H. R. 8300, section 248, provides that certain organization expenditures incldent to the creation of the corporation, subsequent to January 1, 1954, may be amortized over a period of 5 years. The report of the House Ways and Means Committee reflects that the amounts to be amortized do not include the expenses of issuing shares of stock incurred either in the creation or reorganization of a corporation. It is urged that the definition of organization expenses be broadened to inIclude the cost of issuing stock and also to include all other organization and reorganization expenses, including stock issuance stamp taxes if such expenses are not otherwise allowed as a deduction for the year in which they were incurred. It is further urged that the provision of allowing organization expenses as a deduction be extended to companies who have previously incurred such expenses and who have not heretofore been permitted to take such expenses as deductions against taxable income. The limiting of this deduction to new companies can only be considered as discrimination against the older companies. General and new matters A partial and incomplete review of H. R. 8300 discloses many items which, in our opinion, should be corrected. Some of these are as follows: Section 11, tax imposed. Section 461, general rules for taxable year of deduction. Section 481, adjustments required by changes in method of accounting. Section 1341, computation of tax where taxpayer restores substantial amount held under claim of right. Section 6016, declarations of estimated income tax by corporations. Section 6074, time for filing declarations of estimated income tax by corporations. Section 6154, installment payments of estimated income tax by corporations. Memoranda are attached hereto on these last numbered sections which briefly set out the objections thereto. These data are submitted after only a very incomplete review of H. R. 8300, Internal Revenue Code of 1954 and since it will be impossible to properly review the bill within the time allowed for its consideration we earnestly urge that the proposed law be made applicable as outlined in our memorandum under section 7851-applicability of revenue laws-hereto attached. SECTION 11. TAX IMPOSED In H. R. 8300 it is proposed to increase the tax on corporate earnings in excess of $25,000 from 47 percent as exists in the present code to 52 percent, such rate to be effective for taxable years beginning after March 31, 1954. A great deal has been said for and against the increase in tax rates from 47 percent to 52 percent (54 percent for a corporation filing a consolidated return) when the Nation is in a peacetime economy. It is not our purpose to repeat here the many arguments which have been presented against such an extremely high tax rate. We must, however, point out that the increase in the tax rate as set out in section 11, H. R. 8300, results in an excessive and undue burden on businesses in general and that we hereby register our objections to such increase. SECTION 461. GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION The section above referred to provides for the accrual of real property taxes of a taxpayer, using the accrual method of accounting, over the definite period of time to which the real property tax applies, and further provides that such rule shall not apply for a taxable year which began before January 1, 1954. There may be many cases of a taxpayer who has followed the accepted practice of accruing real property taxes for taxable periods covered by the 1939 code, and who has taken deductions for real property taxes for the last taxable period under the provisions of the 1939 code. Should these taxes, accrued after January 1, 1953, and prior to January 1, 1954, have been ratably distributed, then the amount undistributed at January 1, 1954, will not be allowable as a deduction in 1954 under the provisions of H. R. 8300. The taxpayer would thus lose a deduction for taxes to which he is entitled. In order to prevent this injustice it is suggested that for the first taxable year, a taxpayer, in existence for one or more taxable years next preceding the first taxable year under this code, shall be entitled to a deduction for real property taxes for such first taxable year in an amount which is the greater of the amount allowable under the provisions of this code, or the amount to which the taxpayer would have been allowed for such first taxable year in the absence of this section. SECTION 481. ADJUSTMENTS REQUIRED BY CHANGES IN METHOD OF ACCOUNTING The above section provides (a) in computing the taxpayer's taxable income for any taxable year * * * 1. If such a computation is under a method of accounting different from the method under which the taxpayer's taxable income for the preceding year was computed, then 2. There shall be taken into account those adjustments which are determined, by the Secretary or his delegate, to be necessary solely by reason of the change in order to prevent amounts from being duplicated or entirely omitted. The report of the House Ways and Means Committee, on page A-164, carries this statement: "It is only those omissions or doubling up which are due to the change in method wihch must be adjusted." The committee report on page 50 carries the statement that: "Under certain circumstances, however, where a change in accounting method is made involuntarily, the courts have denied the Internal Revenue Service the right to require these adjustments ***" The committee's bill provides that the necessary adjustments will be made in all cases when there is a change in the method of accounting regardless of whether the change is voluntary or involuntary. Many taxpayers are required by law to keep their accounts according to rules of regulatory bodies. In the proceess of regulation, the current and future earnings of such taxpayers are regulated and where a change in the method of accounting is ordered commencing with the current year, the regulated taxpayer company is placed under an undue financial hardship under this section because the retroactive income taxes plus interest resulting from the compulsory change are not recoverable in the normal regulatory process. It is therefore urged that adjustments shall be made under this subsection only for the year in which the accounting change is made where such change is involuntary or compulsory and made in accordance with rules and regulations of a regulatory body exercising control over the accounting procedure of the taxpayer. SECTION 1341. COMPUTATION OF TAX WHERE TAXPAYER RESTORES A SUBSTANTIAL AMOUNT HELD UNDER CLAIM OF RIGHT This section provides a method for the computation of taxes where amounts received under a claim of right have been properly reported as income in prior years but in a later year the taxpayer is required to refund all or a part of such income. The deduction allowed the taxpayer under this section is the lesser amount of tax determined under two different methods. The provision for one of the above computations applies to adjustments for a period not in excess of 3 years. In addition, subsection (b) (2) provides that this section will not apply to certain transactions. Regulated public utilities are frequently involved in rate proceedings and litigation which may sometimes take longer than a 3-year period. Such companies would therefore be unable to avail themselves of the provisions of this section for income received prior to the 3-year period specified in H. R. 8300. In addition, the restrictive provisions of subsection (b) (2) of this section might otherwise operate to deny to taxpayers the use of the alternative tax computation provided by this section. It is therefore urged that this section be modified so that the period in which adjustments can be made will include all of the taxable years during which the proceedings were pending. It is also urged that where the adjustment provided for in this section arises out of refunds or repayments resulting from final determination of proceedings above referred to, is required of a corporation whose rates are fixed by a State or political subdivision thereof, or by a public service of public utility commission of a State, or a political subdivision thereof, or of the District of Columbia, or by an agency or instrumentality of the United States, such adjustments shall come within the provisions of this section. SECTION 6016. DECLARATION OF ESTIMATED INCOME TAX BY CORPORATIONS-SECTION 6074. TIME FOR FILING DECLARATIONS OF ESTIMATED INCOME TAXES BY CORPORATIONS-SECTION 6154. INSTALLMENT PAYMENT OF ESTIMATED INCOME TAX BY 6655. FAILURE BY A CORPORATION TO PAY ESTIMATED CORPORATIONS-SECTION INCOME TAX The above-enumerated sections contain provisions for a new system of advance payments of corporation income tax. Under this system a corporation is required to make and file a declaration of estimated tax on the 15th of the 9th month of the taxable year. Advance payments are to be made during the 9th and 12th months during the taxable year. The amount to be paid at each installment will graduate from 5 percent of the amount estimated to be due for the entire year 1955 to 25 percent in 1959 and later years. The provisions do not apply to corporations whose yearly tax liability cannot reasonably be expected to exceed $50,000. (The current payment requirements are limited to that portion of the tax in excess of $50,000.) The effect of advancing tax payments on corporations is to reduce their cash working capital. This reduction in working capital might well result in many corporations being forced to reduce their expenditures for expansion and investment in plant and equipment. This will produce a result directly contrary to the purpose of the act as expressed by the House Ways and Means Committee (p. 1) as it will undoubtedly have some unfavorable influence on future expansions. Companies whose cash working capital is reduced because of the increased current tax payments may well be influenced by such a situation in their declaration and payment of cash dividends. Any reduction in dividend payments will reduce the overall taxable income of the country since dividends are generally taxable in the hands of the recipients. A reduction in dividend income would work an undue hardship on many citizens and would be a deterring influence on the Nation's overall economy. Because of the above it is urged that H. R. 8300 be amended by eliminating therefrom all references to changes in methods of advancing payments of income taxes by corporations and the filing of declarations of estimated taxes, and substitute therefor the provisions now in effect in the Internal Revenue Code. SECTION 7851. APPLICABILITY OF REVENUE LAWS The House Ways and Means Committee state in their report (p. 1) on H. R. 8300 that "The purpose of these changes has been to remove inequities, to end harassment of the taxpayer and to reduce barriers to future expansion of production and employment." This association is in agreement with the proposal as above stated and is of the opinion that many of the changes recommended by the House and incorporated in H. R. 8300 will tend to accomplish the expressed purpose. It must, however, be recognized that such an undertaking as a complete revision of the Internal Revenue Code however desirable, cannot possibly be accomplished without the occurrence of errors and omissions. The problems of taxes is complex and the laws applying to such problem must, of a necessity, be complicated. To these complexities is added the many provisions of the proposed law which provide that procedure and tax practice be controlled by regulations prescribed by the Secretary or his delegates. The Commissioner of Internal Revenue has been publicly quoted as saying that these regulations cannot possibly be written and in the hands of the taxpayers during this taxable calendar year. Taxpayers will therefore be without any official interpretation of the code until the year 1955. Because of the numerous changes proposed and the lack of official clarifications they are now faced with a sea of uncertainty as to the tax effect of transactions occurring from day to day in their normal business operation. The many presentations made to your committee has pointed out many errors and omissions in H. R. 8300 all of which increases the difficulties under which a taxpayer is placed by the proposal that this law in general will apply to taxable years beginning after December 31, 1953. Such a proposal certainly does not tend to end harassment of the taxpayer and to reduce barriers to expansion of production and employment. On the contrary, it tends to create confusion, uncertainty and delays in expansion of production and employment. The bill undoubtedly contains many provisions which will be helpful to taxpayers and will promote the prime purpose of the bill as above expressed. It must be realized, however, that the uncertainties of the tax effect on many transactions will be a deterring effect on business activities during the transition period from the present Internal Revenue Code to the Internal Revenue Code of 1954. The Independent Natural Gas Association of America therefore recommends that to eliminate the uncertainties hereinbefore mentioned, at least for the current year, and to accomplish the fundamental purpose of the tax-revision bill, the taxpayer be permitted to compute his taxes for the taxable year beginning after December 31, 1953, and prior to December 31, 1954, under the provisions of the Internal Revenue Code of 1939, as amended, or under H. R. 8300, Internal Revenue Code of 1954, whichever produces the lower taxable income. This suggestion may appear unusual, however, a study will indicate that the following will be accomplished: 1. It will provide a method whereby the benefits to the taxpayers said to be in H. R. 8300 can be immediately passed on to taxpayers. 2. Taxpayers will not become victims of the traps and pitfalls in H. R. 8300 until they have had more time to study its provisions. 3. It will allow the Treasury Department time in which to write their regulations and get them in the hands of taxpayers before the law becomes exclusively final. 4. It will permit a comprehensive study of H. R. 8300 during this transitory period and the timely correction of defects by legislation prior to its becoming exclusively effective. 5. It will do away with the many uncertainties which are now deterring business activities. 6. It will provide for the much needed rearrangement of the tax laws. 7. It will be fair and equitable to the taxpayer and to the Government. 8. It will accomplish the prime purpose as expressed by the Committee on Ways and Means which reads: "*** to remove inequities, to end harassment of the taxpayer and to reduce tax barriers to future expansion of production and employment." For the reasons expressed we urge your earnest consideration to this proposal. APPENDIX 4 (House Ways and Means Committee, 83d Cong., 1st sess., p. 170, published hearings) Topic 4.-Deduction of charitable contributions, interest, taxes, and casualty losses. We recommend that stamp taxes imposed by section 1800 and section 3480 of the Internal Revenue Code upon the issuance of corporate securities, capital stock., etc., be allowed in full as a deduction in the year in which incurred. At the present time, as set forth in I. T. 3806 CB 1946–2, 31, issued by the Bureau of Internal Revenue, stamp taxes on bond issuance are allowable as a deduction upon an amortized basis over the life of the bonds to which they apply; stamps purchased in connection with stock issues are not allowed as deductions except for the possibility of deduction as an organization expense at the time of corporate dissolution. We fail to see a distinction in essence getween these stamp taxes and any other kind of taxes, and we believe that in equity and in fairness they should be allowed as deductions from gross income, either as a tax or otherwise, in the determination of taxable net income for the year in which the stamps were purchased. (House Ways and Means Committee, 83d Cong., 1st sess., p. 1195, published hearings) Topic 22.-Capital gains and losses including problems relating to basis An inequity that has existed in the Internal Revenue Code deals with the nondeductibility by corporations of net long-term capital losses when they are in excess of net short-term capital gains for the corporation's current tax year. The fact that such excess of capital losses may be carried forward for a period of 5 years as an offset to net capital gains in those years does not relieve the inequity or hardship on corporations. Such net losses in the case of a corporate taxpayer are usually the result of transactions which are an integral and essential part of the corporation's opera tions. With respect to utility companies, investments may be made in the capital stock of local industries with the object of promoting local employment and business activity which in turn will increase the utility's revenues and scope of operations. Also, two or more corporations may jointly invest in the stock of a new corporation at the request of some governmental authority to promote the national-defense effort or for the public good in general. For example, a group of electric utilities have recently organized a separate corporation to develop electric resources for the Atomic Energy Commission. Additional investments in varying proportions of capital requirements have been made in corporations engaged in research for developing new products from natural gas and oil. The electric industry is joining chemical companies in research toward the development of generating electricity from nuclear energy. Such necessary exploratory and research undertakings are made, in many instances, through separate corporations with the knowledge that partial or complete failures will obtain in many instances. In any of the cases mentioned, the corporate-taxpayer will in most instances own less than 95 percent of each class of the capital stock of the corporation invested in and thus will not come within the requirements of sections 23 (g) (4) (A) and 23 (k) (5) (A). These code sections provide that if 95 percent or more of each class of stock of the affiliated corporation is held by the corporate taxpayer, then such stock will be deemed not to be a capital asset and will not therefore come under the capital gains and loss provisions of section 117, so that any 'loss is an ordinary loss. We urge that in order to arrive at true corporate net income for any current tax year, code section 117 (d) (1) should be amended so that the excess of net long-term capital losses over net short-term capital gains, in the case of corporations, when incurred as a result of a transaction entered into for business purposes, should be allowed as deduction, regardless of the percentage of each class of stock owned as set out in code sections 23 (g) (4) (A) and 23 (k) (5) (A). (House Ways and Means Committee, 83d Cong., 1st sess., p. 1238, published hearings) Topic 24-The net opertaing loss Section 122 of the Internal Revenue Code permits a net operating loss of any year to be carried back to the immediately preceding taxable year and to the extent that the loss is not absorbed by net income of that year, it may be carried forward to each of the 5 succeeding taxable years. This, on the surface, is fair and equitable. However, before a net operating loss carryover may be applied as a deduction from taxable income, the following adjustments are required to be made to both the taxable year in which the loss occurred and to the net income of each year or years to which the loss may be applied: 1. The excess of percentage depletion over cost depletion must be restored; 2. Wholly tax-exempt interest, less any nondeductible interest paid or accrued to carry the exempt securities, must be included in gross income; 3. The net operating loss deduction must be restored; and 4. No deduction or credit is given for intercorporate dividends received. The above adjustments have the effect of reducing the net operating loss and increasing the taxable net income against which the net operating loss is applied. The adjustments purport to be justified on the economic loss theory. The requirement that the adjustments be applied to both loss and income years cannot be justified, and sound principles should limit the carryover provisions to taxable income and not economic income concepts. We urge that the so-called economic-loss limitations be removed from the statute. (House Ways and Means Committee, 83d Cong., 1st sess., p. 1294, published hearings) Topic 26-Consolidated returns and intercorporate dividends To many corporate taxpayers the most discriminatory and inequitable provision in the Internal Revenue Code today is the 2 percent surtax penalty imposed for the privilege of filing a consolidated income tax by an affiliated group of corporations. The first penalty on the privilege of filing a consolidated return by a parent corporation and one or more subsidiary corporations was imposed by Congress |