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and a substantial amount of litigation will be necessary in order to find out just what is and what is not a statutory consolidation or merger.

The CHAIRMAN. You do not think this simplifies any proportion of reorganization?

Mr. GASKILL. I do not, sir. If the present provision is objectionable-and I do not think it is; but if it is-I think they should attempt to substitute the omission. When you are planning a reorganization and reorganizations are quite necessary in these days-it is necessary, as far as possible, to know in advance what your tax liability is going to be, and I am afraid that lawyers and accountants and business men will have great difficulty in finding out whether their reorganization is going to be taxable or nontaxable, under the bill as drawn.

Second, the House has taken out the provision permitting a taxfree distribution of stock in connection with a reorganization. That may be necessary and feasible in a few instances to prevent tax avoidance, and that is the reason it was taken out. However, it will unduly interfere in a great number of legitimate business transactions. For example, it is sometimes necessary to split off a branch of the business into a separate corporation and to give the stock of the new corporation to the stockholders of the old corporation. That is what that provision was in there for. It is quite often necessary to employ just such a reorganization. Clearly, in such a case as that, that is, the ordinary instance there is no element of tax avoidance. There should be no tax upon the stockholders because of the receipt of their stock, as they get no cash out of which they may pay a tax. We also question whether there has been as much avoidance, by virtue of the provision, as is claimed in the report of the Ways and Means Committee. The report that was submitted by the Subcommittee of the Ways and Means Committee contains certain examples. There are three of them, and they relate to those. Example no. 7 on this, in our opinion, is not correct. It states that there is no tax in that case. We think that there is a tax in that case. The other two are cases where we do not think there should be any tax anyway-simply paper profits, where you have no money with which to pay a tax; and we take the position in that case, no tax should be paid. The brief that I will leave with the committee discusses that at greater length.

Next, "Consolidated returns." Our organization takes the position that the additional 1-percent premium for filing consolidated returns is not justified.

The CHAIRMAN. They would rather have that than the prevention of consolidated returns, though, would they not?

Mr. GASKILL. Well, we haven't regarded it as a trading proposition. The CHAIRMAN. If the two propositions were put up to you, as to whether you were going to accept that provision and were willing to carry out that provision, or one abolishing consolidated returns, which do you think would be preferable?

Mr. GASKILL. We should rather have it as it is now, sir. But at the same time we feel that the provision to abolish consolidated returns would not be fair either to the Government or to the taxpayer.

Distributions in liquidation, section 115 (c). The bill, as passed by the House, provides that distributions in liquidations, if they result in a gain, shall be taxed at the full normal and surtax rate without regard to the time when the stock is held. Our organization takes the position that in a distribution in liquidation you have the essential equivalent of an exchange. It resembles that more than anything else, and we feel that there is no justification for taxing it at the full rates. However, the bill provides that in case a loss is realized upon a reorganization, that is subject to the percentage arrangements, as in the case of gains. In other words, if a man held stocks in 2 corporations for 5 years, and he had a gain on one and a loss on the other, in his same return and for the same year would be required to pay 100 percent on the one-that is, the full tax-and the other he could only deduct from that gain 40 percent of it. That, I think, is obviously unfair, and if you are going to treat gains from realizations from liquidations in one way, losses from realizations from liquidations should be treated the same..

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The bill as passed by the House extends the statute of limitations on assessments from 2 years to 3. Our organization takes the position it should be 2 years; that the uncertainties of tax liabilities are difficult and a regretable incident of our income-tax laws, and that they should not be further extended. They seem to be auditing returns and getting along very well on the 2 years. They are caught up with them after a fashion. There is some delay, of course, but we think that after a year it would be all just the same as if it were 2 years. If it is true that sometimes it is necessary to execute a waiver and extend a case beyond the 2-year period, that is not a hardship upon the taxpayer or the Government in particular cases. I think that it takes care of that situation very nicely.

The same is true of refunds. We agree with the provision that the period of limitations upon refunds should be the same as limitations upon additional assessments. We would make this suggestion. however, that that same principle be extended further and that a taxpayer be given the right to file a claim for a refund during the period where the Government has an additional period in which to make additional assessments; for example, where it is necessary to give a waiver and I think those waivers are more often really at the suggestion of the Treasury, rather than at the suggestion of the taxpayer-but during the period where the statute of limitations is still in force, by reason of a waiver, we think a taxpayer should have a right during that period to file a claim for refund. The same thing is true during the period that follows the issuance of a 60-day letter. where the Treasury has an additional 60 days within which to make an assessment. During that period the Treasury could send out a letter at the last moment, just before the statute of limitations expired, and during that period could make an additional assessment, and the taxpayer could not obtain a refund of these though he filed a petition with the board, because the filing of the petition under the new bill would be after the date when he might claim a refund.

On the tax-rate structure we take the position that the new plan of decreasing the normal tax and increasing the surtax, or, rather. extending it to the lower brackets, is unjustified. Admittedly, it will

produce more revenue. We think that the income, having once been taxed to the corporation, is deserving of a higher exemption than 4 percent when again taxed in the hands of the shareholders.

Interest on money borrowed to purchase tax-exempt securities, section 23 (b). That affects banking institutions and denies them the right to deduct interest paid on deposits when the deposits are used in carrying tax-free securities. We draw attention to the fact that it is difficult or impossible to ascertain whether particular moneys are used, whether it is the capital of the bank, or whether it is the deposits that are used for the purchase of these taxable securities. Senator WALSH. Hasn't that subject been dealt with by the committee?

The CHAIRMAN. The committee has not finally passed on it, but that matter has been presented, and we are giving it consideration. We will be glad to get your brief on that Mr. Gaskill.

Mr. GASKILL. This allowance of losses between members of a family: We think that the definition of a "family", as contained in the bill passed by the House, is too broad. It would interfere with legitimate transactions between members of the same family, at most I think it should be limited to a man and his wife, or perhaps to a man and his son or daughter, but not to brothers and sisters, ancestors and lineal descendants, as covered by the bill which passed the House.

I have other points, but I will make only one more. The rest will be covered in the brief, because I do not want to encroach upon the time of the others here," Federal estate taxes, prior taxed property." "That is an extremely technical point. The bill contains an entirely worthy endeavor to prevent the exemption of property from taxation where the death of one decedent occurs more than 5 years after another. It has been the plan of estate tax laws to exempt from taxation a property which would otherwise be taxed in the estates of two decedents within a period of 5 years. In the way the present law is drawn it is possible for one decedent to die, then another decedent, and the third decedent might die 9 years after the first, and yet his property would be exempt from taxation. It is entirely proper to prevent that, and to limit it to 5 years. However, the way the bill is drawn, as it passed the House, it is possible for the third decedent to die within, say 3 years or even 2 years from the time of the death of the first one, and you would tax it again. It is a matter of draftsmanship.

Senator CONNALLY. It would be inherited again, would it not? Someone else would get it, wouldn't he?

Mr. GASKILL. Yes, sir; but the property would be taxed more than once.

Senator CONNALLY. We are not taxing the property. We are taxing the person that gets it.

Mr. GASKILL. You levy a tax on the decedent's estate.

Senator CONNALLY. Surely. He takes it, charged with that.

Mr. GASKILL. But the point I am making is that under certain conditions, the way it is now, it is possible for the same property to be taxed, or the tax computed upon the same property more than once within 5 years.

Senator CONNALLY. Why not? If there is more than one death in 5 years, why should we not tax it more than once?

Mr. GASKILL. That, of course, would represent practical confiscation of property.

Senator CONNALLY. We are not dealing with confiscation.

Senator CLARK. We are taking the property inherited.

Senator CONNALLY. That is the trouble with a lot of you tax fellows. You look on a dollar as the only thing in the bill. We are taxing the man's right to inherit it or to transmit it, which is a privilege. If it vests 2 or 3 times, we should tax it 2 or 3 different times. Senator REED. It is a very unusual case, is it not, when two successive inheritances occur within the 5-year period.

Mr. GASKILL. I do not think it is, sir. For instance, there may be an elderly couple. The man dies, then the wife; and when the wife dies, it would be inherited by the son. Then, if the son should die there would be a double imposition of the Federal estate tax within a period of a few years. It is not often, but our organization thought that the bill, as it passed the House, had no intention of assessing two taxes in the event of the contingency stated.

Senator REED. The committee hasn't reached that, however, in its study of the bill. In fact, what the House does is to permit only one tax-free inheritance; isn't that so?

Mr. GASKILL. Within 5 years.

Senator REED. Within 5 years?

Mr. GASKILL. That is right, sir, I have a report of our committee which I desire to present at this time for the record.

The CHAIRMAN. Thank you very much, Mr. Gaskill. (The report referred to is as follows:)

To the Board of Directors the Cleveland Chamber of Commerce:

GENTLEMEN: Your committee on Federal taxation has given consideration to the revenue bill of 1934, H.R. 7835, as passed by the House of Representatives on February 21, 1934.

The report of the Committee on Ways and Means accompanying H.R. 7835, states that the " primary purpose of the bill is to increase revenue by prevention of tax avoidance." Your committee is in favor of any changes in the Federal tax laws which will serve to prevent unjust avoidance of the tax. It is thought, however, that the Committee on Ways and Means, under the guise of preventing tax avoidance", has endeavored to raise more money from the income tax by means unjust to American taxpayers.

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The yield of the income tax necessarily varies with the prosperity of the country and the reduction in this yield comes at a time when the need for Government revenue is the greatest. It is thought, however, that the revenue requirements do not justify an unfair and unjust income-tax burden upon certain taxpayers. The report of the Committee on Ways and Means states that the revenue bill and certain changes in administrative practice will produce additional revenue in the amount of $258,000,000. If it is necessary to raise this additional amount to pay for the activities of Government, Congress should have the courage to provide the money from other sources.

The occasion for the views so stated will be apparent from the comments made below concerning certain of the proposals now contained in the revenue bill of 1934.

1. TAXATION OF GAINS AND LOSSES

The congressional committee has recommended that gains from the sale of property be taxed, but that losses from such sales be allowed only to the extent of gains. This proposal would require a payment of tax if a taxpayer's gains exceed his losses; but if the losses exceeded the gains, the taxpayer would not be allowed to deduct the excess losses from his ordinary income. Thus a taxpayer may be called upon to pay a substantial tax upon his ordinary income without receiving any deduction for genuine losses he has sustained from the sale of property. If Congress has been correct in its assumption that gains

from sales represent income, then losses from sales should represent deductions from income. The one-sided arrangement now proposed by the congressional committee is obviously unfair.

The congressional committee has also recommended a plan to determine the amount of the profit partially by reference to the period during which the asset was held before sale. The percentage of profit to be taxed depends upon the period of time during which the property was held, ranging from 100 percent if the asset has been held for not more than 1 year to 40 percent if the property has been held for more than 5 years. Previous plans based upon the same theory have been rejected by Congress and the present plan likewise should be rejected. If, under this plan, an asset is held more than 2 years before the sale, but not less than 5 years, 60 percent of the profit would be taxable at the full rates of normal and surtax. Considering the present and proposed high rates, such a provision in many cases would prevent the sale. Moreover, it is believed that the plan would tend to complicate preparation of income-tax returns. The present plan of taxing such "capital gains" at a flat rate of 12% percent, while, perhaps, not perfect, seems preferable to the one proposed. In the event that the plan for taxing gains as set forth in the revenue bill is adhered to by Congress, provision should be made to the effect that losses in excess of gains, which are disallowed for any year, could be deducted from similar gains realized during 2 or 3 succeeding years. This provision would lend some measure of justice to an otherwise unfair provision of the law.

2. EXCHANGES AND REORGANIZATIONS

In the various revenue acts since 1918 Congress has endeavored to prevent the injustice that would necessarily result if taxpayers were called upon to pay an income tax in cash from theoretical or paper profits resulting from certain specified types of exchanges of property such as a substitution of stock or securities upon the reorganization of a corporation. Provisions to this effect have undergone a constant improvement. These same provisions have prevented the claiming of losses upon such transactions. The theory of the present laws, developed after years of effort, is that the profit or loss is deferred in such cases until there is some actual realization upon which a tax could be equitably based.

The new revenue bill proposes to restrict the definition and scope of so-called "corporate reorganizations" which have heretofore been excluded in determining gain or loss. The questions so presented are extremely technical, and a detailed discussion will be avoided. Your committee has considered these provisions in detail, however, and has reached the conclusion that the proposed change is a backward step. It is thought that the provisions of the present law do not permit tax avoidance to any considerable extent, and that the Committee on Ways and Means has been misled in conclusions to the contrary. Hypothetical cases set forth in the report of the subcommittee of the Committee on Ways and Means present instances which are not likely to happen and which, moreover, do not present any real injustice to the Government. Hypothetical cases 6 and 8, upon which one of the changes is based, discloses a misunderstanding of the present law and are incorrect.

It is also pointed out that the change proposed in the definition of reorganizations will bring about great confusion in the interpretation of the law, and that the application of the provision to specific instances will result in extensive litigation with the Government.

Generally speaking, the changes proposed will prevent the consummation of transactions which are entirely proper and which in fact are necessary and advisable during a period of reconstruction. The prevention of such transactions does not produce any revenue for the Government and creates unreasonable interference with the proper transaction of legitimate business. If it is true that present provisions have permitted "avoidance" of tax in rare instances, there is still not occasion to punish the great majority of innocent taxpayers who have dealt fairly with their Government.

3. TAX-RATE STRUCTURE

The bill proposes to increase the surtax and to lower the normal tax. No saving in tax, however, is intended for any class of taxpayers, except that an earned-income credit is provided. Changes in the rate structure are intended to increase the tax rate applicable to dividends subject only to surtaxes. This

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