as one having 10 or fewer stockholders, owning more than 50 percent of the combined voting power of all classes of stock. Here, again, there appears in proposed tax legislation specific discriminations against small business.

Under present law, no gain or loss is recognized to a large or small corporation which consolidates a merger, under State law, into another corporation. As Mr. Herrmann has already pointed out, this principle is retained only for statutory mergers and consolidations now in H. R. 8300, for the publicly held corporation.

It appears that in drafting this provision, the House Ways and Means Committee lost sight of its own objectives, which appear to be set forth on page 2 of the committee report accompanying H. R. 8300 where it is stated:

The bill contains many provisions which are important to the growth and survival of small business.

The enactment into law of sections 309 and 359, as well as such other sections of subchapter C, H. R. 8300, which depend upon the definition of "publicly held corporations" will seriously impair the competitive position of the small American businessman, seriously impair the marketability of the equity stock in his company, which will reflect in due time in the reduced death taxes collected by the Government because the stock isn't worth as much, and, over a period of time, greatly increase the incidence of failure of small businesses where a timely reorganization is not effected because it cannot be effected, as pointed out by Mr. Herrmann, due to the restrictions imposed by subchapter C.

A man who is the head of one of the small mills in South Carolina may just have a wife and minor children when he dies. It would be a very serious matter for that man, if he weren't able to capitalize on the results of a life work, by merging with a much larger unit. Why shouldn't the owner of an open hearth furnace employing half a dozen people be willing and anxious to merge with a much larger corporation and take his holdings out in something that is liquid, about which there will be no argument whatever at the time of his death, as to valuation? When such a transaction is completed, the smallbusiness man has readily marketable securities, received in exchange for his closely held stock-no cash.

We, therefore, recommend that the definition of publicly held corporations set forth in section 359 (a) be stricken from the bill, as well as the tax concept reflected in sections 354, 382, and many others in H. R. 8300 that rely on this concept.

I appreciate very much the opportunity you have given me to speak. The CHAIRMAN. Thank you very much.

Mr. WALTER J. MYERS. I will ask the remaining witnesses to please, while you are waiting, review your remarks. We will have to shorten the length of them. We have spent almost an hour with two witnesses. That is not too long from the standpoint of our desire, but it is too long for the time limit within which we have to operate.

If you can just give us a summary of your paper, the paper will be digested by the staff and nothing will be lost, and a lot will be gained.

(Mr. Kable's prepared statement follows:)

STATEMENT OF CHARLES W. KABLE, JR., CHAIRMAN OF THE TAX COMMITTEE, AMERICAN COTTON MANUFACTURERS INSTITUTE

Mr. Chairman, my name is Charles W. Kable, Jr., of 240 Church Street, New York City. I am chairman of the tax committee of the American Cotton Manufacturers Institute, and appear before your committee on behalf of the institute. The institute, a trade association, includes in its membership about 85 percent of the total manufacturing capacity of the cotton-textile industry. Our industry employs about 500,000 workers, and is essentially an industry of small enterprises, no one of which constitutes more than 4 percent of the total. Since the average cotton textile manufacturer operates on the basis of a minor fraction of 1 percent of the industry's total business, his resources are necessarily limited. When Chairman Reed and the House and Ways and Means Committee first undertook the complete revision of the Internal Revenue Code, which had, over the years, evolved into a patchwork of unworkable legislation and a myriad of confusing and contradictory regulations, most observers felt that an impossible task had been undertaken. Nevertheless, H. R. 8300, completed within an incredibly short period of time, for the most part represents a vast improvement over the present Internal Revenue Code.

In an undertaking of this magnitude, it is only natural that all considerations could not have been taken into account. Suggestions for improvement of certain sections of subchapter C of chapter 1 of H. R. 8300 relating to corporations are, therefore, offered for you consideration.

The first section of subchapter C to which I shall refer is 309. For the past 10 years, under applicable case law and rulings of the Internal Revenue Service, stockholders were permitted to receive a preferred stock dividend on common tax free, in cases where there was no prior outstanding preferred stock. Subsequently, when such preferred stock was redeemed or sold, litigation ensued as to the question of whether such sale or redemption constituted capital gain or a dividend.

Section 309 now proposes an 85 percent transfer tax on such corporation when and if it redeems such preferred stock within 10 years of issuance, or January 1, 1954, whichever is later with certain exceptions.

If these provisions of section 309 are permitted to remain in the bill, they will paralyze many legitimate business functions. It appears that they will also nullify the intended outcome of many transactions originated prior to January 1, 1954, under the present code, and approved by the Treasury Department. The problems of small business, operating on the basis of limited capital and limited credit, at times require rapid changes in corporate structure, which are not predictable at the time earlier transactions are made.

Our reaction to section 309 is threefold. First, there should be no tax imposed on the corporation. Such a tax, intended to penalize the majority stockholder, whose stock is redeemed, would also severely punish the minority stockholder, who is not involved in the transaction. Secondly, from the standpoint of our experience as businessmen, it would appear that a 5-year maximum period of prohibition as to redemption of preferred stock under these conditions would be more than ample. Finally, the arbitrary provision that the period of prohibition start on January 1, 1954, rather than with the date of the issuance of the preferred stock dividend should certainly not be accepted by the Senate. Corporations who issued nontaxable preferred-stock dividends on common prior to January 1, 1954, and in some cases as much as 30 or even 40 years ago, should not be trapped in this fashion, particularly if business considerations indicate the desirability of retiring preferred stock within the next few years.

In 1951, when section 112 (b) (11) dealing with the spin-off situation was before the Senate, Senator Humphrey, of Minnesota, discussed the problem of tax avoidance and the possibility of turning ordinary income into capital gain through the disposal of stock or assets. At that time, he proposed a 3-year holding period to protect the Government from tax avoidance. Senator George opposed the 3-year period, on the ground that it would unduly interfere with general business practices. I quote in part from Senator George's statement at that time in the Congressional Record, volume 97, No. 181, September 27, 1951, pages 12459 through 12462. Mr. George stated:

"That is true; but why put in a time element, which would make the section unworkable? In these uncertain times we cannot foresee how long we can

carry on a business, or when we may have to sell the stock. I believe that the Senator's amendment is wholly unnecessary."

It is a matter of record that Senator George's reasoning prevailed in the Senate at that time.

The loophole as represented by the recent Chamberlin1 case, which section 309 intends to close, still exists. In that case the stockholder who received the nontaxable preferred stock dividend sold it the next day to an insurance company and was allowed to pay tax at capital gain rates. The House bill deals only with redemption of preferred stock dividends and not with their sale. A dividend tax should be levied on the gain derived by the recipient of the preferred stock whether he redeems or sells the stock within 5 years from the date of its issue. Thereafter any gain derived by him should be taxed as a capital gain.

We suggest a 5-year period as being reasonable-6 months is considered a proper holding period for ordinary capital gains. A transfer tax upon the corporation is completely unjustified, and the retroactive feature with respect to the holding period contained in the present House bill is completely unwarranted. Our next suggestion refers to section 359 of H. R. 8300. In general, it amends section 112 (g) (1) (b) of the present code, whereby it has always been possible for a corporation to exchange voting stock for at least 80 percent of the stock or assets of another corporation in tax free reorganization. Subsections (b) and (c) of section 359 require that immediately after such transaction, shareholders of the corporation whose stock is acquired may not own less than 25 percent nor more than 400 percent of the stock of the issuing corporation held by its stockholders immediately prior thereto. This new requirement appears to raise an unwarranted obstacle to the merger or consolidation of a very small with a very large corporation. Here again it must be emphasized that the small business and the closely held corporation would be the sufferers. Small businessmen must constantly face questions as to whether their businesses can survive their death. Problems of estate liquidity, managerial succession, and stability of the income of the survivors of the head of the business often force decisions to merge small businesses with large ones. Due to the unpredictability of business, and living as well, in many instances the small businessman must make such decisions overnight. These rules may have been proposed by the Ways and Means Committee because they considered that very small corporations were actually making sales and not effecting mergers with large corporations. However, after such reorganizations occur, the owners of the small corporations who sell out their interests for stock in the larger corporations usually dispose of their listed securities in whole or in part, and pay capital gains taxes. Such small businesses are usually not controlled by young men, and even if no portion of the listed securities were sold, the death taxes on the market value of such securities would inexorably bring appropriate revenues to the Government within a relatively short period of time. The impariment to the financial mobility of the small businessmen of the Nation is too great a price to pay for this type of legislation. Subsection (a) of section 359 contains the definition of a publicly held corporation by defining a closely held corporation as one having 10 or fewer stockholders owning more than 50 percent of the combined voting power of all classes of stock. Here again, there appears for the first time in proposed tax legislation, specific discrimination against small business. Under present law, no gain or loss is recognized to a large or small corporation which consolidates or merges under State law into another corporation. Under H. R. 8300, this principle is retained only for statutory mergers and consolidations of publicly held corporations. Closely held corporations may not reorganize by merger or consolidation without recognition of gain or loss. Even in cases where there are a group of publicly held corporations involved in a reorganization transaction, if one closely held corporation is involved, it appears that the transaction would give rise to taxable gain or loss.

In the rush of drafting an 875-page tax bill, it appears that the House Ways and Means Committee here lost sight of its own objectives as set forth on page 2 of the committee report accompanying H. R. 8300, where it is stated "The bill contains many provisions which are important to the growth and survival of small business."

The impact of the enactment into law of sections 309 and 359, as well as such other sections of subchapter C of H. R. 8300 which depend upon the definition of

1207 Fed. (2d) 462 (C. C. A. 6th, Oct. 14, 1953).

"publicly held corporation" will seriously impair the competitive position of the small American businessman, seriously impair the marketability of the equity stock in his company, and over a period of time, greatly increase the incidence of failure in small business corporations, where timely reorganization steps are not taken because of restrictions imposed by subchapter C. It is therefore recommended that the definition of "publicly held corporation" set forth in section 359 (a) be stricken from the bill, as well as the tax concept thereof reflected in section 354, 382, and others in H. R. 8300.

STATEMENT OF J. WALTER MYERS, JR., EXECUTIVE SECRETARY, FOREST FARMERS ASSOCIATION OF ATLANTA, GA.

Mr. MYERS. My name is J. Walter Myers, Jr., and I am executive secretary of the Forest Farmers Association of Atlanta, Ga., which is an association of timberland owners in 15 Southern States. Our people are primarily the people who actually own the land. Our 1,300 members in 15 States own 20 million acres of timberland, and we are interested primarily in the revisions to the Internal Revenue Code as embodied in H. R. 8300, as they will affect timberland owners and their properties.

The forests of the United States are one of our most important natural resources and play a vital part in our economy. There has been a lot of money spent in developing these resources, and there has developed a great interest in better forestry practices in recent years.

However, there is still a tremendous development job to be done, and the importance of this development job is emphasized by the fact that there are still 10 to 15 million acres of cutover forestlands in the South, alone, which must be planted.

While I speak for the South, the same situation generally prevails over the Nation. I was checking yesterday with the United States Forest Service to be certain of my figures. While naturally it is impossible to pinpoint it down to the precise number of acres, because there are constant changes, and surveys are not able to keep up with the situation, except as on an estimated basis, there are about 75 million acres over the United States that need replanting, even yet.

Much is being done to foster the rebuilding of these forests, and we are planting millions of trees every year. Last year we planted more trees in the South than had ever been planted before in that area-450 million of them; 450 million trees, however, will only plant about 450,000 acres, so with an acreage of 10 to 15 million, needing planting in the South, it becomes rather obvious that it will take us about 35 years just to complete the development job.

Senator LONG. My understanding in Louisiana, at the rate we have been going and we have been making considerable effort-it would take over 60 years to replant the cutover land.

Mr. MYERS. That is right, Senator Long. I am a native of Louisiana myself, and a graduate of the LSU forestry school, and I am familiar with the fact that Louisiana unfortunately has more cutover land than certain other States.

I think we have in Louisiana one of the most progressive State forestry commissions, but the job there is larger, because originally they had very rich forests, and they were harvested quite heavily.

Senator LONG. In some of those cutover areas, the old-age pension is the biggest payroll in the entire area.

Mr. MYERS. That is a point we would like to present for the committee's consideration, the fact that there are lands like that where capital needs to be interested in putting those lands back into use.

The CHAIRMAN. What do you want to see in the act? What are you after? What do you want us to do?

Mr. MYERS. We would like an amendment to the present code, or an addition, you might say, a new section which might possibly be numbered 617, to subchapter 1, part I, to follow exploration and development expenditures-those two items are now shown as sections 615 and 616, respectively. We suggest this new section read as follows:

Expenditures for forest development and protection. A taxpayer owning, leasing, subleasing, or operating forest tracts which are properly managed for sustained wood production, and who makes expenditures primarily for forest protection, conservation, or improvement, or for forestation or reforestation, at his option, may treat any such expenditures paid or accrued in the taxable year, either (1) as a capital charge to be recovered through depreciation or depletion, as the case may be, or (2) as a deductible expense in such year. Proper forest management is the application of suitable and economically sound forestry principles relating to protection, utilization, and reproduction of forest tracts. This subparagraph shall be effective for taxable years commencing after December 31, 1953.

The CHAIRMAN. Have you discussed the matter with our Joint Committee on Internal Revenue Taxation?

Mr. MYERS. Beg your pardon?

The CHAIRMAN. Have you discussed this matter with our staff, the Joint Committee on Internal Revenue Taxation?

Mr. MYERS. No; but it has been discussed with various attorneys and other interested parties.

The CHAIRMAN. Let me suggest that you talk to Mr. Stam, Joint Committee on Internal Revenue Taxation, 1011 House Office Building.

See that gentleman sitting against the blind, there? You get in contact with him and he will make a date. He is head of our technical staff which advises us on such matters, and it would be a good idea if they had a detailed notion on this, if they haven't already. They will give you a good hearing, and I hope you will see them.

Mr. MYERS. Rather than go into the ramifications of this now, possibly I could discuss it with him.

The CHAIRMAN. Yes.

Mr. MYERS. There is one other change we would suggest for the committee's consideration. Section 272, of H. R. 8300, in our opinion, should be changed to restrict the expenses to be applied against capital gains to such expenses directly attributable to the quantity measurement and to the making of contracts for the disposition of timber. The CHAIRMAN. When you see Mr. Stam, you tell him about that, too, will you?

Mr. MYERS. Yes, sir.

The CHAIRMAN. Thank you very much for coming.

Senator LONG. I would like to see something of that sort put in the law, Mr. Myers.

The only thing that concerns me about it is, I believe as proposed that could be a completely open-end proposition. In other words, the man who owed the Government a million dollars in taxes-if Í understand it the way you explained it-might invest the whole million