The Internal Revenue Code of 1954

I feel, as do they, there is only one honest answer in the light of all the facts that have been developed by your own experts and that is this:

In all fairness to the taxpayers of this country-both individual and corporate these cooperative and mutual corporate businesses must be made to shoulder the same burdens of Federal taxation that the rest of us must and are glad to bear for the privilege of carrying on business under the rights and protection of this great Republic.

STATEMENT ON BEHALF OF THE INDEPENDENT REFINERS ASSOCIATION OF AMERICA

My name is Elmer E. Batzell. This statement is submitted on behalf of the Independent Refiners Association of America, for which the firm of Meyers & Batzell, of which I am a partner, is counsel. The Independent Refiners Association of America has members in the principal refining areas of the country, except in California.

Last summer we had the opportunity of appearing before the House Ways and Means Committee. At that time a rather lengthy statement was submitted recommending the adoption of a more adequate depreciation policy under the internal revenue laws of this country. Since that time this problem has been carefully considered by the House committee and by the House itself. Legislation has passed the House which materially alters the depreciation policy now in effect. This legislation is before this committee for consideration.

It is my understanding that this committee will be given the full benefit of the views that have been previously expressed. It would unnecessarily burden the record to reiterate in full the position which was taken last summer. The association wishes to go on record, however, as fully supporting the views which it has expressed previously. It urges very careful consideration by this committee of the position then taken.

In essence the association has recommended first that the Congress adopt a more flexible depreciation policy; and second, that the method employed be the simple and direct arrangement whereby each taxpayer would be permitted to select the rate at which he would depreciate his facilities. The association continues to believe that ultimately it is to the best interests of a dynamic economy and to this country to permit the taxpayer to select the depreciation period, his election once made being binding upon him thereafter unless specific permission to change is granted by the Government.

In the statement of the association before the Ways and Means Committee it was pointed out, however, that a variation of the complete freedom of election principle could be adopted with material assistance to the small operator and without ultimate loss of revenue to the Government. This "would be an arrangement permitting depreciation on a substantial portion of a newly installed facility in the early period of its life, letting the unrecovered portion of the total cost be over the remaining longer period." It is this arrangement which appears in the House bill, and while the preference of the association remains that of complete freedom to the taxpayer to select his depreciation period, the association certainly subscribes now, as it did in making its original recommendation to the Congress, to the principle which has been incorporated in the pending legislation.

We stated, in our discussion of last June, that "the rules as to accelerated depreciation" should "be self-operating and without review by Government in the selection of facilities to which the rules may be applied." This principle has been adopted in the current legislation and the association firmly believes that it should be sustained.

In my own experience in Government service, recently as finance counselor and as Assistant Deputy Administrator and General Counsel of the Petroleum Administration for Defense, and during World War II as special assistant to the Deputy Administrator of the Petroleum Administration for War, I had continuing direct relationships with the so-called accelerated amortization provisions of the Internal Revenue Code. These experiences have convinced me that a rapid depreciation program is basically a sound concept for assuring continued expansion of industrial activities of this country without ultimate loss of revenue to the Government. The experiences have also convinced me that rules for applying depreciation should, in general, be self-operative and not dependent upon Government review of particular facilities before the taxpayer is entitled to apply those rules.

Any proposal involving Government review involves a program which can be carried out only in accordance with relatively inflexible standards which neces

sarily presume a degree of knowledge on the part of the Government administrator which he cannot possibly possess; and no matter how honestly, how objectively, and how consistently such rules would be administered, inequities would arise leaving the Government open to charges and countercharges of discrimination and unfairness. Accordingly, any long-range program such as that envisaged in the present legislation, which the association here supports, should be operative without review by the Government prior to the installation of the facilities to which the accelerated depreciation will apply.

The circumstances which have led to the recommendations which are here made were set forth at length in the previous statement of the association to the Congress. In brief, to petroleum refining, where, in the 46 years since 1908, 5 revolutions have occurred in the art of refining crude oil, the ability to depreciate facilities in accordance with their useful economic life is critically important. The pending legislation goes a long way to make this possible.

Three other factors discussed in detail in the statement before the House Ways and Means Committee should be emphasied:

(1) Depreciation based on the physical life of existing equipment cannot take into account intrinsically higher replacement costs of existing facilities arising by virtue of tremendous increases in the steel, copper, brick, fabrication, and labor costs which go into a plant.

(2) The new processes which frequently make obsolete already installed facilities in a quarter to half of their useful physical life have invariably required increases in the size of basic refining facilities in order that maximum efficient operation can be obtained.

(3) New processes are themselves intrinsically more expensive than the ones which they replace.

These characteristics make it imperative to have a revised depreciation policy, such as that now proposed, if aggressive economic and technological development is to continue and the participation of the smaller refiner in that development is to be made possible.

Although historical developments in the refining industry make clear that an adjustment such as that proposed to the existing depreciation rules is of significant importance to the industrial development of the Nation and is of particular importance to the smaller segments of industry, considerable resistance to a more flexible policy has been exhibited by the Government in the past. The chief objection seems to have been a fear in the Treasury Department that the loss in current revenues could not be absorbed in the face of the tight fiscal position of the Government. Such a consideration seems to us completely to overlook the far more important consideration that an accelerated depreciation program will inevitably assist in a more rapid development of the industrial base of this Nation and in the aggregate income subject to taxation.

The additional cash available to businessmen arising out of a more realistic depreciation policy inevitably will find itself returned to the business for generation of increased income and increased profits. An inflexible depreciation policy, on the other hand, stifles this growth opportunity and is especially disadvantageous to the small segments of an industry. It may, indeed, both in the short and long run, mark the difference between whether a business succeeds or fails.

There are a number of precedents in the experience of other nations for adoption of a flexible depreciation policy, the most recent of which is the petroleum law of Turkey, enacted in March of this year, which permits the operator to select his depreciation period based upon his "estimate of the number of years that the property can be economically employed in the service of which it was originally installed or erected." Britain has found such a policy absolutely essential as a means of maintaining a continuing flow of investments into new and improved productive facilities. The laws of Canada, Norway, and Sweden all provide for a flexible depreciation policy; and it is not without significance that Canada and Norway under a modern depreciation chargeoff program are the nations which show the greatest industrial expansion since World War II. Any economy which depends for its stability upon a dynamic industrial base must make adequate provision for continued investments and reinvestments in facilities which will insure the continued vigorous growth of that industrial base. The long-rage security of this Nation depends, just as does the short-range security, upon our industrial might. An important inducement in maintaining that industrial strength is a policy with respect to depreciation which will permit a reasonable payout of facilities during periods when there is demand for the production from those facilities. If the facilities have continued use

fulness at the end of the period, the revenues derived from them will be subjected to full taxation without benefit of depreciation allowance. If the facilities have no such utility, sound accounting would require an orderly writeoff within the limited period of their useful life.

While it is not now of direct concern to this committee in its present deliberations, there is a matter of long-range import to the United States in these troubled times which is closely allied with the taxation policies that have been discussed. As a result of strenuous efforts to increase industrial production against the day when it might be needed to supply industrial and military activity in times of emergency, a considerable excess productive capacity has been developed which creates grave economic problems for individual businessmen. This is especially true in industries such as petroleum refining; and the impact of this excess capacity upon the independent refiner, when it continues to be used without restraint, threatens the very existence of this small but significantly important segment of the petroleum industry.

One of the members of the Independent Refiners Association, Mr. D. W. Hovey, of Houston, Tex., has personally brought to the attention of the Members of the Congress a program by which, through appropriate taxation adjustments, the adverse economic effects of excessive productive facilities, constructed for emergency purposes, may be minimized. It is premature here to recommend any specific form for minimizing such adverse effects through tax policies. It is not premature, however, to call this matter to the serious consideration of this committee and to commend to its study this particular problem and the steps which might be taken through tax legislation to handle the problem of maintaining idle capacity for emergency use.

The association urges the passage of a flexible depreciation law such as that now pending before this committee. Tax rates today are such that, very literally, the refiners of this Nation are not securing sufficient capital to replace the facilities which they are presently utilizing in turning out superior products. A flexible depreciation policy will help to assure a proper adjustment to current income so that the opportunity for continuing an improved, efficient, productive industrial mechanism will exist now and in the years to come. If the independent refiner is to continue his ability to deliver competitive products and hence to remain in business, he must be assured of a flexible depreciation policy now and in the future.

STATEMENT OF JOHN F. FLOBERG, ESQ., WASHINGTON, D. C.

Mr. Chairman and members of the committee, my name is John F. Floberg and I am a member of the law firm of Kirkland, Fleming, Green, Martin & Ellis with offices in Washington, D. C., and Chicago, Ill. I appear here today on behalf of United States citizens who are resident in foreign countries.

United States citizens residing in foreign countries find themselves in a position where they must pay duplicate income, estate and gift taxes. The obvious result is that they are at a severe disadvantage as compared either (1) to United States citizens living at home or (2) to the nationals of the country in which the United States citizens are resident, or (3) to the citizens of third countries who are resident in the same country as the United States citizens in question and competing with them in trade or business. The duplication is largely the result of the conflict betwen the United States primary principle of taxation on the basis of citizenship and the fundamental of most of the other countries of the world of taxation on the basis of residence.

Substantial strides have been made toward removing the inequities of the double tax burden on these particular United States citizens, but there is still considerable room for improvement both in the fundamental tax laws which you gentlemen are curently considering and in the conventions, designed to eliminate the double tax burden, between the United States and other countries, which come to the attention of you gentlemen from time to time. This satement will discuss some of those difficulties and will propose solutions for your consideration in the revision of the tax laws which you are currently studying.

STATEMENT OF GENERAL POLICY

It is fundamental national policy at the present time, and has been for several years, for the United States to encourage the economic growth and the capitalistic prosperity of all nations in the free world. This policy has been implemented during the past few years principally by large Government-operated programs of

financial assistance to other nations. These programs have been through various phases and have had various identifying titles, including Marshall plan, Economic Cooperation Administration, Mutual Security Administration, MDAP (which had a good many economic aspects to it), UNRRA (principally American financed), point 4, Foreign Operations Administration, etc.

In spite of the fact that the great bulk of the reconstruction, physical, moral, and economic, of the free world since World War II has been financed by United States Government funds, there can be little doubt that such a financing by private United States capital, to the extent that the projects financed were suited to private investment, would have been and would continue to be far more effective, efficient, and economical than a Government program ever could be. The inevitable cumbersomeness, and consequent relative inefficiency, of any large Government program, plus the fact that our Government does such business not with foreign capitalists but with foreign governments which may have highly questionable efficiencies and policies of their own, creates many obvious and inescapable disadvantages.

The most valuable capital items which the United States can export are its management and supervisory personnel. The managers of American capital, conscious as they must be of the magnified difficulties inherent in doing business in foreign countries, can hardly be expected to invest large sums of money, toward which they have a fiduciary responsibility, in those countries unless they have carefuly appraised the extraordinary demands which will be made on the talents and capacities of the personnel to whom they delegate the management and supervision of such activities. Inducement to invest must always be measured by the prospects of financial profit as compared to the risks involved. When the financial risks grow as disproportionately large as they do in most of the free countries which are our allies and friends and in the health and prosperity of which we have a strong national interest, top-flight United States personnel must be on the scene.

High Government officials for several years have stated all these principles and have attempted to encourage American capital to invest in foreign areas so as privately to accomplish what are really national governmental objectives of the United States. When private American capital does invest in the countries of the free world, furthermore, it has the additional highly beneficial effect of acting as a catalyst for the capital native to the particular foreign country in question. The strengthening of private enterprise, capitalism, and democracy becomes chain reactionary.

Encouragement to United States citizens to invest or to work abroad, however, has more often been limited to exhortation and platitude than it has been fortified with demonstrable advantages to the investor or employee. All too frequently a niggardly fear that a foreign investor or the employee of a foreign investor might "get away with something," a penny-wise-and-pound-foolish attitude toward the few dollars of Federal taxes paid by relatively few individuals while ignoring the alternative of billions of dollars of Federal foreign expenditures paid by all the taxpayers, has operated as an effective block on the achievement of our broad national objectives. It is time for a statesmanlike and courageous approach based on sound economics and international realities, divorced from politics, to dictate a course of national action in this matter.

Although various tax conventions have made the situation obviously better now than it was a few years ago, there can be little doubt that the improvement has failed to keep pace with the increase in the urgency of our national objectives. Far from encouraging individual United States citizens to follow American capital abroad, our tax laws in most cases in effect say to the individual: "You have three choices: (1) Give up your American citizenship, (2) go back home and stop your crying, or (3) grin and bear it." The first of these suggestions seems to be downright immoral and accepting it seems even more so; citizenship, and the patriotism which is corollary to citizenship, should have a nobler foundation than a tax advantage; and yet some United States citizens have felt themselves compelled to do just that and have actually surrendered their citizenship rather than continue bearing tax burdens which neither their fellow citizens in the United States nor their neighbors in the particular foreign country have to bear. The second suggestion is directly contradictory to fundamental national policies and frustrates our objective of strengthening foreign economies and democracies by the services of United States money and know-how. The third suggestion hardly seems a fair one to put to Americans who are directly-more directly than any of their fellow citizens-daily playing an active part in the promotion of some of our most fundamental national policies.

Specific corrective action, sometimes by basic amendment to the Internal Revenue Code and sometimes by enlargement or amendment of existing tax conventions or entering into new tax conventions, is suggested below.

INCOME TAX

Under existing law (and existing conventions) a United States citizen residing in a foreign country must pay income taxes to the United States on all of his income, except "earned income" in the foreign country within the definition of section 116 of the code (sec. 911 of H. R. 8300). He must normally also pay the income tax of the foreign country, because of his residence there, on his entire income both from that country and the United States. Tax conventions and the provisions of section 131 of the code (secs. 901-905 of H. R. 8300) allow a credit for taxes paid to the other country for the same income, but the credit is subject to a proportionate limitation. Even if the credit system worked perfectly, the result would be that the taxpayer would pay either the foreign or United States income tax, whichever is higher, but since each country normally allows different deductions and since each frequently taxes different types of income, the proportion does not always result in even the elimination of double taxation.

The ideal solution in justice and logic would be for each country to tax only income arising from sources within its borders. On the assumption, however, that the millennium has not yet arrived, our suggestions below are less ideal but more practical.

Charitable contributions

The Internal Revenue Code, section 23 (o), provides for the deductibility of contributions or gifts to various political units, to certain war veteran organizations and fraternal societies, and to "a corporation, trust, or community chest, fund, or foundation, created or organized in the United States or in any possession thereof or under the law of the United States or of any State or Territory or of any possession of the United States, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for ***'

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