The "do it our way or not at all" attitude of the representatives of the National Association of Real Estate Boards was not to the best of my knowledge adopted as the result of consultation with or advice from the officers of either the national association or its component boards. I believe that the attitude does not reflect the feelings of any sizable part of the approximately 400,000 real-estate brokers of this county or even of the approximately 50,000 who are members of realestate boards. In this connection I think it should be noted that, even assuming that the representatives of the National Association of Real Estate Boards speak for all members of all real-estate boards, they would still be speaking for only one-eighth of the Nation's real-estate brokers. In my opinion the lack of expression of opposition by more of the rank and file of real-estate brokers to the position taken by representatives of the National Association of Real Estate Boards can be explained by the fact that those representatives have taken no steps to inform members of real-estate boards of the position they proposed taking. In my own case, I learned of the proposed position of these representatives only within the last 10 days and then only as a result of my own inquiries. In conclusion I wish to respectfully urge that recommendations for changes in section 1237 of the proposed new Internal Revenue Code be considered on their merits and that for the sake of the many real-estate brokers throughout the country for whom some definite tax rules in this area are a practical necessity, the section not be deleted at the behest of a small group which is apparently committed to a policy of abandoning the attempt to improve the law if it is not undertaken strictly in accordance with their views. OPPENHEIM, APPEL, PAYSON & DIXON, Re H. R. 8300, a bill to revise the internal revenue laws of the United States; sections 6015 and 6654: Declaration of estimated tax. Mr. CHAIRMAN: In accordance with your permission, I am herewith submitting the following statement to be incorporated in the record of the hearings of the Senate Finance Committee on H. R. 8300, sections 6015 and 6654. My name is Henry Oppenheim, a certified public accountant of the State of New York and senior partner of the accounting firm of Oppenheim, Appel, Payson & Dixon, 33 Rector Street, New York City 6, N. Y. I appreciate this opportunity to bring to your attention a provision of H. R. 8300 which vitally affects many of my clients who include some of the Nation's larger distributors of United States Government and commercial corporate securities, members of the New York Stock Exchange and American Stock Exchange, and investors in venture capital businesses such as real estate, theatrical productions, and the exploration and development of natural resources. The particular provision of the bill to which I refer is section 6654. This deals with the penalties for a failure by an individual to pay his estimated tax. Under the present law, section 294 (d) of the Internal Revenue Code of 1939, a taxpayer has been able to avoid penalties arising from an underestimate of his estimated tax either by paying his current estimated tax on the basis of the previous year's income, or, by paying at least 80 percent of the tax due for the year by the 15th of January after the close of the year. But the penalty applied by the proposed provision, section 6654, is at the rate of 6 percent per annum from the time of the underpayment of any installment, until paid. The underpayment is the amount by which one-fourth of 70 percent of the tax shown on the final return exceeds the installment actually paid. An illustration of the way this works is given in section 6015 of the House report. The penalty can be avoided in three ways. The first two are consistent with present law and provide for the payment of the current estimated tax based on the previous year's tax or income. But the third method is new and merits serious reconsideration. It provides that the penalty can be avoided if the installment of the estimate is based on actual income earned to the last day of the month preceding the due date of the installment. The income for that period is placed on an annual basis. The installment is then computed on 70 percent of the tax so arrived at. The House report indicates that this provision is designed to help taxpayers "who expect to receive the greater part of their income in the latter part of the year." Based on my many years of working experience, the proposed provision would work a great hardship on people whose income varies from year to year, depending on events occurring during the year. In this group we can include thousands of merchants, professional men, commission salesmen, securities dealers, and numerous other business groups. These people cannot pay their estimated tax based on previous year's income. They have no assurance of any year's income. On the other hand, their estimate during the year of their final tax can often be nothing but a sheer guess. It can cost them a heavy penalty if they have underestimated and strip them temporarily of necessary capital if they have overestimated. The only other alternative open to them is to base their estimates on actual income. As drafted, the formula has two defects: (1) It assumes that the rate of income earned for the computation period will continue for the rest of the year. For example, if a taxpayer has an income of $20,000 for the period January 1 to March 31, in paying his April 15 installment it will be assumed that his income for the year will be $80,000. The 1954 tax on $80,000 of net income for a married man is about $39,500. The April 15 installment on a 70-percent basis would be about $6,900. If, however, the taxpayer breaks even for the rest of the year, his full final tax would only total about $5,300. He would have overpaid $1,600, or 30 percent of his final tax. This capital would be tied up and not available for business use for more than a year. (2) No provision is made for a refund within a reasonable period if a taxpayer should actually operate at a loss in a subsequent period. Should the taxpayer in the above example operate at a deficit of $15,000 for April and May, which is very possible in venture-capital businesses, his net income for the period January 1 to May 31 would be $5,000. Placed on an annual basis, his income would then be $12,000, with a total tax of about $2,700. Under the formula of section 6654 (d) (3), all that would have been due through the June 15 installment would be about $950, which is 70 percent of one-half of $2,700. Since the taxpayer paid $6,900 on April 15, there is no payment due in June. There is no way for the taxpayer to recover his overpayment of nearly $6,000 until some time after he files his final return, and he thus suffers a loss of working capital. I see no reason why the law should be changed to create hardships. But should you deem it necessary to make a change, the proposed draft could be amended in the following respects: (1) The formula for paying on the basis of actual income should be revised so as to annualize the tax, and not the income. In effect, the taxpayer should not be subject to the penalty if he pays 70 percent of the total tax computed on his actual income to date. In this way the taxpayer will really be paying as he goes, which is the fundamental objective of the whole tax system. Because of the progressive tax rates, the income annualization requirement, in effect, makes the taxpayer pay on income which he has not as yet received and may never earn. (2) Provision should be made for a quick refund based on an amended estimate. This is simple justice and may, without exaggeration, give quick relief to many individual proprietorships whose capital and credit are limited. If this places an administrative burden on the Treasury, it is at least matched by the inconvenience to the taxpayer of computing his income four times a year. I am submitting for your consideration a supplementary memorandum containing my thoughts as to how the above suggestions may be implemented. It also contains a discussion of the difficulties caused by the effective dates of the new provision. SUPPLEMENTARY MEMORANDUM SUBMITTED BY MR. HENRY OPPENHEIM IN CONNECTION WITH SECTIONS 6015 AND 6654 OF H. R. 8300 1. All of the sections of H. R. 8300 dealing with the declaration of estimated income tax by individuals are located in subtitle F. Section 7851 (a) (6) provides that the provisions of subtitle F "shall take effect on the day after the day of enactment" of the bill. Presumably, then, any installments due on the declaration after the enactment would be subject to new section 6654. This presents an almost impossible administrative problem for both the Government and the taxpayer with respect to installments due before the enactment. How, if at all, would penalties for underdeclaration affect such prior installments? In addition, taxpayers may be subjected to an additional burden. Suppose that the bill is enacted June 14. The June 15 installment would then be covered, without adequate opportunity for the taxpayers to prepare. It would seem that the most equitable solution for both the Government and the taxpayer is to have the new provisions dealing with the declaration of estimated tax by individuals applicable only to taxable years beginning after the date of enactment. In that way the Government's rights for underdeclaration penalties for the entire year would be clearly maintained, and taxpayers would have ample opportunity to adjust their affairs to conform with the new law. 2. The first amendment to section 6654 suggested in my major text could be implemented by amending subsection (d) to read as follows: (d) EXCEPTION. Notwithstanding the provisions of the preceding subsections, the addition to the tax with respect to any underpayment of any installment shall not be imposed if the total amount of all payments of estimated tax made on or before the last date prescribed for the payment of such installment equals or exceeds whichever of the following is the lesser (1) The amount which would have been required to be paid on or before such date if the estimated tax were whichever of the following is lesser(a) The tax shown on the return of the individual for the preceding taxable year, if a return showing a liability for tax was filed by the individual for the preceding taxable year. (b) An amount equal to the tax computed, at the rates applicable to the taxable year, on the basis of the taxpayer's status with respect to personal exemptions under section 151 for the taxable year, but otherwise on the basis of the facts shown on his return for, and the law applicable to, the preceding taxable year. (2) An amount equal to 70 percent (66% percent in the case of individuals referred to in section 6073 (b) relating to income from farming) of the tax computed on the taxable income for the months in the taxable year ending before the month in which the installment is required to be paid, as if such taxable income were the taxable income for the entire taxable year. (3) I am not submitting any draft to implement my second suggestion concerning a quick refund of estimated tax. The mechanics of such a proposal present policy questions for the Treasury. One method which can be adopted, however, is to add a provision to chapter 65 of subtitle F similar to section 6411, dealing with tentative carryback adjustments. .STATEMENT OF MR. HENRY OPPENHEIM-H. R. 8300, SECTIONS 275 AND 312 (c) AND (D): NONDEDUCTIBILITY OF AMOUNTS PAID BY CORPORATIONS ON CERTAIN INSTRUMENTS Mr. Chairman, in accordance with your permission, I am herewith submitting the following statement to be incorporated in the record of the hearings of the Senate Finance Committee on H. R. 8300, sections 275 and 312 (c) and (d). My name is Henry Oppenheim, a certified public accountant of the State of New York, and senior partner of the accounting firm of Oppenheim, Appel, Payson, and Dixon, 33 Rector Street, New York City 6, N. Y. I appreciate this opportunity to bring to your attention a provision of H. R. 8300 which vitally affects the railroad industry of the United States. A number of my clients hold substantial interests in various railroads. These provisions have the effect of denying an income tax deduction for interest paid on certain corporate obligations. The deduction is denied where the interest is dependent upon the earnings of the corporation and is not unconditionally payable at or before maturity. Hardest hit by these arbitrary provisions is the railroad industry which has many millions of dollars of this type of obligation outstanding. The report of the House Ways and Means Committee states that no deduction shall be allowed for "those income debentures which are not true debt obligations of the issuer." The committee also states that it intends to include within the definition of the term "securities," the interest on which is deductible, "bona fide debts only." Apparently, then, the intent inherent in these provisions is to prevent a corporation from getting a deduction for amounts paid on money which is superficially a loan but actually an investment of capital. This intent is borne out by 312 (c) (1) which also denies the deduction for interest paid on "loans" from shareholders which are subordinated to other creditors. The drafters of the bill evidently concluded that an indebtedness, the interest on which is dependent solely upon earnings, demonstrates an equal lack of bona fides. It may be that the provisions are sound when applied to obligations owed to the shareholders of a closely held corporation or to income bonds issued in ex change for outstanding preferred stock. It seems perfectly obvious, however, that the provision is untenable as it affects the bonds of a publicly held railroad corporation. The majority of the railroad income bonds now outstanding were issued in exchange for fixed indebtedness in connection with section 77 bankruptcy reorganizations of the companies. The original indebtedness was incurred for cash and bore fixed interest. The obligations were recognized as bona fide indebtedness in the reorganization proceedings, as evidenced by the fact that in most cases equity shareholders received common stock, if anything. The indebtedness was, therefore, bona fide when issued, bona fide at the time of reorganization and is bona fide now. Section 77 (d) of the Federal Bankruptcy Act provides, among other things, that, in connection with railroad reorganizations, "the (Interstate Commerce) Commission shall render a report and order in which it shall approve a plan, which may be different from any which has been proposed, that will in its opinion meet with the relquirements of subsections (b) and (e) and will be compatible with the public interest;" The Supreme Court, in Ecker v. Western Pacific Railroad (63 Sup. Ct. 692 (Mar. 15, 1943)), stated that railroad reorganizations are "something more than contests between adversary interests to produce plans which are fair and in the public interest. When the public interest, as distinguished from private, bulks large in the problem, the solution is largely a function of the legislative and administrative agencies of government with their facilities and experience in investigating all aspects of the problem and appraising the general interest." It would appear then, that these provisions of H. R. 8300 are based upon the view that it is against the public interest to allow deductions for interest paid on obligations which the Interstate Commerce Commission and the courts specifically decided were in the public interest to issue. The application of these new provisions of H. R. 8300 to the American railroads would create great hardships. To some of the weaker roads, it might well be financially disastrous. Obviously, any road able to do so would refinance its indebtedness to escape the disallowance. Those companies which are in the weakest condition, and which are, therefore, of the greatest public interest, would not be able to do so and would bear the full brunt of the penalty. In conclusion, this loop-hole-closing provision should be limited to those cases where loopholes actually exist and should not be extended to income bonds originally issued as indebtedness by a publicly held corporation for valid business reasons and in the public interest. HERSHEY CHOCOLATE CORP., Re sections 309, 354 (b) and 359 (a) of proposed Internal Revenue Code of 1954. Hon. EUGENE D. MILLIKIN, Chairman, Senate Finance Committee, (Attention: Mrs. Elizabeth Springer, clerk, Senate Finance Committee.) (Attention: Miss Elizabeth Springer, clerk, Senate Finance Committee.) DEAR SIR: This letter is written because the Internal Revenue Code of 1954 will, if it becomes law in the form of H. R. 8300, inflict a real hardship upon Hershey Chocolate Corp. and its stockholders. I am taking the liberty of addressing this letter to you because of the important role you are playing in the shaping of the new Internal Revenue Code. Please let me make it clear at the outset that there is so much that is constructive in H. R. 8300 that it is with great reluctance that I find myself in the role of critic. Nevertheless, I should call to your attention two aspects of H. R. 8300 which, if enacted, would work a genuine hardship on Hershey Chocolate Corp. and its shareholders. They are: (1) The 85-percent-transfer tax imposed by section 309, which tax in our case may amount to from approximately $1 million to over $5 million depending on circumstances, and (2) The tax free advantages accorded to publicly held corporations by section 354 (b) in connection with statutory mergers and consolidations, and the exclusion of Hershey Chocolate Corp. from the category of publicly held corporations by the definition in section 359 (a). That the hardship threatened by these sections is real, that it is unjust, and that it will hit other legitimate corporations as well as Hershey Chocolate Corp., will, I trust, be evident upon a reading of this letter. I. IMPACT OF SECTION 309 Section 309 if enacted will impose a so-called transfer tax on certain amounts paid by corporations within the next 10 years in the purchase or redemption of their preferred stock. Hershey Chocolate Corp. has $11,612,100 par value of preferred stock outstanding. If in each of the next 10 years it redeems 2 percent of its preferred stock it would, if section 309 is enacted, have to pay a transfer tax of approximately $1,093,000. (2 percent per annum is mentioned because it is the bare minimum amount of preferred stock which the corporation must purchase or redeem as a condition precedent to the continued payment of dividends on the common stock.) Furthermore, if the corporation were to redeem all its outstanding preferred stock, the transfer tax would, if section 309 is enacted, be over $5 million. What is this preferred stock? Who holds it? How did it come to be issued? The outstanding preferred stock of the corporation consists of 232,242 shares of series A 44-percent preferred stock of the par value of $50 per share. It is redeemable at the corporation's option. Its current redemption price is $52.50 per share unless the purpose of redemption is to meet the 2-percent-per-annumsinking-fund requirement above mentioned, in which case the current sinking fund redemption price is $50.75 per share. Both prices will be reduced from time to time until the first mentioned redemption price becomes $51 per share in 1960 and the sinking fund redemption price becomes $50 per share in 1966. (All redemption prices mentioned are plus an amount equal to preferred dividends accrued to the redemption date.) The series A 44 preferred stock is listed on the New York Stock Exchange and currently sells for more than $53 per share. Ninety-one percent of the preferred stock is held by approximately 4,100 public stockholders. The remaining 9 percent is owned by a charitable organization, a school for orphan boys founded in 1909 by the late M. S. Hershey and now known as "Milton Hershey School." The school also owns, and for the past 27 years has continuously owned, the controlling common stock interest in the present Hershey Chocolate Corp. (a Delaware corporation organized in 1927). From 1918 to 1927 the school owned all of the common stock of a predecessor corporation of similar name (Hershey Chocolate Co., a Pennsylvania corporation). The present 44 percent preferred stock was issued in November 1949. At that time the corporation had 253,742 shares of old (noncallable) convertible preference stock outstanding, 91 percent of which was owned by the public. By vote of the holders of more than two-thirds of the convertible preference stock and of more than two-thirds of the common stock each share of convertible preference stock was reclassified into a package consisting of 1 share of series A 44 percent preferred stock (par. value $50 per share), 1 share of series B 4% percent preferred stock (par value $50 per share), and 1 share of common stock (of no par value but with a then market value of approximately $37.50 per share. Before this classification was voted on, the Internal Revenue Bureau, on application by the corporation, had issued a ruling to the general effect that the reclassification was taxfree and that, if the stockholdings of the corporation remained approximately the same as they were then, the redemption of series A or series B preferred stock would constitute a partial liquidation under section 115C of the present code (and thus subject to capital gain or loss treatment). Except for the redemptions mentioned below, the stockholdings of the corporation have remained approximately the same as they were in the fall of 1949. In October 1950 the corporation redeemed at a cost of approximately $13 million, all of the series B 44-percent preferred stock. Since then the corporation has also redeemed or purchased, at a cost of approximately $1,100,000, 21,500 shares of series A 42-percent preferred stock pursuant to sinking-fund requirements. How did the old convertible preference stock happen to be issued? It was issued in 1927 when the corporation was organized. It (together with a minority block of common stock) was sold directly by the corporation for cash to a banking house for resale to the public-all in an arm's-length bargaining transaction utterly devoid of any tax avoidance motivation whatsoever. Allocating, as between the two classes of stock, the combined price received by the corporation |