The Revenue Act of 1938

In August, 1937, the House of Representatives took official notice of complaints against the undistributed profits tax and authorized the Committee on Ways and Means to study and recommend needed revisions of this and other features of federal revenue laws. On the basis of the study and the report of a special sub-committee, the Committee on Ways and Means drafted a bill to retain a much reduced surtax on undistributed corporate profits. Corporations with net incomes of $25,000 or less were to be exempted. It proposed, however, a new penalty tax on closely held corporations. The House refused to accept this so-called "third basket" but approved most other provisions of its Committee's bill. The Senate bill eliminated the undistributed profits tax entirely and modified the House sections respecting the taxation of capital gains and losses. In conference, the House managers secured the retention of the reduced undistributed profits tax on corporations, but the Senate managers succeeded in limiting its operation to two years only, 1938 and 1939. Few important changes, other than those relating to capital gains and losses, were made in the sections of the law taxing individual incomes but numerous excises were abolished. The President would neither sign nor veto the bill, hence it became law May 28 without his signature.