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

is done by a rather ingenious extension of the surtax rates which apply not only to dividends but to other income. The increase in the surtax is intended to counterbalance the reduction of the normal tax rate, with the result that a salaried man and a taxpayer receiving ordinary income will pay substantially the same amount of tax as under the present law.

Dividends have been exempted from the normal tax on the theory that the corporation has already paid one tax, and that double taxation is avoided to some extent by exempting the dividends from normal tax. There is an injustice even under the present law, since the corporation rate is 13% percent and the highest bracket of normal tax is 8 percent. The proposed change would reduce this saving to 4 percent by prescribing a flat 4 percent normal tax rate. The difference between this and the corporation rate is 94 percent. Your committee sees no reason for discriminating to this extent against incorporated business. Taxpayers who transact business in the corporate form should not have this unjust additional burden thrust upon them.

4. CONSOLIDATED RETURNS

The bill proposes to require an additional income tax of 2 percent for the “privilege of filing consolidated returns. Your committee sees no justification for this proposal. Consolidated returns are necessary in many cases to reflect properly the net income of a consolidated group of corporations. In view of the complex structure of our State laws, it is now necessary for many incorporated businesses to have branch or subsidiary corporations. There appears to be no justification for the increase thus proposed.

It should be noted that in the act of 1932 an additional tax of three fourths of 1 percent was imposed upon consolidated net income, and this additional tax was increased to 1 percent by the National Recovery Act. Your committee, accordingly, is opposed to the provisions contained in the present law and believes that, in no event, should the tax on consolidated returns be increased.

5. PERSONAL HOLDING COMPANIES

The revenue bill proposes a tax of 35 percent upon the "undistributed net income" of "personal holding companies."

The report of the Committee on Ways and Means upon which this provision is based, appears to assume that personal holding companies are utilized for the prevention of surtaxes on the shareholders. If such is the case, a reasonable measure to prevent the practice is justified, although it is thought that penalties in the present laws for the most part have been effective in discouraging it. It is thought that the proposal made by the congressional committee to cure the alleged evil, while perhaps efficacious for that purpose, if the evil exists, by its terms will serve to impose a severe hardship upon corporations for outside the class of those sought to be penalized. For example, if a coal mining company having five stockholders had leased its property to others and was required to use its lease income for payment of debts or a bond issue, previously contracted, the corporation would be subject to a 35 percent tax upon the greater part of the income applied to the payment of debts. A mortgage company whose income consisted almost entirely of "interest" and which was required to make capital expenditures upon properties acquired at foreclosure or which had found it necessary to pay off prior indebtedness against property, might be required to pay to the Government a tax of 35 percent upon such capital expenditures. A corporation owning and operating an office building or apartment houses, which derived its income from "rents ", might be required to pay to the Government 35 percent of expenditures made by it for necessary capital improvements and for debt payments. It has been stated that certain corporations which would fit the definition of "personal holding companies" have been required by creditors or are required by provisions of bond issues to pay off debts before any dividends can be paid to stockholders. This provision of the proposed bill might well bankrupt such corporations. Certain holding companies find it necessary to make advances to their operating subsidiaries out of dividends received from other subsidiaries or from investment earnings, and the proposed provision, in effect, would require a heavy tax upon such advances. A patent licensing corporation, deriving its income from "royalties ", might be effectively prevented from making capital expenditures which were vitally

Examples of

necessary for its business and for the business of its licensees. absurd results might be mentioned. In fact, it is probably impossible to determine by legislative enactment just who is and who is not obtaining a tax advantage from a holding company. A definition in the law which would probably penalize one personal holding company for tax avoidance, might well apply to another corporation which the legislators have no thought of reaching. It is thought that no intrinsically accurate or just rule can be provided to fit all cases which would be an improvement upon that contained in the present revenue laws.

The present law provides a severe penalty for an unreasonable accumulation of profits to avoid surtaxes. It would seem that we have adequate tribunals to determine whether the accumulation has been unreasonable and as to whether surtaxes have been avoided in particular cases. If the Treasury Department is experiencing difficulty in applying the present penalty of 50 percent, it is not necessarily alarming, and may indicate that the situation does not require drastic steps. On the whole, it is thought that the present system, or some reasonable modification thereof, is adequate and that there is no occasion for placing a provision in the law which would approach confiscation of the property of many legitimate business enterprises.

6. INTEREST ON MONEY BORROWED TO PURCHASE TAX-EXEMPT SECURITIES.

The bill provides that a taxpayer carrying on a banking business should not be permitted to deduct interest paid on deposits where such deposits are invested in tax-exempt securities. It is pointed out that it would be difficult, if not impossible, to determine whether a bank's capital or its depositors' money is used in the purchase of such securities. Aside from that, however, your committee considers that the proposal is economically unwise. Banks are large purchasers of Government securities. It is desirable to encourage such purchases by banks, not only to provide a market for Government bonds but to encourage liquidity of banks. In the interest of raising more money, the congressional committee has undertaken to tamper with an important phase of our economic situation.

7. DEDUCTION OF GIFT TAXES FROM NET INCOME

The bill provides that no deduction be allowed for the payment of gift taxes. Your committee considers it entirely proper to permit a deduction for gift taxes in computing net income. In such cases the one making a gift is required to pay out money to the Government for which he receives no benefit, and the net income is reduced to that extent.

8. DISALLOWANCE OF LOSSES AS BETWEEN MEMBERS OF FAMILY

The bill proposes to deny losses taken in case of sales or exchanges of property between members of a family or between a shareholder and a corporation in which the shareholder owns a majority of the voting stock. The term "family" is defined to include brothers and sisters, spouse, ancestors, and lineal descendants. It may be argued that there is little or no difference between a loss that arises from a transaction between a taxpayer and a member of his family and any other loss. It is thought, however, that in any event the definition of the word "family" is so broad as to discriminate unfairly against bona fide transactions between relatives.

9. ACCRUED INCOME AND ACCRUED DEDUCTIONS OF DECEDENT

The bill contains a provision requiring the income-tax return of a decedent to include amounts of income accrued up to the time of his death regardless of the fact that the income was not received at the time of death. The bill would likewise allow the accrual of deductions from income. It should be noted that in such cases the decedent necessarily had no opportunity to spend the income, and the amount so accrued is subject to death taxes. In view of these conditions, your committee sees no reason for placing additional burdens upon estates of deceased persons.

10. CASUAL SALE ON INSTALLMENT BASIS

The bill provides that the installment method of reporting income be limited to cases where the initial payments do not exceed 30 percent of the selling price. It is thought that the present limit of 40 percent is not too high. In all installment sales the taxpayer pays his tax, ratably, over the period when the cash is received, and in proportion to the amount of cash received. There is no "unreasonable postponement of tax" in such cases as the Ways and Means Committee suggests. On the contrary, the suggestion of the committee is obviously "unreasonable" in requiring the payment of tax on the full paper profit when only 30 percent of the purchase price is received during the year in which the sale is made.

11. DISTRIBUTION IN LIQUIDATION

Under all of the revenue acts, except the Revenue Act of 1921, the liquidation of a corporation has been treated as a sale of the stock. This, in the opinion of your committee, is the logical way of treating such transactions for, in practical effect, the stockholder has disposed of his stock and has received in place thereof the assets of the corporation.

The new revenue bill proposes to continue this principle, but provides that such gains should be taxed at the full rate of normal and surtax, rather than a capital gain, regardless of how long the stock has been held.

Your committee considers that the proposal is so made entirely unjust and unwarranted. The fact that the surplus of a corporation, if distributed as an ordinary dividend, might subject the stockholder to the higher surtax rates applicable to ordinary income is no indication that tax has been avoided. The transaction is essentially an exchange or a sale and the profit thereon does not escape taxation.

A still further injustice is presented in the proposal to consider losses arising from the liquidation of a corporation as capital losses, which would require a deduction of the amount of the loss according to the length of the period during which the stock was held. If a man held stock in two corporations which he had owned for over 5 years and liquidated both corporations, he would be taxed on the full gain, from one transaction, but would be permitted to deduct from that gain only 40 percent of the loss sustained on the other transaction. This proposal is so obviously unfair that it requires no further comment.

12. STATUTE OF LIMITATIONS-ASSESSMENTS

The bill proposes to extend the statute of limitations from 2 years to 3 years. There is no conceivable justification for this measure. The expense and uncertainty of tax liability is a regrettable incident of our income-tax law, particularly since our Treasury Department contests so many unfounded cases. The Department should be required to make assessments of additional taxes within the shortest possible period. The present period of 2 years is adequate.

13. UNDERSTATEMENT OF GROSS INCOME

The bill proposes that the statute of limitations should not apply to cases where the taxpayer has understated his gross income on his return to the extent of 25 percent, even though there is no fraud with intent to evade the tax. The income tax is complicated and technical, and even our courts disagree upon questions as to what constitutes "gross income." Under the measure proposed, a taxpayer might be required to decide a doubtful question against himself or waive the benefits of the statute of limitations. The Government has an opportunity to check returns and if they are unable to discover such a sizeable omission during that period there is no good reason why they should be given until the end of time to assess the tax. If the return is honest, your committees sees no occasion whatsoever for extending the period of controversy.

14. STATUTE OF LIMITATIONS—REFUNDS

The bill proposes to limit the period of limitations applicable to claims for refund to the same period that is permitted the Government for assessing additional taxes. Your committee is generally favorable to the proposal except that, as stated above, the period should be 2 years and not 3 years.

It is thought, however, that this same principle should be further extended. The Ways and Means Committee has not given consideration to injustices in this respect which now exist against the taxpayer and which would continue under the limited proposal now made. In cases where a waiver is executed by the taxpayer and the Commissioner extending the period of limitations within which the Government may assess the tax, the taxpayer should have the right to file a claim for refund within the period as extended by the waiver. The right to file a claim for refund should also be extended to cover the period during which the statute of limitations is suspended by the issuance of a deficiency letter.

15. FEDERAL ESTATE TAX-PRIOR TAX PROPERTY

It has been the policy of the Federal estate tax law to avoid the taxation of property more than once in 5 years. Accordingly provisions have been included in the law to the effect that property taxed within that period shall be deducted from the gross estate of the second decedent. It has been discovered that due to the technical wording of the law, the same property might be deducted from the gross estate of the third decedent, even though the third decedent died more than 5 years after the date of death of the first decedent. A provision has been included in the new bill to prevent the last exemption in such cases, and your committee sees no objection to the principle of the change thus proposed. The change has not been carefully prepared and as presently drawn, the estate of the third decedent would be required to pay the tax upon such property even though the death occurred within 5 years from the date of death of the first decedent. Doubtless this was not intended, and the Senate should correct this mistake in order that the same property may not be taxed, under any contingency, more than once in 5 years.

The change thus suggested will become important in practical operation, as is apparent from the following example. If a man died and left his estate to his wife, an estate tax would be assessed against his estate. If in the next year the wife died and left the property to a son, the property would not be subject to tax under the present law, or under the amendment now proposed, for the reason that it had already been taxed within 5 years. If, however, the son died the next year, the son's estate would be called upon to pay a tax upon the property. The rates of the Federal estate tax extend to 45 percent and the taxation of any property twice, within 5 years, in certain cases, would amount to virtual confiscation of property. If any amendment is necessary, provision should be made that in no case will the same property be taxed within a period of 5 years, regardless of the number of deaths that

occur.

16. FEDERAL ESTATE TAX OF FOREIGN REAL ESTATE

The bill proposes that the estate of an American citizen be required to pay Federal estate tax on property located abroad. It is pointed out that the country in which the property is located may assess tax upon the same real estate and the proposal would result in double taxation in such instances. The property does not pass it in the foreign country by virtue of any American law. The property is protected by the laws of the foreign Government, and that Government is within its rights in assessing death taxes thereon, just as the United States levies the Federal estate tax upon property located in this country and owned by a citizen and resident of a foreign nation. Your committee considers that the proposal is unwarranted unless credit is given against the tax for death taxes paid to the country in which the property is located.

17. SUGGESTED MEASURES FOR INCLUSION IN THE NEW REVENUE BILL

Your committee considers that certain amendments to the revenue laws are advisable, and suggests the following:

(a) Deduction of charitable contributions by corporations.-Your committee recommends that corporations be allowed to deduct charitable contributions within the 15-percent limitation now allowed to individuals. It is thought that such an allowance would be helpful in raising money needed for charitable and unemployment work. These payments, like taxes, contribute to the common good, and, at least under present conditions, are a proper charge against income. The law should be changed so as to permit deductions for such contributions by corporations.