individuals or shareholder employees was placed on more equal footing with a corporation with respect to the type of pension plan which it might adopt. Section 2001 (d) (2) of ERISA permitted such a business to have a defined benefit Keogh Plan. This type of plan permits the tax deductible funding of annuity benefit payments and will result in a larger permissable tax deductible contribution than a standard Keogh profit sharing plan. The theory is excellent. The only problem is that the IRS has not yet issued proposed much less final regulations necessary for the efficient adoption of a plan which qualifies under this Section. Equally important, from the standpoint of the small businessman, the IRS has not yet issued either a Keogh or non-Keogh prototype defined benefit pension plan. To comply with and take full advantage of the provisions of ERISA for a deduction for the amorization of human capital the small businessman needs a defined benefit plan he knows the IRS will accept as qualified. This will both simplify compliance with ERISA and reduce potential controversy with the IRS. IRS litigation One red flag in the Internal Revenue Manual for IRS auditors is the "IRS Prime Issues" list. The Manual describes this list as containing a summary of, "Those issues which present legal questions of major importance in the administration of the internal revenue laws and which have not been tested adequately in litigation. Prime issues are those that the IRS will ordinarily insist on litigating and that will not ordinarily be conceded or compromised." 10 Thus, if a small businessman becomes involved with the IRS on a prime issue, he is either forced to concede the amount in question or undertake an inordinately expensive process of resistance. Even if prior litigation has shown the IRS to be wrong in the Tax Court and one or more Appellate Courts, if the Circuit to which a taxpayer's appeal might be taken has not yet decided the issue the IRS will hold fast to its position. The current prime issue list contains several issues important to small businessmen such as whether a personal holding company's dividends paid deduction equals the fair market value or the adjusted basis of property distributed by the corporation as a dividend. By and large, small business does not have the resources to engage in protracted controversy with the IRS. We believe that Congress should scrutinize the IRS prime issues list, its litigating posture in nonprime issue areas and proposed regulations. All of these interpretative positions are adopted and maintained upon the advice of the Chief Counsel to the IRS in an effort to protect the public revenues. By timely action to change or ratify these positions, Congress could eliminate years of uncertainty and thousands of man hours of both Government and taxpayer time which is consumed in complex arguments over legal rather than factual issues. In short, Congress should cut the Gordian knots as fast as the IRS (or the taxpayers) can tie them. For example, a taxpayer successfully argued against the IRS as early as 1953 that an employer's contribution of its negotiable demand note to a qualified pension trust gave rise to a deduction in the year the note was transferred." The IRS disagreed and continued to litigate the issue, losing first in the 9th Circuit 12 and then in the 10th Circuit.13 Undaunted, the IRS finally won the issue in 1976 in the 7th Circuit and was vindicated by the Supreme Court this year." Even controversies which do not involve a prime issue are often compromised by the IRS on the basis of "litigating hazards." The small businessman looks at the lengthy and litigation oriented process of establishing tax law with great dismay. He would like the Government to establish its tax collecting rules expeditiously, clearly and fairly. The process should not be weighted in favor of those who can outfight their opponent in court. This intimidates the people I represent. Prototype plans have been issued for money purchase and defined contribution plans (Forms 5614 and 5613). 10 MT-1277-8, November 19, 1974. (Emphasis added.) 11 Slaymaker Lock Co., 208 F. 2d 313, (3rd Cir., 1953). Note: Section 406 (a) (1) (B) of ERISA makes such a contribution a prohibited transaction and therefore renders the issue moot for transactions after January 1, 1975. 12 Time Oil Co., 258 F. 2d 237 (9th Cir., 1958). 13 Wasatach Chemical Co., 313 F. 2d 543 (10th Cir., 1963). 14 D. E. Williams Co., 527 F. 2d 649 (7th Cir., 1976); Affd. Sup. Ct. IRS administrative positions The IRS requently provokes controversy by taking administrative positions that are burdensome, unnecessarily rigid and arguably unreasonable. For example, several Internal Revenue Service Centers have taken the position that where an extension request is sent by metered mail instead of postmarked mail, it must be received before the due date for the return. This appears contrary to Treas. Regs. Sec. 301.7502–1 (c) (1) (iii) (b) which holds that metered mail documents are timely filed if dated on or before the due date and received thereafter in the same time required for stamped mail. Another example is Revenue Ruling 76-453 which establishes new tough rules on the withholding of payroll taxes on travel expenses. In essence, the ruling holds that if an employee does not report to his office before visiting the initial client or customer of his day, then travel expenses to that customer's place of business and for the final trip home in the evening are wages subject to withholding tax. The ruling was issued in November, 1976 with an effective date of January 1, 1977. This novel IRS position caused thousands of employers to make changes in payroll and expense reimbursement systems. The impossibility of the initial due date soon become apparent and the implementation of the position was delayed first three months and then six months. The ruling is certain to provoke litigation and cause thousands and perhaps millions of dollars to be spent in efforts to comply, avoid or contest its position. The small businessman resents the unannounced establishment of substantive tax law in the guise of a "Revenue Ruling" which costs him time, money and compliance energy. When the basis of the rule promulgated is questionable, the process appears to be simply a way for the IRS to avoid the notice and public comment requirements of the Administrative Procedures Act.16 In the experience of small businessmen, the IRS's selection procedures for the audit of returns are geared to discover returns for examination which will result in additional tax. The complexity of the tax laws together with the limited knowledge and resources of small businessmen to comply with these laws makes it probable that many are overpaying their taxes. The IRS should be compelled to develop selection procedures designed to uncover such returns. One audit selection procedure currently relied upon heavily by the IRS is the Discriminate Inventory Function (DIF). This procedure requires the establishment of normal amounts for the several deductions which may appear on a return. Computer reading of returns spots those returns with amounts outside of the normal range for further human review. The maintenance of the DIF program requires the IRS to make a random selection of returns for in depth audits under the Taxpayer Compliance Measurement Program. The initials TCMP in a letter from the IRS announcing that a small businessman has been selected to be audited means that he will incur additional expense and administrative downtime before the agent is satisfied. In such an audit no number in a return is sacrosanct and every item is suspect. Since the TCMP is designed to check IRS procedures, small businessmen feel that they should be compensated in some way by the Government for serving as audit guinea pigs. At present, part of the cost of administering the IRS is shifted to those taxpayers unlucky enough to be selected for a TCMP audit. Extensions of time Often the IRS takes considerable time to develop a revenue agent's case. The taxpayer is routinely asked to grant extensions of the statute of limitations along the way. When they complete the work, the agent's report is handed to the taxpayer with a cover letter stating that protest must be filed within 30 days. If extensions of time are granted by the IRS, it is with great difficulty. Fair treatment would allow a more liberal approach. Double tax on dividends Pressure is building to eliminate the "unfair" double tax on dividends. It would follow that corporations would pay larger dividends. Small businesses must retain their earnings to grow and usually cannot pay dividends. The obvious result is that more capital would be attracted to the large publicly held corporation and less to small business and savings and loan associa 15 IRB 76-47, 6. 165 USC 552, et seq. tions. The Report of the SBA Task Force on Venture and Equity Capital for Small Business details the woes of small business in attracting capital. It should be mandatory reading. Two points might be evaluated. The first shows that a private evaluation of the Joint Committee on Internal Revenue indicated that a corporate dividend of $150 of a certain type of corporation would yield a credit of $56. The 50% or lower taxpayer would not only have no tax but could apply this balance as a credit against other income. The second item needing evaluation is the change that both France and England made in mitigating their double tax. The effect may not have been as anticipated. Small business need not question whether the double tax should be eliminated, but rather, if it is eliminated or reduced, significant offsetting benefits must be granted small business for survival. Less than that would be the most severe blow that small business has received in some time. CONCLUSION Tax laws and their implementation with attendant paperwork have become a burden beyond the comprehension of the average man. One federal tax service, The Bureau of National Affairs, takes up 15 feet of shelf space! It does not even deal with payroll taxes! Every suggestion for simplicity is answered with another layer of law followed by layers of regulations. The tax rates are burdensome enough. Compliance with the law is becoming one of the most expensive necessities in business. Simplicity and Equity is what small business demands. That is the sum total of our needs. The preceding pages are some steps that may be taken toward that goal. Your help and concern are appreciated. REV. PROC. 75-31-EXHIBIT A NOTICE [Describe class or classes of interested parties] Application is to be made to the Internal Revenue Service for an advance determination on the qualification of the following employee retirement plan: Name of Plan: Name of Applicant: Name of Plan Administrator: Plan ID No. Applicant ID No. The application will be submitted to the District Director of the Internal Revenue at (address of district office) for an advance determination as to whether or not the plan qualifies under section (enter 401(a), 403 (a), or 405(a)) of the Internal Revenue Code, with respect to (initial qualification, plan amendment, or plan termination). The employees eligible to participate under the plan (describe by class): The Internal Revenue Service (enter has or has not) previously issued a determination letter with respect to the qualification of his plan. Each person to whom this notice is addressed is entitled to submit, or request the Department of Labor to submit, to the District Director described above a comment on the question of whether the plan meets the requirements for qualification under part I of subchapter D of chapter 1 of the Internal Revenue Code of 1954. Two or more such persons may join in a single comment or request. If such a person or persons request the Department of Labor to submit a comment and that department declines to do so in respect of one or more matters raised in the request, the person or persons so requesting may submit a comment to the District Director in respect of the matters on which the Department of Labor declines to comment. A comment submitted to the District Director must be received by him on or before (date). However, if it is being submitted on a matter on which the Department of Labor was first requested, but declined to comment, the comment must be received by the District Director on or before the labor of (date) of the 15th day after the day on which the Department of Labor notifies such person or persons that it declines to comment, but in no event later than (date). Â request of the Department of Labor to submit a comment must be received by that department on or before (date) or, if the person or persons making the request wish to preserve their right to submit a comment to the District Director in the event the Department of Labor declines to comment, on or before (date). Additional informational material regarding the plan and the procedures to be followed in submitting, or requesting the Department of Labor to submit, a comment, may be obtained at (place or places reasonably accessible to the interested parties). Senator BYRD. Our next witness is Mr. Herb Krasnow, president, National Association of Small Business Investment Companies. He will be accompanied by Mr. Walter B. Stults, executive vice president. STATEMENT OF HERBERT KRASNOW, PRESIDENT, NATIONAL ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES; ACCOMPANIED BY WALTER B. STULTS, EXECUTIVE VICE PRESIDENT Mr. KRASNOW. Thank you, Mr. Chairman. I am president of a medium-sized small business investment company, SBIC. I listened to the testimony this morning, and I just about zippered up my pocketbook. There is much that was said this morning that was tremendously negative in approach. Many positive things are happening in the small business area, which are not understood. I would like this morning to draw a bit on that. In 1958, the effective act that started the small business investment company program gave rise to some companies and, 18 years later, there is excellent successs; $3 billion have been invested in the 18year period. The loss written off by the Treasury has been only $29 million. On a numbers-only basis it would be quite significant, but probably what is more significant is that a new financial concept has been born. It is called venture capital today. There is a core of tremendously experienced people who have, as their goal, the investment of money in small business, the building up of their small businesses, cycling their money, and then, when they have their profit, taking that money and investing it in other small businesses. One of our purposes in being here this morning, Walter Stults and myself, is basically to recommend ways where this process may be accentuated so there will be more capital flowing into the small business sector. Several people spoke of the Task Force of the Small Business Administration. That was created by William Casey under the supervision of Administrator Kobelinski. I understand reports have been delivered to the staff and to the various Senators of the subcommittee. The report covers many of the aspects that were discussed this morning and there were different groups of people who presented different viewpoints: the viewpoint of the small business, the viewpoint of the underwriting community, the viewpoint of the banking community, the viewpoint of the Small Business Administration itself. Many of the things that were said today are very well-written in the report and I would very much like to have an opportunity to be of any assistance if there are any aspects there that could yield to more discussion or more detailed recommendations. 92-201 - 77-5 In our own trade association, we have also examined how to do the job better. We have come up with a 20-point program which I would like very much to see entered into the minutes. We call it our NASBIC legislative and regulatory program. There are some tax aspects in there, also some nontax aspects. I am a man who has been in venture capital since 1949, 28 years of my life, the biggest bulk of my life. I am positive that the numbers that are in the prepared testimony that I presented to the committee there are numbers that indicate that the small business community is vibrant, it is large, it is not dying, but it is being discriminated against. Basically what really is needed is first, an understanding of what the small business community really is as against the so-called business community which masquerades as something else again. And, what are the positive and the negative factors that, in effect, must be looked to because it is not all negative. There are many, many positive factors. If this committee can focus on the fact that there are two business communities, that the small business community under the SBA standards employs more than 50 percent of the employees of this country and small business may be small but it is not insignificant. That is really the major point. Not only is this most significant in numbers, but also in its creativity, in the fact that, from a social viewpoint, it is tremendously important to many of us in the United States to have a strong independent sector. There are not too many of us who want to live in a country of big business and big labor and big government. We strive for that independence. It is a tremendous psychological and emotional factor. It is completely separate and apart from the numbers. There are studies that are a part of the documentation that we have submitted that shows that this creativity performs for the country in a way that big business does not. We all are emotional and psychological creatures, and many of us have given up opportunities to enlist in the big business areas simply because of those emotional and those creative factors that we treasure. I am one of them. I would not want to be a part of them-not that they do not have a great place, not that they have not been instrumental in making this country many, many things that it is, but there is a vital factor and a vital place for small business in our society. If we can recognize that, then I think my presence here this morning and the presence of many of the other men will be most important. The specifics will vary. What is very surprising, though, when we talk about the Casey task force report and talk about the Small Business Administration's Advisory Council, talk about the NASBIC program, Ned Heizer will be talking about the National Venture Capital Association, there is commonality. Many, many of the same things are repeated time and time again. I will not repeat them this morning because they are in my reports and with some study, notwithstanding, they will all come out. The fact I would like to get across is that in the creativity that lies in our small business sector, there is growth, there is a great deal of |