receive a return and, therefore, it is limited to production a few months a year, is that true?

Mr. QUINETTE. That is the tendency, pure and simple.

Senator MALONE. Of course, instead of having it so they could make some money and then spend money out of their depletion allowance to discover new deposits-that is your point, isn't it?

Mr. QUINETTE. That is right.

Senator MALONE. That they just quit operating and save what they have?

Mr. QUINETTE. That is right.

Senator MALONE. Mr. Chairman, I believe the witness has opened up the subject, and it has been opened in two other committees, and right at the moment we are discussing it with Mr. Strauss, and I know the Atomic Energy Commission is discussing it with him and it is a question of arriving at a reasonable approach to get enough uranium to do this country in an emergency.

I will ask you this question: I do not know whether you are well enough informed to answer it. It is not the conviction of the committee, but there is a feeling on the committee that a proper approach in taxation and other incentives, if that is arranged, we could become self-sufficient in the production of uranium in this country and certainly in the Western Hemisphere, where we could defend it. Do you have any opinion on that subject? That is, to do it within a reasonable time?

Mr. QUINETTE. My opinion cannot touch upon whether uranium is present or not, but I will express the opinion-and I run into this thing currently because I am a tax-practicing individual

Senator MALONE. You hear the talk.

Mr. QUINETTE. I hear the talk. I am called in by institutions, lending institutions and bankers, to screen things. "Here is an operator who wants to borrow some money. They want to do this. They want to put in a mill."

I am brought in and I am one of the fellows who puts the pencil to it to see whether he can borrow the money to go into an operation and pay it back. And too many times I have had to tell the lender there isn't a chance. It is a good deal before taxes, but when you apply taxes and the controversies to it, it is no good.

Senator MALONE. Your silent partner gets all the money.
Mr. QUINETTE. That is right.

Now, I will say that if the proper income tax incentive-income taxes may, to a large extent be psychological, but still, one of the biggest factors of incentive to get people on the move--they may not thoroughly understand it, but they will part with their money. Let me say this: In my opinion, if 40 percent depletion is granted to the uranium people, there will be a lot of people who never heard of it before who will go out there and start buying shovels and try to find it. Senator MALONE. Then you will find something.

Mr. QUINETTE. Somebody will find something.

Now, the uranium we are talking about, if it is there, will never do us any good as long as it is in the Colorado plateau, or back here in the Appalachians in Pennsylvania. It is only when it is extracted. Senator MALONE. And you know where it is.

Mr. QUINETTE. And you know where it is, that it is worth anything to us in case of an emergency.

Senator MALONE. You see, Mr. Chairman, that depletion allowance, and other incentives, you see, we have about 77-we used to call them strategic and critical materials. We call them critical materialsabout 39 of these 77 materials are minerals. It simply means that we cannot depend upon producing the amount of these minerals you need in wartime.

Now, why can't you? You could go in and talk a good deal of detail, but roughly, this is the situation-the same situation to a lesser degree you find in uranium, because the other minerals are better known, but the same tax situation holds them back and the more we accentuate the tax situation, the greater the strategic classification. That is, the smaller amount you produce. We have cut the production of lead and zinc in half in the last 4 or 5 years, and they are both strategic. There is no use going into all the detail, but, Senator, we have been waiting for you to attend the other meeting. We know you are tied up, but it is the same problem. That is one factor.

The CHAIRMAN. I will catch up with you some day, George.

I hope the staff gives this very careful study. I think the general tendency in the committee is to encourage the search for uranium, taxwise.

Senator MALONE. I would like to say I think the witness has done the National Defense Department a great service, just opening up the subject for discussion.

The CHAIRMAN. The next witness will be Mr. Friedman. Make yourself comfortable, and give the reporter your name.

STATEMENT OF WILBUR H. FRIEDMAN, CHAIRMAN, COMMITTEE ON TAXATION OF THE NEW YORK COUNTY LAWYERS ASSOCIATION, AND THE AMERICAN RETAIL FEDERATION

Mr. FRIEDMAN. My name is Wilbur H. Friedman. I am an attorney and a member of the bars of the State of New York and of the District of Columbia. My address is 11 Broadway, New York, and I am a member of the law firm of Proskauer, Rose, Goetz & Mendelsohn. I am chairman of the committee on taxation of the New York County Lawyers Association. I am appearing on behalf of the American Retail Federation and of said tax committee. The American Retail Federation is a federation of 26 national retail trade associations, and 34 statewide associations of retailers, representing in all more than 600,000 retail outlets.

The stated purpose of section 309 as appears from the report of the Committee on Ways and Means is to prevent the tax practice which was considered by the court in the Chamberlin case. In that case holders of common stock of a corporation received a dividend in preferred stock and by prearranged plan sold the preferred stock to an insurance company. There was provision for early redemption of the preferred stock. This is commonly known as a preferred stock bailout. The Government contended that the transaction resulted in ordinary income, and the Tax Court so held; but the sixth circuit held that the stockholders realized a capital gain on the sale of the preferred stock. The Ways and Means Committee regarded this as an avoidance of taxes and in order to prevent the realization by

common-stock holders of capital gain with respect to a dividend in preferred stock, they inserted in the law section 309 which imposes an 85-percent tax on an issuing corporation at the time that it redeems preferred stock. The term actually used in the bill is nonparticipating stock, but what is meant is in most cases what we call preferred stock. Our opposition to section 309 is along three lines: (1) It does not accomplish the purpose sought by the Ways and Means Committee of preventing preferred-stock bailouts, and it imposes the tax in many cases where there is no bailout. (2) The purpose of the Ways and Means Committee to prevent preferred-stock bailouts could be better accomplished in a different way. (3) section 309 improperly imposes the tax with respect to past transactions. I want to make it clear that I am not opposing legislation which by proper means closes the preferred-stock bailout loophole.

(1) The purpose of the Ways and Means Committee will not be accomplished by this bill. In cases where the corporation is not required to redeem the stock, the corporation will wait for 10 years, since under section 309 the 85 percent tax does not apply if the redemption takes place more than 10 years after January 1, 1954. In this way, the 85 percent tax could be avoided even though a sale of the preferred stock has been made promptly after its issuance in situations similar to that in the Chamberlin case. In situations where the preferred stock has not yet been issued, and the parties desire to accomplish the same result as in the Chamberlin case, section 309 as written can be circumvented. To give one example, section 309 is limited to the redemption of so-called nonparticipating stock. Nonparticipating stock is defined in such manner as to permit a corporation to issue subordinated bonds which would qualify as nonparticipating stock and therefore be tax free at the time of issuance, but which could then be sold to an insurance company at capital-gain rates as in the Chamberlin case. Thereafter the same corporate instruments would no longer be regarded as nonparticipating stock (because of the change in the identity of the holders) but would now be regarded as bonds, and when the corporation then redeemed such bonds from the insurance company, the redemption would not be subject to the 85 percent tax because it would not be a redemption of nonparticipating stock. In this and other ways it seems that for prospective transactions section 309 will be largely inapplicable and easily avoided and will therefore not accomplish the desire of the Ways and Means Committee. It is likely, therefore, that if section 309 is retained in its present form it will be applicable mainly in the case of corporations which are bound by their charters to redeem preferred stock already outstanding and legally issued and where the relationship between corporation and stockholders is such that the corporation will not be able to get a modification of its obligation to redeem the preferred stock. This is an extraordinary and unfair result.

(2) The result obtained by the stockholders in the Chamberlin case could easily and properly be prevented by imposing a tax on the shareholders at ordinary income rates at the time they sell the preferred stock received as a dividend. This is the solution suggested by the sixth circuit in the Chamberlin case. The committee report states that it has not imposed the tax at this point because it would be easier to administer the tax at the corporation level than at the shareholder

level. However, the bill itself in section 353 dealing with the spin off of inactive corporations shows how such a tax can be imposed at the shareholder level. If the method of section 353 were applied to section 309, section 309 would not impose a transfer tax on the corporation, but it would require that in the case of the distribution of preferred stock or so-called nonparticipating stock, the distribution would be tax free to the recipients only if they file an agreement with the Secretary of the Treasury or his delegate to report to the Treas ury any disposition of the preferred stock within a given period of time. Section 309 could also provide as does section 353 that any such disposition would be taxed to the selling stockholders at ordinary income rates and not at capital-gain rates, and that if a shareholder failed to report such sale to the Treasury, the statute of limitations would remain open as it does under section 353. The imposition of the tax at ordinary income rates at the time of sale of the preferred stock should be made only in those cases where the redemption of the preferred stock at that time would be a dividend under section 302, and only where the purchaser of the stock would have the assurance, by reason of the corporate charter or contract, that the stock would be redeemed by the corporation within a short period of time. Such provisions would seem completely to satisfy the desire of the Ways and Means Committee to close up the Chamberlin loophole and it is our recommendation that section 309 be rewritten along these lines. Safeguards would have to be written into such a new provision to cover such cases as sale of the preferred stock after the death of the stockholder, and sale for bona fide business reasons, so as to make sure that the tax would be imposed on the sale of the preferred stock only in the Chamberlin type situation and related situations.

(3) Since the decision by the Supreme Court in Eisner v. Macomber in 1920, it has been considered settled law that the distribution by a corporation of preferred stock to common shareholders where no preferred stock was previously outstanding is tax-free to the recipients. During all these 34 years, it has never been considered that the redemption of such stock by the corporation would result in any tax to the corporation. The mere acts by the corporation of issuing and redeeming preferred stock were entirely normal corporate steps which have never been regarded as taxable events to the corporation. Section 309 would impose the 85 percent tax on the corporation regardless of the time when the preferred stock was issued, even if it had been issued 50 years ago. The tax is imposed regardless as to whether the issuance of the preferred stock was with a tax avoidance motive similar to that described in the Chamberlin case. In many instances the tax would be imposed regardless of whether there had been a sale of the preferred stock as was the situation in the Chamberlin case. In other words, the tax is not limited to the case where the parties are attempting a preferred stock bailout similar to that in Chamberlin.

Further, the tax would be imposed even if the issuing corporation is required by its charter to redeem the preferred stock, and such redemption provisions are entirely proper and usual with respect to preferred stock. The tax applies even though the issuing corporation is a publicly held corporation and even though the stock is listed on the Stock Exchange. It is most unreasonable to levy an 85 percent tax under these circumstances, quite contrary to the American spirit of

fair play. It is a kind of ex post facto imposition of a penalty on the completion of a transaction which was begun at a time when it was perfectly legal and proper. It is impossible to state how many such situations there are, but it is obvious that there must be a great number and I have been advised by representatives of the American Retail Federation that there are many, and to my knowledge there are instances of preferred stock issued by corporations whose stock is listed on a Stock Exchange which might be subject to this tax. The extreme nature of the penalty is indicated by the fact that if the redemption price is $100 per share, it would cost the corporation under this section $185 to redeem the stock.

I therefore suggest that the very least that should be done with this section if it is retained is to make it applicable only to preferred stock issued after the date of enactment of the law.

As regards the other provisions of subchapter C, we understand that major changes are to be made, and that many suggestions have been filed with this committee by other bar associations and groups. We have picked out a number of points which we are going to mention here in addition, to the above points on section 309, but it is our view that many other changes are needed in subchapter C. In limiting ourselves to the points mentioned in this statement we do not mean to infer that subchapter C is otherwise acceptable in its present form. As regards sections 311, 352, 354, and 359, they make a material change in existing law by restricting the ability to merge and consolidate taxfree to publicly held corporations as defined.

Under existing law mergers and consolidations are tax free whether of publicly held corporations or of closed corporations. Further, under existing law certain acquisitions by one corporation of the stock or assets of another corporation in exchange for voting stock of the acquiring corporation are tax free, whereas under H. R. 8300 such transactions would be tax free only if the stockholders of the acquired corporation ended up with at least 20 percent of the so-called participating stock of the acquiring corporation. Generally speaking participating stock is what we usually call common stock.

We have two major objections to these provisions:

(1) They take effect as of March 1, 1954. Many reorganizations proper under the old law were in progress at that time but not completed. On April 1, 1954, Chairman Reed of the Ways and Means Committee stated that the new provisions should not be applicable where certain steps had already been taken regarding proposed reorganizations under the old law. We request that if the present provisions of H. R. 8300 are enacted, the effective date be postponed at least to January 1, 1955, and that existing law be kept in operation until that date as regards the reorganization provisions. (2) We oppose the limitation of the tax-free benefits of statutory mergers and consolidations to publicly held corporations and we oppose the new restriction that corporate acquisitions will not be tax free unless the stockholders of the acquired corporation end up with at least 20 percent of the participating stock of the acquiring corporation. No satisfactory explanation appears in the House committee report why this major change in the philosophy of the reorganization sections as they have stood for the last 20 years should be made. For 20 years now the reorganization sections of the 1939 code and predecessor statutes have permitted tax-free mergers and consolida