October Mr. M. Dear Mr. 7, 1940 A. Browning, Ogden, Utah. Browning: As you know, very strenuous efforts have been made by the American Institute of Accountants and various trade and business associations to have the meaning of the words "earnings and profits" defined in the Federal Income Tax Law. The report of the House Ways and Means Committee, as well as the proposed excess profits taxation and special amortization bill H.R. 10413, provide for an amendment to clarify the law with respect to what constitutes earnings and profits of a corporation. The Treasury Department have been following, through their Rules and Regulation Section of the Internal Revenue Bureau, the doctrine that gains and losses which are not recognized should neither increase or diminish the earnings or profits. Asa result of this practice it was possible for us to get a letter from the Bureau stating that the nationalization of the First Security Bank of Idaho would be non-taxable and that "earnings and profits" would not be increased through this non-recognized transaction. This was directly in conflict with the practice adopted by the General Counsel's office of the Bureau. The new section of the law, as we interpret it, provides that transactions which are not recognized for tax purposes will not increase or decrease the earnings or profits of @ corporation. There still are transactions which will have to be carefully watched. For example, the excess of capital losses over the $2,000.00 limitation in personal holding companies, also transactions between wholly owned corporations resulting in a loss. Transactions of this nature, however, are within the control of the corporation. if the new law is signed, and we have every reason to believe that it will be, the fear that has been with us relative to tax free reorganizations, within the meaning of the Federal Tax Law, wherein a minority stockholder might be forced to take a non-recognized loss and have this loss deducted from surplus account for dividend credit purposes, will be eliminated. We have just received a copy of the Revenue Act of 1940 and the desirable provisions relative to a definition of "earnings and profits" are contained in Section 501 of the bill. Under Section 727 personal holding companies are also exempt from the provisions of the excess profits tax. It is fully expected, according to the press, that the President will sign the bill today. Very GMB:c truly yours,