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November, and December. The retailer must purchase and pay for the merchandise to be sold during this 3-month period in the months of September, October, and November. These are months of heavy cash outlay. Cash resources are usually insufficient to meet these requirements, necessitating borrowing.

The enactment of section 6016 and the related sections will cause a further strain on his resources. It really means further borrowing to pay in advance a tax on income that may not yet have been earned.

The first declaration of estimated income tax is due to be filed on the 15th day of the 9th month. This filing date is wholly unrealistic. A taxpayer is given exactly 15 days from the close of an 8-month period to resolve the complexities that enter into the determination of net income in this modern world.

Physical inventories play an important role in determining net income. These inventories are taken only twice a year at the most. True income can only be determined when the status of the inventory is known.

Retailers using the LIFO method have an added problem. LIFO inventory valuations are based on retail price indexes. These indexes are published by the Bureau of Labor Statistics twice a year, namely, March and September as of January 15 and July 15. No formula has yet been devised to measure the effect of unknown price changes for the intervening months.

Retailers reporting their profit on the gross profit method require further calculations to determine their net income.

Administrative problems are further aggravated. Two more returns are added to the long list of tax returns now required to be filed by retailers. These extra returns will increase administrative costs not only for the taxpayer but for the Government as well.

The corporation income tax was scheduled to be reduced to 47 percent on March 31, 1954. This decrease is now to be postponed for 1 year. Instead of getting the decrease as originaly scheduled, the favored 35,000 corporations are required to pay out a greater amount in corporation income taxes within a 12-month period for the next few years than is now required under present law and more than is to be extracted from the other 390,000 corporations.

Eight percent of all the corporations are singled out for this special tax treatment solely on the basis of their net income. It seems to me that this is an extension of the principle that bigness per se is evil. I am a firm believer in democratic principles and that their principles should be applied to all groups without fear or favor. The application of section 6016 to 8 percent of the corporations violates my sense of fair play, justness, and equity.

We are not unmindful of the sound objectives of H. R. 8300. It does much to clarify and simplify our existing Internal Revenue Code provisions. There are areas in this bill which we believe are not in the best interest of our national economy. We particularly urge that action on subchapter C relating to corporate distributions and adjustments be postponed until adequate consideration can be given to the very complex rules set forth therein.

We specifically recommend:

(a) That section 461 (c) relating to accrual of real property taxes be amended to provide that a taxpayer may continue his present method of deducting real property taxes.

(6) That sections 6016, 6154, and 6655 relating to the declaration of estimated income tax by corporations be deleted completely.

Thank you, sir.
The CHAIRMAN. Thank you very much.
(The statements of Mr. Button, with attachments, follow :)

STATEMENT OF RALPH W. BUTTON OF AMERICAN RETAIL FEDERATION I am Ralph W. Button, assistant secretary of Allied Stores Corp. I appear before you today as a member of the taxation and fiscal policy committee of the American Retail Federation. 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.

A list of participating member associations is attached to this statement.

We have limited our oral testimony to sections 461 (c) relating to the accrual of real property taxes and sections 6016, 6154, and 6655 relating to the declaration of estimated income by corporations. We are concerned with other provisions of H. R. 8300 which we have set out in our more detailed brief accompanying this statement.

We believe that section 461 (C) was designed to bring tax accounting more in line with good accounting practice. In actual operation, section 461 (c) for the first year it is effective will cost taxpayers many millions of dollars.

There are approximately 25 States which specify January 1 as the date real property taxes become a liability. The period covered by this property tax is the calendar year. Taxpayers who file their income tax returns for a fiscal year ending in 1955 will be permitted to deduct only a portion of their 1955 real property taxes. Thus, retailers operating on a fiscal year ending January 31, 1955, will be allowed to deduct 112 of their 1955 real property taxes. This means that their taxable net income will be increased by 1112 of the real property tax expense by reason of the special rules set out in section 461 (c)-(2).

I have applied this section to a specific retailer operating in Massachusetts. Under the present law, his tax liability is $42,900 or an effective rate of 46.1 percent. The disallowance of his real property tax expense in January 31, 1955, all other factors being equal, his tax liability will be increased to $69,500 or an effective tax rate of 74.6 percent on the same accounting net income, the disallowance thus costing him $26,600.

I have made this same calculation for six other retailers operating in the States of Pennsylvania, North Carolina, Massachusetts, and Michigan. The total increase in income taxes by reason of section 461 (c) for these six retailers amounts to $785,200.

It is obvious from the foregoing that the loss sustained by taxpayers throughout the country will reach staggering proportions.

In everyday tax parlance, section 461 (c) is known as a sleeper. I am certain that Congress never intended that this statutory change in accounting methods should result in the loss of millions of dollars and I am confident that this committee will correct the inequity thus created.

The result reached by the application of section 461 (c) to actual situations surely points up the need for careful consideration and study of all the provisions of H. R. 8300.

The declaration and estimation of income taxes by corporations present serious financial and administrative problems particularly for retailers.

The House committee report indicates that out of 425,000 corporations, 35,000 corporations have been singled out for this special tax treatment. These 35,000 corporations were selected for the stated reason that they account for 90 percent of the corporation income-tax liabilities.

The House committee report does not indicate the kinds of companies in their 35,000 figure. What is the economic status, the financial status of these companies? Will the enactment of section 6016 and related sections create greater problems than the problems sought to be solved? These are some of the questions that need to be answered before these sections are enacted into law. The House committee report indicates that consideration has been given to only one part of the problem.

In this connection, I call to your attention an article appearing in the New York World-Telegram and Sun (a copy is attached) which shows that 25 corporations showed a net profit in 1953 of $4.3 billion. A rough estimate of the corporation income tax liability on this amount of income is $2.2 billion which I estimate is approximately 10 percent of all corporation income taxes.

If 1/1400 of this group of 35,000 corporations accounts for 1/10 of the corporate income tax liability, is it not possible that a relatively few corporations account for the major part of the total tax liability? If this is true, how many thousands of corporations with tax liabilities of just over $50,000 are classified into this group and what is the impact of this section on them?

We must measure the adequacy of the solution proposed by section 6016, etc. against a true statement of financial ability of all the 35,000 corporations mentioned.

Retailers, particularly, will have difficulty meeting the financial and administrative requirements of section 6016 and related sections.

The average retailer produces more than half of his annual profits, the range being 48 to 80 percent, during the months of October, November, and December. The retailer must purchase and pay for the merchandise to be sold during this 3-month period in the months of September, October, and November. These are months of heavy cash outlay. Cash resources are usually insufficient to meet these requirements necessitating borrowing.

The enactment of section 6016 and the related sections will cause a further strain on his resources. It really means further borrowing to pay in advance a tax on income that may not yet have been earned.

The first declaration of estimated income tax is due to be filed on the 15th day of the ninth month. This filing date is wholly unrealistic. A taxpayer is given exactly 15 days from the close of an 8-month period to resolve the complexities that enter into the determination of net income in this modern world.

Physical inventories play an important role in determining net income. These inventories are taken only twice a year at the most. True income can only be determined when the status of the inventory is known.

Retailers using the LIFO method have an added problem. LIFO inventory valuations are based on retail-price indexes. These indexes are published by the Bureau of Labor Statistics twice a year, namely, March and September as of January 15 and July 15. No formula has yet been devised to measure the effect of unknown price changes for the intervening months.

Retailers reporting their profit on the gross-profit method require further calculations to determine their net income.

Administrative problems are further aggravated. Two more returns are added to the long list of tax returns now required to be field by retailers. These extra returns will increase administrative costs not only for the taxpayer but for the Government as well.

The corporation income tax was scheduled to be reduced to 47 percent on March 31, 1954. This decrease is now to be postponed for 1 year. Instead of getting the decrease as originally scheduled, the favored 35,000 corporations are required to pay out a greater amount in corporation income taxes within a 12month period for the next few years than is now required under present law and more than is to be extracted from the other 390,000 corporations.

Eight percent of all the corporations are singled out for this special tax treatment solely on the basis of their net income. It seems to me that this is an extension of the principle that bigness per se is evil. I am a firm believer in democratic principles and that these principles should be applied to all groups without fear or favor. The application of section 6016 to 8 percent of the corporations violates my sense of fair play, justness, and equity.

We are not unmindful of the sound objectives of H. R. 8300. It does much to clarify and simplify our existing Internal Revenue Code provisions. There are areas in this bill which we believe are not in the best interest of our national economy. We particularly urge that action on subchapter C relating to corporate distributions and adjustments be postponed until adequate consideration can be given to the very complex rules set forth therein.

We specifically recommend :

(a) That section 461 (c) relating to accrual of real property taxes be amended to provide that a taxpayer may continue his present method of deducting realproperty taxes.

(6) That sections 6016, 6154, and 6655 relating to the declaration of estimated income tax by corporations be deleted completely.

SUPPLEMENTAL STATEMENT OF RALPH W. BUTTON OF AMERICAN RETAIL FEDERATION

I am Ralph W. Button, assistant secretary, Allied Stores Corp. I appear before you today as a member of the taxation and fiscal policy committee of the American Retail Federation. 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. (A list of participating member associations is attached to this statement.)

H. R. 8300 makes sweeping changes in many provisions of the Internal Revenue Code. Some of these changes are good but there are many areas in this bill which will, if passed in their present form, work great hardships on a multitude of taxpayers, large and small alike.

Great pressure is being exerted to get H. R. 8300 passed. Taxpayers have not had adequate time to study and test all of the provisions of this bill to actual situations. Subchapter C, alone, relating to corporate distributions and adjustments changes the rules of many years' standing. This chapter is very complex, it introduces new terms, new phrases, new tests, and changes the very concept of corporate reorganizations.

Section 461 (c) relating to accrual of real property taxes is a brand new provision. The application of this provision will increase income tax payments by many millions of dollars.

Section 6016 and related sections 6154 and 6655 extend the declaration of estimated income tax to an estimated 35,000 corporations.

H. R. 8300, according to published reports, is designed to clarify and simplify existing code provisions, eliminate inequities, create incentives for business and effect some tax relief for individuals. While H. R. 8300 accomplished some of its aims and goals, it also creates inequities, retards and restricts certain expansions, and will cause economic dislocations in some classes of industry.

SUBCHAPTER CORPORATE DISTRIBUTIONS AND LIQUIDATIONS

Subchapter C relating to corporate distributions and adjustments for all practical purposes eliminates the tax free character of the acquisition by one corporation by issuance of its voting stock for all or substantially all of the stock or assets of another corporation. Such an acquisition was a tax free reorganization under the provisions of section 112 (b) (3) and (4) of the Internal Revenue Code of 1939.

The owners of a small retail establishment desiring to sell their business because of age or illness of its management will find it very difficult, if not impossible, to find a buyer who will be able to pay cash for their business. Buyers can be found where the purchase price is paid in stock of the buyer.

I have in mind just such a situation. The owners want to sell their business for the very reasons I have mentioned. The owners prefer to sell for cash but have been unable to find a buyer. Another retail organization is interested in acquiring this business for a part of its voting stock. Under present law, this transaction could be accomplished without incurring a present tax. The tax would be postponed until the selling stockholders converted their stock into cash.

However, under H. R. 8300, this type of transaction would be taxable since the selling stockholders would not own 25 percent of the acquiring corporation's stock.

If the selling stockholders accept stock in exchange for their assets or stock in this transaction, they would be compelled to sell some of the stock so acquired in order to obtain cash with wbich to pay the tax imposed.

When a publicly owned corporation issues its stock in acquisition of another corporation, the SEC requires the selling stockholders to sign an agreement to the effect that the stock so acquired is to be held for investment and not for resale in order that the publicly held corporation may register its stock under the Securities Exchange Act of 1934 rather than the Securities Act of 1933. Thus, a selling stockholder acquiring this stock with the knowledge that he would be forced to sell a part of it would be violating the Securities Exchange Act of 1934.

Another factor involved in this proposed transaction is the necessity of the buyer to spend between $250,000 and $500,000 for renovating and rehabilitating the physical plant.

H. R. 8300 will probably kill this transaction with the probable result that the additional money to rehabilitate the property will not be spent and might

result in the owners liquidating and closing the business. If such should happen, 100 or so employees would be thrown out of work.

I know from my own experience that a number of acquisitions effected in the past under 112 (b) (3) and 112 (b) (4) would not now be effected. I can also say from my own experience that such acquisitions have resulted in the economic improvement to the community in which the retail establishment is located and to the employees employed therein.

Thus, it is subchapter C of H, R. 8300 places an economic brake on corporate expansions to the detriment of economy of the country as a whole.

We recommend that action on subchapter C of chapter 1, subtitle A, be deferred to permit more time for analysis of the economic effects and for the drafting of modifications necessary to accomplish its purposes. If deferment is not feasible then we recommend that the effective date be changed from March 1 to a date 6 months after the adoption of H. R. 8300.

SECTION 461 (C) ACCRUAL OF REAL-PROPERTY TAXES

The House Ways and Means Committee's report explains section 461 (c) as follows:

“Under present law a deduction for the payment of local property taxes accrues upon the date when the amount and liability for the tax become fixed. In many jurisdictions, the amount and liability for a property tax for the calendar year 1955 would be fixed on a date late in 1954 and, under court decisions, is deductible for accrual basis taxpayers only at that time.

“The bill provides that an accrual basis taxpayer may in the future accrue a real property tax ratably over the period for which the property tax is imposed."

A reading of the foregoing gives the impression that the objective sought to be accomplished is most desirable. The language of the second quoted paragraph seems to indicate that a taxpayer has a choice of either changing his method of accruing real property taxes in conformance with section 461 (c) or continuing his present method. Section 461 (c) of H. R. 8300, in fact, makes the change in accounting method mandatory and an accrual basis taxpayer has no choice.

Continuing the House committee's explanation of this section, the report says, “Special rules are provided to cover the transitional problems which may arise as a result of the change."

A taxpayer, reading newspaper accounts of H. R. 8300 has been lulled into the belief that H. R. 8300 is designed to eliminate inequities found in the present law, to clarify existing provisions and, in fact, effect some tax reductions in certain areas.

It is true that H. R. 8300 does fulfill some of its objectives but what will the taxpayer's reaction be when he discovers some months from now that H. R. 8300 for the first year of its operation has actually increased his income taxes.

Section 461 (c) for the first year will actually cost taxpayers, large and small, many millions of dollars. I cannot estimate the total cost to taxpayers but I can factually show what the cost will be to individual retailers.

Let us take a small retailer operating in the State of Massachusetts. Massachusetts is one of approximately 25 States which specifies January 1 as the date real property taxes become a liability. The period covered by this property tax is the calendar year. This retailer keeps his books and records and files his Federal income-tax return on a fiscal-year basis, namely, January 31.

Let us apply section 461 (c) to this taxpayer. For the year ended January 31, 1954, the Federal income-tax return of this retailer will show the following: Net sales Jan. 31, 1954_

$1, 800,000 Real property taxes covering the calendar year 1954 accruing on Jan.

1 under Massachusetts statutes but required to be deducted by present Federal laws on Jan. 31, 1954..

$56, 000 Net profit for the year Jan. 31, 1954.

$93, 000 Federal income-tax liability--

$42, 900 Effective tax rate on accounting net income (percent)

46. 1 Under section 461 (c), this same retailer, all factors being equal, at January 31, 1955, would show the same result for purposes of reporting to owners of the business, creditors, etc.

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