toward accomplishing the goal of urban renewal with a resultant diminished impact on the Federal Treasury. We propose that the emergency of spreading urban decay be met with emergency methods and we cite the precedent of "amortization deduction of emergency facilities" under the present law as an example of an effective approach to meeting an emergency such as the one we describe herein.

We recommend therefore that the pending tax revision bill be amended so as to provide a more rapid depreciation deduction of new capital improvements constructed in an urban renewal area, certified as such by the Administrator of the HHFA, based on a period of 60 months. We are confident that the approval of such an amendment would provide such a stimulant toward renewal of our communities that ultimately the Federal Government will be spared the necessity of spending untold billions in assisting the localities to meet this problem-as would be required by the continued utilization of existing methods. A proposed draft of such an amendment follows:

"SEC. Amortization Deduction.-General Rule.-Every person, at his election, shall be entitled to a deduction, with respect to the amortization of the adjusted basis (for determining gain) of any dwelling, building, facility (including machinery and equipment), or of any part thereof, the construction, erection, or installation of which was completed after December 31, 1953, within an urban renewal area so certified as such by the Administrator of the Housing and Home Finance Agency, based on a period of sixty months. The amortization deduction above provided with respect to any month shall be in lieu of the deduction with respect to such structure for such month provided by section 167, relating to exhaustion, wear and tear, and obsolescence. The sixty-month period shall begin as to any such structure, at the election of the taxpayer, with the month following the month in which the facility was completed, or with the succeeding taxable year."

TAX EXEMPTION OF INCOME PLACED IN A RETIREMENT FUND

As an industry of generally self-employed persons we are rightfully concerned 'with the effect of the high level of progressive income taxes which makes it exceedingly difficult for such persons to plan properly for old age, possible retirement, or to provide for the welfare of dependents in the event of death.

We seek here the removal of an inequity in our tax structure which is discriminatory against the self-employed. Other sections of the Internal Revenue Code provide for tax benefits which operate to encourage corporation pension plans. Approximately 20,000 such approved plans are now in existence covering an estimated 10 million employees and executives. Participants in these plans under the code are not required to include their employers' contributions in their taxable income until pension payments are received. Contributions by employers are deductible from taxable income in the year made. There is no comparable legislation for the self-employed.

We urge that the committee give favorable consideration to the individual retirement plan set forth in the bill, H. R. 10, introduced in the House of Representatives by Mr. Jenkins of Ohio on January 3, 1953. Because the staff of the joint committee is familiar with the language of the bill I will not unduly burden the record of these hearings by making the proposed amendment a part of this statement excpet to review briefly its principal points which are as follows:

1. Any qualified individual may exclude from his gross income in any taxable year, subject to certain limitations, that portion of his earned income that he has contributed to a restricted retirement fund to be managed by a trustee or paid to a life insurance company as premiums under a restricted retirement annuity contract.

2. A “qualified individual" is defined as one not eligible to participate in a pension or profit sharing plan, qualified under section 501 of the proposed revision, or established by a governmental or charitable employer. It thus covers employees of corporations or partnerships which have no qualified pension fund. Even if eligible for pension benefits under a qualified plan, if an individual is also self-employed and more than 75 percent of his earned income results from that self-employment he is a qualified individual.

3. The amount deductible in each year cannot exceed 10 percent of his earned income or $7,500, whichever is less, except as set forth in the following special rule. The aggregate amount excludable is limited to $150,000.

4. (Special rule.) In the case of a qualified individual who before January 1, 1953, had reached his 55th birthday, the amount excludable shall be increased

by 1 percent of the taxpayer's earned income or $750, which ever is the lesser, multiplied by the number of full years in excess of 55 determined as of January 1, 1953, but not in excess of 20.

5. The bill provides for carryover to succeeding years any amount by which the authorized exclusion exceeds the amount actually paid during any taxable year.

6. Upon reaching 65 years of age or prior thereto in the event of permanent disability the taxpayer has the option of withdrawing the accumulated fund in annual, quarterly, or monthly installments, or by the purchase from an insurance company of one or more single premium annuity contracts, or in a lump sum. If the taxpayer elects to receive the sum on an installment basis he pays ordinary income tax rates on the amount received. If he elects to take his entire interest in the fund in a lump-sum payment-after accumulation for more than 5 years— he may treat the distribution as a long-term capital gain.

The principles of this amendment are in conformity with the following statement of President Eisenhower in his message to the Congress :

"There are over 10 million workers who cannot take advantage of these taxrelief provisions now offered to corporations and their employees. They include owners of small businesses, doctors, lawyers, architects, accountants, farmers, artists, singers, writers-independent people of every kind and description but who are not regularly employed by a corporation. I think something ought to be done to help these people to help themselves by allowing a reasonable tax deduction for money put aside by them for their savings. This would encourage and assist them to provide their own funds for old age and retirement."

In behalf of the National Association of Real Estate Boards we strongly urge that the general tax revision bill be amended by incorporating the principles of this retirement plan.

ACCRUAL OF REAL-PROPERTY TAXES

Section 461 (c) changes the rules for the accrual of real property taxes. Under present law, real-property taxes accrue on the date on which such taxes become a lien under local law. Under section 461 (c) of the bill, real-property taxes must be accrued ratably in each month of the year to which the tax applied.

Although the future effects of this provision may be desirable, as presently drafted it would produce a substantial distortion of taxable income for many realproperty owners in the transition year.

To illustrate, in Pennsylvania, Virginia, Wisconsin, and numerous other States, real-property taxes for each year become a lien under local law on January 1 of such year. Under existing law, taxpayers accrue the full year's taxes on that date, regardless of their accounting period. Under section 461 (c) (2), in the transition year, fiscal year taxpayers may be deprived of as much as eleventwelfths of the deduction of real-property taxes to which they would normally be entitled. Thus, a Pennsylvania or Virginia taxpayer on a January 31 fiscal year beginning February 1, 1954, could deduct only 1 month's real-property taxes on his return for the 12-month period ending January 31, 1955.

This section creates similar problems in New York and other States where taxes become a lien in the year preceding the year for which imposed. I understand these situations have been the subject of comment by other witnesses before the committee.

Whatever plan of accrual of real-property taxes is used, there is no justification for denying property owners the full year's deductions for real-property taxes in the transition year. If permitted to remain in the bill, section 461 (c) (2) would cause severe and undue hardship to many real-property owners. If it were eliminated from the bill, it would not result in tax avoidance, for no taxpayer will receive more than 1 year's deduction in any 12-month period.

Section 461 (c) is not a loophole-closing provision, but is designed to bring tax accounting into harmony with generally accepted accounting principles. As such, it is obviously misconceived in its present form, since it imposes substantive burdens far greater than the technical benefits it is designed to accomplish.

We recommend, therefore, that section 461 (c) (2) be deleted from the bill, since it would limit the deduction of taxes previously accrued. If this limitation is not deleted, we urge most strongly that the provision be made elective rather than mandatory.

Mr. WILLIAMSON. 1237 of the bill obviously designed as a relief provision to meet the criticism made by witnesses in the House hear

ings concerning the uncertainty of the application of the capital-gains provisions of existing law to the sale of investment real estate by realestate dealers.

We feel that the section as drafted will not reduce the area of uncertainty but, on the contrary, will increase that area and will therefore increase the volume of litigation in this field. The complaints of the witnesses in the House hearings related primarily to two situations where the present law has produced an irritatingly large volume of litigation. Namely, (1) the case of a dealer in real estate who carries real estate as stock in trade, buying and holding it for sale to customers as a business, but who buys other real estate as an investment. While dealers in other types of property, notably security dealers, may earmark such an investment and get capital-gains treatment when the investment is liquidated, the real-estate dealer is finding it increasingly difficult to do so because of the attitude of the internal revenue service. (2) Then there is the case of the man who is engaged in some other trade, business, or profession, who has invested his savings in real estate. When it comes to the point of liquidating his investment, if he finds it more advisable to sell the land in smaller parcels he is branded by the revenue agent as a dealer and his gains are claimed to be taxable as ordinary income. This taxpayer usually must resort to expensive litigation to get his rights recognized. If he held a large block of corporate stock, however, and sold it in small lots to avoid depressing the market price, his right to capital-gains treatment would not be questioned.

For the reasons set out in detail in our written statement, section 1237, while apparently intended to help taxpayers in these two classes, does not do the job. In summary these reasons are:

(1) While statements in the committee report indicated that if a taxpayer does not elect to come under the new provision, his rights under existing laws will not be impaired. The statutory language does not make this clear. In fact, in the committee report on pages 8284 the House Ways and Means Committee cites two cases as an example of how a dealer under existing law can still qualify for capital-gains treatments.

The two cases are the Carrol and the Weinman Realty cases as examples of how a dealer under existing law could still get capitalgains treatment on property that he held for investment.

In reading those two cases the court emphasized the fact that the taxpayers were not dealers or brokers in real estate. That gives some basis for our anxiety that this section 1237, although it is intended to relieve an inequity, actually removes what benefits a dealer might obtain from existing law.

(2) If prior to the introduction of this bill in the House the taxpayer recorded the intention to hold property for investment, he has no choice but is made subject to the restrictions of a provision which was not in existence when he made that book entry.

(3) Without explanation or any rational justification that we can see, the new section does not apply to dealers who do business in corporate form. No such distinction appears in the section covering security dealers.

(4) Section 1237 provides that the making of substantial improvements, a term which the bill does not even attempt to define, will change the markets of investment property to that of stock in trade. If the

taxpayer replaces a leaky roof or installs an elevator, or air-conditioning equipment in rental property, he loses his right to claim that the property is held for investment. The same result follows if he is holding undeveloped land for investment and he clears, levels, or drains it.

(5) The holding period is extended from the 6 months applicable to other types of property, to 5 years, a tenfold increase.

(6) Even if the taxpayer meets all the restrictive qualification of section 1237 he gets only a part of the relief to which he is entitled. Under existing law on the sale of an investment all gain is taxable under the capital-gains provision, under section 1237, 5 percent of the sales price, less selling expense, if any, is automatically taxed by this bill as ordinary income.

(7) The section will result in a windfall for the 1 taxpayer who is clearly not entitled to relief, a dealer who has carried property for 5 years as stock in trade without making any improvements. He may now make a designation on his books, which is clearly contrary to the facts-that is, investment property-and convert ordinary income into capital gain.

For these reasons we urge: (1) That the holding period be reduced from 5 years to 6 months as is the case with other capital assets. (2) If, however, the committee cannot agree to this proposal we suggest that section 1237 be deleted from the bill and the whole subject matter be given further study. (3) Should the committee insist that legislation on this subject be included in the bill, we strongly urge that section 1237 be amended, at the very least, to make clear that the taxpayer who does not deliberately elect to subject himself to the burdensome conditions of this section will have his rights under existing law preserved. The form of amendments to accomplish this are attached to our written statement filed herein.

Now, Mr. Chairman, I cannot overemphasize the importance of our contention that this section although designed to remove an inequity, actually aggravates the existing one.

The Wall Street Journal on April 14 in its tax report column, in discussing this 1237 headlines it as follows:

Capital Gains Rules for Real Estate Dealers Would Be Stiffer.

You can imagine what repercussions that has had in our industry because originally the section was put in the bill to relieve an inequity and the House report states clearly that the real-estate dealer is getting something here that he doesn't have under existing law.

The CHAIRMAN. Has the staff considered that?

Mr. SMITH. We have gone into it with him.

Mr. WILLIAMSON. We have had consultations with the staff.

I would like to discuss 461 (c), regarding accrual of real-property taxes. This section changes the rule for the accrual of real-property taxes. Under present law real-property taxes accrue on the date of which such taxes become a lien under local law.

Under section 461 (c) of the bill real-property taxes must be accrued ratably in each month of the year to which the tax applies. Although the future effects of this provision may be desirable as presently drafted it would produce a substantial distortion of taxable income for many real property owners in the transition year.

To illustrate, in Pennsylvania, Virginia, Wisconsin, and numerous other States, real-property taxes for each year become a lien under local law on January 1 of such year. Under existing law, taxpayers accrue the full year's taxes on that date, regardless of their accounting period.

Under section 461 (c) (2) in the transition year, fiscal year taxpayers may have been deprived of as much as eleven-twelfths of the deduction of real-property taxes to which they would normally be entitled. Thus, a Pennsylvania or Virginia taxpayer, on a January 31 fiscal year, beginning February 1, 1954, could deduct only 1 month's real-property taxes upon his return for the 12-month period ending January 31, 1955.

Now, we recommend that section 461 (c) (2) be deleted from the bill since it would limit the deduction of taxes previously accrued. If this limitation is not deleted we urge most strongly that the provision be made elective rather than mandatory.

Mr. Chairman, this came to our attention within the last week and I have not had the opportunity to consult with the staff, although I understand that other witnesses have discussed the difficulty raised by this particular section.

Mr. SMITH. That is right.

Mr. WILLIAMSON. Thank you very much, Mr. Chairman.
The CHAIRMAN. Thank you all very much for coming.

We will meet at 10:30 in the morning.

(By direction of the chairman, the following is made a part of the record:)

STATEMENT ON H. R. 8300 BY THE LAKE SUPERIOR IRON ORE ASSOCIATION

The Lake Superior Iron Ore Association represents most of the producers of iron ore from Minnesota, Michigan, and Wisconsin. These States normally produce about 80 percent of the iron ore consumed by the blast furnaces and steel plants of this country.

The members of this association consider that the proposed revision of the Internal Revenue Code is a substantial improvement over the existing code. We have not had an opportunity to consider all phases of this entire bill, but have concentrated our attention on those provisions of particular interest to the iron-ore industry. Later experience with provisions of the bill may indicate the need for further change and there should be a willingness to make such changes when the need becomes evident.

We urge that you consider the following amendments to certain provisions of H. R. 8300 which are confined to some of the problems of particular importance to the iron-ore mining industry.

1. DEFINITION OF PROPERTY

Under section 614 (b) (1) provision is made for election to aggregate separate interests for purposes of computing percentage depletion. Such an election should be permitted both for purposes of percentage depletion and for purposes of cost depletion.

The rule as stated permits but one aggregation within a single operating unit. It should be made clear that a separate right of election exists in respect to each operating unit. Also, it may be desirable to form more than one aggregate within a single operating unit and we urge that the taxpayer should be permitted to elect to form one or more aggregations of mineral interest within each operating unit.

Section 614 (b) (2) relating to the manner of his election appears to subject the taxpayer to unreasonable restrictions. In the interest of simplified administration we believe that once the taxpayer has established his property aggregate by making an election, he should continue to recognize that aggregation so long as conditions which dictated the election remained unchanged.