include any such changes because there was not enough time to adequately consider such proposals. This seemed to effectively kill the possibility of any House consideration of these problems. Thus the need for Senate consideration of these administrative matters is now urgent.

During the hearings on general revenue revision before the House Ways and Means Committee last summer, we pointed out that many of the costly and troublesome administrative problems under the radio-television excise tax could be eliminated if the tax was not applied to radio and television components other than tubes. We submitted data to the staff of the joint committee which showed that such a change in the statute would involve a loss of revenue of less than 1 percent of the collections of this tax and that the savings in administrative costs would largely offset such loss. The House failed to take action on this matter and we urgently request that your committee give consideration to it at this time. We will not duplicate here the testimony we gave before the House committee and the data we submitted to the joint committee staff.

We are submitting a list of other changes in the administrative provisions under these manufacturers' excise taxes which should receive attention in this first general revenue revision of the internal revenue laws in many years. Time does not permit a detailed explanation of these items. Although the House committee did not act upon the excise tax administrative provisions generally, it did make an inadvertent error in the course of recodifying the credit and refund provisions which should be specifically called to your attention. Section 3443 (d) of the old code prohibited refunds to manufacturers (other than those resulting from price readjustments on the use of tax paid articles for further manufacture of taxable articles) unless the manufacturer could establish that the tax had not been passed on to the vendee or that he has repaid the amount of the tax or obtained the consent of the ultimate purchaser to the allowance of the refund. H. R. 8300 inadvertently extends the principle of section 3443 (d) to the refunds relating to price adjustments and to the situation where tax paid articles are used in the further manufacture of other articles. This is done in section 6416 and will create many additional problems for manufacturers which I am sure your committee would like to avoid. The group of experts headed by Mr. Paul recommended to the Ways and Means Committee that the principle of section 3443 (d) be eliminated from the new code. In any event, the principle should be limited to its present scope under the 1939 code.

I have with me today Mr. Cleveland Hedrick, special tax counsel to our association, Mr. A. M. Freeman, of Radio Corporation of America, and Mr. Maurice G. Paul, of Philco Corp., who are familiar with the technical phases of these administrative problems and who will be available to consult with the staff of your committee in drafting the necessary changes in H. R. 8300 to improve the administration of the excise tax with regard to the radio and television industry.

AMENDMENT TO H. R. 8300, CHAPTERS 32 AND 65, TO REMOVE THE EXEMPTION FROM THE MANUFACTURERS' EXCISE TAX OF COMMUNICATION, DETECTION, AND NAVIGATION RECEIVERS WHEN SOLD TO THE UNITED STATES

1. Chapter 32 of the Internal Revenue Code is hereby amended:

(a) In subchapter C, by deleting section 4143 (relating to exemptions for sales to the United States of communication, detection, and navigation receivers). (b) In subchapter F, by deleting section 4218 (b) (relating to the use by the manufacturer, producer, or importer of radio and television parts in the manufacture of receivers for sale to the United States).

2. Chapter 65, subchapter B, section 6416 (relating to the credit or refund of certain taxes on sales and services) is hereby amended by deleting subsections (b) (2) (H) and (b) (3) (B).

NEEDED CHANGES IN ADMINISTRATIVE PROVISIONS OF MANUFACTURERS' EXCISE TAXES

This is a list in summary form of the changes needed to improve the administration of manufacturers' excise taxes.

1. While excise taxes are imposed on "manufacturers," this term is not defined in the code. This omission should be corrected to avoid serious compliance problems.

2. Present licensing provisions of the Treasury regulations should be incorporated in the code and expanded to permit licensing of all manufacturers, dealers, and exporters and thereby authorize them to make tax-free purchases

or sales or to file claims for refund or credit. The law should also specify that the furnishing of the purchaser's registration number to the vendor, either on individual purchase orders or in a continuing document applicable to all future purchase orders until withdrawn in writing, will constitute sufficient validation of all tax-free sales. This will permit elimination of the present cumbersome monthly exempton certificate procedure.

3. The refund and credit provisions should be expanded to make clear that any licensed manufacturer, dealer, or exporter may recover the tax paid where ultimately a tax-free sale or use has occurred.

4. The law should provide clear-cut definitions of the articles intended to be taxed. Examples of deficiencies in this respect are "self-contained air conditioners” and “radio receiving sets," and "parts and accessories for automobiles.” 5. A credit and refund provision should be added to authorize clearly a credit or refund to a manufacturer or licensed vendee where the tax-paid article has been used in further manufacture of another article sold in a tax-exempt transaction (i. e., sale to state or for export).

6. The law should be clarified so that the return and payment of tax shall be deemed to apply against all taxable sales made during the period covered by the return. The Service and courts now construe the law to treat each individual sale as a separate transaction. Under this theory, an overpayment of tax on one sale may not be used as an offset against an underpayment of tax on another sale unless the manufacturer can prove that the overpayment was not passed on to the ultimate purchaser. The logical extension of this theory would nullify the statute of limitations on the ground that if no tax had been paid on a given transaction, then no return had been made to start the running of the statutory period.

7. The law should make clear that articles are not subject to tax when manufactured or bought by the manufacturer of a taxable end-product and used by him in connection with an exchange for a taxable article under his warranty program.

8. The law should provide for the use of "licensed wholesale branches" patterned after the Canadian practice in order to eliminate the use of subsidiaries as sales outlets.

9. Under certain conditions, a manufacturer can recover an overpayment of tax only by making a refund to the "ultimate purchaser." As now defined in regulations, "ultimate purchaser" excludes distributors and dealers holding tax-paid articles for sale. Statutory clarification of this is essential.

10. Where an exemption is based upon end usage or the identity of the ultimate purchaser, regulations require an affidavit from the ultimate vendor, a superfluous requirement. An affidavit from the ultimate purchaser should be sufficient.

11. In order to validate a credit or refund with respect to articles exported, the regulations now require proof that the manufacturer had knowledge of the intended export of the goods prior to time of sale by him. This is a needless technicality. The law should authorize credit or refund where proof is submitted that goods were actually exported.

12. Diplomatic representatives are entitled to exemption from excise taxes only if the purchase is made directly from the manufacturer. This needless technicality should be removed so as to permit dealers to recover the tax from a manufacturer upon proof of sale to a tax-exempt diplomatic official.

13. Taxable articles sold for use in the further manufacture of a nontaxable end article are now subject to tax. To avoid indirect taxation of end articles not intended to be taxed, exemption should be granted to all articles used in the further manufacture of another article, whether or not taxable.

14. The tax imposed on radio and refrigeration repair and replacement parts should be repealed since it produces negligible revenues, is not required to prevent tax avoidance and presents difficult administrative problems. To prevent tax avoidance, however, it may be desirable to tax major elements of apparatus as end articles of manufacture; such as, cabinet, chassis, and tubes for radios and cabinet and refrigerating units for refrigerators.

15. The special exemption for refrigerator components sold for use in the manufacture of nontaxable refrigerating apparatus may be deleted

(a) If all articles sold for use in the further manufacture of another article, whether or not taxable, is adopted as a general administrative section; or

(b) If all refrigerator parts are exempted.

16. The special exemptions for benzol, benzine, and naphtha used or resold for use other than as fuel for the propulsion of motor vehicles, motorboats, or

airplanes may be omitted since these articles used for these purposes are now subject to a tax at the retail level under the Excise Tax Act of 1954.

17. The provision relating to unexposed motion-picture films used or resold for use in the making of newsreel motion pictures is superfluous, since all commercial types of motion-picture film were specifically exempted under the 1951 Revenue Act.

18. The special exemption for articles manufactured by Indians was enacted when jewelry was subject to the manufacturers' excise tax. The exemption is no longer of significance and can be deleted.

19. At present a person who purchases on a tax-free basis becomes the "statutory manufacturer" of the article and is obliged to pay tax on his selling price if article is later sold in a taxable transaction. The law should permit payment of tax on the lower of sales price or purchase price.

20. Efforts to enforce this tax with respect to rebuilt and reconditioned articles, principally automobile parts, have created administrative problems out of proportion to revenues derived. Rebuilt and reconditioned articles should be exempt from tax. If the theory of tax on rebuilt parts is continued, exclusion of value of parts received in exchange should be made a general administrative provision and not limited, as at present, to auto parts.

21. The definition of "sales price" should be improved so as to clearly exclude elements such as product warranties, service charges, and the like not properly a part of the sales price of the article itself.

22. The Secretary or his delegate should be authorized to fix the tax base in an "arm's length" transaction at not more than the fair manufacturers' price at the first level of distribution within the industry.

23. Accessories for taxable end articles should be taxed, if at all, only as they are specifically enumerated and defined in the code. The practice should be abandoned of taxing otherwise nontaxable articles "when sold on or in connection with" the sale of a taxable end article since it is capricious in its application and readily avoided.

24. The Tax Court should be given jurisdiction to determine excise-tax liabilities to correct a serious deficiency in existing appellate procedures.

25. The most serious and widespread complaint directed against the entire selective excise-tax system is that of the lack of adequate published rulings. The law should expressly authorize and direct the Secretary to publish all excise-tax rulings in a separate Revenue bulletin.

The CHAIRMAN. Mr. Benjamin Johnson.

STATEMENT OF BENJAMIN O. JOHNSON, GENERAL COUNSEL OF SPARTAN MILLS

The CHAIRMAN. Be seated, please, make yourself comfortable and identify yourself to the reporter.

Mr. JOHNSON. Mr. Chairman and members of the committee, my name is Benjamin O. Johnson and I am a resident and citizen of Spartanburg, S. C. I am a member of the tax division of the American Bar Association, and a member of the tax committee of the American Cotton Manufacturers Institute. I am general counsel for Spartan Mills and affiliated companies and appear here in their behalf.

Senator FREAR. Are you a friend of Mr. Walter Montgomery? Mr. JOHNSON. I am very closely associated with Mr. Walter Montgomery.

I am also counsel for and director of a number of other business corporations.

My appearance here relates only to the subject of redemption of stock by corporations for the purpose of paying death taxes.

Section 303 of H. R. 8300 sets forth limitations on distributions in redemption of stock to pay death taxes that qualify for treatment as an exchange under section 302 (a) (6), and resultant capital exchange

treatment. Section 303 (b) (2) as now contained in H. R. 8300 permits redemption for payment of death taxes only if the particular stock of the corporation for estate-tax purposes comprises either 35 percent of the value of the gross estate or more than 50 percent of the taxable estate of a decedent. Two or more corporations may be treated as a single corporation only if the decedent owned more than 75 percent in value of the outstanding stock.

It is my position that these percentage limitations on capital redemptions for payment of death taxes are arbitrary, discriminatory, without rational purpose in the tax law, and contrary to the stated purposes of H. R. 8300:

to remove inequities, to end harassment of taxpayers, and to reduce tax barriers to future expansion of production and employment.

The discrimination in favor of estates meeting the test of the stated percentages is compounded by extending the benefits of redemption as an exchange in a qualified case (a) to early redemption of nonparticipating stock under section 309, and (b) to early redemption or disposition of stock of an inactive corporation under section 353. In order to correct this inequity and further the declared objectives of H. R. 8300, I advocate complete deletion of the percentage of ownership standards required to qualify redemptions to pay death taxes as an exchange under section 302 (a) (6); or, in short, the elimination of section 303 (b) (2) in its entirety. I do not object to the other limitations of section 303, except to say that the extent of redemption should be clarified to permit a net redemption after provision for any gains taxes that may be involved in the redemption so as to leave the net amount required to pay the items which are stipulated in section 303 (a).

It is not believed that elimination of section 303 (b) (2) will materially affect the public revenue that might otherwise be derived from its enactment into law.

Some of the reasons for my position are as follows:

(1) The percentage limitations tend to produce uncertainty in estate planning and execution in that they depend on the ultimate variable fact of proportionate valuation which inevitably and unpredictably changes from time to time. A condition of eligibility for exchange treatment may be transformed to one of ineligibility and vice versa because of ever-changing factors affecting proportionate value of assets. Even after death, the same unpredictable change may occur between date of death and the optional valuation date of 1 year later with disruptive effect. In borderline cases, disputes of value may be decisive and thus disputes and litigation will inevitably be fostered by the percentage limitations.

At this point I wish to turn aside simply for the purpose of registering a strong objection to the proposed conditional use of the optional valuation date as now contained in section 2032 of the proposed bill which prevents the use of the alternate valuation date of 1 year after death unless there has been a diminution of at least onethird in the gross value of the estate. That point will be covered by other witnesses so I will not elaborate.

(2) The percentage limitations place a premium on inordinate investment in a single enterprise.

(3) The estate of a nonconforming decedent or small stockholder is denied use of the important channel of liquidation of stock for payment of death taxes through corporate redemption afforded to the qualified decedent.

(4) Full advantage of other relief sections of subchapter C, including proper corporate separations and distributions to shareholders of stock and securities of controlled corporations would be denied in most cases without changing a status of eligibility to one of ineligibility due to the extreme requirement of 75 percent or more ownership in each of the 2 or more resultant corporations.

(5) Application of the accepted principle of diversification of risk is denied proper protection and unwarranted reward is placed on overconcentration of investment in a single enterprise.

(6) Investment in close corporations and corporations without established market for their shares is discouraged by undue limitations on the power of the corporation to trade in its own shares and to redeem its stock for payment of death taxes in every proper case without discrimination between shareholders.

The restrictions are particularly detrimental to the growth and survival of small corporate business, which, in the usual case, has a very limited market outside of the corporation for sale or redemption of its shares. In order to encourage investment in small corporate enterprises, the right of redemption as an exchange to the extent of death taxes and administration expenses should be unfettered by any complicated percentage test.

I point out that section 302 (a) now defines categorically five specific classifications in which corporate distributions are permitted on an exchange basis other than redemptions for payment of death taxes. Obviously, in many cases, estates of decedents could redeem stock as an exchange by compliance with a particular subsection of section 302 (a) other than subsection (6), such as (a) complete redemptions under subsection (3), or (b) substantially disproportionate redemptions under subsection (4), or (c) redemptions by a shareholder holding less than 1 percent of the participating stock under subsection (5). It is the important case of a partial redemption falling outside of the qualifying percentage requirements prescribed by section 303 (b) (2), and the otherwise qualified substantially disproportionate redemptions under section 302 (a) (4) that would be adversely affected. In practice, section 303 (b)` (2) would defeat any partial redemption needed for payment of death taxes that could not conveniently meet the substantially disproportionate redemption test now defined in section 302 (a) (4). This discrimination should be corrected in the public interest. Deletion of the arbitrary percentage requirements under section 303 (b) (2) will accomplish the desired result.

I wish to add that I have spoken briefly to some of the principals in the Treasury Department who appear to be sympathetic to our view but have expressed no ultimate opinion about it. As I see the situation, the percentage limitations as now contained in 303 (b) (2) simply confuse the picture. They do not serve any useful purpose for public revenue. In a great many cases redemption could be effected through these other subsections of section 302 (a), but in many other cases where it is not possible due to practical business considerations or inconvenience, either to the corporation or to the estate, to meet the