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lation in the national interest ; legislation that virtually prevents a successful development company's qualifying as a regulated investment company is not in the public interest.

The existing provisions of new section 851 (b) (4) and section 851 (e), if not revised as proposed by American Research, would justify the charge (as do the existing provisions of old sec. 361 (c)) that the more successful a development company is in developing new enterprises and increasing the value of its investments in such new enterprises the harder it is for such a development company to qualify as a regulated investment company.

American Research is a case in point. With respect to some half dozen or more new enterprises, American Research (a) has bought securities of the new enterprise at a cost amounting to less than 5 percent of American Research's total assets and (6) has directly caused a material increase in the value of its holdings in such new enterprise to an amount greater than 5 percent of the value of its total assets by contributing to the new enterprise managerial and financial advice and timely financial aid and by furnishing one or more experienced directors (taken from its own personnel) for the board of such new enterprise.

The very success of American Research in thus developing new enterprises and increasing the value of its investments in some of these new enterprises far above original cost has made it increasingly harder for American Research to qualify as a regulated investment company under the existing provisions of old section 361 and new section 851.

It is submitted that the attached amendments or revisions would be equitable and helpful from the standpoint of a development company such as American Research and would be in the public interest. Respectfully submitted.


President. OSCAR W. HAUSSERMANN, Secretary, Director, and Counsel.



In addition to the amendments to section 851 (e) of H. R. 8300 proposed by American Research and Development Corp. (herein called American Research) in its April 14, 1954 statement already submitted to the Senate Finance Committee, American Research respectfully submits one further amendment to section 851 (e). This further amendment and the amendments to section 851 already submitted by American Research are all embodied in exhibit A annexed hereto.

The additional amendment herein proposed consists of changing the word “principally” found in the sixth line of section 851 (e) (1) to "substantially” and of changing the word “principally” in the two places in which it is used in section 851 (e) (3) to “substantially.”

Substituting the word “substantially" for the word “principally" in the places above indicated would obviate the practical difficulties inherent in determining annually as of the end of each quarter whether each and every corporation to which a development investment company has furnished capital and whose securities are then in its portfolio is engaged to the extent of 51 percent or more in the “development or exploitation of inventions, technological improvements, new processes, or products.” To determine whether a corporation is “substantially” so engaged is not a difficult matter whereas to determine whether it is "principally” so engaged involves a mathematical problem for which there is no recognized formula.

In this connection it might be pointed out that the question whether an enterprise is “substantially” engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available would have to be officially considered and passed upon by the Securities and Exchange Commission and would not be left to the arbitrary determination of the investment company itself.

In the nature of things, a new enterprise launched by an existing corporation engaged in other activities may need capital advances from a development investment company at an early stage of the new enterprise at a stage when the activities devoted to the development or exploitation of its new enterprise constitute less than 51 percent of the total business in which it is then engaged. Virtually to prevent a development investment company from furnishing funds to help such a new enterprise at a critical time of need, solely because the new enterprise does not at the time represent 51 percent or more of the needy corporation's activities, runs counter to the aim and spirit of section 851 (e). The encouragement of investment companies furnishing capital to development enterprises, which section 851 (e) aims to give in the interest of the national economy and of industrial progress, would actually be furthered, rather than retarded, by permitting an investment company to invest its funds in concerns which are substantially engaged in new enterprises even though doubt may attach to the question whether they are principally so engaged at any given time.

Respectfully submitted.


Secretary, Director and Counsel.



PROPOSED BY AMERICAN RESEARCH AND DEVELOPMENT CORP. American Research and Development Corp. proposes that the provisions of subdivision (ii) of paragraph (4) of subsection (b) of section 851 of the proposed new revenue law (H. R. 8300) be revised to read as follows (the revision consisting of the transposition of the exception clause italicized below):

“(ii) other securities for purposes of this calculation limited, except and to the extent provided in subsection (e), in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the taxpayer and to not more than 10 percent of the outstanding voting securities of such issuer, and".

American Research and Development Corp. proposes that the provisions of subsection (e) of said section 851 be revised to read as follows (the revisions being italicized hereinbelow):


(1) GENERAL RULE. If the Securities and Exchange Commission determines, in accordance with regulations issued by it, and certifies to the Secretary or his delegate not less than 60 days prior to the close of the taxable year of a registered management investment company, that such investment company is principally engaged in the furnishing of capital to other corporations which are substantially engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available, such investment company may, in the computation of 50 percent of the value of its assets under subparagraph (A) of subsection (b) (4) for any quarter of such taxable year, include the value of any securities of an issuer in an amount not greater in value than 10 percent of the value of the total assets of the taxpayer, notwithstanding the fact that such investment company holds more than 10 percent of the outstanding voting securities of such issuer, but only if the investment company has not continuously held any security of such issuer (or of any predecessor company of such issuer as determined under regulations prescribed by the Secretary or his delegate) for 10 or more years preceding such quarter of such taxable year.

“(2) LIMITATION. The provisions of this subsection shall not apply at the close of any quarter of a taxable year to an investment company if at the close of such quarter more than 25 percent of the value of its total assets is rep resented by securities of issuers with respect to each of which the investment company holds more than 10 percent of the outstanding voting securities of such issuer and in respect of each of which or any predecessor thereof the investment company has continuously held any security for 10 or more years preceding such quarter unless the value of its total assets so represented is reduced to 25 percent or less within 30 days after the close of such quarter.

“(3) DETERMINATION OF STATUS. For purposes of this subsection, unless the Securities and Exchange Commission determines otherwise, a corporation shall be considered to be substantially engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available, for at least 10 years after the date of the first acquisition of any security in such corporation or any predecessor thereof by such investment company if at the date of such acquisition the corporation or its predecessor was substantially so engaged, and an investment company shall be considered at any date to be furnishing capital to any company whose securities it holds if within 10 years prior to such date it has acquired any of such securities, or any securities surrendered in exchange therefor, from such other company or predecessor thereof. For purposes of the certification under this subsection, the Securities and Exchange Commission shall have authority to issue such rules, regulations and orders, and to conduct such investigations and hearings, either public or private, as it may deem appropriate.

(4) DEFINITIONS. The term used in this subsection shall have the same meaning as in subsections (b) (4) and (c) of this section."

The CHAIRMAN. Mr. McDaniel, please.

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Mr. McDANIEL. I am Glen McDaniel. I am president of the RadioElectronics-Television Manufacturers Association, an organization of 380 companies, which is celebrating its 30th anniversary today. We were incorporated on April 16, 1924. This isn't the way I would have chosen to have a birthday celebration, Senator, coming down here to testify on a revenue bill.

The CHAIRMAN. It is a holiday and a good day for a good deed.

Mr. McDANIEL. I was here a month ago and testified on H. R. 8224, the excise tax bill. Today, I want to talk very briefly—I have quite a short statement

The CHAIRMAN. Tell me just a little about your corporation. What exactly do you do—what are your activities?

Mr. McDANIEL. I am talking, Senator, for the radio-electronicstelevision manufacturing industry. The association is a nonprofit organization and I am talking for the interests of its various companies, particularly from the excise-tax point of view.

H. R. 8300 recodifies ctrtain provisions of the excise tax on television and radio receiving sets and I wanted to talk about those.

Senator FREAR. Are these companies in an association and is the association a corporation? Mr. McDANIEL. It is a nonprofit corporation; yes, sir. Senator FREAR. Where is it incorporated ? Mr. McDANIEL. In Illinois. Senator FREAR. Well, I can't say too much for it, then, I guess.

Mr. McDANIEL. The incorporation in Illinois was because of a historical accident, Senator Frear.

I wanted to make clear where we stand on excise taxes, because the industry is very disturbed about it. We are the only consumer-goods industry which does not benefit from an excise tax reduction, either this year or next year, under the Revenue Reduction Act of 1954 that has just passed. I want to take 1 minute to have the record show our view.

We think that television is an instrument of public enlightenment and it ought not to have a selective excise tax any more than newspapers ought to have one.

We think Congress recognized this fact by refraining from levying the tax on television until the Korean war broke out in 1950. Even then, the committee report said that one of the reasons—I am talking about the Finance Committee reportsaid that one of the reasons the excise tax was levied on television was to equalize competition with the movies. Now, Congress has prac

tically removed the tax from the movies but it hasn't done anything to equalize competition this time with television.

The CHAIRMAN. Well, you have almost put them out of business. They haven't put you out of business.

Mr. McDANIEL. But this committee said in 1950 that it was unfair competition to tax one and not the other of these closely competitive forms of entertainment. Now, that is just what Congress has done in the last month.

At the same time, Congress voted a reduction of 10 percent to 5 percent on refrigerators and other household appliances and left television and radio sticking out very conspicuously as the one type of household product that didn't get a reduction. Our products are the only consumer durables left that are taxed at 10 percent.

Senator Long. Do you know what it would cost to remove the tax on television?

Mr. McDANIEL. $150 million.
Senator LONG. Television and radio.
Mr. McDANIEL. Television and radio, yes.
Senator FREAR. The excise tax.

Mr. McDANIEL. The manufacturers' excise tax. To remove it would cost $150 million a year.

Senator LONG. On radio and television.

Mr. McDANIEL. To remove it entirely, and we think that is what should be done.

The CHAIRMAN. I doubt very much that this committee in connection with this bill would fool with excise-tax rates. If you have any administrative problems, that would be something else again.

Mr. McDANIEL. I will proceed with those. We want to go on record as opposed to the accelerated corporation-tax payments in sections 6016, 6152, and 6154. We oppose this because we regard it as a tax increase of roughly 10 percent over 5 years, and in our particular industry we think it will create very difficult problems, particularly for the smaller companies. That is because in marketing television and radio sets you have in the last 3 months of the year your big market. You prepare all year for that market. If you guess wrong you can get into difficulties. If you have paid to the Government your taxes before you start, then it greatly increases the hardship that smaller companies find themselves in, if the desires and the whims of the purchasing public go the wrong way.

We think it would be a lot sounder and a lot more in keeping with the administration's professed desire to encourage investment and to encourage the working of the free enterprise system, to leave the tax collections the way they are.

Now, I will go to the structure of this radio-television excise tax. The House, in recodifying the excise-tax provisions—I am not talking about rates, now, Senator, I am talking about the provisions of the bill.

Senator FLANDERS. You will excuse me just a moment?
Mr. McDANIEL. Yes.

Senator FLANDERS. With regard to this new pay-as-you-go plan which at the end of X years, at the cost of 5 percent a year, brings the corporation into a current tax payment position, I might just say,

I Mr. Chairman, that I have meditated on the possibility or the desirability of doing away with the forward estimate and paying each


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quarter, on the estimated profits of that quarter, instead of trying to guess in March what things are going to be like in December.

I don't know whether there is any possibility of that, or any desirability of it, but I would like at least to raise the question.

The CHAIRMAN. In other words, you are raising the question, “Will you love me in December as you did in May?"

Senator FLANDERS. That is what was in my mind but I didn't mention it because I knew you would.

Mr. McDANIEL. Your proposal would be more accelerative than the present plan.

Senator FLANDERS. There would have to be acceleration in it but I haven't figured out whether it would require more or less. I wouldn't want you to pay more than 5 percent anyway but it strikes me as a bit more equitable to pay it as you get it than to pay as you hope to get it.

Mr. McDANIEL. Well, we think that the bill as now written puts corporations in a guessing game about revenue which would present some very unworkable features, just the way the old declared-value excess profits tax did. Congress finally repealed that as being unworkable, because a taxpayer was guessing on the declared value which was based upon his guess of revenue, and

and it was just not workable. In our industry you cannot guess your income even in September, because it depends on events occurring in the last 3 months of the year. I am sure there are other industries that have seasonable factors of that kind which cause the same sort of difficulties.

Senator FREAR. How do you compare that to an individual's guess? Do

you think it is fair for an individual to estimate his income? Mr. McDANIEL. I assume that the gerat bulk of the people can estimate very well what they are going to make. Most people receive a fixed wage or salary but no corporation has that much certainty of income, unless it is perhaps some kind of public utility.

Senator FREAR. I suspect you are right but there are probably as many individuals who would be in the same classification that you are talking about as there are corporations.

Mr. McDANIEL. Are there not special provisions for them, such as the farmers and others!

Senator FREAR. I didn't know the farmer got anything very special attributed to him, but it might be.

Mr. McDANIEL. Now, on the recodifying of the excise tax provisions, the House took a needed step in reasserting the original intention of Congress that our excise tax should apply only to so-called entertainment types of articles. That is the home set, the home radio set, the home television set, and not the marine and mobile equipment or the complicated police systems of communications that have developed since the time the tax was first enacted.

However, the trouble is that the House didn't go far enough.

On page 433 of the bill, the radio-television tax is codified under a new subchapter, C, of chapter 32, entitled, “Entertainment Equipment,” but the bill carries over into section 4143, an exemption for sales to the United States of so-called communication, detection, and navigation receivers. This exemption was added to the Internal Revenue Code by section 482 of the Revenue Act of 1951, at a time when the Internal Revenue Service was improperly seeking to impose the tax on nonentertainment equipment sold to the United States.

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