We therefore urge your support of this legislation as a great help to the selfemployed-who are the operators of a large segment of business firms in this country. if not the majority.

Sincerely yours,

WATSON ROGERS, President.

STATEMENT OF CHESTER D. SwOPE, D. O., CHAIRMAN, DEPARTMENT OF PUBLIC RELATIONS, AMERICAN OSTEOPATHIC ASSOCIATION, RE RETIREMENT FUNDS FOR SELF-EMPLOYED AND OTHERS NOT COVERED BY EXISTING PENSION PLANS

My name is Dr. Chester D. Swope. I am a practicing osteopathic physician, with offices in the Farragut Medical Building, Washington, D. C. My appearance here is in my capacity of chairman of the department of public relations of the American Osteopathic Association.

We appreciate the privilege of expressing our views regarding authorization of restricted retirement funds for self-employed and others not covered by existing pension plans, particularly as proposed in the identical bills, H. R. 10 (Jenkins), H. R. 11 (Keogh), H. R. 2692 (Camp), and H. R. 6114 (Elliott), now pending before this committee and cited as the "Individual Retirement Act of 1953." At its regular session in December 1951, the board of trustees of the American Osteopathic Association took the following action:

"Resolved, That the board of trustees of the American Osteopathic Association favors in principle amending the Internal Revenue Code so that taxpayers not covered by a pension plan qualified under section 165 of the code may be encouraged by a tax credit, a tax deduction, or other means to accumulate out of earned income funds which would be available under appropriate regulations of the Treasury Department to provide retirement income for such taxpayers." The house of delegates of the association, in convention, July 1953, affirmed the resolution but withheld approval of the Jenkins-Keogh-Camp-Elliott bill, pending adoption of appropriate amendments qualifying certifications of total and permanent disability by licensed doctors of osteopathy.

The bill permits a self-employed or pensionless employed person to have deferred until distribution the tax on income which he has paid to a restricted retirement fund or as premiums under a restricted retirement annuity contract, provided the fund or annuity contract requires that distribution during his lifetime may not be made to him prior to age 65, except in the case of his total and permanent disability, which shall be certified to the trustee or insurance company, as the case may be, "by affidavit of a licensed doctor of medicine other than the taxpayer."

We request amendments substituting the term "licensed doctor of medicine or osteopathy" in lieu of the term "licensed doctor of medicine" (p. 6, lines 9-10, and p. 11, lines 8-9).

In the absence of such amendments, affidavits of total and permanent disability of participating persons by licensed doctors of osteopathy will not qualify for certification purposes.

The bill defines total and permanent disability as follows:

"a disability shall be deemed to be 'total' if it prevents a person from engaging in any substantially gainful activity from which he can earn a livelihood, and it shall be deemed to be 'permanent' during its further continuance after it has continued for a period of three months or if the person has suffered the entire and irrevocable loss of the sight of both eyes or the severance or entire loss of use of both hands or of both feet or of one hand and one foot: Provided, That any such disability commences before age sixty-five" (pp. 6-7).

Our requested amendments are in consonance with practice under Federal disability programs as follows: Veterans' partial or total and permanent disability pension or compensation examinations by licensed doctors of osteopathy are acceptable by the Veterans' Administration under the same rules applicable to examinations by licensed doctors of medicine; the Bureau of Employees' Compensation applies a similar rule in the case of injured Federal civil employees; the Railroad Retirement Board follows the same rule for disability retirement purposes; and the regulations of the Civil Service Commission permit a similar application in the case of disability retirement of Federal civil-service employees.

Doctors of osteopathy are licensed and practicing in all of the States. For admission to examination for licensure, the licensing agencies of all States require high-school graduation, a minimum of 2 years' preprofessional college work, and 4 years' professional college work. Of the 529 matriculants in the

fall of 1952 in the 6 osteopathic colleges (there are no osteopathic colleges other than the 6 approved by the American Osteopathic Association), 84 percent had 3 or more years' preprofessional college training, 69 percent had baccalaureate degrees. Some three-fourths of the States grant doctors of osteopathy unlimited licenses, including major operative surgery and drugs. In the remaining States, legal competence is limited in varying degree as to drugs or surgery, but professional competence is common to all States because of the common sources of supply.

With the exception noted, and correction indicated, we are heartily in favor of amendments to the Internal Revenue Code as proposed in the Jenkins-KeoghCamp-Elliott bill.

By the provisions of sections 23 (p) and 165 of the code, Congress already has encouraged private pension plans for employees by tax deferment on employer contributions. In other words, the employee is not taxed currently on what his employer pays into the fund in his behalf (which is in the nature of additional compensation). He is not taxed on that portion of his income until distribution at retirement. That tax deferment puts such employees in a tax-favored class. In order to remove the resultant discrimination against the self-employed and employees not covered by such pension plans, and to offer a comparable incentive to voluntary savings, the bill permits such persons a postponement of tax on a limited portion of earned income, as distinguished from investment income, paid into a so-called restricted retirement fund or as premiums for a restricted retirement annuity contract, the amount so excluded, together with accretions, to be taxed when distributed as retirement benefits. The amount excluded each year could not exceed 10 percent of earned net income, or $7,500, whichever is the lesser, with a lifetime limit of $150,000 excluded. Persons 55 years of age on January 1, 1953, could exclude an additional 1 percent or $750 for each year of age in excess of 55, determined as of January 1, 1953, but not more than 20. A 5-year carryover of unused exclusions is provided for. Organizations may sponsor plans for the benefit of their members, or members or others may contribute to a restricted retirement fund set up by a bank or trust company for those electing to participate.

In excess of 11,500 self-employed osteopathic physicians would be eligible to participate in such a voluntary savings-tax deferment plan, and the American Osteopathic Association in their behalf respectfully petitions Congress for the opportunity.

Hon. DANIEL A. REED,

AWALT, CLARK & SPARKS, Washington, D. C., August 11, 1953.

Chairman, Committee on Ways and Means,

House of Representatives, Washington, D. C.

DEAR CONGRESSMAN REED: I understand that today your committee is holding a hearing on item 36 of your scheduled list of subjects in your present study of necessary tax revisions. This is the subject of retirement funds for selfemployed and others not covered by existing pension plans.

As chairman of the committee on taxation of the Bar Association of the District of Columbia, I have been authorized to state that the bar association endorses the system of taxation of voluntary pension plans for individuals embodied in pending bills H. R. 10 and H. R. 11. We believe it very important that self-employed individuals who are ineligible to participate in corporate or similar pension plans be encouraged to provide for a reasonable amount of security for their later years. The plan embodied in the pending bills will, we believe, assist self-employed persons in creating a reasonable retirement fund. The enactment of the proposed legislation will also go far to eliminate the present discrimination against the self-employed resulting from the present tax treatment of corporate pension plans and their participants. Accordingly, the Bar Association of the District of Columbia joins with numerous other professional groups in recommending the enactment of the pending legislation. I should appreciate it if you would arrange to make this letter a part of the record of your committee's proceedings on the subject of retirement funds for the self-employed.

Very sincerely yours,

SAMUEL O. CLARK, Jr.

[Reprint from the April 1953 issue of the Business Lawyer]

RETIREMENT BENEFITS FOR THE SELF-EMPLOYED (JENKINS (REED)-KEOGH BILLS, H. R. 10 AND H. R. 11)

(By John R. Nicholson *)

This subject, "Retirement Benefits for the Self-Employed," has been treated by many in the past in a somewhat offhand way. Now, however, tax incentive legislation is before Congress and being seriously considered which will make it easier to accumulate funds for retirement. With this prospect you may want to ask some serious questions. You may ask, What benefits? How are they to be obtained? When can I get them, and how much will they cost?

There are 11 million citizens who pay income taxes upon their earned income against whom the present Federal tax laws unjustly discriminate as far as retirement is concerned. This group is comprised chiefly of the self-employed, such as accountants, chemists, artists, farmers, doctors, dentists, lawyers, engineers, writers, industrial designers, shopkeepers, and many others. There may also be included in this group a large number of employed persons whose employers have been unable or unwilling to set up an employees' trust for their employees under section 165 (a) of the Internal Revenue Code.

Lawyers comprise only a small segment of this vast group, but they, like the doctors, are particularly hard hit by these inequities in the tax laws because of the very nature of their professions. It is a known fact that the lifetime income curve of a professional man is generally parabolic. The income rises slowly in early years, then it advances rapidly to a peak where it stays for a few years, then it declines gradually. The problem faced by all who have such a lifetime income experience is to lay something aside from those peak-earning years to provide for themselves and their families.

Since this article is being written for The Business Lawyer, the subject will be discussed chiefly from the standpoint of the legal profession, although the proposed legislation under discussion is not so limited in any way.

For lawyers, perhaps the question should be stated specifically and directly in this way. In these days of high graduated income tax rates, how can a practicing attorney, who is enjoying a good income from his professional services, set aside and save enough so he can retire at retirement age if he chooses to do so? It is obvious there is no commonplace answer or foolproof plan that would make this easy of accomplishment. Nevertheless, some 8 million employed citizensalmost all of them nonprofessional-have found considerable help in the present income tax laws in accomplishing this objective. These eight million are the participants in some 16,000 or more employees' trusts that have been set up for employees by their employers. Such trusts have been qualified as so-called "employees' trusts" under section 165 (a) of the Internal Revenue Code.

As you know, moneys paid into these trusts by the employers are deemed to be a business expense, and constitute a tax deduction for the employer. More important to the employee is the fact that he does not have to pay any income tax on his company's contribution until the benefits are actually paid out.

Among these 8 million participants who find great aid in the present tax laws in building up retirement benefits for themselves are many officers of corporations. These officers are employees of the corporation as well as officers and hence can participate in an employees' trust just as can the operator of a kick press employed to work in the plant. Many of these participating officers are also owners of large blocks of stock in their corporation. This does not disqualify them from participating, subject to limitations, even though they may draw excellent salaries and receive dividends on their stock.

The employee does not currently pay a tax upon the sums paid into the employees' trust for him by his employer. For instance, if Mr. A, the president of corporation X, draws a salary of $50,000 a year and corporation X pays into its qualified employees 'trust each year for Mr. A the sum of $3,000, the taxable income of Mr. A is not thereby increased to $53,000. Mr. A pays income taxes only upon $50,000, the amount of his salary, unless, of course, he has income from other sources. The $3,000 paid to the employees' trust for Mr. A's benefit is not a part of his taxable income until he actually receives it from the trust some years later-usually after his days of high earned income are past. The

1 Section of corporation banking and business law, American Bar Association. Of the Chicago bar, chairman of the section's committee on noncorporate business organizations, and member of the association's special committee on retirement benefits.

same is true of moneys paid into such qualified employees' trust by an employer for a clerk in the office or a workman in the plant. These employed persons are having moneys paid into a trust for them and they do not currently pay taxes on such sums.

However, under the tax laws and the regulations thus far promulgated, partners are not employees of the partnership entity and may not participate in an employees' trust set up by a partnership for its employees. The same disqualification applies to a sole proprietor. Consequently, there are fewer employees' trusts established by partnerships and proprietorships than would be the case if partners and proprietors could participate as do the officers of corporations.

The 11 million taxpayers, largely the self-employed, are not given this assistance and find no aid in the tax laws in their efforts to lay aside something adequate for retirement. This inequity in our tax laws is a tragic one for these 11 million citizens. There is no reason for it. It has no basis in logic or fairness. The writer has found no responsible person who contends that there is any just or reasonable basis for this discrimination in the tax laws against the self-employed. It is this inequity which H. R. 10 and 11, the so-called Jenkins (Reed)-Keogh bill, now pending before Congress, seeks to remove.

This inequity that confronts us finds its origin in Federal legislation that has been enacted by the Congress over the past 18 years. It may be said that the Social Security Act of 1935 introduced a new doctrine of social responsibility. In brief, the theory of this legislation was that the Government would provide minimum benefits for the aged. It is not sought to condemn the Social Security Act nor deny that it has real benefits, but because of its limitations, and also because many were excluded, the Social Security Act itself actually developed grave inequities. Then came the Revenue Act of 1942 with its provisions for employees' trusts.

The effect of this legislation is well described in a bulletin entitled "IncomeTax Discrimination Against the Professions," by Dr. Frank G. Dickinson, director, Bureau of Medical Economic Research, American Medical Association, which refers to this legislative background-both the Social Security Act and the Revenue Act of 1942. An excerpt follows:

"The old-age and survivors insurance sections of this act provide for employee pensions financed by equal taxes paid by employer and employee on the portions of annual salaries not in excess of $3,000. Employers pay their share out of gross receipts. Their payments, as costs of doing business, are income tax free. Employees, on the other hand, cannot deduct their contributions for income-tax purposes, but the pensions, when received, are not subject to Federal income taxes. The effect of the act was to provide proportionally greater benefits for those with incomes below $3,000. Before the new social theory could become properly integrated with our way of life an inequity such as this had to be eliminated.

"Section 165 (a) and related sections of the 1942 Federal Internal Revenue Code provide for additional pensions or shares in profit-sharing trusts on the basis of total income, not just that portion under $3,000. Although these additional pensions and profit-sharing plans largely benefit those with incomes of less than $3,000, I firmly believe that section 165 (a) and related sections were primarily designed to round out the program first introduced in an incomplete form in the depression-born Social Security Act in that they provide more equitable treatment for those with incomes above $3,000 in an era of steeply progressive income-tax rates. Since the code's provisions, however, are restricted to employees, including executives of corporations, those who conduct their businesses or professions as single proprietorships or partnerships are excluded. Thus, all single proprietors or partners-farmers, shopkeepers, professional men-suffer this income-tax discrimination.

"The very nature of professional work and training makes this discrimination a particular hardship for professional men. The total lifetime income taxes paid by a professional man on a lifetime income may greatly exceed those paid by a nonprofessional person on the same lifetime income because the former has a long training period and his high earnings are 'bunched' into a relatively small number of peak earning years."

The above article, of course, was written before Congress raised the $3,000 limit on covered wages to $3,600.

A statement of Mr. George Roberts, chairman of the special committee of the American Bar Association on retirement benefits, is also pertinent. Mr. Roberts said:

It is now practically universal in corporations of any size to have a pension plan which in most cases is a noncontributory plan and which gives a

substantial amount of security against old age and disabiilty. Scarcely a month goes by but some young lawyer talks to me about the advisability of his abandoning the independent practice of law and joining a corporation, sometimes as a lawyer and sometimes as one of the corporation's executives. The persuasive argument is always the security afforded by the corporation's pension plan. I have no doubt that the same tendency exists in the other professions. ***

"I ask you, gentlemen, to consider this problem, not only from the standpoint of fairness and equity to the individuals involved but also from a standpoint of public policy. Is it for the best interests of this country that legislation should be so framed that the professions and self-employed are not encouraged but are discriminated against in favor of employment with corporations-the bigger the better?"

How should this inequity in our tax laws be removed? Certainly not by doing away with the 16,000 qualified profit-sharing retirement or pension trusts that have been established by employers for their employees. The principle underlying these trusts is sound. The practice has become an important and integral part of our business and economic structure. Many employees of companies, including office stockholders, find that one of their most important nesteggs for the future is comprised of their interest in the employees' trust that has been set up by their employer. No one seriously contends that the advantages of section 165 (a) of the Internal Revenue Code should be removed in order to eliminate the discrimination against the 11 million self-employed. Such would be a backward step.

This gross inequity can be removed by a forward-looking, constructive step by instilling in millions of citizens in this country who pay income taxes the desire to save and by giving them a tax incentive to save voluntarily. This would again develop in these millions of taxpayers, who now feel completely frustrated so far as saving is concerned, the desire to themselves provide for their own retirement and for their families. This will build up a self-respect of inestimable value that has been fast waning under the present high taxes and the inequitable treatment of these 11 million citizens-largely the self-employed. Before giving a synopsis of the proposed legislation, a few remarks about its background seem appropriate.

On June 7, 1951, the original bipartisan Keogh-Reed bills, H. R. 4371 and 4373, were introduced in the House of Representatives at the request of the American Bar Association's Special Committee on Retirement Benefits. A coordinating committee on retirement benefits for the professions and the self-employed was organized. This committee is composed of representatives of more than a score of organizations-mostly professional—and of the American Farm Bureau Federation. The bills were studied by the representatives of many national organizations. Conferences were held with the technical staff of the Joint Committee on Internal Revenue Taxation in Congress.

On June 27, 1952, revised drafts of these identical bills were introduced by Representative Eugene Keogh, Democrat, and Representative Daniel Reed, Republican, both of New York. The revised bills attempted to incorporate a number of amendments and changes that were suggested by some 19 persons who had previously testified at a hearing before the Ways and Means Committee. These bills were referred to the Committee on Ways and Means but it took no action before Congress adjourned on July 7, 1952.

At the opening of the present 83d Congress the present bills, identical with those left pending in 1952, were introduced as H. R. 10 and 11. Congressman Daniel Reed is now chairman of the Ways and Means Committee and introduced H. R. 1, providing for a tax reduction. For this reason Mr. Reed did not think he should introduce H. R. 10 and it was introduced by Republican Congressman Jenkins. H. R. 10 and 11 are identical bills. They are pending before the Ways and Means Committee and are now awaiting a hearing before that committee and a report by the Treausry Department. For brevity the pending legislation will be referred to as "H. R. 10" or "the measure under discussion."

WHAT IS H. R. 10?

H. R. 10 is a bill to encourage the establishment of voluntary pension plans by individuals. It is so entitled. It provides that it is to be known as the Individual Retirement Act of 1953. It provides for excluding from gross income in any taxable year that portion of an individual's income for such year paid into a "restricted retirement fund" or paid to a life insurance company as premiums under a "restricted retirement annuity contract." Those "restrictions" will be referred to later. Of course, the excluded portion of the gross