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"(6) NONPARTICIPATING STOCK ISSUED BY PUBLICLY-HELD CORPORATIONS.-If the transfer is in redemption of nonparticipating stock issued by a publicly held corporation as defined in section 359 (a).". Yours very truly,



Connersville, Ind., April 15, 1954. Hon. EUGENE D. MILLIKIN, Chairman, Finance Committee of the Senate,

Senate Office Building, Washington, D. O. DEAR SENATOR MILLIKIN: We note that the Revenue Code of 1954 which has been completely revised, contains certain provisions which we feel should be given further consideration. This has been a very busy time of year for us and we have not had adequate time to thoroughly review the new code, but feel that you would be interested in receiving our comments. It is our opinion that such an important law which has been completely rewritten and perhaps passed, should receive adequate review by the taxpayers of this country. It is our understanding that your committee is now starting hearings on this subject. We earnestly suggest that these bearings be continued until after responsible organizations and taxpayers have had time to review the law and have had opportunity to be heard on this subject.

We do not feel that the revised code in general, should be criticized and we agree that the long existing present code was in need of a general revision. Changes are being made however, in the existing law which we cannot help but feel, are unwise. In reading the provisions with reference to corporate reorganizations, we find a substantial change has been made.

The existing law under section 112 treats any statutory merger or consolidation as a tax-free reorganization. This is when one corporation acquires substantially all the assets or 80 percent of all stock of another, in exchange solely for shares of its own voting stock,

Under section 359 of the new code this rule would be changed by treating the transaction as a taxable exchange unless the stockholders of the acquired corporation receive at least 25 percent as much stock in the acquiring corporation as the old stockholders of the acquiring corporation had before the transaction. In other words, the transaction is taxable unless the stockholders of the acquired corporation wind up with at least 20 percent of the stock in the merged venture. The exception to this rule would be where both corporations are “publicly held”, as the term is defined. Corporations in which members of 10 familiies own as much as 50 percent of the stock, are not considered as publicly held, therefore, the exception applies principally to transactions between corporations which have their stocks listed on an exchange.

It is our opinion that the insertion of the 25-percent rule would penalize the owners or shareholders of smaller corporations. Many times a company manufacturing a certain line of products finds it to their advantage from an economic viewpoint to become merged with a larger company offering a wider line of products to enable them to compete with other concerns. In addition, certain companies may find it advantageous to become integrated with companies manufacturing similar products in a wider area. Accordingly to the present law, shareholders of smaller corporations end up with stock in a continuing venture with a real continuity of interest.

The new revisions of the law would compel shareholders of smaller corporations to sell a part of his stock in order to pay the capital-gains tax. This particularly would be burdensome where neither corporation was widely held and there may be no ready market for sale of the shares in the continuing corporation. The net effect of this change would discourage transactions of this type and the result which we believe is unwarranted, would not be a sound economic basis for mergers of this kind.

A distinction has been drawn between those corporations which are “publicly held" and those which do not meet this definition. Such distinction is without merit. The House committee report seeks to justify this distinction based on the grounds that acquisitions between corporations which are not publicly held are sometimes made with the view of minimizing the stockholders' tax. We do not believe that this is an accurate analysis of most past reorganizations.

In most cases, we believe you will agree with us that reorganizations are established, based on a genuine business purpose. The method of reorganizing is then chosen to minimize taxes on the transaction. Most of these tax-free transactions are not what could be defined as tax avoidance, but are merely a deferment of tax payments until after an economic gain has been realized.

We sincerely hope that your committee will oppose this change in the reorganization section and will permit time for review and discussion of the many changes in the proposed Revenue. Code of 1954. Yours very truly,

R. R. NEWQUIST, President.

APRIL 16, 1954. Re H. R. 8300, the Internal Revenue Code revision bill. Hon. EUGENE D. MILLIKIN, Chairman, Senate Committee on Finance,

Senate Office Building, Washington, D. C. DEAR MR. CHAIRMAN: The American Society of Travel Agents, "Inc., representing over a thousand travel agents and businessmen in allied fields, wishes the Senate Committee on Finance to record its strong support of the proposed amendment to section 4261 of H. R. 8300 urged by the Air Transport Association of America. This proposed amendment would redefine domestic transpo ion as used in section 4261, aforesaid, to prevent the present, large-scale loss of revenue derived from the tax on the transportation of persons and to remove the existing discrimination against those American travel agents doing business near the Mexican and Canadian borders.

The American Society of Travel Agents, Inc., participated, by counsel and members, at the hearings held by the House Committee on Ways and Means on H. R. 91 on August 10, 1953, and supported at that time the same change now sought.

As it now stands, the law imposes a tax on the transportation of persons where the transportation begins and ends in the United States. As pointed out by Mr. Kenneth G. Traux, a member of this society who testified in its behalf at the August hearings, persons living near an international border of the United States who desire to purchase transportation for travel wholly within the United States will buy their tickets in Canada or Mexico where, by also buying a bus ticket from the point of purchase across the border to their point of origin in the United States, they avoid having to pay the Federal tax on transportation.

And, as stated by Mr. Thomas J. Tavano, many people from points inland also avail themselves of this loophole. If the proposed amendment is enacted there will be a substantial tax saving to the United States. This is one way that the administration can help prevent the deficit from getting any worse.

At the same time, this amendment will result in American travel agents having more business, making more money, and, in turn, paying more in income taxes to the Federal Government.

By adopting the amendment proposed by the Air Transport Association of America, your committee will achieve two desirable results. Federal revenues will be increased and a segment of a widespread American business will be strengthened. For the foregoing reasons, the American Society of Travel Agents, Inc., requests your favorable consideration of the proposed amendment. I am, Respectfully yours,

HARRY A. BOWEN, Counsel for the American Society of Travel Agents, Inc.


Los Angeles, Calif., April 5, 1954. Senator WILLIAM L. LANGER, Senate Office Building,

Washington, D. O. My DEAR SENATOR: Since the new tax bill has been referred to the Senate and to your Judiciary Committee for consideration, I desire to call your attention to some matters that I believe are vital and should be in the bill from the standpoint of the citizens and from a practical standpoint of the operation of the law.

(1) The proposed new law extends the statute of limitation with reference to criminal penalties from 3 years to 6 years. This extension would be very burdensome on a great many business people who neither keep records nor can remember 6 years back.' Can you?

The 3-year statute of limitations has been in existence for many years and has been perfectly satisfactory in the operation of criminal cases. The Government has ample protection in the civil penalties and sanctions which it now has and which now covers a penalty of 50 percent in cases of fraud and 25 percent in cases of negligence, together with other penalties with interest, etc. These, it would seem, would be ample to protect the Government without the prolonged period which is now being sought to be injected into the bill.

There is also a section in connection with the bill which provides for criminal prosecution for 6 years, instead of 3 years, "for willful failure to pay any tax or make a return, for making false statements, intimidating United States officers, etc.” The bill does not define what constitutes “making a return.” Recently I had a case in the Tax Court which involved the question whether the fact that the taxpayer himself did not sign 'the return was a failure to make a return, although the return was signed by the accountant who made out the return and was working under the direction of the taxpayer.

The item of “making false statements” is now covered by section 1001 of title 18 of the United States Code, and there is no need to put it in specially in the tax bill.

Also, there should be some definition of what constitutes false statements and whether the testimony of an intelligence officer of the Internal Revenue Department needs corroboration as in the case of perjury. Otherwise, it makes a person liable by pitting his word against that of an agent.

There also ought to be a provision in the law providing that the Federal Rules of Civil Procedure, which now govern the courts of the United States in all other courts, should govern the Tax Court in all proceedings in relation to taxes.

Under the present rules of the Tax Court, the lawyers throughout the United States are required to follow the rules of the District of Columbia as they existed in equity cases prior to 1938. But, where do we find this law and what law library throughout the country, except in Washington, D. C., and some of the major cities, has the rules therein? As long as the tax bill is being modernized, why not bring it up to date and make it uniform with the laws of the district courts of the United States.

There also ought to be some provision in the bill for voluntary disclosure. This was a policy which was carried out by the Department for many years and until its troubles arose 2 years ago, and brought in many hundreds and thousands of dollars to the Department. The voluntary disclosure procedure was, in effect, a provision that if a taxpayer voluntarily disclosed his error prior to the commencement of prosecution he would not be prosecuted criminally and could settle his liabilities without fear of prosecution, having made a voluntary disclosure. Since the upheaval in the Tax Department a few years ago, the Department has abandoned this policy and procedure and it is the opinion of various accountants, tax lawyers, and persons that I have talked to about it that this has resulted in considerable loss to the Government. The provision should be codified so that the Internal Revenue Department would feel free to act under it as well as the taxpayer, and the lawyer to feel free to advise his client that that is the best thing to do, and the client feel free that if he does so he will not face a criminal charge.

These are some of the suggestions I hope you will have the entire committee consider and adopt in the revision of the tax bill. Yours very truly,



Chariton, Iowa, April 13, 1954. Hon. GUY M. GILLETTE, United States Senate,

Washington, D.O. DEAR SENATOR GILLETTE: It has just been brought to my attention that the depreciation proposal as contained in H. R. 8300 does not permit accelerated depreciation on capital equipment manufactured prior to January 1 of this year,

If this is true, I believe that this proposal is very unfair. I feel that it is particularly unfair to smaller manufacturers, such as ourself, who because of limited capital cannot afford the luxury of buying new equipment at all times. As I see it, the only people that would benefit by such a proposal would be manufacturers of capital goods and the larger or well-financed firms who do not need to be so careful in their cash outlays.

I would greatly appreciate your checking into this matter and advising me as to your thoughts regarding it. Yours very truly,


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Chicago, Ill., April 15, 1954. Hon. EUGENE D. MILLIKIN, Chairman, Senate Finance Committee,

Senate Office Building, Washington, D. C. DEAR SENATOR MILLIKIN: We have given careful consideration to H. R. 8300, the proposed Internal Revenue Code of 1954, as it relates to the financial structure of this company. The bill contains several provisions which, if adopted, will not only have a serious effect on this company, but also, in our judgment, will have far-reaching effects on many other companies in the railroad industry.

This company, like many other companies, was reorganized under section 77 of the Bankruptcy Act, the present company having taken over the properties of its predecessor on January 1, 1941. The predecessor company, Chicago & Eastern Illinois Railway Co., owed approximately $30 million of fixed interest bonds secured by a general mortgage on the property. These bonds were in default from 1932 until the reorganization plan went into effect on January 1, 1941. The reorganization plan gave to the holders of the fixed interest bonds of the predecessor company income bonds totaling approximately $15 million, and preferred stock totaling approximately $15 million. Thus, both the income bonds and the preferred stock represent debt of the predecessor company. The indenture under which the income bonds were issued contemplates maintenance of a sinking fund looking to eventual retirement of the debt at the maturity of the income bonds on January 1, 1997. The income bonds are redeemable at their face value that is, $100. Retirement of the preferred stock also is contemplated, the company's certificate of incorporation containing a provision that the preferred stock may be redeemed at par; that is, $40 per share.

Section 275 of H. R. 8300 would preclude this company from deducting interest paid on the income bonds for the first time since the reorganization plan went into effect, on January 1, 1941. Section 275 would impose upon this company an additional tax burden of approximately $300,000. Section 275, if adopted, thus would throw out of balance the carefully thought out plan of reorganization approved by the Interstate Commerce Commission and the courts, and conceivably might have serious consequences for this company. Further, section 275, if adopted, would subvert the other laudable objectives of Congress in adopting the Bankruptcy Act and the Interstate Commerce Act, by impairing provisions of law designed to permit hopelessly insolvent carriers to reorganize on a basis that would permit them to continue to render service to the public 'under private management.

Section 309 of H. R. 8300 also would have an impact upon this company almost as severe as the newly proposed section 275. As we interpret section 309, applied to our presently outstanding income bonds and our obligations with respect to them, the transfer tax proposed by section 309 would require this company to pay $171.61 for each $100 income bond redeemed by the company. This results from the fact that the fixed interest bonds of the predecessor company were selling on the market for approximately $15 and thus the 85 percent transfer tax would apply to $84.25, the difference between the redemption price of $100 and the credit of 105 percent of the fair market value of the fixed interest bonds surrendered for income bonds, given by section 309. Moreover, the indenture under which said income bonds were issued compels the trustee thereof to redeem the income bonds at the redemption price—that is, $100_whenever it is unable to purchase for less than their face value an adequate amount of income bonds for sinking fund purposes on the open market. Accordingly, this company might be required to pay the exorbitant penalty tax proposed to be imposed by section 309 under circumstances completely beyond its control.

Furthermore, section 309 would preclude this company from redeeming its preferred stock as its business improves. It should be readily apparent that as the cash position of this company improves, its preferred stock will move to par and thus the company will be required to exercise the redemption privilege if it desires to retire its preferred stock. In that event, this company would be required to pay substantially the same exorbitant penalty tax proposed to be imposed under section 309 as it would be compelled to pay in connection with redemption of its income bonds. Thus, section 309 is extremely harsh, in that it subverts the objective of the reorganization plan—that is, the eventual retirement of this company's preferred stock-in order that the holders of the fixed interest bonds of the predecessor company eventually might receive 100 cents on the dollar for their investment.

Although this company is now in good shape and we hope that it will remain in that condition, it seems to us that for Congress to adopt drastic provisions which would effectively prevent future reorganizations and recapitalizations under the supervision of the Interstate Commerce Commission would be completely inconsistent with the intent of Congress as expressed in the provisions of law concerning reorganizations and recapitalizations contained in the Bankruptcy Act and the Interstate Commerce Act. We all hope that it will not be necessary for railroad companies to again require reorganization or recapitalization, but it seems to us that it would be extremely unwise for Congress to assume at this stage that the need for the reorganization and recapiltalization provisions of law has ended. In fact, it is our understanding that several proposed reorganizations and recapitalizations now pending before the Interstate Commerce Commission cannot be consummated if H. R. 8300 becomes law in its present form. Moreover, many of the reorganization plans previously approved by the Commission require revision in the light of actual experience or subsequent developments and railroad companies should not be hampered in their efforts to work out such reorganizations and recapitalizations under conditions which the Interstate Commerce Commission finds to be required by the public interest.

It is our understanding that the Association of American Railroads will recommend the complete elimination of section 275. This company deems such elimination to be imperative. It is also our understanding that Mr. John P. Farrington, president of the Rock Island, has proposed an amendment to section 309, which, in substance, would make section 309 inapplicable to publicly held corporations within the meaning of a publicly held corporation as defined in section 359 (a) of H. R. 8300. We have examined this proposed amendment and concur in Mr. Farrington's recommendation that it be adopted. We also understand that Mr. Donald B. Fraser, president of Missouri-Kansas-Texas Railroad Co., will submit for consideration a proposed amendment to H. R. 8300 which would enable the M-K-T to solve the serious financial problems peculiar to that company. We have examined the provisions of this proposed amendment and heartily concur in Mr. Fraser's recommendation that it be adopted.

As we view the matter, H. R. 8300 poses a serious problem for all railroads and for Congress to adopt H. R. 8300 in its present form not only would seriously affect railroad companies in their present form, but also would create a further problem in connection with future reorganizations and recapitalizations required by the public interest.

We request that this letter be included in the record on H. R. 8300.
Respectfully submitted.

C. M. RODDEWIG, President.


Klickitat, Wash., April 12, 1954. Hon. WARREN G. MAGNUSON, Senate Office Building,

Washington, D. C. Hon. SENATOR MAGNUSON: The Senate is now or will be soon considering the proposed technical revision of the Internal Revenue Code passed by the House as H. R. 8300 on March 18, 1954.

We call your attention to section 631 and 272 of H. R. 8300. Section 631 is a reenactment of section 117 (k) with one very important change contained in the second sentence of 631 (a), which reads as follows:

“If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer plus the deductions disallowed under section 272." Section 272 is a new section to the code which provides "that where the cutting of

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