organizations and which was designed to be eliminated by the congressional legislation in the early 1940's. It is, therefore, respectfully submitted that, to carry out fully the concept of continuing interest, tax deficits or surpluses should be carried forward in nontaxable reorganizations, whether they be carried out through the medium of a merger, transfer of assets or recapitalization, or otherwise. In any case equity would seem to require that the remaining corporation inherit whatever tax surplus or deficit previously existed in the predecessor so that the continuing stockowners would have their dividends held to be taxable or nontaxable on the basis of the same broad concepts as those applied to taxability of the reorganization itself. It is, therefore respectfully submitted that the code be amended so as to provide for the carrying over to the successor corporation of tax surpluses or deficits in any reorganization which meets the tests of nontaxability under the provisions of the code relating thereto. Dividends are one element of the continuing ownership and it would seem illogical to treat this ownership as flowing freely forward regardless of the means employed, and then determine the carrying forward of surplus or deficits on the technical basis of the particular form of the reorganization transaction. II. In determining accumulated surplus or deficits for tax purposes, for the purpose of determining taxability of dividends to recipients, there appear to be a considerable number of cases where consolidated returns were filed by corporations during many years in the past and where interest on then existing promissory notes of subsidiaries held by the parent were taken as deductions by the subsidiary and as income by the parent, purely in routine accounting. This treatment, because of the consolidation, had no tax significance in terms of tax liability for the period. It appears that even in cases where it is demonstrable that the subsidiary was insolvent at the time the interest was accrued on the books, it might be doubtful whether it could presently be sustained that such interest should be eliminated as income of the parent in determining the present accumulated tax earnings and profits of the latter. It is submitted that some statutory test of the includability of such income, together with provisions that the accrual thereof on the books in past years should not require inclusion of such interest as income of the parent for the determination of the accumulated earnings and profits, where, because of consolidation (or losses) there was no tax consequence from the treatment of such interest, and where it can be reasonably demonstrated that assets of the subsidiary were not of sufficient value to pay its liabilities, including such interest so accrued. It might be provided that subsequent cancellation of the indebtedness of the subsidiary upon which such interest was accrued, in reorganization or otherwise, solely for stock of such subsidiary, would represent prima facie evidence of the noncollectibility of such interest at the time of its accrual, and, accordingly, the right to eliminate it from the accumulated earnings and profits of the parent corporation. From the writer's investigation, both with respect to clients and otherwise it appears that the foregoing proposed amendments would affect a considerable number of corporate taxpayers. A substantial number of taxpayers would come within the purview of item I of category 1. It is impossible to determine the number that might be affected by item II of category 1, but the number here might be even greater, particularly the smaller corporation without expert tax advice. Respectfully submitted, NEW YORK CITY, April 20, 1954. Hon. EUGENE D. MILLIKIN, Chairman, Senate Finance Committee, WILLARD F. STANLEY, President, Corporate Services, Inc. JOHN J. LANG & CO., CERTIFIED PUBLIC ACCOUNTANTS, Senate Office Building, Washington, D. C. DEAR SENATOR MILLIKIN: I have been corresponding with Congressman Thomas B. Curtis regarding a proposal to amend the Internal Revenue Code to provide for the application of the carryover principle to such contributions as may be made by taxpayers in excess of the limitations set out in the law. Section 170 of H. R. 8300 has made provision for an additional 10 percent allowance for contributions made by individuals to churches, educational organizations, or hospitals. It is not proposed to suggest any change in the percentages now specified. The original proposal had been referred to Mr. Colin Stamm's office and Congressman Curtis now makes the suggestion that I address a statement to you and request that such statement be included in the hearings. I am therefore submitting herewith: (1) Proposed amendment to section 170, H. R. 8300. (2) Statement regarding reasons why proposed amendment to section 170 permitting a contribution carryover should be adopted. The proposal has also received the approval of: F. Emerson Andrews, director of studies in philanthropy, Russel Sage Foundation; Theodore Geiger, National Planning Association. Both of these organizations feel that they cannot express an opinion thereon because of their tax-exempt status. It is believed that the proposal would be a step forward in encouraging charitable contributions by individuals and corporations without any appreciable loss of revenue to the Government. This proposal would simply insure that full tax benefit would be received by the contributor in subsequent years for contributions made in any one year in excess of the limitations. The most recent application of this principle is set out in section 175 dealing with expenditures for soil and water conservation. Here the excess is allowed as a deduction in the succeeding taxable years. I hope you will have your committee give this proposal its earnest consideration and that you will be able to incorporate it in your hearings. I do not believe that it is necessary to take up the time of your committee at any scheduled public hearing but submit this proposal strictly upon its merits and trust your committee may approve it. Respectfully submitted. JOHN J. LANG. CONTRIBUTION CARRYOVER-INDIVIDUAL AND CORPORATIONS PROPOSED AMENDMENT TO SECTION 170, H. R. 8300, REVENUE CODE OF 1954 (d) If for any taxable year a taxpayer has made contributions which would have been deductible in such year except for the fact that such contributions were in excess of the percentage limitation set out in subparagraph (b) then the amount of such excess shall be a contribution carryover. Such contribution carryover shall be deductible as a contribution for each of the five succeeding taxable years to the extent that the contributions in such year and the amount of the carryover do not exceed the percentage limitation set out in such paragraph (b). STATEMENT REGARDING REASONS WHY PROPOSED AMENDMENT TO SECTION 170, H. R. 8300, PERMITTING A CONTRIBUTION CARRYOVER SHOULD BE ADOPTED The proposed amendment has certain advantages both to the Government and the taxpayer. Briefly, the purpose of the proposed amendment is to give application to a principle which has found acceptance in the tax law, making far more equitable taxes over a long-term period, namely, the carryover principle. This principle allows the benefit of a deduction set out in the statute, for which the entire benefit is not received in 1 year, to be carried over into subsequent years. Illustrations of this carryover principle are: (1) Net operating loss carryover. (2) Capital loss carryover. (3) Unused excess profits credit. (4) Excess soil and water conservation expenditures (sec. 175). The application of this principle to the contribution deduction is justified on the following grounds: (1) Individual and corporate taxpayers do not know before the end of the year what their adjusted gross income or net income will be on which figure the percentage deduction of 20 percent (or 30 percent) and 5 percent, respectively, is allowed. Consequently, if contributions in the year exceed the amount computed on the respective incomes, then the taxpayer loses the benefit of the deduction of the excess contribution. (2) This situation has the natural tendency to cause taxpayers, particularly with fluctuating incomes, otherwise willing to make contributions equal to the maximum amount allowable, to seek to keep below this amount so that there will be no loss of tax benefit. (3) The organizations, the beneficiaries of these contributions, are thus deprived of amounts which would otherwise come to them. (4) It is generally acknowledged that it is good public policy to encourage contributions to organizations set out in the Internal Revenue Code to whom deductible contributions may be made, and the proposed amendment would do this without any percentage increase. (5) The proposed amendment would definitely make it possible for a taxpayer to make a contribution to an organization in one lump sum instead of spreading it over a period of years. This would be of particular benefit to the organization receiving the contribution in those cases where the contribution would be for building or expansion or for a specific project which could not be spread over several years. (6) The proposed amendment would be in line with the principle set out in section 175, H. R. 8300, which provides that if the expenditures for soil and water conservation "exceeds 25 percent of the gross income derived from farming during the taxable year such excess (XXX) shall be deductible in the succeeding taxable year in order of time; but the amount so deductible under this section for any one such succeeding taxable year, plus the expenditures actually paid or incurred during the taxable year, shall not exceed 25 percent of the gross income derived from farming during the taxable year." (7) The proposed amendment would not have any material effect on the tax revenues-no increase in percentage allowance is contemplated-taxpayer would only receive assurance that contributions in excess of percentages specified could be carried forward into a succeeding period or periods. LAW OFFICES, DAVIES, RICHBERG, TYDINGS, BEEBE & LANDA, Re Depletion on salt-1954 Revenue Act. SENATE FINANCE COMMITTEE, United States Senate, Washington, D. C. GENTLEMEN: We are writing you on behalf of the Salt Producers Association, Inc. The depletion rate on salt under the present law is 5 percent; under H. R. 8300 currently under consideration by your committee this rate would remain at 5 percent in the 1954 Revenue Act. The Salt Producers Association, speaking on behalf of practically the entire industry in this country, including so-called small producers, testified before the Ways and Means Committee through a labor-management group of spokesmen last fall, and undertook to demonstrate by facts that the 5-percent rate is inadequate for the industry and should be increased to not less than 23 percent. The failure of the Ways and Means Committee, as reflected in H. R. 8300, to provide any increase over the current 5-percent rate constitutes, we respectfully submit, unreasonable discrimination against the salt industry in fact of the numerous rate increases in H. R. 8300 for minerals for which a greater need in our economy cannot possibly be shown. According to the language of section 613 (b) of H. R. 8300, an incalculable number of minerals for which no percentage depletion was established by prior law will be allowed a 15-percent depletion rate. In other words, all minerals not specifically referred to in the act, which includes literally hundreds, would be entitled to 15-percent depletion, despite the fact that for nearly all of these minerals no case for any percentage depletion rate has ever been made before Congress. Yet it is proposed to limit salt, the most widely needed mineral of all, to the present 5 percent. We specifically request your committee to include as part of its record for present consideration the statement on behalf of the Salt Producers Association commencing on page 2043 of part III of the hearings before the Ways and Means Committee beginning August 6, 1953. We believe that upon careful consideration of the statements of this labormanagement salt-industry group the members of your committee will be satisfied that the salt deposits of the United States constitute a major national resource not only for food, but also because of the eminent position of America in the chemical and industrial fields requiring salt. You will also be impressed by the fact that salt in usable form is not readily available, as might be generally believed by persons who do not realize that the cost of locating deposits of the proper chemical composition, and of mining and purifying the output of these deposits, must be economically feasible to the producer. The necessity for a substantial increase in the present 5-percent depletion rate is shown in the cost figures set forth in the statements referred to. Further justification for an increase derives from the fact that a salt industry financially able to meet the increasing demands for salt essential to our national welfare is of greatest importance to our country, and salt ranks second to none of the innumerable minerals for which H. R. 8300 provides a 15-percent depletion rate. We request that the committee's earnest consideration of an increase in the depletion rate for salt to at least 23 percent. Sincerely, ARTHUR D. CONDON. Hon. EUGENE D. MILLIKIN, NATIONAL OIL JOBBERS COUNCIL, Chairman, Senate Committee on Finance, Senate Office Building, Washington 25, D. C. DEAR MR. CHAIRMAN: On behalf of the members of the National Oil Jobbers Council, I appreciate the opportunity to submit a statement to the Senate Finance Committee in connection with its present inquiry on the tax revision bill, H. R. 8300. As you may recall, the National Oil Jobbers Council is composed of 26 State associations of independent jobbers and distributors of petroleum products. An oil jobber is a marketer of petroleum products primarily engaged in wholesale distribution, although some jobbers also engage in the operation of service stations. The word "independent" as it applies to a jobber means that he owns his own business and is in no manner affiliated with, a subsidiary of, or in any manner financially controlled or dominated by integrated oil companies. With this brief word of explanation as to the nature of our organization and the type of function performed by its membership, I should like to proceed immediately to the presentation of the problem we would like to have considered by your committee. Under the present provisions of the Internal Revenue Code, the 2 cents per gallon Federal excise tax levied on gasoline is imposed on the manufacturer or producer of such gasoline. This 2 cents per gallon tax is, in turn, passed along to the jobber who distributes the gasoline to retail outlets. The retail dealer passes the tax on to the ultimate consumer. It should be noted that one of the incidents of a jobber's method of doing business is the storage of bulk quantities of gasoline for distribution to his customers. In the event the gasoline being sold for resale by the jobber is destroyed or lost by fire, flood, or other casualty, under the present provisions of the Internal Revenue Code the jobber must absorb such losses. This is an inequitable situation in that the jobber not only acts as a tax collection agent without compensation for the United States Government, but if such gasoline is lost while in his possession, he has no recourse or means of obtaining a refund for the gasoline excise tax he has been required to pay to his supplier. The National Oil Jobbers Council has been requesting for some years that the Congress amend the Internal Revenue Code so as to eliminate this inequitable situation and provide a means whereby the petroleum products jobbers, wholesaler, retail dealer, or persons in a comparable position, can obtain a refund of the taxes they have paid and thereby recoup to that extent their losses. It is an anomalous situation that in a number of the States, provision is made by statute for obtaining a refund of the State gasoline tax on casualty losses of this type. In our opinion, the Federal Government should be equally realistic and fair in the treatment of this problem. On January 23, 1953, Senator Hugh Butler and Senator Schoeppel introduced S. 594 which would provide a refund of the Federal tax paid on gasoline where the gasoline is destroyed by fire or other casualty while held for resale by a jobber, wholesaler, or retail dealer. This bill proposed to amend chapter 29 of the present Internal Revenue Code by adding a new section 3454 which would set up the mechanics for refunding the amount of tax imposed under section 3412 of the code which has been paid on gasoline destroyed by the named casualties. The bill was referred to the Senate Committee on Finance and I am informed that as of this date no action has been taken by the committee on this particular bill. Inasmuch as the Senate Committee on Finance has before it at the present time the Internal Revenue Code omnibus revision bill, we respectfully suggest that the terms and provisions of S. 594 be incorporated into H. R. 8300 as an amendment. There will be no real loss of revenue involved in such amendment and it would have the practical effect of eliminating a gross inequity that can only be remedied by statute. Respectfully submitted. OTIS H. ELLIS, STATEMENT SUBMITTED BY THE AIRCRAFT INDUSTRIES ASSOCIATION OF AMERICA, WASHINGTON, D. C., IN OPPOSITION TO SECTION 274 OF INTERNAL REVENUE CODE OF 1954 (H. R. 8300) This statement is submitted on behalf of the Aircraft Industries Association of America in opposition to section 274 of the Internal Revenue Code of 1954, because of the adverse effect which such section will, if enacted into law, have upon the aircraft manufacturing industry. The Aircraft Industries Association of America has about 130 members representing almost all of the manufacturers of aircraft, aircraft engines, and related equipment in the United States. The members include almost all the prime contractors with the Department of Defense in the aircraft field. They are located in every section of the United States, and the hardship which will be imposed by the enactment of the proposed section 274 will apply to all sections of the country. It is believed that any new proposal in this bill which adversely affects this important segment of industry should be of serious concern to the members of the Senate Finance Committee. Section 274 is aimed at what is said to be an abuse of the "privilege" of States and political subdivisions thereof to issue securities, the income from which is exempt, under existing law, from taxation by the Federal Government. On page 33 of the report of the Committee on Ways and Means of the House of Representatives on this bill, the following comment appears with respect to section 274: "Present law exempts from Federal income-tax interest on securities issued by States and their political subdivisions as well as Territories and possessions of the United States. There has been a growing abuse of this privilege by many local governments which issue securities to finance the construction of industrial buildings for lease to private industry. * * *” Without tackling the abuse, which is the issuance of tax exempt industrial bonds by local governments, section 274 will penalize a large segment of industry. Section 274, in substance, provides that amounts paid or accrued to any State, Territory, possession, or other political subdivision, for the use and occupancy of property acquired or improved through the use of funds derived from the proceeds of any industrial development revenue bonds authorized after February 8, 1954, will not be deductible as a business expense. Thus, the users of property improved or acquired through the use of the proceeds of any such bonds will, if section 274 is enacted, be denied the ordinary tax deduction for rent paid for the use of such property. If there is an evil or an abuse in tax exempt securities, the proceeds of which are used for the development of industrial property, it is believed that any such evil or abuse should be eliminated by removing the tax exempt character of the securities rather than to penalize innocent third parties. As the members of the committee are aware, aircraft manufacturing plants, of necessity, are adjacent to airports. Most airports and the adjacent property are owned by State, county, or municipal governments. This will be even more necessary in the future with the increased cost of developing airports resulting from the advance of the jet age. With respect to future projects, whether the airport be located at Los Angeles, Wichita, Seattle, or any other locality, if, by reason of plant dispersal or any other cause, an aircraft manufacturer should build a plant on property acquired by a State, county, or municipality through industrial revenue bonds, then amounts paid or accrued by the manufacturer, regardless of the amount, |