But, for Federal income-tax purposes, his return for January 31, 1955, applying section 461 (c) would show the following results: Net sales__ Real property taxes 12 of the real property taxes for the period beginning Jan. 1, 1955 (12 of 56,000) allowed as a deduction under the special-rules section, 461 (c) (2)--. Net profit for accounting purposes as shown above_ Add real property taxes disallowed under the special rules (56,000— 4,700) Taxable net profit under sec. 461 (c). Federal income-tax liability $1,800,000 $4, 700 $93,000 $51,300 $144, 300 Effective tax rate on accounting net income (percent) _-. $69, 500 74. 7 Thus, this retailer's income taxes for the fiscal year ended January 31, 1955, will be increased by $26,600 or an increase in the effective tax rate of 28.6 percent. The following short table summarizes the effect of the application of section 461 (c) on retailers operating in other States. This summary is by no means complete. It is submitted as an indication of the cumulative effect of section 461 (c). The total additional income taxes payable by all six retailers set out above is $811,800. It is important to remember that the disallowance of real property taxes as provided in section 461 (c) (2) is forever lost. It is not a disallowance in one year recoverable in another; it is gone. I have shown the increased income-tax costs of only six retailers. What then is the total cost of all taxpayers? The House committee report is completely silent as to the effect of the application of section 461 (c). I believe that if the House committee was aware of the foregoing results, it would have provided for the continuance of taxpayers present accounting and reporting methods. In everyday tax parlance, section 461 (c) is known as a sleeper. I am convinced that Congress never intended the results portrayed, and I am confident that this committee will correct the situation. The end result reached by application of section 461 (c) surely points up the need for careful consideration and study of all the provisions of H. R. 8300. We recommend that section 461 (c) relating to accrual of real property taxes be amended to provide that a taxpayer may continue his present reporting method of deducting real property taxes. SECTIONS 6016, 6154, AND 6655-DECLARATION OF ESTIMATED INCOME BY CORPORATIONS 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 committe 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 sections 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 one fourteen-hundredths of this group of 35,000 corporations accounts for one-tenth 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? 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? If this 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. I find no indication that consideration has been given to the economic effect on business. 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 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 originally 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 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, equity, and morality. We recommend that sections 6016, 6154, and 6655 be completely deleted from H. R. 8300. 45994-54-pt. 3-18 CONCLUSION We are not unmindful of the sound objectives of H. R. 8300. It does much to clarify and simplify other existing Internal Revenue Code provisions. There are, however, areas in this bill which require additional study and analysis to determine the economic impact of the changes proposed. Consideration of this bill under conditions of haste and pressure can and may result in creating situations that could outweight the good sought to be accomplished. We urge upon you the need for careful, deliberate study of H. R. 8300 lest we do greater harm than we do good. We specifically recommend: (a) That subchapter C relating to corporate distributions and adjustments be deferred to permit more time for study, testing, and to obtain an understanding of the very complex provisions relating to corporate reorganizations. (b) 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. (c) That sections 6016, 6154, and 6655, relating to the declaration of estimated income tax by corporations be deleted completely. MEMBER ASSOCIATIONS AMERICAN RETAIL FEDERATION National associations: American National Retail Jewelers Association American Retail Coal Association Association of Credit Apparel Stores, Inc. Institute of Distribution, Inc. Limited Price Variety Stores Association, Inc. Mail Order Association of America National Appliance and Radio-TV Dealers Association National Association of Chain Drug Stores National Association of Music Merchants, Inc. National Association of Retail Clothiers and Furnishers National Association of Retail Grocers National Association of Shoe Chain Stores National Foundation for Consumer Credit National Industrial Stores Association National Jewelers Association National Luggage Dealers Association National Retail Dry Goods Association National Retail Farm Equipment Association National Retail Furniture Association National Retail Hardware Association National Retail Tea and Coffee Merchants Association National Shoe Retailers Association National Sporting Goods Association National Stationery and Office Equipment Association State associations: Arizona Federation of Retail Associations California Retailers Association Colorado Retailers Association Delaware Retailers' Council Florida State Retailers Association Georgia Mercantile Association Idaho Council of Retailers Illinois Federation of Retail Associations Associated Retailers of Indiana Associated Retailers of Iowa, Inc. Kentucky Merchants Association, Inc. Louisiana Retailers Association Maine Merchants Association, Inc. Maryland Council of Retail Merchants, Inc. Massachusetts Council of Retail Merchants Michigan Retailers Association Minnesota Retail Federation MEMBER ASSOCIATIONS AMERICAN RETAIL FEDERATION-Continued State associations-Continued Missouri Retailers Association Nevada Retail Merchants Association Retail Merchants Association of New Jersey New York State Council of Retail Merchants, Inc. North Carolina Merchants Association, Inc. Retail Merchants Association of South Dakota Utah Council of Retailers Virginia Retail Merchants Association, Inc. [From the New York World-Telegram and Sun, April 12, 1953] TWENTY-FIVE BIGGEST MONEYMAKERS OF 1953 (By Joseph D'Aleo, financial writer) With only three reporting lower profits, the 25 biggest moneymakers of 1953 increased their aggregate earnings 11 percent over 1952 to a record $4,303,108,000. Most of the companies making up the list which is an exclusive tabulation in the World-Telegram and Sun, attained new record dollar profits. Exceptions included General Motors, which reported higher earnings although the total was still some $236 million behind the all-time record $834,044,000 of 1950; and Chrysler, Southern Pacific and Sinclair, all of which had lower net than in 1952. Two newcomers appear this year. With this change the make-up of the list showed considerable shifting around from the ranking of the previous year. There was no change in the first four places-with GM, SONJ, ATT and Du Pont ruling in that order but United States Steel recovered to fifth place, where it was 2 years ago. In 1952 it dipped to ninth place due to the steel strike in that year. New entries were Pacific Gas & Electric (the only gas and electric utility in the list) and International Paper. This is Pacific Gas' first time on the list but International Paper, now at the tail end, managed, in 1950, to place 24th. It was out of the running in 1951 and 1952. The list comprises 9 oil firms, 3 railroads and 2 each for motor, chemical, utility, steel and electric equipment classifications. A nonferrous metal producer, a mail-order house and a paper producer round out the industry groupings. For the 9 oil companies aggregate profit rose to $1,684 392,000, from $1,558,796,000 for the same companies in 1952 and $1,583,595,000 in 1951. High costs incident to the accelerated examination of undeveloped oil and gas leases, and comparison with a year when there was a special credit of $9,630,351 were factors for the reduced profit for Sinclair, the only one of the nine to show lower net than in 1952. The list excludes Ford Motor Co. only because it is a closed corporation and, as such, does not report earnings publicly. It is believed to be a large enough earner to place in the first dozen corporations. STATES SPECIFYING JANUARY 1, OR A DATE WITHIN THE MONTH OF JANUARY, AS THE DATE REAL PROPERTY TAXES BECOME A LIABILITY Section 461 (c) may be amended by adding a subsection (3) immediately following subsection (2). The wording of such subsection (3) may be stated as follows: "(3) Irrespective of the rules provided in subsections (1) and (2) of this subsection (c), a taxpayer may continue his method of accounting for and reporting of real property taxes consistently employed by such taxpayer prior to the effective date of this subsection (c) and which method has been accepted or was required by the Commissioner of Internal Revenue." The CHAIRMAN. Mr. Oates. Is Mr. Oates here? |