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While the problems in our immediate area are not now critical, they may well be in the near future, and we know that the problem is very acute in the metropolitan areas in California.

I hope that you are able to gain passage of this legislation at this session of Congress. Sincerely yours,

CLARENCE A. HIGGINS, Mayor.

HAYWARD, CALIF., April 6, 1954. Subject: Air pollution. To: Senator Thomas Kuchel, Washington, D. C.

SENATOR THOMAS KUCHEL: 1. We are heartened to learn of your proposal (S. 3115) to amend the Internal Revenue Code to provide rapid tax amortization and insured construction loans for air pollution control facilities, as well as support for research in that field.

2. The San Francisco Bay area during the past 2 or 3 years has first experienced incidents which presage a smog problem. Observing the extent to which that same problem has become critical in the southern part of this State and aware of the imposing difficulties present in abatement programs, we support vigorously your proposed legislation.

LOHN R. FICKLIN, City Manager.

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CAJON VALLEY UNION SCHOOL DISTRICT,

CUYAMACA SCHOOL,

El Cajon, Calif., April 2, 1954. Senator KUCHEL, Senate Office Building,

Washington, D. C. DEAR SENATOR KUCHEL: The Cuyamaca School PTA, of El Cajon, Calif., voted unanimously in favor of Senator Kuchel's bill, S. 3115, which is pending before the Senate Finance Committee for consideration. We urge you to give this bill your support. Yours very truly,

MAMIE BRIGHTWELL, Legislative Chairman of Cuyamaca PTA.

CULVER CITY CHAMBER OF COMMERCE,

Culver City, Calif., April 8, 1954. Hon. THOMAS KUCHEL, United States Senator, Senate Office Building,

Washington, D. C. DEAR SENATOR KUCHEL: On behalf of the Culver City Chamber of Commerce it is our desire to go on record favoring the passage of your Senate bill 3115 providing tax amortization concerning certain air pollution control facilities which will be approved at an early date.

We feel that it is imperative that something be done at the earliest possible moment in securing Government aid in solution of the problem which is such a menace to the future development of the Los Angeles area.

We are grateful to you for presenting this bill for consideration of the Senate.
Residents of this community will be happy when they are informed when it is
passed the hearing.
With kindest personal regards.
Very truly yours,

CULVER CITY CHAMBER OF COMMERCE,
GLEN H. PRESTON, Manager.

HAYWARD, CALIF., April 9, 1954. Subject: Air pollution. Senator KUCHEL, 241 Senate Office Building,

Washington, D. C.: 1. The city of Hayward is well aware of the smog potentiality of our area, should there be no controls.

We are definitely in accord with your proposed Senate bill (S. 3115) and wish you to know that we urge its passage.

R. A. DERR, Industrial Agent.

HAYWARD, CALIF., April 9, 1954.

Subject: Air pollution.
Senator KUCHEL,
241 Senate Office Building,

Washington, D. C.: 1. The city of Hayward is tremendously in favor of the passage of your S. 3115.

We are glad to know that our Legislature is working to end a condition before it becomes an impossibility. Rest assured that our vigorous support for your bill is already at work.

R. A. DERR, Industrial Agent.

IN THE CITY COUNCIL OF THE CITY OF SAN LEANDRO

RESOLUTION No. 2320_C. M. S.

RESOLUTION URGING FAVORABLE CONSIDERATION OF S. 3115 ; PERTAINING TO AMORTIZA

TION OF AIR-POLLUTION-CONTROL FACILITIES

Whereas air pollution is a serious problem in rapidly growing industrial areas such as San Leandro, Alameda County, Calif., and its environs; and

Whereas present provisions of the United States's Internal Revenue Code prevents rapid amortization of air-pollution-control facilities built by industries in conformance with State or local law; and

Whereas S. 3115 introduced by Senator Kuchel and now pending before the Senate Finance Committee for consideration provides for rapid tax amortization of air-pollution-control facilities :

Now, therefore, the City Council of the city of San Leandro does resolve as follows:

That this city council urges the Senate Finance Committee to give S. 3115 early and favorable consideration to the end that the same may be included in the Revenue Revision Act of 1954.

Introduced by Councilman Swift and passed and adopted this 5th day of April 1954, by the following called vote:

Ayes : Councilmen Bellini, Cannizzaro, Swift, Vlahos, Dunnigan, 5.
Noes: Councilmen, none.
Absent: Councilmen Knick, Musson, 2.

HALSEY K. DUNNIGAN,

Mayor of the city of San Leandro, pro tempore. Attest:

H. H. BURBANK, City Clerk.

SAN RAFAEL, CALIF., April 7, 1954. Subject: Air pollution, S. 3115 Hon. THOMAS H. KUCHEL, 241 Senate Office Building,

Washington, D. C. DEAR SENATOR KUCHEL : The City Council of the city of San Rafael wishes to express its support of Senate bill 3115. It is our understanding that you have introduced legislation to amend the Internal Revenue Code in order to provide rapid tax amortization for air-pollution-control facilities built by industries in conformance with State or local law.

We wish to compliment you on your vision in introducing such a measure. You are well aware, of course, that this legislation is consistent with the national policy adopted by the American Municipal Association. There is little doubt that air pollution sets up a hazard to the public health and welfare of any community.

The city of San Rafael is situated on the north side of the San Francisco Bay and is just beginning to feel the effect of air pollution. While air pollution does not originate in our own city of San Rafael, under particular meteorological conditions the air surrounding this city does become polluted to a certain degree. While this problem might not be severe at the moment, there is every possibility that it might become so in the future.

It is our experience that air pollution, or smog as we call it in California, can hamper subdivision development and the construction of homes, as well as creating a blight situation in developed areas.

To this date air-pollution control in the San Francisco Bay area has been on a voluntary basis. The city council feels that Senate bill 3115 will greatly accelerate any voluntary program. Very truly yours,

WILBER SMITH, City Manager. The CHAIRMAN. We will recess until 10 o'clock in the morning.

(By direction of the chairman, the following is made a part of the record :) STATEMENT OF ROBERT M. WADDINGTON OF PHILADELPHIA, PA., IN RE SECTION 1237

THE PROPOSED INTERNAL CODE OF 1954 (H. R. 8300) RELATING TO CAPITAL GAINS ON SALES OF INVESTMENT PROPERTY BY REAL ESTATE DEALERS

My name is Robert M. Waddington. I am a licensed real estate broker and maintain an office at 7102 North Frankford Avenue, Philadephia, Pa.

Since for over 30 years I have been active in all phases of the real estate business in Philadelphia, the question of the proper income tax treatment of gains from sales of investment property held by real estate dealers has been a matter of real concern to me. Therefore, it was with considerable gratification that I learned that the Committee on Ways and Means in drafting the proposed Internal Revenue Code of 1954 had recognized some of the problems which are peculiar to real estate dealers.

OF

PRESENT LAW

Under the present Internal Revenue Code, if a real estate dealer realizes a profit on the sale of property held by him for investment purposes, in order to be taxed at capital gain rather than ordinary income rates on such gain, the dealer must bear the burden of proving that the property in question was not "held * * * primarily for sale to customers in the ordinary course of his trade or business." That test creates innumerable factual issues in each case and leads to considerable dispute between taxpayers and auditing agents of the Internal Revenue Service.

SECTION 1237 OF THE PROPOSED INTERNAL REVENUE CODE OF 1954

Section 1237 of the proposed new Internal Revenue Code grants limited capital gains treatment with respect to gains from sales of real property by noncorporate real estate dealers if the following conditions are met :

1. The property is clearly identified as investment property before the end of 30 days after its acquisition or 90 days after enactment of the new law, whichever is later;

2. No substantial improvements were made in the property while held by the taxpayer and certain related taxpayers; and

3. The property was held by the taxpayer for more than 5 years.

If these conditions are met, to the extent of 5 percent of the sale price, the gain on the sale of the property is treated as ordinary income and the balance of the gain is treated as capital gain.

If the property has been identified as investment property, losses from the sale of the property are to be treated as losses from the sale of a capital asset or property used in a trade or business regardless whether the other conditions of the section have been met.

The expenses in connection with the sale of the property are first used to reduce the ordinary income arising out of the sale (but only to the extent of such ordinary income) and the balance is used to reduce the capital gain elements of the sale.

The section is applicable to sales occurring after March 15, 1954.

NEED FOR CLARIFYING AMENDMENTS

Before discussing some of the more fundamental changes in the section which I wish to recommend for the consideration of this committee, I would like to suggest the following changes to clarify the intent of the section :

1. As presently drafted the apparent effect of the section is not to deny capital gains treatment for any transactions which would receive such treatment under present law. Thus, if a taxpayer can show that property was not held for sale to customers and otherwise qualified under present law as a capital asset, a gain from the sale of such an asset would continue to receive capital gains treatment even though the property failed to meet the tests of section 1237 of the proposed new code. While I believe that such is the intent of the section as presently drafted, it seems advisable in order to avoid later arguments as to this point to amend the section to explicitly so state.

2. One of the conditions which must be met before the benefits of the section are available is that the property be held “by the taxpayer” for more than 5 years. It is not uncommon for owners of real property to take title in the name of a nominee or strawman. I would assume that under such circumstances the real and beneficial owner will be considered as holding the property for the required period although title is for all or a part of such period in the name of a nominee. However, an amendment to clarify this point would prove helpful.

It frequently happens that a real estate dealer holds investment property jointly with his wife as tenants by the entirety. As presently drafted, section 1237 leaves some room for dispute as to its effect on sales of property so held by the dealer and his wife. To avoid such dispute and to carry out the apparent intent of the section, it is recommended that it be amended to provide that the period during which the property is held by the dealer and his spouse as joint owners be included in computing the period during which the property was held by the taxpayer.

3. If it is determined that the rule which denies the benefits of the section to property on which the taxpayer has made substantial improvements is to be retained, it is recommended that it be clarified to indicate that improvements to the property hy persons other than the taxpayer and the specified related persons will not serve to disqualify the property. Examples of such improvements which should not disqualify the property are site improvements installed by or pursuant to an order of a governmental body.

OTHER RECOMMENDED CHANGES

In addition to the clarifying amendments mentioned above, I should like to recommend for the consideration of the committee certain modifications of section 1237.

1. Rule against substantial improvements.-Presumably the reason underlying the provision which denies the benefits of the section to property on which the taxpayer (and certain related persons) have made improvements is to prevent the conversion of so-called ordinary builders profits into capital gains. In seeking to prevent this result the present draft of section 1237 imposes what I believe are unnecessarily broad restrictions regarding improvements.

In the interests of promoting the normal development of investment realty and at the same time guarding against the conversion of normal builders' profits into capital gains, it is recommended that the section be amended to define substantial improvements as including buildings, warehouses, elevators, and similar structures but as not including normal site improvements such as streets, utilities, and sewers.

Further, it is recommended that the section be amended to provide that only those substantial improvements which are made by the taxpayer during the required holding period be considered in applying the section. Such a qualification is deemed advisable to avoid the situation in which the owner of real property which has once been identified under section 1237 as investment property will hesitate to make any improvements for fear that if the property is ever sold (no matter how many years later) the gain will be treated as ordinary income. A provision of law which encourages the wasteful failure to develop real property for productive use is to be decried at any time; but it seems particularly out of place in a revenue bill, one of the stated purposes of which is to encourage production and investment.

2. Holding period.-Section 1237 (b) (3) provides that the benefits of the section will not be available unless the property has been held by the taxpayer for more than 5 years. That period was apparently chosen as representing a ready rule-of-thumb test of the investment aspects surrounding the acquisition and sale of the property. While I appreciate that the price of certainty in the tax Jaws is often the acceptance of rules which may seem arbitrary to those whom they penalize, I believe that in this situation, certainty can be achieved by the adoption of a holding period rule which, while concededly arbitrary, is nonetheless more in keeping with the commonly accepted tests of what constitutes investment property.

Based upon my experience of over 30 years in the real-estate business during which time I have dealt in all types of real property including downtown, suburban, residential, commercial, and industrial property, it is my opinion that a holding period of 18 months is a more realistic indication of investment features than the proposed 5-year period. Certainly any period longer than 3 years seems unwarranted in the light of the other restrictions contained in the section.

3. Five percent ordinary income rule.-If property qualifies under section 1237, to the extent of 5 percent of the sales price, the gain on sale of the property will be considered ordinary income and the balance of the gain will be treated as capital gain. However, if property has once been identified as investment property under the section, even though the property for some reason fails to meet the other tests of the section, any gain on the sale will at least to the extent of 5 percent of the sales price be considered ordinary income. Thus, if a dealer in real property identifies a piece of land as investment property under section 1237, subsequently erects an apartment building on it and 20 years after the apartment is completed the property is sold at a gain, to the extent of at least 5 percent of the sales price, the gain will be treated as ordinary income, although, if the unimproved property had not been so identified 20 years earlier, all of the gain would have been capital gain.

Not only does the 5 percent ordinary income rule lead to such bizarre results as that just mentioned, in addition it seems to be founded on the premise that in selling property held for investment purposes, 5 percent of the sales price represents compensation for the dealer's services which he would have rendered had be been acting as a broker in the sale of another person's property. In my opinion such a characterization of a part of the sales price of investment real estate is unjustified. In selling investment property the dealer does not consider any part of the sales price as compensation for personal services rendered to himself and the buyer certainly does not intend a part of his purchase price as personal service compensation for the dealer.

GENERAL STATEMENT

I have attempted to point out certain features of section 1237 which I believe require clarification or modification. However, I do want to state that my criticisms of particular features of the section should not be construed as an indication that I am opposed to retention of the section in the bill. The section represents a sincere effort to introduce into at least a limited area some certainty to replace the present doubt as to the tax treatment of certain sales of real property. While I believe the section could be improved, I also believe that it represents a step in the right direction.

I am informed that certain representatives of the National Association of Real Estate Boards have taken the position that unless section 1237 of the proposed Internal Revenue Code of 1954 is amended to meet their objections they will urge that the entire section be deleted from the bill. I am, and have for many years been, a member of my local real-estate board and have attempted to cooperate with representatives of the National Association of Real Estate Boards in all matters including the presentation of tax problems of real-estate dealers. However, I wish to disassociate myself from the position of the representatives of the National Association of Real Estate Boards as to the deletion of section 1237 of the proposed code.

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