We recommend that section 403 of the proposed bill be amended to permit the deduction of contributions for employees under these circumstances.

SECTION 505-ALLOWABLE INVESTMENTS FOR EMPLOYEES' TRUSTS

The council does not believe that there is any necessity for the Internal Revenue Code to restrict the type of investments available to an employees' trust. It is recognized that the Government may require a trust to meet certain standards if it is to be accorded favorable tax treatment but we submit that the Government is amply protected by other sections (notably, sec. 503 and secs. 511-514) against the misuse of a qualified employees' trust.

It must also be pointed out that much of the benefit to the employee and his beneficiaries to be derived from a qualified profit-sharing trust arises from the accumulation of trust income through wise and profitable investment of trust assets. Restrictions on trust investments is a matter for action by the States and should not be the subject of the Internal Revenue Code since it has no relation to raising revenue.

For these reasons the council recommends that section 505 be deleted from the proposed bill and that section 504 be made inapplicable to employees' trusts qualified under section 501 (a) and (e) of the proposed bill.

In the event the committee does not agree with the council and decides to retain the provisions of section 505, we wish to point out certain objectionable features of that section:

(a) The limitation regarding the investment of trust assets in real estate is too restrictive. By limiting any one investment in real estate to 5 percent of the value of the trust assets the bill denies the benefit of such investments to all but the large trusts. It would take a trust having assets of $1 million to make a single investment of $50,000 in real estate under the 5-percent limitation. Trusts that large are definitely in the minority.

(b) It is also difficult to see the logic in the 5-percent and 10-percent limitations contained in paragraph (7). If it is recognized that stock of A company is a legitimate investment for 100 percent of the assets of the A company's employees' trust, it should also be a legitimate investment for the trust of Company B. If the purpose is to prevent the acquisition of businesses by a qualified trust, the 5-percent limitation is also meaningless. Five percent of the assets of a trust may or may not be sufficient to purchase a controlling interest in a company. Nor is it realistic to prohibit the acquisition of more than 10 percent of the voting stock of any one issuer as proposed in this paragraph. A 10-percent acquisition may give voting control if the corporation is widely held but not if it is closely held.

(c) The limitations in paragraphs (6) and (7) are particularly objectionable when read in light of the requirement that the investment rules be met at the close of each quarter of the taxable year. For example, if a trust has invested 5 percent of its assets in the stock of company A and 95 percent in common stocks of other companies and there is a slight drop in the security market on the last day of the quarter adversely affecting all stocks except that of company A, the trust is disqualified merely because too much is invested in an investment which is obviously sound.

(d) The proposed bill will discourage the establishment of profit-sharing plans and trusts. Heretofore it has been the policy of the revenue laws to encourage the establishment of such trusts. However, as indicated above, it will be possible for a trust to unknowingly become disqualified by a fortuitous change in the securities market on 1 day out of the year. As a result the employer may lose its deduction for contributions for that year-or at best it will be postponed for an indefinite period—and the trust will be taxable on income for the year. Such obstacles will definitely discourage the development of the profit-sharing movement.

In the event the members of the committee or members of its staff wish to discuss the recommendations herein made by the council, the council will send qualified representatives to Washington to meet with them at their convenience.

STATEMENT OF THE NATIONAL EDUCATION ASSOCIATION OF THE UNITED STATES OF AMERICA REGARDING THE DEDUCTION OF PROFESSIONAL EDUCATIONAL EXPENSES The National Education Association of the United States of America is a nonprofit organization of teachers, chartered under the laws of the District of Columbia in 1886 and by act of Congress in 1906. It is an organization of over

$550,000 active members and nearly 1 million members by affiliation, located in each and every one of the States and Territories.

The purpose of the association is "to elevate the character and advance the interests of the profession of teaching and to promote the cause of education in the United States." The association has been concerned with the Federal incometax status of teachers for many years, especially since the Public Salary Law of 1939, because most of the association's members are public-school teachers.

A characteristic of the business of teaching school is that the teacher never ceases to be a student. To be an effective teacher one must periodically take meaningful steps to keep abreast of the ever-changing conditions in his field. His preparation for teaching does not end when he completes his preservice training. Unlike the requirements of many other occupations, a teacher must withdraw from service for a year of sabbatical study, or use his vacation period for summer-school attendance, or attend night school at the end of his teaching day, in order to meet his responsibilities. By any of these methods he incurs expenses. He has never been given adequate tax relief by way of permission to deduct his expenses for professional education as a necessary business expense.

In 1921 the Bureau of Internal Revenue ruled that summer-school attendance of teachers was not deductible as a necessary business expense (O. D. 892). This ruling, having been made prior to the time when salaries of public-school teachers were taxable, could logically be applied to private-school teachers only. Private-school teachers are not subject to the same legal requirements of professional growth as public-school teachers. Hence the association considered the 1921 ruling of the Bureau inapplicable to public-school teachers.

In January 1942 the National Education Association filed a letter with the Commissioner of Internal Revenue presenting the logic and the legality of the deduction of summer-school expenses by public-school teachers, urging the Commissioner to modify the 1921 ruling accordingly. In this letter the association pointed out that teachers are required to attend summer school by State laws and local school board regulations as conditions precedent to renewal of certificates (licenses) and/or to increments in established salary schedules. It also pointed out that actors' expenses of keeping in good physical condition are deductible under the Hutchinson (13 B. T. A. 1187) and Denny (33 B. T. A. 738) decisions and that keeping in good mental condition is the equivalent in the teaching profession.

The Commissioner replied that expenses of summer-school attendance were not deductible. Under date of May 25, 1942, the Commissioner wrote the association as follows:

"It is the opinion of this Office that any expenses incurred for the purpose of educating oneself should be treated as personal expenses, regardless of whether such expenditures are voluntarily incurred or are incurred as a result of requirements of State laws or board of education rules and regulations. In the latter case the expenditures are not essentially different from those incurred for basic education. In either case the education has a bearing upon the obtaining or holding of employment and upon the amount of compensation which will be received. In neither case, however, should the expenditures be classified as ordinary and necessary business expenses."

In the Commissioner's reply he also stated that the Bureau had not acquiesced in the Hutchinson and Denny decisions.

On June 2, 1945, the National Education Association again took up this matter with the Bureau of Internal Revenue, referring to the decision of the United States Supreme Court in Dobson v. Commissioner (320 U. S. 489), wherein the Court discussed the desirability of administrative uniformity in tax matters and the weight that should be given to decisions of the Board of Tax Appeals. The association felt that under the Dobson decision, the Bureau should desist from continuing rulings on professional educational expenses of teachers that were contrary to decisions of the courts in analogous situations.

In the 1945 letter the association attempted to compromise the situation by accepting the principle that teachers who attend summer school for the purpose of self-improvement only incurred the expense voluntarily under such circumstances that their deductibility could be denied on the theory that they are personal expenses. We insisted, however, that when a teacher is required to obtain additional education to hold his position or to maintain his certification status, his expense in so doing is a necessary business expense. Since requirements of this sort apply to all teachers within a school system or within a State and are recurrent at stated intervals, it is an ordinary expense-ordinary and necessary in the business life of the public-school teacher.

The Bureau replied on November 9, 1945, in the following words:

"On several different occasions this Office has considered the question of whether the above expenses constitute ordinary and necessary business expense. On each occasion, after thorough consideration, the conclusion has been reached that the expenses of a teacher in attending summer school, whether incurred voluntarily or by reason of State requirement, are not incident to performing the duties devolving upon him by reason of his holding the teaching position, but, rather are incident to preparing himself in order that he may better perform such duties. Such expenses are, therefore, personal expenses, the deduction of which is specifically prohibited by section 24 (a) (1) of the Internal Revenue Code." The Bureau failed to take notice of McDonald v. Commissioner (65 Sup. Ct.). Even in the limited scope of section 23 (a) (2) of the Internal Revenue Code as enunciated by the Court in the majority opinion of the McDonald case, a distinction must be made between expenses incurred in obtaining a position and those incurring in carrying on such employment. The Supreme Court of the United States does not question the right of a taxpayer to deduct expenses incurred in carrying on a trade or business. The Bureau of Internal Revenue has set itself above the Court.

In 1947 Senator Pepper (without any request by the NEA) introduced a bill which would have made summer-school expenses of all teachers deductible for Federal income-tax purposes. The National Education Association thanked the Senator for his interest on behalf of the teaching profession, but took no active part in urging the adoption of his proposal. As you know, Congress did not enact Senator Pepper's bill. However, on the floor the following comments were made:

"Mr. TYDINGS. Does the Senator from Florida have any knowledge as to whether or not in spite of the ruling of the Internal Revenue Bureau, a case was ever presented and carried before the Court of Tax Appeals to obtain a determination?

"Mr. PEPPER. I will say to the Senator from Maryland that I think the teachers have simply accepted the ruling of the Internal Revenue Bureau, except that the National Education Association, which strongly approves my amendment, has been trying to have the ruling changed for some time. I have a statement in the Record from the National Education Association.

"Mr. TYDINGS. It seems to me that if the prima facie evidence presented by the Senator from Florida were presented to the proper court which we have designated to rule on such cases, it would find it difficult to adjudicate against the philosophy of the Senator's amendment. The reason I asked the question was that I cannot conceive that such a court would allow medical and other men travel expenses and would deny them to the school teachers. I shall support the Senator's amendment, and even if we find later on that we have overlooked some point in it, which I doubt very much we have, the conferees will be in a position to correct it. I think the Senator has made a just case, and I think we ought to give the amendment the support it merits. * * *”

The Pepper bill was lost by 10 votes only.

These proceedings on the Senate floor encouraged one of the members of our association to appeal a decision rendered against her by the Internal Revenue Bureau. Nora Payne Hill was a public-school teacher in Virginia. She held the highest grade certificate issued by the State and had taught in Danville, Va., for 27 years. Her certificate required renewal at the end of each 10-year period. In order to renew it she was required to attend summer school or take an examination on a specified program of professional reading. She chose to attend summer school at Columbia University during the summer of 1945. She received a deficiency notice from the Bureau dated September 27, 1947. The deficiency was caused by the disallowance of her education of summer-school expense of $239.50 as a necessary business expense. The Tax Court held that there was no evidence that public-school teachers ordinarily attend summer school when alternative methods of showing professional growth are available, and supported its decision by reference to the 1921 ruling (O. D. 892) previously mentioned in this statement.

Mrs. Hill appealed her case to the Fourth Circuit Court of Appeals, which ruled that in her individual circumstances her summer-school expenses were deductible, saying:

"The existence of two methods for the renewal of these certificates, one or the other of which is compulsory, is not in itself vital in this connection. If the particular course adopted by the taxpayer is a response that a reasonable person would normally and naturally make under the specific circumstances, that

would suffice. Even if a statistical study actually revealed that a majority of Virginia teachers adopted the examination on the selected books, in order to renew their certificates, rather than the method of acquiring college credits, our conclusion here would be the same ***. We note that the statistical requirement does not seem to have been enforced in the cases subsequently cited in this opinion [in which the Tax Court allowed the deduction of specialized training as an ordinary and necesasry business expense].""

Following the decision in the Hill case the Bureau of Internal Revenue issued the following ruling:

"SECTION 23 (a)-DEDUCTIONS FROM GROSS INCOME: EXPENSES "Section 29.3 (a)-1: Business expense,

(Also sec. 22 (n), sec. 29.22 (n)−1; sec. 29.23 (a)−2)

INTERNAL REVENUE CODE

"1951-2 13518 "I. T. 4044

"I. T. 4044: Summer school expenses incurred by a public-school teacher in order to maintain her position are deductible as ordinary and necessary business expenses under section 23 (a) (1) (A) of the Internal Revenue Code, and such expenses may be deducted in determining adjusted gross income under section 22 (n) of the Code. [O. D. 892 (C. B. 4, 209 (1921)) modified.]

"Reconsideration has been given to O. D. 892 (C. B. 4, 209 (1921)) in the light of the recent decision in Nora Payne Hill v. Commissioner (181 Fed. (2d) 906). "In O. D. 892, supra [isued in 1921], it was held that expenses incurred by school teachers in attending summer school are in the nature of personal expenses incurred in advancing their education and are not deductible in computing net income.

"In the Hill case [in 1950], the taxpayer had taught in the public schools of the State of Virginia for some 27 years and had obtained the highest-certificate issued to public-school teachers by the State board of education. She was notified of the expiration of her certificate and that the certificate could not be renewed unless she acquired college credits or passed an examination on five selected books. She elected the former alternative and attended summer school at Columbia University. Thereafter she sought to deduct the expenses which she incurred in that connection as ordinary and necessary business expenses. The United States Court of Appeals for the Fourth Circuit held that such expenses, including tuition, room rent, cost of travel, and the difference between the cost of living while at summer school and at home, properly constituted ordinary and necessary business expenses incurred in carrying on a trade or business which are deductible under section 23 (a) (1) (A) of the Internal Revenue Code.

"In reaching its conclusion, the court stressed the fact that the taxpayer incurred the expenses “to maintain her position; to preserve, not to expand or increase; to carry on, not to commence." Thus it is apparent that the court did not hold that all teachers attending summer school may deduct their expenses as "ordinary and necessary business expenses." In cases in which the facts are similar to those present in the Hill case, the rule of that case will be applied. O. D. 892, supra, is hereby modified to conform with this conclusion.

"In general, summer school expenses incurred by a teacher for the purpose of maintaining her position are deductible under section 23 (a) (1) (A) of the code as ordinary and necessary business expenses, but expenses incurred for the purpose of obtaining a teaching position, or qualifying for permanent status, a higher position, an advance in the salary schedule, or to fulfill the general cultural aspirations of the teacher, are deemed to be personal expenses which are not deductible in determining taxable net income.

"Summer school expenses which are deductible under section 23 (a) (1) (A) of the code may, under appropriate circumstances, be deducted in determining the adjusted gross income of a teacher under section 22 (n) of the code. Expenses of travel, including meals and lodging, while away from home, incurred by a teacher in connection with the employment, are deductible under section 22 (n) (2) of the code. To the extent that other expenses, including tuition, are reimbursed expenses which qualified as deductible items under section 23 (a) (1) (A) of the code, they may be deducted in computing adjusted gross income under section 22 (n) (3) of the code. Reimbursements or expense allow

1 Nora Payne Hill v. Commissioner (181 F. (2d) 906 (CCA 4th 1950)).

ances received by a teacher are includible in gross income. C. B. 1949-2, 24.)"

(See I. T. 3978,

The entire preceding statement is a quotation from the Internal Revenue Bulletin of January 22, 1951. The opening paragraph (I. T. 4044) states the basic rule which takes the place of rule O. D. 892.

This ruling indicates that the Bureau has construed the decision in the Hill case most narrowly, and evidences the need for instructions from the Congress to the Bureau as to the deductibility of professional educational expenses of teachers.

The professional educational expenses of teachers may be incurred by means of extension work or by attendance at night school or summer school. The same legal principles apply in any of these circumstances. Greater emphasis has been placed upon summer-school attendance merely because attention was accidentally focused on it at the beginning. The National Education Association has compiled legal and statistical data with regard to the professional educational expenses of teachers; these data are here furnished for the information of the committee.

STATUTORY AND REGULATORY PROVISIONS REQUIRING TEACHERS TO ATTEND SUMMER

SCHOOL

Public-school teachers attend summer school under a variety of statutory and regulatory provisions which constitute a direct or indirect element of legal and moral obligation. There are requirements which must be met in order to continue in employment in the same position, at the same salary, in the same school system. There are requirements which are conditions precedent to salary increments in the same position. There are requirements which must be met in order to continue eligibility as a legally qualified teacher anywhere in a State under State certification standards. There are requirements which must be met in order to complete a probationary period and those which must be met in order to maintain a permanent status after having completed the probationary period.

There are penalties for failure to meet the requirements of periodic professional growth-such penalties include salary reduction within the same school system, return to probationary status, loss of position in the school system, and disqualification for public-school service anywhere within the State.

CERTIFICATION REQUIREMENTS

In every State teachers are required to be certified. Without a certificate, a teacher cannot pursue his chosen profession. The teacher's certificate is like the license of a physician or a lawyer, with this exception: A physician or a lawyer is licensed for life subject only to revocation for malpractice; most teachers are certified for a definite period subject not only to revocation for cause, but subject also to renewal only by meeting specified requirements.

In most States there are a number of grades, ranks, or classes of certificates. When an individual completes his preparation for entering the teaching profession he is granted his initial certificate of a certain grade depending upon the type and extent of his preparation. That initial certificate is renewable upon expiration on the basis of the quality of the service rendered during its life and the successful completion of renewal requirements. Or, the initial certificate may be exchanged for one of higher grade if the holder has met the advance requirements. The second certificate, upon expiration, may be renewed or exchanged in the same way if the holder meets the specified requirements. The number of renewals of a certificate is frequently limited and a teacher is required to qualify for exchange to a certificate of higher grade, the qualifications for which necessitate additional college attendance.

When a teacher has exchanged his certificate for the highest grade issued in the jurisdiction, he is usually not even then licensed for life. The highest grade certificates are often of limited duration subject to renewal. Renewal is not automatic upon expiration but again depends upon meeting qualifications therefor.

Qualifications for the renewal of certificates usually include (a) successful teaching experience, and (b) evidence of professional growth. Evidence of professional growth includes attendance at an accredited college or university for the purpose of study in prescribed or recommended courses listed by the State or local school administrators as necessary for the improvement of the teacher's service in the public schools.