal income taxes?

Mr. WEST. Do you have that, Mr. Walker? I might have it before I leave.

If you will permit me, there was one other distinction between that bill and the existing law, in that we do tax the income of a person residing outside of the District of Columbia if he earned it from District of Columbia sources, giving reciprocal credit.

Mr. SMITH. That is where you always run into trouble.

Mr. WEST. But our law is substantially the same as Maryland and Virginia. For example, if that is subject to tax, suppose a man lives in Maryland, and works in the District and earns his income in the District, and has to pay the tax on that income in Maryland. We would not tax him in the District unless our tax was higher, and then only tax him for the difference.

Senator CAIN. For the difference.

Mr. WEST. Only for the difference, providing the other States give the same credit, and I understand Maryland and Virginia do.

Mr. SMITH. How would he demonstrate that he had paid the tax in Maryland or Virginia? Remember, we had the O'Hara bill up last year, and that left a wide loophole there. Would he present his tax receipts under this bill to you and show that he had actually paid the tax?

Mr. WEST. Yes. What he would do would be to file his return and then claim credit in the return for the amount of tax that he had been compelled to pay on that income to the other jurisdiction.

Mr. SMITH. Yes. Would he be required to produce any proof that he had paid it?

Mr. WEST. I do not suppose he would unless there was some question about it.

Senator CAIN. Mr. West, how much money are you talking about in this provision, which seems to be one fraught with considerable trouble?

Mr. WEST. That is included in the $2,250,000.

Mr. BATES. That is personal income?

Mr. WEST. Yes.

Mr. SMITH. But you do not know how much of it would fall in that class.

Mr. WEST. No.

Senator CAIN. Your adjoining States all have income taxes?

Mr. WEST. Yes, sir.

Senator CAIN. Your rates are not going to be very much higher? Mr. WEST. Our rates would be lower.

Mr. BATES. But there are a number of other States in the Union that have no reciprocal arrangement. And the people from those States who are domiciled in those States would be required to pay the tax in the District and any additional difference in their own State of domicile?

Mr. WEST. That is correct.

SEC. 3. (a) DEDUCTION ALLOWED-The following deductions shall be allowed from gross income in computing net income:

(1) EXPENSES.-All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity: Provided, however, That nothing herein contained shall be construed to exempt any salary or other compensation for personal services from taxation as a part of the taxable income of the person receiving the same.

(2) INTEREST.-All interest paid or accrued, according to the taxpayer's method of accounting, within the taxable year.

(3) TAXES.-All taxes paid or accrued during the taxable year except income, excess profits, sales, use, admission, utility bill, cigarette, inheritance, and estate taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

(4) LOSSES.-Losses sustained during the taxable year and not compensated for by insurance or otherwise

(A) if incurred in a trade or business; or

(B) if incurred in any transaction entered into for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income, though not connected with any trade or business; or

(C) of property not connected with a trade or business; if such losses arise from fires, storms, shipwrecks, or other casualty: Provided, however, That no such loss shall be allowed as a deduction under this subsection if such loss is claimed as a deduction for inheritance- or estate-tax purposes: And provided further, That this subsection shall not be construed to permit the deduction of a loss of any capital asset as defined in this Act.

(5) BAD DEBTS.-Debts ascertained to be worthless and charged off within the taxable year or, in the discretion of the Assessor, a reasonable addition to a reserve for bad debts. When satisfied that a debt is recoverable only in part, the Assessor may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. No debt which existed prior to January 1, 1939, shall be allowed as a deduction.

(6) INSURANCE PREMIUMS.-All fire-, tornado-, and casualty-insurance premiums paid during the taxable year in connection with property held for investment or used in a trade or business.

(7) DEPRECIATION.-A reasonable allowance for exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence; and including in the case of natural resources allowances for depletion as permitted by reasonable rules and regulations which the Commissioners are hereby authorized to promulgate. The basis upon which such allowances are to be computed is the basis provided for in title XI, section 4, of this Act.

(8) CHARITABLE CONTRIBUTIONS.-Contributions or gifts, actually paid within the taxable year to or for the use of any religious, charitable, scientific, literary, military, or educational institution, the activities of which are confined principally to the District, and no part of the net income of which inures to the benefit of any private shareholder or individual: Provided, however, That such deductions shall be allowed only in an amount which in the aggregate of all such deductions does not exceed 15 per centum as computed without the benefit of this subsection.

(9) WAGERING LOSSES.-Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

(10 MEDICAL, DENTAL, AND SO FORTH, EXPENSES OF INDIVIDUALS.-Expenses in the case of individuals, paid by the taxpayer during the taxable year, not compensated for by insurance or otherwise, for the medical care of the taxpayer, his spouse, or dependents as defined in this Act. The term "medical care", as used in this subsection, shall include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of diseases, or for the purpose of effecting healthier function of the body (including amounts paid for accident or health insurance): Provided, however, That a taxpayer may deduct only such expenses as exceed 5 per centum of his net income, or 5 per centum of the aggregate net income in the case of husband and wife filing a joint return, computed with the benefit of

subsection (8) of this section but without the benefit of this subsection: And provided further, That the maximum deduction for the taxable year shall not exceed $1,000 in the case of a husband and wife filing a joint return, or $500 in the case of all other individuals.

(11) ALIMONY OR SEPARATE MAINTENANCE. In the case of individuals, amounts paid as alimony or separate maintenance pursuant to and under a decree or judgment of a court of record of competent jurisdiction to adjudge or decree that the taxpayer pay such alimony or separate maintenance: Provided, however, That all amounts allowed as a deduction under this subsection shall be reported. and taxed as income of the recipient thereof.

(12) CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES' TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A DEFERRED-PAYMENT PLAN.-In the return of an employer, contributions made by such employer to an employees' trust or annuity plan and compensation under a deferred-payment plan to the extent that deductions for the same are allowed the taxpayer under the provisions of section 23 (p) of the Federal Internal Revenue Code.

(13) NONTRADE OR NONBUSINESS EXPENSE.-In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

(14) In lieu of the foregoing deductions, any resident, and any nonresident whose entire net income is subject to tax under this Act, whose gross income less allowance for dependents is $5,000 or more may irrevocably elect to deduct an optional standard deduction of $500: Provided, however, That the option provided in this section shall not be permitted to any such taxpayer on any return filed by him for any period less than a full calendar or fiscal year: And provided further, That in the case of husband and wife living together, the standard deduction shall not be allowed to either if the net income of one of the spouses is determined without regard to the standard deduction.

(b) DEDUCTIONS NOT ALLOWED.-In computing net income, no deductions shall be allowed in any case for—

(1) Personal, living, or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements or betterments, made to increase the value of any property or estate;

(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; and

(4) Premiums paid on any life-insurance policy covering the life of any officer or employee or of any person financially interested in any trade or business carried on by the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy.

(5) If the net income of an unincorporated business for the taxable year is in excess of the exemption provided in section 4 of title VIII, no deduction which is allowed or allowable under section 3 (a) of this title from the gross income of any unincorporated business subject to the tax imposed by title VIII of this Act shall be allowed as deduction in the return and computation of the net income of any person entitled to share in the net income of such unincorporated business. (6) CAPITAL LOSSES.-Losses from the sale or exchange of any capital asset as defined in this Act.

TITLE IV-ACCOUNTING PERIODS, INSTALLMENT SALES, AND INVENTORIES

SEC. 1. ACCOUNTING PERIODS.-The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Assessor does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 4 (j) of title I or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. If the taxpayer makes a Federal income-tax return, his income shall be computed, for the purposes of this title, on the basis of the same calendar or fiscal year as in such Federal income-tax return, if the basis is accepted and approved by the Commissioner of Internal Revenue.

SEC. 2. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.-The amount of all items of gross income shall be included in the gross income for the taxable 99538-47-28

year in which received by the taxpayer unless, under methods of accounting permitted under section 1, any such amounts are to be properly accounted for as of a different period. In the case of death of a taxpayer on the cash basis, no amount will be accrued on his final return; and on the accrual basis, amounts (except amounts includible in computing a partner's net income) accrued only by reason of the death of the taxpayer shall not be included in computing net income for the period in which falls the date of the taxpayer's death, but such amounts shall be included in the income of the person receiving such amounts by inheritance or survivorship from the decedent.

SEC. 3. PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN.-The deductions and credits provided for in this Act shall be taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting upon the basis of which the net income is computed unless, in order to clearly reflect the income, the deductions or credits should be taken as of a different period. In the case of death of a taxpayer on the cash basis, no amount will be allowed as a deduction which was accrued up to the date of the taxpayer's death; and on the accrual basis, no amount (except amounts includible in computing a partner's net income) accrued only by reason of the death of the taxpayer shall be included in computing net income for the period in which falls the date of the taxpayer's death but such amounts shall be deductible by the estate or other person who paid them or is liable for their payment.

SEC. 4. INSTALLMENT SALES.-If a person reports any portion of his income from installment sales for Federal income-tax purposes under section 44 of the Federal Internal Revenue Code and as the same may hereafter be amended, and if such income is subject to tax under this Act, he may report such income under this Act in the same manner and upon the same basis as the same was reported by him for Federal income-tax purposes, if such method of reporting is accepted and approved by the Commissioner of Internal Revenue.

SEC. 5. INVENTORIES.-Whenever in the opinion of the Assessor the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Assessor may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

SEC. 6. ASSESSOR MAY REJECT METHOD OF ACCOUNTING EMPLOYED BY TAXPAYER — Notwithstanding any other provisions of this Act, the Assessor is hereby authorized to reject any return of income reported on a cash basis where, in his opinion, the net income of the taxpayer is not properly reflected and cannot be determined on such basis, and to require the return to be filed on such a basis as in his opinion will properly reflect the net income of the taxpayer.

TITLE V-RETURNS

SEC. 1. (a) FORM OF RETURNS.-The Assessor is hereby authorized and directed to prescribe the forms of returns. All returns required under this title shall be filed on the forms and in the manner prescribed by the Assessor.

(b) TAXPAYER TO MAKE RETURN WHETHER FORM IS SENT OR NOT.-Blank forms of returns of income shall be supplied by the Assessor. It shall be the duty of the Assessor to obtain an income-tax return from every taxpayer who is liable under this Act to file such return; but this duty shall in no manner diminish the obliga. tion of the taxpayer to file a return without being called upon to do so.

(c) INFORMATION RETURNS.-Every person subject to the jurisdiction of the District in whatever capacity acting, including receivers or mortgagors of real or personal property, fiduciaries, partnerships, and employers making payment of dividends, interest, rent, premiums, annuities, compensations, remunerations, emoluments or other income to nonresidents, foreign partnerships, foreign unincorporated businesses and foreign corporations, shall render such returns thereof to the Assessor as he may by rule prescribe.

SEC. 2. REQUIREMENT.-Each of the following persons shall file a return with the Assessor stating specifically the items of his gross income and the items claimed as deductions and credits allowed under this Act, and such other information for the purpose of carrying out the provisions of this Act as the Assessor may require:

(a) RESIDENTS AND NONRESIDENTS.-Every nonresident of the District receiving income subject to tax under this Act and every resident of the District, except fiduciaries, when

(1) his gross income for the taxable year exceeds $1,000, if single, or if married and not living with husband or wife; or